-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQ7l6LsBcxIuXvf7dQWS+oCrK9IBgSssyD5oDWnDGLxv5q3Oeh5LemMQqasn212K rga9fLG/Yigt4bR2o9QV0A== 0000950128-97-000762.txt : 19970520 0000950128-97-000762.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950128-97-000762 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARNEGIE GROUP INC CENTRAL INDEX KEY: 0001001188 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 251435252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26964 FILM NUMBER: 97607729 BUSINESS ADDRESS: STREET 1: FIVE PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4126426900 MAIL ADDRESS: STREET 1: FIVE PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 CARNEGIE GROUP, INC. 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _______ to ________ Commission File Number 0-26964 ------- Carnegie Group, Inc. -------------------- Delaware 25-1435252 -------- ---------- (State or other Jurisdiction of (I.R.S Employer Identification Number) Incorporation or Organization) Five PPG Place, Pittsburgh, Pennsylvania 15222 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) (412) 642-6900 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to files such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date: Class Outstanding at April 30, 1997 ----- ----------------------------- Common Stock, $.01 par value 6,287,784 2 FORM 10-Q CARNEGIE GROUP, INC. TABLE OF CONTENTS
Page Number PART 1 FINANCIAL INFORMATION Item 1. Financial Statements Carnegie Group, Inc. and Subsidiaries 3 Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996 Carnegie Group, Inc. and Subsidiaries 4 Consolidated Balance Sheets Carnegie Group, Inc. and Subsidiaries 5 Consolidated Statements of Cash Flows Note to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about 11 Market Risks PART 2 OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13
2 3 PART I - FINANCIAL INFORMATION CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended --------------------------------------- March 31, March 31, 1997 1996 ---- ---- Revenue Software services--Unrelated parties $ 5,499,732 $ 7,442,750 Software services--Related parties 1,007,108 750,649 ------------- ------------- Total software services 6,506,840 8,193,399 Software licenses 625,078 129,941 ------------- ------------- Total revenue 7,131,918 8,323,340 ------------- ------------- Costs and expenses: Cost of revenue - Unrelated parties 3,837,500 4,701,682 Cost of revenue - Related parties 581,745 362,511 ------------- ------------- Total cost of revenue 4,419,245 5,064,193 Research and development 357,682 179,014 Selling, general and administrative 1,876,836 2,135,969 ------------- ------------- Total costs and expenses 6,653,763 7,379,176 ------------- ------------- Income from operations 478,155 944,164 Other income (expense): Interest income 163,898 147,166 Other income 6,199 6,099 Interest expense (3,645) (4,857) ------------- ------------- Total other income 166,452 148,408 ------------- ------------- Income before income taxes 644,607 1,092,572 Income tax provision (256,360) (409,387) ------------- ------------- Net income $ 388,247 $ 683,185 ============= ============= Earnings per share of common stock $ .06 $ .10 ============= ============= Weighted average number of common shares outstanding 6,952,814 7,176,127 ============= =============
The accompanying notes are an integral part of these financial statements. 3 4 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1997 1996 ---- ---- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,396,031 $ 14,691,765 Accounts receivable 3,312,839 2,751,316 Accounts receivable from related parties 553,671 769,223 Accounts receivable--unbilled 3,236,313 3,660,765 Accounts receivable related parties--unbilled 405,807 188,302 Deferred income taxes 2,155,072 2,179,426 Other current assets 479,586 403,508 ------------- ------------- Total current assets 24,539,319 24,644,305 ------------- ------------- Property and equipment, net of accumulated depreciation and amortization 2,413,834 2,046,415 Deferred income taxes 1,571,674 1,775,480 Other assets 21,517 23,055 ------------- ------------- Total assets $ 28,546,344 $ 28,489,255 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 1,012,446 $ 614,458 Payables to related parties 437,147 1,034,608 Accrued compensation 600,279 706,965 Advance billings and deferred revenue 1,131,989 1,101,221 Accrued rent 446,124 538,641 Other accrued liabilities 862,419 821,752 Obligations under capital leases--current portion 18,627 33,242 ------------- ------------- Total liabilities 4,509,031 4,850,887 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 20,000,000 shares authorized, 6,513,991 and 6,512,038 shares issued at March 31, 1997 and December 31, 1996 respectively 65,140 65,120 Capital in excess of par value 31,394,758 31,384,080 Accumulated deficit (6,947,585) (7,335,832) Treasury stock, 190,000 shares at March 31, 1997 and December 31, 1996 (at cost) (475,000) (475,000) ------------- ------------- Total stockholders' equity 24,037,313 23,638,368 ------------- ------------- Total liabilities and stockholders' equity $ 28,546,344 $ 28,489,255 ============= =============
