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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ 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, 1998
[ ] 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
Series A Preferred Stock Purchase Rights
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]
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. [ ]
State issuer's revenues for its most recent fiscal year. $12,200,849
The aggregate market value of Common Stock, $.01 par value per share, held by
non-affiliates of the registrant was $23,113,493 on March 22, 1999 (based on the
average bid and ask price per share of Common Stock on that date as reported by
the Nasdaq SmallCap Market). 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 22, 1999, there were 4,968,546 shares of Common Stock, $.01 par value
per share, of the registrant outstanding.
Documents Incorporated by Reference
Proxy Statement for the 1999 Annual Meeting of Stockholders Part III
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Teknowledge(R) and Copernicus(R) are registered trademarks of Teknowledge
Corporation. Sales Associate(TM) is a trademark of Teknowledge Corporation. All
other brand names, product names, trademarks and registered trademarks are the
property of their respective holders.
PART I
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Item 1. Description of Business
Teknowledge Corporation (the "Company") is in the Internet knowledge
system business. Almost all of Teknowledge's projects involve processing
application knowledge and distributing it over the Internet. Teknowledge is
leveraging its core competencies in knowledge-based systems and large-scale
distributed object-oriented software with the expanding opportunities presented
by the Internet and the World Wide Web. The Company provides software products
and consulting services for government and commercial applications. The
application areas are addressed by five program areas: Distributed Systems
Engineering, Situation Assessment and Data Fusion, Education & Training
Technologies, Information Assurance, and Electronic Commerce ("E-Commerce")
Systems. Each program area does application assessments for customers, utilizes
third party software components in delivering customer solutions, and conducts
research and development ("R&D"). The Company is increasing its focus on
commercial software products and services, particularly in the E-Commerce
market; however, this transition takes time. Teknowledge has become a Premier
Provider for IBM's Net.Commerce(TM) product, and is now also a Microsoft
Certified Solution Provider and a CheckPoint Value Added Reseller ("VAR"). In
addition, Teknowledge sells its own Sales Associate(TM) software for selling
products on Internet E-Commerce web sites. However, the customer base for the
Company's products and services currently consists primarily of government
related projects. For the year ended December 31, 1998, the Company's direct
revenue mix from continuing operations was approximately 99% government and 1%
commercial products and services. This ratio is expected to change as E-Commerce
related investment and customer solution capabilities increase over the coming
years.
Teknowledge was incorporated on July 8, 1981 under the laws of the
State of Delaware. The Company's principal executive and engineering offices are
located at 1810 Embarcadero Road, Palo Alto, California 94303. In addition,
Teknowledge has software engineering offices located in San Diego, California;
Arlington, Virginia; Fairfax, Virginia; and Orlando, Florida. Teknowledge's
business is currently concentrated in the United States.
Overview
The information economy places a competitive premium on an
organization's ability to process and distribute its knowledge effectively.
Knowledge has become the primary competitive weapon in the economic and military
battlespace. However, knowledge acquired by people often does not get reused
because it is not organized or distributed effectively. Knowledge systems are
software programs that enable combinations of people and computers to capture,
refine, distribute, and apply knowledge to solve business application problems.
Teknowledge develops software architectures and programs that integrate
conventional software and knowledge systems in high-value Internet application
solutions. These solutions are developed through software products and services
which support integration, processing, and systematic utilization of an
organization's key knowledge assets. Increasingly, an organization's knowledge
assets are encoded in knowledge processing applications and distributed via the
Internet to make solutions available globally, seven days a week, 24 hours a
day. This value chain will drive the growth of Teknowledge's business.
Teknowledge operates five business programs within a single reporting
segment. The Distributed Systems Engineering program provides the foundation for
optimizing the quality of Internet service delivered through the use of network
resources. The Data Fusion and Situation Assessment program develops software
algorithms that refine information from multiple sources into a coherent body of
knowledge that can be acted upon. The Education and Training Technologies
program encapsulates knowledge into reusable media, develops intelligent
tutoring systems to communicate that knowledge, and distributes the tutoring
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systems over the World Wide Web. The Information Assurance program develops and
installs software to protect the information stored in computer networks and
ensures that information is accessible by the right people at the right time.
Finally, Teknowledge's E-Commerce Systems business program provides commercial
software products and services that enable corporations to manage their sales
knowledge and sell products effectively over the Internet.
Each of Teknowledge's business programs utilizes internally developed
and third party software components in its application solutions. Utilizing
third party components in an application solution allows for faster and more
robust solutions. It also allows Teknowledge to focus on developing knowledge
processing components in the context of a robust application solution.
Teknowledge's Sales Associate product is one such example. It is an Internet web
site sales component that can be sold with storefronts and databases from
companies such as IBM or Microsoft, and a security firewall from CheckPoint.
This strategy allows Teknowledge to provide its innovative components in the
context of delivering basic value to the customer with leading commercial
products. The customer gets a faster and more robust solution, and Teknowledge
gets a VAR license fee on each third party commercial product delivered.
Computer software applications provide maximum value when integrated
into networked operations, both within and between enterprises. Integration of
these various functions is facilitated if object-oriented software is designed
with an "open architecture." This allows the same applications software and user
interfaces to be distributed via network protocols across many different types
of computers. The Company's products and services are designed to maximize the
value of integrating, distributing and activating application knowledge.
Teknowledge is beginning a transition from a primary focus on R&D to increasing
focus on delivering application solutions to customers.
Since the U.S. Department of Defense and many commercial businesses are
now conducting large-scale operations over international computer networks such
as the Internet, much of the Company's current and future business focus is on
providing software to make it possible to delegate knowledge-intensive tasks to
network-enabled computer software "associate systems." These associate systems
may integrate several special-purpose software agents to accomplish routine
tasks as well as accelerate knowledge gathering, refinement, dissemination, and
utilization over computer networks. Teknowledge's strategic plans include
commercializing associate systems software that amplifies human productivity and
the ability to apply knowledge effectively. Teknowledge has built six prototype
associate systems and commercialized one. These systems include: the Briefing
Associate, the Parent's Associate, the Student's Associate, the Project Center
Associate, the Desktop Associate, and the commercial Sales Associate.
Business Programs
Teknowledge has distributed operations, with its headquarters located
in Palo Alto, California and offices in San Diego, California; Arlington and
Fairfax, Virginia; and Orlando, Florida. The Company operates five business
programs within its current operations: four focused primarily on government
customers and one, E-Commerce, focused entirely on commercial customers. The
government programs currently contribute over 99% of the revenue; therefore all
programs are reported as a single segment.
Distributed Systems Engineering. Operations that are widely distributed require
extensive object-oriented systems infrastructure. Currently, the World Wide Web
provides little of this systems infrastructure, but instead relies on the
distribution of linked multimedia documents. In the future, complex webs of
objects and knowledge will have to be distributed systematically and updated
dynamically. This requires the ability to provide reliable quality of service,
security of operations, maintainability, and distribution by intelligent "push"
and "pull" techniques. In addition, the types and quantity of knowledge
distributed will require new designs and new software specialized for specific
knowledge processing tasks. Teknowledge's Distributed Systems Engineering
program focuses on providing new Internet systems infrastructure to address
these needs.
Situation Assessment and Data Fusion. Complex problem solving in the military
and in corporations requires the ability to access and synthesize data quickly
and effectively from multiple sources in order to develop a dynamic assessment
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of an evolving battle, emergency, or competitive situation. Decision-makers in
government and industry have noticed that using satellite and World Wide Web
information systems is like "standing in front of an information fire hose." It
is hard to take a sip without getting more information than necessary.
Teknowledge's Situation Assessment and Data Fusion program focuses on providing
knowledge-based tools and systems infrastructure to fuse data from multiple
sources and combine those data into a cogent and often shared perception of a
situation. This program is developing a situation server, which combines data
from multiple sources, and detects patterns or conditions of interest to a
customer. These conditions may in turn trigger alerts or actions to respond to a
situation quickly and effectively.
Education and Training Technologies. The Internet and the World Wide Web have
created a new opportunity for formerly isolated desktop systems that provided
computer-aided instruction. Not only have the techniques of computer-aided
instruction improved dramatically in recent years, but also the means to
distribute them have undergone a veritable revolution. Now it is possible to
provide distance learning via an interactive course delivered through a standard
World Wide Web browser. There are major opportunities to deliver in-house
corporate training over intranets, K-12 education over the Internet, and
just-in-time adult training on the job or in the home. Teknowledge has been
involved in education and training since 1981; and, in 1997, it created a
program devoted entirely to this growing opportunity. Teknowledge served as the
Cluster Leader for the U.S.'s largest multi-institution project on Intelligent
Tutors and Associates between 1995 and 1997. The DARPA Computer Assisted
Education and Training Initiative sponsored Teknowledge's work on the Parent's
Associate and the Center Associate. The Parent's Associate enables parents to
get advice on parenting and access to Internet-based educational resources. The
Center Associate provides a computer-based coach to help guide users in getting
the most from education resources available to them. Teknowledge is now leading
the Business and Marketing Group of the Government sponsored Advanced Distance
Learning Initiative, which is actively developing distance learning technology
to provide cost effective industrial strength courseware over the Internet. In
1998, Teknowledge was one of three prime contractors selected out of 51 teams in
the National Institute of Standards and Technology (NIST) Adaptive Learning
Systems competition. Teknowledge was awarded a $2 million cost-sharing contract
for development of a Courseware Factory(TM) for converting podium-based
traditional courses for delivery over the World Wide Web.
Information Assurance. The need for information security solutions has created
tremendous demand in both government and industry. Keeping Internet sites and
transactions secure from hackers and thieves is critical to effective military
and E-Commerce operations. Information assurance goes beyond simply protecting
information. It is relatively easy to protect information if it does not need to
be accessible. However, both military and E-Commerce information needs to be
accessible by people globally, seven days a week, 24 hours a day. This
requirement shifts the focus from information protection to assured information
access to the appropriate customers. Techniques for accomplishing information
assurance, such as authentication, encryption, and firewalls, are constantly
evolving. Some new products, such as CheckPoint's firewall for web site
security, have emerged as commercial market leaders. Teknowledge has recently
become certified as a VAR to deliver CheckPoint's firewall product, which
provides an opportunity for product license and services sales to government and
commercial information assurance applications.
E-Commerce Systems. Teknowledge's E-Commerce Systems business program provides
assessments of corporate E-Commerce strategy and technology, VAR services to
deliver and support leading E-Commerce products, and installations of
Teknowledge's own Sales Associate software. Teknowledge is focusing on the
delivery of a total web site E-Commerce solution, which incorporates one or more
leading commercial products. This provides VAR license fees, services revenues,
and some pull-through opportunities for selling Teknowledge's own Sales
Associate product. The Sales Associate is a commercial software product which
provides unassisted sales over the Internet. It incorporates rules of selling
and utilizes specific product knowledge to emulate the best practices of the
most productive sales person in a firm. The product goes beyond the typical
browsing interaction on the World Wide Web by engaging the customer in an
interactive dialog about products. The Sales Associate creates a unique profile
of every customer and specializes the sales presentation to each prospect. It
learns and remembers a customer's profile and preferences, and applies all
available information towards the next sale. The system can cater its
presentation form to match the user's profile, selecting among web text, audio,
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or 3D graphics. The Sales Associate incorporates both generic and
domain-specific "rules of selling" to guide the sales process. It matches a
customer profile with the products in a product knowledge base. The Sales
Associate delivers up-to-the-minute information on product features and
availability, as well as news of special discounts and other promotions. The
product is designed for delivery with other commercial components such as web
servers, databases, firewalls, and other web site component software. The Sales
Associate is a new product in a rapidly growing, but still unformed market.
There are uncertainties and risks associated with the introduction of any new
software product (see Part II, Item 6), however, the Company has continued to
evolve Sales Associate capabilities to help make the product a commercial
success.
Sales and Marketing
Teknowledge's services and software are marketed primarily by the
Company's employees, including the Chief Executive Officer, the President, and
business program managers. Each business program offers consulting services to
help prospective customers define their problems and projects. Government
proposal work conducted in response to a Broad Area Announcement or Request for
Proposal is typically not funded. However, consulting assignments are funded to
evaluate current corporate E-Commerce capabilities and recommend next steps,
including application work.
Teknowledge has increased its commercial sales and marketing efforts to
lay the foundation for increased commercial business. In 1998, the Company began
implementation of its VAR strategy and has achieved VAR and premier status from
IBM as a member of its award-winning BESTeam software business partner program.
It is now a Microsoft Certified Solution Provider, and a CheckPoint VAR partner.
The Company is offering value-added services for leading commercial products
with considerable market demand. This should provide license and services
revenues, and broaden market acceptance of Teknowledge's product by increasing
our access to an expanded base of commercial customers.
