-----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, EMBWfG6VnpQAjp/0mtHmp/bpLIBz+7mb31wuwo48CCwtPPOR9yFnTk0GA38NSJph mgb1a4WUXiE41ZhFqhTxBA== 0000950128-97-000908.txt : 19970815 0000950128-97-000908.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950128-97-000908 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97663060 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 June 30, 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 July 31, 1997 Common Stock, $.01 par value 6,338,145 - ------------------------------------------------------------------------------ 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 and six months ended June 30, 1997 and 1996 Carnegie Group, Inc. and Subsidiaries 4 Consolidated Balance Sheets Carnegie Group, Inc. and Subsidiaries 5 Consolidated Statements of Cash Flows Notes 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 16 Market Risks PART 2 OTHER INFORMATION 17 Signatures 18 Exhibit Index 19 -2- 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended ------------------ ----------------- June 30, June 30, June 30, June 1997 1996 1997 1996 ---- ---- ---- ---- Revenue Software services--Unrelated parties $ 6,078,572 $ 5,636,264 $ 11,578,304 $13,079,014 Software services--Related parties 1,681,074 494,277 2,688,182 1,244,926 ------------ ------------ ------------ ----------- Total software services 7,759,646 6,130,541 14,266,486 14,323,940 Software licenses 98,361 532,820 723,439 662,761 ------------ ------------ ------------ ----------- Total revenue 7,858,007 6,663,361 14,989,925 14,986,701 ------------ ------------ ------------ ----------- Costs and expenses: Cost of revenue - Unrelated parties 3,785,525 3,907,883 7,623,025 8,609,565 Cost of revenue - Related parties 924,949 412,765 1,506,694 775,276 ------------ ------------ ------------ ----------- Total cost of revenue 4,710,474 4,320,648 9,129,719 9,384,841 Research and development 392,864 288,276 750,546 467,290 Selling, general and administrative 2,061,187 2,014,917 3,938,023 4,150,886 ------------ ------------ ------------ ---------- Total costs and expenses 7,164,525 6,623,841 13,818,288 14,003,017 ------------ ------------ ------------ ---------- Income from operations 693,482 39,520 1,171,637 983,684 Other income (expense): Interest income 168,978 151,524 332,876 298,690 Other income 6,399 6,699 12,598 12,798 Interest expense (3,408) (4,564) (7,053) (9,421) ------------ ------------ ------------ ---------- Total other income (expense) 171,969 153,659 338,421 302,067 ------------ ------------ ------------ ---------- Income before income taxes 865,451 193,179 1,510,058 1,285,751 Income tax provision (343,942) (72,356) (600,302) (481,743) ------------ ------------ ------------ ---------- Net income $ 521,509 $ 120,823 $ 909,756 $ 804,008 ------------ ------------ ------------ ---------- Earnings per share of common stock $ 0.08 $ 0.02 $ 0 .13 $ 0.11 ============ ============ ============ ========== Weighted average number of common shares 6,905,348 7,182,428 6,930,042 7,205,668 outstanding ============ ============ ============ ==========
The accompanying notes are an integral part of these financial statements. -3- 4 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, December 31, 1997 1996 --------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,819,458 $ 14,691,765 Accounts receivable 3,993,957 2,751,316 Accounts receivable from related parties 1,422,954 769,223 Accounts receivable--unbilled 2,801,797 3,660,765 Accounts receivable related parties--unbilled 717,824 188,302 Deferred income taxes 2,032,767 2,179,426 Other current assets 634,262 403,508 ------------- ------------ Total current assets 26,423,019 24,644,305 ------------- ------------ Property and equipment, net of accumulated depreciation and amortization 2,603,708 2,046,415 Deferred income taxes 1,393,617 1,775,480 Other assets 18,441 23,055 ------------ ------------ Total assets $ 30,438,785 $ 28,489,255 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 1,291,460 $ 614,458 Payables to related parties 292,877 1,034,608 Accrued compensation 798,543 706,965 Advance billings and deferred revenue 2,185,289 1,101,221 Accrued rent 402,915 538,641 Other accrued liabilities 755,708 821,752 Obligations under capital leases--current portion 5,343 33,242 ------------ ------------ Total liabilities 5,732,135 4,850,887 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 20,000,000 shares authorized, 6,563,845 and 6,512,038 shares issued at June 30, 1997 and December 31, 1996 respectively 65,638 65,120 Capital in excess of par value 31,542,088 31,384,080 Accumulated deficit (6,426,076) (7,335,832) Treasury stock, 190,000 shares at June 30, 1997 and December 31, 1996 (at cost) (475,000) (475,000) ------------ ------------ Total stockholders' equity 24,706,650 23,638,368 ------------ ------------ Total liabilities and stockholders' equity $ 30,438,785 $ 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)
