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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number 0-14793
TEKNOWLEDGE CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 94-2760916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1810 Embarcadero Road, Palo Alto, California 94303
(Address of principal executive offices)
(650) 424-0500
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at March 31, 2000
Common Stock, $.01 par value 5,315,239 Shares
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TABLE OF CONTENTS
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Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
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PART I. FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
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(Unaudited)
March 31, December 31,
2000 1999
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Current assets:
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Cash and cash equivalents $ 1,799,568 $ 1,951,393
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Receivables:
Customer - billed, net of allowance of $30,000 1,874,779 2,028,953
Customer - unbilled 931,012 1,234,189
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Total receivables 2,805,791 3,263,142
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Deferred tax asset, short-term 400,000 400,000
Deposits and prepaid expenses 118,880 75,692
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Total current assets 5,124,239 5,690,227
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Capitalized software development costs, net of accumulated
amortization of $34,781 and $104,485, respectively 523,794 359,743
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Fixed assets, at cost
Computer and other equipment 3,128,543 3,078,647
Furniture and fixtures 112,647 112,647
Leasehold improvements 838,398 838,398
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4,079,588 4,029,692
Less accumulated depreciation and amortization (3,716,579) (3,652,857)
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363,009 376,835
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Deferred tax asset, long-term 500,000 500,000
Other Assets, long-term 983,447 241,162
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Total assets $ 7,494,489 $ 7,167,967
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 505,745 $ 747,404
Payroll and related liabilities 605,576 659,752
Short-term loan obligations 500,000
Other accrued liabilities 212,818 221,159
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Total current liabilities 1,824,139 1,628,315
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized 2,500,000
shares, Series A, Convertible, none issued - -
Common stock, $.01 par value, authorized 25,000,000
shares, issued and outstanding 5,329,451 shares 53,225 53,025
Additional paid-in capital 1,880,525 1,795,402
Retained earnings since January 1, 1993
(following quasi-reorganization) 3,917,698 3,872,322
Less: Treasury stock, at cost (181,098) (181,097)
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Total stockholders' equity 5,670,350 5,539,652
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Total liabilities and stockholders' equity $ 7,494,489 $ 7,167,967
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The accompanying notes are an integral part of these consolidated financial statements.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
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(Unaudited)
3 Months ended March 31,
2000 1999
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Revenues $ 2,754,804 $ 2,790,644
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Costs and expenses:
Cost of revenues 1,993,249 1,752,482 *
General and administrative 580,671 629,819
Sales and marketing 75,409 33,302 *
Research and development 47,807 148,676
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Total costs and expenses 2,697,136 2,564,278
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Operating income 57,668 226,366
Interest income 21,232 26,209
Other expenses (3,275)
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Income before taxes 75,625 252,575
Provision for income taxes 30,250 101,030
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Net income and comprehensive income $ 45,375 $ 151,545
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Net income per share:
- Basic $ 0.01 $ 0.03
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- Diluted $ 0.01 $ 0.03
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Shares used in computing net income per share:
- Basic 5,314,305 4,961,169
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- Diluted 6,225,358 5,919,681
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* Amounts were reclassified to conform to current presentation.
The accompanying notes are an integral part of these consolidated financial statements.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
3 Months Ended March 31,
2000 1999
Cash flows from operating activities:
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Net income $ 45,375 $ 151,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 98,505 92,958
Deferred income taxes 27,603 90,000
Changes in assets and liabilities:
Receivables 457,351 (429,554)
Deposits and prepaid expenses (43,188) 12,617
Accounts payable (241,659) (243,165)
Accrued liabilities (62,519) (122,585)
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Net cash provided by (used for) operating activities 281,468 (448,184)
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Cash flows from investing activities:
Investment in GlobalStake (742,285) -
Capitalization of software development costs (198,832) (2,415)
Purchase of fixed assets (49,896) (31,084)
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Net cash used for investing activities (991,013) (33,499)
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Cash flows from financing activities:
Drawdown on line of credit 500,000 -
Proceeds from issuance of common stock 57,720 26,899
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Net cash provided by financing activities 557,720 26,899
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Net increase (decrease) in cash and cash equivalents
(151,825) (454,784)
Cash and cash equivalents at beginning of year
1,951,393 2,378,390
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Cash and cash equivalents at end of year
$ 1,799,568 $ 1,923,606
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The accompanying notes are an integral part of these consolidated financial statements.