Backlog
At December 31, 1998, the expected order backlog was approximately $15
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. One hundred percent
of the December 31, 1998 backlog is from government customers. Approximately 75%
of the backlog consists of government-sponsored 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. Backlog is
an estimate and is subject to a number of risks (see Part II Item 6.
Management's Discussion & Analysis or Plan of Operation - Certain Factors That
May Affect Future Results of Operations and/or Stock Price). The portion of the
overall backlog that is reasonably expected to be fulfilled in the current
fiscal year is approximately 50%.
Research and Development
Almost all of the Company's software engineering operations, except for
the E-Commerce business program, were related to advanced government development
projects. As a result, the Company's R&D activities were mostly funded
externally by the Federal Government. Generally, the Company retains the
exclusive right to market the government sponsored R&D commercially. From time
to time the Company sponsors its own R&D, mostly in the form of commercializing
the technology developed under its government contracts. As the Company
continues to grow its commercial products and services business, more internally
directed R&D is expected. The Company expensed $132,501 and $206,603 of its own
funds on R&D for the years ended December 31, 1998 and 1997, respectively. In
addition, the Company capitalized $267,046 and $10,712 of computer software
development costs in the years ended December 31, 1998 and 1997, respectively.
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Competition
A number of companies provide consulting services and software that
compete with aspects of Teknowledge's business. Many of these companies are
substantially larger and have greater financial resources than Teknowledge.
Teknowledge's primary competitive advantage is its experienced management team,
its extraordinary technical talent base, its extensive intellectual property,
and its leading-edge R&D program. Sales and configuration systems are provided
by Trilogy Development Group, Calico, Concentra, Selectica, Brightware, Baan,
SAP, Oracle, PCorder.com, and others. Knowledge processing systems are provided
by Logica Carnegie Group, Inference Corp., Neuron Data Corp., Intellicorp, Inc.,
and Trinzic Corp. Distributed systems engineering, data fusion, and information
assurance services are provided by GTE, Trusted Information Systems, Secure
Computing Lockheed-Martin, Boeing, Perceptronics, ISX, and SAIC, among others.
Internet-based distance education and training technologies are mostly in the
R&D stage, with competitors still emerging in the commercial marketplace.
Potential competitors could also be collaborators, such as Macromedia and
Asymetrix Learning Systems, Teknowledge's technology suppliers on our Courseware
Factory project.
Proprietary Rights
Teknowledge maintains an active intellectual property program and
currently holds eight U.S. software patents. The application software developed
by Teknowledge includes the Sales Associate for configuring automated sales on
the Internet, knowledge-based expert systems, pattern detection and data fusion
tools, and systems to manage and protect webs of networked information. Sales
Associate is a trademark of the Company. The COPERNICUS(R) trademark is
registered in the U.S. and many foreign jurisdictions. As use of any product
name becomes consistent and established, the Company intends to apply for formal
registration of the product name as a trademark in the United States and
relevant foreign jurisdictions.
Teknowledge has relied on a combination of patent, copyright, trade
secret and trademark laws, as well as contractual provisions, to protect its
proprietary technology. The Company has required employees, customers, vendors,
and others who have access to proprietary technology to sign nondisclosure
agreements. The Company retains a proprietary right to market commercially most
of the development that was sponsored by government agencies. The government may
not distribute proprietary information that was developed by the Company to any
third party for commercial purposes without first receiving permission from the
Company.
Teknowledge provides its software products to end users under
non-exclusive, non-transferable licenses that typically have a perpetual term
unless terminated for breach. The Company protects the source code of its
software products as trade secrets and unpublished copyrighted works.
Additionally, Teknowledge holds patents for the knowledge processing and systems
engineering technologies that form the basis for many of the products and
configuration services that the Company markets.
There can be no assurance that Teknowledge's protective measures will be
adequate to protect its proprietary rights, that others have not or will not
independently develop or acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Thus far, Teknowledge has not been
notified that it may be infringing any patents or proprietary rights owned by
third parties. There can be no assurance that the Company would be able to enter
into an acceptable license under such third party patent, or that it could
redesign or modify its products and processes to avoid infringement of such
patent or proprietary rights, or that the Company could otherwise avoid
infringement of such patent or proprietary rights. In the event the Company is
unable to take such action, its business, financial condition and results of
operations could be materially and adversely affected. In some cases, litigation
may be necessary to protect the Company's proprietary rights.
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Government Contracts
In 1998, approximately 99% of the Company's revenues were from
cost-type government contracts, and 100% of its December 31, 1998 backlog was
from government contracts. The Company's business has been dependent upon
successful bidding for government contracts. The Company applies for contracts
in the form of a proposal by responding to Requests for Proposals and Broad
Agency Announcements issued by the United States Federal Government or by prime
contractors under contract to the Federal Government. Proposals include
discussion of the technical approach to be taken to satisfy the government's or
the prime contractor's requirements and a detailed presentation of costs
expected to be incurred. The proposal is reviewed and evaluated by technical and
administrative personnel employed by the government or the prime contractor. If
the procurement method is "competitive bid," the contract is awarded to the
company which would best satisfy the government's or the prime contractor's
requirements. If the procurement method is a "negotiated award," the government
or the prime contractor would enter into negotiations to determine a price for
the contract; upon successful conclusion of negotiations, a contract is awarded.
Government contracts contain termination clauses, which permit contract
termination upon the Company's default or at the government's discretion.
Government contracts are subject to agency funding limitations, congressional
appropriation, and the agenda of the current administration in Washington, D.C.
The typical cost-type government contract performed by the Company has
a regulated fixed fee limit, which inhibits the Company from improving profit
margins on government contracts 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. During 1998, DARPA terminated several
of its own projects due to a change in its program priorities. Since the
terminations involve some of Teknowledge's multi-year projects, the effect on
revenue is spread over approximately three years, and did not have a material
effect on 1998 results due to the Company's ability to utilize technical staff
on alternate projects. Such cancellations may occur again in the future. The
Company intends to build its substantial multi-year backlog further with
additional proposals for new government and commercial projects.
The indirect costs and expenses accumulated in the performance of
government contracts are allocated to the customer in the form of overhead
(indirect) rates. These rates, which are periodically reviewed by government
auditors, fluctuate based on the relationship between the overhead costs and
direct costs incurred in the performance of the contracts during the year.
Excluded from these rates, and not subject to reimbursement, are certain
allowable costs (less than 1% of total costs in 1998), such as entertainment and
advertising. In addition, the government has established compensation limits for
employees which expressly reduces the amount of compensation and related
expenses, such as bonuses and stock options, that can be passed on to the
government through the overhead rates. In recent years, the Company has
experienced some decline in the fees on new government contracts due to
government cost saving efforts. New contracts may not suffer this fee erosion;
however, the overall limitation on potential government contract fees coupled
with a potential increase in the expenses not eligible for reimbursement,
combine to restrict the Company's ability to improve profit margins on
government contracts in the future. The Company's government-sponsored R&D is
most valuable as a technology incubator, development laboratory, and testbed.
The best software from this work becomes a candidate for software product
commercialization. This helps the government amortize the considerable cost of
maintenance, and it provides Teknowledge with the opportunity to compete in a
growing commercial marketplace.
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Employees
Including contract engineers and temporaries, the Company had a total
of 57 full time employees at December 31, 1998. All the employees were employed
in the continental United States. The majority of employees, including top
management, are technical. They perform direct billable work on contracts or
develop and support software products. A core group of administrative staff
performs general and administrative functions. A large percentage of the
employees hold advanced degrees in technical disciplines. The future success of
the Company will depend, in part, on the Company's ability to continue to
retain, attract, and motivate highly qualified technical, marketing, and
management personnel. This has become a particular challenge as increasing
demand for top quality software professionals has exceeded supply. The Company
has never had a work stoppage, and it is not a party to any collective
bargaining agreement with any of its employees.
Item 2. Description of Property
The Company's executive offices are located at 1810 Embarcadero Road,
Palo Alto, California, under a lease for a period of three years commencing
April 5, 1996, with an option to extend the lease for an additional three years.
The Company is currently finalizing the renewal of this lease. The Company has
also signed renewable leases for office space in Arlington and Fairfax,
Virginia; and San Diego, California.
In January 1994, the Company entered into a settlement agreement with
the landlord for its former Franklin, Massachusetts location. Under the terms of
this agreement, the lease scheduled to expire in May 1999 was terminated for a
total consideration, including accrued interest, of $131,760 which is to be paid
in escalating payments over a five-year period. The last payment was made on
January 31, 1998 and no liability remained as of December 31, 1998.
In September 1993, the Company entered into a settlement agreement with
the landlord at the former Bridgeville, Pennsylvania location. Under the terms
of the agreement, the Company will avoid an annual settlement amount of $18,306
unless there exists a differential in rent between what the new tenant pays and
what the Company was expected to pay during the term of the original lease. The
settlement agreement provides for a maximum payment of $18,306 by the Company
per annum until 1998. There has been no such rent assessment to date and any
liability previously recorded was written off in its entirety as of December 31,
1998.
Item 3. Legal Proceedings
During 1998, the Company entered into a cash settlement agreement with
Dan Robusto, a former executive of the Company, in the amount of $80,000. The
settlement resolves all severance claims made by the former executive relating
to a 1994 lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
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PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of Teknowledge has been trading under the symbol TEKC
on the Nasdaq SmallCap Market since March 5, 1999. Before this date it was
traded under the same symbol on the "Bulletin Board," an over-the-counter
("OTC") listing service provided by the National Quotation Bureau. On March 22,
1999 the closing "bid" price of the stock was $5.75 a share.
The Company has effected a one-for-five reverse stock split on
December 22, 1998. The following table sets forth the range of high and low bid
information for the Common Stock on the OTC Bulletin Board for the quarterly
periods indicated, adjusted for the effect of the reverse stock split. All share
and per share data has been retroactively restated to reflect the effect of the
reverse stock split. The bid information reflects inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions. The Company has never paid dividends on its capital stock.
1998 High Low
First quarter, ended March 31, 1998 $ 4.70 $ 2.30
Second quarter, ended June 30, 1998 11.00 4.40
Third quarter, ended September 30, 1998 8.45 2.50
Fourth quarter, ended December 31, 1998 6.75 2.15
1997 High Low
First quarter, ended March 31, 1997 $ 2.95 $ 1.90
Second quarter, ended June 30, 1997 3.40 1.90
Third quarter, ended September 30, 1997 2.55 2.15
Fourth quarter, ended December 31, 1997 3.25 2.15
As of December 31, 1998 there were 1,804 holders of record of Common
Stock of the Company.
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Item 6. Management's Discussion and Analysis or Plan of Operation
Overview of Significant Matters
Forward looking statements made in this section relate to the demand
for technical employees, expected revenue growth, realizability of backlog,
competition for new government contracts, development of commercial products and
VAR services, deferred tax assets, and the availability of strategic
acquisitions. 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 described in "Certain Factors That May Affect Future Results
of Operations and/or Stock Price."
Year Ended December 31, 1998
Quarterly Results Summary
(In thousands, except for per share data)
First Second Third Fourth Total
Revenues $3,070 $3,081 $3,070 $2,980 $12,201
Costs and Expenses 2,867 2,931 2,816 2,901 11,515
Other and Tax Provision 17 36 19 28 100
Net Income 220 186 273 107 786
Diluted Net Income per share .04 .03 .05 .02 .14
Teknowledge's revenues for the year ended December 31, 1998 increased
to $12,200,849, a 10% improvement over 1997. In both 1998 and 1997, 99% of the
revenues were from Federal government agencies. Revenue growth was fueled in
part from new contracts awarded primarily in 1997 and early 1998. During 1998,
approximately $14 million of the Company's backlog of new work was reduced when
the government curtailed spending on several of their ongoing contracts. DARPA,
the agency that funds most of our contracts, experienced extensive turnover in
management, and the new DARPA management team decided to review and reshape
existing programs until it finalizes its long-term strategic plan. The Company
decided to reduce its backlog by the full amount. The Company previously had
never experienced any material contract cancellations. The effect on revenue
from these terminations is spread over several years and did not have a material
effect on 1998 results. The Company continues to submit proposals for new work
to the government and commercial organizations.
The Company intends to increase its investment in the development of
commercial products in 1999 and to accelerate the transition from dependence on
government R&D contracts. In 1999, our focus is on the growth and scalability of
our commercial E-Commerce business. In general, our business strategy will be to
1) enhance and leverage our web-based software such as Sales Associate and the
NIST Courseware Factory, 2) deliver commercial VAR services and licenses for
third party E-Commerce products, 3) license our software patents, and 4) pursue
a strategy of growth through one or more strategic acquisitions of small
commercial software companies. The Company, however, may not identify suitable
strategic acquisitions or may not be able to negotiate an acquisition on terms
acceptable to the Company. In addition, there are significant risks in
consolidating businesses.
