<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
<TABLE>
<S> <C>
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>
CARNEGIE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------
(2) Form, Schedule or Registration No.:
-------------------------------------
(3) Filing Party:
------------------------------------------------
(4) Date Filed:
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<PAGE> 2
Carnegie Group, Inc.
Five PPG Place
Pittsburgh, PA 15222
Phone: (412) 642-6900 E-mail: [email protected]
CARNEGIE GROUP Fax: (412) 642-6906 Web: http://www.cgi.com
- --------------------------------------------------------------------------------
April 14, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of Carnegie Group, Inc. to be held on Tuesday, May 13, 1997, at 10:00 a.m., at
the Westin William Penn Hotel, 530 William Penn Place, in Pittsburgh,
Pennsylvania.
The Annual Meeting will begin with a report on Company operations, followed
by discussion and voting on the matters described in the accompanying Notice of
Annual Meeting and Proxy Statement. We also plan to have demonstrations of
selected Company technologies at the meeting to give you a better understanding
of our software solutions.
Please read the accompanying Notice of Annual Meeting and Proxy Statement
carefully. Whether or not you plan to attend, you can ensure that your shares
are represented and voted at the Annual Meeting by promptly completing, signing,
dating and returning the enclosed proxy card in the envelope provided.
We look forward to seeing you on May 13, 1997.
Sincerely,
/s/ DENNIS YABLONSKY
Dennis Yablonsky
President and Chief Executive Officer
<PAGE> 3
CARNEGIE GROUP, INC.
FIVE PPG PLACE
PITTSBURGH, PENNSYLVANIA 15222
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, MAY 13, 1997
------------------
The Annual Meeting of Stockholders (the "Annual Meeting") of Carnegie
Group, Inc., a Delaware corporation (the "Company"), will be held on Tuesday,
May 13, 1997, at 10:00 a.m., local time, at the Westin William Penn Hotel, 530
William Penn Place, Pittsburgh, Pennsylvania 15219, for the following purposes:
1. To elect two Class II directors to serve for a term of three years
and until their respective successors are duly elected and qualified;
2. 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; and
3. To transact such other business as may properly come before the
Annual Meeting and any and all adjournments and postponements thereof.
The Board of Directors has fixed the close of business on April 10, 1997 as
the record date for the determination of stockholders entitled to notice of, and
to vote at, the Annual Meeting and any adjournment or postponement thereof.
The enclosed proxy is solicited by the Board of Directors of the Company.
Reference is made to the accompanying Proxy Statement for further information
with respect to the business to be transacted at the Annual Meeting.
A complete list of the stockholders entitled to vote at the Annual Meeting
will be available during ordinary business hours for examination by any
stockholder, for any purpose germane to the Annual Meeting, for a period of at
least ten days prior to the Annual Meeting, at the offices of the Company, Five
PPG Place, Pittsburgh, Pennsylvania.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. YOU ARE CORDIALLY
INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. THE RETURN OF THE ENCLOSED PROXY
CARD WILL NOT AFFECT YOUR RIGHT TO REVOKE YOUR PROXY OR TO VOTE IN PERSON IF YOU
DO ATTEND THE ANNUAL MEETING.
By order of the Board of Directors,
JOHN W. MANZETTI
Executive Vice President and Secretary
Pittsburgh, Pennsylvania
April 14, 1997
YOUR VOTE IS IMPORTANT, NO MATTER HOW MANY SHARES
YOU OWNED ON THE RECORD DATE.
PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATE IT,
SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR
CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO
AVOID THE ADDITIONAL EXPENSE TO THE COMPANY OF FURTHER SOLICITATION, WE ASK YOUR
COOPERATION IN MAILING YOUR PROXY PROMPTLY.
<PAGE> 4
CARNEGIE GROUP, INC.
FIVE PPG PLACE
PITTSBURGH, PENNSYLVANIA 15222
---------------
PROXY STATEMENT
---------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Carnegie Group, Inc., a
Delaware corporation (the "Company"), for use at the Company's 1997 Annual
Meeting of Stockholders (together with any and all adjournments and
postponements thereof, (the "Annual Meeting") to be held on Tuesday, May 13,
1997, at 10:00 a.m., local time, at the Westin William Penn Hotel, 530 William
Penn Place, Pittsburgh, Pennsylvania 15219, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders (the "Notice"). This Proxy
Statement, together with the accompanying Notice and the enclosed proxy card,
are first being sent to stockholders on or about April 14, 1997.
RECORD DATE; VOTING SECURITIES; VOTING AND PROXIES
The Board has fixed the close of business on April 10, 1997 as the record
date (the "Record Date") for the determination of stockholders entitled to
notice of, and to vote at, the Annual Meeting. On the Record Date, there were
6,283,091 shares of Common Stock of the Company, par value $.01 per share
("Common Stock"), outstanding and entitled to vote. Each share of Common Stock
is entitled to one vote per share on each matter properly brought before the
Annual Meeting. Abstentions may be specified as to all proposals to be brought
before the Annual Meeting other than the election of directors.
Shares can be voted at the Annual Meeting only if the stockholder is
present in person or is represented by proxy. If the enclosed proxy card is
properly executed and returned prior to voting at the Annual Meeting, the shares
represented thereby will be voted in accordance with the instructions marked
thereon. In the absence of instructions, shares represented by executed proxies
will be voted as recommended by the Board. Brokers, banks and other nominee
holders will be requested to obtain voting instructions of beneficial owners of
stock registered in their names, and shares represented by a duly completed
proxy submitted by such a nominee holder on behalf of a beneficial owner will be
voted to the extent instructed by the nominee holder on the proxy card. Rules
applicable to nominee holders may preclude them from voting shares held by them
in nominee capacity on certain kinds of proposals unless they receive voting
instructions from the beneficial owners of the shares (the failure to vote in
such circumstances is referred to as a "broker non-vote").