The accompanying notes are an integral part of these financial statements. 4 5 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended ----------------------------------------- March 31, March 31, 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 388,247 $ 683,185 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 283,841 224,679 Deferred income taxes 228,160 357,547 Changes in working capital component: Accounts receivable (137,071) (826,576) Accounts receivable - Related parties (1,953) (600,914) Other assets (74,540) 18,329 Trade accounts payable 397,988 (205,253) Payables to related parties (597,461) (341,358) Accrued compensation (106,686) (281,844) Accrued rent (92,517) (4,519) Other accrued liabilities 40,667 805,515 Advance billings and deferred revenue 30,768 333,594 ------------- ------------- Net cash (used in) provided by operating activities 359,443 162,385 Cash flows from investing activities: Proceeds from the sale of fixed assets, net -- -- Capital expenditures (651,259) (369,097) ------------- ------------- Net cash used in investing activities (651,259) (369,097) Cash flows from financing activities: Principal payments under capital lease obligations (14,615) (13,335) Proceeds from sales of common stock, net 10,697 65,276 ------------- ------------- Net cash (used in) provided by financing activities (3,918) 51,941 ------------- ------------- Net change in cash (295,734) (154,771) Cash and cash equivalents: Beginning of period 14,691,765 12,394,588 ------------- ------------- End of period $ 14,396,031 $ 12,239,817 ============= =============
The accompanying notes are an integral part of these financial statements. 5 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION In the opinion of the management of Carnegie Group, Inc. (the "Company"), these unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of operating results for the three month period ended March 31, 1997. Results for the interim periods are not necessarily indicative of results for the full year. The accompanying statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. Accordingly, the information contained in this Form 10-Q should be read in conjunction with the financial statements and notes thereto contained in the Company's Form 10-K for the year ended December 31, 1996 as filed with the Securities and Exchange Commission. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS No. 128 establishes new standards for computing and presenting earnings per share. The Company is required to adopt the provisions of SFAS No. 128 for its consolidated financial statements for the year ended December 31, 1997 and subsequent interim periods. Upon adoption, the standard also requires the restatement of all prior period earnings per share information presented. The adoption of SFAS No. 128 is not expected to have a material effect on the Company's earnings per share computations or disclosures. 6 7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides client/server software development services that integrate advanced user-centered, intelligent software technologies with clients' existing computing infrastructures to automate and enhance complex business processes. The Company performs business and technical consulting, custom software development, and systems integration services to improve clients' productivity and market position in two business areas: customer interaction; and logistics, planning and scheduling. Within these areas, the Company targets its services to clients in the financial services, government, manufacturing and telecommunications industries. The Company's expertise encompasses a wide range of advanced software technologies, including knowledge-based systems, object-oriented technology, advanced graphical user interfaces, constraint-directed search and distributed computing. The Company captures certain aspects of its business area experience and advanced technology expertise in a portfolio of reusable software templates that can be used as building blocks to create software solutions quickly and effectively. In addition, Carnegie Group employs an iterative or "spiral" approach to software design that begins with the construction of a prototype and continues through testing of successive versions of the software against project requirements. This iterative design facilitates rapid software development, encourages client feedback and leads to greater congruence with client needs and expectations. Since inception, Carnegie Group has emphasized relationships with leading corporations in its targeted industries. These relationships have provided the Company with opportunities for growth through the provision of additional services to existing clients and through references to other companies within the Company's targeted industries. Carnegie Group's clients include U S WEST Communications, Inc., the United States Transportation Command, U.S. Army, Caterpillar Inc., BellSouth Telecommunications, Inc., First USA Bank, Highmark Blue Cross Blue Shield and Philips Medical Systems. The Company only includes in backlog signed contracts that either have milestones yet to be attained or for which the Company can make a reasonable estimate of work yet to be performed. The Company's backlog was $17.3 million at March 31, 1997 compared to $14.1 million at March 31, 1996. Backlog at March 31, 1997 increased from backlog of $9.6 million at December 31, 1996. This increase reflected large contract closures resulting from expanded business development capabilities. As most of the contracts in backlog are terminable by the Company or the client upon short notice, there can be no assurance that contracts reflected in backlog are a reliable measure of future revenue. 