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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 1998. Commission file number: 0-8918
CARNEGIE INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 13-3692114
(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
11350 McCormick Rd., Executive Plaza 3, Suite 1001, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 785-7400
Securities registered pursuant to Section 12(b) of the Act)
Title of Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act)
Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X
State the issuers revenues for the most recent fiscal year: $11,657,223
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 26, 1999 was approximately $152,097,437, computed by
reference to the closing bid price of the registrant's common stock on such date
($7.125).
The number of shares of the registrant's common stock outstanding as of March
26, 1999 was 52,645,245. Transactional Small Business Disclosure Format (check
one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit Index.
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TABLE OF CONTENTS
Page
PART I
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Item 1. Description of Business.........................................................................1
Item 2. Description of Property........................................................................14
Item 3. Legal Proceedings..............................................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................................15
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.......................................15
Item 6. Management's Discussion and Analysis or Plan of Operation......................................17
Item 7. Financial Statements...........................................................................24
Item 8. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure..........................................................................24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act........................................................25
Item 10. Executive Compensation.........................................................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................30
Item 12. Certain Relationships and Related Transactions.................................................31
Item 13. Exhibits, List and Reports on Form 8-K.........................................................32
SIGNATURES..............................................................................................33
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PART I
ITEM 1. Description of Business.
CORPORATE HISTORY
General
The Corporation was formed under the laws of the State of Colorado in
1974 to engage in the development, manufacture and sale of solar energy systems.
The Corporation ceased operations twice thereafter and was last revived in
August 1994. The current history of the Corporation began in March 1996, when it
entered into an Exchange Agreement with Grandname Limited, a British Virgin
Islands corporation ("Grandname") pursuant to which the Corporation exchanged
its common stock, no par value ("Common Stock") for all of the stock of
Electronic Card Acceptance Corporation, a Virginia corporation ("ECAC"), and DAR
Products Corporation, a Maryland corporation ("DAR"). As a result of the
Exchange Agreement, ECAC and DAR became wholly-owned subsidiaries of the
Corporation. ECAC engages in the transaction processing and servicing of credit
card transactions for merchants. DAR owns and licenses a patented Non-grip
Technology(R) for application to a variety of handheld items which minimizes or
eliminates the need for the user to exert a gripping force. During the spring of
1997, the Board of Directors of the Corporation made a decision to focus the
future operations of the Corporation primarily in telecommunications rather than
financial services due to the then declining profit margins and increased
competition in that industry and greater perceived opportunity for rapid growth
in the telecommunications industry.
Transactions Through 1998
In furtherance of the implementation of the business strategy of
concentrating in the telecommunications business, the Corporation effected the
following transactions involving ECAC and DAR: (i) in April 1997, sold a portion
of it's ECAC accounts; (ii) in January 1998, sold ECAC's subsidiary, ECAC
(Europe), Ltd., and then sold ECAC, retaining only an interest in the accounts
of one bank; and (iii) in September 1997, spun-off DAR by forming TimeCast
Corporation ("TimeCast"), a Nevada corporation, to act as a holding company for
DAR and to be utilized to acquire other businesses.
In addition, between September 1997 and December 31, 1998 the
Corporation acquired the following companies:
Profit Through Telecommunications (Europe) Ltd. ("PTT"), a
telecommunications software company providing business solutions
utilizing proprietary speech recognition, touch tone and bar code
responses to send and/or receive information, including a
multi-language automated voice response system ("MAVIS(TM)"), on
September 29, 1997;
Talidan Limited, a telecommunications company that creates call traffic
for telecommunication carriers by promoting, through print media and
television, information and entertainment services using their circuits
("Talidan"), on September 29, 1997;
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Harbor City Corporation trading as ACC Telecom ("ACC"), a leading
reseller of equipment and business telephone systems for Comdial, SONY
and Sprint, on February 1, 1998;
Voice Quest, Inc. ("Voice Quest"), a developer and provider of speech
recognition and voice mail technology products, including an automated
attendant system known as "Personal Operator(TM)," on November 20,
1998; and
RomNet Support Services, Inc. ("RomNet"), an Internet, e-business and
technical support services company, on December 1, 1998.
In addition to all of the above transactions related to the
Corporation's telecommunications strategy, the Corporation made one additional
acquisition. In order to provide cash flow to the Corporation in the period
prior to the time that the Corporation's telecommunications business becomes
self-sustaining, the Corporation acquired the Victoria Station Restaurant
("Victoria") in Virginia Gardens, Florida, effective in August 1997.
In June 1998, the Corporation also sold all of it's business of Talidan
derived from print media, but retained its business derived from television
media.
Subsequent Events
In January 1999, the Corporation executed a letter of intent to acquire
all of the assets of (i) The Phone Stop, Inc., a Chicago telephony company
engaged in sales of Ameritech cellular phones and services, as well as answering
machines, cordless phones, pagers and related residential phone products and
(ii) an affiliated entity engaged in the sales and servicing of Comdial phone
equipment, primarily to governmental agencies. In February 1999, the Corporation
executed a letter of intent to acquire PCNet, Inc., a Connecticut corporation,
which is a leading value-added reseller specializing in E-Commerce and
Electronic Digital Interchange, PC hardware, software, network integration and
support services. There is no certainty that a definitive purchase will be
consummated with respect to either letter of intent.
In February 1999, in response to an unsolicited offer, the Corporation
entered into a non-binding letter of intent to sell all of the outstanding stock
of Talidan for stock of Entertainment Internet, Inc. ("EII"). The letter is
subject to due diligence by both parties which has not yet commenced. EII, whose
stock is traded on over-the-counter market, provides online subscriber
electronic information and data distribution services for the entertainment,
media and creative industries.
In February 1999, the Corporation acquired the stock of Paramount
International Telecommunications, Inc., a Nevada corporation ("Paramount"), an
outside service provider to the hospitality, health care and pay-telephone
industries in the United States, Mexico and Canada. In exchange for all of the
issued and outstanding stock of Paramount, the Corporation issued to the former
Paramount stockholders 6,950,000 shares of its restricted Common Stock. Pursuant
to the Acquisition Agreement, Paramount entered into employment agreements with
each of the four former stockholders of Paramount (See "Subsequent
Acquisition--Paramount").
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BUSINESS
The Corporation is a holding company that conducts business primarily
through wholly owned subsidiaries specializing in telephony, telecommunications
and Internet products and services. The Corporation also has subsidiaries in the
financial services and restaurant industries. The Corporation has no direct
operating assets or business activity, but does provide management and other
services to its subsidiaries. In addition, the Corporation formed Carnegie
Communications, Inc. ("CCI") to assist in the marketing of MAVIS(TM) and other
PTT software products. The Corporation's telecommunication's business includes
the development of interactive voice response and voice recognition system
software; the provision of technical support, beta testing and Internet support
for telephone related computer services; the sale, installation and servicing of
telephone equipment; the marketing of international long distance call traffic
through the promotion of information and entertainment services; and, since the
acquisition of Paramount, the provision of long distance call routing services
to the hospitality and health care industries. The Corporation's restaurant
business consists of the ownership and operation of one restaurant located in
the Miami, Florida area. The Corporation continues activity in financial
services in the processing of credit card accounts through its subsidiary
Electronic Card Processing, Inc. ("ECPI"). The Corporation has sixteen full-time
employees.
Speech Recognition and Interactive Voice Response --PTT and Voice Quest
General. Speech is typically the most natural, efficient and convenient
means of human communication. Speech recognition technology converts spoken
inputs into digital electronic signals, which are then decoded by a computer
processor into specific computer instructions or data. Until recently, speech
recognition technology and products have been deficient and costly, thereby
limiting widespread acceptance. Early speech recognition applications typically
required programming of equipment to recognize a limited number of discrete
words spoken by a specific user. These speaker-dependent systems also tended to
be sensitive to background noise and to changes in speech patterns of the user.
Additionally, these initial speech recognition applications had limited
vocabularies and required the user to speak discretely, pausing between each
word, rather than allowing natural continuous speech.
With the development of more reliable and efficient technology,
including an increase in speed, as well as a reduction of costs in computer
processors and increased public familiarity with computer automated devices, the
integration of human speech as an interface to telephone and computer
applications has become an accepted feature of many telecommunications
applications. PTT and Voice Quest design, develop, commercialize and market
proprietary products that exploit these recent advances in speech recognition
technologies, including PTT's MAVIS(TM) and Voice Quest's Personal Operator(TM).
In addition, PTT and Voice Quest develop interactive voice response
("IVR") software products, using the caller's voice commands. The telephony
industry is developing a variety of new applications each year and expects to
benefit from the efficiencies and cost savings of this relatively new
technology.
In its acquisitions of PTT and Voice Quest, the Corporation has
obtained the services of two of the leading pioneers in the field of voice
recognition systems.
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Technological advancements created by Voice Quest, particularly with respect to
voice mail features, will be used to complement and strengthen the MAVIS(TM)
product.
MAVIS(TM)
General. PTT is engaged in the development and marketing of MAVIS(TM),
a multi- language automated voice independent recognition system. MAVIS(TM)
creates an auto attendant for businesses that connects callers to an individual
or department using voice only without the need to key punch numbers. On the
occasions when MAVIS(TM) is unsure of the callers request, it will ask the
caller to repeat themselves, exactly as a live operator does, and then processes
the call. Upon receiving a call, MAVIS(TM) simply asks the caller for the name
of the person or department that the caller requires. The caller is then asked
to identify himself, before being transferred to the necessary extension. The
recipient has the choice to accept or reject the announced call. Rejected
callers hear a message and are invited to leave a message in the voice mail. If
the caller doesn't want to leave a message they can ask for the operator, in
which case MAVIS(TM) will transfer the call to a live operator.
MAVIS(TM) interfaces with Microsoft's Windows NT and Lernout &
Hauspie's ASR Run- Time and TTS Run-Time software programs. Lernout & Hauspie, a
Belgium company, is a world leader in the burgeoning market for multi-language
enhanced speech recognition, and MAVIS(TM) can be operated in any language that
Lernout and Hauspie's speech recognition platform supports, which currently
includes "American" English, "British" English, French, Spanish, Portuguese,
Italian, Russian and German. MAVIS(TM) can also provide voice mail and e-mail
capabilities. A caller has the option to access both voice mail and e-mail
remotely through MAVIS(TM) without the need for a computer by using text to
speech technology to read the voice mail or e-mail to the caller. The caller can
then request that the voice mail or e-mail be repeated, deleted or saved by
stating the appropriate voice command instead of pressing buttons on the
telephone keypad. MAVIS(TM) can be both retrofited to perform with most existing
private branch exchange ("PBX") equipment or can be incorporated into new PBX
switchboards.
Marketing. The Corporation has entered into a Distributor Agreement
with ALLTEL Supply, Inc., a business unit of ALLTEL Corp., an information
technology company that provides wireline and wireless communications and
information services, and is also a leading distributor of communications and
data networking equipment for data network service providers and end users.
ALLTEL Corp. is a major distributor of Panasonic, Comdial and Lucent
telecommunications equipment and had total revenues of $5.2 billion for 1998.
ALLTEL Supply, Inc. is one of the nations leading providers of
telecommunications and data communications products. Pursuant to the Distributor
Agreement, ALLTEL Supply, Inc. will market MAVIS(TM) throughout the United
States, including to its affiliates. The Corporation has already received a
$100,000 initial order from ALLTEL Supply, Inc. to supply equipment with
pre-installed MAVIS(TM) software, based upon orders placed with ALLTEL Supply,
Inc. by its customers. CCI will serve as a liaison to ALLTEL Supply and will
work to broaden vertical sales channels for MAVIS(TM) and other PTT developed
applications.
ACC, through its existing relationship with Comdial dealers, and other
telephony dealers to be acquired by the Corporation will market MAVIS(TM) as an
integrated addition to existing PBX systems. The Corporation also intends to
negotiate with major manufacturers of multiple
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line business phone systems and switchboards such as Comdial and Sprint for
MAVIS(TM) software to be incorporated directly into their hardware products. The
Corporation will also market MAVIS(TM) to the hospitality and the health care
industries through Paramount, its recent acquisition, and to the clients of
RomNet. PTT and CCI are currently seeking marketing partners throughout the
United Kingdom and Europe and CCI and ACC are doing the same throughout the
United States.
The Corporation will also market MAVIS(TM) in the former Soviet Union,
Poland, Hungary, Czech Republic and other countries of the Eastern Block (the
"Eastern Block"). The Corporation acquired PTT and Talidan in a transaction
brokered by Tiller Holding Limited, an Anguilla company ("Tiller"). As a part of
the transaction, Tiller and the stockholders of PTT and Talidan (collectively
the "Tiller Group") received certain options to purchase additional shares of
the Corporation's Common Stock. To the extent that these options were not fully
exercised by the third anniversary of the date of issue, the holders could, for
a period of 30 days thereafter, exercise the remaining options in whole or in
part, and require the Corporation to purchase the resultant shares at the then
market price. On December 8, 1998, the Corporation sold the rights to sell
MAVIS(TM) exclusively in the Eastern Block to a designee of the Tiller Group, in
exchange for the relinquishment of the put rights of the Tiller Group under the
options. As a result of the transaction, the Corporation recognized income in
the amount of $3,107,564. In addition, Tiller acquired for nominal consideration
non-exclusive rights to sell MAVIS(TM) in Italy, subject to minimum sales
requirements and to subscribers of Eudora (an Internet service provider).
Personal Operator(TM)
Voice Quest is also a developer and provider of speech recognition and
voice mail technologies and products. Voice Quest's main product is the Personal
Operator(TM) which is an automated attendant system similar to MAVIS(TM), except
that it is not a multi-lingual product and has fewer capabilities. However, the
Personal Operator(TM) has voice mail capabilities not available with MAVIS(TM).
Personal Operator(TM) enables the routing of inbound calls and faxes using
speech recognition technology. It enables voice interaction between the caller
and the system. It offers call routing by person or department name, automatic
directory routing by first then last name, and automatic fax routing by stating
the intended recipient's name and then pressing the fax start button. The
Personal Operator(TM) has a new QuickMessage interface, which is a special call
screening application that lets a person communicate to callers with a short
message without having to take the call. The Personal Operator(TM) also features
follow me calling, message delivery, message center, internal and external
paging, multiple phones per user or multiple users per phone. Personal
Operator(TM) is used on PBX equipment and functions similar to MAVIS(TM).
The addition of Voice Quest allows the Corporation to market its speech
recognition product line to a broader spectrum of clients. The Corporation
intends to market MAVIS(TM) to larger companies requiring highly sophisticated
systems and Personal Operator(TM) to smaller and medium size businesses seeking
affordable speech recognition systems.
PTT has also developed a variety of IVR software products which are
currently being marketed in Europe and will be marketed in the United States in
the future. Due to the Corporation's current concentration on marketing
MAVIS(TM), it does not have an expected date
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to commence marketing of the IVR software products in the United States. These
products include the following:
OrderMaster(TM): This product allows businesses to place orders from
various suppliers in a general voice box owned by PTT. The orders are
then forwarded to the supplier seemlessly. Conventional phone ordering
requires calls to each supplier individually by a certain time or, if
placed after business hours, require a voice mail to be provided and a
response on the next business day. OrderMaster(TM) allows the customer
to place the order at any time seven days a week which is transmitted
to the supplier instantly. PTT charges a fee for handling each order to
the supplier. This will allow the customer to reduce its internal costs
by eliminating answering services and providing timely updating of
inventory records.
WageMaster(TM): This product is an automated payroll designed for use
by small businesses over the telephone. Callers enter time and pay. The
software then calculates and records the deductions and sends a
facsimile similar to a pay stub to the client. PTT charges an annual
fee and a calculation fee.
Database Management: This is a software product which is used to
collect over the telephone a variety of information from individuals,
such as name, address, telephone number, identity and date of purchase
of products. Its first commercial application is planned to register
purchases. PTT charges a database management fee to the manufacturer of
the product.
Profiling: This is an IVR program used to analyze prospective employees
for companies. PTT has a contract for profiling applicants for
executive positions with a bank in the United Kingdom.
Travel Information: This product is used by travelers. A special
telephone number is advertised to the public. The caller states his
destination country and is informed of various information relative to
that country such as necessary inoculations. The caller pays a premium
telephone rate for this service and PTT receives a portion of such fee
from the telephone company.
Hotels: PTT has an agreement with British Travel Agents Accommodation
Register (the "Register") whereby the Register advertises hotel rooms
on behalf of the English and Scottish tourist boards in national
newspapers. The customer calls a free telephone number which allows the
customer to reserve a hotel room. The customer information is then
passed on to the relevant hotel instantly. PTT charges a fee to the
participating hotels for the maintenance of the hotel database.
Security Micro Dot: This is a security program to assist in the
recovery of stolen automobiles. The vehicle and its principal parts are
embedded with a serial number that is not visible to the naked eye. PTT
maintains a database of these serial numbers which may be accessed by
telephone. PTT is paid a maintenance fee and for calls made to the
database.
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Call-a-Card(TM): This is an interactive software program pursuant to
which a customer calls a special telephone number and dictates a
greeting message. A card is sent to the intended recipient giving him
or her a telephone number to call. When that number is called the
special recorded message is broadcast.
Employee Supervision: This program is designed for companies with a
large number of employees nationally or internationally that perform
services at a customer's business such as a cleaning service. The
employee is required to call a special telephone number when arriving
at and leaving the customer's business, which information is recorded
and sent to the client. If an employee doesn't call at the specified
time, a supervisor is called and informed.
In addition to the Personal Operator(TM), Voice Quest's other products
include a database query product and a prescription refill system. The database
query product is IVR software which provides instantaneous automated speech
recognized databases similar to the OrderMaster(TM).
Telephone Business Systems--ACC
ACC engages in the sale, installation and servicing of key business
telephones and systems including the new telecom technologies such as computer
telephone integration, data cabling, networking, auto attendant and voice-mail
systems, video conferencing equipment and integrated voice response systems. In
addition, ACC has recently begun to market PTT's IVR products and the MAVIS(TM)
system to its customers. ACC is one of the leading telecommunications hardware
and software inter-connect dealers in the Baltimore-Washington metropolitan
area. ACC targets mostly small to mid-sized businesses, providing flexible and
cost effective phone systems, voice messaging and call center facilities.
ACC's major revenues are derived from the sale, installation and
servicing of Comdial telecommunications equipment, which accounted for
approximately 97% of revenues in 1998. Comdial is a major manufacturer of
business telecom systems in the United States and in 1998 ACC Telecom was its
second largest commercial dealer. ACC also purchases equipment from Sprint's
North Supply and ALLTEL Corp. ACC's recently submitted application to become an
accredited Lucent Technologies dealer has been accepted, which should open a
broader market to ACC.
