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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
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COMMISSION FILE NUMBER 0-26964
CARNEGIE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1435252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FIVE PPG PLACE, PITTSBURGH, PENNSYLVANIA 15222
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 642-6900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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<S> <C>
NONE NOT APPLICABLE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 20, 1998, the aggregate market value of voting common stock
held by non-affiliates of the registrant, based upon the last reported sale
price for the registrant's Common Stock on the Nasdaq National Market on such
date, as reported in The Wall Street Journal, was $15,189,210 (calculated by
excluding shares owned beneficially by directors and executive officers as a
group from total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's Common Stock outstanding as of the
close of business on March 20, 1998 was 6,499,635.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of Carnegie Group, Inc.
to be used in connection with the 1998 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III of this Annual
Report on Form 10-K to the extent provided herein. Except as specifically
incorporated by reference herein, the Proxy Statement is not to be deemed filed
as part of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides business
and technical consulting, client/server and Internet-based custom software
development, third-party package implementation and systems integration
services. The Company focuses on two business areas in the information
technology professional services marketplace: customer interaction; and
logistics, planning and scheduling. Within these areas, the Company helps
clients in the financial services, government, manufacturing and
telecommunications industries improve business processes, customer relations,
productivity and market position.
The Company's expertise encompasses a wide range of advanced software
technologies, including knowledge management 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 its three-phased
RAPID methodology to help provide speed and repeatable reliability in creating
software solutions across different client engagements. RAPID begins with an
Analysis and Planning phase, is followed by an Implementation phase, and ends
with a Deployment phase.
Since inception, Carnegie Group has emphasized relationships with leading
corporations in its targeted industries. These relationships have provided the
Company with opportunities for growth through the provision of additional
services to existing clients and through references to other companies within
the Company's targeted industries. Carnegie Group's clients include U S WEST
Communications, Inc., the United States Transportation Command, U.S. Army,
Diebold, BellSouth Telecommunications, Inc., First USA Bank, Highmark Blue Cross
Blue Shield and Philips Medical Systems.
INDUSTRY BACKGROUND
Corporations increasingly seek to gain competitive advantages by
reengineering business processes in order to increase productivity, improve
responsiveness to market demands and facilitate comprehensive planning. The
knowledge and experience of workers involved in complex business processes can
be captured and disseminated through business process reengineering in order to
support and improve enterprise-wide decision-making.
As computer speed and capacity have increased and computer hardware and
software costs have declined, corporations have decentralized their computing
infrastructures by distributing computing power to end-users. While centralized
computing infrastructures have historically collected, stored and manipulated
large volumes of information, the widespread installation of client/server
architectures has enabled multiple personal computers and workstations to be
linked together in various locations within an enterprise and has permitted
information to be disseminated to end-users. In addition, the Internet has
provided a global network through which information can be disseminated without
regard to specific computing platforms.
The use of advanced software technologies within client/server and
Internet-based architectures has facilitated the creation of sophisticated
software solutions that capture, analyze and disseminate enterprise-wide
knowledge. These solutions allow end-users to access business rules and
accumulate corporate knowledge, and to use that information to make decisions
more quickly and exploit business opportunities more effectively.
Successful implementation of sophisticated software solutions within
client/server and Internet-based architectures requires specialized expertise in
advanced software technologies. Generally, such expertise is not found in
corporations' internal information systems departments, because maintaining
specialized expertise in advanced software technologies is not believed to be
cost-effective. As a result, corporations are increasingly retaining information
technology service providers to develop the sophisticated software solutions
they require.
The demand for sophisticated software solutions that automate and enhance
business processes has created significant opportunities for information
technology service providers. However, not all information technology service
providers have the expertise to provide sophisticated solutions within
client/server and Internet-based architectures. Some of these providers focus on
general business consulting or on the
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methodologies through which business processes can be reengineered, while others
focus on consulting for specific industries or on specific systems integration
services.
CARNEGIE GROUP'S STRATEGY
Carnegie Group has recognized the demand for information technology
services from providers who combine expertise in a wide range of advanced
software technologies with experience in developing sophisticated software
solutions for specific industries. Carnegie Group's goal is to be a leading
provider of knowledge-based, user-centered client/server and Internet-based
software development services that integrate advanced technologies with clients'
existing computing infrastructures to automate and enhance business processes in
two business areas: customer interaction; and logistics, planning and
scheduling. To attain that goal, the Company employs the following strategies:
Apply Advanced Software Technologies to Develop High-Value
Solutions. Carnegie Group focuses on performing software development, systems
integration and technical consulting services that apply advanced software
technologies to develop high-value software solutions that improve its clients'
productivity and competitive market position. The Company's expertise
encompasses a wide range of advanced software technologies, including: knowledge
management systems; object-oriented technology; advanced graphical user
interfaces; constraint-directed search; and distributed computing. Carnegie
Group intends to continue to focus on applying advanced software technologies as
new technologies are developed that can be used to build high-value solutions
for its clients.
Employ Reusable Software Templates to Leverage Business Area
Experience. Carnegie Group captures certain aspects of its business area
experience and advanced technology expertise, developed principally in the
course of engagements for clients, in a portfolio of reusable software
templates. The Company selects templates for use in new engagements where
appropriate, and then modifies and enhances these templates to serve as the
building blocks of complete knowledge-intensive software solutions. Carnegie
Group believes that its portfolio of reusable software templates reduces
development time and project costs and enhances project quality, allowing it to
quickly provide sophisticated software solutions to its clients. The Company
plans to continue to employ reusable software templates within appropriate
application niches and to develop new templates as it performs engagements for
its clients.
Continue to Grow Significant Client Relationships. Carnegie Group has
emphasized relationships with leading organizations in its targeted industries.
These organizations 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. In each relationship, the
Company seeks to capitalize on its success in completing an initial engagement
by offering additional services that automate and enhance other business
processes for that client. Carnegie Group expects that its focus on providing
additional software solutions for existing clients will continue to be an
important component of its marketing efforts.
Expand Client Base in Targeted Industries. Carnegie Group is focused upon
expanding its client base in the financial services, government, manufacturing
and telecommunications industries. The Company believes that successful
engagements for existing clients create opportunities for client references that
enhance the Company's reputation and enable it to attract additional clients in
its targeted industries. Carnegie Group also intends to target additional
industries in which its business area experience and advanced software
technology expertise can be applied.
Apply RAPID Methodology to Facilitate Rapid Custom Software
Development. In the course of performing its engagements, Carnegie Group
employs its three-phased RAPID methodology to help provide speed and repeatable
reliability in creating software solutions across different client engagements.
RAPID begins with an Analysis and Planning phase, is followed by an
Implementation phase, and ends with a Deployment phase. This methodology
encourages client feedback and leads to greater congruence with client needs and
expectations. The Company believes that this approach enables the rapid
deployment of knowledge-intensive software solutions for its clients.
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Strategic Acquisition. Carnegie Group acquired Advantage kbs, Inc. in
March 1998. Advantage provides problem solving resolution software and
professional services for automating customer support. The Company believes that
the acquisition of Advantage will enhance its customer interaction and call
center strategy by enabling the Company to offer Advantage's IQSupport
Application Suite in the call center and help desk market. See "Recent
Development." The Company will continue evaluating acquisitions of businesses,
products and technologies that complement the Company's business.
SERVICES AND SOLUTIONS
Carnegie Group's project teams provide software development, systems
integration and technical consulting services to create knowledge-intensive
software solutions that improve business processes, customer relations,
productivity, and market position.
Services
Carnegie Group provides its services through project teams comprised of
engineers, project managers and sales and marketing personnel that are assigned
to client engagements. These professionals apply industry, advanced technology
and business area expertise to create a solution that is intended to meet the
client's needs. The Company's project teams generally perform services in three
phases (which are usually the subjects of separate contracts but which may be
governed by one contract covering all phases):
Phase I typically consists of a "proof of concept" or feasibility
assessment for the client which identifies the specific problem and proposes the
solution to be created by Carnegie Group, including the technology likely to be
employed during the engagement and the engagement milestones for each phase. The
first phase is generally completed in one to three months and is usually
performed on a fixed-price basis. Successful completion of phase one may lead to
the continuation of the project into phase two, although there is no obligation
for the client to engage Carnegie Group to continue the project following the
completion of the first phase.
Phase II generally lasts three to nine months and involves completing a
solution for the client. The solution may include a licensed software component
such as a reusable software template. In designing software solutions, the
Company applies an iterative or "spiral" approach that starts with the client's
identification of its requirements during Phase I, from which Carnegie Group
proceeds to construct a prototype that is then tested with the client against,
and used to refine, the original requirements. Carnegie Group then produces
successive new versions of the software, each of which is again tested with the
client against project requirements.
Phase III generally consists of deploying the solution at additional client
sites or throughout the client's business enterprise. The project specification
may be further customized during this phase to incorporate changing client
needs. The third phase may take from six months to more than a year. The
majority of the Company's engagement contracts in the second and third phases
are performed on a time-and-materials basis.
Solutions
Carnegie Group creates software solutions for two business areas: customer
interaction; and logistics, planning and scheduling.
Customer Interaction. Carnegie Group develops knowledge-based agent
software that enables business managers to consistently deliver corporate
knowledge and business strategy to all points of customer contact across an
enterprise. Knowledge-based agents deliver corporate knowledge and strategy to
human decision makers in the form of recommendations that can help solve
problems and sell products and services. This technology enables organizations
to affect the quality of customer encounters and optimize all interactions to
generate greater revenue, improve customer satisfaction and achieve other
critical business goals.
A solution designed for Philips Medical Systems helps customer support
engineers make a repair at the customer's site, where time and performance are
critical. Using Carnegie Group's TestBench(TM) diagnostic software, engineers
are able to service the customer immediately. TestBench automates the process of
accessing information and gives customer support engineers the instantaneous
access to knowledge bases,
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consisting of technical expertise and legacy data, that they need to perform
their job more efficiently and effectively. At Philips, TestBench enables
engineers to repair the company's medical equipment efficiently and on the first
call whenever possible. The engineer determines a machine's symptoms, queries
the knowledge base, and plays out scenarios to reach a solution. Repair cycles
are shortened, unnecessary service calls are eliminated, spare parts inventory
is reduced, and solutions are shared among engineers' peers.
A solution designed for U S WEST Communications, Inc. ("U S WEST"), a
subsidiary of a regional Bell operating company, helps make U S WEST's call
center more responsive and efficient and improves customer service and
satisfaction. To help U S WEST maximize its share of their Mass Market
environment, Carnegie Group developed a Front End Screen & Route (FES&R) system
as the central component of U S WEST's Call Handling program. The FES&R system
shortens call routing time to call centers and improves the match between the
caller (customer) and the call handler (customer service/collection teams) so
that each call gets to the call handler best equipped to help with the
customer's particular needs. The FES&R system handles any call, any time,
anywhere and supports a seven-day/24-hour call center operation covering
multiple voice response units (VRU's) and automatic call distributors in the
14-state U S WEST Mass Market territory. The system provides a front end for
VRU's to enable customer self-help. Flexible business rules, combined with
customer, network, and market intelligence information, are used to provide
advanced call control capabilities and load balancing for intelligent call
routing and screening.
A solution designed for First USA Bank, a subsidiary of Banc One, helps
utilize First USA's call center in a variety of critical customer service
functions. To help First USA develop a call center-based collections strategy to
assist card members in controlling their accounts, Carnegie Group developed a
Collections Support System. The Collections Support System enables customer
support representatives to focus on helping customers, rather than navigating a
computer system, by delivering the correct information as it is needed. This
capability speeds the customer service representative's ability to answer
questions and anticipate customer needs.
A solution designed for BellSouth Telecommunications, helps make its web
site provide more than company information to its customers. Carnegie Group
provided the knowledge engineering and teamed with BellSouth on the software
development for Solution Advisor, an interactive web site that enables small
business customers to obtain the information and services they need, when they
need them. When accessed via the Worldwide Web, an animated on-line "agent"
greets the customer and presents a series of questions about specific business
requirements. Based on the customer's response, Solution Advisor provides
instant recommendations for telecommunications solutions customized to the
customer's business, as well as pricing tailored to each business location.
Opening this new channel gives BellSouth's web-based customers a chance to use a
smart solution for self-help while reducing the number of calls to BellSouth's
call center.
Logistics, Planning and Scheduling. Carnegie Group's knowledge-based
logistics, planning and scheduling solutions are intended to optimize the
allocation of available resources, thereby increasing efficiency and reducing
costs. These solutions provide advanced decision-support to planners by modeling
and manipulating complex information, and by simulating and analyzing multiple
scenarios. The Company's logistics, planning and scheduling solutions help to
reduce lead times and to match resources with requirements.
A solution designed for the U.S. Transportation Command (TRANSCOM) is
helping U.S. military patient movement planners synchronize operations with
evacuation processes. The TRANSCOM Regulatory And Command & Control Evacuation
System (TRAC(2)ES) is the result of a Department of Defense directive that
tasked TRANSCOM with establishing a global system for patient movement,
integrating medical regulating and evacuation. Prior to TRAC(2)ES, medical
regulation and evacuation were two separate processes. With little or no
correlation between a patient's needs and the capabilities at hand to transport
patients to proper care, TRAC(2)ES consolidates medical regulation and
evacuation through an advanced decision-support system. This system determines
the appropriate time-and-resource-sensitive information and how it should be
presented to support planners in getting patients where they need to go for the
best treatment.
Another solution, developed for a steel producer, provides mill operators
with advanced decision-support for planning and scheduling continuous slab
caster and melt shop facilities. This solution arranges slab requirements into
possible production sequences and helps the operator evaluate alternative
sequences before
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scheduling actual production. This solution assists the client in reducing costs
by improving yield and cutting inventory, while simultaneously improving
customer service by creating more reliable production schedules. The solution is
based on the Company's Caster Planning and Scheduling System (CaPSS) software
template.
TECHNOLOGY
Advanced Software Technologies
Carnegie Group's engineering staff is experienced in applying advanced
software technologies to create solutions within enterprise-wide client/server
and Internet-based architectures. The architecture of the Company's software
solutions typically contains three tiers or layers: a "presentation layer" which
contains the user interface; a "functionality layer" which embodies the business
logic, knowledge base and application logic of the system; and a "data layer"
which is comprised of both data created with existing systems and new data
created with the solution.
To create its solutions within three-tiered client/server and
Internet-based environments, Carnegie Group's engineers are skilled at employing
advanced software technologies, including: knowledge-based systems;
object-oriented technology; advanced graphical user interfaces;
constraint-directed search; and distributed computing.
Knowledge management systems are software systems that can make reasoned
decisions about complicated processes and that enable those processes to be
completed with little or no human intervention. Knowledge-based systems access
detailed information about the process, apply underlying reasoning and recommend
decisions.
Object-oriented technology is a methodology for designing a software system
using an object-oriented programming language, which represents concepts, things
and actions by describing their attributes. Once a concept, thing, or action has
been described, that description and its accompanying software code can be
reused broadly.
Advanced graphical user interfaces combine screen icons, text and pointing
devices to allow computer users to direct a computer's activities by
manipulating images. Well-designed interfaces distill powerful and complex
functions into simple and intuitive graphic representations.
Constraint-directed search is a software system that searches for desired
data or decisions across a large range of alternatives, with limiting factors
attached to the search. Such a search may, for example, be constrained by dates
or by certain characteristics of available resources. In a knowledge-based
system, the sets of constraints imposed on the search may be many, complex and
interdependent.
Distributed computing refers to computer transactions, such as information
transfer, that may take place between different types of computers, which may or
may not be at the same location. Distributed computing and transaction
processing software automates and enables enterprise-wide information exchanges
that might not otherwise be available.
Other advanced software technologies employed by the Company include
case-based reasoning and relational and object-oriented database management
systems.
Reusable Software Templates
Carnegie Group captures certain aspects of its business area experience and
advanced technology expertise in a portfolio of reusable software templates.
Generally, these templates are developed and refined in the course of performing
services for clients. The Company selects templates for use as building blocks
in new engagements where appropriate, and then modifies and enhances these
templates to form complete, customized, knowledge-intensive solutions. The
Company believes that its reusable software templates reduce development time
and project costs and enhance project quality, allowing it to quickly provide
sophisticated software solutions to its clients. The Company's reusable software
templates include the following:
Recommender is a customer contact software template that consolidates
valuable knowledge from sales and marketing personnel, and disseminates it to
sales consultants and customer service representatives.
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Customer Xpress helps the user navigate through the process of defining customer
needs and exploring options among available products. It is intended to enable
the end-user to increase revenue from each customer contact, improve the quality
of service and reduce service representative training time and costs.
TestBench is a customer service software template that is designed to
increase the accuracy and efficiency of help desk, technical assistance center
and stand-alone field support. TestBench enables organizations to capture human
troubleshooting expertise and deploy that expertise rapidly and inexpensively to
end-users. This template can be integrated with or embedded in other
conventional computing environments. TestBench is also available from the
Company as a stand-alone software product.
WorkBench is a reusable customer service software template developed from a
user-centric perspective. It provides a consistent, graphical interface into
service applications while allowing data to be shared between these
applications. Service representatives can access the information they need
quickly and easily, and share information through the system.
RECENT DEVELOPMENT
On March 19, 1998, the Company acquired all the outstanding stock of
Advantage kbs, Inc. (Advantage) for a purchase price of $5m, plus an additional
contingent payment of up to $2.5m which is dependent upon revenue and earnings
of Advantage for the year ending December 31, 1998. Based in Edison, New Jersey,
Advantage provides problem resolution software and professional services for
automating customer support. The Company believes that the acquisition of
Advantage will enhance its customer interaction and call center strategy by
enabling the Company to offer Advantage's IQSupport Application Suite in the
call center and help desk markets. In addition, the Company believes that the
acquisition will broaden its capacity to offer business consulting services to
its customers. The integration of Advantage is subject to certain risks. The
possible business and financial advantages of the acquisition may not be
achieved unless the operations of Advantage are successfully integrated with the
Company in a timely manner. See "Risk Factors--Risks Associated with Integration
of Advantage." A Current Report on Form 8-K is being filed with respect to the
acquisition of Advantage.
MARKETING, SALES AND CLIENTS
Carnegie Group markets its services directly to clients in its targeted
industries of financial services, government, manufacturing and
telecommunications. These industries 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.
The Company identifies leading organizations in each industry and seeks to
provide an initial solution that builds on one of the Company's reusable
software templates. Once an initial project has been successfully completed,
Carnegie Group seeks to offer additional services that automate and enhance
other business processes for the client. Carnegie Group intends to target
additional industries in which its business area experience and advanced
software technology expertise can be applied.
The Company markets its services to clients throughout the United States
from its headquarters in Pittsburgh, Pennsylvania. In addition, the Company
maintains offices in Denver, Colorado, Atlanta, Georgia, and Oakland, California
focusing upon clients in the telecommunications industry. The offices in
Fairview Heights, Illinois and Arlington, Virginia service government industry
clients. Of the 257 people employed or engaged by the Company as of December 31,
1997, 25 were involved directly in sales and marketing and were supported by 36
project managers and 162 project engineers focused upon the industries that the
Company serves.
The Company employs a variety of business development and marketing
techniques to communicate directly with current and prospective clients. These
techniques include exhibiting at trade shows, authoring articles and presenting
papers regarding the Company's solutions and technology, holding seminars for
clients and prospective clients on technology and industry issues and marketing
through direct mail initiatives. In accordance with government contracting
requirements, the Company's marketing and sales efforts toward
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government industry clients that are governmental agencies or instrumentalities
are limited to responding to requests for proposals and participating in
competitive bidding. Periodically, the Company responds to requests by these
clients for bids on projects in which the technology to be employed or services
to be rendered are available from only one or a limited number of sources.
1997 saw the addition of a channels marketing program called the Carnegie
Alliance Team. The Carnegie Alliance Team participates in the third-party
package implementation business by securing partnerships with leading product
and tool set vendors in the customer interaction business area. These product
and tool set providers rely on services firms like Carnegie Group to
successfully implement their products and integrate them with clients' existing
information systems. In 1997, the Carnegie Alliance Team concentrated its
efforts on a relationship with Genesys Telecommunications Laboratories, Inc.
Genesys develops, markets and sells computer telephony integration (CTI)
software products and tool sets. CTI products enable information to flow more
easily between telecommunications switching equipment and the desktop computers
in customer interaction or call center environments. This improved information
flow leverages information contained at the switch and in existing data
structures and creates a richer information environment for customer interaction
business personnel to improve management and customer support and service.
In 1997, total revenue from billings to each of the United States
Transportation Command, U S WEST Communications, Inc. and BellSouth
Telecommunications accounted for more than 10% of the Company's total revenue.
In 1996, total revenue from billings to the United States Transportation
Command, the U S Army, Caterpillar, Inc. and BellSouth Telecommunications
accounted for more than 10% of the Company's total revenue. The Company expects
to continue to derive a significant portion of its revenue from a relatively
limited number of major clients.
BACKLOG
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 totaled $8.7 million
at December 31, 1997, compared to $9.6 million at December 31, 1996.
Contracts included in backlog are generally performed within 12 months. In
accordance with industry practice, most of the Company's contracts are
terminable by the Company or the client upon short or no notice. There can be no
assurance that contracts reflected in backlog will not be canceled or delayed.
Accordingly, the Company believes that backlog is not a reliable measure of
future revenue.
COMPETITION
The information technology services market, which includes the market for
the Company's services and solutions, is comprised of a large number of
participants, is subject to rapid change and is highly competitive. 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. Many participants in the
information technology services market have significantly greater financial,
technical and marketing resources and greater name recognition than does
Carnegie Group. Moreover, clients may elect to use their internal information
systems resources to satisfy their needs for the software development, systems
integration and technical consulting services that the Company offers. 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
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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 market 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 it competes favorably with respect to these factors.