The Board knows of no matters which are to be brought before the Annual
Meeting other than those set forth in the accompanying Notice. If any other
matters properly come before the Annual Meeting, the persons named in the
enclosed proxy card, or their duly appointed substitutes acting at the Annual
Meeting, will be authorized to vote or otherwise act thereon in accordance with
their judgment on such matters.
Any proxy may be revoked at any time prior to its exercise by attending the
Annual Meeting and voting in person, by notifying the Secretary of the Company
of such revocation in writing or by delivering a duly executed proxy bearing a
later date, provided that such notice or proxy is actually received by the
Company prior to the taking of any vote at the Annual Meeting.
The cost of solicitation of proxies for use at the Annual Meeting will be
borne by the Company. Solicitations will be made primarily by mail or by
facsimile, but regular employees of the Company may solicit proxies personally
or by telephone.
<PAGE> 5
QUORUM; VOTES REQUIRED
The presence at the Annual Meeting, in person or by proxy, of shares of
Common Stock representing at least a majority of the total number of shares of
Common Stock entitled to vote on the Record Date will constitute a quorum for
purposes of the Annual Meeting. Shares represented by duly completed proxies
submitted by nominee holders on behalf of beneficial owners will be counted as
present for purposes of determining the existence of a quorum (even if some such
proxies reflect broker non-votes). In addition, abstentions will be counted as
present for purposes of determining the existence of a quorum.
Under applicable Delaware law, directors are to be elected by a plurality
of the votes of the shares of Common Stock present in person or represented by
proxy at the Annual Meeting. Accordingly, and in accordance with the Company's
Amended and Restated By-Laws, the two nominees for election as directors who
receive the highest number of votes actually cast will be elected. Broker
non-votes will be treated as shares that neither are capable of being voted nor
have been voted and, accordingly, will have no effect on the outcome of the
election of directors.
The 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 requires the affirmative vote of a majority of the shares
present and entitled to vote at the Annual Meeting. Abstentions will be counted
as shares present at the Annual Meeting and will thus increase the minimum
number of affirmative votes necessary to approve this proposal. Because they
will not be recorded as votes in favor of such proposals, however, abstentions
will have the effects of votes against such proposals. Broker non-votes with
respect to these proposals will be treated as shares not capable of being voted
on these proposals; accordingly, broker non-votes will have no effect either on
the minimum number of affirmative votes necessary to approve such proposal or on
the outcome of voting on such proposal.
ELECTION OF DIRECTORS
The Restated Certificate of Incorporation and the Amended and Restated
By-Laws of the Company provide that the number of directors (which is to be not
less than three) is to be determined from time to time by resolution of the
Board. The Board is currently comprised of eight persons.
Pursuant to the Company's Restated Certificate of Incorporation, the
members of the Board are divided into three classes, designated Class I, Class
II and Class III. Each class is to consist, as nearly as may be possible, of
one-third of the total number of members of the Board. The term of the Class II
directors expires at the Annual Meeting. The terms of the Class I and Class III
directors will expire at the 1999 and 1998 Annual Meetings of Stockholders,
respectively. At each Annual Meeting, the directors elected to succeed those
whose terms expire are of the same class as the directors they succeed and are
elected for a term to expire at the third Annual Meeting of Stockholders after
their election and until their successors are duly elected and qualified. A
director of any class who is elected to fill a vacancy resulting from an
increase in the number of directors holds office for the remaining term of the
class to which he is elected and a director who is elected to fill a vacancy
arising in any other manner holds office for the remaining term of his
predecessor.
The two incumbent Class II directors are nominees for election this year
for a three-year term expiring at the 2000 Annual Meeting of Stockholders. In
the election, the two persons who receive the highest number of votes actually
cast will be elected. The proxies named in the proxy card intend to vote for the
election of the two Class II nominees listed below unless otherwise instructed.
If a holder does not wish his or her shares to be voted for a particular
nominee, the holder must identify the exception in the appropriate space
provided on the proxy card, in which event the shares will be voted for the
other listed nominees. If any nominee becomes unable to serve, the proxies may
vote for another person designated by the Board or the Board may reduce the
number of directors. The Company has no reason to believe that any nominee will
be unable to serve.
2
<PAGE> 6
Set forth below is certain information with regard to the two nominees for
election as Class II directors and each continuing Class I and Class III
Director.
NOMINEES FOR ELECTION AS CLASS II DIRECTORS
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------------ --------------------------------------
<S> <C>
John W. Manzetti .......... Mr. Manzetti has served as Executive Vice President, Chief
Age 49 Financial Officer and Treasurer and as a director of the
Company since February 1995. Prior to becoming an Executive
Vice President, Mr. Manzetti served as Vice President, Finance
and Administrative Services and Chief Financial Officer from
October 1988 to February 1993, and as Vice President and
Division Manager and Chief Financial Officer from February
1993 to February 1995. Mr. Manzetti has been Secretary since
February 1989.