Sales are made by ACC directly to business end-users by its sales
department which currently consists of ten employees. The sales department is
made up of highly trained and experienced personnel with on-going training to
cope with the ever-changing telecommunications technology. Marketing is achieved
principally by heavy Yellow Page advertising throughout the Baltimore-Washington
regions, in Northern Virginia and in the Wilmington, Delaware area,
telemarketing and customer referrals. ACC currently has approximately 2,700
customers.
The market for ACC's products and equipment is subject to rapid
technological change, changes in customer requirements and frequent new product
introductions. However, the small- to-mid-sized business targeted by ACC is less
likely to rapidly change their phone system with every new technological change.
Generally, customers needs and expectations will require ACC
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to continuously identify, test and market new equipment and features that keep
pace with the new technology, evolving industry standards and competitive
offerings. These activities will require ACC to make expenditures on testing
equipment and on the training of both sales and service personnel. ACC has been
approved as a bidder on contracts for the federal General Services Agency and
Department of Defense and Maryland's State Department of Procurement.
In the past few years, ACC has significantly increased its business in
Northern Virginia. As a result, ACC has opened a branch in Fairfax, Virginia to
be able to more expeditiously serve its growing customer base in that area. In
March 1999, ACC opened a branch in New Castle, Delaware, in the Wilmington,
Delaware area, a region in which the Corporation has determined to have a high
potential growth market.
ACC has long maintained a favorable relationship with its suppliers
such as Comdial's Key Voice, Sprint's North Supply, and ALLTEL Corp. for its
main systems and products. Incidentals, such as computers, monitors, keyboards,
jacks, and cords are usually purchased through a variety of vendors that are
easily accessible. If ACC were to experience significant delays, interruptions
or reductions in its supply of Comdial key telephone systems, or unfavorable
changes to prices and delivery terms, ACC could be adversely affected.
Support Services--RomNet, Inc.
RomNet is engaged in the business of providing technical support
services for software and hardware, beta testing, and Internet support. RomNet's
major clients include: Macmillan Publishers, which is based in the United
Kingdom; Arthur Andersen LLP; Yahoo! Inc. and the Yahoo! Store; Pitney Bowes;
Scientific American Magazine; the American College of Cardiology; Aztech New
Media; and Nature Science Magazine. Global technical support for software and
hardware comprises about 60-65% of RomNet's services. The Corporation intends to
use RomNet to provide technical support for MAVIS(TM) software.
In addition, 5-10% of RomNet's services are for beta testing, which
tests new products prior to distribution. The Internet support and services
comprise 20-25% of RomNet's business. These include web design, web hosting,
technical support for Internet related services including E-Commerce
transactions via the Internet, TCP/IP connectivity and the use of various
browsers. RomNet intends to support more Internet related activities and
E-Commerce related activities in the future.
An additional 5% of RomNet's business is made up of product sales and
product fulfillment. Providing technical support affords the opportunity to sell
products available from its clients or to offer discounts and promotions. RomNet
also fulfills product orders for its clients, serving as a telephone
distribution channel to supplement primary retail channels of its clients. In
this capacity, RomNet employs the latest technology in order fulfillment, credit
card authorization and secure electronic commerce.
RomNet has a total of 28 customers and supports over 200 products from
various software, hardware and Internet companies. Products range from business
and financial applications from Pitney Bowes and Arthur Andersen to
"edutainment" titles for children from Houghton Mifflin Publishing and Hasbro
Interactive. RomNet assigns a project manager for
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every client, who becomes an expert on that client's particular product. Along
with a core group of technicians, RomNet provides professional, quality support
and courteous customer care.
Call Traffic Marketing--Talidan
Talidan is engaged in the business of creating call traffic for small
international telephone carriers by public promotion of information and
entertainment services using the telephone circuits of such carriers.
Telecommunication companies have agreements which determine how an imbalance of
telephone traffic to and from a country is handled. Generally, a payment is made
by the carrier from which the higher level of traffic originated. Talidan's
promotions create or increase an imbalance of call traffic in favor of its
associated telephone carriers. Talidan receives commissions from these carriers
as a percentage of the imbalance payments which these carriers receive from
their correspondent carriers. Talidan currently has contracts with international
carriers in Sao Tome and a contract with a domestic carrier in Brazil utilizing
circuits inside of that country.
The services promoted by Talidan use dedicated ranges of telephone
numbers allocated for that purpose. The most successful of the services are
those appealing to a late night adult audience. Advertisements for these
services were placed on television in Brazil and in print in newspapers and
magazines elsewhere. The domestic carrier in Brazil has agreements with
advertising merchants to provide the television advertisements on behalf of the
local carrier and Talidan. Callers respond to such ads and are charged by their
local telephone company for calls to the international destination. The
originating local carriers pay Talidan's international carrier who then pays
Talidan.
The Corporation determined that the late night adult audience reached
by the print and television media was not consistent with the business image it
wanted to convey with its other telecommunications companies. Initially, Talidan
sold all of its business derived from print media, including rights to certain
telephone numbers, line access and advertising materials, to Westshire Trading
Company, Inc., a Bahamas corporation in June 1998 and retained its business
derived from television media to provide additional cash flow to the
Corporation. In February 1999, the Corporation as a result of an unsolicited
offer, entered into a non-binding letter of intent to sell all of the
outstanding stock of Talidan to EII. The transaction is subject to satisfaction
of the Corporation with its due diligence examination of EII and other
conditions.
Victoria Station Restaurant
Victoria is located in Virginia Gardens, Florida and was opened in
1973. The Corporation acquired the restaurant in August 1997 to provide cash
flow to the Corporation until its telecommunications companies could support the
operations of the Corporation. The restaurant is a full service steak house
which features quality steaks, barbecue ribs, chicken, fish, a salad bar and a
full liquor service. Victoria emphasizes consistent high quality ingredients and
generous portions at moderate prices in a casual dining atmosphere. The
restaurant attracts a diverse mix of customers, including professionals and
families, near Miami International Airport.
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Financial Services
In May 1996, the Corporation acquired ECAC which was engaged in the
business of processing credit card accounts. In 1997, due to then declining
profit margins and increased competition in credit card processing and greater
perceived opportunity for rapid growth in telecommunications, the Corporation
decided to sell ECAC and to utilize the funds derived thereby to finance
acquisitions in and operations of telecommunications businesses. As a result,
the Corporation sold approximately 75% of ECAC's accounts in April 1997 and all
of the stock of ECAC and its start-up operation in Europe in January 1998. The
Corporation retained a 40% interest in the future gross profit derived by ECAC
from the credit card accounts of Franklin Bank, which operates in Southfield,
Michigan, a suburb of Detroit.
COMPETITION
The Corporation's competitors in the development of voice recognition
systems are independent companies such as Vocalis, Phillips and VCS, as well as
PBX and key telephone manufacturers such as Lucent Technologies, Northern
Telecom, Siemens, Executone, Panasonic and Toshiba which the Corporation
believes are seeking a voice recognition system partner to integrate such
systems into their equipment. Most of these companies have greater financial,
technical, personnel and other resources than the Corporation and have
established reputations for success in the development, licensing and sale of
their products and technology. The Corporation believes that its MAVIS(TM) and
Personal Operator(TM) systems can compete favorably with any other similar
system being currently marketed because, unlike most such systems, each can be
integrated with most existing and all new PBX equipment and MAVIS(TM) can be
produced in seven different languages. The most comparable product to MAVIS(TM)
is the Personal Operator(TM), which is now owned by the Corporation. However,
ongoing research and product development for voice recognition products is
widespread, and as a result, the Company does not know the full extent of its
competition or the stage of its competitors' product development. The
Corporation believes that other larger companies including Voice Control
Systems, Registry Magic, Locus and General Magic are attempting to develop voice
recognition software systems functionally similar to MAVIS(TM). The
Corporation's new relationship with ALLTEL Supply, Inc., one of the nation's
leading providers of telecommunications and data communications products, will
greatly increase the Corporation's ability to compete with other large
telecommunication dealers that enter the market in the future.
There are many companies developing IVR software products that have
substantially greater technical, financial and marketing resources as well as
larger customer bases and greater name recognition than the Corporation. The
Corporation's competitors in the telephony oriented market for messaging systems
are independent suppliers, including Octel Communications, Centigram
Communications, Active Voice, Voysys, and Cellware Technologies. PTT and Voice
Quest's IVR products represent a rapidly evolving market with competition from
many companies pursuing the development of competing IVR software products.
However, the Corporation believes that it can compete based on innovation of the
Corporation's products, early marketing, price, relationship with end-users, and
the universality of many of its software products.
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<PAGE>
The telephone business systems market is highly competitive and the
Corporation believes competition will intensify as manufacturers such as Lucent
Technologies and Northern Telecom continue to acquire smaller telecom companies.
ACC's principal competitors are a few local businesses which represent
manufacturers such as Siemens, Panasonic, Northern Telecom, Vodavi-North Star,
and Toshiba. Lucent Technologies, Bell Atlantic, and Executone sell directly to
customers and through local businesses. The larger companies have tremendous
national advertising resources with greater name recognition, substantially
greater technical, financial and marketing resources, as well as larger customer
bases. The Corporation believes that by targeting the small and mid-size
businesses ACC has an edge in both pricing flexibility and customer relations.
The approval of ACC's Lucent "Business Partner" Dealership will enable ACC to
take advantage of the advertising resources and name recognition associated with
Lucent Technologies. Competition for skilled and trained technicians and sales
personnel is intense. ACC's continued success depends on its ability to attract
and retain key personnel involved in its sales, technical, and administrative
departments. ACC's success also depends on the ability of its officers and key
employees to manage growth successfully and to smoothly and promptly replace
needed positions and oversee the training of new personnel. Barry Hunt, the
founder of ACC in 1979, and its president and chief executive officer, has 19
years experience in the industry.
There are many companies in the marketplace that offer technical
support services similar to RomNet. Many of the larger outsourcing companies
like Sykes Enterprises, Keane Inc., Stream International, and 800 Support are
large enough to have offices across the United States and overseas and are able
to provide their services to major companies of the size of Microsoft, Lotus and
Oracle. RomNet targets privately held software/hardware developers as well as
those Fortune 500 companies which are relatively new in the technological area.
RomNet believes it offers a more customized approach to technical support and
customer service than the competition. RomNet further believes that it is this
flexible approach to the business relationship that has attracted its clients
like Arthur Andersen, Macmillan Publishers, and others, to RomNet.
INTELLECTUAL PROPERTY
The Corporation's success depends in part on its ability to protect its
proprietary technology. PTT and Voice Quest believe that their success will
depend on the ability to design, develop and market new products and new or
enhanced applications, rather than on patent protection. However, the likelihood
of obtaining patents is evaluated with respect to each product and patent
applications are filed where appropriate. The Corporation has filed a patent
application for the OrderMaster(TM) in England and under the Patent Cooperation
Treaty which permits filing in 95 countries worldwide upon designation within
one year and the payment of appropriate fees. The Corporation is in the process
of filing new patent applications for MAVIS(TM) and for a number of the other
IVR software products in England and under the Patent Cooperation Treaty. The
patent applications will probably be filed in the second quarter of 1999 and the
Corporation believes that it is likely that it will obtain the patents for
MAVIS(TM) and the other IVR software products. The Corporation otherwise relies
on a combination of copyright, trademark and trade secret laws, nondisclosure
and other agreements and technical measures to protect its proprietary
technology. Two applications for trademark registration are currently pending in
the United States Patent and Trademark Office covering the mark "MAVIS" in
ordinary block letters and in a stylized form. There can be no assurance that
the Corporation will be able to obtain any meaningful patent protection for its
technology in the future or that measures taken by the
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<PAGE>
Corporation will be adequate to prevent or deter misappropriation of its
technologies or the development of technologies having similar performance
characteristics. The Corporation licenses certain portions of its technology
from third parties under written agreement such as the multi- language programs
from Lernout & Hauspie which require the Corporation to pay ongoing royalty
payments. The Corporation is not aware of any violation of proprietary rights
claimed by any third party relating to PTT or Voice Quest or their products.
Because the computer technology market is characterized by frequent and
substantial intellectual property litigation, there can be no assurance that the
Corporation will not become involved in such litigation in the future to either
enforce or defend its intellectual property rights.
EMPLOYEES
PTT currently has eight employees of which six are full-time and two
are part-time, consisting of four programmers, one salesmen, one receptionist,
one administrator and one database clerk. PTT expects to increase its technical
and sales personnel as additional products come online and the distribution of
MAVIS(TM) becomes widespread. Michael R. Faulks, a Vice President of the
Corporation, is the creator of MAVIS(TM) and serves as the Technical Director of
PTT.
Voice Quest has no employees other than its president, Mark Ortner, who
is the founder of Voice Quest and the developer of all of Voice Quest's speech
recognition and voice mail technology, including the Personal Operator(TM).
ACC employs 38 full-time personnel, including eight in administration,
twelve in sales and eighteen in service. ACC has never had a work stoppage and
none of its employees are represented by a labor organization.
RomNet has 27 employees, 23 of which work full-time.
Talidan does not have any employees as such. Talidan's managing
director, in the Isle of Man, and individuals providing administration services
in Brazil and the United Kingdom are all paid pursuant to consulting agreements.
Talidan relies on outside sources for its sales, marketing and advertising.
Antony Redfern, a Vice President of the Corporation, serves as a consultant to
Talidan. Mr. Redfern will resign from his position as Vice President of the
Corporation.
Victoria has 24 full-time and 26 part-time employees. None of the
employees are covered by a collective bargaining agreement. The Corporation
believes its employee relations to be good.
REGULATORY MATTERS
Except with respect to Victoria, the Corporation is not subject to
direct regulation by any government agency, other than regulations applicable to
businesses generally. Restaurants are subject to numerous federal, state and
local laws affecting health, sanitation and safety, as well as state and local
licensing of the sale of alcoholic beverages. The Americans With Disabilities
Act prohibits discrimination in employment and public accommodations on the
basis of disability.
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Under the Act, Victoria could be required to expend funds to modify its
restaurant to provide service to disabled persons or make reasonable
accommodations for the employment of disabled persons.
SUBSEQUENT ACQUISITION--PARAMOUNT
General. Paramount provides telecommunications services to the
hospitality, health care and pay-telephone industries as an outside service
provider in the United States, Mexico and Canada. The company markets call
accounting systems similar to systems, which operate as the primary systems used
by hotels to provide telephone-related services, including credit card calls and
third party collect calls to their guests, as well as to produce the
information necessary to bill guests for telephone calls and to properly manage
telecommunications services in the hotel. In addition, Paramount will market
MAVIS(TM) to the hospitality and the health care industries. Paramount's
revenues for 1998 were $11,314,649 and its net income for such period was
$646,937.
Paramount's client base consists of domestic and international hotels,
motels, inns, resorts, hospitals, and publicly accessible telephone equipment
providers. In March 1999, Paramount signed a three-year contract with First
Choice Communications of Texas to provide services that generate automated
operated-assisted calling data in the hospitality industry. In addition, in
April 1999, Paramount entered into a Memorandum of Understanding with a
subsidiary of BCT.TELUS to provide and receive certain services for its
hospitality industry clients in Canada.
Employees. Paramount has 10 employees. Michael Eberle, President; David
M. Moody and David Paton, Executive Vice Presidents; and Kay Eberle, Secretary,
each have five year employment agreements with Paramount, which expire on
January 1, 2004 renewed at least 120 days prior to its expiration. Each
agreement provides for a $130,000 base salary with a signing bonus of $375,000
and 12,500 shares of restricted Common Stock of the Corporation. Additionally,
each will be entitled to receive additional shares of Common Stock of the
Corporation based on Paramount's sales revenues for the two year period
commencing April 1, 1999 and ending March 31, 2001.
Competition. Paramount's competition includes AT&T, MCI Worldcom, Inc.
and Sprint Corporation, as well as other smaller companies. These larger
companies have tremendous national advertising resources with greater name
recognition, substantially greater technical, financial and marketing resources,
as well as larger customer bases. As competitive, technological and regulatory
changes occur, Paramount anticipates that new and different competitors will
enter and expand their position in the communications services markets. However,
Paramount believes that by focusing primarily on the hospitality industry, it
has created its own niche in that industry. With the sheer size of the
multi-billion dollar long distance market being so large, even a very small
share can translate to high revenues. The PBX equipment is proprietary to the
company. Other companies offering similar services to hotels must divert the
phone traffic to an outside OSP, and then the hotel is paid a commission by the
OSP. Paramount's PBX systems are located in the hotels, which allows each hotel
to operate as an OSP. This provides a greater profit margin to the hotel because
it set its own prices for O+ calls. An increase in use of cellular telephones by
hotel guests, thereby reducing the number of calls made on the hotel telephones,
could have an adverse impact on Paramount's profitability.
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<PAGE>
ITEM 2. Description of Property.
The Corporation owns no real estate. The principal executive offices of
the Corporation are located at Executive Plaza 3, Suite 1001, Hunt Valley,
Maryland 21031. The Corporation's lease, which covers approximately 7,700 square
feet, expires April 30, 2003. The annual rent is $132,000, subject to increases
of 3.5% per year.
The Corporation has subleased its prior offices in Owings Mills,
Maryland for its remaining term expiring in March 2003. Monthly payments are
required under the lease which escalate over the term of the lease starting with
$1,925 and ending with $2,100. The rent under the sublease covers the rent under
the lease to the Corporation.
The Corporation believes that its leased premises are suitable for its
corporate headquarters and offices. The Corporation also believes that its
insurance coverage for its leased and subleased premises is adequate.
PTT currently leases 1,900 square feet of office space in Sheffield,
England under a three year lease which expires January 2001 at an annual rent of
$33,000.
ACC's offices are located in 5,000 square feet of leased space in
Columbia, Maryland. The lease term is for five years expiring in August 2000 and
at an annual rent of $59,000. The Virginia ACC branch currently leases 3,010
square feet in Fairfax, Virginia. The lease term is for two and a half years and
expires on July 11, 2001 at an annual rent of $70,908. The ACC branch in
Delaware will enter into a five year lease for 3480 square feet in New Castle,
Delaware. The proposed lease has two additional option periods of five years,
with annual rent ranging from $27,266 in the first two years, to $30,798 in the
fifth year.
RomNet currently subleases 3,800 square feet in Boston, Massachusetts.