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, engineers and sales
and marketing personnel; 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.
EMPLOYEES
As of December 31, 1997, the Company had a total staff of 257 employees and
independent contractors, comprised of 198 technical personnel (of whom 36 were
project managers and 162 were project engineers), 25 sales and marketing
personnel and 34 corporate services personnel. The Company's professional
personnel have a variety of educational backgrounds, including degrees in
software engineering, electrical engineering, computer science, mechanical
engineering, linguistics and business administration; there were 106 employees
at December 31, 1997 with advanced degrees. The Company has historically filled
a portion of its engineering staffing needs through the retention of independent
contractors at a cost not materially greater than the cost of retaining its own
employees. The Company believes that its practice of retaining independent
contractors on a per engagement basis provides it with access to specialized
knowledge when needed, as well as greater flexibility in adjusting staffing
levels in response to changes in the demand for its services.
The Company believes that its future success will depend in large part upon
its ability to attract, retain and motivate highly skilled managerial,
technical, marketing and support personnel. None of the Company's employees is
subject to a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
After giving effect to the acquisition of Advantage, the total number of
employees of the Company and Advantage is 294.
INTELLECTUAL PROPERTY
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.
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 1998 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.
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
8
<PAGE> 10
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 noninfringing intellectual property or acquire licenses to the
intellectual property which is the subject of asserted infringement.
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing and software solutions development operations are located in
approximately 88,000 square feet of leased space in Pittsburgh, Pennsylvania.
The Company occupies these premises under a lease expiring in December 2004. The
Company also leases an additional 7,000 square feet of space under this lease;
this additional space is currently subleased to another tenant with a term
ending in March 1998. In addition, the Company leases office space in Denver,
Colorado, Atlanta, Georgia, Fairview Heights, Illinois, Arlington, Virginia, and
Oakland, California. Advantage, leases 8,700 square feet of office space in
Edison, New Jersey and additional office space in San Francisco, California. The
Company anticipates that additional space will be required as business expands
and believes that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dennis Yablonsky 45 President, Chief Executive Officer and Director
John W. Manzetti 50 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Bruce D. Russell 52 Senior Vice President
</TABLE>
Mr. Yablonsky has served as President and Chief Executive 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.
Mr. Manzetti has served as Executive Vice President, Chief 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.
Dr. Russell has served as Senior Vice President, Software Delivery since
December 1997. Prior to that, he served as Executive Vice President, Chief
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.
9
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "CGIX." The following table sets forth the range of high and
low sale prices of the Common Stock as reported on the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
First Quarter (ended 3/31/96)............................... $10.250 $6.625
Second Quarter (ended 6/30/96).............................. $10.750 $8.250
Third Quarter (ended 9/30/96)............................... $ 8.750 $5.000
Fourth Quarter (ended 12/31/96)............................. $ 8.500 $5.250
1997:
First Quarter (ended 3/31/97)............................... $ 7.750 $5.375
Second Quarter (ended 6/30/97).............................. $ 7.750 $5.000
Third Quarter (ended 9/30/97)............................... $ 8.000 $6.500
Fourth Quarter (ended 12/31/97)............................. $ 8.000 $2.813
</TABLE>
On March 20, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $3.63 per share. As of such date there were
approximately 4,100 holders of record of the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue............................ $12,817 $17,875 $25,650 $28,409 $29,406
Income (loss) from operations............ (2,065) 1,159 2,847 2,301 (548)
Income (loss) before income taxes........ (2,021) 1,162 2,849 2,928 182
Income tax benefit (provision)........... -- 277 1,827 432 (72)
Net income (loss)........................ (2,021) 1,439 4,676 3,360 110
Basic earnings (loss) per share of common
stock.................................. ($ 0.42) $ 0.31 $ 0.99 $ 0.54 $ 0.02
Diluted earnings (loss) per share of
common stock........................... ($ 0.42) $ 0.25 $ 0.82 $ 0.47 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital.......................... $ 1,196 $ 2,055 $16,139 $19,793 $18,795
Total assets............................. 6,025 8,943 24,989 28,489 29,591
Obligations under capital
leases-noncurrent portion.............. -- 90 40 -- --
Total stockholders' equity............... 2,761 4,200 19,729 23,638 24,070
</TABLE>
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<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Carnegie Group, Inc. founded in 1983, derives its revenue primarily from
the performance of software services, and to a lesser extent from the sale of
software licenses. Carnegie Group provides business and technical consulting,
client/server and Internet-based custom software development, third-party
package implementation and systems integration services. The Company focuses on
two business areas in the information technology professional services
marketplace: customer interaction; and logistics, planning and scheduling.
Within these areas, the Company helps clients in the financial services,
government, manufacturing and telecommunications industries improve business
processes, customer relations, productivity and market position.
The market for the Company's services and solutions is highly fragmented
and is served by numerous firms. In providing services to clients in its
targeted industries, the Company competes with, among others, the consulting
practices of the "Big Six" accounting firms, systems consulting and integration
firms and the professional services groups of large companies. In addition,
clients may elect to use their internal information systems resources to satisfy
their needs for the software development, systems integration and technical
consulting services that the Company offers.
Revenue from software services represented 95.1% of the Company's total
revenue in 1997. Fees for software services provided by the Company typically
are based on Carnegie Group staffing requirements and the overall scope and
timing of the project as agreed upon with the client. The Company has
historically filled a portion of its engineering staffing needs through the
retention of independent contractors. The Company believes that its practice of
retaining independent contractors on a per engagement basis provides it with
access to specialized knowledge when needed, as well as greater flexibility in
adjusting staffing levels in response to changes in the demand for its services.
The Company's software services are generally performed on a time-and-materials
basis, although the Company also provides certain software services on a
fixed-price or cost-plus-fixed-fee basis, depending on the overall project
scope, risks and client requirements. The Company records software services
revenue at estimated realizable rates as labor hours are recorded, or as project
milestones or deliverables are met, whichever most accurately reflects project
completion status. Adjustments are made to software services revenue as required
using the percentage-of-completion method of accounting.
Revenue from software licenses, which represented 4.9% of the Company's
total revenue in 1997, includes fees for licenses, education and training,
maintenance revenue and miscellaneous revenue. Revenue from software licenses
includes fees for reusable software templates as well as fees for templates sold
on a stand-alone basis. The Company records revenue on licenses of reusable
software templates when the license agreement is executed, the client purchase
order is received and the software has been shipped to the client. Because
development costs of these templates have been fully amortized in previous
periods (as described below), current costs of software licenses revenue are
insignificant. The Company does not believe that the effects of costs of
software licenses revenue on the Company's aggregate gross margins or software
licenses gross margins are material. Maintenance revenue with respect to
software licenses is recorded ratably over the term of the maintenance
agreement. Miscellaneous revenue includes fees received from various joint
marketing arrangements with other companies.
Historically, a significant portion of the Company's total revenue has been
attributable to sales to a limited number of clients. In 1997, total revenue
from billings to each of the United States Transportation Command, U S WEST
Communications, Inc. and BellSouth Telecommunications, Inc. accounted for more
than 10% of the Company's total revenue. In 1996, total revenue from billings to
the United States Transportation Command, US Army, Caterpillar, Inc. and
BellSouth Telecommunications accounted for more than 10% of the Company's total
revenue. The Company expects to continue to derive a significant portion of its
revenue from a relatively limited number of major clients.
In accordance with applicable accounting principles, the Company presents
revenue from related parties and cost of revenue from related parties as
separate line items in its statements of operations. Software license revenue
from related parties is not presented because it is not significant. Related
parties for these purposes
11
<PAGE> 13
include: U S West Communications, Inc., the ultimate parent corporation of which
has a representative on the Company's Board of Directors, and Ford Motor
Company, which holds approximately 8.6% of the Company's Common Stock
outstanding as of March 20, 1998. Because the Company's business is
characterized by significant customer concentration and relatively large
projects, the timing of performance for each client engagement can result in
significant variability in the Company's total revenue and total cost of revenue
from period to period; both revenue and cost of revenue from software services
from related parties have varied accordingly.
Research and development expenses consist primarily of expenses for the
development of licensable software for sale as stand-alone products, rather than
development work performed in the course of client project engagements.
Development efforts with respect to TestBench represent investments in new or
updated functions or features. Research and development expenses have increased
as a percentage of total revenue and have remained a significant percentage of
software license revenue. Over the past six years, the Company has also
benefitted from the development of reusable software templates in the course of
performing engagements for clients. No software development costs were
capitalized in 1995, 1996 or 1997. Based on the Company's product development
process, technological feasibility is not established until completion of a
working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant in recent years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to total revenue of certain items in the Company's consolidated
statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software services-Unrelated parties................... 81.8% 84.6% 68.4%
Software services-Related parties..................... 12.6 10.3 26.7
----- ----- -----
Total Software services............................ 94.4 94.9 95.1
Software licenses..................................... 5.6 5.1 4.9
----- ----- -----
Total revenue...................................... 100.0 100.0 100.0
Costs and expenses:
Cost of revenue-Unrelated parties..................... 53.1 56.1 46.5
Cost of revenue-Related parties....................... 6.9 6.4 18.4
----- ----- -----
Total cost of revenue.............................. 60.0 62.5 64.9
Research and development.............................. 2.2 3.2 5.4
Selling, general and administrative................... 26.7 26.2 28.9
Restructuring charge.................................. .0 .0 2.7
----- ----- -----
Total costs and expense............................ 88.9 91.9 101.9
Income (loss) from operations........................... 11.1 8.1 (1.9)
Other income, net....................................... -- 2.2 2.5
----- ----- -----
Income before income taxes.............................. 11.1 10.3 .6
Income tax benefit (provision).......................... 7.1 1.5 (.2)
Net income.............................................. 18.2% 11.8% .4%
----- ----- -----
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
Revenue. Total revenue was $29.4 million in 1997 compared to $28.4 million
in 1996, an increase of $1.0 million or 3.5%. This growth resulted principally
from volume increases in sales of software services.
Total software services revenue was $28.0 million in 1997 compared to $27.0
million in 1996, an increase of $1.0 million or 3.7%. This increase was
primarily attributable to customer contact engagements for clients in the
telecommunications industry. Revenue from software services-unrelated parties
was $20.1 million in 1997
12
<PAGE> 14
compared to $24.0 million in 1996, a decrease of $3.9 million or 16.2%. This
decrease was due primarily to a funding gap for a logistics, planning and
scheduling engagement for a government industry client. Revenue from software
services-related parties was $7.8 million in 1997 compared to $2.9 million in
1996, an increase of $4.9 million or 167.3%. This increase was primarily
attributable to multiple customer interaction engagements for a
telecommunications industry client.
Revenue from software licenses was unchanged at $1.4 million in 1997
compared to $1.4 million in 1996.
Cost of Revenue. Cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses. Total cost of
revenue was $19.1 million in 1997 compared to $17.8 million in 1996, an increase
of $1.3 million or 7.5%. This increase was primarily attributable to additional
professional staff hired to perform the increased volume of software services.
Total cost of revenue was 64.9% of total revenue in 1997, compared to 62.5% of
total revenue in 1996. This percentage increase was primarily attributable to
increased costs associated with the use of contract labor on some customer
interaction engagements and an increase in project related travel. Cost of
revenue-unrelated parties was $13.7 million in 1997 compared to $15.9 million in
1996, a decrease of $2.2 million or 14.3%. This decrease, as mentioned earlier
in relation to a decrease in revenue, was affected due to a funding gap on a
logistics, planning and scheduling engagement for a government industry client.
Cost of revenue from software services-related parties was $5.4 million in 1997
compared to $1.8 million in 1996 an increase of $3.6 million or 199.1%. This
increase was directly related to the increase in software services-related
parties revenue mentioned earlier.
Research and Development. Research and development expenses were $1.6
million in 1997 compared to $.9 million in 1996, an increase of $.7 million or
76.4%. This increase was 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, 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 $8.5 million in 1997 compared to $7.4 million in 1996, an increase
of $1.1 million or 14.1%. This increase resulted primarily from increases in
sales and marketing expenses needed to support the Company's channels marketing
program. Also, contributing to the increase were additions to the human resource
staff and their related expenses and the cost to recruit technical staff.
Restructuring. Restructuring costs of $.8 million were incurred in 1997 in
response to the significant funding gap in a government engagement mentioned
previously. These one-time charges were for a reduction in force and the
write-down of certain assets related to underutilized capacity.
Other Income. Total other income for 1997 was $731,000 compared to total
other income of $627,000 in 1996, an increase of $104,000 or 16.4%. This
increase was due primarily to compounded 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 $72,000 was recorded in
1997. The effective income tax rate in 1997 was higher than the effective income
tax rate in 1996 due to benefit recognized in 1996 as a result of the Company's
estimate of the deferred tax asset believed more likely than not to be realized.
See "Income Tax Considerations."
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Revenue. Total revenue was $28.4 million in 1996 compared to $25.7 million
in 1995, an increase of $2.7 million or 10.8%. This growth resulted principally
from volume increases in sales of software services.
Total software services revenue was $27.0 million in 1996 compared to $24.2
million in 1995, an increase of $2.8 million or 11.4%. This increase was
primarily attributable to an extension of a logistics, planning and scheduling
engagement for a government industry client and the continuation of a customer
contact engagement for a client in the telecommunications industry. Revenue from
software services-unrelated parties
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<PAGE> 15
was $24.0 million in 1996 compared to $21.0 million in 1995, an increase of $3.0
million or 14.6%. This increase was primarily attributable to the extension of a
logistics, planning and scheduling engagement and of a customer interaction
engagement, both of which are described above. Revenue from software services-
related parties was $2.9 million in 1996 compared to $3.2 million in 1995, a
decrease of $.3 million or 9.7%. This decrease was primarily attributable to the
completion of customer interaction engagements for a telecommunications industry
client. Also, results for 1996 were affected by the renegotiation of a
fixed-price contract, which resulted in engineers related to that contract being
underutilized for a portion of the year.
Revenue from software licenses was unchanged at $1.4 million in 1996
compared to $1.4 million in 1995.
Cost of Revenue. Cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses. Total cost of
revenue was $17.8 million in 1996 compared to $15.4 million in 1995, an increase
of $2.4 million or 15.5%. This increase was primarily attributable to additional
professional staff hired to perform the increased volume of software services.
Total cost of revenue was 62.5% of total revenue in 1996, compared to 60.0% of
total revenue in 1995. This percentage increase was primarily attributable to
increased costs associated with the renegotiation of a fixed-price contract for
a telecommunications industry client. Cost of revenue-unrelated parties was
$15.9 million in 1996 compared to $13.6 million in 1995, an increase of $2.3
million or 17.1%. This increase was primarily attributable to additional
professional staff hired or reassigned to perform the increased volume of
software services following the completion of customer contact engagements for a
telecommunications client. Also, as mentioned earlier, the increased revenue
from software services-unrelated parties for the extension of a logistics,
planning and scheduling engagement for a government industry client required an
increase in associated costs. Cost of revenue from software services-related
parties was $1.8 million in 1996 compared to $1.8 million in 1995.
Research and Development. Research and development expenses were $908,000
in 1996 compared to $568,000 in 1995, an increase of $340,000 or 59.9%. This
increase was primarily due to product development of various templates for the
services areas of the business.
Selling, General and Administrative. Selling, general and administrative
expenses include costs of proposal development and proposal writing, marketing
communications and advertising, sales and management staff and corporate
services functions, including accounting, human resources and legal services,
along with corporate executive staff. Selling, general and administrative
expenses were $7.4 million in 1996 compared to $6.9 million in 1995, an increase
of $.5 million or 8.5%. This dollar increase resulted primarily from increases
in sales and marketing expenses needed to support the Company's total revenue
growth along with increased insurance and professional services expenses related
to being a newly public company. These expenses decreased as a percentage of
total revenue from 26.7% in 1995 to 26.2% in 1996 as a result of lower Company
fixed costs as a percentage of total revenue.
Other Income. Total other income for 1996 was $627,000 compared to total
other income of $2,000 in 1995, an increase of $625,000. This increase was due
primarily to 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 Benefit. An income tax benefit of $432,000 was recorded in
1996. The effective income tax rate in 1996 was higher than the effective income
tax rate in 1995 due to changes in the amount of benefit recognized as a result
of the Company's current estimate of the deferred tax asset believed more likely
than not to be realized. See "Income Tax Considerations."
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. In 1995 the Company
also funded its operations in part through borrowing under available lines of
credit and through the net proceeds of the initial public offering of its Common
Stock. There were no borrowings in 1996 or 1997.
14
<PAGE> 16
During 1997, the Company had net income of $110,000 and had a net use of
cash of $1.2 million. The net use of cash was primarily attributable to various
changes in elements of working capital and to capital expenditures.
The Company experienced a drop in revenue earned but not yet billed when
comparing the year ended December 31, 1997 to the year ended December 31, 1996.
Invoicing of amounts to clients generally occurs within 45 days of time and
materials cost occurrence, 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 the payments are doubtful; accordingly, the Company has not made an
allowance for doubtful accounts.
Advanced billings and deferred revenue increased at December 31, 1997 when
compared to the year ended December 31, 1996. Advanced billings and deferred
revenue balances normally will change from period to period. Any increase would
reflect 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 has a committed line of credit agreement in the amount of $3.5
million in place with PNC Bank, N.A. (the "Bank"). No borrowings were
outstanding against the committed line of credit at December 31, 1997 and
December 31, 1996. Borrowings under this agreement are collateralized by
accounts receivable. This 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 at December 31, 1997 was
8-1/2% compared to 8-1/4% at December 31, 1996.
The Company believes that current cash balances, together with cash
generated from operations and borrowing available under its lines of credit,
will satisfy the Company's working capital and capital expenditure requirements
during fiscal year 1998 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.
On March 19, 1998, the Company acquired all the outstanding stock of
Advantage kbs, Inc. for a purchase price of $5.0 million, plus an additional
contingent payment of up to $2.5 million, depending on revenue and earnings of
Advantage for the year ending December 31, 1998. A Current Report on Form 8-K is
being filed with respect to the acquisition of Advantage.
INCOME TAX CONSIDERATIONS
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $8.6 million available to reduce federal taxable income through
2012. If an "ownership change" were to occur, within the meaning of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards would be subject to an annual limitation. Generally, an "ownership
change" occurs with respect to a corporation if shareholders who own, directly
or indirectly, 5% or more of the capital stock of the corporation increase their
aggregate percentage ownership of such stock by more than 50 percentage points
over the lowest percentage of such stock owned by such shareholders at any time
during a prescribed testing period. If the annual limitation were to apply, the
amount of the limitation would equal the product of (i) the fair market value of
the Company's equity on the date of the ownership change, with certain
adjustments, including an adjustment to exclude capital contributions made in
the two years preceding the date of the ownership change and (ii) a long-term
tax exempt bond rate of return published monthly by the Internal Revenue
Service. Should the annual limitation apply, the Company believes that it would
affect the timing of the use of, but not the ultimate ability of the Company to
use, the net operating loss carryforwards to reduce future income tax
liabilities. The applicability of the limitation is not expected to affect the
income tax provision (benefit) reported for financial accounting purposes.
15
<PAGE> 17
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 profitability over the last four years and future income
expectations against the negative evidence of dependence upon a limited number
of customers and other uncertainties and concluded that retaining a valuation
allowance related to net operating losses was not necessary at December 31, 1996
and continues to be unnecessary at December 31, 1997.
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. For example, in the fourth quarter of 1996 and 1995, as a result of
its annual strategic business planning process, the Company reevaluated its
future years' income expectations and recorded a discrete income tax benefit as
an adjustment to the valuation allowance in each of those quarters.
OTHER
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," did not affect the Company's financial position or results of
operations because the Company has not offered such benefits.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of," became effective in 1996. The adoption of this standard did not
have a material effect on the results of operations or the financial position of
the Company.
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for an employee stock option but allows
companies to continue recording compensation cost using currently accepted
measurement principles. Beginning in 1996, companies electing to continue using
currently accepted recognition principles are required to make pro forma
disclosures of net income as if the fair value based method of accounting had
been applied. Carnegie Group continues accounting for its stock-based employee
compensation plans under currently accepted recognition principles and has
presented the pro forma disclosures required under this statement in the notes
to the financial statements. Accordingly, the adoption of this statement had no
affect on the results of operations or financial position of Carnegie Group.
SFAS No. 128, "Earnings per Share," the objective of which is to simplify
the computation of earnings per share and to make the U.S. standard for
computing earnings per share more compatible with the earnings per share
standards of other countries and with that of the International Accounting
Standards Committee, was issued in 1997. The Company adopted the provisions of
SFAS No. 128 for the year ended December 31, 1997, and has restated earnings per
share amounts for all periods presented in conformity with the new standard.
Also in 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 the 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 ended 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 Nos. 130 and 131 are not expected to have a material effect on
the Company's financial position, results of operations or cash flows.
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<PAGE> 18
Impact of Year 2000 Issue: The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations of operations,
including, among other things, a temporary inability to process transactions, or
engage in similar normal business activities.
During 1997, the Company began a strategic project to replace and enhance
its existing financial systems technology. While the decision to embark on this
project was solely business related, the new software that the Company
implemented is year 2000 compliant. Therefore, the Year 2000 issue will not pose
significant operational problems for the Company's computer systems.
The Company has designed a systems environment that is Year 2000 compliant
and all systems are verified for Year 2000 compliance prior to purchase from
suppliers. However, there can be no guarantee that the systems of other
companies on which the Company's system rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
the Company's systems, would not have material adverse effect on the Company.
The Company believes that it has no material exposure to contingencies related
to the Year 2000 Issue for systems it has developed for its clients.