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TEKNOWLEDGE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. Interim Statements
The unaudited consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not
misleading. These interim statements should be read in conjunction
with the financial statements and the notes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended
December 31, 1999. In the opinion of management, these interim
statements include all adjustments, consisting of normal, recurring
adjustments, which are necessary for a fair presentation of results
for such periods. The results of operations for any interim period
presented herein are not necessarily indicative of results that may be
achieved for the entire fiscal year ended December 31, 2000.
2. Net Income Per Share
Net income per share is calculated in accordance with the
provision of Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings per Share," which requires companies to compute net income
per share under two different methods, basic and diluted. Basic earning
per share is calculated by dividing net income by the weighted average
shares of common stock outstanding during the period. Diluted earning
per share is calculated by dividing net income by the weighted average
shares of outstanding common stock and common stock equivalents during
the period. Common stock equivalents consist of dilutive shares
issuable upon the exercise of outstanding common stock options.
3. Reverse Stock Split
The Company effected a one-for-five reverse stock split on
December 22, 1998. All share and per share data has been retroactively
restated to reflect the effect of the reverse stock split. Since there
was no change in per share par value, aggregate par value has also been
retroactively adjusted to reflect the reduction in the number of common
stock.
4. Repurchase of Common Stock
On December 16, 1998, the Company adopted a program to
repurchase up to 300,000 shares of the Company's common stock in the
open market or in private during the twelve-month period ending
December 15, 1999 at prevailing prices. Repurchases will be made
periodically at management discretion using the Company's own cash
reserves. As of December 31, 1999, the Company has used $291,494 to
repurchase 70,270 shares of the Company's Common Stock. Shares
repurchased may be reissued to employees pursuant to the Company's
stock option plans, or for other corporate purposes.
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5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires companies to value derivative financial
instruments, including those used for hedging foreign currency
exposures, at current market value with the impact of any change in
market value being charged against earnings in each period. In June
1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133" to defer the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
To date, the Company has not entered into any derivative financial
instrument contracts. Thus the Company anticipates that SFAS No. 133
will not have a material impact on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in
financial statements. We will adopt SAB 101 as required in the second
quarter of 2000. We do not expect the adoption of SAB 101 to have a
material impact on our consolidated results of operations and financial
position.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto.
Teknowledge Corporation (the "Company") provides intelligent Internet
transactions. Teknowledge's government and commercial projects involve
knowledge-based, reliable, and secure transactions over the Internet. In Q1 the
Company continued implementing its strategy to move its primary customer base
from defense R&D to rapid-growth commercial applications, particularly in the
financial services industry. For the three months ending March 31, 2000, the
percentage of commercial business increased to 29% from 5% in the comparable
quarter in 1999. As a result of project commitments and anticipated growth in
Internet-based financial services, the Company expects improved commercial
revenues in 2000.
Teknowledge is increasing its focus on the TekPortal(TM) financial
account aggregation product, along with services for the raidly growing
Internet-based financial services industry. The TekPortal(TM) account
aggregation solution gives financial institution customers the ability to
register and manage their multiple bank, brokerage, frequent flier, and credit
card accounts at a single web site. This provides convenience for customers, and
can improve bank profits, and customer asset levels and retention. Financial
institution customers may also provide follow-on demand for the security,
training, and quality of service competencies that Teknowledge develops in its
government R&D work.
Teknowledge's core competencies are in eCommerce financial services,
web-based training, network security, knowledge systems, and distributed
systems. These core competencies are complementary and inherently "dual-use."
They help Teknowledge integrate its own proprietary software and third party
products into intelligent transaction solutions for customers in industry or
government.