7 8 Comparison of Quarters Ended March 31, 1997 and March 31, 1996. Revenue. Total revenue was $7.1 million in the first quarter of 1997 compared to $8.3 million in the first quarter of 1996, a decrease of $1.2 million or 14.3%. This decrease resulted principally from volume decreases in sales of software services. Total software services revenue was $6.5 million in the first quarter of 1997 compared to $8.2 million in the first quarter of 1996, a decrease of $1.7 million or 20.6%. A significant fixed-price contract was renegotiated in the second quarter of 1996. The impact of that renegotiated contract resulted in lower quarterly revenue and earnings levels for the second, third and fourth quarters of 1996, and for the first quarter of 1997, but not the first quarter of 1996. Revenue from software services-unrelated parties was $5.5 million in the first quarter of 1997 compared to $7.4 million in the first quarter of 1996, a decrease of $1.9 million or 26.1%. This decrease was primarily attributable to the renegotiated contract described above. Revenue from software services-related parties increased by 34.2 % to $1.0 million in the first quarter of 1997 compared to $.8 million in the first quarter of 1996. This increase was primarily attributable to an increase in customer contact engagements for a telecommunications industry client. Revenue from software licenses was $625,000 in the first quarter of 1997 compared to $130,000 in the first quarter of 1996, an increase of $495,000 or 381.0%. This increase was attributable to increased sales of reusable software templates. Cost of Revenue. Cost of revenue consists primarily of salaries and related benefits for personnel, and also includes an allocated portion of rent, building services and computer equipment services and expenses. Total cost of revenue was $4.4 million in the first quarter of 1997, compared to $5.1 million in the first quarter of 1996, a decrease of $.7 million or 12.7%. This decrease was primarily attributable to a decrease in the cost of consultant labor. Cost of revenue-unrelated parties was $3.8 million in the first quarter of 1997 compared to $ 4.7 million in 1996, a decrease of $.9 million or 18.4%. This decrease was primarily attributable to the decreased volume of software services performed. Cost of revenue-related parties was $.6 million in the first quarter of 1997 compared to $.4 million in the first quarter of 1996, an increase of $.2 million or 60.5%. This increase was primarily attributable to an increase in customer contact engagements for a telecommunications industry client. Research and Development. Research and development expenses were $358,000 in the first quarter of 1997 compared to $179,000 in the first quarter of 1996, an increase of $179,000 or 99.8%. This increase was primarily due to the Company's decision to increase the investment in template and methodology development. Selling, General and Administrative. Selling, general and administrative expenses include costs of proposal development and proposal writing, marketing communications and advertising, sales and management staff, and corporate services functions including accounting, human resources and legal services, along with corporate executive staff. Selling, general and administrative expenses were $1.9 million in the first quarter of 1997 compared to $2.1 million in the first quarter of 1996, a decrease of $.2 million or 12.1%. 8 9 Other Income (Expense). Other income (expense) was $167,000 in the first quarter of 1997 compared to $148,000 in the first quarter of 1996, an increase of $19,000 or 12.2%. This income primarily represents interest income earned on net proceeds received in December 1995 from the Company's initial public offering, which remain invested in an interest-bearing account. Income Tax Provision. An income tax provision of $257,000 was recorded in the first quarter of 1997, based on the Company's estimate of the effective tax rate for the year. SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." The ultimate realization of the Company's deferred income tax asset depends on its ability to generate sufficient taxable income in the future. The Company has weighed the positive evidence of sustained profitability over the last three years and future income expectations within the Company's three year strategic planning horizon against the negative evidence of dependence upon a limited number of customers and other uncertainties and has concluded that retaining a valuation allowance related to net operating losses is no longer necessary. In estimating the amount of its realizable deferred tax asset, the Company gives substantial weight to recent historical results. Significant changes in circumstances or in enacted tax laws which affect the valuation allowance are recorded when they occur. The Company's annual strategic business planning process takes place in the fourth quarter of the year, and the valuation allowance is adjusted for future years' income expectations resulting from that process. When preparing subsequent interim and annual financial statements, the Company reevaluates whether there has been any significant change in the assumptions underlying its plan and adjusts the valuation allowance as necessary. 