The sublease expires in October 2001 at an annual rent of $51,600.
Paramount currently leases 4,000 square feet in Vista, California under
a seven year lease which expires in October 2005 at annual rent of $4,202, with
an increase of rent 5% per year.
The Victoria Station restaurant is located at 6301 Northwest 36th
Street, Virginia Gardens, Florida. The annual rent under the lease, which
expires in 2001, is $121,000.
ITEM 3. Legal Proceedings.
On July 22, 1998, the Corporation obtained an option to acquire
Advanced Networking, Inc. ("ANI"), a Delaware company engaged in the sale,
installation and servicing of telephone equipment in Delaware and adjoining
states, subject to due diligence satisfactory to the Corporation. The purchase
price for the business, if consummated, would be $2,800,000 in cash or cash
equivalents. Upon the option's initial expiration date, the Corporation believed
that the option was mutually extended by the parties. ANI refused to implement
the terms of the option and as a result, on December 22, 1998, the Corporation
filed a complaint in the Circuit Court of Baltimore County against ANI and the
stockholders of ANI. The Complaint asserts claims based
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<PAGE>
on breach of contract, promissory estoppel and misrepresentation. The Complaint
seeks specific performance of the option and/or compensatory damages in the
amount of $3,000,000 for each claim and $3,000,000 in punitive damages for the
misrepresentation claim. On January 27, 1999, the Defendants filed a notice of
Removal to the United States District Court for the District of Maryland. The
Defendants have filed a Motion to Dismiss based on a lack of personal
jurisdiction, which is currently pending before the Court.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None
PART II
ITEM 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Common Stock of the Corporation is traded on the National
Association of Securities Dealers Bulletin Board market. During the period of
the Corporation's inactivity from June 1985 through September 1996, there was no
public trading of the Corporation's shares.
Trading of the Corporation's Common Stock on the over-the-counter
market commenced in September 1996. The following table reflects the high and
low bid prices for the Corporation's Common Stock for each quarterly period
ended since 1997. These quotations are based on information supplied by market
makers of the Corporation's Common Stock. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
1998 1997
---- ----
Price Range Price Range
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1st Quarter $.22 $1.44 $.65 $1.20
2nd Quarter .42 .8125 .375 .9375
3rd Quarter .48 1.90 .375 1.375
4th Quarter .73 2.45 .375 1.000
</TABLE>
For the first quarter of 1999, the high bid price for the Common Stock
was $7.31 and the low bid price was $2.13. On March 26, 1999, the closing bid
price of the Common Stock was $7.125.
Holders
As of March 26, 1999, there were 1,211 holders of record of the
Corporation's Common Stock. At such date, 52,645,245 shares of Common Stock were
issued and outstanding.
In addition, the Corporation has issued Preferred Stock in Series in
connection with its business acquisitions, including: (i) 200,000 shares of
Series A Preferred Stock issued to two shareholders of record, convertible on
May 18, 2000 into the greater of 2,000,000 shares of Common Stock or $2,000,000
worth of Common Stock based on the fair market value price per share of Common
Stock on May 18, 2000; (ii) 200,847.5 shares of Series B Preferred Stock, issued
to one shareholder of record, currently convertible into 2,008,475 shares of
Common Stock; (iii) 21,600 shares of Series E Preferred Stock issued to two
shareholders of record, convertible on November 20, 2000 into the greater of
216,000 shares of Common Stock or $270,000 worth of Common Stock based on the
fair market value per share of Common Stock
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<PAGE>
on November 20, 2000; (iv) and 52,500 shares of Series F Preferred Stock issued
to one shareholder of record, which will automatically convert on December 1,
2000 into the greater of 525,000 shares of Common Stock or $700,000 worth of
Common Stock based on the fair market value per share of Common Stock on
December 1, 2000.
Dividends
The Corporation has declared no dividends and is not likely to do so in
the near future.
Recent Sales of Unregistered Securities
The following information relates to sales of securities of the
Corporation issued or sold in the period from January 1, 1998 to December 31,
1998 which were not registered under the Securities Act of 1933, as amended
("Securities Act").
(1) On February 1, 1998, the Corporation issued to two shareholders of
ACC, 5,000 shares of Common Stock and 200,000 shares of its Series A Preferred
Stock, in partial consideration for all of the outstanding stock of ACC. These
transactions were effected without registration under the Securities Act in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act. The recipients of the shares were accredited investors. Each of
the recipients of such shares, represented that the shares were acquired for
investment without a view to distribution, the certificates representing such
shares contained appropriate restrictive legends and to date none of such shares
have been transferred in transactions in public markets of the United States.
(2) Through December 31, 1998, the Corporation sold 2,763,688 shares
for an aggregate consideration of $968,878 in cash or services to 42 purchasers.
Of these purchasers, six were not U.S. persons, one was an accredited investor,
one was an employee of the Corporation, four were counsel to the Corporation or
their relatives, two were accountants who performed internal accounting for the
Corporation, sixteen were relatives or friends of the officers or the employees
of the Corporation, four were related purchasers and eight were others. These
transactions were effected without registration under the Securities Act in
reliance upon the exemption provided by SEC Rule 504 of Regulation D.
(3) Through December 31, 1998, the Corporation sold 4,014,389 shares
for an aggregate consideration of $815,799 in cash or services to 21 purchasers.
Of these purchasers, three were not U.S. persons, three were employees, officers
or directors of the Corporation, three were counsel to the Corporation, five
were relatives or friends of officers or the employees of the Corporation, four
were related purchasers and three were others. These transactions were effected
without registration under the Securities Act in reliance upon the exemption
from registration
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<PAGE>
provided by Section 4(2) of the Securities Act. Of the 18 purchasers who were
U.S. persons, 14 were accredited investors and three were sophisticated
investors who received corporate information that was provided by Standard and
Poor's as well as financial statements and information available on the
Corporation's web site. Each of the recipients of such shares represented that
the shares were acquired for investment without a view to distribution, the
certificates representing such shares contained appropriate restrictive legends
and to date none of such shares have been transferred in transactions in public
markets of the United States.
(4) On December 1, 1998, the Corporation issued to the owner of the
assets of RomNet, Inc. 300,000 shares of Common Stock and 52,500 shares of its
Series F Preferred Stock, in partial consideration for all of the assets of
RomNet, Inc. These transactions were effected without registration under the
Securities Act in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act. The recipient of the shares was an
accredited investor. The recipient of such shares represented that the shares
were acquired for investment without a view to distribution, the certificates
representing such shares contained appropriate restrictive legends and to date
none of such shares have been transferred in transactions in public markets of
the United States. Prior to the completion of the transactions, the recipient of
the shares performed a thorough due diligence review of the Corporation and
received a copy of the Corporation's Form 10-SB filed on October 28, 1998.
(5) Through December 31, 1998, the Corporation sold 580,200 shares for
an aggregate consideration of $1,145,400 in cash to 44 purchasers. All of these
purchasers were accredited investors. These transactions were effected without
registration under the Securities Act in reliance upon the exemption provided by
SEC Rule 506 of Regulation D.
Certain of the stock issuances described in paragraphs (2), (3) and (5)
above may not have been in full compliance with the rules and regulations under
the Securities Act and applicable state securities laws. On July 31, 1998, the
Corporation offered to the purchasers of such stock issuances (other than
purchasers who are not U.S. persons) a right to rescind their purchases and
receive a full refund of their purchase price, plus interest. No purchaser has
elected to rescind. The Corporation acknowledges that it may be subject to
regulatory action by federal and state securities regulatory authorities in
connection with such sales. However, the highest price per share paid by any
purchaser was $0.85, and on March 26, 1999 the average of the closing bid and
asked prices in the over-the-counter bulletin board market was $7.125. As a
result, the Corporation does not believe that it has any material liability to
the purchasers in respect to these sales.
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The current history of the Corporation began on May 3, 1996 with the
acquisition of ECAC and DAR. In early 1997, the Corporation decided to
concentrate its operations primarily in telecommunications rather than financial
services. From that time to December 31, 1998, the Corporation has implemented
the following acquisitions and dispositions which have transformed the
Corporation's primary operations from financial services to telecommunications.
In April 1997, the Corporation sold a substantial portion of ECAC's merchant
accounts; in August 1997, the Corporation acquired Victoria; in September 1997,
the Corporation (i) spun-off TimeCast (with DAR) and (ii) acquired PTT and
Talidan; in January 1998, the Corporation sold all of the stock of ECAC and a
European affiliate; in February 1998, the Corporation acquired ACC; in November
1998, the Corporation acquired Voice Quest; and in December 1998, the
Corporation acquired RomNet.
During fiscal 1997, revenues were contributed principally by ECAC,
Talidan and Victoria. For 1998, revenues were contributed principally by
Talidan, PTT, ACC and Victoria. Revenues for RomNet, Voice Quest and ECPI were
not significant.
As part of the sale of ECAC in January 1998, the Corporation retained
40% of the future gross profit derived from the merchants utilizing the credit
card of Franklin Bank of Southfield,
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Michigan. The revenues are generated from customers who have small to mid-size
retail and professional businesses in Michigan. Revenues for 1998 from this
activity were not significant.
In 1999 the Corporation made an additional acquisition by acquiring
Paramount, which provides telecommunications services and systems to the
hospitality, health care and pay- telephone businesses as an outside service
provider in the United States, Canada and Mexico.
As a result of the transactions described herein, the Corporation
became primarily a telecommunications company whose business units are (i) the
development and marketing of IVR and response software, including two automated
voice independent systems known as "MAVIS(TM)" and "Personal Operator(TM)", (ii)
the promotion of international telephone traffic through the marketing of
information and entertainment services, (iii) the provision of Internet support
services, beta testing services and technical support for telephone related
computer services, including software and hardware products, (iv) the sale,
installation and servicing of business telephones and system solutions, and (v)
outside service provider to the hospitality, health care and pay-telephone
industries. Income is also currently derived from two other sources consisting
of (i) the ownership and operation of the Victoria Station Restaurant near
Miami, Florida, and (ii) 40% of the gross profit collected by ECAC from the
accounts of the Franklin Bank. The cash flow from these two sources will
continue to provide funding to the Corporation until the telecommunications
businesses become self-sustaining.
The Corporation expects that sales of voice recognition systems and IVR
software products have the highest immediate potential for growth of any of the
Corporation's business units, particularly the MAVIS(TM) and the Personal
Operator(TM) systems. Both can integrate with virtually any PBX whether
currently marketed or already in use; MAVIS(TM) has greater capability and can
function in a number of languages; and Personal Operator(TM) has greater voice
mail capability. The Corporation intends to initially market MAVIS(TM) in the
United States through marketing relationships with ALLTEL Supply Inc., a
business unit of ALLTEL Corp., internationally through distributors and through
the clients of telephony companies that it owns or acquires. On December 8,
1998, the Corporation entered into a Distributor Agreement with a designee of
the Tiller Group, whereby, in exchange for the put rights it held, the
Corporation appointed and designed the Tiller Group designee as the exclusive
authorized distributor of MAVIS(TM) in the Eastern Block. The recent acquisition
of Paramount will provide the Corporation with the ability to market MAVIS(TM)
to the hospitality and health care industries. The Corporation's acquisition of
Voice Quest, together with PTT, will provide the Corporation with the benefits
to be derived from having two of the outstanding pioneers in the field of voice
recognition systems managing these two entities and collaborating on future
product development and enhancement. The acquisition of PTT and Voice Quest
affords the Corporation the opportunity to market both MAVIS(TM) to large
companies requiring highly sophisticated systems as well as Personal
Operator(TM) to small and medium size businesses seeking affordable systems. PTT
has also developed a number of IVR telephone software products including systems
to place orders from suppliers, automate payrolls, register purchases by
customers, profile prospective employees, protect merchandise from theft, make
hotel reservations, send greeting card messages and obtain travel information.
Voice Quest has developed a database query product and a prescription refill
system, both IVR telephone software products.
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<PAGE>
Results of Operations
Fiscal Year Ended December 31, 1997. The Corporation realized operating
revenues in 1997 of $3,245,810 and revenue from the sale of a portion of ECAC's
accounts of $3,700,000, or aggregate revenues of $6,945,810. Cost of sales for
1997 were $1,589,925, operating expenses were $3,819,463, interest expense (net
of interest income) was $32,583, and there was an income tax benefit of $12,279
resulting in the Corporation realizing net income from continuing operations of
$1,516,118. After a loss from discontinued operations of $100,330, arising as a
result of the spin-off of TimeCast (with DAR), net income for the year was
$1,415,788, or $0.06 per share, diluted.
Revenues attributable to ECAC in the amount of $5,056,223 consisted of
service revenue of $1,356,223 and revenue from the sale of the service contract
portfolio of $3,700,000. The sale of the portfolio was based on management's
belief that the future operations of the Company should be directed toward the
acquisition of businesses involved in the telecommunications industry. The
profit realized on the sale of the portfolio provided the funds necessary for
the Corporation to pursue acquisitions in this area.
In September, the Corporation acquired Talidan and PTT. The acquisition
of Talidan provided the Corporation with access to financial resources to
continue the development of MAVISTM and other software owned by PTT.
Victoria was acquired in 1997 in order to provide working capital to
the Corporation during the transition of principal operations to the
telecommunications industry.
The contribution (loss) of the Corporation and each operating
subsidiary to revenues and net income before income taxes for 1997 were as
follows:
Income
Revenues Before Taxes
-------- ------------
Carnegie $ -- $ (1,617,849)1
ECAC 5,056,223 3,123,989
PTT 14,400 (46,996)
Talidan 1,202,512 39,385
Victoria 672,675 5,310
--------------- ---------------
$ 6,945,810 $ 1,503,839
============== ==============
- -------------------------------------
1 Expenses of the Corporation, including management services provided by the
Corporation to its subsidiaries.
Fiscal Year Ended December 31, 1998. The Corporation realized revenues
for the year ended December 31, 1998 of $11,657,223, including $3,107,564 from
the sale of MAVIS(TM) software and distribution rights in exchange for
cancellation of the put rights held by the Tiller Group. Cost of fees and sales
for the year were $3,679,506. Operating expenses were $7,299,322, interest
expense (net of interest income) was $465,709 and the provision of income taxes
was $539,913. The Corporation also realized gains, net of costs, of $2,988,154
on the sale of certain of Talidan's assets ($1,596,273) and the sale of ECAC and
its European affiliate ($1,391,881), resulting in the Corporation realizing net
income of $2,660,927, or $0.06 per share, diluted. Income taxes increased over
the preceding period due to an increase in income
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<PAGE>
for the year over that of the preceding year and the Company's utilization of
all of its domestic net operating loss carry-forwards.
Effective February 1, 1998, the Corporation acquired ACC, which is a
distributor of telephone systems to small and medium-size businesses.
Additionally, ACC will provide the sales and marketing support for the sale of
the MAVIS(TM) and Personal Operator(TM) systems to customers who have existing
telephone systems. The revenues of ACC for the period from February 1, 1998 to
December 31, 1998 of $3,183,009 did not include sales of the MAVIS(TM) system.
In December 1998, the Corporation sold 1000 units of MAVIS(TM) and the
rights to sell MAVIS(TM) exclusively in the Eastern Block to a designee of the
Tiller Group in exchange for the relinquishment of the put rights of the Tiller
Group. Revenue recognized on this transaction amounted to $3,107,564.
During the year management concluded that a segment of Talidan's
operations were not consistent with the image that the Corporation wanted to
convey. As a result, the rights to certain telephone lines and promotional
materials with respect to Talidan's print media business were sold along with
releases of certain consultants to Talidan from their covenants not to compete
for $1,596,273 net of costs, evidenced by a note in the amount of $2,340,000.
The proceeds of this note will be used by the Corporation to bring the MAVIS(TM)
system to market.
The contribution (loss) of the Corporation and of each operating
subsidiary to revenues and income before income taxes for the year ended
December 31, 1998 were as follows:
Income
Revenues Before Taxes
-------- ------------
Carnegie $ -- $ (1,460,721)1
PTT 3,147,639 2 2,910,503 2
Talidan 3,073,348 1,576,613 3
Victoria 2,117,930 134,150
ACC 3,220,875 68,787
RomNet 97,431 (16,501)
Voice Quest -- (11,991)
---------------- ----------------
$ 11,657,223 $ 3,200,840
================ ================
- -------------------------------------
1 Represents gains from the sale of ECAC and ECAC (Europe) offset by expenses
of the Corporation, including management services provided by the
Corporation to its subsidiaries.
2 Includes gain on sale of MAVIS(TM) software and distribution rights.
3 Includes gain on sale of certain of Talidan phone lines and relinquishment
of covenants not to compete.
Plan of Operations
In 1999 the Corporation intends to operate each of its business
units as follows:
PTT. Prior to 1999, PTT had been a development stage company with
minimal income engaged in the development of MAVISTM and a wide variety of IVR
products, which are now ready for commercialization. It is the Corporation's and
PTT's intention in 1999 to develop
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distribution systems in the United States and Europe and to concentrate
marketing efforts initially on MAVISTM. In the United States, the Corporation
has begun to establish a national dealer network for MAVISTM through its
agreement with ALLTEL Supply, Inc. The Corporation intends to also market
MAVISTM in the United States through ACC and other telephony companies acquired
in the future, through RomNet and, through Paramount, to the hospitality and
health care industries. In Europe, PTT, with the assistance of CCI, will
negotiate for marketing partners for MAVISTM and will begin the sale of its IVR
products. PTT will also continue to develop additional IVR products and to
improve MAVISTM as well as add additional foreign languages in which MAVISTM
operates.
Talidan. Talidan expects that revenues on its retained business in 1999
will be comparable to 1998. In addition, Talidan anticipates the receipt of
$2,551,776 in 1999 from the sale of a portion of its business in June 1998.
Talidan has entered into a non-binding letter of intent for the sale of its
stock. In the event the sale is not completed, Talidan will attempt to generate
additional business with additional international telephone carriers.
ACC. ACC will (i) continue to serve its existing commercial accounts
and solicit new accounts, (ii) expand its services to governmental agencies,
(iii) increase its hardware and software product lines, (iv) market in its area
of operations software products of PTT and Voice Quest, including the MAVIS(TM)
and Personal Operator(TM) systems and (v) develop arrangements with other
telephony dealers for the marketing of such products throughout North America.
ACC has also opened two branch offices in Northern Virginia and Delaware in
order to better serve its increasing business in those areas. ACC's recently
submitted application to become an accredited Lucent Technologies dealer has
been accepted, which should open a substantially broader market to ACC. In 1998,
ACC's revenues were $3,400,000, representing a substantially improved
performance compared to $2,900,000 in 1997.