The Company is and will continue to utilize both internal and external
resources to implement and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project within one year or not later
than December 31, 1998. The total cost of the Year 2000 project is estimated at
$550,000 and is being funded through operating cash flows. Of the total project
cost, approximately $150,000 is attributed to the purchase of new software which
was purchased and capitalized in 1997. The remaining $80,000, some of which will
be capitalized or expensed as incurred over the next year, is not expected to
have a material effect on the results of operations. To date, the Company has
capitalized or expensed approximately $470,000 related to the assessment of, and
preliminary efforts in connection with, its Year 2000 project.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modifications and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Inflation is not expected to have a significant effect upon the Company's
business in the near future.
------------------------
This report contains forward-looking statements with respect to, among
other things, the market for the Company's services, certain plans and
objectives of the Company's management and prospects. These statements are
indicated by phrases such as "the Company will" or use of verbs such as
"believes," "plans," "intends," "anticipates," or words of similar impact. The
following are certain factors that may cause the company's actual results to
differ materially from those which are the subject of 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
79%, 83% and 87% of total software services revenue in the years ended December
31, 1997, 1996 and 1995, respectively, was derived from the Company's five
largest clients in each such period. In 1997, revenue from billings to each of
the United States Transportation Command, U S WEST Communications, Inc. and
BellSouth Telecommunications accounted for more than 10% of the Company's total
revenue. In 1996, revenue from billings to the United States Transportation
Command, the U S Army, Caterpillar, Inc. and BellSouth Telecommunications
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.
17
<PAGE> 19
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 68%, 76%, and 68% of total software
services revenue in the years ended December 31, 1997, 1996 and 1995,
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 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.
Risks Associated with the Integration of Advantage. On March 19, 1998, the
Company acquired all the outstanding capital stock of Advantage which became a
wholly owned subsidiary of the Company. The integration of companies in the
information technology services industry may be more difficult to achieve than
in other industries. There can be no assurance that the acquisition of Advantage
will result in any business and financial benefits to the Company. The
realization of any such benefit requires, among other things, that the
operations of Advantage be successfully integrated with those of the Company in
a timely manner. The successful integration of the Company and Advantage will
require the coordination of research and development and sales and marketing
efforts. The difficulties of such integration may be increased by the need to
coordinate geographically separated organizations and integrating personnel with
disparate business backgrounds. In addition, the Company's senior management has
not had previous experience in integrating acquisitions. There can be no
assurance that the Company will be able successfully to manage the integration
of Advantage.
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
more uncertain, and management's
18
<PAGE> 20
assessment of its ability to realize its deferred tax asset through future
taxable income reflects this. The Company's interim and annual financial
statements include a valuation allowance that is 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 the
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, on the other hand. The
Company then adjusts the valuation allowance to reflect the portion of the
deferred tax asset that the Company believes it will, more likely than not, be
unable to realize. The valuation allowance reflects the Company's belief that it
is more likely than not to realize most but not all of its deferred tax assets.
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. 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, 1997 through December 31, 1997, the size of the Company's staff
increased from 238 to 257 employees and independent contractors. In addition,
the Company has opened offices in Atlanta, Georgia, Fairview Heights, Illinois,
Oakland, California and Arlington, Virginia 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 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
19
<PAGE> 21
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. In addition, business combinations among the Company's competitors
may result in the creation of additional large information technology service
providers with greater financial, marketing and other resources, than those
provided by the company.
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 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 1998 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.
20
<PAGE> 22
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
21
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Carnegie Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Carnegie Group, Inc. and its subsidiaries (the Company) at December 31, 1995,
1996 and 1997, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 3, 1998, except for Note 14 which is as of March 19, 1998
22
<PAGE> 24
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $12,394,588 $14,691,765 $13,483,284
Accounts receivable (Note 3)....................... 5,131,922 2,751,316 2,955,241
Accounts receivable from related parties (Notes 3
and 12).......................................... 76,296..... 769,223 3,396,859
Accounts receivable--unbilled (Note 3)............. 2,048,609 3,660,765 1,390,650
Accounts receivable related parties--unbilled
(Notes 3 and 12)................................. 87,690 188,302 211,885
Deferred income taxes (Note 13).................... 1,222,061 2,179,426 2,005,855
Other current assets............................... 397,883 403,508 871,931
----------- ----------- -----------
Total current assets.......................... 21,359,049 24,644,305 24,315,705
----------- ----------- -----------
Property and equipment, net of accumulated
depreciation and amortization (Note 4)........... 1,812,894 2,046,415 2,568,758
Deferred income taxes (Note 13).................... 1,779,792 1,775,480 1,910,760
Long term notes receivable from officers........... -- -- 584,984
Other assets....................................... 36,900 23,055 210,597
----------- ----------- -----------
Total assets.................................. $24,988,635 $28,489,255 $29,590,804
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................. $ 1,107,592 $ 614,458 $ 663,667
Payables to related parties (Note 12).............. 967,673 1,034,608 182,145
Accrued compensation............................... 1,130,479 706,965 933,004
Advance billings and deferred revenue.............. 537,541 1,101,221 2,388,660
Accrued rent (Note 5).............................. 626,253 538,641 330,981
Accrued restructuring (Note 6)..................... -- -- 598,723
Other accrued liabilities.......................... 801,544 821,752 423,544
Obligations under capital leases--current portion
(Note 5)......................................... 48,691 33,242 --
----------- ----------- -----------
Total current liabilities..................... 5,219,773 4,850,887 5,520,724
----------- ----------- -----------
Obligations under capital leases--noncurrent
portion (Note 5)................................. 39,671 -- --
----------- ----------- -----------
Total liabilities............................. 5,259,444 4,850,887 5,520,724
----------- ----------- -----------
STOCKHOLDERS' EQUITY (NOTES 7 AND 8):
Common stock, $.01 par value; 20,000,000 shares
authorized, 6,386,200, 6,512,038 and 6,707,934
shares issued at December 31, 1995, 1996, and
1997, respectively............................... 63,862 65,120 67,079
Capital in excess of par value..................... 30,836,317 31,384,080 31,704,241
Accumulated deficit................................ (10,695,988) (7,335,832) (7,226,240)
Treasury stock, 190,000 shares at December 31,
1995, 1996, and 1997 (at cost)................... (475,000) (475,000) (475,000)
----------- ----------- -----------
Total stockholders' equity.................... 19,729,191 23,638,368 24,070,080
----------- ----------- -----------
Commitments (Note 5)...............................
----------- ----------- -----------
Total liabilities and stockholders' equity.... $24,988,635 $28,489,255 $29,590,804
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenue (Notes 11 and 12):
Software services--Unrelated parties............. $20,972,461 $24,039,258 $20,138,562
Software services--Related parties............... 3,245,219 2,931,565 7,837,364
----------- ----------- -----------
Total software services....................... 24,217,680 26,970,823 27,975,926
Software licenses................................ 1,432,628 1,438,225 1,430,335
----------- ----------- -----------
Total revenue................................. 25,650,308 28,409,048 29,406,261
----------- ----------- -----------
Costs and expenses:
Cost of revenue--Unrelated parties............... 13,618,798 15,948,615 13,669,530
Cost of revenue--Related parties................. 1,757,072 1,810,554 5,416,175
----------- ----------- -----------
Total cost of revenue......................... 15,375,870 17,759,169 19,085,705
Research and development......................... 567,710 907,976 1,601,525
Selling, general and administrative.............. 6,859,608 7,441,487 8,493,030
Restructuring charges (Note 6)................... -- -- 774,608
----------- ----------- -----------
Total costs and expenses...................... 22,803,188 26,108,632 29,954,868
----------- ----------- -----------
Income (loss)from operations....................... 2,847,120 2,300,416 (548,607)
Other income (expense):
Interest income.................................. 58,660 617,764 718,412
Other income..................................... 24,447 27,428 25,447
Interest expense................................. (81,124) (17,665) (13,293)
----------- ----------- -----------
Total other income............................ 1,983 627,527 730,566
----------- ----------- -----------
Income before income taxes......................... 2,849,103 2,927,943 181,959
Income tax benefit (provision) (Note 13)........... 1,826,926 432,213 (72,367)
----------- ----------- -----------
Net income.................................... $ 4,676,029 $ 3,360,156 $ 109,592
=========== =========== ===========
Basic earnings per share........................... $ .99 $ .54 $ .02
=========== =========== ===========
Diluted earnings per share......................... $ .82 $ .47 $ .02
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CAPITAL
COMMON IN EXCESS TREASURY ACCUMULATED
STOCK OF PAR VALUE STOCK DEFICIT TOTAL
----- ------------ ----- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 47,559 19,999,834 (475,000) (15,372,017) 4,200,376
------- ----------- ---------- ------------ -----------
1995:
Exercise of stock options--
130,330 shares at
$1.25-$5.625 per share.... 1,303 463,974 -- -- 465,277
Initial Public
Offering--1,500,000 shares
at $8.00 per share (less
issuance costs)........... 15,000 10,372,509 -- -- 10,387,509
Net income................... -- -- -- 4,676,029 4,676,029
------- ----------- ---------- ------------ -----------
Balance at December 31, 1995... 63,862 30,836,317 (475,000) (10,695,988) 19,729,191
------- ----------- ---------- ------------ -----------
1996:
Exercise of stock options--
123,847 shares at
$1.15-$5.00 per share..... 1,238 359,593 -- -- 360,831
Issuance of common stock
under employee stock
purchase plan............. 20 15,887 -- -- 15,907
Income tax benefit from stock
option plan activity...... -- 196,863 -- -- 196,863
Initial Public Offering
costs..................... -- (24,580) -- -- (24,580)
Net Income................... -- -- -- 3,360,156 3,360,156
------- ----------- ---------- ------------ -----------
Balance at December 31, 1996... 65,120 31,384,080 (475,000) (7,335,832) 23,638,368
------- ----------- ---------- ------------ -----------
Exercise of stock options--
184,393 shares at
$0.03-$6.38 per share..... 1,844 161,676 -- -- 163,520
Issuance of common stock
under employee stock
purchase plan............. 115 53,860 -- -- 53,975
Income tax benefit from stock
option plan activity...... -- 104,625 -- -- 104,625
Net Income................... -- -- -- 109,592 109,592
------- ----------- ---------- ------------ -----------
Balance at December 31, 1997... $67,079 $31,704,241 $ (475,000) $ (7,226,240) $24,070,080
======= =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,676,029 $ 3,360,156 $ 109,592
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization................. 704,312 982,208 1,294,374
(Gain) loss on the disposal of fixed assets... 2,176 (1,833) 44,976
Deferred income taxes......................... (1,988,361) (953,053) 38,291
Changes in working capital component:
Accounts receivable......................... (3,406,927) 768,450 2,066,190
Accounts receivable--Related parties........ 1,574,087 (793,539) (2,651,219)
Other assets................................ (184,449) 8,220 (655,965)
Interest receivable......................... -- -- (9,984)
Trade accounts payable...................... (50,496) (493,134) 49,209
Payables to related parties................. 396,461 66,935 (852,463)
Accrued compensation........................ 44,975 (423,514) 226,039
Accrued rent................................ (68,761) (87,612) (207,660)
Accrued restructuring charge................ -- -- 598,723
Other accrued liabilities................... 606,817 217,071 (293,583)
Advance billings and deferred revenue....... (361,444) 563,680 1,287,439
----------- ----------- -----------
Net cash provided by operating
activities............................. 1,944,419 3,214,035 1,043,959
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from the sales of fixed assets, net..... 18,420 4,585 1,000
Long term notes receivable from officers......... -- -- (575,000)
Capital expenditures............................. (1,285,752) (1,218,481) (1,862,693)
----------- ----------- -----------
Net cash used in investing activities.... (1,267,332) (1,213,896) (2,436,693)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings on line of credit..................... 5,125,000 -- --
Repayments on line of credit..................... (5,125,000) -- --
Principal payments under capital lease
obligations................................... (50,522) (55,120) (33,242)
Proceeds from sales of common stock, net......... 10,852,786 352,158 217,495
----------- ----------- -----------
Net cash provided by financing
activities............................. 10,802,264 297,038 184,253
----------- ----------- -----------
Net change in cash and cash equivalents............ 11,479,351 2,297,177 (1,208,481)
Cash and cash equivalents:
Beginning of period.............................. 915,237 12,394,588 14,691,765
End of period.................................... $12,394,588 $14,691,765 $13,483,284
=========== =========== ===========
Supplementary information:
Cash paid during the period for income taxes..... $ 32,474 $ 157,250 $ 172,585
Cash paid during the period for interest......... $ 63,358 $ 5,667 $ 6,326
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 28
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. DESCRIPTION OF THE BUSINESS
Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides business
and technical consulting, client/server and Internet-based custom software
development, third-party package implementation and systems integration
services. The Company focuses on two business areas in the information
technology professional services marketplace: customer interaction; and
logistics, planning and scheduling. Within these areas, the Company helps
clients in the financial services, government, manufacturing and
telecommunications industries improve business processes, customer
relations, productivity and market position.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Carnegie Group, Inc., and its
wholly owned subsidiaries, Carnegie Group Investments, Inc., Carnegie
Investment Services, Inc., Carnegie Services, Inc., and Carnegie Federal
Systems Corporation. All significant intercompany balances and transactions
have been eliminated.
REVENUE RECOGNITION
Software services. Revenue from software services contracts is recognized
as time and material costs are incurred, or as project milestones or
deliverables are met, and is adjusted using the percentage-of-completion
method of accounting, as required. When a loss is anticipated for a
software services contract, a provision for such loss is recorded in the
period in which the loss becomes evident. The difference between
contractual amounts billed in advance to customers and amounts recorded as
revenue is included in advance billings. Amounts earned but not billed to
the customer are included in accounts receivable.
Software licenses. Revenue from software licenses is recognized when a
license agreement is executed, the client purchase order is received and
the software is shipped to the customer. No significant vendor and
post-contract support obligations remain at the time revenue is recognized.
Revenue applicable to insignificant post-contract support is deferred and
recognized ratably as the obligations are fulfilled. Revenue from customer
support and training is recognized over the period in which the services
are rendered.
SOFTWARE DEVELOPMENT COSTS
Certain internal development costs, primarily coding and testing of new
products and enhancements to existing products, are capitalized after
technological feasibility has been established. Capitalized software costs
are amortized on a straight-line basis over the estimated useful life of
each product, not to exceed five years, or the ratio of current revenue to
the total of current and anticipated future revenue, whichever is the
greater annual charge. Based on the Company's product development process,
technological feasibility is not established until completion of a working
model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release
27
<PAGE> 29
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
have been insignificant in recent years. Accordingly, no software
development costs were capitalized in 1995, 1996 or 1997.
Research and development expenses consist primarily of expenses for the
development of licensable software for sale as stand-alone products.
Research and development costs, including software costs incurred prior to
establishing technological feasibility, are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term interest-bearing deposits with
original maturities of less than 90 days.
CREDIT RISKS
Financial instruments that subject the Company to concentrations of credit
risks consist primarily of billed and unbilled receivables. The Company's
clients are primarily involved in the financial services, government,
manufacturing and telecommunications industries (Notes 3 and 12).
Concentrations of credit risk with respect to billed and unbilled accounts
receivable are limited due to the Company's credit evaluation process.
Historically, the Company has not incurred any significant credit-related
losses.
PROPERTY AND EQUIPMENT
Properties are recorded at cost. Equipment under capital lease is recorded
at the lower of fair market value or the present value of future minimum
lease payments. For financial reporting purposes, depreciation and
amortization are provided under the straight-line method over the estimated
useful lives of the respective assets, which range up to 5 years but are
primarily 3 years or less. The Company uses accelerated methods for income
tax purposes.
EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) Savings Plan (the Plan). The Plan allows
employees to contribute up to 20 percent of their annual compensation,
subject to statutory limitations. Company contributions to the Plan are
discretionary. The company contributed $113,734 to the plan in 1997, no
Company contributions were made in prior years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes," which requires an asset and liability approach in accounting for
income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between carrying amounts and the tax
bases of all assets and liabilities.
PER SHARE AMOUNTS
All share and per share data have been adjusted to give effect to the 2:5
"reverse" stock split of the Company's common stock which became effective
on September 18, 1995.
The Company has adopted SFAS No. 128 (SFAS 128), "Earnings per Share" which
establishes standards for computing and disclosing basic and diluted
earnings per common share. Basic earnings per common share is computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is
computed by dividing net income by the weighted average number of common
shares outstanding plus all dilutive potential common shares outstanding
during the period. Dilutive common shares are determined using the treasury
stock method.
28
<PAGE> 30
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings per common share for 1997, 1996 and 1995 have been restated to
reflect the adoption of SFAS 128. (See Note 9)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. (See Note 10)
3. ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
U.S. government agencies:
Billed................................... $ 277,060 $ 663,877 $ 753,242
Unbilled................................. 946,192 2,269,340 321,460
Telecommunications companies, including
$64,932, $852,122 and $3,608,213 from
related parties
Billed................................... 1,315,904 1,066,187 3,736,103
Unbilled................................. 347,077 241,182 367,234
Other trade receivables, including $99,054,
$105,402 and $531 from related parties
Billed................................... 3,615,254 1,790,475 1,862,755
Unbilled................................. 843,030 1,338,545 913,841
Allowance for doubtful accounts............... -- -- --
---------- ---------- ----------
$7,344,517 $7,369,606 $7,954,635
========== ========== ==========
</TABLE>
Revenue earned but not yet billed to customers is generally billed to
customers within 45 days of time and material cost incurrence unless a
specific billing schedule is agreed. Retainage and claims are not
significant.
29
<PAGE> 31
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
OWNED LEASED OWNED LEASED OWNED LEASED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Equipment (primarily
computer equipment).... $7,055,000 $ -- $8,124,460 $ -- $9,691,589 $ --
Furniture and fixtures... 1,430,806 419,494 1,541,005 419,494 1,807,426 419,494
Other.................... 210,758 -- 244,604 -- 184,574 --
---------- -------- ---------- -------- ---------- --------
8,696,564 419,494 9,910,069 419,494 11,683,589 419,494
Less--Accumulated
depreciation and
amortization........... 6,975,381 327,783 7,897,505 385,643 9,114,831 419,494
---------- -------- ---------- -------- ---------- --------
$1,721,183 $ 91,711 $2,012,564 $ 33,851 $2,568,758 $ --
========== ======== ========== ======== ========== ========
</TABLE>
There were no significant operating leases other than leases for office
space (see Note 5).
Depreciation expense for the years ended December 31, 1995, 1996 and 1997,
was $646,608, $924,347, and $1,260,524 respectively.
For the years ended December 31, 1995, 1996 and 1997, amortization expense
was $57,704, $57,861, and $33,850 respectively.
5. COMMITMENTS
The Company leases office space in Pittsburgh, Pennsylvania, Denver,
Colorado, Fairview Heights, Illinois and Atlanta, Georgia under agreements
that provide for escalating rent. Rent expense is normalized over the term
of the lease which expires in December 2004, December 2002, August, 1998
and March 2002 respectively. The difference between cash payments and rent
expense is carried as accrued rent.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
OPERATING
---------
<S> <C>
1998........................................................ $ 1,645,121
1999........................................................ 1,653,389
2000........................................................ 1,668,852
2001........................................................ 1,671,665
2002........................................................ 1,604,868
Thereafter.................................................. 2,750,398
-----------
Total minimum lease payments................................ 10,994,293
===========
</TABLE>
Minimum payments under operating leases have not been reduced by minimum
sublease rentals of $32,344 due in the future under noncancelable
subleases. Rent expense under operating leases was $1,546,873, $1,592,215,
and $1,794,241, and receipts under subleases were $288,821, $286,105 and
$376,937 during the periods ended December 31, 1995, 1996 and 1997
respectively.
6. RESTRUCTURING CHARGES
During 1997, the Company implemented a restructuring plan in response to a
significant funding gap for a government contract. The restructuring
involved a reduction in workforce and the write off of certain assets
related to underutilized capacity.
30
<PAGE> 32
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The statement of operations for the year ended December 31, 1997 included
costs of $774,608, of which $598,723 is recorded as accrued restructuring
in the December 31, 1997 balance sheet. Costs associated with the
restructuring include employee severance costs of $413,932, the write off
of certain assets related to underutilized capacity of $289,958 and other
costs of $70,718. All costs associated with the restructuring are expected
to be incurred by the end of 1998.
7. BORROWINGS
At December 31, 1995, the Company had a $3,000,000 line of credit
agreement. Additionally, the Company had an agreement for a $500,000
discretionary line of credit. The availability of those funds were subject
to the lender's approval. Both the $3,000,000 committed line and the
discretionary line expired on June 30, 1996.
The agreement was amended by extending the expiration date to June 29, 1998
and increasing the committed line to $3,500,000, while eliminating the
$500,000 discretionary amount. 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 the line of credit. The line of credit agreement
in place at December 31, 1995 bore interest at the bank's prime interest
rate plus 0.75%, and the bank charged a 0.25% fee per annum on the unused
portion. The bank's prime interest rate was 8.50%, 8.25% and 8.50% at
December 31, 1995, 1996 and 1997, respectively. There were no borrowings
outstanding at December 31, 1995, 1996 or 1997.
8. STOCKHOLDERS' EQUITY
On September 1, 1995, the Board of Directors authorized 5,000,000 shares of
preferred stock, par value $.01 per share. Terms of any series of such
preferred stock will be established by the Board of Directors at the time
of issue.
On January 7, 1998, the Board of Directors authorized the repurchase of up
to 200,000 shares of Carnegie Group common stock, on the open market or in
negotiated transactions. The authorization will remain in effect until June
30, 1998, and purchases may be made from time to time during that period.
9. EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings per common share for the
years ended December 31, 1997, 1996 and 1995 is performed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income............................ $ 109,592 $3,360,156 $4,676,029
========== ========== ==========
Weighted average common shares
outstanding......................... 6,358,221 6,250,964 4,709,818
Effect of dilutive options............ 583,634 850,425 972,637
---------- ---------- ----------
Diluted shares outstanding............ 6,941,854 7,101,389 5,682,455
========== ========== ==========
Earnings per common share
Basic............................... $ .02 $ .54 $ .99
========== ========== ==========
Diluted............................. $ .02 $ .47 $ .82
========== ========== ==========
</TABLE>
Stock options to purchase 497,000 shares of common stock at exercise prices
ranging from $9.88 to $6.38 per share outstanding at December 31, 1997 were
not included in the computation of diluted earnings per common share
because the options' exercise prices were greater than the average market
price of the common shares for the year ended December 31, 1997. Stock
options to purchase 434,000 shares of common stock at exercise prices
ranging from $9.88 to $8.00 per share outstanding at December 31, 1996
31
<PAGE> 33
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
were not included in the computation of diluted earnings per common share
because the options' exercise prices were greater than the average market
price of the common shares for the year ended December 31, 1996. All stock
options outstanding at December 31, 1995 were included in the computation
of diluted earnings per common share for December 31, 1995.
10. STOCK OPTIONS
1989 STOCK OPTION PLAN
Incentive stock options granted under the Carnegie Group, Inc., 1989 Stock
Option Plan expire 10 years from the date of grant, generally become
exercisable over a four-year period and are adjusted pro forma for stock
splits or dividends. All grants of incentive stock options under the plan
are exercisable at prices that were at least 100% of the fair market value
of the Company's common stock at the date of grant as determined by the
Board of Directors. The plan provides that the payment for the shares may
be in cash or by exchange of common stock previously held.
In May 1992, the Company issued 4,000 nonqualified stock options under this
plan to a newly elected member of the Board of Directors at an exercise
price of $1.65 per share. The options become exercisable over a four-year
period and expire on May 12, 2002. In March 1995, the Company issued 2,000
nonqualified stock options under the plan to the same member of the Board
of Directors at an exercise price of $4.65 per share. The options become
exercisable over a four-year period and expire on March 6, 2005.
The following table summarizes activity under the plan:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE GRANTED & WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994........... 163,268 777,482 $3.96
Granted.............................. (43,060) 43,060 $4.65
Exercised............................ -- (56,170) $3.53
Forfeitures.......................... 12,530 (12,530) $3.53
------- -------
Balance, December 31, 1995........... * 751,842 $4.04
Granted.............................. -- -- $ --
Exercised............................ -- (94,793) $4.19
Forfeitures.......................... -- (7,408) $2.08
------- -------
Balance, December 31, 1996........... * 649,641 $4.15
Granted.............................. -- -- $ --
Exercised............................ -- (46,500) $2.60
Forfeitures.......................... -- (10,600) $4.77
------- -------
Balance, December 31, 1997........... * 592,541 $4.26
=======
</TABLE>
- ---------
* See additional discussion below regarding the termination of the
1989 stock option plan.
At December 31, 1997, options to purchase 577,012 shares of the Company's
common stock were exercisable under this plan.
On February 7, 1995, the Board of Directors determined the estimated fair
market value of the stock to be $4.65 per share. During 1995, options to
acquire 43,060 shares were granted at this exercise price.
NONQUALIFIED STOCK OPTIONS: On September 30, 1985, in exchange for a
six-month personal guarantee of a line of credit to the Company from a
bank, an individual was granted an option to purchase 40,000 shares of
common stock exercisable over a 10-year period at a price of $5.625 per
share. The option was exercised on September 29, 1995.
32
<PAGE> 34
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Not included in the table above are 108,000 nonqualified stock options
(which do not qualify under Section 422A of the Internal Revenue Code),
which were granted in August 1987, as part of the employment agreement with
an officer, at an exercise price of $0.025 per share. These options became
exercisable immediately upon grant. The options were exercised on August 5,
1997.
LONG-TERM INCENTIVE STOCK OPTION PLAN
In 1991, the Company implemented the Carnegie Group, Inc. Long-Term
Incentive Stock Option Plan to provide an incentive for the Company's key
management employees to achieve long-term corporate objectives.
The options under the Long-Term Incentive Plan become exercisable on
September 29, 2001, subject to an acceleration clause. Each year,
acceleration can be awarded based on predetermined Company performance
criteria and individual performance criteria set by the Compensation
Committee of the Board of Directors. Within 90 days after the previous
year, the Committee determines the number of shares (allotted shares) to be
accelerated for exercise, if any. Options subject to acceleration will
become exercisable over a two-year period, with one-third becoming
exercisable immediately upon the determination date and the remaining
two-thirds becoming exercisable on each anniversary of the determination
date.
In October 1991, under this plan, 662,000 shares were granted to 16 key
management employees at an option price of $1.25, which was the
Board-determined fair market value at the date of grant.
The following table summarizes activity under the plan:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE GRANTED & WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994........... 149,840 512,160 $1.25
------- -------
Granted.............................. (24,000) 24,000 $4.65
Exercised............................ -- (34,160) $1.25
Forfeitures.......................... -- -- $ --
------- -------
Balance, December 31, 1995........... * 502,000 $1.45
Granted.............................. -- -- $ --
Exercised............................ -- (29,054) $1.25
Forfeitures.......................... -- (19,706) $1.25
------- -------
Balance, December 31, 1996........... * 453,240 $1.43
Granted.............................. -- -- $ --
Exercised............................ -- (29,393) $1.25
Forfeitures.......................... -- (9,328) $4.17
------- -------
Balance, December 31, 1997........... * 414,519 $1.38
=======
</TABLE>
- ---------
* See additional discussion below regarding the termination of the
long term incentive stock option plan.
Of the total options outstanding as of December 31, 1997, the number of
shares subject to accelerated exercise was 394,828 and 275,972 shares had
become exercisable.
1995 STOCK OPTION PLAN
In 1995, the Company implemented the 1995 Stock Option Plan (1995 Stock
Option Plan) under which stock option awards may be made to eligible
employees of the Company. Awards to employees under the 1995 Stock Option
Plan may take the form of incentive stock options or nonqualified stock
options. The
33
<PAGE> 35
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
term of each option will be determined by the Board of Directors, but no
option will be exercisable more than 10 years after the date of grant. The
exercise price for incentive stock options must be at least equal to 100%
of the fair market value of the common stock on the date of grant. The
exercise price of nonqualified options will be determined by the Board of
Directors at the time of grant. The maximum number of shares of common
stock which may be issued or delivered and as to which awards may be
granted under the 1995 Stock Option Plan is 800,000 shares. In 1995, the
Board of Directors terminated the 1989 Stock Option and Long-Term Incentive
Plans and directed that options under the plans which thereafter become
available for grant (because outstanding options expire or terminate
unexercised) will become available for award under the 1995 Stock Option
Plan.
The following table summarizes activity under the plan:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE GRANTED & WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Balance, September 8, 1995........... 800,000 -- --
Granted.............................. (436,000) 436,000 $8.00
Forfeitures 1989 Plan................ 3,710 -- $ --
-------- -------
Balance, December 31, 1995........... 367,710 436,000 $8.00
Granted.............................. (69,500) 69,500 $9.22
Exercised............................ -- -- $ --
Forfeitures.......................... 86,114 (59,000) $8.06
-------- -------
Balance, December 31, 1996........... 384,324 446,500 $8.18
Granted.............................. (154,000) 154,000 $6.24
Exercised............................ -- (500) $6.38
Forfeitures.......................... 102,928 (83,000) $8.06
-------- -------
Balance, December 31, 1997........... 333,252 517,000 $7.62
======== ======= =====
</TABLE>
At December 31, 1997, options to purchase 195,875 shares of the Company's
stock were exercisable under this plan.
SUMMARY STOCK OPTION INFORMATION
The Company applies APBO 25 and related interpretations in accounting for
its three stock-based compensation plans. No compensation cost has been
recognized for its stock option plans and its stock purchase plan. The pro
forma data below reflects the effect had compensation cost for the
Company's three stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
SFAS 123.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C> <C>
Net income (loss) As reported........ $3,360,156 $ 109,592
Pro forma.......... $2,411,481 $ (542,169)
Basic earnings (loss) per common share As reported........ $ .54 $ .02
Pro forma.......... $ .39 $ (.09)
Diluted earnings (loss) per common
share As reported........ $ .47 $ .02
Pro forma.......... $ .34 $ (.09)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for grants in 1996 and 1997, respectively: risk-free interest rates of
5.68-6.97 percent and 5.91-6.65 percent; dividend yields of zero in both
years; expected terms of 9.7-10.0 years and 9.8-10.0 years, and volatility
(based on an analysis of "peer" companies) of 69.7 percent and 68.7
percent.
34
<PAGE> 36
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
under all of the Company's stock option plans at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- --------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$1.15-$1.65 513,074 3.86 $1.25 379,196 $1.26
$4.50-$6.38 629,986 3.27 $5.23 487,788 $5.02
$7.13-$9.88 381,000 7.84 $8.14 181,875 $8.15
--------- ---------
1,524,060 1,048,859
========= =========
</TABLE>
The weighted average fair value of options granted during 1996 and 1997
under the 1995 Stock Option Plan were $7.35 and $6.24, respectively.
1995 EMPLOYEE STOCK PURCHASE PLAN
In 1995, the Company implemented the 1995 Employee Stock Purchase Plan
(1995 Stock Purchase Plan). Under the 1995 Stock Purchase Plan, eligible
employees will have the opportunity to purchase up to an aggregate of
200,000 shares of common stock. Shares of common stock purchased under the
1995 Stock Purchase Plan will be paid for by payroll deductions. Each
participant will be deemed to be granted purchase rights to acquire the
whole number of shares of common stock that can be purchased with
accumulated payroll deductions at an amount equal to 85% (or such higher
amount as the Board of Directors may establish) of the fair market value of
the common stock as of the offering commencement date (January 1, April 1,
July 1 or October 1) or the offering termination date, whichever is less.
Under the 1995 Stock Purchase Plan the Company sold 1,991 shares to
employees during 1996 and 10,350 during 1997 at 95% of the fair market
value as of the offering commencement date. The 1995 Stock Purchase Plan is
intended to be an "employee stock purchase plan" under section 423 of the
Internal Revenue Code and noncompensatory under SFAS 123.
11. MAJOR CUSTOMERS
For the years ended December 31, 1995, 1996, and 1997, clients who
individually accounted for 10% or more of the Company's revenue were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Client A............................ $2,769,000 $ * $ 7,808,000
Client B............................ 9,060,000 12,340,000 12,370,000
Client C............................ 3,787,000 3,340,000 *
Client D............................ 3,706,000 2,937,000 3,401,000
</TABLE>
- ---------
* Less than 10%
Receivables from these clients were $3,984,468, $2,368,735 and $4,489,345
at December 31, 1995, 1996 and 1997, respectively.
12. RELATED PARTIES
The Company provides software services to four companies (Ford Motor
Company, Digital Equipment Corporation, Texas Instruments Incorporated, and
U S WEST Inc.) which have been significant stockholders of the Company; one
of these companies has a representative on the Company's Board of
Directors. Revenue from software services from these companies is reported
as from related parties. U S WEST Inc. and Ford Motor Company are major
customers (Note 10).
35
<PAGE> 37
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and Carnegie Mellon University, through its Center for Machine
Translation, were 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 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 and to access Center personnel,
computational resources and technical information. The term of each of the
License Agreement and the Subcontract Agreement expired on December 31,
1997. Pursuant to the Subcontract Agreement, the Company engaged 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 agreement
were $1,996,987, $1,904,473 and $444,385 for the years ended December 31,
1995, 1996 and 1997, respectively. Total payables at December 31, 1995,
1996 and 1997 under these agreements amounted to $967,673, $959,608,and
$182,145 respectively.
13. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109, which
requires an asset and liability approach in accounting for income taxes.
The Company and its subsidiaries file a consolidated federal income tax
return. The income tax (benefit)/provision consists of the following for
the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................ $ 54,659 $ 333,897 $ (70,552)
State.................................. 106,776 28,227 --
----------- ---------- ----------
161,435 362,124 (70,552)
----------- ---------- ----------
Deferred:
Federal................................ (1,891,057) (829,309) 182,197
State.................................. (97,304) 34,972 (39,278)
----------- ---------- ----------
(1,988,361) (794,337) 142,919
----------- ---------- ----------
Net income tax (benefit) provision....... $(1,826,926) $ (432,213) $ 72,367
=========== ========== ==========
</TABLE>
The income tax expense differs from the amount computed by applying the
statutory rate of 34 percent to income (loss) before taxes as shown in the
following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision (benefit),
at statutory rate...................... $ 968,695 $1,002,875 $ 61,866
Effect of valuation allowance
adjustments............................ (2,936,159) (1,779,675) --
Prior year adjustments and other......... 26,906 302,876 36,424
State income tax, net of federal
benefit................................ 113,632 41,711 (25,923)
----------- ---------- ----------
Net income tax (benefit) provision....... $(1,826,926) $ (432,213) $ 72,367
=========== ========== ==========
</TABLE>
36
<PAGE> 38
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities consist of the following as of December
31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses................... $ 3,728,724 $2,838,951 $3,036,699
Tax credit carryforwards............... 644,299 693,585 690,724
Executive compensation................. 375,575 378,773 --
Expense accruals....................... 294,548 338,725 491,695
Prior years write-off of investments in
affiliates.......................... 252,833 254,991 256,707
Depreciation........................... 107,789 61,014 68,397
Deferred revenue....................... 48,751 50,106 46,675
----------- ---------- ----------
Total deferred tax assets.............. 5,452,519 4,616,145 4,590,897
Less--Valuation allowance........... (2,351,116) (571,441) (571,441)
----------- ---------- ----------
Net deferred tax assets................ $ 3,101,403 $4,044,704 $4,019,456
=========== ========== ==========
Deferred tax liabilities:
Capital leases......................... $ 94,139 $ 77,953 $ 97,576
Expense accrual........................ -- -- --
Other.................................. 5,411 11,845 5,265
----------- ---------- ----------
Total deferred tax liabilities......... $ 99,550 $ 89,798 $ 102,841
=========== ========== ==========
</TABLE>
Income tax benefits of $196,863 and $104,625 associated with the exercise
of employee stock options were credited to equity in 1996 and 1997,
respectively.
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. The ultimate realization of the deferred
income tax asset depends on the Company's ability to generate sufficient
taxable income in the future. The Company weighed the positive evidence of
profitability over the last four years and future income expectations
against the negative evidence of dependence upon a limited number of
customers and other uncertainties and concluded that retaining a valuation
allowance related to net operating losses was not necessary at December 31,
1996 and continues to be unnecessary at December 31, 1997. The remaining
valuation allowance at December 31, 1996 and 1997 relates to general
business credits which expire sooner than net operating loss carryforwards
and realization is limited to years not subject to the alternative minimum
tax.
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. In the event the estimated
results are not achieved, an adjustment to the recorded deferred tax asset
could result and such adjustment could be material.
The changes in the valuation allowance at December 31, 1995 and 1996
resulted primarily from current year utilization of net operating loss
carryforwards in excess of amounts estimated at the respective preceding
year ends together with changes in the Company's estimate of the portion of
the deferred tax asset more likely than not to be realized in the future in
light of the factors described above.
37
<PAGE> 39
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the net operating loss carryforwards for federal tax
purposes available to offset future income are as follows:
<TABLE>
<CAPTION>
YEAR FEDERAL YEAR OF
ORIGINATED AMOUNT EXPIRATION
- ---------- ------ ----------
<S> <C> <C>
1986................................................... 35,000 2001
1987................................................... 1,124,900 2002
1988................................................... 2,463,600 2003
1989................................................... 2,898,300 2004
1992................................................... 423,800 2007
1993................................................... 1,329,200 2008
1997................................................... 363,100 2012
----------
$8,637,900
</TABLE>
Additionally, at December 31, 1997, the Company has net operating loss
carryforwards for Pennsylvania income tax purposes of $1,513,800 available
to offset taxable income in the years 1998 through 2000.
At December 31, 1997, Carnegie Group had investment, research and minimum
tax credit carryforwards available totaling $96,162, $475,279 and $119,283,
respectively. Investment credit carryforwards have been reduced 35 percent
under the provisions of the Tax Reform Act of 1986. The investment tax
credit carryforwards expire by the year 2000, the research tax credit
carryforward expires by the year 2003 and the minimum tax credit has an
indefinite carryforward.
If certain substantial changes in the Company's ownership were to occur,
there would be an annual limitation on the amount of carryforwards that
could be utilized for federal income tax purposes.
14. ACQUISITION OF ADVANTAGE kbs, INC.
On March 19, 1998, Carnegie Group acquired all of the outstanding stock of
Advantage kbs, Inc. (Advantage) for a purchase price of $5 million cash,
plus an additional contingent payment of up to $2.5 million, which is
dependent on revenue and earnings of Advantage for the year ending December
31, 1998. Advantage provides problem resolution software and professional
services for automating customer support. The transaction will be accounted
for as a purchase.
Supplemental Pro Forma Results of Operations (Unaudited)--Supplemental pro
forma results of operations for the acquisition of Advantage have not been
presented as the relative fair values of the net assets acquired have not
yet been determined. Carnegie Group anticipates it will write off a
significant portion of the purchase price as "in-process research and
development" in the first quarter of 1998.
15. CURRENT ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. The Company is required
to adopt the provisions of SFAS No. 130 beginning with its consolidated
financial statements for the three months ended March 31, 1998. SFAS No.
131 requires certain disclosures about segment information in interim and
annual financial statements and related information about products and
services, geographic areas and major customers. The Company must adopt the
provisions of SFAS No. 131 for its consolidated financial statements for
the year ending December 31, 1998. The adoptions of SFAS Nos. 130 and 131
are not expected to have a material effect on the Company's financial
position, results of operations or cash flows.
38
<PAGE> 40
CARNEGIE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
($ IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
1997:
Revenue............................... $7,132 $7,858 $7,944 $6,472 $29,406
Revenue less cost of revenue.......... 2,713 3,147 2,966 1,494 10,320
Income (loss) from operations......... 478 693 352 (2,071) (548)
Net income (loss)..................... 388 522 322 (1,122) 110
Basic earnings (loss) per common
share.............................. 0.06 0.08 0.05 (0.17) 0.02
Diluted earnings (loss) per common
share................................. 0.06 0.08 0.05 (0.17) 0.02
1996:
Revenue............................... $8,323 $6,664 $6,509 $6,913 $28,409
Revenue less cost of revenue.......... 3,258 2,344 2,547 2,501 10,650
Income from operations................ 944 40 529 788 2,301
Net income............................ 683 121 410 2,146 3,360
Basic earnings per common share....... 0.11 0.02 0.07 0.34 0.54
Diluted earnings per common share..... 0.10 0.02 0.06 0.31 0.47
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
39
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference in response to this Item 10.
In addition to Messrs. Yablonsky and Manzetti, the principal occupations
and employments of whom are set forth under the caption "Executive Officers of
the Registrant" in Part I of this Annual Report on Form 10-K, the following
persons are directors of the Company:
Dr. Reddy is a co-founder of the Company and has served as a director since
the Company's inception. 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, Director and
Chairman of the Board of SEEC, Inc., and a member of the Technical Advisory
Board of Microsoft Corporation.
Dr. Carbonell is a co-founder of the Company and has served as a director
since the Company's inception. 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. Dr. Carbonell is Director, Wisdom
Technologies Corporation.
Mr. Chatfield has served as a director of the Company since 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.
Dr. Fox is a co-founder of the Company and has served as a director since
the Company's inception. 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.
Ms. Muesing has served as a director of the Company since August 1995. Ms.
Muesing has been Vice President of 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, Ms. Muesing was Vice President of
Transformation Systems for U S West Communications, Inc. from August 1994 to
September 1995, 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.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference in response to this Item 11.
40
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the subcaption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference to this Item 13.
41
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. The following consolidated financial statements of
the Company are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants........................... 22
Consolidated Balance Sheets at December 31, 1995, 1996 and
1997...................................................... 23
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 24
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X, or
the information that would otherwise be included in such schedules is contained
in the registrant's consolidated financial statements or accompanying notes.