Mark S. Fox, Ph.D. ........ Dr. Fox is a co-founder of the Company and has served as a
Age 44 director since the Company's inception in 1983. Dr. Fox serves
as a consultant in a scientific or engineering capacity from
time to time on projects for the Company. Dr. Fox has been
Professor of Industrial Engineering with cross appointments in
the Department of Computer Science and Faculty of Management
at the University of Toronto since August 1991. Dr. Fox is
founder, President and Chief Executive Officer of Fox-Novator
Systems Ltd., a provider of electronic commerce software for
the Internet/World Wide Web. Prior to August 1991, Dr. Fox
was an Associate Professor of Computer Science and Robotics
and Director of the Center for Integrated Manufacturing
Systems at Carnegie Mellon University.
</TABLE>
DIRECTORS CONTINUING AS CLASS I DIRECTORS
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------------ --------------------------------------
<S> <C>
Dennis Yablonsky .......... Mr. Yablonsky has served as President and Chief Executive
Age 44 Officer and as a director of the Company since August 1987.
Before joining the Company, Mr. Yablonsky was President and
Chief Operating Officer of Cincom Systems of Cincinnati, Ohio,
a privately-held company that markets software products to the
manufacturing, government and academic markets.
Raj Reddy, Ph.D. .......... Dr. Reddy is a co-founder of the Company and has served as a
Age 59 director since the Company's inception in 1983. Dr. Reddy
serves as a consultant in a scientific or engineering capacity
from time to time on projects for the Company. Dr. Reddy has
served as Chairman of the Board since February 1988. Dr. Reddy
is Dean of the School of Computer Science and the Herbert A.
Simon University Professor of Computer Science and Robotics at
Carnegie Mellon University. Dr. Reddy joined Carnegie Mellon's
Department of Computer Science in September 1969 and served as
Director of the Robotics Institute from September 1979 to
September 1992. Dr. Reddy is a member of the Board of
Directors of Telxon Corporation, a director and Chairman of
the Board of SEEC, Inc. and a member of the Technical Advisory
Board of Microsoft Corporation.
Glen F. Chatfield ......... Mr. Chatfield has served as a director of the Company since
Age 53 May 1992. Mr. Chatfield was President of Chatfield Enterprises
from April 1990 to November 1992, and has been President of
Optimum Power Technology, Inc. since December 1992, Chairman
of Emprise Technologies, Inc. since December 1992, and General
Partner of CEO Venture Fund since January 1986. He was a
founder of Duquesne Systems, Inc., a predecessor of LEGENT
Corporation.
</TABLE>
3
<PAGE> 7
DIRECTORS CONTINUING AS CLASS III DIRECTORS
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------------ --------------------------------------
<S> <C>
Bruce D. Russell, Ph.D. ..... Dr. Russell has served as Executive Vice President and Chief
Age 51 Operating Officer and as a director of the Company since
February 1995. Prior to becoming an Executive Vice President,
Dr. Russell served as Vice President and Division Manager from
January 1989 through January 1995.
Tracie A. Muesing ........... Ms. Muesing has served as a director of the Company since
Age 48 August 1995. Ms. Muesing has been Vice President--Network and
Technology Services for U S WEST Communications, Inc., a
wholly owned subsidiary of U S WEST, Inc., since September
1995. Prior to that time she was Vice President of
Transformation Systems for U S WEST Communications, Inc. from
August 1994, Vice President of Information Application
Development for U S WEST Technologies from June 1992 to August
1994 and Vice President of Quality, U S WEST, Inc. from
October 1990 to June 1992.
Jaime G. Carbonell, Ph.D. ... Dr. Carbonell is a co-founder of the Company and has served as
Age 43 a director since the Company's inception in 1983. Dr.
Carbonell serves as a consultant in a scientific or
engineering capacity from time to time on projects for the
Company. Dr. Carbonell has been affiliated with Carnegie
Mellon University since January 1979. He has been a Professor
of Computer Science since July 1983 and the Director, Center
for Machine Translation since July 1986 at Carnegie Mellon's
School of Computer Science.
</TABLE>
BOARD OF DIRECTORS AND COMMITTEES
The Board met six times during the year ended December 31, 1996. The Board
has an Audit Committee and a Compensation Committee. The Board does not have a
standing Nominating Committee.
The Audit Committee is responsible for nominating the Company's independent
auditors for approval by the Board, reviewing the scope, results and costs of
the audit with the Company's independent auditors, and reviewing the financial
statements and accounting practices of the Company. The members of the Audit
Committee are Dr. Reddy and Mr. Chatfield. The Audit Committee met four times
during 1996.
The Compensation Committee is responsible for administering the Company's
1989 Stock Option Plan, its Long-Term Incentive Plan, its 1995 Stock Option Plan
and its 1995 Employee Stock Purchase Plan, and for recommending other
compensation decisions to the Board. The members of the Compensation Committee
are Dr. Reddy, Mr. Chatfield and Ms. Muesing. The Compensation Committee met
twice during 1996.
No director attended fewer than 75% of the total number of meetings of the
Board and the meetings of any committee of the Board on which he or she served
during the fiscal year ended December 31, 1996.
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected Price Waterhouse LLP to serve as the Company's
independent accountants for the year ending December 31, 1997. A representative
of Price Waterhouse LLP will be present at the Annual Meeting and will have the
opportunity to make a statement, if such person desires to do so, and to respond
to appropriate questions.
The proposal to ratify the selection of Price Waterhouse LLP will be
approved by the stockholders if it receives the affirmative vote of a majority
of the shares present and entitled to vote on the proposal.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE SELECTION
OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS.