Voice Quest. Voice Quest will continue to develop it existing product
line and market it through the Corporation's domestic and international
distribution systems. Additionally, the technological advancements created by
Voice Quest, particularly in adding valuable features to voice mail, will be
used to complement and strengthen MAVIS(TM).
RomNet. RomNet will continue to provide a broad range of high-end
technical services to its current base of clients and will attempt to generate
additional business, particularly through its Internet support and services,
including E-Commerce related activities.
Financial Services. The Corporation was entitled to receive forty
percent (40%) of the gross profit derived by ECAC from credit card accounts of
the Franklin Bank beginning in March 1998. Such revenues for 1998 were not
material. The Corporation has presently delayed seeking to enlarge this customer
base because it is focusing on its telecommunications strategy. In the future
the Corporation may consider taking advantage of its expertise in credit card
processing and becoming more active in that market.
Victoria Station Restaurant. The Corporation intends to continue to
operate Victoria under its ownership in essentially the same manner as it
operated in the past.
21
<PAGE>
Acquisitions
In February 1999, the Corporation acquired Paramount, which will
continue to provide telecommunications services and systems to the hospitality,
health care and pay-telephone businesses, primarily as an outside provider in
the United States, Canada and Mexico. Paramount markets PBX systems, which
operate as the primary systems used by hotels to provide telephone-related
services to their guests, as well as to produce the information necessary to
bill guests for telephone calls and to properly manage telecommunications
services in the hotel. In the future, Paramount will market to hospitality and
health care clients the software products developed by PTT and Voice Quest,
including MAVIS(TM) and Personal Operator(TM).
In the remainder of 1999, the Corporation will seek to acquire
companies in the United States engaged in the sale, installation and servicing
of telephone equipment and systems; the provision of technical and Internet
support services; the provision of operator service and related products; or
marketing relationships with such companies. It is the intention of the
Corporation to ultimately own or have marketing relationships with a complex of
such companies operating across the United States. The Corporation has currently
signed two letters of intent to acquire such companies, however, the Corporation
is uncertain as to the possibility of acquiring either of the companies. The
Corporation believes that such coverage by its own telephony companies will be
ideal for the marketing to their customers of PTT's IVR products and the
MAVIS(TM) and Personal Operator(TM) systems, in addition to the national
distribution of MAVIS(TM) by ALLTEL Supply, Inc. The Corporation expects that it
will take a combination of stock and cash to acquire any of such companies and
that the cash requirements will be met by a combination of cash generated by the
Corporation's operations, by the private and public sales of stock and by lines
of credit. There can be no assurances that this strategy will be successful.
Working Capital and Liquidity
Cash needs of the Company have been met to date by a combination of
funds generated from operations, from borrowings, from the sale of assets and
from issuances of the Corporation's stock for cash and for services. For 1997,
cash flow from operations was $2,356,734, and proceeds from the sales of stock
were $229,541. In 1998 the Corporation had cash flow used in operations of
$(2,154,651) and generated $3,670,883 in proceeds from the sale of stock as well
as $100,000 from the sale of ECAC's stock. Cash from borrowings amounted to
$990,568 and $1,677,563 for the years ended December 31, 1997 and December 31,
1998, respectively.
In addition, in 1997, the Corporation issued 2,290,145 shares of Common
Stock for services rendered valued at $602,192. For the year ended December 31,
1998, the Corporation issued 2,179,268 shares of Common Stock for services
rendered and other costs valued at $922,732.
The Corporation has made up for the loss of income from ECAC by the
acquisition of other income producing assets for stock, deferred cash payments
and/or relatively small amounts of upfront cash. PTT and Talidan were acquired
for stock; ACC was acquired for $1,000,000 note payable over five years and
stock; Voice Quest was acquired for a $102,084 note payable over three
22
<PAGE>
years and stock; RomNet was acquired for stock and the assumption of debt
obligations of $509,529; the Victoria Station Restaurant was acquired for cash
in the amount of $140,000, a note payable of $185,000 and stock; and Paramount
was acquired for stock, however, the stockholder-employees were paid $1,500,000
in the aggregate as bonuses for entering into employment agreements with
Paramount.
Since the acquisition of PTT at the end of September 1997, the
Corporation has utilized its available cash flow primarily in the development of
PTT's MAVIS(TM) system and to a lesser extent in the development of its various
IVR software products. As of December 31, 1998, the cash requirements of PTT for
product development have been substantially reduced due to the start of
commercial sales of several completed IVR software products and to the
completion of the development of the initial MAVIS(TM) system. As a result, the
Corporation believes that its funds from current operations will be sufficient
to meet operating expenses and debt service without any significant additional
sales of stock or any significant increase in debt. If unforeseen events cause
increases from time to time in the need for additional working capital, the
Corporation believes it will be able to satisfy substantially all of such
temporary operating funding requirements from lines of credit on commercially
reasonable terms.
The Corporation's plans for 1999 call for it to make additional
acquisitions of companies engaged in the sale, installation and servicing of
telephone systems and equipment, the provision of technical and Internet support
services or the provision of operator service and related products in other
areas of the United States in addition to the Mid-Atlantic region where the
Corporation currently owns an operating subsidiary. If such acquisitions require
substantial amounts of cash the Corporation will have to issue additional stock
or incur additional debt. The Corporation believes that it will be able to
generate such capital from either or a combination of both of such sources on
terms satisfactory to the Corporation. If acquisitions are funded utilizing bank
debt it is likely that such debt would have to be secured at least with the
assets of the company to be acquired and possibly with additional assets of the
Corporation.
Year 2000 Computer Systems Compliance
The term "Year 2000 Issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year and a date, often meaning that the computer will
fail to distinguish dates in the "2000's" from dates in the "1900's."
The Corporation believes that its software is certified and fully Year
2000 compliant due to its recent modification of existing software and
conversion to new software or computer systems. The Corporation has also
conducted an internal review of all its computer systems and has contacted all
its software suppliers to determine whether there are any major areas of
exposure to the Year 2000 Issues. The Corporation believes that any Year 2000
Issues which may arise will not be significant and should be able to be funded
through the Corporation's normal operating revenue and income.
The Corporation has contacted most of its other vendors, suppliers and
significant customers to determine that their operation, products and services
are Year 2000 compliant or to
23
<PAGE>
monitor their progress toward Year 2000 compliance. Most of the these parties
state that they intend to be Year 2000 compliant. Although some of the vendors
and the suppliers may not be Year 2000 compliant, the Corporation believes that
such failure would not have a major impact on the Corporation due to the
reliance on the Corporation's own proprietary software. The Corporation believes
that some of its customers may not be Year 2000 compliant and may therefore have
cash flow problems and become a potential credit risk for the Corporation. The
Corporation believes that this should not be a significant problem to the
Corporation and may be a marketing opportunity since its software is Year 2000
compliant.
Forward Looking Statements
This Form 10-KSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements included
herein that address activities, events or developments that the Corporation
expects, believes, estimates, plans, intends, projects or anticipates will or
may occur in the future, including such things as future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, competitive strengths, goals, expansion and other such
matters are forward-looking statements. Actual events may differ materially from
those anticipated in the forward-looking statements. Important factors that may
cause such a difference include general economic and business conditions;
changes in interest rates; increased competition in the Corporation's market
areas; success of operating initiatives; operating costs; changes in business
strategy or development plans; availability, terms and deployment of capital;
and changes in, or failure to comply with government regulations. Although the
Corporation believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore there can be no assurance that the forward-looking
statements included in this filing will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Corporation or any other person that the objectives and
expectations of the Corporation will be achieved.
ITEM 7. Financial Statements.
The financial statements are included herein following Item 13 of this
Annual Report on Form 10-KSB commencing on page F-1.
ITEM 8. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure.
There were no changes in or disagreements with the Corporation's
certified public accountants during the fiscal years ended December 31, 1998 and
1997.
24
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following is a listing of the directors and executive officers of
the Corporation, their ages and positions with the Corporation.
<TABLE>
<CAPTION>
Name Age 1 Position 2
- ---- ----- ----------
<S> <C> <C>
E. David Gable3 49 Chairman of the Board of Directors
Lowell Farkas4 58 Director, President and Chief
Executive Officer
Stuart L. Agranoff 49 Director
Richard M. Cohen 47 Director
Barry N. Hunt 51 Director
Michael Eberle5 53 Director
B. Chris Schwartz6 56 Chief Operating Officer
Bennett H. Goldstein7 50 Executive Vice President, Chief Financial Officer and
Treasurer
Michael R. Faulks 45 Vice President
Lawrence Gable3 52 Vice President
Antony Redfern 40 Vice President
Richard J. Greene7 60 Vice President and Corporate Secretary
- -----------------------------
1 As of December 31, 1998
2 Each Director holds office for one year or until his successor has been duly
elected and qualified.
3 E. David Gable and Lawrence Gable are brothers.
4 Pursuant to Lowell Farkas' employment agreement with the Corporation, he is
entitled to be a Director so long as he is the President.
5 Pursuant to the terms of the Paramount acquisition, Mr. Eberle is entitled to
a seat on the Board of Directors but has not yet begun to serve in that
capacity.
6 Effective March 16, 1999, B. Chris Schwartz became the Chief Operating Officer
of the Corporation.
7 Effective February 15, 1999, Bennett H. Goldstein became Executive Vice
President, Chief Financial Officer and Treasurer of the Corporation and
Richard J. Greene became the Secretary of the Corporation.
</TABLE>
E. David Gable. Mr. Gable serves as Chairman of the Board of Directors
and was Chief Operating Officer from May 1997 to March 16, 1999. He was elected
Chairman in September 1996 and From September 1996 through May 1997, Mr. Gable
served as the Acting President and Chief Executive Officer of the Corporation.
From 1988 to 1993, he served as a Principal and President of the All Star
Automotive Group which consisted of fourteen automobile dealerships located
throughout Maryland, Virginia, West Virginia and Pennsylvania.
Lowell Farkas. Mr. Farkas serves as the President and Chief Executive
Officer of the Corporation and as a Director. Mr. Farkas first became involved
with the Corporation in October 1996 when he began working as a part-time
consultant. He was appointed a Director and President and CEO in May 1997 and
continues to serve in these positions. Prior to joining the Corporation, Mr.
Farkas served as President and CEO of Mad Martha's Ice Cream, Inc. from
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<PAGE>
1995 to 1996. From 1992 to 1995, Mr. Farkas was a management consultant on a
full-time basis to A.S. Management Corporation which operated restaurants on the
east coast. Mr. Farkas has also served as the President, Chief Executive Officer
and a member of the Board of Directors of Victoria Station Acquisition
Corporation and the Executive Vice president and Chief Operating Officer of Horn
& Hardart.
Stuart L. Agranoff. Mr. Agranoff has served as a Director of the
Corporation since August 1998. Mr. Agranoff is a general partner of Murphy &
Partners, an equity investment fund, in New York City. From 1988 to 1997, he was
employed by Citicorp Venture Capital, Ltd., an investment group, as its Chief
Financial Officer and Vice President. Mr. Agranoff has also served as a Director
of Farm Fresh, Inc., a privately-held supermarket chain based in Norfolk,
Virginia.
Richard M. Cohen. Mr. Cohen has served as a Director of the Corporation
since September 1998. Mr. Cohen owns Richard M. Cohen Consultants, Inc., a
financial consulting firm, in New York City. From 1992 to 1996, he was employed
by General Media, Inc., a publishing and entertainment company engaged in the
production and sale of men's magazines, automotive publications and various
entertainment products, as its President.
Barry N. Hunt. Mr. Hunt has served as Director of the Corporation since
October 1998. Mr. Hunt also serves as the President of ACC. He is the co-founder
of ACC and has served as its President since 1979.
Michael Eberle. Mr. Eberle has served as the President and Chief
Executive Officer of Paramount since 1994 and is a co-founder of Paramount. Mr.
Eberle also is President of Carlsbad Framing, Inc., a California corporation
engaged in the residential framing business. Since 1996, Mr. Eberle has served
as the Managing Director of Cherry Mountain Spring Water Company, LLC, which
sells bulk spring water to bottlers in the Phoenix metropolitan area.
B. Chris Schwartz. Mr. Schwartz has served as Chief Operating Officer
since March 16, 1999. From 1995 to March 1999, he served as Chairman and CEO of
Whitlock Equity Partners, a management firm specializing in business analysis
and operations, with a focus on E-Commerce and Internet-related companies. From
September 1992 to June 1995, he served as President and CEO of Family Bargain
Center Stores, a 90 store apparel retailer. He has also served as President and
CEO of MC Sporting Goods and Bata Shoe-North America, the world's largest shoe
manufacturer.
Bennett H. Goldstein. Mr. Goldstein has served as Chief Financial
Officer, Executive Vice President and Treasurer since February 1999. Prior to
joining the Corporation, he was a partner with Grant Thornton, LLP, the
Corporation's accounting firm. He joined Grant Thornton, LLP in 1993 and served
as a partner from 1995 until joining the Corporation.
Michael R. Faulks. Mr. Faulks has served as a Vice President of the
Corporation since October 1998. Mr. Faulks is the creator of the MAVIS(TM)
system and serves as Technical Director of PTT, as well as a member of the Board
of Directors of PTT. As Technical Director, Mr. Faulks is involved in the design
and creation of the Voice Response Services and manages a software development
team. From 1990 to 1993, he served as the Managing Director of
26
<PAGE>
Software Marketing Corporation Limited, a software development company in the
United Kingdom. In 1992, Mr. Faulks also became the Technical Director of CFS
(Distribution) Limited, the distributor for Software Marketing Corporation
Limited.
Antony Redfern. Mr. Redfern has served as a Vice President of the
Corporation since October 1997. Mr. Redfern is a consultant to Talidan. Mr.
Redfern has been working in telecommunications and voice computer technology
since 1990 when he joined Legion, Ltd. as its international business development
director until June 1996. While at Legion, Ltd, he was responsible for
establishing successful telecommunication businesses in Portugal, Brazil, Sao
Tome, and South Africa. From June 1996 to September 1997, Mr. Redfern was a
consultant to various companies. Mr. Redfern has a mechanical engineering
background and has worked on design projects in Europe and the Middle East.
Lawrence E. Gable. Mr. Gable has served as a Vice President of the
Corporation since May 1997. He is currently responsible for the integration of
the Corporation's acquisitions in the telephone interconnect operations. Upon
completion of these projects, he will reassume responsibility for managing the
Corporation's credit card operations. From February 1996 through February 1997,
Mr. Gable served as a consultant to ECAC. Prior thereto, Mr. Gable worked as a
Sales Representative for Shaw Industries, a Corporation engaged in the carpet
and floor covering industries.
Richard J. Greene. Mr. Greene has served as Vice President and
Corporate Secretary of the Corporation since February 15, 1999 and was the Chief
Financial Officer and Treasurer of the Corporation from September 1998 until
February 1999. He has been a certified public accountant since 1960 and has
operated his own accounting and business consulting firm since 1986.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and executive officers, and persons who own more than
ten percent of the Corporations outstanding Common Stock to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock. Such persons are required by
SEC regulation to furnish the Corporation with copies of all such reports they
file.
To the Corporation's knowledge, based solely on a review of the copies
of such reports furnished to the Corporation and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten percent beneficial owners have been
complied with for the period which this Form 10-KSB relates.
27
<PAGE>
ITEM 10. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information concerning
compensation of the Corporation's Chief Executive Officer and all executive
officers whose total annual salary and bonus exceeded $100,000, for the years
ended December 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Restricted Securities
Other Annual Stock Underlying All Other
Name Year Salary Bonus Compensation Awards Options/SARs Compensation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. David Gable 1998 $200,000 $ -- $ -- $ -- 1,000,000 $ --
1997 225,000
1996 100,000
Lowell Farkas 1998 150,000 -- -- -- -- --
1997 125,000 400,000
</TABLE>
Option/SAR Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options to the Corporation's executive officers in 1998.
<TABLE>
<CAPTION>
Percent Of
Number of Total
Securities Options/SARs
Underlying Granted To Exercise Or
Options/SARs Employees In Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. David Gable 1,000,000 80% $0.45 12/31/99
</TABLE>
Stock Option Plan
General. On July 15, 1998, the Board of Directors of the Corporation
approved the Carnegie International Corporation 1998 Stock Option Plan (the
"Plan"). The purpose of the Plan is to provide incentives for directors,
officers and employees of the Corporation who may be designated for
participation and to provide additional means of attracting and retaining
competent personnel.
The Plan provides for the reservation of 2,000,000 shares of the
Corporation's Common Stock for issuance upon the exercise of options granted
under the Plan. The number of shares of Common Stock reserved for the grant of
options and the number of shares of Common Stock which are subject to
outstanding options granted under the Plan are subject to adjustment to give
effect to any stock splits, stock dividends, or other relevant changes in the
capitalization of the Corporation. The options granted under the Plan may be
Incentive Stock Options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") or Non-Qualified Stock Options which are not
intended to be Incentive Stock Options.
28
<PAGE>
Administration and Grant of Options. The Plan is administered by a
committee of at least two directors appointed by the Board of Directors of the
Corporation (the "Committee"). The Committee designates from time to time those
directors, officers and employees of the Corporation or a subsidiary of the
Corporation to whom options are to be granted and who thereby become
participants in the Plan. No member of the Committee may vote upon or decide any
matter relating to him or herself or a member of his or her immediate family.
The Committee may grant to participants in the Plan options to purchase shares
of Common Stock in such amounts as the Committee shall from time to time
determine.
Terms of Options. In the case of Incentive Stock Options, the option
exercise price per share is the Fair Market Value, as that term is defined in
the Plan, of the Common Stock of the Corporation on the date preceding the date
of grant, except that if the grantee then owns more than 10% of the combined
voting power of all classes of stock of the Corporation (a "Ten Percent
Shareholder"), the option exercise price will be 110% of Fair Market Value. In
the case of NonQualified Stock Options, the option exercise price per share is
determined in the discretion of the Committee. Each option granted under the
Plan will expire on the 10th anniversary of the date the option was granted
except (i) as otherwise stated by the Committee in the Option Agreement, or (ii)
on the 5th anniversary of the date the option was granted in the case of a Ten
Percent Shareholder.
No option may be transferred by an optionee other than by will or the
laws of descent and distribution. Options are exercisable only by the optionee
during his or her lifetime and only as described in the Plan. Options may not be
assigned, pledged or hypothecated, and shall not be subject to execution,
attachment or similar process. Upon any attempt to transfer an option, or to
assign, pledge, hypothecate or otherwise dispose of an option in violation of
the Plan, or upon the levy of any attachment or similar process upon such option
or such rights, the option immediately becomes null and void.