The Company has reflected, as a reduction to the provision for income
taxes, the benefit from tax losses generated subsequent to the date of the
quasi-reorganization in 1992. As of December 31, 1998, the Company has utilized
essentially all tax losses generated subsequent to the date of the
quasi-reorganization. Any subsequent realization of tax benefits existing at the
date of the quasi-reorganization, will be recorded as an adjustment to
additional paid-in-capital. Accordingly, the Company expects that its provision
for income taxes and its effective income tax rate will increase in 1999.
However, the cash liability for income taxes is not expected to change as a
result of the utilization of tax losses existing at the date of the
quasi-reorganization (see Notes 1 and 6 of Notes to Consolidated Financial
Statements.)
<PAGE>
11
In 1997 the Company recorded a deferred tax asset of $900,000 that
represented the more likely than not expected tax savings which may be realized
from its net operating loss carryforwards generated subsequent to the
quasi-reorganization. The Company evaluates its earnings prospects in revolving
two-year cycles annually, to determine if adjustment to the deferred tax asset
balance is necessary. No adjustment was deemed necessary for the year ended
December 31, 1998 as a result of this evaluation.
During the third quarter of 1998, the Company reached an amicable
settlement with a former executive of the Company which required a payment of
$80,000 to the former executive. With the settlement of this action, all
outstanding lawsuits involving the Company were eliminated (see Part 1 Item 3.
Legal Proceedings).
Net income was $785,620, or $.14 diluted earnings per share, for 1998;
and was $2,759,654, or $.48 diluted earnings per share, for 1997. During 1997,
the Company reported the settlement of a patent matter for $1.1 million and
recorded a deferred tax asset of $900,000, which together contributed
approximately $.35 to earnings. Operating income was 6% of revenues, both in
1998 and 1997.
Certain Factors That May Affect Future Results of Operations and/or Stock Price
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 is
that 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 in headcount growth, billable efficiency,
and costs may vary from original estimates and necessitate periodic adjustments
to overhead rates and revenues. Such adjustments are made on a cumulative basis
whereby the resulting revenue and income effects are recognized in the period of
the adjustments.
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.
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. The Company also recognizes that the loss of one or
more key management and technical personnel could adversely affect aspects of
the Company's business. To mitigate this risk, several senior program manager
positions were created in recent years. The Company relies on its executives and
program managers for the acquisition and negotiation of government awards,
preparation of proposals, and the general direction and management of the
Company. The Company believes that its future success depends on attracting and
retaining highly skilled technical personnel and other employees.
Management believes that the market for Internet software is a
significant new opportunity for the Company and that it is in an excellent
position to convert software developed under government R&D contracts into new
commercial products. The market for Internet software, however, is at an early
stage of development, rapidly evolving, and characterized by an increasing
number of market entrants who have introduced or are developing competing
software products and services. As is typical for a new and rapidly evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. Further, aspects of the
Internet (including security, reliability, cost, ease of use and quality of
services) are undergoing rapid evolution that may affect growth of the use of
the Internet in general and of Internet software in particular. The demand for
Internet software will require broad acceptance of new methods of conducting
<PAGE>
12
business and exchanging information over the Internet. The demand for products
developed by the Company cannot be determined, nor can the viability of these
products in the marketplace be estimated at this time due to the explosive
growth and competitive nature of the environment. As the market continues to
expand, there can be no assurance that the Company will be able to develop and
bring to market products that will gain market acceptance or generate
significant revenue or profits. If the Internet E-Commerce develops more slowly
than expected, becomes saturated with competitors, or if the Company's products
for the Internet market do not achieve market acceptance, the Company's
business, financial condition, and results of operations may be materially and
adversely affected.
The Company's operating results are affected by a wide variety of
factors, including successful commercialization of the Company's products,
competition from larger companies, ability to staff and recruit employees,
general economic conditions, and government intervention.
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 properly
recognize date-sensitive information when the year changes to 2000. The
consequences of this issue may include systems failures and business process
interruption.
Although most of the hardware and software currently in use at the
Company are 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 validation and remediation, if any, of its
internal systems, as well as to develop contingency plans for certain internal
systems, by mid-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. 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 accurately process date-sensitive information
beyond Y2K, 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 are 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 replace its telephone system and
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 DoD payment
systems are Y2K compliant and are targeted to be on Y2K compliant platforms by
the end of May 1999. Since the majority of DoD payments are made by electronic
funds transfer (EFT), systems will be tested with the Federal Reserve System
(FRB) 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.
<PAGE>
13
Results of Operations
1998 compared to 1997
Revenues rose $1,105,919, or 10%, to $12,200,849 in 1998, from
$11,094,930 in 1997. Revenue from service contracts awarded by agencies of the
Federal government accounted for 99% of total revenues. Revenues are generated
when direct labor or other direct costs, such as subcontractors and consultants,
are incurred in the performance of contracts. Between 1997 and 1998, revenues
increased primarily because of anticipated growth in the demand for technical
services on government contracts awarded in previous periods. Due to changing
priorities at the government customer agency, a number of long-term contracts
were concluded late in 1998. The effect of this change in priorities was not
evident in 1998, but it may adversely affect future revenue growth. The company
often engages subcontractors and consultants to work on larger and more complex
projects. Teaming arrangements help the Company compete for new business,
because they complement our skill set. For the year ended December 31, 1998,
subcontractor and consultant costs were $2,760,906, compared to $2,417,308 in
1997. The subcontractor and consultant costs incurred by the Company in the
performance of the contracts are reimbursed by the government and the results
are reflected in revenues.
Cost of revenues increased 9% to $8,244,290 in 1998 from $7,575,634 in
1997. The increase was mostly attributable to the aforementioned growth in
contract services and use of subcontractors and consultants, the costs of which
accounted for nearly 33% of the total cost of revenues in 1998. Since revenues
and cost of revenues grew at approximately the same rate, cost of revenues
remained at 68% of revenues in 1998 and 1997.
General and administrative costs were $2,373,789 and $2,122,499 in 1998
and 1997, respectively. The Company experienced cost increases related to office
rents, information system consultants, placement advertising, and director fees.
Overall, general and administrative costs were relatively stable between years,
reflecting the Company's conscientious effort to control administrative costs.
General and administrative costs remained at 19% of revenues between 1998 and
1997.
Sales and marketing costs increased $229,165 to $764,911 in 1998 from
$535,746 in 1997, as the Company built a team and dedicated increasingly
substantial resources to market and sell commercial Internet products and
services. The Company's sales and marketing efforts include applications
engineering and technical support, direct sales efforts, as well as trade shows,
demonstrations, advertising and other traditional marketing activities.
The Company expended $132,501 of its internally funded research and
development ("R&D") costs in 1998 and $206,603 in 1997. Most of the
Company-sponsored R&D was concentrated in the development of commercial products
for the Internet. The development of commercial products for the Internet has
not achieved significant revenues to date. The majority of the Company's R&D
efforts were funded externally through government projects (and recorded as cost
of revenues), which are expected to provide the basis for future commercial
development opportunities. The Company also capitalized $267,046 and $10,712 of
computer software development costs in the years ended December 31, 1998 and
1997, respectively.
Interest income was $102,945 in 1998 versus $83,229 in 1997. The
increase was primarily due to increased cash balances during the year. Other
income and expense decreased to $2,065 in 1998 from $1,145,108 in 1997. Included
in other income in 1997 was the aforementioned settlement of a patent lawsuit
with Trilogy Development Group that accounted for approximately $1.1 million of
other income.
Net income in 1998 was $785,620 versus $2,759,654 in 1997. Diluted net
income per share was $.14 for 1998 and $.48 in 1997.
<PAGE>
14
Liquidity and Capital Resources
As of December 31, 1998, unused sources of liquidity of the Company
were $2,378,390 in cash and cash equivalents, an increase of $206,155 over the
previous year. The Company generated cash reserves of $570,282 from its
operating activities and $102,962 from issuance of common stock to employees
exercising their stock options. It invested $267,046 for developing capitalized
software and $198,122 for purchases of computer equipment and other
improvements.
The Company believes that the present level of cash and cash
equivalents is adequate to service the liquidity needs of the Company in 1999.
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 that have
been fulfilled. The line expires in June 1999 and is renewable. The Company did
not utilize the credit line in 1998.
Item 7. Financial Statements
The response to this item is incorporated by reference in a separate
section of this report. See Exhibits, Financial Statement Schedules and Reports
on Form 8-K, Item 13(a)(1) and (2).
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
15
PART III
- --------------------------------------------------------------------------------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 15(a) of the Exchange Act
The information required by Item 9 regarding directors and executive
officers of the Company is incorporated herein by reference to the sections
entitled "Election of Directors" and "Executive Compensation - Employment
Arrangements" included in the definitive proxy statement for the Company's 1999
Annual Meeting of Stockholders (the "1999 Annual Meeting Proxy Statement").
Item 10. Executive Compensation
The information required by Item 10 is incorporated herein by
reference to the section entitled "Executive Compensation and Other Matters" and
"Proposal 1: Election of Directors - Directors Compensation" included in the
1999 Annual Meeting Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 is incorporated herein by
reference to the section entitled "Security Ownership" included in the 1999
Annual Meeting Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 is incorporated herein by
reference to the section entitled "Certain Relationships and Other Transactions"
included in the 1999 Annual Meeting Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) and (2): Financial Statements and Financial Statement Schedules
Reference is made to the Index to Financial Statements preceding the
consolidated financial statements included in response to Part II, Item 7 of
this annual report for a list of all financial statements filed.
(a)(3): Exhibits
Set forth below is a list of all exhibits filed herewith or
incorporated by reference as part of this Annual Report on Form 10-KSB.
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of
Teknowledge Corporation
3.2 Amended and Restated Bylaws of Teknowledge Corporation
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 Change of Control Agreement, dated November 21, 1994, between
Teknowledge Corporation and Frederick Hayes-Roth and
Neil Jacobstein (1)
<PAGE>
16
Exhibit No. Description
10.2 Teknowledge Corporation 1998 Stock Option Plan (3)
23.1 Consent of Arthur Andersen LLP, independent public accountants
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
Reference is made to the response to Item 13(a)(3) above for a list of
all exhibits filed herewith or incorporated by reference as part of this Annual
Report on Form 10-KSB. Reference is also made to the Exhibit Index forming part
of this Annual Report on Form 10-KSB.
(d) Financial Statement Schedules
Reference is made to the response to Item 13(a)(1) and (2) above with
regard to the financial statement schedules filed as part of this Annual Report
on Form 10-KSB.
<PAGE>
17
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: March 30, 1999 By: /s/ Frederick Hayes-Roth
------------------------
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 March 30, 1999
- ------------------------------ of Directors and
Frederick Hayes-Roth Chief Executive Officer
(Principal Executive
Officer)
/s/ Neil A. Jacobstein President, Chief Operating March 30, 1999
- ------------------------------ Officer and Director
Neil A. Jacobstein
/s/ Dennis A. Bugbee Director of Finance, March 30, 1999
- ------------------------------ Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
/s/ Lawrence Druffel Director March 30, 1999
- ------------------------------
Lawrence Druffel
/s/ General Robert T. Marsh Director March 30, 1999
- ------------------------------
General Robert T. Marsh (Ret.)