Six Months Ended -------------------------------------- June 30, June 30, 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 909,756 $ 804,008 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 602,433 469,124 Deferred income taxes 528,522 420,744 Changes in working capital component: Accounts receivable (383,673) (27,754) Accounts receivable - Related parties (1,183,253) (987,431) Other assets (226,140) 80,995 Trade accounts payable 677,002 (302,915) Payables to related parties (741,731) (90,561) Accrued compensation 91,578 (84,444) Accrued rent (135,726) (29,365) Other accrued liabilities 720 791,437 Advance billings and deferred revenue 1,084,068 (12,208) ------------- ------------ Net cash (used in) provided by operating activities 1,223,556 1,031,630 Cash flows from investing activities: Proceeds from the sale of fixed assets, net -- -- Capital expenditures (1,159,726) (722,192) -------------- ------------- Net cash used in investing activities (1,159,726) (722,192) Cash flows from financing activities: Borrowings on line of credit -- -- Repayments on line of credit -- -- Principal payments under capital lease obligations (27,899) (26,982) Proceeds from sales of common stock, net 91,762 105,804 ------------- ------------ Net cash (used in) provided by financing activities 63,863 78,822 ------------- ------------ Net change in cash and cash equivalents 127,693 388,260 Cash and cash equivalents: Beginning of period 14,691,765 12,394,588 End of period $ 14,819,458 $ 12,782,848 ============= ============
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 interim 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 and six month periods ended June 30, 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. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. The Company is required to adopt the provisions of SFAS No. 130 beginning with its consolidated financial statements for the three months ending March 31, 1998. SFAS No. 131 requires certain disclosures about segment information in interim and annual financial statements and related information about products and services, geographic areas and major customers. The Company must adopt the provisions of SFAS No. 131 for its consolidated financial statements for the year ending December 31, 1998. The adoptions of SFAS No. 128, SFAS No. 130 and SFAS No. 131 are not expected to have a material effect on the measurement of the Company's financial position, results of operations or cash flows; the Company is reviewing possible changes in disclosures that may be called for. -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 the United States Transportation Command, U S WEST Communications, Inc., BellSouth Telecommunications, Inc., U.S. Army, Caterpillar, 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 at June 30, 1997 was $12.4 million, compared to $15.1 million at June 30, 1996 and $9.6 million at December 31, 1996. The increase compared to the prior year end reflects contract closures resulting from 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 Quarter and Six Months Ended June 30, 1997 and June 30, 1996. Revenue. Total revenue for the quarter ended June 30, 1997 was $7.9 million compared to $6.7 million for the quarter ended June 30, 1996, an increase of $1.2 million or 18%. For the six months ended June 30, 1997 revenue was unchanged at $15.0 million compared to $15.0 million for the six months ended June 30, 1996. Total software services revenue for the quarter ended June 30, 1997 was $7.8 million compared to $6.1 million for the quarter ended June 30, 1996, an increase of $1.7 million or 27%. The renegotiation of a significant fixed-price contract in the second quarter of 1996 adversely affected revenue and earnings for that period. Software services revenue was unchanged at $14.3 million for the six months ended June 30, 1997 compared to $14.3 million for the six months ended June 30, 1996. Revenue from software services-related parties was $2.7 million for the six months ended June 30, 1997 compared to $1.2 million for the six months ended June 30, 1996, an increase of $1.5 million or 116%. This increase was primarily due to an increase in customer contact engagements for a telecommunications industry client. Revenue from software licenses was $98,000 for the three month period ended June 30, 1997, compared to $533,000 for the same three month period in 1996, a decrease of $435,000 or 82%. The decrease in software licenses in the second quarter of 1997 when compared to 1996 was attributable to the timing of closing sales of software templates. Revenue from software licenses was $723,000 for the six months ended June 30, 1997 compared to $663,000 for the six months ended June 30, 1996, an increase of $60,000 or 9%. 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 expenses. For the second quarter of 1997, total cost of revenue was $4.7 million compared to $4.3 million for the second quarter of 1996, an increase of $.4 million or 9%. For the six months ended June 30, 1997, total cost of revenue was $9.1 million compared to $9.4 million for the six months ended June 30, 1996, a decrease of $.3 million or 3%. The six month decrease was primarily attributable to a decrease in the cost of consultant labor. Cost of revenue-related parties was $1.5 million for the six months ended June 30, 1997 compared to $.8 million for the six months ended June 30, 1996, an increase of $.7 million or 94%. This increase was primarily attributable to an increase in customer contact engagements for a telecommunications industry client. Research and Development. Research and development expenses for the quarter ended June 30, 1997 were $393,000 compared to $288,000 for the second quarter of 1996, an increase of $105,000 or 36%. For the six months ended June 30, 1997 research and development expenses were $751,000 compared to $467,000 for the six months ended June 30, 1996, an increase of $284,000 or 61%. These increases were primarily attributable to continued 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, -8- 9 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 $3.9 million for the six months ended June 30, 1997 compared to $4.1 million for the six months ended June 30, 1996, a decrease of $.2 million or 5%. Other Income (Expense). Total other income for the second quarter of 1997 was $172,000 compared to total