3. EXHIBITS. The Exhibits listed below are filed or incorporated by
reference as part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.01 Restated Certificate of Incorporation of Carnegie Group,
Inc. (1)
3.02 Amended and Restated By-Laws of Carnegie Group, Inc. (1)
10.01 Carnegie Group, Inc. 1989 Stock Option Plan. (1)(2)
10.02 Carnegie Group, Inc. Long-Term Incentive Plan. (1)(2)
10.03 Carnegie Group, Inc. 1995 Stock Option Plan. (1)(2)
10.04 Carnegie Group, Inc. 1995 Employee Stock Purchase Plan.
(1)(2)
10.05 Employment Agreement, dated August 11, 1987, between
Carnegie Group, Inc. and Dennis Yablonsky. (1)(2)
10.06 Signing Bonus Stock Option Agreement, dated August 11, 1987,
between Carnegie Group, Inc. and Dennis Yablonsky. (1)(2)
10.07(a) Severance Agreement, dated May 28, 1993, between Carnegie
Group, Inc. and Dennis Yablonsky. (1)(2)
10.07(b) Severance Agreement, dated May 28, 1993, between Carnegie
Group, Inc. and Bruce D. Russell. (1)(2)
10.07(c) Severance Agreement, dated May 17, 1993, between Carnegie
Group, Inc. and John W. Manzetti. (1)(2)
10.08(a) General License Agreement, dated December 17, 1992, among U
S WEST Advanced Technologies, Inc., U S WEST Communications,
Inc. and Carnegie Group, Inc. (1)
10.08(b) Development Agreement, dated as of January 2, 1996. (3)
10.08(c) Development Agreement, dated as of March 1, 1996. (3)
10.08(d) Development Agreement, dated as of July 1, 1996. (4)
10.08(e) Development Agreement, dated as of October 15, 1996
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.08(g) Development Agreement, dated as of January 24, 1997, by and
between U S West Advanced Technologies, Inc., U S West
Communications, Inc., and Carnegie Group, Inc. (5)
10.08(h) Development Agreement, dated April 28, 1997, by and between
an affiliate of U S West Communications Group, Inc., and
Carnegie Group, Inc. (6)
10.08(i) Letter Agreement, dated May 20, 1997, to amend Development
Agreement, dated as of January 24, 1997, as previously
amended by Letter Agreement, dated March 6, 1997, by and
between U S West Business Resources, Inc., as agent for U S
West Advanced Technologies, Inc., U S West Communications,
Inc., and Carnegie Group, Inc. (6)
10.08(j) Letter Agreement, dated as of March 25, 1997, by and between
U S West Business Resources, Inc., as agent for U S West
Advanced Technologies, Inc., U S West Communications, Inc.,
and Carnegie Group, Inc. (6)
10.08(k) Letter Agreement, dated as of March 6, 1997, by and between
U S West Business Resources, Inc., as agent for U S West
Advanced Technologies, Inc., U S West Communications, Inc.,
and Carnegie Group, Inc. (6)
10.08(l) Agreement No. 9700050785, effective as of July 1, 1997,
between US West Business Resources, Inc., as agent for
various U S West Companies, and Carnegie Group, Inc. (7)
10.08(m) Schedule Number 230397, effective as of July 21, 1997, to
Agreement No. 9700050785, effective as of July 1, 1997,
between U S West Business Resources, Inc., as agent for
various U S West Companies, and Carnegie Group, Inc. (7)
10.08(n) Schedule Number 230597, effective as of August 18, 1997, to
Agreement No. 9700050785, effective as of July 1, 1997,
between U S West Business Resources, Inc., as agent for
various U S West Companies, and Carnegie Group, Inc. (7)
10.08(o) Schedule Number "35-002-97"/Agreement No. 9700050785,
effective September 2, 1997, issued pursuant to the General
terms and Conditions of Agreement No. 9700050785 dated June
30, 1997 between U S West and Carnegie Group, Inc.
(confidential treatment with respect to certain information
contained in this exhibit has been requested of the
Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended)
10.08(p) Schedule No. 230997 effective August 11, 1997 pursuant to
the General Terms and Conditions of Agreement No. 9700050785
dated June 30, 1997 between U S West and Carnegie Group,
Inc. (confidential treatment with respect to certain
information contained in this exhibit has been requested of
the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934 as amended)
10.08(q) Schedule No. "14-001-07 effective September 29, 1997, issued
pursuant to the General Terms and Conditions of Agreement
No. 9700050785 dated June 30, 1997 between U S West and
Carnegie Group, Inc. (confidential treatment with respect to
certain information contained in this exhibit has been
requested of the Securities and Exchange Commission pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended)
10.08(r) Letter Agreement dated October 1, 1997 to Amend Development
Agreement No. 35-001-97 (Amendment No. 35-001-97-B)
(confidential treatment with respect to certain information
contained in this exhibit has been requested of the
Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended)
10.08(s) Letter Agreement dated October 30, 1997 to Amend Development
Agreement No. 37-001-97 (Amendment No. 37-001-97-C)
(confidential treatment with respect to certain information
contained in this exhibit has been requested of the
Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended)
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.08(t) Schedule Number "X34-001-97" effective October 10, 1997
issued pursuant to the General terms and Conditions of
Agreement No. 9700050785 dated June 30, 1997 between U S
West and Carnegie Group, Inc. (confidential treatment with
respect to certain information contained in this exhibit has
been requested of the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended)
10.08(u) Schedule No. "23-07-97" effective November 17, 1997 pursuant
to the General Terms and Conditions of Agreement No.
9700050785 dated June 30, 1997 between U S West and Carnegie
Group, Inc. (confidential treatment with respect to certain
information contained in this exhibit has been requested of
the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended)
10.08(v) Schedule No. "23-09-97" effective November 21, 1997 pursuant
to the General Terms and Conditions of Agreement No.
9700050785 dated June 30, 1997 between U S West and Carnegie
Group, Inc. (confidential treatment with respect to certain
information contained in this exhibit has been requested of
the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended)
10.08(w) Letter Agreement dated December 1, 1997 with respect to
Schedule No. "230397"/ Agreement No. 9700050785
(confidential treatment with respect to certain information
contained in this exhibit has been requested of the
Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended)
10.09 CCA Marketing Agreement, dated January 19, 1995, between U S
WEST Communications, Inc. and Carnegie Group, Inc. (1)
10.10(a) Lease, dated December 12, 1986, between Glass Plaza
Associates and Carnegie Group, Inc. (1)
10.10(b) Amendment, dated as of September 2, 1987. (1)
10.10(c) Amendment, dated as of December 15, 1987. (1)
10.10(d) Amendment, dated as of February 4, 1991. (1)
10.10(e) Amendment, dated as of October 1, 1991. (1)
10.10(f) Amendment, dated as of November 23, 1993. (1)
10.10(g) Amendment, dated as of March 14, 1995. (1)
10.10(h) Lease, dated as of October 18, 1995, between Glass Plaza
Associates and Carnegie Group, Inc. (8)
10.11(a) Loan Agreement, dated as of September 11, 1997, between
Dennis Yablonsky and Carnegie Group, Inc. (2)(7)
10.11(b) Loan Agreement, dated as of September 11, 1997, between John
Manzetti and Carnegie Group, Inc. (2)
21.01 Subsidiaries of the Registrant
23.01 Consent of Price Waterhouse LLP
27 Financial Data Schedule
</TABLE>
- ---------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1, File No. 33-97118.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1996 as amended.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1996, as amended.
44
<PAGE> 46
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A
for the fiscal quarter ended March 31, 1997
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A
for the fiscal quarter ended June 30, 1997.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A
for the fiscal quarter ended September 30, 1997.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(b) Reports on Form 8-K:
The Company did not file any Reports on Form 8-K during the year ended
December 31, 1997.
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CARNEGIE GROUP, INC.
March 27, 1996
By: /s/ DENNIS YABLONSKY
------------------------------------
Dennis Yablonsky
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ DENNIS YABLONSKY President and Chief Executive Officer March 27, 1997
- ------------------------------------ (Principal Executive Officer) and
Dennis Yablonsky Director
/s/ JOHN W. MANZETTI Executive Vice President and March 27, 1997
- ------------------------------------ Chief Financial Officer
John W. Manzetti (Principle Financial and Accounting
Officer) and Director
/s/ RAJ REDDY Chairman of the Board and Director March 27, 1997
- ------------------------------------
Raj Reddy
/s/ JAIME G. CARBONELL Director March 27, 1997
- ------------------------------------
Jaime G. Carbonell
/s/ GLEN F. CHATFIELD Director March 27, 1997
- ------------------------------------
Glen F. Chatfield
/s/ MARK S. FOX Director March 27, 1997
- ------------------------------------
Mark S. Fox
/s/ TRACIE A. MUESING Director March 27, 1997
- ------------------------------------
Tracie A. Muesing
</TABLE>
46
<PAGE> 1
EXHIBIT 10.08(o)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
LONG DISTANCE GUI
SCHEDULE NUMBER "35-002-97"/AGREEMENT NO. 9700050785
U S WEST
LONG DISTANCE-GUI
(USWLD-GUI)
This Schedule Number "35-002-97", effective September 2, 1997, issued pursuant
to the General Terms and Conditions of Agreement No. 9700050785 dated June 30,
1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") and is made a part thereto.
For purposes of this Schedule 35-002-97 only, the Customer is U S WEST Long
Distance, Inc., an Affiliate of U S WEST Communications Group, Inc.
The U S WEST Long Distance GUI Proposal from Carnegie Group, Inc. to U S WEST
Long Distance dated October 8, 1997 (the "Long Distance GUI Proposal") shall be
included in its entirety as part of this Schedule 35-002-97. This Schedule
contains the following sections which may reference specific portions of the
Proposal.
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
I. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST in support of U S WEST LONG DISTANCE GUI. The work to
be provided by CGI represents a new effort between the parties.
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 35-002-97 Carnegie Group, Inc. and U S West 10/23/97
Proprietary and Confidential Page 1
</TABLE>
<PAGE> 3
LONG DISTANCE GUI
1.2 OVERVIEW
Reference the Executive Summary and Articles 1 through 2 of the Long Distance
GUI Proposal in their entirety for a complete project overview description of
the project.
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following exceptions and definitions apply to this Schedule:
o Special Rampdown provisions: Notwithstanding subsection 21.2 of the
Agreement, Customer shall be responsible for continued funding of the
current CGI project resources at the time of termination for a period
of two (2) weeks.
o Services Warranty terms: CGI will warrant the final Purchases for a
period of ninety (90) days from final Acceptance in accordance with the
terms of section 5 of the Agreement.
o Management of project resources:
The CGI project manager assigned to this U S WEST LONG
DISTANCE GUI has exclusive control of and over the CGI
resources on the project, including but not limited to
responsibility for staff assignment, project team makeup, and
transition of CGI resources either onto or from a project. U S
WEST may request the CGI project manager to make changes
relating to the CGI resources. CGI will respond with consent
or an objection to consent and reasons why consent will be
withheld; consent will not be unreasonably withheld.
The CGI project manager and the U S WEST project manager have
the authority to mutually agree on the location, either at a U
S WEST site or CGI site, where each CGI resource may work
during the project, including an associated period of time,
based on not compromising the schedule and deliverables set
forth in this Schedule.
o Review of the Schedule
The parties agree that the U S WEST team leader, the U S WEST
project manager and the CGI project manager will meet within
the first week after the date this Schedule is signed to
review the details of this Schedule, including but not limited
to the Exceptions to the Agreement provided above ("Review").
The Review will occur more than once should a new U S WEST
team leader, U S WEST project manager or CGI project manager
be assigned by U S WEST or CGI respectively to the U S WEST
LONG DISTANCE GUI after the initial Review, unless as
otherwise mutually agreed by the parties.
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1.4 ROLES AND RESPONSIBILITIES
Reference Article 6 in its entirety of the Long Distance GUI Proposal for CGI, U
S WEST and Joint CGI and U S WEST Roles and Responsibilities for the project.
1.5 SCOPE
Reference Article 3 in its entirety of the Long Distance GUI Proposal for the
scope of the project.
1.6 DELIVERABLES
The following USWLD-GUI deliverables will be provided by CGI to U S
WEST:
o SOFTWARE PROJECT MANAGEMENT PLAN (SPMP): The SPMP provides a
project management guide for successful execution of the
USWLD-GUI project. It documents such elements as project
goals, points of contact, schedule, resources, risks,
constraints, and assumptions. The SPMP ensures that all
project elements are considered initially and managed to
successful completion.
o USER REQUIREMENTS SPECIFICATION: This document defines the set
of requirements specified by the USWLD client representatives
for functional purposes and channel groups for usability
purposes.
o SYSTEM ARCHITECTURE SPECIFICATION: This document describes the
overall system architecture, which describes modular
composition, high-level interfaces, hardware platform, and
software platform.
o FUNCTIONAL SPECIFICATION: This document describes the
functions and operations that the LD GUI must perform, as
determined and defined by Carnegie Group and U S WEST . It
describes the characteristics of the application as end users
would experience the application, and provides preliminary
high-level technical information for application developers.
o DESIGN SPECIFICATION: This document contains a detailed
description of each USWLD- GUI application module and their
respective interfaces.
O SOURCE CODE: U S WEST will receive a software release at the
beginning of NT testing and another at the end of NT testing,
after any issues noted during NT testing have been addressed.
o The BUSINESS SERVICE MODULE: contains the business rules
defined by U S WEST for inclusion in the USWLD-GUI
application. The business services content will be reviewed by
USWLD prior to its formal acceptance, following procedures
specified in
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LONG DISTANCE GUI
the SPMP. (Note: the Business Services Module may be
implemented as part of the TFS database.)
o TFS DATABASE: The TFS database contains the data used by the
business processing layer of the LD GUI.
o STATUS REPORTS: CGI will provide monthly written status
reports that describe project status, progress, issues, and
plans. Carnegie Group's project manager and other personnel as
appropriate will provide more frequent regular status updates
via phone or face-to-face conversation.
o ADMINISTRATOR'S GUIDE: A manual for System Administrators,
describing the installation, set-up, and maintenance of the
system.
o CONSULTING ON TRAINING MATERIALS: Carnegie Group will work
with U S WEST market units to determine the type and content
of user training that should be provided. This proposal
assumes approximately three person weeks of CGI time will be
used for consulting on the content and organization of
training materials. We assume that the training materials will
be produced by US WEST.
1.7 SUMMARY
This Schedule covers efforts to be performed from September 2, 1997 through May
31, 1998. See Section 2.1 for a more detailed schedule.
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LONG DISTANCE GUI
2. SCHEDULE, STATEMENT OF WORK, AND DELIVERABLES
2.1 TASKS AND SCHEDULE
Reference Section 4 in its entirety of the Long Distance GUI Proposal for the
Statement of Work and Schedule to address this section of this Schedule No.
35-002-97.
2.2 ASSUMPTIONS AND RISKS
The project description, schedules, and deliverables were developed based on the
assumptions provided in Sections 6.1 and 6.2 of the Long Distance GUI Proposal.
If these assumptions are not valid, changes to the schedule, deliverables, and
cost of the LD GUI project may be required.
Both parties agree that there are specific risks associated with this effort, as
provided in Section 6.2 of the Long Distance GUI Proposal.
2.2.1 SCOPE ASSUMPTIONS
The scope of LD GUI is as described in Section 2 of the Long Distance GUI
Proposal.
2.2.2 PERSONNEL AND LOGISTICS ASSUMPTIONS
Reference Section 6.1.2 of the Long Distance GUI Proposal.
2.2.3 HARDWARE AND SOFTWARE ASSUMPTIONS
Reference Section 6.1.3 of the Long Distance GUI Proposal.
2.2.4 SCHEDULE ASSUMPTIONS
Reference Section 6.1.4 of the Long Distance GUI Proposal.
2.2.5 PROCESS ASSUMPTIONS
Reference Section 6.1.5 of the Long Distance GUI Proposal.
2.2.6 RISKS
Reference Section 6.2 of the Long Distance GUI Proposal.
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2.3 DELIVERABLES
See Section 1.6 of this Schedule for a description of the LD-GUI deliverables.
A copy of each deliverable will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within ten (10) business days
after delivery, then the Deliverables shall be deemed accepted.
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LONG DISTANCE GUI
3. PROJECTED COST
The total cost of the work net of discounts shall not exceed [ ] based on
estimated time and material expenses. Should travel be required, U S WEST agrees
to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort.
Estimated costs with applicable discounts for the project are provided below:
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ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT AND [ ]
[ ] PROJECT VOLUME DISCOUNT [ ]
- ------------------------------------------------------ ------------------------------------------------------
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
ESTIMATED HOURS ARE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED CARNEGIE GROUP HOURS
- ------------------------------------------------------ ------------------------------------------------------
MANAGER(S) [ ]
PRINCIPAL ENGINEER [ ]
ENGINEER(S) [ ]
TECHNICAL WRITER(S) [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS [ ]
- --------------------------------------------------------------------------------------------------------------
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LONG DISTANCE GUI
IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST LONG DISTANCE
MARK HERNANDEZ
SENIOR DIRECTOR - SYSTEMS
BY: /s/ BRUCE RUSSELL BY: /s/ MARK HERNANDEZ
------------------------- -------------------------
NAME: Bruce Russell NAME: Mark Hernandez
----------------------- -----------------------
(printed) (printed)
TITLE: EVP/COO DATE: 10/30/97
---------------------- -----------------------
DATE: 11/4/97
-----------------------
U S WEST BRI LONG DISTANCE
KEVIN PHELPS
DIRECTOR - FINANCE
BY: /s/ KEVIN PHELPS
-------------------------
NAME: Kevin Phelps
-----------------------
(printed)
DATE: 10/30/97
-----------------------
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EXHIBIT 10.08(p)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
PROJECT TITLE: Product Modeling FINAL VERSION
SCHEDULE NUMBER "230697"/(AGREEMENT NO. 9700050785)
PRODUCT MODELING
This Schedule Number "230697", effective August 11, 1997 issued pursuant to the
General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997
between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") is made a part thereto.
This Schedule contains the following sections:
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST EAC in support of PRODUCT MODELING. The work to be
provided by CGI represents a new effort between the parties.
1.2 OVERVIEW
U S WEST products are an important architectural element of service delivery now
and in the future. [ ] The initial
focus of this effort will be on modeling product from the customer contact and
consumer viewpoint. CGI will supply a single resource to this project. The CGI
resource will be a team member providing a set of skills to a group effort. A
result of this approach will be a jointly developed set of documents under the
leadership and management of U S WEST.
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PROJECT TITLE: Product Modeling FINAL VERSION
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following definitions apply to this Schedule:
1. Review of the Schedule
a) The parties agree that the U S WEST team leader, the
U S WEST project manager and the CGI resource will
meet within the first week after the effective date
of this Schedule to review the details of this
Schedule.
b) The Review will occur more than once should a new U S
WEST team leader, U S WEST project manager or CGI
resource be assigned by U S WEST or CGI respectfully
to the PRODUCT MODELING effort after the initial
Review, unless as otherwise mutually agreed by the
parties.
1.4 CGI ROLES AND RESPONSIBILITIES
The following activities are to be performed by CGI:
1. Research
[ ]
3. Documentation
The following task(s) (including details involved in the activities provided
above) are to be performed by CGI:
1. The CGI resource will work within the U S WEST research team as
dependent and independent member. The research will be guided by and
direction provided by U S WEST. The area of research will be focused on
modeling U S WEST products from a customer point of view.
[ ]
3. Documentation of work and assigned tasks. Where during the project the
CGI resource is assigned tasks that require a final document and/or a
component/section(s) of a final document the CGI resource will produce
that document or component/section(s).
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PROJECT TITLE: Product Modeling FINAL VERSION
1.5 U S WEST ROLES AND RESPONSIBILITIES
The following activities are to be provided by U S WEST:
1. Scope definition
2. Research
3. Documentation
1.6 JOINT CGI AND U S WEST ROLES AND RESPONSIBILITIES
CGI and U S WEST are jointly responsible for the following activities:
1. Research
2. Requirements Development
3. Design
[ ]
1.7 SCOPE
This is a U S WEST lead project supported by a single CGI resource. The scope of
this phase of the project is to define requirements, publish draft models and
specifications to support multiple applications use of product knowledge. The
CGI resource is a contributor to the overall effort through October of 1997.
1.8 DELIVERABLES
[ ] Actual deliverables will be determined during this phase of the
project. In addition to the research and design the CGI resource will also be
required to document their work.
1.9 SUMMARY
This Schedule covers efforts to be performed from August 11, 1997 through
October 31, 1997.
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PROJECT TITLE: Product Modeling FINAL VERSION
2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES
2.1 TASKS, SCHEDULE, AND DELIVERABLES
The following table summarizes the tasks, schedule and deliverables included in
this Schedule.
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Research, Design U S WEST and To be
and CGI 8/11/97 10/31/1997 determined
Documentation during the early
phases of the
project. Both U S
WEST and CGI resources
will produce the
requisite documents
as determined in
the early phases
of the project.
- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
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2.2 ASSUMPTIONS
The above tasks, schedules and deliverables were developed based on the
following assumptions.
1. The schedule is based on a project start date of August 11,
1997. Delays in this start date may impact the delivery date
of one or more Deliverables.
2. The work estimates are based on CGI Methodology and
past experience. CGI will continuously monitor the
status and notify U S WEST of any issues or risk
situations which may impact the delivery date.
3. CGI has timely access to U S WEST personnel (i.e. SMEs).
4. U S WEST to provide a sponsor and project manager to act as
the liaison between the U S WEST project team and the CGI
resource.
5. Weekly status reports and meetings to be held between the U S
WEST project manager and the CGI project manager to measure
progress against the workplan. Any known issues and risks are
also discussed and raised to the next level if not resolved.
6. U S WEST to provide facilities, computer equipment, software,
etc., as requested by CGI.
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PROJECT TITLE: Product Modeling FINAL VERSION
7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact
the delivery date of one or more Deliverables.
8. Change requests to be submitted using the CGI change process
for analysis to provide estimates, costs, and impact on
current deliverables. Signed approval in compliance with RPP
1001 is required before implementation of any change requests.
2.3 DELIVERABLES
Deliverables will be determined during the early phases of the project and will
be completed jointly between U S WEST and CGI. [ ]
A copy of the deliverables will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within five (5) business days
after delivery, then the Deliverables shall be deemed accepted.
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PROJECT TITLE: Product Modeling FINAL VERSION
3. PROJECTED COST
The total cost of the work net of discounts shall not exceed [ ] based on
estimated time and material expenses. Should travel be required, U S WEST agrees
to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort.
Estimated costs with applicable discounts for the project are provided below:
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ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT AND ANY [ ]
PROJECT VOLUME DISCOUNT
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES None
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH None
EXPENSES
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
Estimated hours are as follows:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED HOURS
- ------------------------------------------------------ ------------------------------------------------------
Manager(s)
Business Consultant(s)
Engineer(s) [ ]
Technical Writer(s)
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS [ ]
- --------------------------------------------------------------------------------------------------------------
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IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST
BY: /S/ BRUCE RUSSELL BY: /S/ M.G.
-------------------------- -------------------------
NAME: BRUCE RUSSELL NAME: MOTTI GOLDBERG
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TITLE: EVP TITLE: DIRECTOR
----------------------- ----------------------
DATE: 11/20/97 DATE: 11/10/97
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EXHIBIT 10.08(q)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
CTAS Enhancements
SCHEDULE NUMBER "14-001-97"/AGREEMENT NO. 9700050785
U S WEST
CUSTOMER TERMINAL ACCESS SYSTEM (CTAS) ENHANCEMENTS
(CTAS ENHANCEMENTS PROJECT)
This Schedule Number "14-001-97", effective September 29, 1997, issued pursuant
to the General Terms and Conditions of Agreement No. 9700050785 dated June 30,
1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") and is made a part thereto.