9 10 Liquidity and Capital Resources The Company has funded its operations in recent years primarily through cash generated from operations, the use of cash reserves, and in part by borrowing under available lines of credit. The Company has also funded its operations through the net proceeds of the initial public offering of its Common Stock consummated in December 1995. During the first quarter of 1997, the Company generated $359,000 in positive cash flow from its operating activities. Overall, the Company had a net use of cash of $296,000. The net use of cash resulted from a significant investment in capital equipment. In the first quarter of 1997, capital expenditures totaled $651,000. The Company's net accounts receivable decreased by $139,000 for the quarter ended March 31, 1997. Invoicing of amounts to clients generally occurs within 45 days of time and materials cost incurrence, unless a specific schedule is agreed upon, and payment follows invoicing in accordance with customary terms. The Company has not experienced any significant write-downs of receivables, nor does the Company expect that payments are doubtful; accordingly, the Company has not made any allowance for doubtful accounts. Advance billings and deferred revenue increased $31,000 at March 31, 1997 when compared to December 31, 1996. Advanced billings and deferred revenue balances will normally change from period to period. Any increase reflects billings in advance of revenue earned, but which were billed in accordance with established or agreed billing schedules. These amounts are recorded as deferred revenue until earned. The timing and magnitude of such advance billings vary from contract to contract and from client to client. The Company currently has a committed line of credit agreement in the amount of $3.5 million in place with PNC Bank, N.A. (the "Bank"). Borrowings under this agreement are collateralized by accounts receivable. The line of credit bears interest at the Bank's prime interest rate and the Bank charges a 0.15% fee per annum on the unused portion of that line of credit. The Bank's prime interest rate was 8.50% at March 31, 1997 compared to 8.25% at December 31, 1996. No borrowings were outstanding against the line of credit at March 31, 1997 or December 31, 1996. The Company believes that its current cash balances, together with cash generated from operations and borrowing available under its line of credit, will satisfy the Company's working capital and capital expenditure requirements during fiscal year 1997 and the foreseeable period thereafter. In the longer term, the Company may require additional sources of liquidity to fund future growth. Such sources of liquidity may include additional equity offerings or debt financings. Capital expenditures are typically made for computing equipment, software, physical plant, and furniture and fixtures in order to seek enhancements in the productivity of the Company's employees and to support growth. 10 11 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable - ------------------------------------------------------------------------------- To the extent that this report on Form 10-Q contains forward looking statements with respect to anticipated future results including statements with respect to growth in the Company's business and client engagements, such statements involve a number of risks and uncertainties that could materially and adversely affect future results. Such risks include, among others, the potential variability of the Company's quarterly operating results, in part due to significant client concentrations and relatively large projects. For a more detailed discussions of risk factors affecting the Company, please refer to the risk factors set forth in the Company's Annual Report of Form 10-K for the year ended December 31, 1996. 11 12 PART II - OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibit listed below is filed or incorporated by reference as part of this quarterly report on Form 10-Q: 11.1 Statement regarding computation of Per Share Earnings (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended March 31, 1997. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 1997 CARNEGIE GROUP, INC. /s/ DENNIS YABLONSKY ---------------------------- Dennis Yablonsky President and Chief Executive Officer /s/ JOHN W. MANZETTI ---------------------------- John W. Manzetti Executive Vice President, Chief Financial Officer and Treasurer 13 14 EXHIBIT INDEX Exhibit No. Description 11.1 Statement regarding computation of per share earnings 14 EX-11.1 2 CARNEGIE GROUP, INC. 1 Exhibit 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS PRIMARY EARNINGS PER SHARE
Three months ended March 31, 1997 1996 ------------------------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 6,278,594 6,205,842 Weighted Average Common Equivalent: Shares 674,220 970,285 ---------- ---------- 6,952,814 7,176,127 ---------- ---------- Net Income $ 388,274 $ 683,185 ========== ========== Net Income Per Common Share $ 0.06 $ 0.10 ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Three months ended March 31, 1997 1996 ------------------------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 6,278,594 6,205,842 Weighted Average Common Equivalent: Shares 674,072 969,803 ---------- ---------- 6,952,666 7,175,645 ---------- ---------- Net Income $ 388,274 $ 683,185 ========== ========== Net Income Per Common Share $ 0.06 $ 0.10 ========== ==========
15 EX-27 3 CARNEGIE GROUP, INC.
5 0001001188 CARNEGIE GROUP, INC. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 14,396,031 0 7,508,630 0 0 24,539,319 2,413,834 0 28,546,344 4,509,031 0 0 0 65,140 23,972,173 28,546,344 625,078 7,131,918 6,653,763 2,234,518 0 0 3,645 644,607 256,360 388,247 0 0 0 388,247 .06 0
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