In the event of the termination of employment or other relationship of
an optionee for any reason other than death, all unexercised options of the
optionee will terminate unless such options are exercised within 90 days after
the termination of employment. In the event of the death of an optionee, the
options may be exercised by the personal representative, administrator or a
person who acquired the right to exercise any such option, provided that such
option is exercised within one year after the death of the optionee.
Employment Agreements
Lowell Farkas. Mr. Farkas entered into an employment agreement with the
Corporation effective May 15, 1997 at an annual salary of $100,000 until
September 1, 1997 increasing to $125,000 in the second year, $150,000 in the
third year, and $200,000 for the remainder of the term. The agreement terminates
on August 30, 2003 and is renewable for one year terms unless the Corporation
gives notice of termination. As additional compensation, Mr. Farkas will be paid
a performance bonus annually, which will be based upon the net profits of the
Corporation for each year. Mr. Farkas also received non-qualified stock options
to purchase 400,000 shares of Common Stock of the Corporation at $0.50 per
share, the bid price on the date of the Farkas Agreement. If the Corporation
successfully completes a public offering of 5,000,000 shares of the
Corporation's stock which raises at least $5,000,000 or achieves a net profit of
$1,000,000 in
29
<PAGE>
any fiscal year, Mr. Farkas will receive options to purchase an additional
500,000 shares of Common Stock at $0.10 per share. Mr. Farkas is to be
reimbursed for the cost of leasing and operating an automobile. Upon termination
of his employment with the Corporation, Mr. Farkas has an option to acquire the
rights and title to Corporation's Victoria Station restaurant at a purchase
price paid by the Corporation for the business plus the depreciated value of
improvements made after the acquisition.
E. David Gable. Mr. Gable entered into an employment agreement with the
Corporation effective April 8, 1998 at an annual salary of $200,000. The
agreement will terminate on April 7, 2003 and is renewable on the same terms
unless the Corporation gives notice of termination. As additional compensation,
Mr. Gable will be paid a performance bonus annually, which will be based upon
the net profits of the Corporation each year. Mr. Gable received stock options
to purchase 1,000,000 shares of Common Stock of the Corporation at $0.45 per
share which shall become vested when the Corporation has a consolidated pre-tax
net income of at least $1,000,000 in two consecutive quarters. These options
must be exercised no later than December 31, 1999 or the options will become
void. In addition, if the Corporation successfully completes a public offering
of 5,000,000 shares of the Corporation's stock or raises at least $5,000,000 in
the Offering, Mr. Gable will receive options to purchase an additional 500,000
shares of Common Stock at $0.10 per share. In the event the Corporation
terminates the Gable Agreement for its convenience prior to the expiration
thereof, the Corporation will provide Mr. Gable with written notice of 90 days
prior to the termination date, along with compensation in an amount equal to
five years of salary in the Gable Agreement.
Bennett H. Goldstein. Mr. Goldstein entered into an employment
agreement with the Corporation effective February 15, 1999 at an annual salary
of $140,000. The agreement is for five years, and is renewable on the same terms
unless the Corporation or Mr. Goldstein gives notice of termination. As
additional compensation, Mr. Goldstein will be paid a performance bonus
annually, which will be based upon the net profits of the Corporation each year,
but in any event shall equal a minimum of $35,000. Mr. Goldstein received stock
options to purchase 200,000 shares of Common Stock of the Corporation at $2.50
per share which shall become vested in 30,000 share increments on the first
through fourth anniversary dates of the Goldstein Agreement and on the fifth
anniversary, the remaining 80,000 shall become vested. In the event the
Corporation terminates the Goldstein Agreement for its convenience prior to the
expiration thereof, the Corporation will provide Mr. Gable with written notice
of 90 days prior to the termination date, along with compensation in an amount
equal to two years of salary in the Goldstein Agreement.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table reflects the beneficial ownership of the
Corporation's Common Stock as of March 26, 1999 held by directors, executive
officers, each person known to Management of the Corporation to own
beneficially, directly or indirectly, more than 5% of the Corporation's Common
Stock, and all directors and executive officers as a group. Except as otherwise
indicated, the persons or entities listed below have sole voting and investment
power with respect to all Common Stock shown as beneficially owned by them.
Unless otherwise indicated, the address of all executive officers and directors
is the principal office of the Corporation.
30
<PAGE>
5% Beneficial Owners Number of Shares Percent of Class
- -------------------- ---------------- ----------------
The Greater Metropolitan
Corporation 1........ 3,133,874 5.81%
333 7th Avenue
New York, New York 10001
- -------------------------------------
1 Leonard Mezi is the sole stockholder of The Greater Metropolitan Corporation
and controls the corporation.
<TABLE>
<CAPTION>
Executive Officers and Directors Number of Shares Percent of Class
- -------------------------------- ---------------- ----------------
<S> <C> <C>
E. David Gable 1.......................... 1,253,100 2 2,38%
Lowell Farkas 1........................... 425,000 0.80%
Bennett H. Goldstein...................... 0 --
Stuart L. Agranoff ....................... 50,000 0.10%
Richard Cohen1 ........................... 80,000 0.15%
Michael Eberle ........................... 0 --
Lawrence E. Gable......................... 50,000 0.10%
Antony Redfern............................ 0 --
Richard J. Greene......................... 29,673 0.05%
Michael R. Faulks......................... 370,370 0.70%
Barry N. Hunt............................. 9,400 3 .02%
B. Chris Schwartz......................... 0 --
--------- ------
All directors and executive officers
as a group (12 persons)................. 2,267,543 4.30%
========= =======
</TABLE>
- -------------------------------------
1 Includes shares of Common Stock that the above individuals have a right to
acquire within 60 days pursuant to the exercise of options. Such shares are
deemed outstanding for the purpose of computing the percentage ownership of
such individuals, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
2 Includes 748,000 shares issued to Mr. Gable in exchange for shares of stock
in DAR Products Corporation and for services rendered in connection with the
Exchange Agreement with Grandname Limited.
3 Does not include 200,000 shares of Series A Preferred Stock convertible into
2,000,000 shares of Common Stock on May 18, 2000 or, earlier, at any time
into Common Stock valued at $2,000,000 based on its then market value. Since
market value of the Company's Common Stock is substantially in excess of
$1.00, the conversion right is not likely to be exercised within 60 days.
ITEM 12. Certain Relationships and Related Transactions.
The Corporation has a number of common officers, directors, and
relationships with TimeCast and DAR (See "Corporate History"). E. David Gable,
Director of DAR, serves as the Corporation's Chairman. Donna Ruff, Secretary of
DAR, is an employee of the Corporation. With respect to Talidan, Antony Redfern,
a consultant to Talidan, serves as a Vice President of the Corporation.
The Corporation expects to continue its business relations with
TimeCast and assisted TimeCast with financial, administrative, and human
resources support. The Corporation
31
<PAGE>
anticipates that all future transactions with TimeCast will be conducted on an
arm's-length basis, on terms that the Corporation and TimeCast believe, without
an independent third party evaluation, will be no less favorable to TimeCast
than could have been obtained from unrelated third parties.
TimeCast spun off DAR in December 1998. The Corporation had made loans
to DAR in the amount of approximately $57,000 to fund its operations since the
Corporation acquired all of DAR's issued and outstanding shares in May 1996. The
Corporation does not intent to make any further advances to DAR in the future.
The Corporation made advances to certain of its officers and directors
from time to time which were non-interest bearing and which did not have a
specified repayment date. The Corporation determines whether it will make an
advance, attach any conditions or obligations to the advance, or what the
repayment obligations will be on a case by case basis. Typically, the advances
are made at the discretion of the executive officers. In the event a large
advance is to be made, then the board of directors must approve such advance.
The advances are made to help the Corporation's officers, directors and
employees in the time of personal need because the Corporation is unable to pay
at this time wages at industry standard. The highest advances made during the
last three years were $116,500 to E. David Gable, $175,000 to Scott Caruthers, a
former Director of the Corporation, and $46,664 to David Pearl, former Secretary
to the Corporation. To date, all advances have been paid back to the
Corporation. In the event of termination of employment, either voluntary or
involuntary, any advances made to such officers must be repaid at the time of
such termination.
ITEM 13. Exhibits, List and Reports on Form 8-K.
Exhibits
The exhibits filed as a part of the Annual Report on Form 10-KSB are
listed in the "Index of Exhibits" on the page following the signature page
hereof.
Reports on Form 8-K
None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
CARNEGIE INTERNATIONAL CORPORATION
Date: April 27, 1999 By: /s/ Lowell Farkas
-------------------------------------
Lowell Farkas
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.
Signature Title Date
/s/ E. David Gable Chairman of the Board April 27, 1999
- ----------------------- and Director
E. David Gable
/s/ Lowell Farkas President, Chief Executive April 27, 1999
- ----------------------- Officer and Director
Lowell Farkas
/s/ Bennett H. Goldstein Executive Vice President, Chief
- ----------------------- Financial Officer and Treasurer April 27, 1999
Bennett H. Goldstein
/s/ Richard J. Greene Secretary April 27, 1999
- -----------------------
Richard J. Greene
/s/ Stuart L. Agranoff Director April 27, 1999
- -----------------------
Stuart L. Agranoff
/s/ Richard M. Cohen Director April 27, 1999
- -----------------------
Richard M. Cohen
/s/ Barry N. Hunt Director April 27, 1999
- -----------------------
Barry N. Hunt
C76659M.634 Y:1
33
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Exhibit Description
- ----------- -------------------
3.1 Articles of Incorporation, as amended, filed herewith.
3.2 Bylaws (filed as Exhibit 3.2 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference herein)
10.1 Employment Agreement between the Corporation and Lowell Farkas, as
amended (filed as Exhibit 10.1 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.2 Employment Agreement between the Corporation and E. David Gable (filed
as Exhibit 10.2 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.3 Employment Agreement between the Corporation and Bennett H. Goldstein,
filed herewith.
10.4 1998 Stock Option Plan (filed as Exhibit 10.4 to the Corporation's
Form 10-SB, filed with the Commission on October 28, 1998 and
incorporated by reference herein).
10.5 Exchange Agreement between A&W Corporation, Inc. and Grandname Limited
(filed as Exhibit 10.5 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.6 Assignment Agreement by and between First USA Merchant Services, Inc.
and Electronic Card Acceptance Corporation (filed as Exhibit 10.6 to
the Corporation's Form 10-SB, filed with the Commission on October 28,
1998 and incorporated by reference herein).
10.7 Agreement between Tiller Holdings Limited and the Corporation (filed as
Exhibit 10.7 to the Corporation's Form 10-SB, filed with the Commission
on October 28, 1998 and incorporated by reference herein).
10.8 Form of Warrant (filed as Exhibit 10.8 to the Corporation's Form 10-SB,
filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.9 Form of Stock Option Agreement (filed as Exhibit 10.9 to the
Corporation's Form 10-SB, filed with the Commission on October 28, 1998
and incorporated by reference herein).
10.10 Preemption Agreement (filed as Exhibit 10.10 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated
by reference herein).
34
<PAGE>
10.11 Stock and Asset Purchase Agreement for Victoria Station Restaurant
(filed as Exhibit 10.11 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.12 Purchase Agreement and Promissory Note between the Corporation and the
Alpina Tours, LLC (filed as Exhibit 10.12 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.13 Stock Purchase Agreement between the Corporation and Value Partners,
Ltd. (filed as Exhibit 10.13 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference
herein).
10.14 Stock Purchase Agreement for Harbor City Corporation, t/a ACC Telecom
(filed as Exhibit 10.14 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.15 Buy-Back/Sell-Back Agreement for Purchase of Harbor City Corporation,
t/a ACC Telecom (filed as Exhibit 10.15 to the Corporation's Form 10-SB,
filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.16 Employment Agreement between Barry N. Hunt and Harbor City Corporation,
t/a ACC Telecom (filed as Exhibit 10.16 to Amendment Number 1 of the
Corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
10.17 Distributor Agreement between the Corporation and ALLTEL Supply, Inc.
(filed as Exhibit 10.17 to Amendment Number 1 of the Corporation's Form
10-SB/A, filed with the Commission on February 12, 1999 and incorporated
by reference herein).
10.18 Stock Purchase Agreement between the Corporation and Voice Quest. Inc.
(filed as Exhibit 10.18 to Amendment Number 1 of the Corporation's Form
10-SB/A, filed with the Commission on February 12, 1999 and incorporated
by reference herein).
10.19 Employment Agreement between Voice Quest, Inc. and Mark S. Ortner (filed
as Exhibit 10.19 to Amendment Number 1 of the Corporation's Form
10-SB/A, filed with the Commission on February 12, 1999 and incorporated
by reference herein).
10.20 Asset Purchase Agreement between the Corporation and the J-Net Group,
Inc. (filed as Exhibit 10.20 to Amendment Number 1 of the Corporation's
Form 10- SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.21 Employment Agreement between RomNet Support Services, Inc. and Nicholas
R. Gentile (filed as Exhibit 10.21 to Amendment Number 1 of the
Corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
35
<PAGE>
10.22 Consulting Agreement between the Corporation and the Vadiari Group
International (filed as Exhibit 10.22 to Amendment Number 1 of the
Corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
10.23 Distributor Agreement between the Corporation and Tiller International
(filed as Exhibit 10.23 to Amendment Number 1 of the Corporation's Form
10-SB/A, filed with the Commission on February 12, 1999 and incorporated
by reference herein).
10.24 Acquisition Agreement between the Corporation and Paramount
International Telecommunications, Inc., filed herewith.