The U S WEST Customer Terminal Access System (CTAS) Enhancements Proposal from
Carnegie Group, Inc. to U S WEST dated September 1997 (the "CTAS Proposal")
shall be included in its entirety as a part of this Schedule 14-001-97. This
Schedule contains the following sections which may reference specific portions
of the Proposal.
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST in support of the CUSTOMER TERMINAL ACCESS SYSTEM
(CTAS) ENHANCEMENTS PROJECT. The work to be provided by CGI represents a new
effort between the parties.
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CTAS Enhancements
1.2 OVERVIEW
Reference the Executive Summary and sections 1.1 through 1.3 of the CTAS
Proposal in its entirety for a complete project overview description of the
project.
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following exceptions and definitions apply to this Schedule:
o Special Rampdown provisions: Notwithstanding subsection 21.2 of the
Agreement, Customer shall be responsible for continued funding of the
current CGI project resources at the time of termination for a period
of two (2) weeks.
o Services Warranty terms: CGI will warrant the final Purchases (CTAS
ENHANCEMENTS) for a period of ninety (90) days from final Acceptance in
accordance with the terms of section 5 of the Agreement. This warranty
does not include correction of Errors in the CTAS software code which
are traceable to any portion of such code other than the CTAS
ENHANCEMENTS.
o Acceptance terms: U S WEST shall test the CTAS software delivered
hereunder according to the Acceptance Test(s) to be mutually agreed to
by the parties and provided hereunder.
The CGI project manager assigned to this CTAS ENHANCEMENTS PROJECT has
exclusive control of and over the CGI resources on the project,
including but not limited to responsibility for staff assignment,
project team makeup, and transition of CGI resources either onto or
from a project. U S WEST may request the CGI project manager to make
changes relating to the CGI resources. CGI will respond with consent or
an objection to consent and reasons why consent will be withheld;
consent will not be unreasonably withheld.
The CGI project manager and the U S WEST project manager have the
authority to mutually agree on the location, either at a U S WEST site
or CGI site, where each CGI resource may work during the project,
including an associated period of time, based on not compromising the
schedule and deliverables set forth in this Schedule.
o Review of the Schedule
The parties agree that the U S WEST team leader, the U S WEST project
manager and the CGI project manager will meet within the first week
after the effective date of this Schedule to review the details of this
Schedule, including but not limited to the Exceptions to the Agreement
provided above ("Review").
The Review will occur more than once should a new U S WEST team leader,
U S WEST project manager or CGI project manager be assigned by U S WEST
or CGI respectively
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CTAS Enhancements
to the CTAS ENHANCEMENT PROJECT after the initial Review, unless as
otherwise mutually agreed by the parties.
1.4 ROLES AND RESPONSIBILITIES
Reference section 2.2 in its entirety of the CTAS Proposal for CGI, U S WEST and
Joint CGI and U S WEST Roles and Responsibilities for the project.
1.5 SCOPE
Reference sections 1.3 through 1.5 of the CTAS Proposal in their entirety for
the scope of the project.
1.6 DELIVERABLES
The following CTAS ENHANCEMENTS deliverables will be provided by CGI to U S
WEST:
o Software Project Management Plan (SPMP): The SPMP provides a project
management guide for successful execution of the CTAS ENHANCEMENTS
project. It documents such elements as project goals, points of
contact, schedule, resources, acceptance criteria, risks, constraints,
and assumptions. The SPMP ensures that all project elements are
considered initially and managed to successful completion.
o Client and User Requirements Document: This document defines the set of
requirements specified by the CTAS ENHANCEMENTS client representatives
for functional purposes and channel groups for usability purposes.
o Architecture Document: This document describes the overall system
architecture, which describes modular composition, high-level
interfaces, hardware platform, and software platform.
o Design Document: This document contains a detailed description of each
CTAS ENHANCEMENTS application module and their respective interfaces.
o User Guide: This document contains detailed instructions of actions
required by Inter- exchange carriers to effectively utilize all system
functions.
o Source Code: Multiple releases of the CTAS ENHANCEMENTS source code
will be provided to U S WEST. Releases include the initial development
release, integration- tested software, system-tested software, and
final production software.
o Status Reports: Weekly (or as determined appropriate) status reports
will be developed by CGI which describes project status, progress,
issues, and plans.
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CTAS Enhancements
o Administrators Guide: providing instructions for System Administrators
describing the installation, set-up, and maintenance of the system.
o Training Materials: We will work with U S WEST market units to
determine what training materials, if any, need to be provided.
o Additionally, User Cases, User Requirements, Design Notes, and Test
Plans will be developed.
1.7 SUMMARY
This CTAS Enhancements project covers efforts to be performed over an estimated
three (3) month duration.
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CTAS Enhancements
2. SCHEDULE, STATEMENT OF WORK, AND DELIVERABLES
2.1 TASKS AND SCHEDULE
Reference Article 2 at the very beginning under "General", including the
development tasks in 1 through 5, of the CTAS Proposal for a more detailed
schedule with development tasks by functional area.
2.2 ASSUMPTIONS AND RISKS
The project description, schedules, and deliverables were developed based on the
assumptions provided in Section 2.3 of the CTAS Proposal. If these assumptions
are not valid, changes to the schedule, deliverables, and cost of the CTAS
Enhancement project may be required.
Both parties agree that there are risks associated with this effort primarily
because the original CTAS software was developed by a different U S WEST
contractor (and not CGI). To minimize the risks, the parties have agreed to
fully define the scope prior to the start of this CTAS Enhancements Project.
2.3 DELIVERABLES
See Section 2.1 of the CTAS Proposal for a description of the deliverables.
A copy of each deliverable will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within ten (10) business days
after delivery, then the Deliverables shall be deemed accepted.
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 14-001-97 Carnegie Group, Inc. and U S West 10/13/97
Proprietary and Confidential Page 5
</TABLE>
<PAGE> 7
CTAS Enhancements
3. PROJECTED COST
The total cost of the work net of discounts shall not exceed [ ] based on
estimated time and material expenses. Should travel be required, U S WEST agrees
to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort.
Estimated costs with applicable discounts for the project are provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT [ ]
- ------------------------------------------------------ ------------------------------------------------------
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
ESTIMATED HOURS ARE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED CARNEGIE GROUP HOURS
- ------------------------------------------------------ ------------------------------------------------------
PROJECT MANAGER [ ]
ENGINEER(S) [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS [ ]
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 14-001-97 Carnegie Group, Inc. and U S West 10/13/97
Proprietary and Confidential Page 6
</TABLE>
<PAGE> 8
CTAS Enhancements
IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST
By: /s/ BRUCE RUSSELL By: /s/ LEE TANNER
------------------------ ------------------------
Name: Bruce Russell Name: Lee Tanner
---------------------- ----------------------
(printed) (printed)
Title: EVP/COO Title: Program Manager
--------------------- ---------------------
Date: 10/20/97 Date: 10/15/97
---------------------- ----------------------
U S WEST BRI
By: /s/ SHERYL SWAYZE
------------------------
Name: Sheryl Swayze
----------------------
(printed)
Title: Commodity Manager
---------------------
Date: 10/15/97
----------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 14-001-97 Carnegie Group, Inc. and U S West 10/13/97
Proprietary and Confidential Page 7
</TABLE>
<PAGE> 1
EXHIBIT 10.08(r)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
LETTER AGREEMENT TO AMEND
DEVELOPMENT AGREEMENT NO. 35-001-97 and AMENDMENT 35-001-97-A
- Call Handling - 1997 -
AMENDMENT NO. 35-001-97-B
This Letter Agreement dated October 1, 1997 is in regard to Development
Agreement No. 35-001-97 dated December 31, 1996 and the Amendment 35-001-97-A
thereto dated March 25, 1997 (collectively the "Development Agreement"), and
constitutes an amendment to portions of the Development Agreement and to one or
more of the Exhibits attached thereto, in accordance with Article 11 of the
Development Agreement.
At the request of U S WEST's Call Handling Project Manager, CGI will complement
and enhance the current Call Handling 1997 capabilities by providing additional
CGI resources in support of newly recognized project needs to be incorporated
into the ongoing project. The time period in which the additional CGI resources
will work is currently estimated to be October 1, 1997 through December 31,
1997.
Based on remaining funds and CGI resources previously estimated under the
Development Agreement, this Amendment estimates additional resources to be two
(2) Project Managers, six (6) Senior Engineer II's, two (2) Senior Engineer I's,
two (2) Requirements Analysts, one (1) Associate Engineer who are providing or
are estimated to provide Call Handling services in 1997.
CGI will continue to work under U S WEST direction and, based on currently known
requirements, has included within this Amendment additional capabilities to Call
Handling for which U S WEST has expressed interest in incorporating into future
Call Handling releases. CGI will work within the funding limitations to provide
such capabilities under this Amendment in 1997.
OVERALL ASSUMPTIONS:
It is not foreseen that all capabilities in this Amendment, as fully or
partially implemented, will be provided this year.
The delivery dates and inclusion of requirements in the Call Handling releases
resulting from any of the tasks below are dependent upon U S WEST defining the
scope of work in the Project Plans for going forward, the client setting
requirements priorities, project resources, and commitment dates of other CH
applications provided by U S WEST, CGI and/or third parties.
A detailed schedule for the Call Handling releases resulting from the tasks
below being implemented will be prepared by CGI upon delivery of the Functional
Specification and as requested by U S WEST.
35-001-97-B 1 November 10, 1997
<PAGE> 3
Upon delivery of each Project Plan corresponding to the Modules below, CGI will
continue to go forward with implementating the Project Plan within the funding
and schedule limitations herein, unless otherwise directed by U S WEST. The
additional resources provided in this Amendment will be applied to the tasks in
accordance with the Project Plans.
- --------------------------------------------------------------------------------
ADDITIONAL PROJECT TASKS/TASK CHANGES:
[
]
35-001-97-B 2 November 10, 1997
<PAGE> 4
STAFFING FOR GLOBAL CONDITIONS
(1) Project Manager (Tech Lead)
(4) SE II
(2) SE I
NEW DELIVERABLES
Requirements Document 9/30
Functional Specification 10/31
Project Plan 10/31
Due to major changes in the Activity-Based Routing requirements by U S WEST, the
delivery of the final Functional Specification has been delayed and the Global
Conditions Functional Specification and resulting release is intended to
incorporate the Activity-Based Routing tasks and deliverables.
ASSUMPTIONS/DEPENDENCIES: Due to the increased scope of Global Conditions
requirements coupled with other CH requirements that the client is requesting,
the Global Conditions
35-001-97-B 3 November 10, 1997
<PAGE> 5
scope of work needs to be defined in the Project Plan for going forward.
Additionally, the Global Conditions requirements will need to be prioritized, by
providing a cut off in project tasks if necessary, by the clients. An initial
Global Conditions release will not necessarily satisfy all the requirements
identified in the requirements document. A subsequent release may be required to
deploy all requirements.
SUPPORT FOR ONGOING ACTIVITIES
Because it is difficult and problematic to develop Call Handling capabilities in
parallel, project planning and coordination efforts are needed. To that end, CGI
provides overall management, architectural direction and support for ongoing
FES&R development. Specifically CGI provides release management, requirements
analysis and technical architecture direction for FES&R. There is an ever
changing list of deliverables here. If the parties were finished with release
planning we could include due dates for release plans, but this is not the case.
The technical architect is always evaluating new directions for FES&R, e.g.
evaluation of Long Distance requirements. Requirements work is planned for
Inbound Promotions, underway for Call Tracking and completed for Global
Conditions.
Note: The Requirements Analysts will also work on the Functional Specifications.
STAFFING
(1) Managers
(1) SE III as Technical Architect
(2) Requirements Analysts
DMS100 SCREEN POP (REFLECTS SCHEDULE CHANGE)
The scope of work for DMS100 Screen Pop is unchanged from the current
Development Agreement. However in accordance with U S WEST changes in project
priorities and under their direction, the deliverable schedule has changed
significantly, as below.
DELIVERABLES
The deliverable schedule in Exhibits 3 and 5 relating to Screen Pop - DMS is no
longer valid. Deliverables relating to Design, Construction, Integration Test,
System Test, User Acceptance, Product Integration, ORL, and Deployment Support
will be prepared by CGI after the Function Specification Update is delivered and
as requested by U S WEST.
35-001-97-B 4 November 10, 1997
<PAGE> 6
The new commitments for deliverables in Exhibit 3 under "SCREEN POP - DMS"
should be:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Feasibility Start 9/3/97 Finish 11/97
- ---------------------------------------------- ------------------------------- -------------------------------
Functional Specification Update Start 11/97 Finish 11/97
- ---------------------------------------------- ------------------------------- -------------------------------
Project Plan Finish 11/97
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
STAFFING FOR DMS100 SCREEN POP
(1) Project Manager
(2) SE II
(1) SE I (full time Oct. and 25% in Nov.-Dec. )
(1) Associate Engineer
INBOUND PROMOTIONS
[
]
NEW DELIVERABLES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Functional Specification Start 5/97 Finish 10/97
- ------------------------------------ ------------------------------------ -----------------------------------
Project Plan Finish 10/97
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
STAFFING
(1) Project Manager
(1) SE I
(1) SE II
CALL TRACKING
[
]
35-001-97-B 5 November 10, 1997
<PAGE> 7
NEW DELIVERABLES
Requirements definition for Call Tracking is underway. Once requirements are
completed the next step in Call Tracking development will be scheduled.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Requirements Specification Start 9/22/97 Finish 10/97
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
STAFFING
This is very difficult to estimate since requirements are not defined and the
scope of work is extremely variable. CGI expects the staffing for this to change
based on two factors: schedule interaction with people rolling off of DMS100
Screen and final scope of work.
Note: the scope of work has increased dramatically during requirements.
Best estimate:
(.75) Project Manager
(2) SE II
(2) SE I
- --------------------------------------------------------------------------------
[
]
Exhibit 2 - Estimated Cost is amended as attached.
This Amendment describes the expanded scope, in accordance with the current
intent of the parties, for which the Call Handling - 1997 Development Agreement
is being modified hereunder. It is intent of the parties that the new services
to be provided by CGI under this Amendment will be incorporated into the ongoing
effort under the 35-001-97 Development Agreement as amended without
interruption. Such services will continue to be provided by CGI under this
Development Agreement and Amendment as subject to change in accordance with U S
WEST direction and additional amendments or change orders.
Except as expressly set forth in this Letter Agreement, the terms of the
Development Agreement and all signed amendments shall remain in full force and
effect.
35-001-97-B 6 November 10, 1997
<PAGE> 8
IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. LICENSEE
By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN
--------------------------- ------------------------------
Title: President/CEO Title: Sr. Director
------------------------ ---------------------------
Date: 12-2-97 Date: 12/1/97
------------------------- ----------------------------
U S WEST BUSINESS RESOURCES, INC.
ACTING AS AGENT FOR: LICENSEE
By: /s/ SHERYL SWAYZE
------------------------------
Title: Commodity Manager
---------------------------
Date: 11/26/97
----------------------------
35-001-97-B 7 November 10, 1997
<PAGE> 9
EXHIBIT 2 - ESTIMATED COST
COST OVERVIEW
The total cost of the work net of discounts is estimated at [ ] based on
expected time and material expenses, which represents an increase of [ ]
above the original funding approved for Call Handling - 1997 of [ ]. No
travel is anticipated for this project. Should travel be required, U S WEST
agrees to pay CGI travel expenses for all pre-approved trips.
Work will be provided on a time and materials basis. The cost estimate and
applicable discount breakouts being extended are as shown below. The [ ]Alliance
Discount has been extended pursuant to the GLA extension executed between U S
WEST and CGI in March, 1997. The [ ]Facilities Discount (includes [ ] computer
and [ ] building discount) is extended under the assumption that all work will
be performed at U S WEST facilities for this project. Work requiring platforms
and software outside of this environment will be requested by U S WEST. It is
planned that U S WEST will provide availability to the nonstandard items to CGI
for the duration of the project should any be required. CGI has also extended
the applicable Volume Discount of [ ].
U S WEST may, at its discretion, close the project or the involvement of CGI
resources by providing a written notice to the CGI Program Manager. If such an
eventuality occurs, the respective resources will be given a ramp down period of
[ ] weeks to find other work. Upon completion of the [ ] week ramp down period,
U S WEST will be obligated to CGI for the time and materials expended up to and
including the [ ] week ramp down.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNTS
- ----------------------------------------------------------------- -----------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS: [ ] ALLIANCE DISCOUNT [ ]
LESS: [ ] VOLUME DISCOUNT [ ]
LESS: [ ] FACILITIES DISCOUNT [ ]
- ----------------------------------------------------------------- -----------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ----------------------------------------------------------------- ----------------------------------------
TRAVEL EXPENSES 0
- ----------------------------------------------------------------- ----------------------------------------
TOTAL AMENDED DA ESTIMATE: [ ]
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35-001-97-B 8 November 10, 1997
<PAGE> 10
Additionally, we are providing the estimated hours for the labor categories
associated with the 24-person CGI team as shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CATEGORY CONTRIBUTION BY TOTAL ESTIMATED HOURS
CATEGORY
- --------------------------------------------- -------------------------- ----------------------------------
<S> <C> <C>
Manager/Project Manager (4) [ ] [ ]
Sr. Engineer III (1) [ ] [ ]
Sr. Engineer II (9) [ ] [ ]
Sr. Engineer I/Reqs. Analyst (8) [ ] [ ]
Engineer (1) [ ] [ ]
Associate Engineer (1) [ ] [ ]
- ------------------------------------------------------------------------------------------------------------
TOTAL CONTRIBUTION / HOURS: 100% [ ]
- --------------------------------------------- -------------------------- ----------------------------------
</TABLE>
35-001-97-B 9 November 10, 1997
<PAGE> 1
EXHIBIT 10.08(s)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
LETTER AGREEMENT TO AMEND
DEVELOPMENT AGREEMENT NO. 37-001-97
- -
AMENDMENT NO. 37-001-97-C
This Letter Agreement dated October 30, 1997, is in regard to Development
Agreement No. 37-001-97 dated January 24, 1997, as amended under Amendment No.
37-001-97-A dated March 6, 1997, and as amended under Amendment No. 37-001-97-B
dated May 20, 1997 (together the "Development Agreement"), and constitutes an
amendment to portions of the Development Agreement and to one or more of the
Exhibits attached thereto, in accordance with Article 11 of the Development
Agreement.
Under this Amendment, CGI will complement the current Fetch & Stuff Phase 2
consulting services by providing additional CGI resources in support of on-going
project tasks as mutually determined by the parties.
The tasks covered under this amendment include:
o Requirements Gathering
o Requirements Analysis
o Requirements Specification
o Requirements Traceability
o Coordination of Requirements Testability with U S West System
Testers
o The Design, Development, Unit Testing, and Integration Testing
related to CR2598; [ ].
o Additional Management in Support of Requirements Analysis
and such tasks will be incorporated into the existing schedule, statement of
work and deliverables, under U S WEST's direction.
One (1) additional CGI team member will be included over four (4) project
months, currently estimated from September 1, 1997, through December 31, 1997
and there will be an increase in the involvement of the Manager. Such resource
related modifications will maintain the current level of effort on the Fetch &
Stuff project development effort, including the level of effort originally
scoped by U S WEST for [ ], and will provide the additional services described
herein. Accordingly, this Amendment includes additional estimated funding in the
amount of [ ] to the work previously scoped in
Development Agreement.
The Projected Cost and Payment for the Project in Article 5 of the Development
Agreement have been increased by [ ].
37-001-97-B 1 MAY 22, 1997
<PAGE> 3
Exhibit 2 - Estimated Cost is amended as attached.
This Amendment describes the expanded scope, in accordance with the current
intent of the parties, for which the Fetch & Stuff Phase 2 Development Agreement
(as amended) is being modified hereunder. It is understood by the parties that
the consulting services will continue to be provided by CGI under the
Development Agreement and this Amendment as subject to change in accordance with
U S WEST direction.
Except as expressly set forth in this Letter Agreement, the terms of the
Development Agreement and all signed amendments shall remain in full force and
effect.
IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. LICENSEE
By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN
------------------------ ---------------------------
Title: President/CEO Title: Sr. Director
--------------------- ------------------------
Date: 12-1-97 Date: 12-1-97
---------------------- -------------------------
37-001-97-B 2 MAY 22, 1997
<PAGE> 4
EXHIBIT 2 - ESTIMATED COST
COST OVERVIEW
The total cost of the work net of discounts is estimated at [ ] based on
estimated time and material expenses, which represents an increase of [ ]
above the previous funding approved for Fetch & Stuff Phase 2, Release 3 of
[ ]. No travel is anticipated for this project. Should travel be
required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips.
Work will be provided on a time and materials basis. The cost estimate and
applicable discount breakouts being extended are as shown below.[
].