other income of $154,000 in 1996, an increase of $18,000 or 12%. For the six months ended June 30, 1997, total other income was $339,000 compared to total other income of $302,000 in 1996 an increase of $37,000 or 12%. This income is primarily interest income earned on the net proceeds received in December 1995 from the Company's initial public offering, which were invested in an interest-bearing account. Income Tax Provision. An income tax provision of $344,000 was recorded for the second quarter of 1997 and $600,000 for the six months ended June 30, 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 its deferred income tax asset depends on the Company's 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. Liquidity and Capital Resources The Company has funded its operations in recent years primarily through cash generated from operations and 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 six months of 1997 the Company generated $1.2 million in positive cash flow from operating activities and overall net cash provided of $128,000. This positive cash -9- 10 flow was generated even with a substantial six month investment of $1.2 million in capital equipment. In comparison, capital equipment spending for the six months ended June 30, 1996 was $722,000. The Company's net accounts receivable increased by $1.6 million for the six months ended June 30, 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 $1.1 million for the six months ended June 30, 1997. 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 billings 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 June 30, 1997 compared to 8.25% at December 31, 1996. This agreement was amended on July 1, 1997 by extending the expiration date to June 30, 1998. No borrowings were outstanding against the line of credit at June 30, 1997 or December 31, 1996. The Company believes that the 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. 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. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. The Company is required to adopt the provisions of SFAS No. 130 beginning with its consolidated financial statements for the three months ending March 31, 1998. SFAS No. 131 requires certain disclosures about segment information in interim and annual financial statements and related information about products and services, geographic areas and major customers. The Company must adopt the provisions of SFAS No. 131 for its consolidated financial statements for the year ending December 31, 1998. The adoptions of SFAS No. 128, SFAS No. 130 and SFAS No. 131 are not expected to have a material effect on the measurement of the Company's financial position, results of operations or cash flows; the Company is reviewing possible changes in disclosures that may be called for. -10- 11 Material Factors Affecting the Company's Business The Company's business is subject to a number of risks and uncertainties that could materially affect future results. To the extent that any of the statements made in this report on Form 10-Q (including, without limitation, statements with respect to growth in the Company's business and client engagements) may be deemed to be forward-looking statements, or to the extent that the Company or its representatives may in the future be deemed to make oral forward-looking statements, the following is a list of important factors, among others, that could cause actual results to differ materially from those expressed in any such forward-looking statements: Dependence Upon Limited Number of Clients. The Company has derived in the past, and expects to derive in the future, a significant portion of its revenue from a relatively limited number of major clients. For example, approximately 83%, 87% and 80% of total software services revenue in the years ended December 31, 1996, 1995 and 1994, respectively, was derived from the Company's five largest clients in each such period. In 1996, revenue from billings to each of the United States Transportation Command, BellSouth Telecommunications, Inc. and Caterpillar Inc. accounted for more than 10% of the Company's total revenue. In 1995, revenue from billings to each of such customers and U S WEST Communications, Inc. accounted for more than 10% of the Company's total revenue. The Company's business depends in large part upon its ability to establish and maintain relationships with a limited number of large clients. The loss of, or any significant reduction in the services provided to, any existing major clients, or the failure of the Company to establish and maintain relationships with new major clients, would have a material adverse effect on the Company's business, financial position and results of operations. Project Risks. Many of the Company's engagements involve projects which are critical to the operations of its clients' businesses and which provide benefits that may be difficult to quantify. Moreover, many of these engagements are significant to the Company, in that each may represent a significant portion of the Company's total revenue. For example, the Company's ten largest engagements accounted for approximately 76%, 68%, and 56% of total software services revenue in the years ended December 31, 1996, 1995 and 1994, respectively. The Company's failure or inability to meet a client's expectations in the performance of an engagement could have a material adverse effect on the Company's business, financial position and results of operations, including damage to the Company's reputation that could adversely affect its ability to attract new business. In addition, the Company's engagements generally are terminable by clients on