/s/ William G. Roth Director March 30, 1999
- ------------------------------
William G. Roth
/s/ James C. Workman Director March 30, 1999
- ------------------------------
James C. Workman
<PAGE>
18
ANNUAL REPORT ON FORM 10-KSB
ITEM 7, ITEM 13(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND FOR THE TWO YEARS ENDED DECEMBER 31, 1998
TEKNOWLEDGE CORPORATION
PALO ALTO, CALIFORNIA
<PAGE>
19
TEKNOWLEDGE CORPORATION
FORM 10-KSB - ITEM 13(a)(1) and (2)
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Teknowledge Corporation are
included in Item 7:
Page
Report of Independent Public Accountants 20
Consolidated Balance Sheet - December 31, 1998 21
Consolidated Statements of Operations and Comprehensive Income
- - Years ended December 31, 1998 and 1997 22
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998 and 1997 23
Consolidated Statements of Cash Flows - Years ended
December 31, 1998 and 1997 24
Notes to Consolidated Financial Statements 25 - 35
<PAGE>
20
Report Of Independent Public Accountants
To Teknowledge Corporation:
We have audited the accompanying consolidated balance sheet of Teknowledge
Corporation (a Delaware Corporation) and subsidiary as of December 31, 1998, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Teknowledge Corporation and
subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
San Jose, California
February 10, 1999
<PAGE>
21
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEET
As of December 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 2,378,390
-------------
Receivables:
Customer - billed, net of allowance of $10,000 2,471,242
Customer - unbilled 62,541
-------------
Total receivables 2,533,783
-------------
Deferred tax asset, short-term 400,000
Deposits and prepaid expenses 116,255
-------------
Total current assets 5,428,428
-------------
Capitalized software development costs, net of accumulated
amortization of $11,562 267,206
-------------
Fixed assets, at cost
Computer and other equipment 2,939,274
Furniture and fixtures 112,647
Leasehold improvements 838,398
-------------
3,890,319
Less accumulated depreciation and amortization (3,385,942)
-------------
504,377
-------------
Deferred tax asset, long-term 500,000
-------------
Total assets $ 6,700,011
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 661,321
Payroll and related 678,514
Other accrued liabilities 267,863
-------------
Total current liabilities 1,607,698
-------------
Commitments and contingencies (Note 4 and 11)
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 4,954,954 shares 49,550
Additional paid-in capital 1,553,980
Retained earnings since January 1, 1993
(following quasi-reorganization) 3,488,783
-------------
Total stockholders' equity 5,092,313
-------------
Total liabilities and stockholders' equity $ 6,700,011
=============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
22
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Years ended December 31,
1998 1997
---- ----
Revenues $12,200,849 $ 11,094,930
---------- -----------
Costs and expenses:
Cost of revenues 8,244,290 7,575,634
General and administrative 2,373,789 2,122,499
Sales and marketing 764,911 535,746
Research and development 132,501 206,603
---------- -----------
Total costs and expenses 11,515,491 10,440,482
---------- -----------
Operating income 685,358 654,448
Interest income 102,945 83,229
Other income and expense, net (Note 10) 2,065 1,145,108
---------- -----------
Income before taxes 790,368 1,882,785
Provision (benefit) for income taxes 4,748 (876,869)
---------- -----------
Net income and comprehensive income $ 785,620 $ 2,759,654
========== ===========
Net income per share:
- Basic $ 0.16 $ 0.56
========== ===========
- Diluted $ 0.14 $ 0.48
========== ===========
Shares used in computing net income per share:
- Basic 4,887,910 4,942,900
========== ===========
- Diluted 5,763,361 5,775,787
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
23
<TABLE>
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Retained
Common Stock Additional Earnings
Shares Par Paid-in (Accumulated Treasury
Issued Value Capital Deficit) Stock Total
------ ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 5,219,354 $ 62,748 $ 2,191,013 $ (56,491)$ (3,000)$ 2,194,270
Exercise of stock options 49,783 2,490 16,078 - - 18,568
Net income - - - 2,759,654 - 2,759,654
Reversal of portions of
provisions made prior to
quasi-reorganization for
restructuring reserve - - 193,306 - - 193,306
Common stock received from
Trilogy settlement - - - - (1,005,757) (1,005,757)
Retirement of treasury stock (472,594) (23,630) (985,127) - 1,008,757 -
----------- -------- ---------- ------------- ---------- ----------
Balance, December 31, 1997 4,796,543 41,608 1,415,270 2,703,163 - 4,160,041
Exercise of stock options 158,839 7,942 95,020 - - 102,962
Net income - - - 785,620 - 785,620
Distribution of cash for
fractional shares due to
reverse stock split (428) - (1,921) - - (1,921)
Reversal of portions of
provisions made prior to
quasi-reorganization for
restructuring reserve - - 45,611 - - 45,611
----------- -------- ---------- ------------- ---------- ----------
Balance, December 31, 1998 4,954,954 $ 49,550 $ 1,553,980 $ 3,488,783 $ - $ 5,092,313
=========== ======== ========== ============= ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
24
<TABLE>
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 785,620 $ 2,759,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 319,578 326,805
Noncash portion of other income from Trilogy Settlement - (1,005,757)
Deferred tax asset - (900,000)
Changes in assets and liabilities:
Receivables (245,030) (999,350)
Deposits and prepaid expenses (18,350) (36,453)
Accounts payable (41,577) 493,136
Accrued liabilities (229,959) 225,852
---------- -----------
Net cash provided by operating activities 570,282 863,887
---------- -----------
Cash flows from investing activities:
Capitalization of software development costs (267,046) (10,712)
Purchase of fixed assets (198,122) (497,400)
---------- -----------
Net cash used for investing activities (465,168) (508,112)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 102,962 18,568
Redemption of fractional shares from reverse stock split (1,921) -
---------- -----------
Net cash provided by financing activities 101,041 18,568
---------- -----------
Net increase in cash and cash equivalents 206,155 374,343
Cash and cash equivalents at beginning of year 2,172,235 1,797,892
---------- -----------
Cash and cash equivalents at end of year $ 2,378,390 $ 2,172,235
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
25
TEKNOWLEDGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. History and Business
Teknowledge Corporation (the "Company") was incorporated on
July 8, 1981 under the laws of the State of Delaware and is the
surviving corporation of the merger of American Cimflex Corporation
("Cimflex") and Teknowledge Inc., which was consummated in 1989. Prior
to 1993, Cimflex restructured and divested a significant part of its
operations. Reserves for discontinued operations and restructuring
obligations were established for those events. In December 1992, the
Board of Directors approved a quasi-reorganization, which had the
effect of eliminating the accumulated deficit at December 31, 1992 of
approximately $58 million by reducing paid-in-capital. Adjustments to
previously established reserves and any subsequent realization of tax
benefits existing at the date of the quasi-reorganization will be
recorded as adjustments to additional paid-in-capital. As of December
31, 1998, there was no remaining accrued liability for discontinued
operations or restructuring obligations and no benefits have been
recorded for tax loss and credit carryforwards existing at the date of
the quasi-reorganization (see Note 6).
The Company is in the Internet knowledge system business.
Almost all of Teknowledge's projects involve processing application
knowledge and distributing it over the Internet. Teknowledge is
leveraging its core competencies in knowledge-based systems and
large-scale distributed object-oriented software with the expanding
opportunities presented by the Internet and the World Wide Web. The
Company provides software products and consulting services for
government and commercial applications. The application areas are
addressed by five program areas: Distributed Systems Engineering,
Situation Assessment and Data Fusion, Education & Training
Technologies, Information Assurance, and Electronic Commerce
("E-Commerce") Systems.
The Company recognizes that the continued success of the
business is dependent on key management and technical personnel, the
loss of one or more of whom could adversely affect the Company's
business. The Company is also subject to risks inherent to companies at
a similar stage of development, including the successful
commercialization of the Company's products, competition from larger
companies with financial resources greater than the Company, the
ability to retain and attract employees, and capital and financing
needs.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Consolidated Financial Statements
The consolidated financial statements include the accounts of
Teknowledge Corporation and its wholly owned subsidiary, Teknowledge
Federal Systems, Inc. All significant intercompany transactions and
balances have been eliminated.
<PAGE>
26
2. Summary of Significant Accounting Policies (cont'd)
Cash and Cash Equivalents
The Company considers all highly liquid investments, with
original maturity dates of less than 90 days, as cash equivalents. As
of December 31, 1998, the Company's funds were invested almost entirely
in money market instruments at various institutions.
Unbilled Receivables
Unbilled receivables represent differences between billings
and revenues recognized on cost-type contracts. The unbilled amounts
primarily represent (i) timing differences between incurred costs and
billed costs, or (ii) a portion of the earned fee held back as
retention until the contract is completed and the final indirect
overhead rates have been determined. A substantial portion of the
retained fee may be billed to the government after the final indirect
rates are submitted to the government; however, they are subject to
future review and approval by the Defense Contract Audit Agency. The
Company has received final overhead rate approval for costs incurred
through December 31, 1993.
Concentration of Credit Risk
The Company performs periodic credit evaluations of the
financial condition of commercial customers and generally does not
require collateral. Historically, the Company has experienced minimal
write-offs from commercial receivables. The Company has not experienced
a credit loss from a government customer nor does it anticipate such
losses.
Capitalized Software Development Costs
Teknowledge capitalizes software development costs starting
from the point technological feasibility is determined and continuing
until the general availability of the product. During 1998 and 1997,
software development costs of $267,046 and $10,712 were capitalized,
respectively. Amortization costs were $27,238 in 1998 and $83,408 in
1997.
The Company's policy is to amortize capitalized software
development costs by the greater of (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated
future gross revenues for that product, or (b) the straight-line method
over the remaining estimated economic life of the product.
Fixed Assets
Equipment and improvements, which include assets under capital
leases, are depreciated using the straight-line method over their
estimated useful lives ranging from three to five years. Maintenance
and repairs are charged to expense as incurred. Leasehold improvements
are amortized over the shorter of the useful life or the remaining
lease term.
<PAGE>
27
2. Summary of Significant Accounting Policies (cont'd)
Revenue Recognition
(a) Government Contracts
The Company's revenues are primarily generated from U.S.
Government contracts under which the Company may be either the prime
contractor or a subcontractor. The Company principally uses the
percentage-of-completion method of accounting for contract revenues.
The percentage-of-completion method is based on total costs incurred to
date compared with estimated total costs upon completion of contracts.
The Company charges all losses on contracts to operations in the period
when the loss is known.
In both 1998 and 1997, approximately 99% of the Company's
revenues were recorded in connection with U.S. Government contracts,
principally of the cost-plus-fixed-fee type. These contracts are
predominantly funded by the Defense Advanced Research Projects Agency
(DARPA) and administered by various government agencies.
For the year ended December 31, 1998, a classified customer
was the sponsor of the Company's largest government contract,accounting
for approximately 17% of total revenues. The DARPA Information
Technology Office and Information Systems Office were the sponsors for
the second and third largest government contracts, each contributed 14%
of total revenues. For the year ended December 31, 1997, the DARPA
Information Systems Office was the sponsor for the first three largest
government contracts, accounting for approximately 32% of total
revenues.
(b) Commercial Contracts
Revenue earned under software license agreements with end
users are generally recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or
determinable, and collection is probable. Revenue from post-contract
customer support is recognized ratably over the period the customer
support services are provided, and software services revenue is
recognized as services are performed.
Revenues from professional services provided principally under
technology contracts are recognized when costs for time and materials
are incurred.
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.
<PAGE>
28
2. Summary of Significant Accounting Policies (cont'd)
Net Income Per Share
Basic earnings per share is calculated by dividing net income
by the weighted average shares of common stock outstanding during the
period. Diluted earnings 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 included
in the diluted calculation consist of dilutive shares issuable upon the
exercise of outstanding common stock options.
A summary of the earnings per share calculation for each of
the two years ended December 31, 1998 and 1997 is as follows (in
thousands, except per share amounts). All share amounts have been
adjusted for the effect of the one-for-five reverse stock split
effective December 22, 1998.
1998 1997
---- ----
Basic earnings per share:
Net income $ 786 $ 2,760
--------- --------
Weighted average common shares 4,888 4,943
--------- --------
Basic earnings per share $ 0.16 $ 0.56
========= ========
Diluted earnings per share:
Net income $ 786 $ 2,760
--------- --------
Weighted average common shares 4,888 4,943
Weighted average common shares equivalent:
Options 875 833
--------- --------
Diluted weighted average common shares 5,763 5,776
--------- --------
Diluted earnings per share $ 0.14 $ 0.48
========= ========
Accounting for Stock-Based Compensation
Effective January 1, 1997, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." The adoption did not
have a significant effect on the Company's results of operations as the
Company continues to apply the principles of APB Opinion No. 25 and
related interpretations in accounting for the Company's stock plans.
Note 9 to the Consolidated Financial Statements contains a summary of
the pro forma effects on reported net income and earnings per share for
1998 and 1997 based on the fair value of the options granted at the
grant date as prescribed by SFAS No. 123.
<PAGE>
29
2. Summary of Significant Accounting Policies (cont'd)
Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
requires a new basis of determining reportable business segments, i.e.,
the management approach. This approach requires that business segment
information used by management to assess performance and manage Company
resources be the source for information disclosure. On this basis, the
Company is organized and operates as one business segment, providing
software products and consulting services for government and commercial
applications. As a result, the adoption of SFAS No. 131 had no impact
on the Company's disclosures or financial statements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which requires companies to record derivative
financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship
must be highly effective in achieving offsetting changes in fair value
or cash flows. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. This Statement will not
have a material impact on the financial condition or results of the
operations of the Company.
In March 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, `Software Revenue Recognition,'" which defers
for one year the application of provisions in SOP 97-2 which limit what
is considered vendor-specific objective evidence of the fair value of
the various elements in a multiple element arrangement. All other
provisions of SOP 97-2 remain in effect. This SOP was effective as of
March 31, 1998. In October 1998, the AICPA issued SOP 98-9,
"Modification of SOP 97-2, `Software Revenue Recognition,' With Respect
to Certain Transactions," which amends paragraphs 11 and 12 of SOP
97-2, Software Revenue Recognition, to require recognition of revenue
using the "residual value method" under certain conditions. Effective
December 15, 1998, SOP 98-9 amends SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, `Software Revenue Recognition,'" to
extend the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of this SOP are effective for
transactions entered into in fiscal years beginning after March 15,
1999. The Company does not anticipate that these statements will have a
material adverse impact on its statement of operations.