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNTS
- ----------------------------------------------------------------- -----------------------------------------
<S> <C>
Contract Engineering Costs (time and materials) [ ]
Less: [ ] Alliance Discount [ ]
Less: [ ] Volume Discount [ ]
Less: [ ] Facilities Discount [ ]
- ----------------------------------------------------------------- -----------------------------------------
Total Contract Engineering [ ]
- ----------------------------------------------------------------- -----------------------------------------
Travel Expenses 0
- ----------------------------------------------------------------- -----------------------------------------
Total Amended DA Expenses [ ]
- -----------------------------------------------------------------------------------------------------------
</TABLE>
37-001-97-B 3 MAY 22, 1997
<PAGE> 5
Estimated hours by skill category are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CATEGORY CONTRIBUTION BY TOTAL ESTIMATED HOURS
CATEGORY
- --------------------------------------------- -------------------------- ----------------------------------
<S> <C> <C>
Manager .71 [ ]
Principal Engineer .79 [ ]
Sr. Engineer III .16 [ ]
Sr. Engineer II 2.89 [ ]
Sr. Engineer I 3.06 [ ]
Engineer 1.66 [ ]
Associate Engineer .73 [ ]
- ------------------------------------------------------------------------------------------------------------
TOTAL CONTRIBUTION/HOURS: 10.00 [ ]
- --------------------------------------------- -------------------------- ----------------------------------
</TABLE>
U S WEST may, at its discretion, close the project or the involvement of CGI
resources by providing a written notice to the CGI Program Manager. If such an
eventuality occurs, the respective resources will be given a ramp down period of
[ ] weeks to find other work. Upon completion of the [ ] week ramp down period,
U S WEST will be obligated to CGI for the time and materials expended up to and
including the [ ] week ramp down.
37-001-97-B 4 MAY 22, 1997
<PAGE> 1
EXHIBIT 10.08(t)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
PROJECT TITLE: List Administration/Distribution
SCHEDULE NUMBER "X34-001-97"/AGREEMENT NO - 9700050785
U S WEST
LIST ADMINISTRATION/DISTRIBUTION PROJECT
(CLIMATE ENHANCEMENT PROJECT)
This Schedule Number "34-001-97", effective October 10, 1997 issued pursuant to
the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997
between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") and is made a part thereto.
This Schedule contains the following sections:
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST in support of the LIST ADMINISTRATION/DISTRIBUTION
project. The work to be provided by CGI represents a new effort between the
parties.
1.2 OVERVIEW
This section provides a high level system overview for the List
Administration/Distribution project. It defines the overall system components of
the proposed system. Carnegie Group will be working with U S WEST by providing
development services in support of U S WEST's CLIMATE software and related
systems solution under U S WEST direction.
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Schedule Number ______ Carnegie Group, Inc. and U S West 10/10/97
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</TABLE>
<PAGE> 3
PROJECT TITLE: List Administration/Distribution
As defined by the users, three major functions of the List
Administration/Distribution project include:
o List Management and Administration
o List Distribution
o Reports
LIST MANAGEMENT & ADMINISTRATION
This will be the point and click based system. This will be used for management
of the generated list. This module will provide:
o Current user list associated by sales code in each offices
o Flexibility to list data by various factors
o Call lists could include any of the following:
o Telephone number
o Credit Class
o Originating Sales Code
o Product
o Product information
o Contract USOC charges
o Expiration Date
o Average Toll
o Accumulative Toll
o Customer quality checks
LIST DISTRIBUTION
The List Distribution system will be used for manually distributing the calls to
various clients. After the list has been generated, this module will provide
capability to:
o distribute call list
o run multiple lists simultaneously
o distribute calls between all of the listed locations and selected agents
o status the system, at any time, to check list(s) point of completion
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<PAGE> 4
PROJECT TITLE: List Administration/Distribution
REPORTS
Various types of reports will be required for the List Administration/
Distribution project. The reports can be generated daily, monthly or both.
Reports can be pulled from a remote location for all offices. Ability to
customize report requests are also needed. These reports include:
o Post Installation Verification Performance Report.
o This report provides various call counts by each office. These
call counts include Scheduled,
Completed, Rescheduled, Follow-up, Missed Commitment etc.
o This report also provides call counts by various product types
o Basic and Summary Reports at all levels, depicting product sold by
individual sales code or office
o Summary Report on agents and/or offices performance
o Call Outcome Report listing order placed, order number, TN, due-date.
o Due Date Missed Report tracking due dates missed and refer to
appropriate department
o Agent Sales Code Changes Report.
SYSTEM OVERVIEW
Figure 1 provides an overview of the List Administration/Distribution System. It
contains 2 major subsystems, namely:
o Marketing System - for list generation, management and administration
o Host/PACT System - for providing customer/sale related information.
Host system, such as CRIS/CDW can provide the customer and order related
information to marketing system. PACT or SCATS system can provide sales code
related information to marketing system. Marketing system can use the
information to generate various lists. The list can be generated using various
factors, such as Customer Credit Class, Originating Sales Code, Product related
information, Expiration Date, Customer quality checks etc. Marketing system can
be used for providing all required reports.
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<S> <C> <C>
Schedule Number ______ Carnegie Group, Inc. and U S West 10/10/97
Proprietary and Confidential Page 3
</TABLE>
<PAGE> 5
PROJECT TITLE: List Administration/Distribution
[GRAPHIC OMITTED]
FIGURE 1: LIST ADMINISTRATION/DISTRIBUTION - SYSTEM OVERVIEW
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following exceptions and definitions apply to this Schedule:
I. Special Rampdown provisions: Notwithstanding subsection 21.2 of the
Agreement, Customer shall be responsible for continued funding of the
current CGI project resources at the time of termination for a period
of two (2) weeks.
II. Services Warranty terms: CGI will warrant the final Purchases (LIST
ADMINISTRATION/DISTRIBUTION PROJECT SOFTWARE DELIVERABLES) for a period
of ninety (90) days from final Acceptance in accordance with the terms
of section 5 of the Agreement. This warranty does not include
correction of Errors in the CLIMATE sfotware code which are traceable
to any portion of such code other than the LIST ADMINISTRATION/
DISTRIBUTION PROJECT SOFTWARE DELIVERABLES.
III. Acceptance terms: U S WEST shall test the List Administration/
Distribution project software delivered hereunder according to the
Acceptance Test(s) agreed upon by both U S WEST and CGI.
A. The CGI project manager assigned to this LIST ADMINISTRATION/
DISTRIBUTION PROJECT has exclusive control of and over the CGI
resources on the project, including but not limited
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</TABLE>
<PAGE> 6
PROJECT TITLE: List Administration/Distribution
to responsibility for staff assignment, project team makeup,
and transition of CGI resources either onto or from a project.
U S WEST may request the CGI project manager to make changes
relating to the CGI resources. CGI will respond with consent
or an objection to consent and reasons why consent will be
withheld; consent will not be unreasonably withheld.
B. The CGI project manager and the U S WEST project manager have
the authority to mutually agree on the location, either at a U
S WEST site or CGI site, where each CGI resource may work
during the project, including an associated period of time,
based on not compromising the schedule and deliverables set
forth in this Schedule.
IV. Review of the Schedule
A. The parties agree that the U S WEST team leader, the U S WEST
project manager and the CGI project manager will meet within
the first week after the effective date of this Schedule to
review the details of this Schedule, including but not limited
to the Exceptions to the Agreement provided above ("Review").
The Review will occur more than once should a new U S WEST
team leader, U S WEST project manager or CGI project manager
be assigned by U S WEST or CGI respectively to the LIST
ADMINISTRATION/DISTRIBUTION PROJECT after the initial Review,
unless as otherwise mutually agreed by the parties.
1.4 CGI ROLES AND RESPONSIBILITIES The following activities are to be performed
by CGI:
o Develop an overall project schedule for this effort based on
joint CGI/U S WEST input.
o Provide project management for the CGI software development
team.
o Create weekly status reports documenting project progress.
o Conduct all software development processes, listed in the
deliverable section, required to achieve project deliverables
and schedule.
o Provide all document and software deliverables listed in the
deliverable section.
o Provide knowledge transfer to U S WEST for maintenance,
training, and ongoing support as requested.
o Support U S WEST in all phases of installation and testing.
U S WEST Roles and Responsibilities
The following activities are to be performed by U S WEST:
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<PAGE> 7
PROJECT TITLE: List Administration/Distribution
o Provide subject matter expertise on this LIST ADMINISTRATION/
DISTRIBUTION PROJECT relative to the CLIMATE system and the client
needs stated in the project requirements.
o Acquire and install all test and production software and hardware to be
used for testing and deployment.
o Acquire and install all development software and hardware to be used
for project development.
o Provide system administration and database administration required for
project testing and deployment.
o Specify any required documentation standards and formats that CGI is
required to follow for project deliverables.
o Provide project management and appropriate project sponsorship support
to aid CGI in gaining access to either IT or end user organizations,
containing appropriate expertise.
o Review and either sign-off or provide comments on all CGI deliverables.
o Manage scope and expectations with end user clients.
o Conduct system and acceptance testing on U S WEST's production platform
after the software is delivered to U S WEST.
o Conduct all required end user training for using the LIST
ADMINISTRATION/DISTRIBUTION PROJECT system.
Joint CGI/U S WEST Roles and Responsibilities
CGI and U S WEST are jointly responsible for the following activities:
o Hold periodic status meetings where schedule, progress, plans,
and issues are presented and action items are assigned for
resolution.
o Meet with U S WEST subject matter experts for such meetings as
requirements gathering and knowledge acquisition.
o Follow all project change management procedures as directed by
either party.
o Define and document the success criteria for the project in a
timely manner.
o Participate in U S WEST project review meetings including
architecture reviews and operational readiness reviews.
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PROJECT TITLE: List Administration/Distribution
1.7 SCOPE
Please refer to section 1.2 for project scope. This is joint U S WEST and CGI
project. CGI is supplementing the team with two Engineer developers and one half
time Project Manager. The scope of the project is to provide the three major
functions of the List Administration/Distribution project which are:
o List Management and Administration
o List Distribution
o Reports
1.8 DELIVERABLES
Deliverables are provided in Section 2.3 below. Due to the joint
responsibilities between U S WEST and CGI, successful delivery of the software
solution will be shared by both U S WEST and CGI.
1.9 SUMMARY
The services and deliverables provided hereunder covers efforts to be performed
from October 13, 1997 through January 13, 1998.
2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES
2.1 TASKS, SCHEDULE, AND DELIVERABLES.
This section lists proposed changes which will be needed in the CLIMATE system
in order to run the List Administration application.
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EXISTING CLIMATE CAPABILITY CLIMATE ENHANCEMENTS
(H&PS) (SBG)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
DATABASE (STRUCTURES) Everything Add Customer Quality
Checkpoints
- ------------------------------------ ------------------------------------ ------------------------------------
DATABASE (DATA) Everything exists for H&PS Reuse same extract programs to
populate following H&PS data:
o Contract USOC Charges
o Average Toll
o Accumulative Toll
o Customer Quality Checks
o Agent Sales Code History
- ------------------------------------ ------------------------------------ ------------------------------------
PROCESSING LAYER o List Creation o Sub List Creation
o List Distribution o Sub List Assignment
o Query List o Adjust for Response flow
o Multiple Lists
- ---------------------------------------------------------------------------------------------------------------
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PROJECT TITLE: List Administration/Distribution
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<S> <C> <C>
PRESENTATION o View List o View Master List
o Assign Sub list o Form Sub list
o Sort List by Search Criteria o Assign Sub list to
o Ability to load SubList Office/Sales Agent
o Update List Status
- ----------------------------------- ------------------------------------- ------------------------------------
REPORTS o Post Installation Verification
o Summary Office Performance
o Due Date Report
o Agent Sales Code Changes
- ------------------------------------ ------------------------------------ ------------------------------------
ADMINISTRATION o Database Security o Install Software on PC
o Application Security o Access to Server
o Training
o Capacity
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
2.2 ASSUMPTIONS
The above tasks, schedules and deliverables were developed based on the
following assumptions.
1. The schedule is based on a project start date of October 13,
1997. Delays in this start date may impact the delivery date
of one or more Deliverables.
2. The work estimates are based on CGI Methodology and past
experience. CGI will continuously monitor the status and
notify U S WEST of any issues or risk situations which may
impact the delivery date.
3. CGI has timely access to U S WEST personnel (i.e. SMEs).
4. U S WEST to provide a sponsor and project manager to act as
the liaison between the U S WEST project team and the CGI
project team.
5. Weekly status reports and meetings to be held between the U S
WEST project manager and the CGI project manager to measure
progress against the workplan. Any known issues and risks are
also discussed and raised to the next level if not resolved.
6. U S WEST to provide facilities, computer equipment, software,
etc., as requested by CGI.
7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact
the delivery date of one or more Deliverables.
8. Change requests to be submitted using the CGI change process
for analysis to provide estimates, costs, and impact on
current deliverables. Signed approval in compliance with RPP
1001 is required before implementation of any change requests.
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PROJECT TITLE: List Administration/Distribution
2.3 DELIVERABLES
Project deliverables are included in the table below. U S WEST will provide a
systems solution for the LIST ADMINISTRATION/DISTRIBUTION project. CGI as
members of a U S WEST/CGI team, will provide systems solution consulting to U S
WEST, software development services and project management of the CGI team. As
such, no identifiable segment of the List Administration/Distribution solution
can be detailed as purely a CGI responsibility, but a shared responsibility with
U S WEST.
A copy of the deliverables will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within ten (10) business days
after delivery, then the Deliverables shall be deemed accepted.
<TABLE>
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MILESTONE DURATION (FROM START OF PROJECT) DELIVERABLES
- --------------------------- -------------------------------------------- ------------------------------------
<S> <C> <C>
Milestone 1 Week 0 Obtain Funding
- --------------------------- -------------------------------------------- ------------------------------------
Milestone 2 Week 2 Mock up screens & design document
- --------------------------- -------------------------------------------- ------------------------------------
Milestone 3 Week 7 Alpha Software
- --------------------------- -------------------------------------------- ------------------------------------
Milestone 4 Week 9 Beta Software
- --------------------------- -------------------------------------------- ------------------------------------
Milestone 5 Week 10 User Acceptance & Training
- -------------------------------------------------------------------------------------------------------------
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<PAGE> 11
PROJECT TITLE: List Administration/Distribution
3. PROJECTED COST
The total cost of the work net of discounts shall not exceed [ ] based on
estimated time and material expenses. Should travel be required, U S WEST agrees
to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort..
Estimated costs with applicable discounts for the project are provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS MINIMUM DISCOUNT AND ANY PROJECT [ ]
VOLUME DISCOUNT
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES 0
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES TBD
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
Estimated hours are as follows:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED HOURS
- --------------------------------------------------------------------------------------------------------------
Manager(s) [ ]
Business Consultant(s)
Engineer(s) [ ]
Technical Writer(s)
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS [ ]
- ------------------------------------------------------ ------------------------------------------------------
</TABLE>
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<PAGE> 12
IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST
BY: /S/ BRUCE RUSSELL BY: /S/ BARBARA IRWIN
----------------------- ------------------------
NAME: BRUCE RUSSELL NAME: BARBARA IRWIN
--------------------- ----------------------
(printed) (printed)
TITLE: EVP/COO TITLE: SR. DIRECTOR
-------------------- ---------------------
DATE: 10/23/97 DATE: 10/13/97
--------------------- ----------------------
U S WEST BRI
BY: /S/ SHERYL SWAYZE
------------------------
NAME: SHERYL SWAYZE
----------------------
(printed)
TITLE: COMMODITY MANAGER
---------------------
DATE: 10/20/97
----------------------
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<PAGE> 1
EXHIBIT 10.08(u)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
CSRM
SCHEDULE NUMBER "23-07-97"/(9700050785)
CSR [ ]
CSRM
This Schedule Number "23-07-97", effective November 17, 1997 issued pursuant to
the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997
between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") and is made a part thereto.
The CSR [ ] Proposal from Carnegie Group, Inc. to U S WEST Communications,
Information Technologies dated November 17, 1997 (the "CSR [ ] Proposal")
shall be included in its entirety as part of this Schedule 23. This Schedule
contains the following sections which may reference specific portions of the
Proposal.
This Schedule contains the following sections:
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST in support of CSR [ ]. The work to be provided by CGI
represents a new effort between the parties.
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CSRM
1.2 OVERVIEW
Reference the Executive Summary and Articles 1, 2 and 3 of the CSR [ ]
Proposal in their entirety for a complete overview and description of the
project.
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following exceptions and definitions apply to this Schedule:
o Work Authorization: It is agreed by the parties that any work provided
by CGI under the Letter of Intent dated November 17, 1997 will be
included under this Schedule as billable to U S WEST and in accordance
with the terms and conditions hereunder.
o Special Rampdown provisions: Notwithstanding subsection 21.2 of the
Agreement, Customer shall be responsible for continued funding of the
current CGI project resources at the time of termination for a period
of two (2) weeks.
o Services Warranty terms: CGI will warrant the final Purchases for a
period of ninety (90) days from final Acceptance in accordance with the
terms of section 5 of the Agreement.
o Management of project resources:
o The CGI project manager assigned to this CSR [ ] has
exclusive control of and over the CGI resources on the
project, including but not limited to responsibility for staff
assignment, project team makeup, and transition of CGI
resources either onto or from a project. U S WEST may request
the CGI project manager to make changes relating to the CGI
resources. CGI will respond with consent or an objection to
consent and reasons why consent will be withheld; consent will
not be unreasonably withheld.
o The CGI project manager and the U S WEST project manager have
the authority to mutually agree on the location, either at a U
S WEST site or CGI site, where each CGI resource may work
during the project, including an associated period of time,
based on not compromising the schedule and deliverables set
forth in this Schedule.
o Review of the Schedule
o The parties agree that the U S WEST team leader, the U S WEST
project manager and the CGI project manager will meet within
the first week after the effective date of this Schedule to
review the details of this Schedule, including but not limited
to the Exceptions to the Agreement provided above ("Review")
o The Review will occur more than once should a new U S WEST
team leader, U S WEST project manager or CGI project manager
be assigned by U S WEST or CGI respectfully to the CSR [ ]
after the initial Review, unless as otherwise mutually agreed
by the parties.
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<PAGE> 4
CSRM
1.4 CGI ROLES AND RESPONSIBILITIES
Reference Article 9 in its entirety of the CSR [ ] Proposal for CGI, U S WEST
and Joint CGI and U S WEST Roles and Responsibilities for the project.
1.5 SCOPE
Reference Article 3 and 4 in its entirety of the CSR [ ] Proposal for the
scope of the project.
1.6 DELIVERABLES
The following CSR [ ] deliverables will be provided by
Carnegie Group to U S WEST and are considered Work Products pursuant to
subsection 7.1 of the Agreement. For the purposes of this Schedule
No. 23-07-97 such deliverables will be the sole and exclusive property
of U S WEST:
o SOFTWARE PROJECT MANAGEMENT PLAN (SPMP): The SPMP provides a
project management guide for successful execution of the CSR
[ ] project. It documents such elements as project
goals, points of contact, schedule, resources, risks,
constraints, and assumptions. The SPMP ensures that all
project elements are considered initially and managed to
successful completion.
o CLIENT AND USER REQUIREMENTS DOCUMENT: This document defines
the set of requirements specified by the U S WEST client
representatives for functional purposes and Interconnect
Engineering for usability purposes.
o ARCHITECTURE DOCUMENT: This document describes the overall
system architecture and design notes.
o DESIGN DOCUMENT: This document contains a detailed description
of each CSR [ ] application and related interfaces.
o USER GUIDE: This document contains detailed API specifications
to support interfacing developers, and also actions required
by users to effectively utilize any GUI screens provided.
o SOURCE CODE: Multiple releases of the CSR [ ] source
code will be provided to U S WEST. Releases include the
initial development release, integration-tested software,
system-tested software, and final production software.
o STATUS REPORTS: Status reports will be developed by Carnegie
Group which describes project status, progress, issues, and
plans.
o ADMINISTRATORS GUIDE: providing instructions for System
Administrators describing the installation, set-up, and
maintenance of the system.
1.7 SUMMARY
This Schedule covers efforts to be performed from November 17, 1997 through
February 27, 1998.
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CSRM
2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES
2.1 TASKS AND SCHEDULE
Reference Section 4 and 5 in its entirety of the CSR [ ] Proposal for the Work
Breakdown Structure and Schedule to address this section of this Schedule No.
23-07-97.
2.2 ASSUMPTIONS
The project description, schedules, and deliverables were developed based on the
assumptions provided in Sections 8 of the CSR [ ] Proposal. If these
assumptions are not valid, changes to the schedule, deliverables, and cost of
the CSR [ ] project may be required.
1. BOSS access for new APIs can be provided through existing IMS
capability with no updates to the BMP process. If IMS
capability for these transactions does not exist, U S WEST
will add the necessary IMS transactions.
2. Based on past Fetch 'N Stuff experience, we assume that CARS
access through screen scraping will be necessary (worst case
assumption). Capabilities are not supported by COBOL through
the BMP.
3. The schedule is based on a project start date of 12/1/97.
Delays in this start date will impact the project completion
date.
4. The work estimates are based on Carnegie Group Methodology and
past experience. Carnegie Group will continuously monitor the
project status and notify U S WEST of any issues or risk
situations which may impact the delivery date.
5. Carnegie Group has timely access to required U S WEST
personnel (e.g. subject matter experts).
6. U S WEST provides a project sponsor to act as the liaison
between the U S WEST and Carnegie Group. This does not require
that U S WEST handle all Interconnect Engineering interactions
but that appropriate personnel be provided to support these
activities.
7. All development will be done on Carnegie Group premises and
facilities. Intermediate and final software products will be
moved to U S WEST facilities as required.
8. Any delays outlined in the Dependencies may impact the
delivery dates.
9. Change requests to the requirements outlined in this proposal
must be defined by U S WEST for analysis by Carnegie Group to
provide estimates, costs, and impact on current deliverables.
Signed approval by both parties is required prior to
implementation of any change request.
10. The primary point of contact will be Patti Jansen who will
designate a back-up contact when unavailable.
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CSRM
2.3 DELIVERABLES
See Section 6 of this Schedule for a description of the CSR [ ]
deliverables.
A copy of each deliverable will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within ten (10) business days
after delivery, then the Deliverables shall be deemed accepted.