4
<PAGE> 8
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth information regarding compensation of
certain executive officers (the "Named Executive Officers") of the Company for
the years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
--------------------------- ---- -------- -------- ---------------------
<S> <C> <C> <C> <C>
Dennis Yablonsky............................. 1996 $217,506 $ 30,000 --
President and Chief Executive Officer 1995 207,501 72,996 65,000
1994 198,255 137,148 --
Bruce D. Russell............................. 1996 181,758 25,000 --
Executive Vice President and Chief 1995 171,756 49,496 45,000
Operating Officer 1994 160,500 90,898 --
John W. Manzetti............................. 1996 167,505 25,000 --
Executive Vice President, Chief Financial 1995 157,506 49,496 45,000
Officer, Treasurer and Secretary 1994 147,501 90,148 --
</TABLE>
STOCK OPTIONS
The Company currently maintains three stock option plans under which stock
option awards may be made to eligible employees of the Company: the 1989 Stock
Option Plan, the Long-Term Incentive Plan and the 1995 Stock Option Plan. The
number of shares authorized to be issued under the 1995 Stock Option Plan, and
the terms of outstanding stock options under the 1989 Stock Option Plan, the
Long-Term Incentive Plan and the 1995 Stock Option Plan, may be adjusted to
prevent dilution or enlargement of rights in the event of any stock dividend,
reorganization, reclassification, recapitalization, stock split, combination,
merger, consolidation or other relevant capitalization change. On September 8,
1995, the Board terminated the 1989 Stock Option Plan and the Long-Term
Incentive Plan and directed that options which expire or terminate unexercised
under the plans shall become available for award under the 1995 Stock Option
Plan. As of March 31, 1997, the numbers of options granted and outstanding under
the 1989 Stock Option Plan, the Long-Term Incentive Plan and the 1995 Stock
Option Plan were 647,841, 443,912 and 537,000, respectively.
5
<PAGE> 9
The following table sets forth certain information with respect to the
value of options held by the Named Executive Officers on December 31, 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END FISCAL YEAR-END ($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dennis Yablonsky......................... 357,135 107,865 $1,597,389 $ 339,911
Bruce D. Russell......................... 172,135 92,865 625,089 339,911
John W. Manzetti......................... 122,135 92,865 525,089 339,911
</TABLE>
- ---------
(1) Represents the difference between the closing price per share of Common
Stock as reported on the Nasdaq National Market on December 31, 1996 ($7.00)
and the exercise price of the options, multiplied by the number of shares of
Common Stock issuable upon exercise of the options.
ARRANGEMENTS REGARDING TERMINATION OF EMPLOYMENT
On August 11, 1987, the Company entered into an employment agreement with
Mr. Yablonsky, its President and Chief Executive Officer, which continues in
effect. The initial term of the employment agreement expired December 31, 1990,
with the term thereafter being extended for successive one year periods unless
either party gives written notice to the other not later than 90 days prior to
the current expiration date of his or its desire not to extend the term. Under
the agreement, the Company has agreed to use its best efforts to cause Mr.
Yablonsky to be renominated and reelected to the Board at each election of
directors of the Company which occurs prior to the expiration of the employment
agreement. The agreement provides for the payment to Mr. Yablonsky of (i) a base
salary to be reviewed annually by the Board and increased (but not decreased) if
the Board (or a committee thereof) so determines and (ii) an annual performance
bonus pursuant to an annual performance bonus plan administered by the Board and
applicable to members of key management. For these purposes, Mr. Yablonsky's
bonus is awarded pursuant to the Board's overall practice of setting performance
goals and bonus compensation for individual executives. In addition, Mr.
Yablonsky will participate on the same terms and conditions as all other
employees in all employee benefit plans sponsored and maintained for all
employees of the Company, and shall also participate in each other compensation
plan, program or arrangement provided to management employees of the Company, on
the same terms and conditions as such other management employees may
participate. The agreement provides for at least 30 days' written notice of the
Company's intention to terminate Mr. Yablonsky's employment. If the Company
terminates Mr. Yablonsky's employment under the agreement without "cause," the
Company must pay Mr. Yablonsky (i) severance payments in the amount of his then
annual base salary over a period of twelve months following termination and (ii)
his prorated portion of any performance bonus in effect for such year, and must
provide him with life, health and disability insurance benefits for such
twelve-month period. All such payments and benefits will cease immediately upon
the commencement of employment of Mr. Yablonsky by another employer. The
agreement contains provisions intended to limit Mr. Yablonsky's use of
confidential information of the Company both during his employment and
thereafter.
The Company has entered into Severance Agreements with each of Mr.
Yablonsky, Dr. Russell and Mr. Manzetti, and with certain other members of
senior management. The Severance Agreement of each employee provides that if, on
or after the date of a "Change in Control" (as defined below), the Company, for
any reason, terminates the employee's employment or the employee resigns "for
good reason" (as defined below), then the Company shall pay to the employee
within five days following the date of termination or date of resignation: (i)
the employee's salary and benefits through the termination date or resignation
date, both as in effect on the date prior to the date of the Change in Control;
and (ii) the amount of any bonus payable to the employee for the year in which
the Change in Control occurred, prorated to take into account the number of days
that have elapsed in such year prior to the termination date or the resignation
date. In addition, during the "designated period" following the termination or
resignation date, the Company shall continue to pay to the employee his annual
6
<PAGE> 10
salary, as in effect on the day prior to the date of the Change in Control, on
the dates when such salary would have been payable, had the employee remained
employed by the Company and shall continue to provide to the employee during
such twelve-month period, at no cost to the employee, the benefits the employee
was receiving on the day prior to the date of the Change in Control or benefits
substantially similar thereto. The "designated period" is twelve months for Mr.