<PAGE>
30
3. Other Accrued Liabilities
Other Accrued liabilities as of December 31, 1998 consist of
the following:
Provision for contract charges $ 175,000
Accrual for professional services 79,280
Miscellaneous 13,583
-------------
$ 267,863
=============
4. Commitments
Teknowledge leases its facilities and certain equipment under
operating leases. As of December 31, 1998, the Company had active
leases in the following locations:
Location Date Lease Expired
-------- ------------------
Palo Alto, California April 4, 1999
San Diego, California May 31, 1999
Arlington, Virginia January 31, 2002
Fairfax, Virginia June 30, 2002
The remaining obligations under these leases are as follows:
Year Ending
December 31,
------------
1999 $ 215,000
2000 160,000
2001 127,000
2002 45,000
------------
$ 547,000
============
Rent expense for the years ended December 31, 1998 and 1997
totaled $504,111 and $421,655, respectively.
5. Line of Credit
The Company has a $2,000,000 unsecured line of credit
agreement with a bank. The line expires in June 1999 and can be
extended from year to year. The Company can borrow up to 60% of the
eligible receivables base or $2,000,000, whichever is lower. The
maximum rate that may be charged is one percent over the bank's prime
rate. The agreement includes certain financial covenants and disclosure
requirements that were met during the year. The line was not utilized
in 1998.
<PAGE>
31
6. Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109 "Accounting for Income Taxes." SFAS No. 109 is an asset and
liability approach for computing deferred income taxes based on enacted
tax laws and rates applicable to the period in which the taxes become
payable.
The Company has reflected as a reduction to the provision for
income taxes the benefit from tax losses generated subsequent to the
date of the quasi-reorganization (see Note 1). The provision for income
taxes differs from the statutory U.S. Federal income tax rate due to
the following:
1998 1997
---- ----
Provision at U.S. statutory rate 34.0% 34.0%
State income taxes, net of Federal benefit 6.1 6.1
Change in valuation allowance (39.5) (86.7)
------ ------
Provision (benefit) for income taxes 0.6% (46.6)%
====== ======
The components of the net deferred income tax asset as of
December 31, 1998 was as follows:
Net operating loss carryforwards $ 24,511,845
Cumulative temporary differences 303,126
Tax credit carryforwards 1,017,339
--------------
25,832,310
Valuation allowance (24,932,310)
--------------
Net deferred income tax asset $ 900,000
==============
The valuation allowance consists of net operating losses,
cumulative temporary differences and tax credit carryforwards, which
may expire before they can be used. The Company believes sufficient
uncertainty exists regarding the realizability of these items, and
accordingly, a valuation allowance has been established.
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $72 million available to offset future
Federal taxable income. Any subsequent realization of tax loss
carryforwards that existed at the date of the quasi-reorganization will
be recorded as an adjustment to additional paid-in-capital. These loss
carryforwards expire through the year 2009. The availability and timing
of the amount of prior losses to be used to offset taxable income in
future years may be limited due to various provisions, including any
change in ownership interest of the Company resulting from significant
stock transactions.
Realization of the net deferred tax asset of $900,000 as of
December 31, 1998 is dependent on generating sufficient taxable income
to offset future deduction of the related items. Although realization
is not assured, management believes it is more likely than not that the
net deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced.
<PAGE>
32
7. 401(k) Plan
Teknowledge has a 401(k) plan covering all of the Company's
regular employees. Participants in the plan may make a contribution as
a percentage of their gross wages subject to the applicable government
limits. Effective January 1, 1999, the Board of Directors amended the
Plan, and increased the Company matching provision of eligible wages
from 4% to 5%. The Company matching contribution vests at 20% a year
over a five-year period. The Company contributed $143,333 and $115,599
to the plan, during 1998 and 1997, respectively.
8. Executive Compensation Plan
The Chief Executive Officer and the President of the Company
each have an employment agreement that provides for annual base
salaries and an incentive compensation plan with target objectives
established in the five strategic areas of cash flow, profitability,
bookings, new commercial lines, and recruiting, that were determined
and assessed by the Board of Directors to a maximum of 100% of base
salary. As of December 31, 1998, $155,162 in incentive compensation was
accrued for these executives and was included in Accrued Payroll &
Related Liabilities.
9. Stock-Based Compensation Plans
The Company has two stock option plans. The stock option plan
for employees is called the Teknowledge Corporation 1998 Stock Option
Plan (the "1998 Plan") and the stock option plan for Directors is
called the Teknowledge Plan for Non-Employee Directors (the "Directors'
Plan"). The Company accounts for these plans under APB Opinion No. 25.
Had compensation cost for this plan been determined consistent
with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
1998 1997
---- ----
Net Income As Reported $785,620 $2,759,654
Pro Forma $681,737 $2,642,156
Diluted EPS As Reported $.14 $.48
Pro Forma $.12 $.46
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be
expected in future years.
<PAGE>
33
9. Stock-Based Compensation Plans (cont'd)
The Company may grant options for up to 1,546,636 shares under
the 1998 Plan to employees. The Company has granted options for 347,900
shares ($2.15 - $8.60 per share) and 160,000 shares ($1.90 - $3.25 per
share) in 1998 and 1997, respectively, and has reserved for issuance a
total of 1,500,219 shares through December 31, 1998. The Board of
Directors has granted options to employees that are either incentive
stock options ("ISO") or non-statutory stock options ("NSO"). For ISO,
the exercise price of the common stock options granted under the 1998
Plan may not be less than the fair market price on the date of grant.
For NSO, the exercise price of the common stock may not be less than
85% of the fair market price of the common stock on the date of grant.
Options that have been granted normally vest in quarterly increments
starting the second year of a four-year term and expire ten years after
the grant date. The 1998 Stock Option Plan is scheduled to expire in
April 2008.
The Company also has a stock option plan for non-employee
directors. The aggregate number of shares issued under the Directors'
Plan, may not exceed 100,000 shares of Common Stock. 50,000 shares were
available for future grant as of December 31, 1998. Under this plan,
non-employee directors are entitled to receive annual option grants to
purchase 3,000 shares of Common Stock on their initial election to the
Board and thereafter on the anniversary date of their election to the
Board. Options, which are granted at fair market value, are exercisable
one year after the grant date and expire ten years from the grant date.
Options to purchase a total of 45,000 shares were outstanding as of
December 31, 1998 at $.75 to $8.15 per share and a weighted average of
$4.24 per share. Options for 33,000 shares at $.75 to $4.30 per share
and a weighted average of $2.82 per share were vested at December 31,
1998. No options were exercised during the year.
A summary of the status of the Company's stock option plans as
of December 31, 1998 and 1997, and changes during the years then ending
is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -------------------------------
Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Outstanding at beg. of year 1,268,516 $ 1.75 1,209,366 $ 1.64
Granted 347,900 2.85 198,000 2.41
Exercised (158,839) .65 (49,783) .37
Forfeited (192,678) 6.59 (89,067) 2.60
------------ ------------
Outstanding at end of year 1,264,899 1.44 1,268,516 1.73
------------ ------------
Exercisable at end of year 890,482 .91 1,117,341 1.63
Weighted average fair value
of options granted $2.26 $1.35
</TABLE>
<PAGE>
34
9. Stock-Based Compensation Plans (cont'd)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------- ------------------------------------------------ -------------------------------
Wtd Avg
Range of Number Remaining Number
Ex Prices Outstanding Plan Life Wtd Avg Exercisable Wtd Avg
($'s) 12/31/98 (Years) Ex Price 12/31/98 Ex Price
---------------- ------------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
.05 - .19 700,375 5.5 $ .15 700,375 $ .15
.20 - 4.99 510,308 8.7 2.22 162,891 2.12
5.00 - 13.15 54,216 4.8 10.73 27,216 13.15
------------------- -------------------
.05 - 13.15 1,264,899 6.8 1.44 890,482 .91
------------------- -------------------
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998 and
1997, respectively; risk-free interest rates of 5.5 and 6.3 percent;
expected lives of 5.5 and 5.3 years; expected volatility of 100% and
50%; and expected dividend yield of 0%.
As of December 31, 1998, the following number of shares of
Common Stock have been reserved for future issuance under both Plans:
Teknowledge Corporation 1998 Stock Option Plan 1,500,219
Stock Option Plan for Non-Employee Directors 95,000
---------
1,595,219
=========
10. Other Income and expense
The composition of other income and expense is as follows:
1998 1997
---- ----
Settlement of patent litigation, net $ - $ 1,145,108
Other 2,065 -
------------ -------------
Total $ 2,065 $ 1,145,108
============ =============
On May 15, 1997, the Company and Trilogy Development Group,
Inc. ("Trilogy") agreed to a settlement of all outstanding lawsuits
between the companies. The Settlement Agreement, License Agreement, and
Mutual Release specifies that the Company immediately grant to Trilogy
a non-exclusive, royalty-free license to the Company's United States
Patent 4,591,983 in exchange for 467,794 shares of Company stock owned
by Trilogy, with a fair market value of $1,006,000, based on the
average trading stock price over 6 months preceding the settlement, and
$400,000 in cash. After the provision for legal fees of $260,000, net
proceeds of $1,145,000 were reported as Other Income.
<PAGE>
35
11. Contingencies
Change of Control - Severance Benefits
In the event of a change of control, defined as any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation, the Chief Executive Officer and
the President of the Company will be entitled to severance benefits to
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 their most recent
respective annual salaries.
Rights Agreement
On January 29, 1996, the Company's Board of Directors approved
a Rights Agreement (the "Plan"). The adoption of the Plan is intended
as a means to guard against takeover tactics designed to gain control
of Teknowledge without paying all stockholders full and fair value.
Under the Plan, stockholders will receive 5 Rights to purchase
one one-hundredth of a share of a new series of Preferred Stock for
each outstanding share of Teknowledge Common Stock of record held at
the close of business on February 12, 1996. The Company has effected a
one-for-five reverse stock split on December 22, 1998. Pursuant to the
Plan, the number of Rights received per share of Common Stock held has
been proportionately adjusted to reflect the effect of the reverse
stock split.
The Rights, which will initially trade with the Common Stock,
become exercisable to purchase one one-hundredth of a share of the new
Preferred Stock, at $2.00 per Right, when a third party acquires 15
percent or more of Common Stock or announces a tender offer which could
result in such person owning 15 percent or more of Common Stock. Each
one one-hundredth of a share of the new Preferred Stock has terms
designed to make it substantially the economic equivalent of one share
of Common Stock. Prior to a third party acquiring 15 percent, the
Rights can be redeemed for $.001 each by action of the Board. Under
certain circumstances, if a third party acquires 15 percent or more of
Common Stock, the Rights permit the holders to purchase Teknowledge
Common Stock having a market value of twice the exercise price of the
Rights, in lieu of the Preferred Stock. In addition, in the event of
certain business combinations, the Rights permit purchase of the Common
Stock of an acquirer at a 50 percent discount. In either case, Rights
held by the acquirer will become null and void.
Exhibit 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:30 AM 12/22/1998
981495299 - 0917963
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TEKNOWLEDGE CORPORATION
Teknowledge Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Teknowledge
Corporation duly held on April 21, 1998, a resolution was duly
adopted setting forth a proposed amendment to the Certificate
of Incorporation of said corporation, declaring said amendment
to be advisable and proposing the consideration thereof by the
stockholders of said corporation at its 1998 Annual Meeting of
Stockholders. The resolution setting forth the proposed
amendment is as follows
RESOLVED, that the restated Certificate of
Incorporation of this corporation be amended to read
in its entirety as follows:
IV
This corporation is authorized to issue two
classes of shares designated respectively "Common
Stock" and "Preferred Stock", and referred to herein
either as Common Stock or Common Shares and Preferred
Stock or Preferred Shares, respectively. The number
of shares of Common Stock is 25,000,000, par value
$.01 and the number of shares of Preferred Stock is
2,500,000, par value $.01. Upon amendment of this
Certificate to read as herein set forth, each five
(5) shares of outstanding Common Stock are converted
into and reconstituted as one (1) share of Common
Stock.
SECOND: That, on June 25, 1998, the annual meeting of the stockholders
of said corporation was duly called and held, upon notice in
accordance with Section 222 of the General Corporation Law of
the State of Delaware, at which meeting the necessary number
of shares as required by statute and said corporation's
Certificate of Incorporation and Bylaws, were voted in favor
of such proposed amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, said Teknowledge Corporation has caused
this certificate to be signed by Neil A. Jacobstein, its President and Chief
Operating Officer, and Dennis A. Bugbee, its Secretary and Principal Accounting
Officer on this 11th day of December 1998.