In the first quarter of 2000, Teknowledge announced that it had won a
new DARPA sponsored Cyber Security contract. This work will provide advanced
security capabilities, including integration of multiple security components, as
well as intrusion detection and response. The Information Assurance team in
Fairfax is also a Check Point FireWall-1(TM) value added reseller and security
services provider. In the first quarter, it began providing some firewall and
other network security support to Teknowledge's commercial customers.
The Web-based Training business unit continues to develop Courseware
Factory under NIST and Teknowledge sponsorship. This Courseware Factory is
designed to make systematic and easy the process of moving traditional training
course materials to the web. The project also addresses the ability to deliver
knowledge-based training materials via a web server. This technology is being
used to upgrade Teknowledge's Sales Associate(TM) product. One of the Courseware
Factory's test applications is to provide Internet security training over the
web. The unit is also considering potential applications in tutoring bank
customers on alternative investment instruments.
Teknowledge's Knowledge Systems business unit now includes
responsibility for R&D in the area of building advanced systems to represent,
process, and serve knowledge efficiently on the web. The unit has won several
government contracts to support this work. It is providing advanced knowledge
systems technology and consulting services to GlobalStake.com, now doing
business as ExploreRealty.com. It has also consolidated Teknowledge's work in
building different types of Associate Systems, as well as systems for situation
assessment and data fusion.
The Distributed Systems unit is focused on network quality of service.
They delivered a major DARPA integration and demonstration project in January,
and have been involved as one of the prime contractors in the QUORUM program.
This work will provide a toolkit and instrumented testbed that can be used for
developing network quality of services solutions for government and
commercial customers.
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Teknowledge has sustained its business for eighteen years. It has
reported twenty-three consecutive profitable quarters. The Company maintains an
aggressive intellectual property program and actively defends its software
patents portfolio. In February of 2000, the Company announced an important new
patent #6,029,175 titled: "Automatic retrieval of changed files by a network
software agent." This patent has 96 claims and may prove Teknowledge's most
valuable patent.
Teknowledge provides a challenging and collaborative technical
environment with many employee rewards. These rewards include advanced education
and training, incentive stock options, performance bonuses, competitive salary,
and an attractive benefits program. Teknowledge is headquartered in Palo Alto,
California with offices in Fairfax, Cleveland, Orlando, and San Diego. The
Company's stock is traded on the NASDAQ SmallCap Market under the symbol TEKC.
Results of Operations
Revenues
Revenues for the three months ended March 31, 2000 and 1999 were
$2,754,804, and $2,790,644, respectively. Commercial revenues increased fivefold
over the comparable quarter in 1999, when commercial revenues were 5% of total
revenues vs. 29% in 2000. Approximately 72% of the revenues earned in the first
quarter of 2000 were attributed to government sponsored R&D contracts. Some
eCommerce resources were diverted to help on the TekPortal product development
effort, which is expected to improve future revenue streams. The Company also
elected not to record approximately $158,000 of potential revenues on eCommerce
services projects until the second quarter or until customer acceptance is
assured. In addition, TekPortal product licenses associated with Q1 eCommerce
services will be recognized in Q2. Overall government revenue in the first
quarter of 2000 declined approximately $650,000 over the comparable period due
primarily to a government program reduction that began in late 1998. The Company
believes the outlook for future revenue growth from government contracts has
improved because of recent contract awards. In addition, the Company elected not
to record approximately $275,000 of net revenues at December 31, 1999 pending
the outcome of an arbitration matter with an eCommerce customer. A ruling is
expected in the second quarter of 2000, which could have a positive impact on
the second quarter's results. The Company expects an increase in demand for its
TekPortal(TM) product and services in the second quarter of 2000 and it is
expanding its workforce to meet the expected demand.