Yablonsky, nine months for each of Dr. Russell and Mr. Manzetti, and six months
for each of the other remaining senior managers. The Severance Agreements also
provide that in the event of a Change in Control, all options whether or not
then exercisable shall vest and become fully exercisable beginning on the date
of the Change in Control and shall continue to be exercisable for the remainder
of the term applicable thereto, pursuant to the plan or agreement under which
the options were granted.
For purposes of the Severance Agreements, a "Change in Control" is deemed
to occur upon any of the following events: (i) any individual, corporation,
partnership, association, trust or other entity becomes the beneficial owner (as
defined in Rule 13(d)(3) under the Securities Exchange Act of 1934, as amended),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding voting securities;
(ii) the individuals who as of the date of the Severance Agreements are members
of the Board of Directors of the Company (the "Incumbent Board"), cease for any
reason to constitute at least a majority of the Board of Directors of the
Company (provided, however, that if the election, or nomination for election by
the Company's stockholders, of any new director was approved by a vote of at
least a majority of the Incumbent Board, such new director will, for purposes of
the Severance Agreements, be considered as a member of the Incumbent Board);
(iii) an agreement by the Company to consolidate or merge with any other entity
pursuant to which the Company will not be the continuing or surviving
corporation or pursuant to which shares of the Common Stock of the Company would
be converted into cash, securities or other property, other than a merger of the
Company in which holders of the Common Stock of the Company immediately prior to
the merger would have the same proportion of ownership of Common Stock of the
surviving corporation immediately after the merger; (iv) an agreement of the
Company to sell, lease, exchange or otherwise transfer in one transaction or a
series of related transactions all or any material portion of the assets of the
Company; (v) the adoption of any plan or proposal for a complete or partial
liquidation or dissolution of the Company; or (vi) an agreement to sell more
than 50% of the outstanding voting securities in one or a series of transactions
other than an initial public offering of voting securities registered with the
Securities and Exchange Commission.
The term "good reason" means: (i) a material diminution by the Company of
the employee's title or responsibilities, as that title and those
responsibilities existed on the day prior to the date of a Change in Control;
(ii) a material diminution by the Company in the employee's salary, benefits or
incentive or other forms of compensation, all as in effect on the day prior to
the date of a Change in Control; or (iii) any reassignment of the employee or
relocation of the Company's principal executive offices outside of the greater
Pittsburgh area.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for serving as members of the Board
or committees thereof or reimbursement of travel or other expenses relating to
attendance at meetings of the Board of Directors or committees thereof.
Upon his appointment to the Board in May 1992, Mr. Chatfield was granted
options to purchase 4,000 shares of Common Stock at an exercise price of $1.65
per share, and in March 1995, Mr. Chatfield was granted options to purchase
2,000 shares of Common Stock at an exercise price of $4.65 per share. All of
these stock options are subject to a vesting schedule, and unexercised options
terminate 90 days after Mr. Chatfield ceases to be a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1996 through December 31, 1996, the Compensation Committee
of the Board consisted of Dr. Reddy, Mr. Chatfield and Ms. Muesing. The
Compensation Committee is empowered to recommend to the Board compensation
decisions for the Company's executive officers.
7
<PAGE> 11
Ms. Muesing is the representative of U S WEST, Inc. on the Company's Board
of Directors. For a description of certain transactions between a subsidiary of
U S WEST, Inc. and the Company, see "Certain Transactions."
CERTAIN TRANSACTIONS
During 1996, the Company derived revenue of approximately $2.7 million and
approximately $0.3 million from the provision of software services to U S WEST
Communications, Inc. ("U S WEST") and Ford Motor Company ("Ford"), respectively.
The Company is a party to certain existing agreements pursuant to which it will
provide software services to U S WEST and Ford in 1997. U S WEST is a subsidiary
of U S WEST, Inc., which is a beneficial owner of more than 5% of the Company's
Common Stock. Ford is also a beneficial owner of more than 5% of the Company's
Common Stock. Ms. Tracie Muesing, an officer of U S WEST, is the representative
of U S WEST, Inc. on the Company's Board of Directors.
The Company and Carnegie Mellon University, through its Center for Machine
Translation, are parties to a License and Affiliate Agreement dated January 31,
1991 (as amended, the "License Agreement") and a Subcontract Agreement dated
February 1, 1991 (as amended, the "Subcontract Agreement"). Carnegie Mellon
University's Center for Machine Translation is headed by Dr. Jaime Carbonell, a
director and stockholder of the Company. Under the License Agreement, Carnegie
Mellon University granted to the Company several perpetual, non-exclusive,
worldwide licenses, some of which are royalty-bearing, to use and distribute
certain base software. Also, pursuant to the License Agreement, the Company
became an "affiliate" of the Center for Machine Translation entitled to certain
"affiliate benefits," which include access to Center for Machine Translation
personnel and computational resources, copies of technical reports, manuals and
other publications produced by the Center for Machine Translation, and copies of
any improvements, modifications, enhancements, revisions, translations,
extensions, corrections and adaptations to such base software. Unless extended
or terminated earlier, these affiliate benefits will expire on December 31,
1997. The term of the Subcontract Agreement extends through December 31, 1997,
unless extended or terminated earlier. Pursuant to the Subcontract Agreement,
the Company engages Carnegie Mellon University, through its Center for Machine
Translation, to perform certain software development services and to furnish
certain deliverable items. All of the deliverables developed under the
Subcontract Agreement belong exclusively to the Company. Expenses incurred under
the Subcontract Agreement and the License Agreement were approximately $1.9
million during 1996.