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CSRM
3. PROJECTED COST
The total cost of the work (less options) net of discounts shall not exceed [ ]
based on estimated time and material expenses. Travel be required. U S WEST
agrees to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort.
Estimated costs with applicable discounts for the project are provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS MINIMUM DISCOUNT AND ANY PROJECT [ ]
VOLUME DISCOUNT
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
Estimated hours are as follows:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED HOURS
- ------------------------------------------------------ ------------------------------------------------------
Manager(s) [ ]
Business Consultant(s)
Engineer(s) [ ]
Technical Writer(s) [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS [ ]
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 8
CSRM
IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST
BY: /s/ DENNIS YABLONSKY BY: /s/ BARBARA IRWIN
--------------------------- -----------------------
NAME: DENNIS YABLONSKY NAME: BARBARA IRWIN
------------------------- ----------------------
(printed) (printed)
TITLE: PRESIDENT/CEO TITLE: SR. DIRECTOR
------------------------ ---------------------
DATE: 12-8-97 DATE: 12/05/97
------------------------- ---------------------
U S WEST BRI
BY: /s/ SHERYL SWAYZE
------------------------
NAME: SHERYL SWAYZE
---------------------
(printed)
TITLE: COMMODITY MANAGER
---------------------
DATE: 12/3/97
---------------------
- --------------------------------------------------------------------------------
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<PAGE> 1
EXHIBIT 10.08(v)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
PROJECT TITLE: Quick Hit Team
SCHEDULE NUMBER "23-09-97"/(AGREEMENT NO. 9700050785)
QUICK HIT TEAM
This Schedule Number "23-09-97", effective November 21, 1997 issued pursuant to
the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997
between U S WEST and Carnegie Group, Inc. ("CGI") including the Special
Provisions Module - Software License and Services dated June 30, 1997
(collectively, the "Agreement") is made a part thereto.
This Schedule contains the following sections:
1. Project Description
2. Schedule, Statement of Work and Deliverables
3. Projected Cost
This Schedule specifically overrides the terms and conditions of the Agreement
pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In
the event that such section 1.3 conflicts with the provisions of the Agreement,
the terms of section 1.3 shall control for purposes of this Schedule only.
In consideration of the mutual covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PROJECT DESCRIPTION
1.1 INTRODUCTION
This Schedule covers the services and deliverables to be provided by Carnegie
Group, Inc. for U S WEST Information Technologies Service Delivery in support of
the QUICK HIT TEAM. The work to be provided by CGI represents a new effort
between the parties.
1.2 OVERVIEW
U S WEST Information Technologies (IT) Service Delivery has created a team to
provide short timeframe turnaround on solutions delivery to their respective
clients (the "Quick Hit Team"). The U S WEST Immediate Solution Discovery Team
recommends solutions for the clients. The solutions recommended are small from a
time and resources perspective, but the end results are of value to the success
of the channels. The Quick Hit Team, which includes three (3) Carnegie Group
resources, will provide hourly consulting services to U S WEST Information
Technologies and will be working within the complete development process of
individual quick hit projects. It is intended that this will include solutions
review to coding and testing. A result of this approach will
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PROJECT TITLE: Quick Hit Team
be jointly developed documents and solutions under the leadership and management
of U S WEST IT.
1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT
The following definitions apply to this Schedule:
1. Review of the Schedule
a) The parties agree that the U S WEST team leader, the U S WEST
project manager and the CGI resource will meet within the
first week after the effective date of this Schedule to review
the details of this Schedule.
b) The Review will occur more than once should a new U S WEST
team leader, U S WEST project manager or CGI resource be
assigned by U S WEST or CGI respectfully to the QUICK HIT TEAM
effort after the initial Review, unless as otherwise mutually
agreed by the parties.
c) Special Rampdown provisions: Carnegie Group is aware that U S
WEST intends to replace CGI resources with U S WEST resources
when such person(s) can be identified and made available to
this project. Notwithstanding subsection 21.2 of the
Agreement, Customer shall be responsible for continued funding
of the current CGI project resources at the time of
termination for a period of two (2) weeks or at the expiration
of this Schedule whichever comes first.
1.4 ROLES AND RESPONSIBILITIES
The Roles and Responsibilities of the QUICK HIT TEAM are separated and defined
in this document by individual company and collectively between U S WEST and
Carnegie Group. The project team has been assembled such that CGI is playing a
role on the team. Each team member within this collective group may be asked to
perform any one of the responsibilities listed below. Therefore, the listing of
Roles and Responsibilities has been duplicated and listed separately and jointly
between U S WEST and Carnegie Group.
1.4.1 CGI ROLES AND RESPONSIBILITIES
The following activities are to be performed by CGI:
1. Research
2. Design
3. Coding
4. Testing
5. Documentation
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PROJECT TITLE: Quick Hit Team
The following task(s) (including details involved in the activities provided
above) are to be performed by CGI under IT direction:
o Investigate discovery team recommended solutions to determine actual
problem(s) to be solved.
o Work with clients to uncover and document functional requirements.
o Convey requirements to developers and answer/investigate questions as
they arise.
o Develop solutions from coding through testing.
o Review final solutions prior to delivery to client to insure
requirements match.
o Help deliver solutions to client and perform client acceptance testing.
o Help review test results with functional analysts and (sometimes)
client.
o Create all required application documentation.
o Deploy applications in production.
o Hand-off solutions/applications to maintenance teams.
1.4.2 U S WEST ROLES AND RESPONSIBILITIES
The following activities are to be provided by U S WEST:
1. Research
2. Design
3. Coding
4. Testing
5. Documentation
6. Project Management
7. User acceptance
1.4.3 JOINT CGI AND U S WEST ROLES AND RESPONSIBILITIES
CGI and U S WEST are jointly responsible for the following activities:
1. Research
2. Design
3. Coding
4. Testing
5. Documentation
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PROJECT TITLE: Quick Hit Team
1.5 SCOPE
This is a U S WEST IT lead effort supported by a single CGI resources. for an
individual solutions delivery project for a given client. [
]. There may be innumerable
quick hit projects identified, Therefore each of the three (3) CGI resources may
work on more than one quick hit project at any time. Such resources will
contribute to the overall Quick Hit Team effort through February 23, 1998.
1.6 DELIVERABLES
Actual deliverables will be determined during the early phases of the project.
For the purpose of this Schedule No. 23-09-97, such deliverables will be the
sole and exclusive property of U S WEST.
1.7 SUMMARY
This Schedule covers efforts to be performed from November 24, 1997 through
February 23, 1998.
2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES
2.1 TASKS, SCHEDULE, AND DELIVERABLES
The following table summarizes the tasks, schedule and deliverables included in
this Schedule.
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<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TASKS RESPONSIBILITY START DATE END DATE DELIVERABLES
- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Research U S WEST and 11/24/97 2/23/98 To be
CGI determined
Design during the early
phases of the
Coding project. Both
US WEST and
Testing CGI resources
will produce the
Documentation requisite documents
as determined
in the early
phases of the
project.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
2.2 ASSUMPTIONS
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97
Proprietary and Confidential Page 4
</TABLE>
<PAGE> 6
PROJECT TITLE: Quick Hit Team
The above tasks, schedules and deliverables were developed based on the
following assumptions.
1. The schedule is based on a project start date of November 24,
1997. Delays in this start date may impact the delivery date
of one or more Deliverables.
2. The work estimates are based on fixed dates provided by U S
WEST. CGI will continuously monitor the overall effort's
status and notify U S WEST of any issues or risk situations
which may impact one or more delivery dates.
3. CGI has timely access to U S WEST personnel (i.e. SMEs).
4. U S WEST to provide a sponsor and project manager to act as
the liaison between the U S WEST project team and the CGI
resource.
5. Weekly status reports and meetings to be held between the U S
WEST project manager and the CGI project manager to measure
progress against the workplan as mutually agreed upon by U S
WEST and CGI. Any known issues and risks are also discussed
and raised to the next level if not resolved.
6. U S WEST to provide facilities, computer equipment, software,
etc., as requested by CGI.
7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact
the delivery date of one or more Deliverables. (Such dependent
tasks may likely be determined and documented during the early
phases of the project and jointly agreed upon between U S WEST
and CGI.)
8. Change requests to be submitted using the CGI change process
for analysis to provide estimates, costs, and impact on
current deliverables. Signed approval in compliance with RPP
1001 is required before implementation of any change requests.
2.3 DELIVERABLES
Deliverables will be determined during the early phases of the project and will
be completed jointly between U S WEST and CGI. [
].
A copy of the deliverables will be provided to the appropriate U S WEST
recipients. The master copy will contain a letter to be mutually signed by the
parties acknowledging delivery, receipt and acceptance of the deliverables.
Should CGI not receive the signed letter or a written list of items which are
not in compliance with the project specifications within five (5) business days
after delivery, then the Deliverables shall be deemed accepted.
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97
Proprietary and Confidential Page 5
</TABLE>
<PAGE> 7
PROJECT TITLE: Quick Hit Team
3. PROJECTED COST
The total cost of the work net of discounts shall not exceed [ ] based on
estimated time and material expenses. Should travel be required, U S WEST agrees
to pay CGI travel expenses for all pre-approved trips.
This Schedule does not represent a follow-on effort or a change order effort.
Estimated costs with applicable discounts for the project are provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT AND ANY PROJECT
VOLUME DISCOUNT [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES None
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES None
- ------------------------------------------------------ ------------------------------------------------------
TOTAL SCHEDULE ESTIMATED PRICE [ ]
- --------------------------------------------------------------------------------------------------------------
Estimated hours are as follows:
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED HOURS
- ------------------------------------------------------ ------------------------------------------------------
Manager(s)
Business Consultant(s)
Engineer(s) [ ]
Technical Writer(s)
- --------------------------------------------------------------------------------------------------------------
TOTAL HOURS [ ]
- ------------------------------------------------------ ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97
Proprietary and Confidential Page 6
</TABLE>
<PAGE> 8
PROJECT TITLE: Quick Hit Team
IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. U S WEST INFORMATION TECHNOLOGIES
BY: /s/ DENNIS YABLONSKY BY: /s/ BARBARA IRWIN
----------------------- ------------------------------
NAME: Dennis Yablonsky NAME: Barbara Irwin
--------------------- --------------------------
(printed) (printed)
TITLE: President/CEO TITLE: Sr. Director
-------------------- --------------------------
DATE: 1/28/98 DATE: 01/21/98
--------------------- --------------------------
U S WEST BRI
BY: /s/ SHERYL SWAYZE
------------------------------
NAME: Sheryl Swayze
----------------------------
(printed)
TITLE: Commodity Manager
---------------------------
DATE: 1/20/98
----------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97
Proprietary and Confidential Page 7
</TABLE>
<PAGE> 1
EXHIBIT 10.08(w)
Confidential treatment with respect to certain information in this Exhibit has
been requested of the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended. The bracketed portions of
this Exhibit have been omitted from material filed in accordance with Rule 24b-2
and have been filed separately with the Commission.
<PAGE> 2
LETTER AGREEMENT TO AMEND
SCHEDULE NUMBER "230397" / AGREEMENT NO. 9700050785
- -
AMENDMENT NO. 230397-A
This Letter Agreement dated December 1, 1997, is in regard to Schedule Number
"230397"/ Agreement No. 9700050785 dated July 21, 1997. Under this Amendment,
CGI will extend the services of three (3) Technical Functional Coordinators to
perform like roles as described under Schedule 230397.
The tasks covered under this Amendment include:
The CGI support team will continue to provide hourly consulting services to U S
WEST Information Technologies (IT) to collectively recommend an approach to IT
by identifying the system requirements, the gaps, the risks and the solutions to
the U S WEST Long Distance (LD) business objectives. Then under IT direction,
the CGI support team will translate these into more detailed requirements for
the project development teams; work with the project development teams; and
continue to be the liaison between the project development teams, IT, and LD.
The time period in which the CGI resources will provides services hereunder is
December 1, 1997 to April 30, 1997.
The following tasks are to be performed by CGI:
(1) Translate the LD service delivery business requirements into detailed
requirements.
(2) Actively monitor and work to promote billing and service delivery are
in synch with each other.
[ ]
(4) Work with each area to promote the completion of their deliverables.
(5) Work with the development teams to assist them with their target to
meet schedule.
(6) Work with development teams on the best approach to develop their
solutions.
(7) Coordinate the development team's delivery of their tasks.
[ ]
Accordingly, this Amendment includes additional estimated funding in the amount
of [ ] FOR AN ADDITIONAL ESTIMATED FIVE (5) MONTHS OF EFFORT to the work
previously scoped in Schedule 230397.
The project end date provided in Section 2.1 of Schedule 230397 has effectively
been changed hereunder from November 30, 1997 to April 30, 1998.
230397-A 1 NOVEMBER 25, 1997
<PAGE> 3
The Projected Cost in Article 3 of Schedule 230397 has been increased by
[ ] to [ ] in accordance with Exhibit 1 as attached hereto to
effectively replace the original Article 3 in its entirety.
This Amendment describes the project extension and scope, in accordance with the
current intent of the parties, for which the Technical/ Functional Specification
Development Schedule 230397 is being modified hereunder. It is understood by the
parties that the consulting services will continue to be provided by CGI under
Schedule 230397 and this Amendment as subject to change in accordance with U S
WEST direction and within the funding constraints of this Amendment.
Except as expressly set forth in this Letter Agreement, the terms of Schedule
230397 and all signed amendments shall remain in full force and effect.
IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in
duplicate by their respective authorized representatives.
CARNEGIE GROUP, INC. LICENSEE
By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN
------------------------- ------------------------
Title: President/CEO Title: Director
---------------------- ---------------------
Date: 12-2-97 Date: 12/1/97
----------------------- ----------------------
U S WEST Business Resources, Inc.
Acting as Agent for: LICENSEE
By: /s/ SHERYL SWAYZE
------------------------
Title: Commodity Manager
---------------------
Date: 11/26/97
----------------------
230397-A 2 NOVEMBER 25, 1997
<PAGE> 4
EXHIBIT 1 - PROJECTED COST
3. Projected Cost
The total cost of the work net of discounts shall not exceed [ ] based
on estimated time and material expenses, which represents an increase of
[ ] above the previous funding approved for Technical Functional
Coordinator of [ ] No travel is anticipated for this project. Should
travel be required, U S WEST agrees to pay CGI travel expenses for all
pre-approved trips.
This Amendment No. 230397-A represents direct follow-on work to the Technical
Functional Specification Development Schedule No. 230397. Based on the aggregate
contract engineering costs (before discounts) of Schedule No. 230397 and
Amendment No. 230397-A totaling [ ], a [ ] Cumulative Project Volume Discount
has been applied to incremental contract engineering costs (before discounts) of
this Amendment.
Estimated costs with applicable discounts and estimated hours are provided below
for this Amendment No. 230397-A and for the entire project, respectively.
The incremental Amendment costs and hours follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT [ ]
LESS [ ] CUMULATIVE PROJECT VOLUME DISCOUNT [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES
- ------------------------------------------------------ ------------------------------------------------------
TOTAL INCREMENTAL AMENDMENT 230397-A [ ]
ESTIMATED PRICE
- ------------------------------------------------------ ------------------------------------------------------
</TABLE>
230397-A 3 NOVEMBER 25, 1997
<PAGE> 5
<TABLE>
<CAPTION>
CATEGORY ESTIMATED HOURS
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Senior Engineer II [ ]
Senior Engineer I [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS
[ ]
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Technical/Functional Specification Development project to date hours and
costs follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
ITEMIZATION OF COSTS AMOUNT
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ]
LESS [ ] MINIMUM DISCOUNT
LESS APPLICABLE VOLUME DISCOUNT
[ ]
[ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL CONTRACT ENGINEERING [ ]
- ------------------------------------------------------ ------------------------------------------------------
CGI/THIRD PARTY LICENSE FEES
- ------------------------------------------------------ ------------------------------------------------------
TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES
- ------------------------------------------------------ ------------------------------------------------------
TOTAL AMENDMENT NO. 230397-A AND [ ]
SCHEDULE NO. 230397 ESTIMATED PRICE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
CATEGORY ESTIMATED HOURS
- ------------------------------------------------------ ------------------------------------------------------
Senior Engineer II [ ]
Senior Engineer I [ ]
- ------------------------------------------------------ ------------------------------------------------------
TOTAL HOURS
[ ]
- --------------------------------------------------------------------------------------------------------------
</TABLE>
230397-A 4 NOVEMBER 25, 1997
<PAGE> 1
EXHIBIT 10.11(b)
LOAN AGREEMENT
THIS AGREEMENT is made as of this 15th day of December, 1997, by and
between CARNEGIE GROUP, INC., a Delaware corporation (the "Company") located in
Pittsburgh, Pennsylvania, and JOHN MANZETTI, an individual residing at 272
Seasons Drive, Wexford Pennsylvania 15090 (the "Executive").
WHEREAS, the Company and the Executive desire that the Company loan to
the Executive the sum of $250,000 in accordance with the terms and conditions
set forth herein;
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, and intending to be legally bound, the parties hereto
agree as follows:
ARTICLE 1
LOAN
1.1 The Company hereby loans to the Executive the sum of $250,000 (the
"Principal Sum"). The Principal Sum, together with interest compounded annually
at the rate of 6.39% per annum on the outstanding balance of the Principal Sum
(the "Interest Amount"), shall be repaid in a single installment on December 30,
1999 (the "Repayment Date"), subject to the provisions of Section 1.2.
1.2 In the event that, prior to November 30, 1999, (i) the Executive
voluntarily terminates his employment with the Company or his employment is
terminated by the Company for "Cause" (as hereinafter defined), and (ii) there
has been no "Change in Control" (as defined in the Severance Agreement dated as
of May 17, 1993, as amended, between the Company and the Executive) prior to
such termination, then the Repayment Date shall be thirty days following the
date of such termination.
1.3 As used herein, "Cause" shall mean the willful commission by the
Executive of any of the following actions, provided that such action is
demonstrably and materially injurious to the assets, operations or business
prospects of the Company: (i) a felony; (ii) the unlawful or unethical
conversion or commitment for the personal benefit of the Executive, a member of
his family or a business owned or controlled by the Executive or a member of his
family, of corporate funds or property or a material business opportunity of the
Company; or (iii) the unauthorized disclosure or use of confidential information
of the Company, other than disclosures which are made in the ordinary course of
the Company's business or for the purpose of carrying out business objectives of
the Company. No action of Executive shall be considered "willful" unless it is
done by the Executive in bad faith and without reasonable belief that such
action is in the best interests of the Company.
<PAGE> 2
ARTICLE 2
PLEDGE OF SHARES
2.1 To secure the repayment of the Principal Sum and the Interest
Amount, the Executive shall pledge to the Company any shares of the Common Stock
of the Company, par value $.01 per share, which may be acquired after the date
hereof by the Executive (the "Pledged Shares"). To perfect such security
interest, the Executive shall deliver to the Company immediately upon receipt
any stock certificates representing any Pledged Shares. All stock certificates
delivered by the Executive to the Company hereunder shall be accompanied by
stock powers duly endorsed in blank and medallion signature guaranteed. Until
such time, if any, that the Company forecloses on the Pledged Shares, the
Executive shall be entitled to retain cash dividends and cash distributions (if
any) in respect of, and voting rights incident to, the Pledged Shares.
2.2 The Executive acknowledges and agrees that the loan made hereunder
is a full-recourse loan, and if the value of the Pledged Shares is not
sufficient to repay the Principal Sum and the Interest Amount, the Executive
shall be liable to the Company for the repayment in full on the Repayment Date
of the Principal Sum and the Interest Amount.
2.3 Each stock certificate evidencing Pledged Shares shall be held by
the Company until the Principal Sum and the Interest Amount has been paid in
full.
ARTICLE 3
MISCELLANEOUS
3.1 This Agreement shall be binding upon and inure to the benefit of
the heirs and representatives of the Executive and the successors and assigns of
the Company. The Company shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, expressly to assume and agree to perform
this Agreement. Regardless whether such an agreement is executed, this Agreement
shall be binding upon any successor of the Company.
3.2 This Agreement contains the entire understanding between the
parties hereto with respect to the subject matter set forth herein, but in no
way supersedes the Severance Agreement. This Agreement may be modified only by
means of a written agreement signed by both parties.
3.3 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
3.4 This Agreement may be executed in several counterparts each of
which shall be deemed an original.
<PAGE> 3
3.5 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania.
3.6 All disputes and controversies arising out of or relating to this
Loan Agreement, or any breach thereof, will be settled by arbitration
administered by the American Arbitration Association in accordance with its
Commercial Arbitration Rules then in effect. An arbitral award will be final and
binding on both parties hereto and may be enforced by any court or judicial
authority having competent jurisdiction over either party or its assets against
whom the arbitral award is to be enforced.
IN WITNESS WHEREOF, the parties have duly executed this Agreement.
CARNEGIE GROUP, INC.
By: /S/ DENNIS YABLONSKY
-------------------------
Title: PRESIDENT/CEO
----------------------
/S/ JOHN MANZETTI
---------------------------
John Manzetti
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-01760) of Carnegie Group, Inc. of our report
dated February 3, 1998 appearing on page 22 of this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001001188
<NAME> CARNEGIE GROUP, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,483,284
<SECURITIES> 0
<RECEIVABLES> 7,954,635
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,315,705
<PP&E> 2,568,758
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,590,804
<CURRENT-LIABILITIES> 5,520,724
<BONDS> 0
0
0
<COMMON> 67,079
<OTHER-SE> 24,003,001
<TOTAL-LIABILITY-AND-EQUITY> 29,590,804
<SALES> 1,430,335
<TOTAL-REVENUES> 29,406,261
<CGS> 19,085,705
<TOTAL-COSTS> 29,954,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,293
<INCOME-PRETAX> 181,959
<INCOME-TAX> 72,367
<INCOME-CONTINUING> 109,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,592
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