short or no notice. An unanticipated termination of a major engagement could require the Company either to maintain under-utilized employees, resulting in a higher than expected number of unassigned persons and concomitant lower utilization rate, or to terminate such employees, resulting in higher severance expenses. The Company must maintain a sufficient number of senior professionals to oversee existing client engagements and to participate with the Company's sales force in securing new client engagements; thus, professional staff expenses are relatively fixed. Although the majority of the Company's contracts are 11 12 performed on a time-and-materials basis, some contracts are performed on a fixed-price basis, exposing the Company to the risks of cost overruns and inflation. Variability of Quarterly Operating Results; Future Operating Results Uncertain. The Company has experienced significant quarterly and other variations in revenue and operating results. Because the Company's business is characterized by significant client concentration and relatively large projects, the timing of performance for each client engagement can result in significant variability in the Company's revenue and cost of revenue from quarter to quarter. In addition, variations in the Company's revenue and operating results occur as a result of a number of other factors, such as employee hiring and utilization rates and the number of working days in a quarter. The timing of revenue is difficult to forecast because the Company's sales cycle is relatively long and may depend on factors such as the size and scope of assignments and general economic conditions. Because a high percentage of the Company's expenses, particularly employee compensation, are relatively fixed, a variation in the timing of the initiation or completion of client engagements, especially at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in quarterly losses. Future revenue and operating results may vary as a result of these and other factors, including the demand for the Company's services and solutions and the competitive conditions in the industry. Moreover, much of the Company's revenue from software licenses is realized upon the licensing of individual copies of software, rather than in the course of a specific services engagement. Accordingly, the timing of software license revenue can be difficult to predict and may vary significantly from quarter to quarter. Many of the factors that could result in quarterly variations are not within the Company's control. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, quarterly variations, together with the Company's dependence upon a limited number of clients and the Company's experience of adverse operating results in years prior to 1994, make it difficult for management to engage in strategic planning that contemplates a horizon of more than three years. Thus, income expectations beyond three years are viewed by management as very uncertain, and management's past assessments of its ability to realize its deferred tax asset through future taxable income have reflected this. Prior to December 31, 1996, the Company's interim and annual financial statements included a valuation allowance that was intended to reflect management's estimation, in light of these and other risk factors, of the realizability of its deferred tax asset. In determining the amount of any valuation allowance and the possible need to adjust that amount, the Company weighs the negative evidence of its dependence upon a limited number of clients and the other risks described herein, on the one hand, against the positive evidence of recent results and future expectations over its three-year planning horizon, on the other hand. The Company then adjusts the valuation allowance, if any, to reflect the portion of the deferred tax asset that the Company believes it will, more likely than not, be unable to realize. Any valuation allowance that may be shown on the Company's financial statements would reflect that the Company does not believe that it is more likely than not to realize certain deferred tax assets. 12 13 Dependence on Key Management Personnel. The Company's success depends in significant part upon the retention of key senior management and technical personnel. The Company does not have employment agreements with any of its personnel other than Dennis Yablonsky, its President and Chief Executive Officer, nor does it maintain key man life insurance on any of its personnel. The loss of one or more of its key management employees or the inability to attract and retain other qualified management employees could have a material adverse effect on the Company's business, financial position and results of operations. Attraction and Retention of Employees. Carnegie Group's business involves the delivery of software development services and is labor-intensive. The Company's success depends in large part upon its ability to attract, retain and motivate highly skilled employees, particularly project managers, sales and marketing personnel, engineers and other senior personnel. Qualified project managers and engineers are in particularly great demand and are likely to remain a limited resource in the foreseeable future. Although the Company expects to continue to attract sufficient numbers of highly skilled employees and to retain existing project managers, sales and marketing personnel, engineers and other senior personnel for the foreseeable future, there can be no assurance that the Company will be able to do so. The Company, like others in the information technology services industry, is subject to a relatively high annual rate