TEKNOWLEDGE CORPORATION
By: /s/ Neil A. Jacobstein
----------------------------------
Neil A. Jacobstein, President, COO
ATTEST:
/s/ Dennis A. Bugbee
- ------------------------------
Dennis A. Bugbee,
Secretary, Director of Finance
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
TEKNOWLEDGE CORPORATION
Amended and Restated
By-Laws Adopted:
January 26, 1999
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
TEKNOWLEDGE CORPORATION
TABLE OF CONTENTS
ARTICLE I - MEETINGS OF STOCKHOLDERS...........................................1
SECTION 1. Annual Meetings...........................................1
SECTION 2. Special Meetings..........................................1
SECTION 3. Notice of Meetings........................................2
SECTION 4. Conduct of Meetings.......................................2
SECTION 5. Inspectors of Election....................................3
SECTION 6. Voting....................................................3
SECTION 7. Quorum....................................................4
SECTION 8. List of Stockholders......................................4
SECTION 9. No Action Without Meeting.................................4
ARTICLE II - BOARD OF DIRECTORS................................................4
SECTION 1. General Powers............................................4
SECTION 2. Number, Election. Term of Office and Qualifications.......4
SECTION 3. Resignation...............................................5
SECTION 4. Removal or Increase in Number of Directors by
the Stockholders...............................5
SECTION 5. Vacancies.................................................5
SECTION 6. Annual and Regular Meetings...............................5
SECTION 7. Special Meetings..........................................5
SECTION 8. Notice of Special Meetings................................6
SECTION 9. Quorum....................................................6
SECTION 10. Regulations...............................................6
SECTION 11. Compensation..............................................6
SECTION 12. Participation in a Meeting by Conference Telephone........6
SECTION 13. Written Consent in Lieu of Meeting........................6
ARTICLE III - EXECUTIVE AND OTHER COMMITTEES...................................7
SECTION 1. Designation, Term of Office and Qualifications............7
SECTION 2. Powers....................................................7
SECTION 3. Resignation, Removal or Dissolution.......................7
SECTION 4. Vacancies.................................................7
SECTION 5. Meetings..................................................7
SECTION 6. Quorum....................................................8
SECTION 7. Other Committees..........................................8
<PAGE>
ARTICLE IV - NOTICES...........................................................8
SECTION 1. Waiver of Notice..........................................8
SECTION 2. Attendance at Meeting.....................................9
ARTICLE V - OFFICERS...........................................................9
SECTION 1. Number....................................................9
SECTION 2. Selection, Term of Office and Qualifications..............9
SECTION 3. Resignation...............................................9
SECTION 4. Removal...................................................9
SECTION 5. Vacancies.................................................9
SECTION 6. Chairman.................................................10
SECTION 7. President and Chief Operating Officer....................10
SECTION 8. Vice Presidents..........................................10
SECTION 9. Secretary................................................10
SECTION 10. Treasurer................................................10
SECTION 11. Surety Bonds.............................................11
ARTICLE VI - EXECUTION OF INSTRUMENTS.........................................11
SECTION 1. Execution of Instruments Generally.......................11
SECTION 2. Execution of Checks, All Evidence of Indebtedness
and Similar Instruments.......................11
ARTICLE VII - CAPITAL STOCK...................................................11
SECTION 1. Certificate of Stock.....................................11
SECTION 2. Transfer of Stock........................................12
SECTION 3. Lost, Stolen or Destroyed Certificates...................12
SECTION 4. Regulations, Transfer Agents and Registrars..............12
SECTION 5. Making of Record Date....................................12
SECTION 6. Dividends and Reserves...................................12
SECTION 7. Record Ownership.........................................13
ARTICLE VIII - BOOKS, ACCOUNTS AND OTHER RECORDS..............................13
ARTICLE IX - CORPORATE SEAL...................................................13
ARTICLE X - FISCAL YEAR.......................................................13
ARTICLE XI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS.....................................................13
SECTION 1. Directors and Executive Officers.........................13
SECTION 2. Other Officers, Employees and Other Agents...............14
SECTION 3. Good Faith...............................................14
SECTION 4. Expenses.................................................14
SECTION 5. Enforcement..............................................16
SECTION 6. Non Exclusivity of Rights................................16
SECTION 7. Survival of Rights.......................................17
<PAGE>
SECTION 8. Insurance................................................17
SECTION 9. Amendments...............................................17
SECTION 10. Savings Clause...........................................17
SECTION 11. Certain Definitions......................................17
ARTICLE XII - AMENDMENTS......................................................18
<PAGE>
1
TEKNOWLEDGE CORPORATION
(a Delaware Corporation)
AMENDED AND RESTATED
BY LAWS
I.
MEETINGS OF STOCKHOLDERS
1. Annual Meetings. The annual meeting of the stockholders of the Corporation
shall be held at such date and time and place, either within or without the
state of Delaware, as the Board of Directors may designate. At such annual
meeting, Directors shall be elected and any other business may be transacted
which may properly come before the meeting.
2. Special Meetings.
(a) "Special meetings may be called at any time by (i) the board of directors,
(ii) the chairman of the board, (iii) the president, (iv) the chief executive
officer or (v) subject to the procedures set forth in this Section 2, one or
more stockholders holding shares in the aggregate entitled to cast not less than
ten percent (10%) of the votes at such meeting.
Upon request in writing sent by registered mail to the president or
chief executive officer by any stockholder or stockholders entitled to call a
special meeting of stockholders pursuant to this Section 2(a), the board of
directors shall determine a place and time for such meeting, which time shall be
not less than one hundred twenty (120) nor more than one hundred thirty (130)
days after the receipt of such request, and a record date for the determination
of stockholders entitled to vote at such meeting shall be fixed by the board of
directors, in advance, which shall not be more that 60 days nor less than 10
days before the date of such meeting, nor more than 60 days prior to any other
action. Following such receipt of a request and determination of the validity of
the request, it shall be the duty of the secretary to cause notice to be given
to the stockholders entitled to vote at such meeting, in the manner set forth in
Section 3, hereof, that a meeting will be held at the place and time so
determined.
(b) Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, (x)
nominations for the election of directors and (y) business proposed to be
brought before any stockholder meeting, may be made by the Board of Directors or
a proxy committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of directors generally. However, any such
stockholder may nominate one or more persons for election as directors at a
meeting or propose business to be brought before a meeting, or both, only if
such stockholder has given timely notice in proper written form of his intent to
make such nomination or nominations or to propose such business. To be timely, a
stockholder's notice must be delivered to or mailed and received by the
Secretary of the Corporation not later than ninety (90) days prior to such
meeting; provided, however, that in the event that less than one hundred (100)
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2
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the tenth (10th) day following the date
on which such notice of the date of such meeting was mailed or such public
disclosure was made. To be in proper written form, a stockholder's notice to the
Secretary shall set forth:
(i) the name and address of the stockholder who intends to make the nominations
or propose the business and, as the case may be, of the person or persons to be
nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and, if applicable, intends to
appear in person or by proxy at the meeting to nominate the person or persons or
to bring such business before the meeting specified in the notice;
(iii) if applicable, a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder;
(iv) such other information regarding each nominee or each matter of business to
be proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated or the matter been proposed by the
Board of Directors; and
(v) if applicable, the consent of each nominee to serve as a Director of the
Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
3. Notice of Meetings. Written notice of the time, place and purposes of each
meeting of the stockholders shall be given by, or at the direction of, the
Secretary or person(s) authorized to call the meeting and shall be served
personally or by mail on each stockholder of record entitled to vote at such
meeting not less than ten (10) nor more than fifty (50) days before the meeting.
If mailed, such notice shall be directed to each such stockholder at his address
as it appears on the stock book of the Corporation unless he shall have filed
with the Secretary a written request that notice intended for him be mailed to
some other address, in which case it shall be mailed to the address designated
in such request.
4. Conduct of Meetings. Each meeting of the stockholders shall be presided over
by the Chairman and Chief Executive Officer (in accordance with the provisions
of Section 6 of Article V of these Bylaws) or, if such officer shall not be
present, by the President and Chief Operating Officer, or if such officer shall
not be present, by such person as may be designated from time to time by the
Board of Directors or, in the absence of such person or if there shall be no
such designation, by a chairman to be chosen at the meeting. The Secretary of
the Corporation shall act as secretary of each meeting of the stockholders, or
if he shall not be present, such person as may be designated by the Board of
Directors shall act as such secretary or, in the absence of such person or if
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3
there shall be no such designation, the meeting may choose a secretary.
Unless otherwise approved by the chairman of the meeting (the
"Chairman"), attendance at the stockholders' meeting is restricted to
stockholders of record, persons authorized in accordance with Section 6 of
Article I of these Bylaws to act by proxy, and officers of the Corporation. The
Chairman shall call the meeting to order, establish the agenda, and conduct the
business of the meeting in accordance therewith or, at the Chairman's
discretion, it may be conducted otherwise in accordance with the wishes of the
stockholders in attendance. The date and time of the opening and closing of the
polls for each matter upon which the stockholders will vote at the meeting shall
be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 4 and Section
2(b) above. The Chairman of a meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 4 and Section 2(b), and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
5. Inspectors of Election. At each meeting of stockholders at which an election
of Directors is to be held, the chairman of the meeting shall appoint one or
more persons, who need not be stockholders, to act as inspectors of election at
such meeting. The inspectors so appointed, before entering on the discharge of
their duties, shall take and subscribe an oath or affirmation faithfully to
execute the duties of inspectors at such meeting with strict impartiality and
according to the best of their ability, and thereupon the inspectors shall take
charge of the polls and after the balloting shall canvass the votes and make a
certificate of the results of the vote taken. No Director or candidate for the
office of Director shall be appointed an inspector.
6. Voting. At each meeting of the stockholders, each stockholder entitled to
vote at such meeting shall be entitled to one vote for each share of stock
standing in his name on the books of the Corporation and may vote either in
person or by proxy, but no proxy shall be voted after three years from its date
unless such proxy provides for a longer period. Every proxy must be executed in
writing by the stockholder or by his duly authorized attorney.
At each meeting of the stockholders, if there shall be a quorum, the
vote of the holders of a majority of the shares of stock present, in person or
by proxy, and entitled to vote thereat, shall decide all matters brought before
such meeting, except as otherwise provided by law, by the Certificate of
Incorporation or by these By Laws.
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4
7. Quorum. At all meetings of the stockholders, the presence, in person or by
proxy, of the holders of record of a majority of the shares of stock issued and
outstanding, and entitled to vote thereat, shall be necessary and sufficient to
constitute a quorum for the transaction of business, except as otherwise
provided by law, by the Certificate of Incorporation or by these By Laws. In the
absence of a quorum, the holders of record of a majority of the shares of stock
present, in person or by proxy, and entitled to vote thereat, or if no such
stockholders are present in person or by proxy, any officer entitled to preside
at, or act as secretary of, such meeting, without notice other than by
announcement at the meeting, may adjourn the meeting from time to time, for a
period of not more than thirty (30) days at one time, until a quorum shall
attend. At any such adjourned meeting at which a quorum shall be present in
person or by proxy, any business may be transacted that might have been
transacted at the meeting as originally called.
8. List of Stockholders. The officer who shall have charge of the stock ledger
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
such meeting, arranged in alphabetical order with the address, and the number of
shares registered in the name, of each such stockholder. Such list shall be open
to the examination of any stockholder for ten (10) days prior to the meeting at
the place of the meeting and shall be produced and kept at the time and place of
the meeting during the whole time thereof and subject to the inspection of any
stockholder who may be present.
9. No Action Without Meeting. Any action required or permitted to be taken by
the stockholders of the Corporation must be effected at a duly called annual or
special meeting of such holders and may not be effected by any consent in
writing by such holders.
II.
BOARD OF DIRECTORS
1. General Powers. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the property, affairs and business of the
Corporation shall be managed by the Board of Directors. In addition to the
powers and authority expressly conferred on it by these By Laws, the Board of
Directors may exercise all such powers of the Corporation, and do all such
lawful acts and things, as are not by law, by the Certificate of Incorporation
or by these By Laws directed or required to be exercised or done by the
stockholders.
2. Number, Election. Term of Office and Qualifications. The authorized number of
Directors of the Corporation shall consist of a maximum of ten (10) directors,
with the exact number as fixed from time to time by the Board of Directors
either by a resolution or a by law duly adopted by the Board of Directors.
Except as provided in Section 4 or 5 of this Article II, the Directors shall be
elected at the annual meeting of the stockholders. All elections of Directors
shall be by a majority of the votes cast. Except as provided by law, each
Director (whether elected at a meeting of the stockholders or otherwise) shall
continue in office until the annual meeting of the stockholders held next after
his election and until his successor shall have been elected and shall qualify,
or until his death, resignation or removal in the manner provided in Section 3
or 4 of this Article II. No Director need be a stockholder.