8
<PAGE> 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1997 held by each person
who is known by the Company to have been the beneficial owner of more than five
percent of the Company's Common Stock on such date, by each director and Named
Executive Officer of the Company and by all directors and executive officers of
the Company as a group (based on 6,283,091 shares of Common Stock outstanding as
of such date).
<TABLE>
<CAPTION>
SHARES OWNED
BENEFICIALLY
---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
------------------------------------ ------ -------
<S> <C> <C>
Ford Motor Company.................................... 560,000(1) 8.9%
The American Road.
Dearborn, MI 48121
Raj Reddy............................................. 413,000(2) 6.5
c/o School of Computer Science
Carnegie Mellon University
Pittsburgh, PA 15213
Jaime G. Carbonell.................................... 400,800(3) 6.3
c/o School of Computer Science
Carnegie Mellon University
Pittsburgh, PA 15213
Mark S. Fox........................................... 372,776(4) 5.9
c/o Department of Industrial Engineering
University of Toronto
4 Taddle Creek Road
Toronto, Ontario
Canada
Automatic Data Processing, Inc........................ 400,000(5) 6.4
Generale de Service Informatique (USA)
Transcomm Data Systems, Inc.
1380 Old Freeport Road
Pittsburgh, PA 15238
U S WEST, Inc......................................... 400,000(6) 6.4
7800 East Orchard Road
Englewood, CO 80111
Tracie A. Muesing..................................... 400,000(6) 6.4
c/o U S WEST Communications, Inc.
1801 California St., 52nd Floor
Denver, CO 80202
Dennis Yablonsky...................................... 381,066(7) 5.7
c/o Carnegie Group, Inc.
Five PPG Place
Pittsburgh, PA 15222
Bruce D. Russell...................................... 196,066(7) 3.0
John W. Manzetti...................................... 146,066(7) 2.3
Glen F. Chatfield..................................... 5,000(7) *
All directors and executive officers as a group
(8 persons)......................................... 2,314,774(8) 32.5%
</TABLE>
9
<PAGE> 13
- ---------
* Less than 1%
(1) Based on information contained in a Schedule 13G filed by Ford Motor Company
with the Securities and Exchange Commission on February 14, 1996.
(2) Includes 40,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1997. Also includes 100,000 shares owned by Dr.
Reddy's spouse and 200,000 shares held by Dr. Reddy's spouse as trustee of
trusts for the benefit of Dr. Reddy's children. Dr. Reddy disclaims
beneficial ownership of all 300,000 such shares.
(3) Includes 40,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1997. Also includes 12,800 shares held by Dr.
Carbonell as custodian for his children under the Pennsylvania Uniform Gifts
to Minors Act. Dr. Carbonell disclaims beneficial ownership of all 12,800
such shares.
(4) Includes 40,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1997. Also includes 1,100 shares owned by Dr.
Fox's spouse and 1,100 shares held by Dr. Fox's spouse as custodian for his
child under the Pennsylvania Uniform Gifts to Minors Act. Dr. Fox disclaims
beneficial ownership of all 2,200 such shares.
(5) Based on information contained in a Schedule 13G filed by Automatic Data
Processing, Inc. with the Securities and Exchange Commission on February 14,
1996.
(6) Based on information contained in a Schedule 13G filed by U S WEST, Inc.
with the Securities and Exchange Commission on February 14, 1996. As U S
WEST, Inc.'s representative in its dealings as a stockholder of the Company,
Ms. Muesing has shared voting power with respect to such shares.
(7) Consists of shares issuable upon the exercise of options.
(8) Includes 848,198 shares issuable upon the exercise of options.
10
<PAGE> 14
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee determines compensation for all three of the
Company's executive officers: Dennis Yablonsky, President and Chief Executive
Officer; Bruce D. Russell, Executive Vice President and Chief Operating Officer;
and John W. Manzetti, Executive Vice President, Chief Financial Officer and
Treasurer.
GENERAL COMPENSATION PHILOSOPHY
The Company's compensation philosophy is that a significant portion of an
executive's income should be based upon financial performance of the Company. In
addition, compensation should reflect not only short-term performance but should
also provide long-term incentives designed to tie the executive's economic
return to the return of the Company's stockholders. Finally, the Committee
believes that as a technology-based company, the Company must encourage and
reward development of new technologies that contribute to the Company's growth.
COMPONENTS OF COMPENSATION
The components of compensation for the Company's executive officers, which
are designed to reflect the compensation philosophy, are addressed below:
(a) Salary. The Company's salary policy is designed to provide salaries to
its executives that have a modest competitive edge over the "market" for similar
technology-based companies. Consideration is given to both general industry and
computer services/software or high technology industry surveys to determine the
appropriate level of salary increases. In addition, the Committee considers
salary and other compensation provided by a group of comparable companies. For
1996, the Compensation Committee set salaries for the principal executive
officers that represented increases ranging from 4.8% to 6.4% over their
respective 1995 salaries .
(b) Short-Term Incentive Compensation/Bonus Pool. The Company's senior
management executive compensation program is designed to provide short term
incentive bonuses for the achievement of specified performance goals. For 1996,
the Compensation Committee approved the allocation of a specified dollar amount
for each executive as an "A Pool" and a "B Pool." The amounts payable from each
pool are based on the following performance criteria: corporate profit growth
(50% of each pool), corporate revenue growth (25%), backlog (15%) and the
creation of new technologies coupled with achievement of a specified level of
revenue from continuing technology (10%). The A Pool is payable based on the
extent to which target goals are achieved, while the B Pool is payable only if
Company performance exceeds one or more of the target goals. To the extent an A
Pool target is not met with respect to one performance criterion, a pro rata
portion of the A Pool allocated to that criterion may be paid, but only if a
minimum threshold is exceeded. In 1996, the profit growth and revenue growth
levels and backlog were below the threshold and target amounts and the
technology growth/revenues from continuing technology target was met. As a
result, each of the principal executives received 30% of his total A Pool and 0%
of his total B Pool.