of turnover in personnel. The loss of project managers, sales and marketing personnel, engineers and other senior personnel could have a material adverse effect on the Company's business, financial position and results of operations, including its ability to secure and complete engagements. No project managers, sales and marketing personnel, engineers or other senior personnel have entered into employment agreements, other than Dennis Yablonsky, the Company's President and Chief Executive Officer. Management of Growth. Carnegie Group is currently experiencing a period of growth which has placed, and could continue to place, a strain on the Company's financial and other resources. The Company was founded in 1983 by computer scientists at Carnegie Mellon University in Pittsburgh, Pennsylvania. The Company was initially funded through equity investments and technology alliances with Digital Equipment Corporation, Generale de Service Informatique, The Boeing Company, Texas Instruments Incorporated, Ford Motor Company and U S WEST, Inc. From January 1, 1994 through December 31, 1996, the size of the Company's staff increased from 124 to 238 employees and independent contractors. In addition, the Company has opened offices in Atlanta, Georgia and Fairview Heights, Illinois since January 1, 1995. In order to manage any further growth in its staff and facilities, the Company must continue to improve its operational, financial and other internal systems, and to attract, train, motivate and manage its personnel. If the Company is unable to manage growth effectively and new personnel are unable to achieve anticipated performance levels, the Company's business, financial position and results of operations would be adversely affected. Competition. The information technology services market includes a large number of participants, is subject to rapid change and is highly competitive. The Company competes with 13 14 and faces potential competition for client assignments and experienced personnel from a number of companies that have significantly greater financial, technical and marketing resources and greater name recognition. Primary competitors include: the consulting practices of the "Big Six" accounting firms; systems consulting and integration firms such as American Management Systems, Inc. and Cambridge Technology Partners, Inc.; and the professional services groups of large companies, such as International Business Machines Corporation, Digital Equipment Corporation and AT&T Corporation. In addition, clients may elect to use their internal information systems resources to satisfy their needs for software development, systems integration and technical consulting services, rather than using those services offered by the Company. The Company also faces competition from organizations providing outsourcing services to the information systems departments of existing and potential clients. In addition, the information technology services market is highly fragmented and is served by numerous firms; some of these firms compete nationally and internationally, while others serve only their respective local markets. While the Company has not experienced competition from foreign providers of information technology services, there can be no assurance that the Company will not experience such competition in the future. Carnegie Group has targeted, and expects to continue to target, industries that are characterized by business areas (such as customer interaction, and logistics, planning and scheduling) to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations necessary to support the engagement of service providers such as the Company. A growing number of professional services firms are seeking engagements from that same client group. The Company believes that the principal competitive factors in the information technology services industry include the nature of the service offering, quality of service, timeliness, responsiveness to client needs, experience with the client's industry and competitive environment, technical expertise, access to replicable technology, such as software templates, and price. The Company believes that its ability to compete also depends in part upon a number of competitive factors outside its control, including: the ability of its competitors to hire, retain and motivate project managers, sales and marketing personnel and engineers; competitors' ownership of or access to software and technology used by potential clients; the development by others of software that is competitive with the Company's solutions and services; the price at which others offer comparable services; and the extent of competitors' responsiveness to customer needs. While the information technology services market remains highly fragmented and continues to be served by numerous firms, the Company notes that this market has been subject to recent consolidation. Accordingly, the Company from time to time considers possible acquisitions, consolidations and other strategic alternatives. Developing Market; Technological Advances. The market for client/server software development services is continuing to develop. The Company's success is dependent in part upon the acceptance of information processing systems utilizing client/server architectures. While the Company believes that corporations and government agencies will continue to accept the use of client/server architectures, a decline in this trend could have a material adverse effect 14 15 on the Company's business, financial position and results of operations. The Company's success will also depend in part on its ability to develop software solutions that