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5
3. Resignation. Any Director may resign at any time by giving written notice to
the Chairman or the Secretary. Unless otherwise specified therein, such
resignation shall take effect on receipt thereof.
4. Removal or Increase in Number of Directors by the Stockholders. Any Director
may be removed at any time, either with or without cause, by the affirmative
vote of the holders of record of a majority of the shares of stock issued and
outstanding and entitled to vote, given at a meeting of the stockholders called
for that purpose. Any vacancy in the Board of Directors (i) resulting from any
such removal, or (ii) resulting from any increase in the number of Directors at
a meeting of the stockholders, may be filled at such meeting in the manner
provided in Section 2 of this Article II, provided that, in the event that the
stockholders do not fill such vacancy at such meeting, such vacancy may be
filled in the manner provided in Section 5 of this Article II.
5. Vacancies. If any vacancy shall occur in the Board of Directors by reason of
death, resignation, removal, increase in the number of Directors (whether by
action of the Board of Directors or the stockholders) or otherwise, such vacancy
may be filled, subject to the provisions of Section 4 of this Article II, by a
majority vote of Directors then in office, though less than a quorum, provided,
however, that a Director so elected to fill such a vacancy may be displaced in
the manner provided by law.
In the event that the resignation of any Director shall specify that it
shall take effect at a future date, the vacancy resulting from such resignation
may be filled by a majority vote of the Directors then in office, including that
of the Director who shall have so resigned, and the vote thereon shall take
effect when such resignation shall become effective.
6. Annual and Regular Meetings. As soon as practicable after the annual meeting
of the stockholders in each year, an annual meeting of the Board of Directors
shall be held at such time and place as the Board may determine by resolution
duly adopted at any meeting of the Board, for organization of the Board of
Directors, for the election of officers and for the transaction o such other
business as may properly come before the meeting.
Regular meetings of the Board of Directors shall be held at such times
and places (within or without the State of Delaware) as the Board may from time
to time determine by resolution duly adopted at any meeting of the Board.
7. Special Meetings. A special meeting of the Board of Directors may be called
at any time by the Chairman and shall be called by the Chairman or the Secretary
on the written request of two Directors, and shall be held at such time and
place (within or without the State of Delaware) as may be fixed by the Chairman
or by such Directors in such request, as the case may be, provided that the time
so fixed shall permit the giving of notice as provided in Section 8 of this
Article II.
8. Notice of Special Meetings. Notice of the time and place of each special
meeting of the Board of Directors shall be sent to each Director by mail,
facsimile, telegraph, wireless telegraph, radio or cable, addressed to him at
his address as it appears on the record of the Corporation, at least ten (10)
days before the day on which such meeting is to be held, or telephoned, sent by
facsimile (with confirmation of receipt) or delivered to him personally, at
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6
least forty eight (48) hours before the time at which the meeting is to be held.
Except as otherwise provided in these By Laws, or by law, such notice need not
state the purposes of the meeting.
9. Quorum. At all meetings of the Board of Directors the presence in person of a
majority of the Directors then in office, but in no event less than one third
(1/3) of the total number of Directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and, except as otherwise
provided by law, by the Certificate of Incorporation or by these By Laws, if a
quorum shall be present, the act of a majority of the Directors present shall be
the act of the Board of Directors. In the absence of a quorum, a majority of the
Directors present, or if no Director is present, any officer entitled to preside
at, or act as secretary of, such meeting, without notice other than by
announcement at the meeting, may adjourn the meeting from time to time, for a
period of not more than thirty (30) days at any one time, until a quorum shall
be present.
10. Regulations. The Board of Directors may adopt such rules and regulations for
the conduct of its meetings and for the management of the property, affairs and
business of the Corporation as it may deem proper, not inconsistent with law,
the Certificate of Incorporation or these By Laws.
11. Compensation. Directors, as such, shall receive no stated salary for their
services, but Directors who are not full time employees of the Corporation may
receive such compensation for their services and allowances for expense, as the
Board of Directors may fix from time to time. Nothing herein shall be construed
to preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
12. Participation in a Meeting by Conference Telephone. Any member of the Board
of Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment by means of which all persons
participating in a meeting pursuant to this section shall constitute presence in
person at such meeting within the meaning of Section 9 of this Article II, or
for any other purpose.
13. Written Consent in Lieu of Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if a written consent thereto shall be signed by all
members of the Board or of such committee, as the case may be, and such written
consent shall be filed with the minutes of proceedings of the Board or
committee.
III.
EXECUTIVE AND OTHER COMMITTEES
1. Designation, Term of Office and Qualifications. The Board of Directors may in
its discretion, by resolution adopted at any meeting by a majority of the whole
Board, designate an Executive Committee consisting of such number of Directors
as may be so designated, but in no event less than two. Each member of the
Executive Committee must be a Director and shall forthwith cease to be a member
of such committee if he shall cease to be a Director. Each member of the
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7
Executive Committee shall continue in office until the annual meeting of the
Board of Directors held next after his designation, or until he shall cease to
be a Director, or until his death, resignation or removal, or until the
dissolution of the Executive Committee, in the manner provided in Section 3 of
this Article III.
2. Powers. Except as may be provided by law or by the resolution of designation,
the Executive Committee, if so designated, shall have and may exercise all of
the powers of the Board of Directors in the management of the business and
affairs of the Corporation, expressly including the power to declare a dividend
or to authorize the issuance of stock, and including without limitation all
powers expressly conferred on the Board of Directors by these By Laws, and shall
have power to authorize the seal of the Corporation to be affixed to all papers
which may require it, provided, however, that the Executive Committee shall not
have power to amend the Certificate of Incorporation; to make, alter or repeal
these By Laws; to adopt an agreement of merger or consolidation; to recommend to
the stockholders the sale, lease or exchange of all, or substantially all of the
Corporation's property and assets; to recommend to the stockholders a
dissolution of the Corporation or a revocation of a dissolution; to fill
vacancies in the Board of Directors; or to dissolve, remove members or change
the number of, or fill vacancies in, the Executive Committee.
3. Resignation, Removal or Dissolution. Any member of the Executive Committee
may resign at any time by giving written notice to the Chairman or the
Secretary. Unless otherwise specified therein, such resignation shall take
effect on receipt thereof. Any member (except a member ex officio) of the
Executive Committee may be removed at any time, either with or without cause, by
a majority vote of the Directors then in office, at any meeting of the Board of
Directors called for that purpose. The Board of Directors may, by resolution
duly adopted at any meeting, dissolve the Executive Committee.
4. Vacancies. If any vacancy shall occur in the Executive Committee by reason of
death, resignation, removal or otherwise, such vacancy may be filled at any
meeting of the Board of Directors.
5. Meetings. The Executive Committee may provide for the holding of regular
meetings at such times and places (within or without the State of Delaware) as
it may from time to time determine by resolution duly adopted at any meeting of
the Executive Committee. No notice of any such meeting need be given. A special
meeting of the Executive Committee may be called at any time by the Chairman
and/or the Chairman of the Executive Committee. Notice of the time and place
(within or without the State of Delaware) of each special meeting shall be sent
to each member of the Executive Committee by mail, facsimile telegraph, wireless
telegraph, radio or cable, addressed to him at his address as it appears on the
records of the Corporation, at least ten (10) days before the day on which the
meeting is to be held, or telephoned, sent by facsimile (with confirmation of
receipt) or delivered to him personally, at least forty eight (48) hours before
the time at with the special meeting is to be held. Except as otherwise provided
by law or in these By Laws, such notice need not state the purpose of the
special meeting. Any member of the Executive Committee may participate in a
meeting of the Executive Committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting by such means shall
constitute presence in person at such meeting within the meaning of Section 6 of
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8
this Article III, or for any other purpose. The Executive Committee shall keep
minutes of its proceedings and shall report the same to the meeting of the Board
of Directors held next after such proceedings are taken. The Executive Committee
may adopt such rules and regulations for the conduct of its meetings as it may
deem proper, not inconsistent with law, the Certificate of Incorporation or
these By Laws.
6. Quorum. At all meetings of the Executive Committee the presence in person of
a majority of the membership of the Executive Committee then in office shall be
necessary and sufficient to constitute a quorum for the transaction of business,
and, except as otherwise provided by law, by the Certificate of Incorporation or
by these By Laws, if a quorum shall be present, the act of a majority of the
members present shall be the act of the Executive Committee. In the absence of a
quorum, a majority of the members present, without notice other than by
announcement at the meeting, may adjourn the meeting from time to time, for a
period of not more than thirty (30) days at one time, until a quorum shall be
present.
7. Other Committees. The Board of Directors may in its discretion, by resolution
adopted at any meeting by a majority of the whole Board, designate such other
committees as it may deem advisable. Each such committee shall consist of such
number of Directors as may be so designated, but in no event less than two and
shall have and may exercise such powers, and shall perform such duties, in such
manner, as may be delegated to it by resolution of the Board of Directors. The
Board of Directors shall have power at any time to remove any member of any such
committee, with or without cause, and to fill vacancies in and to dissolve any
such committee.
IV.
NOTICES
1. Waiver of Notice. Whenever any notice is required to be given by law, by the
Certificate of Incorporation or by these By Laws, a waiver thereof by the person
or persons entitled to such notice given before or after the time stated
therein, in writing, shall be deemed equivalent to such notice.
2. Attendance at Meeting. Attendance of a person at any meeting, whether of
stockholders (in person or by proxy), Directors or the executive or any other
committee, shall constitute a waiver of notice of such meeting, except when such
person attends such meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not legally called or convened.
V.
OFFICERS
1. Number. The officers of the Corporation shall be a Chairman of the Board and
Chief Executive Officer ("Chairman"), President and Chief Operating Officer, one
or more Vice Presidents, Secretary and Treasurer. Other officers may be elected
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9
or appointed in accordance with the provisions of Section 2 of this Article V.
Any two or more offices may be held by the same person.
2. Selection, Term of Office and Qualifications.
(a) The officers shall be elected by the Board of Directors or by such officer
or officers as the Board of Directors may designate.
(b) Other officials, including without limitation one or more Vice Presidents,
Assistant Secretaries, and/or Assistant Treasurers, shall be chosen in such
manner, hold office for such period, have such authority, perform such duties
and be subject to removal as may be determined by the Board of Directors. The
Board of Directors may delegate to any officer or officers the power to appoint
any such other officers, to fix their respective terms of office, to prescribe
their respective authorities and duties, to remove them and to fill vacancies in
any such offices.
(c) No officer need be a Director, and no officer need be a stockholder.
3. Resignation. Any officer may resign at any time, unless otherwise provided in
any contract with the Corporation, by giving written notice to the Chairman or
the Secretary. Unless otherwise specified therein, such resignation shall take
effect on receipt thereof.
4. Removal. Any officer may be removed at any time, either with or without
cause, by the affirmative vote of a majority of the Directors then in office;
and any officer not elected by the Board of Directors may be removed in such
manner as may be determined by or pursuant to delegation from the Board of
Directors.
5. Vacancies. If a vacancy shall occur, by reason of death, disqualification,
resignation, removal or otherwise, in any office required by Section 2 of this
Article V to be elected by the Board of Directors, such vacancy may be filled
for the unexpired portion of the term by the Board of Directors. A vacancy in
any other office shall be filled in such manner as may be determined by, or
pursuant to delegation from, the Board of Directors.
6. Chairman. The Chairman shall, subject to the control of the Board of
Directors, exercise general management and supervision over the property,
affairs and business of the Corporation and shall authorize the other officers
of the Corporation to exercise such powers as he, in his discretion, may deem to
be in the best interest of the Corporation. Unless the Board of Directors
designates another person, the Chairman shall preside at all meetings of the
stockholders, of the Board of Directors and of the Executive Committee, and in
general the Chairman shall perform all duties incident to general management and
supervision of the Corporation and such other duties as from time to time may be
assigned to him by the Board of Directors.
7. President and Chief Operating Officer. The President and Chief Operating
Officer, at the request of the Chairman or upon his absence or disability, or in
the event of a vacancy in the office of Chairman, shall exercise all the powers
of the Chairman as provided in Section 6. The President and Chief Operating
Officer in general shall perform all duties incident to the powers authorized in
<PAGE>
10
him by the Chairman and such other duties as from time to time may be assigned
to him by the Board of Directors.
8. Vice Presidents. There may be one or more Vice Presidents, as determined by
the Board of Directors or pursuant to delegation from the Board of Directors.