10.25 Employment Agreement between Paramount International Telecommunications,
Inc. and Michael Eberle, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
27.1 Financial Data Schedule is filed electronically herewith via EDGAR.
36
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
FINANCIAL STATEMENTS
<PAGE>
Carnegie International Corporation and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1998 and 1997
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-5
STATEMENTS OF EARNINGS F-7
STATEMENTS OF STOCKHOLDERS' EQUITY F-9
STATEMENTS OF CASH FLOWS F-11
NOTES TO FINANCIAL STATEMENTS F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Carnegie International Corporation
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Carnegie
International Corporation and Subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
On July 29, 1998, we originally reported on the 1997 financial statements
referred to above. This report was issued prior to the matters set forth in Note
B to the financial statements, wherein revisions of amounts previously reported
as of December 31, 1997, and for the year then ended are described.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Carnegie
International Corporation and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Baltimore, Maryland
April 22, 1999
F-3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
Carnegie International Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1997
ASSETS 1998 (restated)
---- ----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 789,068 $ 226,422
Certificate of deposit-restricted - 400,000
Accounts receivable - trade 770,475 761,464
Accounts receivable - affiliates 13,435 -
Accounts receivable - former subsidiaries 1,941,583 -
Note receivable and accrued interest - affiliate 2,090,000 -
Loans receivable 9,017 10,200
Inventory 163,686 32,575
Prepaid expenses 632,597 24,620
Refundable income taxes - 12,279
------------ ---------
Total current assets 6,409,861 1,467,560
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization of
$135,239 in 1998 and $102,042 in 1997 815,121 471,114
SOFTWARE DEVELOPMENT COSTS, less accumulated
amortization of $136,826 in 1998 7,998,510 6,664,953
OTHER ASSETS
Intangibles, less accumulated amortization of
$864,337 in 1998 and $190,797 in 1997 13,848,248 10,805,094
Loans receivable - officers and employees 6,560 301,201
Security deposits and other assets 91,002 109,047
---------- ----------
13,989,160 11,215,342
---------- ----------
$29,169,302 $19,818,969
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(restated)
---- ----------
CURRENT LIABILITIES
<S> <C> <C>
Notes payable $ 1,356,047 $ 803,752
Current maturities of long-term debt 112,806 789,230
Current maturities of notes payable to stockholder and affiliates 172,771 185,000
Accounts payable and accrued expenses 1,411,136 1,274,064
Deferred revenue 66,056 -
Income taxes payable 128,338 -
------------- ------------
Total current liabilities 3,247,154 3,052,046
LONG-TERM OBLIGATIONS
Long-term debt, less current maturities 375,359 169,612
Notes payable to stockholder and affiliates, less current maturities
600,527 -
Put option obligation - 3,756,574
------------- ------------
975,886 3,926,186
DEFERRED INCOME TAXES 399,296 -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, B, E and F, $1 par value; 40,000,000
authorized shares; 474,948 issued at December 31,
1998, none issued at December 31, 1997 474,948 -
Common stock, no par with a stated value of $0.01; 110,000,000 shares 545,212
authorized; 54,521,154 issued and 51,743,135 outstanding at
December 31, 1998 and 38,835,486 issued and 36,057,467 388,355
outstanding at December 31, 1997
Additional paid-in capital 23,150,206 14,732,345
Retained earnings (accumulated deficit) 1,661,964 (998,963)
Accumulated other comprehensive loss (4,364) -
------------- ------------
25,827,966 14,121,737
Less treasury stock at cost (2,778,019 shares) (1,281,000) (1,281,000)
------------- ------------
24,546,966 12,840,737
------------- ------------
$ 29,169,302 $ 19,818,969
============ ===========
</TABLE>
F-6
<PAGE>
Carnegie International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
<TABLE>
<CAPTION>
1997
1998 (restated)
---- ----------
Revenue
<S> <C> <C>
Operating $ 8,549,659 $ 3,245,810
Sale of software and distribution rights 3,107,564 -
Sale of service contracts - 3,700,000
------------ ------------
Total revenue 11,657,223 6,945,810
Cost of sales 3,679,506 1,589,925
------------ ------------
Gross profit 7,977,717 5,355,885
Operating expenses
Sales and marketing 1,090,929 359,966
General and administrative 5,399,030 3,211,055
Depreciation and amortization 809,363 248,442
------------ ------------
7,299,322 3,819,463
------------ ------------
Operating income 678,395 1,536,422
Other income (expense)
Interest expense (608,838) (49,417)
Interest income 143,129 16,834
Sale of assets and release of covenants 1,596,273 -
Gain on sale of subsidiaries 1,391,881 -
------------ ------------
2,522,445 (32,583)
------------ ------------
Income from continuing operations before income 3,200,840 1,503,839
taxes
Income taxes (benefit) 539,913 (12,279)
------------ ------------
Net income from continuing operations 2,660,927 1,516,118
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Discontinued operations
<S> <C> <C>
Loss from operation of TimeCast - (100,330)
------------ -----------
NET INCOME $ 2,660,927 $ 1,415,788
=========== ==========
Earnings (loss) per share Basic:
Continuing operations $ 0.06 $ 0.07
Discontinued operations - (0.01)
------------ -----------
Net income $ 0.06 $ 0.06
=========== ==========
Diluted:
Continuing operations $ 0.06 $ 0.06
Discontinued operations - -
------------ -----------
Net Income $ 0.06 $ 0.06
============ ===========
Weighted average common shares
Basic 43,304,804 22,164,134
============ ===========
Diluted 47,040,585 24,418,814
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
Carnegie International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - 16,574,786 $165,748
Comprehensive income
Net earnings for the year - - - -
Spin-off TimeCast - - - -
Issuance of common stock - - 420,400 4,204
Shares issued in lieu of compensation 2,290,145 22,901
Shares and warrants issued in connection with acquisitions
- - 19,340,000 193,400
Note payable converted to common stock - - 210,155 2,102
Affiliates' forgiveness of note payable - - - -
Purchase of treasury shares - - - -
-------- ------------ ---------- --------
Balance at December 31, 1997 - as restated - - 38,835,486 388,355
Comprehensive income (loss)
Net earnings for the year - - - -
Currency translation adjustment - - - -
Total comprehensive income - - - -
Issuance of common stock - - 7,952,100 79,521
Shares issued in lieu of compensation and other cases 200,848 200,848 2,179,268 21,793
Issuance of warrants - - - -
Notes payable converted to common stock - - 1,358,000 13,580
Exercise of stock options - - 3,635,500 36,355
Shares issued in connection with acquisitions 274,100 274,100 560,800 5,608
------- -------- ---------- --------
Balance at December 31, 1998 474,948 $474,948 54,521,154 $545,212
======= ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings other
paid-in accumulated comprehensive Treasury Stockholders'
capital (deficit) loss stock equity
------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C>
$ 593,413 $ (2,414,751) $ - $ - $ (1,655,590)
- 1,415,788 - - 1,415,788
99,330 - - - 99,330
225,337 - - - 229,541
579,291 - - - 602,192
12,923,350 - - - 13,116,750
159,124 - - - 161,226
152,500 - - - 152,500
- - - (1,281,000) (1,281,000)
------------ ----------------- ---------- ---------- ----------
14,732,345 (998,963) - (1,281,000) 12,840,737
- 2,660,927 - - -
- - (4,364) - -
- - - - 2,656,563
3,591,362 - - - 3,670,883
700,091 - - - 922,732
415,132 - - - 415,132
270,620 - - - 284,200
1,000,636 - - - 1,036,991
2,440,020 - - - 2,719,728
----------- --------- ---------- ---------- -----------
$23,150,206 $1,661,964 $(4,364) $ (1,281,000) $24,546,966
========== ========= ====== =========== ==========
</TABLE>
F-10
<PAGE>
Carnegie International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
<TABLE>
<CAPTION>
1997
1998 (restated)
---- ----------
Cash flows from operating activities
<S> <C> <C>
Net income $ 2,660,927 $ 1,415,788
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 809,363 248,442
Sale of software and distribution rights (3,107,564) -
Issuance of stock as compensation 669,809 602,192
Issuance of stock options 148,532 -
Gain on sale of subsidiaries (1,391,881) -
Sale of assets and release of covenants (1,596,273) -
Put option accretion 387,981 -
Deferred income taxes 399,296 -
Changes in assets and liabilities
Accounts receivable 435,685 (40,544)
Due from affiliates (1,292,885) (513,194)
Inventory (143,104) (20,582)
Prepaid expenses (103,454) (24,248)
Refundable income taxes (140,618) (12,279)
Other assets (16,670) 61,112
Accounts payable and accrued expenses (158,759) 640,047
Deferred revenue 3,728 -
----------- ---------
Net cash (used in) provided by operating activities (2,154,651) 2,356,734
Cash flows from investing activities
Restricted certificate of deposit (purchase) proceeds 400,000 (400,000)
Purchase of property, plant and equipment (1,623,102) (170,008)
Acquisition costs (220,759) (530,628)
----------- ---------
Net cash used in investing activities (1,443,861) (1,100,636)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
1997
1998 (restated)
---- ----------
Cash flows from financing activities
<S> <C> <C>
Payments on notes payable (1,558,043) (1,454,033)
Payments on capital leases (1,271) -
Proceeds from issuance of notes payable 1,677,563 990,568
Purchase of treasury shares - (800,000)
Sale of common stock 3,670,883 229,541
Proceeds from sale of subsidiaries 100,000 -
Loans receivable officers and employees 280,207 -
Notes receivable (3,817) (10,200)
------------- -----------
Net cash provided by (used in) financing activities 4,165,522 (1,044,124)
Effects of exchange rates on cash (4,364) -
------------- -----------
NET INCREASE IN CASH 562,646 211,974
Cash at beginning of period 226,422 14,448
------------- ------------
Cash at end of period $ 789,068 $ 226,422
=========== ===========
</TABLE>
Supplemental schedule of non-cash activities:
During 1998, the Company:
o Purchased all of the stock of ACC Telecom, Voice Quest and RomNet for
274,100 shares of preferred stock and 560,800 shares of common stock,
representing an aggregate price of $3,534,690 including notes for
$904,962.
During 1998 and 1997, the Company:
o Issued 2,179,268 and 2,290,145 shares of the Company's common stock
at a value of $922,732 and $602,192 as compensation for services
rendered by various consultants, attorneys, and others.
o Issued 1,358,000 and 210,155 shares of common stock in exchange for
notes payable of $284,200 and $161,226, respectively.
During 1997, the Company:
o Purchased all of the stock of Talidan, PTT, and Victoria for
19,340,000 shares of common stock, warrants for 5,000,000 shares,
options and a put option for shares valued at $5 million, representing
an aggregate price of $17,217,074, including cash and notes of
$325,000.
o Acquired 2,778,019 shares of its common stock in settlement of
notes receivable from affiliates of $481,000 and cash of $800,000.
o Spun-off a subsidiary with a deficit, which increased stockholders'
equity by $99,330.
o A stockholder relieved the Company of an obligation to make payment on
a note payable in the amount of $152,500.
F-12
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
Organization
Carnegie International Corporation, a Colorado corporation (the Company or
Carnegie) (formerly A&W Corporation, Inc., which discontinued operations
in September, 1985) acquired all of the outstanding stock of DAR Products
Corporation (DAR) and Electronic Card Acceptance Corporation (ECAC) in
exchange for 94% of its common stock pursuant a stock purchase agreement
with Grandname, Ltd. in May, 1996. For accounting purposes, this
transaction was reflected as a reverse acquisition with DAR and ECAC as
the acquirers.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of Carnegie and its wholly-owned subsidiaries: Talidan Limited (Talidan),
a British Virgin Islands corporation; Profit Through Telecommunications
(Europe) Limited (PTT), a United Kingdom corporation; Talidan USA t/a
Victoria Station - Miami, Inc. (Victoria), a Florida corporation; and in
1998, Harbor City Corporation t/a ACC Telecom (ACC Telecom), a Maryland
corporation; Voice Quest, Inc. (Voice Quest), a Florida corporation; The
J-Net Group, Inc. t/a RomNet (RomNet), a Delaware corporation; Carnegie
Communications, a Maryland corporation; and through the date of their
disposition in 1998 and 1997, ECAC Europe (ECAC Europe), a United Kingdom
corporation; Electronic Card Processing, Inc. ("ECPI"), Electronic Card
Acceptance Corporation (ECAC), a Virginia corporation; and TimeCast
Corporation (TimeCast), a Nevada corporation.
ACC Telecom, Voice Quest and RomNet were acquired in 1998 and were
accounted for as purchases. Results of operations since February 1, 1998
for ACC Telecom, November 20, 1998 for Voice Quest, and December 1, 1998
for RomNet have been consolidated.
Talidan and PTT were acquired on September 29, 1997 and Victoria was
acquired August 18, 1997. These acquisitions were accounted for as
purchases. Results of operations of these subsidiaries from their dates of
acquisition have been consolidated.
Significant intercompany transactions have been eliminated in
consolidation.
F-13
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Business Operations
-------------------
The Company operates primarily in the United States, the United Kingdom,
and South America. During 1998, on the basis of revenues, the Company's
business operations were 28% in the installation and servicing of
telephone systems; 28% in the sale of software and distribution rights to
the software; 26% in the marketing of telephone time through international
contracts primarily in South America and Europe; and 18% in restaurant
operations in Miami, Florida. During 1997, the Company's business
operations were 73% in credit card processing in the United States; 17% in
the marketing of telephone time through international contracts primarily
in South America and Europe; and 10% in restaurant operations in Miami,
Florida. The primary business segments and a description of the business
operations of each company follows:
Corporate
---------
Carnegie provides management services to its wholly owned subsidiaries.
Carnegie has no direct domestic operating assets or business activity.
Telecommunications
Talidan markets telephone service through international contracts for
discounted telephone time.
PTT is a telecommunications software company. Its software can be utilized
by voice recognition, touch-tone keypad, or bar code readers for a broad
range of applications. One of PTT's products is MAVIS(TM) (Multi-language
Automated Voice Independent System), an automated attendant system
allowing telephone callers to reach or leave messages for a person or a
department of a company, by verbally responding to prompts, without
pressing buttons on the telephone.
o ACC Telecom sells, installs and services telephone systems, voice
mail integration, computer technology, LAN operating systems and
cable media in the Washington, DC, Maryland and Northern Virginia
areas.
o Voice Quest, located in Sarasota, Florida, is involved in the
development of voice activated software applications that are
compatible with the Company's MAVIS(TM) product.
F-14
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Business Operations - continued
-------------------------------
Telecommunications - continued
o RomNet is engaged in the business of providing technical support
services for software and hardware, beta testing services, and
Internet support and services
Restaurant
o Victoria operates a restaurant in Miami, Florida.
Financial Services
o ECAC is an independent sales organization providing bankcard
services to U.S. merchants. Its primary business objective was to
build a portfolio of customer service contracts between itself and
individual merchants. The service contracts provide for the payment
of fees by the individual merchants to the Company who in turn pays
a financial institution for service. When the portfolio of contracts
approximates 1,000 or more contracts it was the Company's intent to
offer the portfolio for sale to financial institutions, or other
companies, involved in the credit card processing business. On
January 30, 1998, the stock of ECAC was sold.
o ECAC Europe is an independent sales organization providing bankcard
services to merchants in the United Kingdom. On January 6, 1998, the
stock of ECAC Europe was sold.
Other
o TimeCast, prior to its spin-off in September 1997, was engaged in
the business of designing, manufacturing and marketing physical
fitness exercise devices and equipment, and muscular development
products, including Non-Grip Technology(R) related to exercise and
fitness equipment.
F-15
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and reported revenue
and expenses during the reporting period. Actual results may differ from
those estimates.
Accounts Receivable
-------------------
For financial reporting purposes, the Company utilizes the allowance
method of accounting for doubtful accounts. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for
potential credit losses. The allowance is based on an experience factor
and review of current accounts receivable. Uncollectible accounts are
written off against the allowance accounts when deemed uncollectible.
Inventory
---------
Inventory consists of telephone equipment, supplies, credit authorization
equipment and restaurant supplies, which are valued at the lower of cost
or market on a first-in, first-out basis.
Property, Plant and Equipment
-----------------------------
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
primarily on a straight-line basis. Accelerated depreciation methods are
used for tax purposes on certain assets. The estimated service lives used
in determining depreciation are five to seven years for computers,
software, furniture and equipment. Leasehold improvements are amortized
over the shorter of the useful life of the asset or the lease term.
Maintenance and repairs are charged to expense as incurred; additions and
betterments are capitalized. Upon retirement or sale, the cost and related
accumulated depreciation of the disposed assets are removed and any
resulting gain or loss is credited or charged to operations.
F-16
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Software Development Costs
--------------------------
Software development costs are charged to expense as incurred until
technological feasibility has been established for the product. Software
acquired and development costs incurred after technological feasibility
has been established are capitalized and amortized on a straight line
basis over a period of five years, commencing with product release. There
was no amortization in 1997, as none of the software had been released.
Research and Development
------------------------
Cost incurred in research and development activities are charged to
operations.
Intangibles
-----------
Intangibles represent costs in excess of net assets acquired in connection
with businesses acquired, acquisition costs, and noncompete agreements.
The costs in excess of net assets acquired in connection with businesses
acquired are being amortized to operations over 15 years, the acquisition
costs are being amortized over 15 years and noncompete agreements are
being amortized over the term of the contracts, all on a straight-line
basis. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. The primary indicators are current or
forecasted profitability of the related business.
Revenue Recognition
-------------------
ECAC recognized income resulting from the sale of service contract
portfolios when title to these contracts is assigned to the purchaser. The
Company recognizes revenue from bank services pursuant to the terms of
service agreements that are based upon a percentage of sales volume
transacted by the merchant.
Talidan recognizes revenue from telephone sales on a monthly basis in
accordance with its service contracts. The monthly revenue is based on the
number of minutes of calls that are processed.
F-17
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Revenue Recognition - continued
-------------------
PTT recognizes product revenues upon shipment to the customer,
satisfaction of significant Company obligations, if any, and reasonable
assurance regarding the collectability of the corresponding receivable. At
the time of shipment, the Company accrues for the estimated cost of post
contract support. The Company provides an allowance for estimated returns
at the time of product shipment and adjusts this allowance as needed based
on actual returns history.
Victoria recognizes revenue based on food and beverage sales at its Miami,
Florida restaurant.
ACC Telecom recognizes revenue from telephone sales and service when the
equipment is installed or service is provided.
Voice Quest recognizes revenue upon delivery and installation of software
products.
RomNet recognizes revenue on a monthly basis under the service contracts
to which it is a party. Amounts received in advance of the services being
provided are deferred.
TimeCast, ECAC Europe, and PTT revenues were not material for the year
ended December 31, 1997.
Stock-Based Compensation
------------------------
Compensation costs for stock options to employees are measured as the
excess, if any, of the fair market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Compensations costs for stock options and warrants to other than employees
are based on the fair value of the instrument issued. Compensation for
stock awards is recorded based on the fair market value of the Company's
stock at the time of grant.
F-18
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Advertising
-----------
Advertising costs are expensed as incurred. Total advertising and
promotion expense for the years ended December 31, 1998 and 1997 amount to
$1,090,929 and $359,966, respectively.
Income Taxes
------------
The Company records income taxes using the liability method for financial
reporting purposes. Deferred and prepaid taxes are provided for on
temporary differences in the basis of assets and liabilities that are
recognized in different periods for financial and tax reporting purposes.
Earnings Per Share
------------------
Basic earnings per share amounts have been computed based on the weighted
average number of common shares outstanding. Diluted earnings per share
amounts reflect the increase in weighted average number of common shares
outstanding that would result from the assumed conversion of convertible
preferred stock and outstanding stock options, calculated using the
treasury stock method.
Translation of Foreign Currencies
---------------------------------
Assets and liabilities recorded in functional currencies other than U.S.
dollars are translated into U.S. dollars at the year-end exchange rates.
Revenue and expenses are translated at the weighted-average exchange rates
for the year. The resulting translation adjustments are charged or
credited directly to accumulated other comprehensive income, which is a
separate component of stockholders' equity. Foreign currency translation
adjustments prior to 1998 were not material.
Statement of Cash Flows
-----------------------
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
F-19
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Reclassifications
-----------------
Certain items in the 1997 financial statements have been reclassified to
conform to the current presentation.
Newly Issued Accounting Standards
---------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(SFAS 130), which is effective for fiscal years beginning after December
15, 1997. The Statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted SFAS 130 in
the fiscal year beginning January 1, 1998, and has restated its prior year
financial statements to conform to this presentation.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS 131), which is effective for
fiscal years beginning after December 15, 1997. The statement establishes
revised standards under which an entity must report business segment
information in its financial statements on the basis that is used
internally for evaluating segment performance. The Company adopted SFAS
131 in the fiscal year beginning January 1, 1998 and has restated its
prior year segment data to conform to this presentation.
In December 1997, SFAS No. 132, Employers' Disclosures about Pension and
Other Postretirement Benefits, was issued and is effective for the
Company's 1998 fiscal year. The statement revises current disclosure
requirements for employers' pensions and other retiree benefits.
Implementation of this disclosure standard did not affect the Company's
financial position or results of operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The statement establishes
accounting and reporting standards for derivative instruments, and for
hedging activities. Implementation of this standard is not anticipated to
have an effect on the Company.
F-20
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the year ended
December 31, 1997. This action was taken as a result of a revaluation of
the discount for restrictions on stock issued during the year. The effect
of the restatement was to increase intangibles and capitalized software by
approximately $6,090,000 and $4,952,535, respectively, increase general
and administrative expenses by approximately $154,000, and increase
amortization expense on the capitalized assets by approximately $73,000.
NOTE C - ACQUISITIONS
During 1998, the Company made the following acquisitions:
ACC Telecom
-----------
On May 18, 1998, with an effective date of February 1, 1998, the Company
acquired all of the outstanding stock of ACC Telecom for $2,467,855
consisting of a $1,000,000 note payable in quarterly installments over
five years, plus 200,000 shares of the Company's Series A preferred stock.
After a two year holding period, this preferred stock is convertible into
the greater of $2,000,000 worth or 2,000,000 shares of the Company's
common stock. In the event the Company declares a common stock dividend,
or the market price of the Company's common stock exceeds $2.00 per share,
the preferred stock may be converted prior to the end of the two year
holding period. This acquisition was accounted for as a purchase.
F-21
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACQUISITIONS - Continued
Voice Quest
-----------
On November 20, 1998, the Company acquired all of the outstanding stock of
Voice Quest, a Florida corporation, for $382,141. Voice Quest is involved
in the development of voice activated software applications that are
compatible with the Company's MAVISTM product. Consideration consisted of
21,600 shares of Series E Preferred Stock that is convertible into the
Company common stock, which shares are subject to Rule 144 restrictions.
Conversion of the Preferred Series E Stock to common will be based on the
greater of common stock with a value of $270,000 or 216,000 shares of
common stock if the value per share during the business day immediately
preceding expiration of the conversion period is greater than $1.25 per
share. Conversion may not take place until November 20, 2000. In addition,
the sellers received 230,000 shares of common stock subject to Rule 144
restrictions, at closing. Additional consideration included a non-interest
bearing note to the sellers of $102,084. This note is payable in quarterly
installments of $8,507 over a three-year period commencing January 1,
1999. The value of this obligation discounted at 10% is $90,000. The
Company has recorded this acquisition as a purchase.