incorporate and keep pace with continuing changes in advanced software technologies, evolving industry standards and changing client preferences. There can be no assurance that the Company will be successful in adequately addressing these developments on a timely basis or that, if these developments are addressed, the Company will be successful in the marketplace. The Company's failure to address these developments could have a material adverse effect on the Company's business, financial position and results of operations. In addition, there can be no assurance that products or technologies developed by others will not render the Company's services uncompetitive or obsolete. Intellectual Property Rights. The Company's success is dependent in part upon reusable software templates and other intellectual property. The Company's business includes the development of custom software solutions in connection with specific client engagements. Ownership of certain custom components of such software is generally assigned to the client. The Company has licensed through December 1997 certain custom software components developed in the course of an engagement for a client. In addition, the Company also develops core software technology and reusable software templates, often in the course of engagements for clients, as well as object-oriented software components and certain software "tools," which can be reused in software application development and which generally remain the property of the Company. The Company relies upon a combination of patent, trade secret, non-disclosure and other contractual arrangements, and patent, copyright and trademark laws, to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. Although the Company believes that its services and solutions (including its reusable software templates) do not infringe on the intellectual property rights of others and that it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of litigation alleging infringement of third party intellectual property rights. There can be no assurance that third parties (including the parties for whom the Company has been engaged to develop solutions, from which its reusable software templates have been derived) will not assert infringement claims against the Company in the future with respect to intellectual property utilized by the Company now or in the future. Any such claims could require the Company to expend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of asserted infringement. 15 16 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable -16- 17 PART II - OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 13, 1997, the Company held its 1997 Annual Meeting of Stockholders. (b) Mark S. Fox and John W. Manzetti were elected directors at the Annual Meeting; Dennis Yablonsky, Raj Reddy, Glen F. Chatfield, Bruce D. Russell, Tracie A. Muesing and Jaime G. Carbonell continued as directors after the Annual Meeting. (c) The following matters were voted upon at the Annual Meeting, with the results indicated: 1. Election of Directors Authority Broker Votes For Withheld Non-Votes --------- --------- --------- Mark S. Fox 5,090,187 38,935 0 John W. Manzetti 5,093,087 36,035 0 2. Proposal to ratify the selection of Price Waterhouse LLP, independent accountants, to audit the books and accounts of the Company for the year ending December 31, 1997. Votes for: 5,111,512 Votes against: 9,860 Abstentions: Broker Non-Votes 0 (d) Not applicable ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibits Description 11.1 Statement regarding computation of per share earnings 27. Financial Data Schedule Reports on Form 8-K The registrant did not file any reports on Form 8-K during the quarter ended June 30, 1997. -17- 18 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: August 14, 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 -18- 19 EXHIBIT INDEX Sequential Exhibit No. Description page number 11.1 Statement Regarding Computation of Per Share Earnings 27 Financial Data Schedule -19- 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 Six months ended June 30, June 30, 1997 1996 1997 1996 ------------------------ ------------------------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 6,296,648 6,178,789 6,287,408 6,217,739 Weighted Average Common Equivalent: Shares 608,700 1,003,639 642,634 987,929 ---------- ---------- ---------- ---------- 6,905,348 7,182,428 6,930,042 7,205,668 ---------- ---------- ---------- ---------- Net Income $ 521,509 $ 120,823 $ 909,756 $ 804,008 ========== ========== ========== ========== Net Income Per Common Share $ 0.08 $ 0.02 $ 0.13 $ 0.11 ======== ======== ======== ========
FULLY DILUTED EARNINGS PER SHARE
Three months ended Six months ended June 30, June 30, 1997 1996 1997 1996 ------------------------ ------------------------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 6,296,648 6,178,789 6,287,408 6,217,739 Weighted Average Common Equivalent: Shares 744,199 1,002,849 750,885 987,306 ---------- ---------- ---------- ---------- 7,040,847 7,181,638 7,038,293 7,205,045 ---------- ---------- ---------- ---------- Net Income $ 521,509 $ 120,823 $ 909,756 $ 804,008 ========== ========== ========== ========== Net Income Per Common Share $ 0.07 $ 0.02 $ 0.13 $ 0.11 ======== ======== ======== ========
EX-27 3 CARNEGIE GROUP, INC.
5 0001001188 CARNEGIE GROUP, INC. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 14,819,458 0 8,936,532 0 0 26,423,019 2,603,708 0 30,438,785 5,732,135 0 0 0 65,638 24,641,012 30,438,785 723,439 14,989,925 9,129,719 4,688,569 0 0 7,053 1,510,058 600,302 909,756 0 0 0 909,756 .13 0
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