(c) Profit Sharing. All employees of the Company participate in the
Company's profit sharing plan and receive an equal amount, regardless of their
capacity with the Company. The amount distributed is based on a fixed formula
related to pre-tax profits.
(d) Long-Term Incentive Plan. In 1991, options were granted to all
executive officers under the Carnegie Group, Inc. Long-Term Incentive Plan. The
purpose of this stock option plan was to provide an incentive for the Company's
key management employees to increase their ownership interest in the Company and
to achieve long-term corporate objectives by exerting their efforts to
accelerate the growth of revenue, profit and technology creation. To achieve
this purpose, options were granted with vesting provisions that would not permit
exercise for an extended period of time (nine to ten years), but with the
opportunity to accelerate vesting based on the achievement of profit growth,
revenue growth and technology creation coupled with specified revenue growth
from continuing technology.
Under the plan, an "Annual Available Pool" equal to one-fifth of the
executive's options granted under the plan is used as a base amount for
determining the number of shares underlying the option as to which vesting may
be accelerated in a particular year. The base amount is multiplied by a
percentage (the "Applicable Percentage") allocated to each of the profit growth,
revenue growth and technology creation/revenues from
11
<PAGE> 15
continuing technology components. The Applicable Percentage ranges from zero to
150% and is based on a predetermined formula applied to the Company's
performance in these areas. The product of the base amount and the Applicable
Percentage is multiplied by a factor (the "Applicable Factor") of 50% in the
case of the profit growth component, 30% in the case of the revenue growth
component and 20% in the case of the technology creation/revenues from
continuing technology component. The profit growth, revenue growth and
technology creation/revenue from continuing technology components as adjusted by
their respective Applicable Factors are added to determine the percentage of the
"Annual Available Pool" subject to accelerated vesting. For 1996, based on the
achievement of the technology/revenues from continuing technology goal, vesting
equal to 30% of the pool was obtained. Accordingly, a number of shares equal to
30% of the shares in the "Annual Available Pool" qualified for accelerated
vesting and become exercisable in equal increments over the following three year
period. For example, in the case of Messrs. Yablonsky, Russell and Manzetti,
each of whom had 60,000 shares in the "Annual Available Pool" (one fifth of the
300,000 shares underlying options initially granted to them under the plan),
accelerated vesting was earned with respect to 18,000 shares, with 6,000 shares
vesting in each of 1997, 1998 and 1999.
(e) 1995 Stock Option Plan. As is the case with the Long-Term Incentive
Plan, the 1995 Stock Option Plan is designed to provide incentive for the
enhancement of stockholder value, since the full benefit of stock option grants
typically is not realized unless there has been appreciation in per share values
over several years.
1996 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Reference is made to the discussion above with respect to objective
criteria applicable to compensation for executive officers, including Dennis
Yablonsky, the Company's President and Chief Executive Officer.
The Committee believes, based on the information discussed above under
"Salary," that Mr. Yablonsky's salary in 1996, which reflected an increase of
4.8% over his 1995 salary, is consistent with the Committee's policy to provide
a modest competitive edge over the "market" for similar technology-based
companies.
With regard to the senior management incentive compensation program, the
percentage of the A Pool and B Pool paid to Mr. Yablonsky were the same as the
percentages paid to the other principal executive officers. The dollar amount of
Mr. Yablonsky's aggregate bonus pool was higher than the other principal
executive officers, because Mr. Yablonsky's bonus pool reflects the level of his
responsibilities as the Company's principal executive officer.
Mr. Yablonsky's profit sharing payment and accelerated exercisable options
under the Long-Term Incentive Plan were based upon the same factors applicable
to the respective participants in those plans.
INTERNAL REVENUE CODE SECTION 162(M)
The Committee reviewed the potential consequences of Section 162(m) of the
Internal Revenue Code with respect to executive compensation. Section 162(m)
imposes a limit on tax deductions for annual compensation in excess of
$1,000,000 paid to any of the five most highly compensated executive officers.
The Company does not anticipate that Section 162(m) will have an adverse effect
on the Company in the short-term. In this regard, base salary and bonus levels
are expected to remain well below the $1,000,000 limitation in the foreseeable
future. In addition, the 1995 Stock Option Plan has been designed to qualify
potential benefits under that plan as "performance based" compensation which may
be excluded from the compensation used to determine the $1,000,000 limitation.
Over the longer term, the Committee will continue to examine the effects of this
tax provision and will monitor the level of compensation paid to the executive
officers in order to ameliorate, to the extent possible, the potential adverse
effects of Section 162(m).
DR. RAJ REDDY GLEN F. CHATFIELD TRACIE A. MUESING
12
<PAGE> 16
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE NOVEMBER 29, 1995
The following graph shows the cumulative total stockholder return on the
Common Stock from November 29, 1995 (the first day of trading of the Company's
Common Stock upon its initial public offering) through December 31, 1996, as
compared to the returns of the Nasdaq National Market Composite Index and the
Nasdaq Computer and Data Processing Services Stock Index. The graph assumes that
$100 was invested in the Common Stock on November 29, 1995 and in the Nasdaq
National Market Composite Index and the Nasdaq Computer and Data Processing
Services Stock Index and assumes reinvestment of dividends.