The Vice Presidents, in the order of their seniority or such other order as the
Board of Directors or the Chairman may from time to time determine, at the
request of the highest ranking officer identified in Sections 6 and 7 of this
Article V who is present and in office or upon his absence or disability, or in
the event of vacancies in both of the offices identified in Sections 6 and 7,
shall exercise all of the powers provided in Sections 6 and 7. The Vice
Presidents or any of them shall have the power to enter into contracts on behalf
of the Corporation and to hire and fire employees of the Corporation and in
general shall have such duties and exercise such other powers as from time to
time may be assigned to them by these By Laws, by the Board of Directors or by
the officers identified in Sections 6 and 7.
9. Secretary. The Secretary shall record all the proceedings of the meetings of
the stockholders and the Board of Directors in a book to be kept for that
purpose, and perform such other duties as shall be assigned to the Secretary.
10. Treasurer. The Treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. The Treasurer shall cause
all moneys and other valuable effects to be deposited in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements, and shall render to the Chairman and the Board
of Directors, whenever requested, an account of all his transactions as
Treasurer and of the financial condition of the Corporation. The Treasurer
shall, in general, perform all duties and have all powers incident to the office
of Treasurer and shall perform such other duties and have such other powers as
may from time to time be assigned to him by these By Laws, by the Board of
Directors or by the Chairman.
11. Surety Bonds. In the event that the Board of Directors shall so require, any
officer or agent of the Corporation shall execute to the Corporation a bond in
such sum and with such surety or sureties as the Board of Directors may direct,
conditioned on the faithful performance of his duties to the Corporation,
including responsibility for negligence an for the accounting of all property,
funds or securities of the Corporation that may come into his hands.
VI.
EXECUTION OF INSTRUMENTS
1. Execution of Instruments Generally. Subject to the control of the Board of
Directors and except as otherwise provided by law, by the Certificate of
Incorporation or by these By Laws, any one or more of the following persons, the
Chairman, or any officer, agent or employee of the Corporation who may from time
to time be authorized (either generally or in specific instances) by the Board
of Directors or by the Chairman to do so, may sign, execute (with or without the
seal of the Corporation), verify, acknowledge and deliver in the name and on
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11
behalf of the Corporation any agreement, deed, contract, proxy, covenant, bond
or other security, or any other document, instrument or writing of any nature.
2. Execution of Checks, All Evidence of Indebtedness and Similar Instruments.
All checks, drafts, bills of exchange, notes, acceptances and endorsements and
all evidences of indebtedness of the Corporation whatsoever shall be signed by
such officers, agents or employees of the Corporation, or any one of them, and
in such manner, as from time to time may be determined (either generally or in
specific instances) by the Board of Directors or by such officer or officers to
whom the Board of Directors may delegate the power so to determine.
VII.
CAPITAL STOCK
1. Certificate of Stock. The interest of each stockholder shall be evidenced by
a certificate representing shares of stock of the Corporation which shall be in
such form as the Board of Directors may from time to time adopt. Each such
certificate shall be signed by the Chairman or President and Chief Operating
Officer or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, shall be sealed with the seal of the
Corporation, and shall be countersigned and registered in such manner, if any,
as the Board of Directors may prescribe. In case such certificate is signed (i)
by a transfer agent or (ii) by a transfer clerk and a registrar, the signature
of any such officer, and the seal of the Corporation on such certificate, may be
facsimile. In case any officer who shall have signed, or whose facsimile
signature shall have been used on any such certificate, shall cease to be such
officer of the Corporation, before such certificate shall have been delivered by
the Corporation, such certificate may nevertheless be adopted by the Corporation
and be issued and delivered as though the person who signed such certificate, or
whose facsimile signature shall have been used thereon, had not ceased to be
such officer; and such issuance and delivery shall constitute adoption of such
certificate by the Corporation. There shall be entered on the stock books of the
Corporation the number of each certificate issued, the number of shares
represented thereby, the name of the person to whom such certificate was issued
and the date of issuance thereof.
2. Transfer of Stock. The original stock ledger of the Corporation shall contain
the names, alphabetically arranged, and addresses of all persons who are
stockholders of the Corporation and the number of shares of stock held by them
respectively. Transfer of shares of the stock of the Corporation shall be made
only on the books of the Corporation by the holder of record thereof, or by his
attorney thereunto duly authorized by a power of attorney executed in writing
and filed with the Secretary, upon the surrender of the certificate or
certificates for such shares properly endorsed, with such evidence of the
authenticity of such transfer, authorization and other matters as the
Corporation or its agents may reasonably require, and accompanied by all
necessary federal and state stock transfer stamps.
3. Lost, Stolen or Destroyed Certificates. A certificate for share of the stock
of the Corporation may be issued in place of any certificate lost, stolen or
destroyed, but only on delivery to the Corporation, if the Board of Directors so
requires, of a bond of indemnity, in form and amount and with one or more
sureties satisfactory to the Board, and of such evidence of such loss, theft or
destruction as the Board may require.
<PAGE>
12
4. Regulations, Transfer Agents and Registrars. The Board of Directors may make
such rules and regulations as it may deem expedient concerning the issuance and
transfer of certificates for shares of the stock of the Corporation and may
appoint transfer agents or registrars, or both, and may require all certificates
of stock to bear the signature of either or both. Nothing herein shall be
construed to prohibit the Corporation from acting as its own transfer agent at
any of its offices.
5. Making of Record Date. In lieu of closing the stock transfer books of the
Corporation in the manner provided by law, the Board of Directors may fix in
advance a date, not more than sixty (60) days nor less than ten (10) days
preceding the date of the meeting of stockholders and not more than sixty (60)
days preceding the date for the payment of any dividend, or the date of the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, or a date in connection with obtaining the
vote of stockholders for any purpose, as a record date for the determination of
the stockholders entitled to notice of, and to vote at, any such meeting and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to, so vote; and in such
case such stockholders and only such stockholders as shall be stockholders of
record on the date so fixed shall be entitled to such notice of, and to vote at,
such meeting and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to so vote, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid.
6. Dividends and Reserves. Dividends shall be declared and paid at such times as
the Board of Directors may determine, provided that no dividends shall be paid
or declared contrary to applicable provisions of law or of the Certificate of
Incorporation. The Board of Directors may from time to time set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board,
in its discretion, may deem proper as a reserve fund for working capital, or to
meet contingencies, or for equalizing dividends, or for the purpose of
repairing, maintaining or increasing the property or business of the
Corporation, or for any other purpose that the Board may deem to be in the best
interests of the Corporation. The Board of Directors may, in its discretion,
modify or abolish any such reserve at any time.
7. Record Ownership. The Corporation shall be entitled to recognize the
exclusive right of a person registered as such on the books of the Corporation
as the owner of the shares of the Corporation's stock to receive dividends, and
to vote as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such shares of the part of any other person,
whether or not the Corporation shall have express or other notice thereof,
except as otherwise provided by law.
<PAGE>
13
VIII.
BOOKS, ACCOUNTS AND OTHER RECORDS
Except as otherwise provided by law, the books, accounts and other
records of the Corporation shall be kept at such place or places (within or
without the State of Delaware) as the Board of Directors or the Chairman may
from time to time designate.
IX.
CORPORATE SEAL
The corporate seal of the Corporation shall have inscribed thereon the
name of the Corporation, the figures "1981" and the words "Corporate Seal", and
"Delaware." In all cases in which the corporate seal is duly authorized to be
used, it may be used by causing it or a facsimile of it to be impressed,
affixed, reproduced, engraved or printed.
X.
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of
January and end on the last day of December in each year.
XI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
1. Directors and Executive Officers. The Corporation shall indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of alleged occurrences of actions or omissions preceding any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment); provided, however, that the Corporation may
limit the extent of such indemnification by individual contracts with its
Directors and executive officers; and provided, further, that the Corporation
shall not be required to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the Corporation or its directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the Board of Directors
of the Corporation or (iii) such indemnification is provided by the Corporation,
in its sole discretion, pursuant to the powers vested in the Corporation under
the Delaware General Corporation Law.
2. Other Officers, Employees and Other Agents. The Corporation shall have power
to indemnify its other officers, employees and other agents as set forth in the
Delaware General Corporation Law.
<PAGE>
14
3. Good Faith.
(a) For purposes of any determination under this Article, a Director or
executive officer shall be deemed to have acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe that his or her conduct was unlawful, if such
action is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him or her by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise.
(b) The termination of any proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal proceeding, that he or she had
reasonable cause to believe that his or her conduct was unlawful.
(c) The provisions of this Section 3 shall not be deemed to be exclusive or to
limit in any way the circumstances in which a person may be deemed to have met
the applicable standard of conduct set forth by the Delaware General Corporation
Law.
4. Expenses. The Corporation shall advance, prior to the final disposition of
any proceeding, promptly following request therefor, all expenses incurred by
any Director or executive officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it should be determined ultimately that such person is not entitled to be
indemnified under this Article or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 5 of this Article, no advance shall be made by the Corporation if a
determination is reasonably and promptly made (1) by the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to the
proceeding, or (2) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested Directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
5. Enforcement. Without the necessity of entering into an express contract, all
rights to indemnification and advances under this Article shall be deemed to be
contractual rights and to be effective to the same extent and as if provided for
in a contract between the Corporation and the Director or executive officer who
serves in such capacity at any time while this Article and other relevant
provisions of the Delaware General Corporation Law and other applicable law, if
any, are in effect. Any right to indemnification or advances granted by this
Article to a Director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if (i)
the claim for indemnification or advances is denied, in whole or in part, or
<PAGE>
15
(ii) no disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole or in
part, shall be entitled to be paid also the expense of prosecuting his or her
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in connection with any proceeding in
advance of its final disposition when the required undertaking has been tendered
to the corporation) that the claimant has, not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed but the burden of
proving such defense shall be on the corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
6. Non Exclusivity of Rights. The rights conferred on any person by this Article
shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, By Laws, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding office. The Corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent permitted by the Delaware General Corporation
Law. 7. Survival of Rights. The rights conferred on any person by this Article
shall continue as to a person who has ceased to be a Director, officer, employee
or other agent of the Corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person.
8. Insurance. To the fullest extent permitted by the Delaware General
Corporation Law, the Corporation, upon approval by the board of directors, may
purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Article.
9. Amendments. Any repeal or modification of this Article shall only be
prospective and shall not affect the rights under this Article in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the Corporation.
10. Savings Clause. If this Article or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each Director and executive officer to the full extent
permitted by any applicable portion of this Article that shall not have been
invalidated, or by any other applicable law.
11. Certain Definitions. For the purposes of this article, the following
definitions shall apply:
<PAGE>
16
(a) The term "proceeding" shall be broadly construed and shall include, without
limitation, the investigation, preparation, prosecution, defense, settlement,
arbitration and appeal of, and the giving of testimony in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall include, without
limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in
settlement or judgment: and any other costs and expenses of any nature or kind
incurred in connection with any proceeding.
(c) The term "the Corporation" shall include, will addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as he or
she would have with respect to such constituent corporation if its separate
existence had continued.
(d) References to a "director", officer", "employee, or "agent" of the
Corporation shall include, without limitation, situations where such person is
serving at the request of the Corporation as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(e) References to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a Director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such Director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good faith
and in a manner he or she reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article.
XII.
AMENDMENTS
The By Laws of the Corporation may be made, altered or repealed at any
meeting of the stockholders by the affirmative vote of the holders of a majority
of the shares of stock issued and outstanding, and entitled to vote thereat,
provided that notice of the general nature of the proposed change in the By Laws
shall have been given the notice of such meeting of the stockholders. The Board
of Directors shall also have power to make, alter or repeal the By Laws of the
Corporation by an affirmative vote of a majority of the whole Board at any
regular meeting or special meeting of the Board, whether or not notice of a
<PAGE>
17
proposed change in the By Laws shall have been given in the notice of such
meeting of the Board, subject always to the power of the stockholders to adopt,
amend or repeal the By Laws.
<PAGE>
18
SECRETARY'S CERTIFICATE OF ADOPTION OF
THE AMENDED AND RESTATED BY-LAWS OF
TEKNOWLEDGE CORPORATION
I hereby certify:
That I am the duly elected Secretary of Teknowledge Corporation, a
Delaware corporation;
That the foregoing Amended and Restated By-Laws comprising seventeen
(17) pages, constitute the Amended and Restated By-Laws of said corporation as
duly adopted by the Board of Directors of the Corporation on January 26, 1999.
IN WITNESS WHEREOF, I have hereunder subscribed my name this 26th day
of January, 1999.
/s/ Dennis A. Bugbee
---------------------------------
Dennis A. Bugbee, Secretary
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to
the incorporation of our report included in this Form 10-KSB, into
the Company's previously filed Registration Statements on Form S-8
(File No. 33-27291, File No. 33-77874, File No. 33-78984, File No.
33-82720, File No. 333-00261, and File No. 333-67623).
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
San Jose, California
March 26, 1999
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