RomNet
------
On December 1, 1998, the Company acquired all of the assets, and assumed
all of the liabilities of RomNet for $684,694. The consideration paid was
52,500 shares of Series F preferred stock, which automatically converts
into common stock of the Company on December 1, 2000. The Series F
preferred stock will convert into the greater $700,000 of common stock or
525,000 shares of stock if the average closing price of the Company's
common stock is $1.33 or greater for the five business days preceding
conversion. In addition, the Company assumed liabilities, including
equipment leases, totaling $509,529. This acquisition was accounted for as
a purchase.
F-22
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACQUISITIONS - Continued
The fair value of assets acquired and liabilities assumed during 1998 are
summarized as follows:
ACC Telecom Voice Quest RomNet
----------- ----------- ------
Current assets $ 462,877 $ 7,632 $ 42,761
Property and equipment 178,692 14,012 94,200
Other assets 4,360 379 -
Goodwill 2,158,384 364,384 1,057,262
Liabilities (336,458) (4,266) (509,529)
---------- --------- ---------
Purchase price $2,467,855 $ 382,141 $ 684,694
========= ======== ==========
During 1997, the Company made the following acquisitions:
PTT and Talidan
---------------
On September 29, 1997, the Company acquired all of the outstanding stock
of PTT and Talidan from Tiller Holding Limited ("Tiller"), a broker, for
$5,954,250 and $10,919,074, respectively. The consideration was comprised
of 19,340,000 shares of the Company's common stock; warrants for five
million shares, exercisable at 50% of the average market price for the 30
days prior to exercise; and options for shares valued at $5 million,
exercisable at $0.001 per share, with a related put option valued at
$3,756,574. Neither of the parties are related.
The Agreement with Tiller also provides that the Company shall have a
three year right of first refusal for future dispositions by Tiller of
companies in the telecommunications industry.
Victoria
--------
On September 29, 1997, the Company acquired 100% of the stock of Victoria.
The agreement was effective August 18, 1997. Victoria operates the
Victoria Station restaurant in Miami, Florida. Consideration for the
acquisitions was cash of $140,000 and a note for $185,000, payable not
later than January 15, 1998, plus 25,000 shares of the Company's stock
valued at $18,750 ($0.75 per share).
F-23
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACQUISITIONS - Continued
Victoria
--------
The above transactions have been recorded under the purchase method of
accounting and, accordingly, the results of operations of PTT and Talidan
from September 29, 1997 are included in the accompanying consolidated
financial statements. The operations of Victoria commenced August 18,
1997.
The fair value of assets acquired and liabilities assumed during 1997 are
summarized as follows:
PTT Talidan Victoria
--- ------- --------
Current assets $ 16,000 $ 575,379 $ -
Property and equipment 32,000 - 225,000
Software 6,651,850 - -
Other assets - 3,341 75,000
Goodwill - 10,561,513 43,750
Liabilities (745,600) (221,159) -
---------- ----------- ----------
Purchase price $5,954,250 $10,919,074 $ 343,750
========= ========== ========
The following table reflects unaudited pro forma combined results of
operations of the Company assuming the above stock acquisitions had taken
place at the beginning of the year for the years ending December 31, 1998
and 1997:
1998 1997
------ -------
Revenues $ 11,866,647 $11,180,677
========== ==========
Income from continuing operations $ 2,607,340 $ 2,304,810
Loss from discontinued operations - (100,330)
------------- -----------
Net income $ 2,607,340 $ 2,204,480
=========== ===========
F-24
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACQUISITIONS - Continued
1998 1997
---- ----
Earnings per common share:
Basic
Continuing operations $ 0.06 $ 0.06
Discontinued operations - -
--------------- ----------------
Net income $ 0.06 $ 0.06
============== ================
Diluted
Continuing operations $ 0.06 $ 0.05
Discontinued operations - -
-------------- ----------------
Net income $ 0.06 $ 0.05
============== ================
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of the
foregoing periods or of future operations of the combined companies under
the ownership and management of the Company.
NOTE D - DISPOSITIONS
ECAC
----
On January 30, 1998, the Company entered into an agreement to sell the
outstanding shares of ECAC, its credit card processing subsidiary.
Consideration for the sale was $100,000 that was paid at closing. The
Company realized a gain on sale of the stock of approximately $1.14
million, since ECAC's liabilities exceeded its assets at the time of sale.
At the time of sale, ECAC owed the Company approximately $1,600,000 on a
non-interest bearing debt which the buyer assumed. This obligation which
was due in December 1998, was discounted to reflect imputed interest at
10% on the obligation and is classified on the balance sheet as Accounts
Receivable - former subsidiaries.
To secure this obligation, ECAC's management personally guaranteed the
debt and delivered one million free trading shares of Carnegie stock as
collateral for the amount due by ECAC.
F-25
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - DISPOSITIONS - Continued
ECAC - continued
----
In December 1998, the Company's management agreed to extend the due date
of the amount due from ECAC. This extension was granted to enhance the
Company's negotiating position with respect to a pending venture between
Nuefield Investments, ECAC, and the Company. A 7% note was received from
ECAC and Nuefield Investments agreed to substitute 391,000 shares of
Carnegie shares valued at $770,000 as collateral on behalf of the
management of ECAC. On March 31, 1999 the collateral was sold in
satisfaction of the balance due on the note.
The Company has entered into an agreement with the purchaser of ECAC and a
bank, whereby the Company receives a distribution of 40% of the gross
profit arising from the services sold to new merchants that the Company is
instrumental in recruiting. The Company has the authority to direct these
customers to other financial institutions without the joint venture
partner's consent. Revenues realized by the Company approximate the direct
cost of the Company's employees.
ECAC Europe
-----------
On January 6, 1998, the Company entered into an agreement to sell the
outstanding shares of ECAC Europe, in consideration for a $250,000 note
bearing interest at 6%, that matures in June 1999.
TimeCast
--------
On September 15, 1997, the Company's Board of Directors declared a
distribution of 100% of the common shares of TimeCast to the Company's
common shareholders of record at the close of business on September 15,
1997 (the "Spin-Off"). Common shares were distributed on the basis of one
share of TimeCast for every three shares of the Company's common stock
held by each shareholder. The accumulated deficit of $99,330 attributable
to TimeCast's operations has been eliminated as a result of the spin-off
and additional paid-in capital has been increased accordingly.
F-26
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - DISPOSITIONS - Continued
TimeCast - continued
--------
Summarized income statement information relating to TimeCast's results of
operations, which is reported as discontinued operations is as follows:
Royalty income $ 5,400
Operating loss (100,330)
Net loss (100,330)
Sale of Certain Talidan Assets
On June 22, 1998 the Company sold its business derived from print media,
including the rights to certain telephone numbers, line access, and
advertising materials used in its operations in South America for a
$2,340,000 note bearing interest at 7%. The lines sold were not compatible
with the Company's operations. In addition to the sale of the business,
the Company agreed to release certain consultants to the Company from
their covenant not to compete with the Company. The Company has allocated
$600,000 of the selling price to sale of the business and the balance of
$1,740,000 was allocated to the buy out of the covenant not to compete.
The Company charged $616,792 of purchased goodwill attributable to the
original acquisition of this business to operations at the time of sale.
Payments on the $2,340,000 note are due quarterly commencing December 22,
1998 in the amount of $585,000 plus accrued interest. The Company received
a portion of the first payment on October 28, 1998, which was in advance
of its due date. As a result of the early partial payment, the Company
agreed to extend the payment on the balance until January 27, 1999.
Through March 31, 1999, a total of $1,310,000 has been collected on the
note. In the event of non payment, the non compete agreements will become
in force again and the Company will have the right to recover the assets
sold.
NOTE E - CERTIFICATE OF DEPOSIT - RESTRICTED
At December 31, 1997, the Company maintained a $400,000 certificate of
deposit, which was redeemed in 1998, that was assigned as collateral for a
note payable to First Mariner Bank. The carrying value of the certificate
of deposit approximated its market value at December 31, 1997.
F-27
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE F - LOANS RECEIVABLE - OFFICERS AND EMPLOYEES
The Company made advances to and has receivables from officers and
employees that amount to $6,560 and $301,201 as of December 31, 1998 and
1997, respectively. The advances are non-interest bearing, do not have
specified repayment dates and have been reflected as non-current assets.
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1998 1997
----------- ---------
Vehicles $219,165 $ 4,170
Computer equipment and software 157,961 176,026
Furniture and office equipment 419,056 231,160
Equipment 114,178 -
Leasehold improvements 40,000 40,000
Equipment held for lease - 121,800
-------- -------
Total property and equipment 950,360 573,156
Less accumulated depreciation and amortization 135,239 102,042
-------- -------
$815,121 $471,114
======= =======
NOTE H - LEASE AGREEMENTS
The Company has entered into operating leases for office space in
Maryland, Florida and the United Kingdom. The lease terms range from 5 to
6 years and expire at various dates through March 2003. The leases require
monthly payments which range from $3,515 to $10,260. Total rent expense
charged to operations for the years ended December 31, 1998 and 1997 was
$272,300 and $45,623, respectively.
F-28
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - LEASE AGREEMENTS - Continued
Base rentals due on operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1998 are as follows:
Year Amount
---- ------
1999 $371,449
2000 415,220
2001 374,677
2002 292,440
2003 64,476
NOTE I - NOTES PAYABLE
Notes payable consisted of the following at December 31:
1998 1997
---------- -------
Former shareholders of PTT $ 255,585 $ -
Unaffiliated individuals 11,877 366,155
Strongput International, LLC - 180,484
Affiliated individuals 4,169 257,113
CNI 320,586 -
Preferred Investments 556,877 -
First Union National Bank 57,000 -
Cambridge Trust Company 149,953 -
---------- ----------
$1,356,047 $ 803,752
========= =========
The Company is obligated under several notes payable due to former
shareholders of PTT. The notes are payable on demand, are non-interest
bearing and had a balance due of $255,585 at December 31, 1998. One of
these former shareholders, Applied Knowledge Limited (Applied), is
currently controlled by shareholders of Carnegie. The balance due Applied
at December 31, 1998 was $164,835.
F-29
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE I - NOTES PAYABLE - Continued
Notes payable to unaffiliated individuals have outstanding balances
aggregating $11,877 and $366,155 at December 31, 1998 and 1997,
respectively. The notes are due on demand and accrue interest at rates
that vary from 10% to 20%.
A note due Strongput International, LLC, a management company partially
owned by a shareholder, had an unpaid principal balance of $180,484 at
December 31, 1997. The loan was paid in full during 1998.
The Company has other notes payable to affiliated individuals and entities
with aggregate outstanding balances of $4,169 and $257,113 at December 31,
1998 and 1997, respectively. These notes are due on demand and accrue
interest at rates that vary from 10% to 12%.
The Company is obligated on notes due CNI, a management company partially
owned by a shareholder. The notes have an unpaid principal balance of
$320,586 at December 31, 1998. The note is due on demand and accrues
interest at 12% per annum.
The Company is obligated on a note due Preferred Investments. The note has
an unpaid principal balance of $556,877 at December 31, 1998. The note is
due on demand and accrues interest at 12% per annum.
The Company has a $100,000 line-of-credit with First Union National Bank,
which expires June, 1999. Interest is due monthly at a rate of 2% over the
prime rate (effective rate of 10.5% at December 31, 1998). Advances drawn
under this line as of December 31, 1998 were $57,000.
The Company is obligated on several notes payable to Cambridge Trust
Company that have outstanding balances aggregating $149,951 at December
31, 1998. These notes are due on demand and accrue interest at rates that
vary from 11 1/4 to 11 1/2%.
F-30
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1998 1997
-------- --------
Union Planter's Bank $160,333 $ -
Estate of former owner of ECAC 126,000 151,000
First Mariner Bank auto loans 85,021 -
Convertible note - 250,000
Envoy Medical Corporation - 109,786
First Mariner Bank - 398,665
Security Financial and Investment Corporation - 49,391
Capital lease obligations 116,811 -
------- --------
488,165 958,842
Less current maturities 112,806 789,230
------- -------
$375,359 $169,612
======= =======
The Company is obligated on a $185,000 note to Union Planter's Bank. The
note bears interest at prime + 2 % (10.5% as of December 31, 1998) and is
payable in equal installments of $3,083 per month starting in May, 1998,
with the balance due in full on January 15, 2001. A balance of $160,333
was outstanding at December 31, 1998.
The Company is obligated on a note to the estate of the former owner of
ECAC in connection with the original acquisition. The unpaid balance of
the note was $126,000 and $151,000 at December 31, 1998 and 1997,
respectively.
During 1998, the Company entered into loan agreements with First Mariner
Bank in connection with the purchase of three automobiles. The notes bear
interest at rates ranging from 8.5% to 10.25% and are payable in monthly
installments totaling $1,938, plus interest through October 2003. The
balance of these notes were $85,021 at December 31, 1998.
F-31
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - LONG-TERM DEBT - Continued
On November 19, 1997, the Company issued a convertible note payable for
cash in the amount of $250,000. The note bears interest at 10% and matured
on November 18, 1998. Interest was payable in semi-annual installments
beginning July 1, 1998. The note was convertible into shares of common
stock of the Company. The note and accrued interest thereon of $34,200 was
converted into 1,250,000 shares of common stock at $.20 per share during
the first quarter of 1998.
The Company was obligated on a note payable to Envoy Medical Corporation
with an outstanding principal balance at December 31, 1997 of $109,786.
The note bears interest at prime plus 3% and was due in June 1998. Monthly
payments on the note are the greater of $7,000 or twenty percent of
revenue earned from a certain customer. Payment on the note was overdue as
of December 31, 1997. The loan was paid in full as of December 31, 1998.
On June 11, 1997, the Company entered into a loan agreement with First
Mariner Bank. The loan had a balance of $398,665 at December 31, 1997. The
loan requires monthly interest payments at 7.26%. The loan was paid in
full on June 5, 1998. The loan was collateralized by a $400,000
certificate of deposit.
The Company was obligated on a note payable to Security Financial and
Investment Corporation, with an outstanding principal balance of $49,391
at December 31, 1997, bearing interest at 12% per annum. The loan was paid
in full as of December 31, 1998.
The Company is obligated on several capital leases for office equipment
that have outstanding balances aggregating $116,811 at December 31, 1998.
The lease terms range from 1 to 4 years and accrue interest at rates that
vary from 7.5% to 17%.
F-32
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - LONG-TERM DEBT - Continued
Scheduled annual maturities of long-term debt as of December 31, are as
follows:
Debt Lease
Year amount obligation
---- ------ ----------
1999 $64,783 $48,023
2000 67,223 39,588
2001 70,253 17,432
2002 71,030 11,768
2003 41,895 -
Thereafter 56,170 -
o The aggregate carrying value of the long-term debt at December 31, 1998
and 1997 approximates market value.
NOTE K - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES
Notes payable to stockholder and affiliates as of December 31, are as
follows:
1998 1997
------------- -------
Former shareholder of Victoria $ - $185,000
Former shareholders of ACC Telecom 683,298 -
Former shareholders of Voice Quest 90,000 -
-------- ----------
773,298 185,000
Less current maturities 172,771 185,000
-------- ----------
$600,527 $ -
======== ==========
At December 31, 1997 the Company was obligated on a 10% note payable to
the former shareholder of Victoria in the amount of $185,000, issued in
connection with the acquisition of Victoria. This note was paid in January
1998, when it was refinanced with the Union Planter's Bank.
F-33
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES - Continued
In connection with the acquisition of ACC Telecom in February, 1998, the
Company signed a $1,000,000 non-interest bearing note, payable quarterly
over five years. At the time of the acquisition, the note was valued at
$814,962, based on a discount at Carnegie's average incremental borrowing
rate of 8.37%. The outstanding balance on the note is $683,298 as of
December 31, 1998.
In connection with the acquisition of Voice Quest in November, 1998, the
Company signed a $102,084 non-interest bearing note, payable to two former
shareholders of Voice Quest in quarterly payments over three years. At the
time of the acquisition, the note was valued at $90,000 based on a
discount at Carnegie's average incremental borrowing rate of 8.37%. The
outstanding balance on the note is $90,000 as of December 31, 1998.
Scheduled annual maturities of these obligations are as follows:
Year Amount
---- ------
1999 $172,771
2000 187,122
2001 203,400
2002 185,974
2003 24,031
NOTE L - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
1998 1997
--------------- ---------
Accounts payable $1,073,059 $1,090,660
Accrued liabilities 298,998 161,308
Accrued interest 39,079 22,096
----------- -----------
$1,411,136 $1,274,064
========= =========
F-34
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE M - PUT OPTION/SALE OF DISTRIBUTION RIGHTS
On December 8, 1998, the Company entered into a Distributor Agreement with
Tiller, whereby, in exchange for the Put on the options it holds, the
Company appointed and designated Tiller as the exclusive authorized
distributor of the MAVIS software in the former Soviet Union, Poland,
Hungary, Czech Republic and other countries of the Eastern Block.
Under the terms of the agreement, Carnegie is obligated to support the
distributor in its effort to promote the sale of the software at the
distributor's expense; provide reasonable technical and/or sales training
assistance for the distributor's customers at the distributor's request
and expense; to support the distributor by providing it, upon request,
with all reasonable quantities of literature, catalogs, advertisements,
circulars, other related materials at cost plus 10%; and to provide a
master disk which would allow the distributor the right to 1,000 copies of
the MAVIS software.
The Company, having no future commitments under the distribution
agreement, and having delivered the software by December 31, 1998, has
recognized a gain of $3,107,564 on the sale of the software and
distribution rights.
NOTE N - CAPITAL STOCK
Convertible Preferred Stock
---------------------------
The following Convertible Preferred stock shares were issued and
outstanding at December 31:
Issued
1998 1997
---------- ----
Series A, $1 par value; 200,000 shares authorized 200,000 -
Series B, $1 par value: 200,848 shares authorized 200,848 -
Series E, $1 par value; 21,600 shares authorized 21,600 -
Series F, $1 par value; 52,500 shares authorized 52,500 -
-------- ----
474,948 -
F-35
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
Convertible Preferred Stock - continued
---------------------------
In 1998, the Company issued 200,000 shares of non-cumulative Series A
preferred stock in conjunction with the acquisition of ACC Telecom. The
preferred stock is convertible after a two year holding period into the
greater of $2,000,000 worth or 2,000,000 shares of the Company's common
stock. The preferred stock is not entitled to share in dividends; however,
if a dividend is declared on the common stock, or the market price of the
Company's common stock exceeds $2.00 per share, the preferred stock may be
converted prior to the end of the two year holding period. In the event of
conversion, the common stock issued will be subject to restrictions under
Section 144 of the Securities Act of 1934. The shares were valued at a
discounted valuation of $1,652,893.