[GRAPH]
<TABLE>
<CAPTION>
NOVEMBER 29, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Carnegie Group, Inc. 100.00 121.88 71.79
Nasdaq National Market
Composite Index 100.00 99.64 121.11
Nasdaq Computer and Data
Processing Services Stock
Index 100.00 98.17 119.66
</TABLE>
13
<PAGE> 17
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Act, the Company's directors, officers, and
persons who are directly or indirectly the beneficial owners of more than 10% of
the Common Stock of the Company are required to file with the Securities and
Exchange Commission (the "Commission"), within specified monthly and annual due
dates, a statement of their initial beneficial ownership and all subsequent
changes in ownership of Common Stock. Rules of the Commission require such
persons to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of such forms, the Company believes that, during the
year ended December 31, 1996, all such persons complied with all applicable
filing requirements.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Act"), stockholders may present proper proposals for inclusion in
the Company's proxy statement and for consideration at the next Annual Meeting
of Stockholders by submitting such proposals to the Company in a timely manner.
In order to be so included for the 1998 Annual Meeting, stockholder proposals
must be received by the Company no later than December 15, 1997 and must
otherwise comply with the requirements of Rule 14a-8.
The Company's Amended and Restated By-Laws provide that advance notice of
stockholder-proposed business to be brought before an Annual Meeting of
Stockholders and of nominations for election as directors must be given to the
Secretary of the Company not less than 60 days in advance of the date of the
Annual Meeting. To propose business for an Annual Meeting, a stockholder must
specify in writing the business desired to be brought before the Annual Meeting
and the reasons for conducting such business at the Annual Meeting, the
proposing stockholder's name and address, the class and number of shares
beneficially owned by the stockholder, and any material interest of the
stockholder in such business. The Company's Amended and Restated By-Laws also
provide that a stockholder may request that persons be nominated for election as
directors by submitting such request, together with the written consent of the
persons proposed to be nominated, to the Secretary of the Company not less than
60 days prior to the date of the Annual Meeting. To be in proper form, the
nominating stockholder must set forth in writing, as to each proposed nominee,
the nominee's age, business address and residence address, principal occupation
or employment, number of shares of Common Stock of the Company beneficially
owned by such person and such other information related to such person as is
required to be disclosed by applicable law, and, as to the stockholder
submitting the request, such stockholder's name and address as they appear on
the Company's books and the number of shares of Common Stock of the Company
owned beneficially by such person. The Company may require any proposed nominee
to furnish such other information as may reasonably be required by the Company
to determine the eligibility of such proposed nominee to serve as a director of
the Company.
FORM 10-K
STOCKHOLDERS MAY OBTAIN A COPY (WITHOUT EXHIBITS) OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHOUT CHARGE BY WRITING TO: INVESTOR
RELATIONS, CARNEGIE GROUP, INC., FIVE PPG PLACE, PITTSBURGH, PENNSYLVANIA 15222.
14
<PAGE> 18
PROXY
CARNEGIE GROUP, INC.
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS
MAY 13, 1997
The undersigned stockholder of Carnegie Group, Inc. (the "Company") hereby
appoints Dennis Yablonsky and John W. Manzetti, and each of them, as the
attorneys and proxies of the undersigned, with full power of substitution, to
vote all shares of Common Stock, par value $.01 per share, of the Company,
which the undersigned would be entitled to vote if personally present at the
Annual Meeting of Stockholders of the Company, to be held at the Westin William
Penn Hotel, 530 William Penn Place, Pittsburgh, Pennsylvania, on May 13, 1997,
commencing at 10 a.m., local time, and at any adjournment or postponement
thereof, as follows:
(continued and to be signed, on the other side)
FOLD AND DETACH HERE
<PAGE> 19
Please mark
your votes as
indicated in
this example [ X ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION AS CLASS II DIRECTORS
OF ALL NOMINEES LISTED AND FOR PROPOSAL 2.
PROPOSAL 1. Election of Class II Directors
FOR
All Nominees WITHHOLD
Listed (except those AUTHORITY
for whom authority to Vote for All
is being withheld) Nominees
[ ] [ ]
NOMINEES: Mark S. Fox and John W. Manzetti
(To withhold authority to vote for any nominee, write the
name of the nominee below.)
- ---------------------------------------------------------
PROPOSAL 2. 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.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the proxy holders are authorized to vote upon such other
matters as may properly come before the meeting.
UNLESS OTHERWISE SPECIFIED, THE SHARES OF COMMON STOCK REPRESENTED
HEREBY WILL BE VOTED "FOR" THE ELECTION AS CLASS II DIRECTORS OF ALL
NOMINEES LISTED AND "FOR" PROPOSAL 2.
Dated: , 1997
-----------------------------------------------------------
- -------------------------------------------------------------------------
Signature of Stockholder
- -------------------------------------------------------------------------
Signature of Stockholder
NOTE: Please sign this proxy exactly as name(s) appear on your stock
certificate. When signing as attorney-in-fact, executor, administrator, trustee
or guardian, please add your title as such, and if signing as a corporation,
please sign with full corporate name by a duly authorized officer or officers
and affix the corporate seal. Where stock is issued in the names of two (2) or
more persons, all such persons should sign.
IMPORTANT: PLEASE SIGN, DATE AND RETURN PROMPTLY.
FOLD AND DETACH HERE