Costs and Expenses
Cost of revenues was $1,993,249 for the three months ended March 31,
2000, a 14% increase from the comparable period in 1999. Labor costs between
periods rose as the market demand for technical employees increased and the
Company expanded its eCommerce workforce in anticipation of the increased
demand. The Company experienced low gross margins on some of its initial
eCommerce contracts during the quarter, due primarily to start-up costs. The
cost of labor on government contracts declined in proportion to the reduced rate
of production. This was partially offset by a 9% increase in billable
subcontractor and consultant costs. Subcontractor and consultant costs were
$682,620 for the first quarter ended March 31, 2000, compared to $624,372 in the
first quarter last year. Cost of revenues as a percentage of total revenues was
72% for the three months ended March 31, 2000 compared to 63% for the three
months ended March 31, 1999.
General and administrative costs for the three months ended March 31,
2000 were $580,671, an 8% decrease over the first quarter in 1999. In the first
quarter of 2000, the Company experienced less average headcount in
administrative functions, partly as a result of consolidating the CEO and
President functions. General and administrative costs for the three months ended
March 31, 2000 were 21% of total revenues, versus 23% for the first quarter last
year.
Sales and marketing costs for the three months ended March 31, 2000
increased to $75,409, or 126% higher than the comparable period in 1999. Sales
and marketing costs rose in the first quarter of 2000 as the eCommerce unit
added staff to its sales and marketing department. In the first quarter of 1999,
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the Company did not have a full time commercial sales and marketing staff.
Sales and marketing costs were 3% and 1% of total revenues for the first
quarter of 2000 and 1999, respectively.
Internally sponsored Research and Development ("R&D") costs for the
three months ended March 31, 2000 were $47,807, a 68% decrease from the
comparable period in 1999. During the first quarter of 1999, the Company
expended a considerable amount of internal effort developing its Associate
Systems capabilities. In the first quarter of 2000, the Company expended
$198,832 in the development of TekPortal product software that was capitalized
in anticipation of future revenue growth. Some of these resources were diverted
from normal R&D functions to TekPortal product development. R&D costs were 2%
and 5% of revenues for the three months ended March 31, 2000 and 1999,
respectively. These figures excluded the extensive R&D conducted under contract
for our government customers, and the aforementioned software product
development costs that were capitalized during the period.
Interest income was $21,232 and $26,209 for the three months ended
March 31, 2000 and 1999, respectively. Interest income reflects lower average
cash balances during the period.
Income before taxes for the three months ended March 31, 2000 was
$75,625, which represented a 70% decrease over the comparable period in 1999, of
$252,575. The decrease was directly attributable to the continued expansion of
the eCommerce business in the first quarter of 2000. The Company experienced
lower net margins on some eCommerce projects as it continued to transition from
a predominantly government business. Income before taxes represented 3% and 9%
of revenues, for the three months ended March 31, 2000 and 1999, respectively.
The Company has utilized essentially all tax losses generated
subsequent to the date of the quasi-reorganization, which were reflected as a
reduction to the effective tax rate and provision for income taxes, up to
December 31, 1998. Commencing 1999, realization of tax benefits existing at the
date of the quasi-reorganization is recorded as an adjustment to additional
paid-in-capital. Accordingly, the Company has increased its effective tax rate
and provision for income taxes for the first quarter of 1999 and thereafter.
However, even with the increase in its effective tax rate for book purposes, the
Company will continue to realize full cash savings from its extensive tax loss
benefits existing at the date of the quasi-reorganization. In short, the Company
will begin to report increased tax expenses, but will not actually pay such
taxes, and there will be no effect on the Company's cash resulting from the
reported increases.
Net income for the three months ended March 31, 2000 was $45,375, or
$.01 per diluted share, versus $151,545, or $.03 per diluted share, for the same
period in 1999. Because the eCommerce unit is relatively new, it has not
achieved its expected net margins. The Company expects to achieve higher net
margins in the future as volume increases and operating efficiencies improve.
Net income represented 2% and 5% of revenues, for the three months ended March
31, 2000 and 1999, respectively.
Bookings and Backlog
At March 31, 2000, the expected order backlog was approximately $18.7
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. Most of the product
and services work in the eCommerce unit is for approximately 3-month
TekPortal(TM) implementations. The work is often booked and delivered in the
same or adjacent quarters. The Company does not expect to build a huge services
backlog for eCommerce implementations vs. the government contract R&D work. As a
result, 96% of March 31, 2000 backlog is from government customers.
Approximately 90% of this 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.
The Company recently won a contract with the government to provide Cyber Command
and Control for mission critical systems that is scheduled to start in Q2 of
2000. The portion of the overall backlog that expected to be fulfilled in the
current fiscal year is approximately 35%. The Company's backlog at December 31,
1999 was approximately $18.6 million.
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Liquidity and Capital Resources
As of March 31, 2000, unused sources of liquidity of the Company were
$1,799,568 in cash and cash equivalents, a decrease of $151,825 over December
31, 1999. The Company generated cash of $281,468 from its operating activities
and $57,720 from issuance of common stock to employees exercising their stock
options. It invested $198,832 for developing capitalized software and $49,896
for purchases of computer equipment and other improvements. The Company invested
$742,285 in the first quarter of 2000 in GlobalStake.com and has invested a
total of $954,051 since the company was spun off in November of 1999. Generally,
the Company has experienced slower than expected payments from its eCommerce
customers relative to its government customers.
The Company believes that the present level of cash and cash
equivalents and borrowing capacity is adequate to service the Company's
short-term liquidity needs in 2000. The Company is contractually committed to
provide approximately $1,000,000 of seed money to GlobalStake.com in 2000. It is
anticipated that this requirement will be fulfilled during the second quarter of
2000 and no future cash requirements are anticipated. The Company borrowed
$500,000 against its line of credit in March 2000 to supplement its existing
reserves. The Company has entered into negotiations with a third party to
restructure the arrangement with GlobalStake.com. It is likely that the new
agreement will have a favorable effect on Teknowledge's cash reserves in the
second quarter of 2000, while preserving considerable investment upside in the
GlobalStake.com opportunity.
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 December 2000 and is renewable.
Risks and Uncertainties
Seventy-one percent of Teknowledge's revenue is currently derived from
government R&D contracts, and the Company has historically been profitable in
that business. However, dependence on government contracts can be risky because
the contracts are subject to administrative, legislative, and political
interruptions, which may jeopardize the flow of funds. Another uncertainty in
providing services under government contracts is the Company's ability to
attract and retain sufficient technical staff to meet the demands of new orders.
The Company's revenues, costs and earnings on government contracts are
determined based on estimated overhead rates derived from forecasted annual
costs. The Company's actual experience with fluctuations in the workforce,
billable efficiency, and costs may vary from original estimates and necessitate
periodic adjustments to the overhead rates until the actual costs have been
tabulated and the year closed-out. Such adjustments are made on a cumulative
basis whereby the resulting revenue and income effects are recognized in the
period of the adjustment.
The typical cost-type government contract performed by the Company has
a regulated fixed fee limit, which inhibits the Company from improving profit
margins beyond what is permitted in the government regulations. In addition,
Federal Acquisition Regulations exclude from reimbursement some "unallowable"
expenses, which the Company considers a regular part of the business.
Furthermore, almost all the Company's contracts contain termination clauses,
which permit contract termination upon the Company's default or at the
contracting party's discretion. This could result in loss of backlog, or
revenues.
The Company believes that Tekportal and the financial services market
offers a significant new opportunity for growth. Furthermore, Teknowledge is in
a good position to convert Internet-based software developed under its
government R&D contracts into new commercial products. However, if the Company's
eCommerce related sales develop more slowly than expected, or the market becomes
saturated with competitors, or if the Company's products do not achieve market
acceptance, the Company's commercial business, financial condition, results of
operations, and employee retention may eventually be adversely affected.
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In spite of these potential risks, the Company's management is bullish
on Teknowledge's prospects. There are numerous new revenue generating
possibilities, and considerable upside potential in TekPortal(TM) products and
services, eSecurity services and VAR licenses, the growing intellectual property
portfolio, and the investment in GlobalStake.com.
Forward-Looking Statements
Forward-looking statements made in this section relate to the expected
growth of the commercial business, ability to realize backlog, competition for
government and commercial contracts, the mix of revenues between government and
commercial, development of commercial products and services, the anticipated
growth of eCommerce, GlobalStake.com, and the possible requirement for
additional financing. All forward-looking statements involve risks and
uncertainties, and actual results could differ materially from those set forth
in the forward-looking statements contained herein as a result of competition,
agency funding limitations, other factors relating to government contracting,
ability to attract and retain technical and management personnel, commercial
opportunities, and other factors set forth under "Risks and Uncertainties" above
and the section entitled "Certain Factors Which May Affect Future Results of
Operations and/or Stock Price" in the Company's Form 10-KSB.
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PART II. OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS
In 1999 Teknowledge offered to sell SAP a license to use the technology
related to Teknowledge's Intelligent Configuration Patent Portfolio, a
collection of five patents relating to configuration technologies, including the
`983 patent. In response to this offer, on October 8, 1999, SAP America, Inc.
and SAP Aktiengesellschaft (collectively, "SAP") filed a lawsuit against the
Company in the United States District Court for the District of Delaware. The
subject matter of the case involves Teknowledge's configuration systems patent,
Bennett et al. U.S. Patent 4,591,983 (the "'983 patent") and the configuration
technology associated with the SAP R/3 System ("R/3 System"). SAP is seeking a
judgment against Teknowledge that the `983 patent is invalid and is not
infringed by the R/3 System; an award of attorney fees, costs of suit, and other
relief the court may deem just and proper.
On October 21, 1999 Teknowledge filed a counterclaim against SAP for
patent infringement of two of its patents. The subject of the counter suit is
the `983 patent entitled "Hierarchical Knowledge System" and U.S. Patent
4,783,752 entitled "Knowledge Based Processing for Application Programs Using
Conventional Data Processing Capabilities." The management of the Company
considers the suit brought by SAP to be without merit and intends to defend its
patents vigorously. Management believes the ultimate resolution of the above
matters may have a positive impact, and will not have an adverse material impact
on the Company's financial position and results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Set forth below is a list of all exhibits filed herewith or incorporated by
reference as part of this Quarterly Report on Form 10-QSB.
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Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Teknowledge
Corporation (4)
3.2 Amended and Restated Bylaws of Teknowledge Corporation (4)
3.3 Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred
Stock (2)
4.1 Rights Agreement dated January 29, 1996 between the Company and Registrar and Transfer Company
as Rights Agent (2)
10.1 Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
November 29, 1993 (5)
10.2 Stock Option Agreement between the Company and Neil Jacobstein, dated
November 29, 1993 (5)
10.3 Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
April 1, 1994 (5)
10.4 Stock Option Agreement between the Company and Neil Jacobstein, dated
April 1, 1994 (5)
<PAGE>
14
10.5 Change of Control Agreement, dated November 21, 1994, between Teknowledge Corporation and
Frederick Hayes-Roth and Neil Jacobstein (1)
10.6 Stock Option Agreement between the Company and Frederick Hayes-Roth, dated
March 30, 1995 (5)
10.7 Stock Option Agreement between the Company and Neil Jacobstein, dated
March 30, 1995 (5)
10.8 Teknowledge Corporation 1998 Stock Option Plan (3)
10.9 Executive Compensation Plan, adopted by resolution of the Company's Compensation Committee,
dated November 22, 1999 (6)
10.10 Contract Agreement with GlobalStake.com, dated November 22, 1999 (6)
27 Financial Data Schedule
</TABLE>
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 March 31, 1998.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB,
for the fiscal year ended December 31, 1998.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB, for the quarter ended June 30, 1999.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB,
for the fiscal year ended December 31, 1999.
(b) Reports on Form 8-K
None.
<PAGE>
15
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TEKNOWLEDGE CORPORATION
(Registrant)
/s/ Neil A. Jacobstein Chairman of the Board May 12, 2000
- ------------------------------ of Directors, President &
Neil A. Jacobstein Chief Executive Officer
(Principal Executive
Officer)
/s/ Dennis A. Bugbee Chief Financial Officer, May 12, 2000
- ------------------------------ Vice President of Finance
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
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