In July, 1998, the Company issued 200,848 shares of non-cumulative Series
B preferred stock, with piggyback registration rights, in consideration
for an eighteen month consulting agreement with the Vadiari Group
International. The stock was valued at $1.60 per share at the time of the
issuance. The preferred stock is convertible into 2,008,475 shares of
common shares after certain conditions related the Company's stock prices
are achieved. These conditions were met as of December 31, 1998 and the
preferred stock is convertible at any time. The shares were valued at a
discounted valuation of $321,356.
On November 20, 1998, the Company issued 21,600 shares of non-cumulative
Series E preferred stock in conjunction with the acquisition of Voice
Quest. The preferred stock automatically converts after a two year holding
period into the greater of $270,000 worth or 216,000 shares of common
stock subject to restrictions under Section 144 of the Securities Act of
1934. The shares were valued at a discounted valuation of $223,141.
On December 1, 1998, the Company issued 52,500 shares of non-cumulative
Series F preferred stock in conjunction with the acquisition of RomNet.
The preferred stock automatically converts after a two year holding period
into the greater of $727,000 worth or 525,000 shares of common stock
subject to restrictions under Section 144 of the Securities Act of 1934.
The shares were valued at a discounted valuation of $578,512.
F-36
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
Common Stock
------------
During 1998 and 1997, the Company entered into various transactions that
included issuance of its common stock. The number of shares issued in each
transaction was determined through negotiations among the parties. The per
share value of stock exchanged varied among transactions that were similar
in nature, based on the time the terms were agreed upon by the parties.
Exclusive of the shares exchanged for acquisitions, per share values
ranged from $0.40 to $0.96 in 1998 and $0.32 to $0.64, during 1997.
Of the 55,796,154 and 38,835,486 common shares issued as of December 31,
1998 and 1997, respectively, 46,888,725 and 33,003,803 shares are
restricted pursuant to the Securities Act of 1933 as amended, and
8,907,429 and 5,831,683 shares were issued pursuant to Rule 504 of the
Securities Act of 1933 and are exempt from registration.
Treasury Stock
--------------
During 1997, the Company acquired 1,700,000 shares of common stock for
$800,000 ($.47 per share) in cash and 1,078,019 shares of its common stock
in settlement of notes receivable for $481,000 ($.45 per share) from
affiliates.
1998 Stock Options Plan
-----------------------
On July 15, 1998, the Board of Directors of the Company approved the
Carnegie International Corporation 1998 Stock Option Plan (the "Plan").
The purpose of the Plan is to provide incentives for directors, officers
and employees of the Company who may be designated for participation and
to provide additional means of attracting and retaining competent
personnel.
The Plan provides for the reservation of 2,000,000 shares of the Company's
Common Stock for issuance upon the exercise of options granted under the
Plan. The number of shares of Common Stock reserved for the grant of
options and the number of shares of Common Stock which are subject to
outstanding options granted under the Plan are subject to adjustment to
give effect to any stock splits, stock dividends, or other relevant
changes in the capitalization of the Company.
Stock Options
-------------
In October, 1998, two Directors of the Company were each granted options
to purchase 50,000 shares of common stock of the Company at an average
exercise price of $0.94 per share. As of December 31, 1998, none of the
options had been exercised.
F-37
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
Stock Options - continued
-------------
On April 8, 1998 the Chairman and Chief Operating Officer of the Company
was granted options to purchase 1,000,000 shares of common stock of the
Company at an exercise price of $.45 per share. These options will vest
when the company achieves an operating pretax income of at least
$1,000,000 for each of two consecutive quarters. These options expire on
December 31, 1999. Additional options for 500,000 shares were also issued
which have an exercise price of $0.10 per share and vest upon the Company
successfully completing an offering of 5 million shares of Company stock
or $5,000,000, whichever is lower, or achieving a $1,000,000 net profit at
the end of a fiscal year. As of December 31, 1998 none of the options had
been exercised.
On April 8, 1998 the Secretary of the Company was granted options to
purchase 250,000 shares of common stock of the Company which are
exercisable immediately at an exercise price of $0.45 per share. In
addition, in the event the Company completes a public offering of at least
5 million shares of common stock or realizes at least $5,000,000 through
such an offering the Secretary will have the option to purchase an
additional 100,000 shares of common stock for $0.10 per share. As of
December 31, 1998 none of the options had been exercised.
As part of the Company's employment agreement with its Chief Executive
Officer, options for a total of 400,000 shares were issued on May 15,
1997. These options have an exercise price equal to the fair market value
at the date of grant. These options vested as follows: 150,000 on May 15,
1997, 150,000 on December 31, 1997, and 100,000 on September 1, 1998.
Additional options for 500,000 shares also issued have an exercise price
of $0.10 per share and vest upon the Company successfully completing an
offering of 5 million shares of Company stock or $5,000,000, whichever is
lower, or achieving a $1,000,000 net profit at the end of a fiscal year.
As of December 31, 1998 and 1997 none of the options had been exercised.
The vesting of outstanding options is accelerated upon the sale of the
Company or more than 50% of its outstanding shares to one person or
entity.
F-38
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
Stock Options - continued
-------------
The Company entered into an option agreement in connection with the
acquisition of Talidan. This option, which expires in 2001, provides that
the option holder may purchase additional shares of the Company's common
stock at a price of one tenth of a cent ($.001) per share. The number of
shares that may be purchased will be determined by dividing $2.5 million
by the average market price of the common stock of the Company as traded
in the thirty days prior to exercise of the option.
The Company has also issued an option to Tiller to purchase shares in
exchange for the right of first refusal (The Preemptive Agreement) for any
telecommunication company that Tiller owns and offers for sale. This
option, which expires in 2000, provides that Tiller may purchase
additional shares of Company's common stock at a price of one tenth of a
cent ($.001) per share. The number of shares that may be purchased will be
determined by dividing $2.5 million by the average market price of the
common stock of the Company as traded in the thirty days prior to exercise
of the option.
The Tiller and Talidan stock options have a Put Option associated with
them. To the extent that the options are not fully exercised on the third
anniversary of the issue date, the holder may, for a period of thirty days
following such anniversary, exercise the remainder of the option, in whole
or in part. The Company may be required by the holder to purchase the
resultant number of shares as determined in the agreement. As of December
31, 1997, the Company had recorded its liability under the Put Option
based on the discounted value of the stock options utilizing a 10%
discount rate. The Option's carrying value was $3,756,574 as of December
31, 1997. The Put Option was terminated in 1998 in consideration for the
award of certain distribution rights and software licenses. All of the
options were exercised during 1998.
F-39
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
Warrants
--------
In December, 1998, the Company issued warrants to purchase 250,000 shares
of common stock, with 150,000 of the warrants having an exercise price of
$0.71 per share and 150,000 of the warrants having an exercise price of
$1.25 per share, to Bristol Asset Management, LLC (Bristol) in connection
with Bristol's purchase of common stock. The warrants may be exercised at
any time through December 31, 2001. As of December 31, 1998, none of the
warrants were exercised.
In November, 1998, the Company issued a warrant to purchase 2 million
shares of common stock, at an exercise price of $1.43 per share, to
Westshire Trading Company, in consideration for prepayment on a $2,340,000
note due the Company. The warrant may be exercised at any time prior to
November, 2000. As of December 31, 1998, the warrant had not been
exercised.
In association with the acquisition of Talidan, the Company issued
warrants for 5 million shares of common stock. The warrants are
exercisable at any time through September 29, 1999 at a subscription price
equal to 50 percent of the average market price of the Company's shares as
quoted by the NASD OTC Bulletin Board Service for the 30 consecutive
trading days before exercise. As of December 31, 1998, the warrants had
not been exercised.
F-40
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
The following table summarizes option activity during 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 6,108,334 $0.020 - $ -
Options exercised (3,635,500) 0.001 - -
Adjustment due to change in stock price (1) (1,572,834) 0.001 - -
Options granted 1,900,000 0.350 6,108,334 0.02
Options forfeited/expired - - - -
---------------- ------ --------------- -----
Options outstanding at end of year 2,800,000 $0.290 6,108,334 $0.02
===== ====
Option price range at end of year $0.10 to $1.11 $0.001 to $0.23
Option price range for exercised options $0.001 $ -
Weighted-average fair value of options,
granted during the year $0.38 $0.12
Options exercisable at end of year 1,700,000 5,508,334
</TABLE>
o (1) Number of available options increases or decreases as a result
of movement in the stock price. See discussion of stock options
above.
The following table summarizes options outstanding at December 31, 1998:
Weighted average
Number Weighted average remaining
outstanding Exercise prices exercise prices contractual life
1,100,000 $0.10 to $0.15 $0.10 0.64
400,000 $0.20 to $0.25 $0.23 0.20
1,250,000 $0.40 to $0.55 $0.45 1.40
50,000 $0.75 to $1.13 $0.94 2.22
F-41
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - CAPITAL STOCK - Continued
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes options-pricing model, with the following
weighted-average assumptions used for grants in 1998 and 1997:
1998 1997
------------------------- --------------
Risk free interest rate 4.12% to 5.56% 5.90% to 6.48%
Volatility rate 109.4% to 112.0% 200%
Expected lives 1.75 to 3.75 years 2 to 4 years
The following table presents the pro forma earnings for each period
presented if the fair values of options granted had been recognized as
compensation expense on a straight-line basis over the vesting period of
the grant:
1998 1997
---------------- ---------
Pro forma
Net earnings $ 2,316,451 $1,343,321
Earnings per share
Basic $ 0.05 $ 0.06
Diluted $ 0.05 $ 0.06
During 1998 and 1997, 2,179,268 and 2,290,145 shares of the Company's
common stock were issued as compensation for various consultants,
attorneys, and others at $.42 and $.26 per share or $922,732 and
$602,192, respectively.
NOTE O - INCOME TAXES
Earnings before income taxes from continuing operations is comprised as
follows:
Years ended December 31,
------------------------
1998 1997
--------------- --------
Domestic $(1,286,276) $1,511,450
Foreign 4,487,116 (7,611)
---------- -----------
$ 3,200,840 $1,503,839
========== =========
F-42
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE O - INCOME TAXES - Continued
The Company's provision for income taxes is comprised as follows:
December 31,
------------
1998 1997
---------- --------
Currently payable
Domestic $ 140,617 $(12,279)
Foreign - -
--------- ----------
140,617 (12,279)
Deferred - net 399,296 -
-------- ----------
$ 539,913 $(12,279)
======== ==========
The Company's provision for income taxes differs from the anticipated
United States statutory rate. Differences between the statutory rate and
the Company's provision are as follows at December 31:
1998 1997
--------- ------
Taxes at statutory rate 34.0% 34.0%
Benefit of net operating loss carryforward (7.6) (28.3)
Foreign tax rate differential (13.0) (6.5)
Other 3.5 -
------ -------
16.9% (0.8)%
===== =======
Deferred tax liabilities have not been recognized for basis differences
related to investments in the Company's United Kingdom subsidiaries. These
differences, which consist primarily of unremitted earnings intended to be
indefinitely reinvested, aggregated approximately $3,516,000 and $52,000
at December 31, 1998 and 1997, respectively. The Company has not
determined the amount of unrecognized deferred tax liabilities.
Talidan is chartered in the British Virgin Islands, and is not subject to
tax in this jurisdiction. Additionally, the point of service is located in
countries in Africa that do not impose income taxes.
F-43
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE O - INCOME TAXES - Continued
Deferred taxes are comprised as follows at December 31:
1998 1997
-------- --------
Noncurrent tax (liability) asset
Domestic net operating loss
carryforwards $ - $ 639,378
Capitalized software costs (399,296) (43,641)
-------- --------
Noncurrent deferred tax (liability) asset (399,296) 595,737
Valuation allowance - (595,737)
-------- --------
Net deferred tax (liability) asset $(399,296) $ -
======== =========
F-44
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P- EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share (EPS) computations.
<TABLE>
<CAPTION>
1998 1997
-------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Income from
continuing Discontinued
Net income operations operations Net income
---------- ---------- ---------- ----------
Basic EPS
Income (loss) available to
common stockholder $ 2,660,927 $ 1,516,118 $ (100,330) $ 1,415,788
=========== =========== =========== ===========
Weighted average number of
common shares 43,304,804 22,164,134 22,164,134 22,164,134
outstanding ========== ========== ========== ==========
Basic EPS $ 0.06 $ 0.07 $ (0.01) $ 0.06
=========== ============ ============= ============
</TABLE>
F-45
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P- EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
1998 1997
--------------
Income from
continuing Discontinued
Net income operations operations Net income
---------- ---------- ---------- ----------
Diluted EPS
Income (loss) available to
<S> <C> <C> <C> <C>
common stockholder $ 2,660,927 $ 1,516,118 $ (100,330) $ 1,415,788
Income impact of assumed
conversions - - - -
------------- ------------ ------------ -----------
Income (loss) available to
Common stockholders on
a diluted basis $ 2,660,927 $ 1,516,118 $ (100,330) $ 1,415,788
=========== =========== =========== ===========
Weighted average number of
common shares 43,304,804 22,164,134 22,164,134 22,164,134
outstanding
Effect of dilutive securities -
Stock options and warrants 1,481,569 2,254,680 2,254,680 2,254,680
Preferred stock 2,254,213 - - -
----------- ----------- ------------ -----------
Adjusted weighted average
Number of common shares
outstanding 47,040,586 24,418,814 24,418,814 24,418,814
========== ============ ============ ==========
Diluted EPS $ 0.06 $ 0.06 $ - $ 0.06
========== ========== ============ ==========
</TABLE>
o During 1998, options and warrants to purchase 7,150,000 shares at
prices ranging from $1.10 to $1.78 per share were outstanding, which
were not included in the computation of diluted EPS from
discontinued operations since inclusion of such shares would be
antidilutive.
F-46
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE Q - COMMITMENTS AND CONTINGENCIES
Financial Services Agreement
----------------------------
ECAC had a financial services agreement with Old Kent Bank for the
processing of credit card transactions which expired on December 31, 1994;
however, the parties continued to operate under the terms provided by the
expired agreement until October 1, 1996. On October 1, 1996, ECAC entered
into a settlement agreement under which its debt to Old Kent Bank was
liquidated and Old Kent Bank paid ECAC $325,000 as a final settlement. Of
the total debt forgiven, $513,529 related to amounts due in 1997 under
these contracts, which was recognized as revenue in 1997.
On April 16, 1997, ECAC entered into an assignment agreement with First
USA Merchant Services, Inc. (First USA), under which ECAC agreed to
assign, sell, transfer and convey to First USA, and First USA agreed to
purchase from ECAC, all the Company's rights with respect to payments and
fees related to certain merchant accounts under a prior Independent Sales
Organization Marketing Agreement dated August 16, 1996. The consideration
paid by First USA was $3,700,000. The revenue recognized in this
transaction has been included in operating income for 1997. The company
continues to market credit card processing services and the building of
processing portfolios that may be packaged and sold in the future.
Litigation
----------
The Company and its subsidiaries were involved in two lawsuits involving
1996 acquisitions and stock transactions related to those acquisitions.
Both of these suits were settled during 1998 for a total of $17,952 of
cash and the issuance of 353,000 shares of common stock which are
restricted under the Securities Act of 1933.
Employment Agreements
---------------------
The Company has entered into an employment agreement with a key employee.
The agreement is for a two-year period commencing on May 15, 1997 and will
be extended on the same terms unless sooner terminated. In the event the
Company terminates without cause the employment of this employee, the
employee shall receive an amount equal to one year's salary in addition to
the balance of the salary due under the terms of the agreement. The
agreements contain a provision which causes all options granted through
this agreement to immediately vest if certain defined changes to the
Company's ownership occur.
F-47
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE R - RELATED PARTY TRANSACTIONS
In 1998, the Company sold the rights to certain telephone lines and
intangibles to a company affiliated with one of its Directors (see Note
D). The Company holds a note receivable related to this sale in the amount
of $2,340,000.
Legal fees of approximately $409,000 and $187,000 were paid to a firm of
which a stockholder is the managing partner for the years ended December
31, 1998 and 1997, respectively.
During 1997, the Company acquired 1,078,019 shares of its common stock in
settlement of notes receivable from stockholders. In 1997, ECAC realized
$152,500 of additional paid-in-capital from the forgiveness of a note
payable to a stockholder.
The Company made advances to and has receivables from officers and
employees that amount to $6,560 and $301,201 as of December 31, 1998 and
1997, respectively. The advances are non-interest bearing and do not have
a specified repayment date. Therefore, these obligations have been shown
as non-current assets.
F-48
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE R - RELATED PARTY TRANSACTIONS - Continued
As of December 31, 1997, the Company was obligated on a note payable
outstanding to a stockholder in the amount of $185,000, issued in
connection with the acquisition of Victoria. In January 1998, the note had
paid with the proceeds of the Union Planter's bank loan which has a
balance of $160,333 at December 31, 1998.
The Company was obligated on a 12% demand note to Strongput International,
LLC, a management company partially owned by a shareholder. The note has
an unpaid principal balance of $180,484 at December 31, 1997 and was
repaid in 1998.
The Company has other notes payable to several affiliated individuals and
entities with aggregate outstanding balances of $4,169 and $257,113 at
December 31, 1998 and 1997, respectively. These notes are due on demand
and accrue interest at rates that vary from 10% to 12%. Some of these
notes were satisfied by the issuance of 108,000 shares of the Company's
common stock valued at $34,200.
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
The Company currently operates in three principal segments:
Telecommunications, Financial Services, and Restaurant. Telecommunications
include the development and distribution of software, and telephony
operations. Corporate and other includes unallocated corporate costs.
The Company's foreign operations are conducted by Talidan and PTT.
1998 1997
---------------- -------------
Revenues from external customers
Telecommunications $ 9,539,293 $1,216,912
Financial Services - 5,056,223
Restaurant 2,117,930 672,675
Corporate - -
------------------ ------------
$11,657,223 $6,945,810
=========== ==========
F-49
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
1998 1997
-------------- --------------
Interest expense
Telecommunications 6,622 $ -
Financial Services - 16,434
Restaurant 760 3,092
Corporate 601,456 29,891
------------ -----------
$ 608,838 $ 49,417
============ ===========
Interest income
Telecommunications - $ 2,360
Financial Services - -
Restaurant - -
Corporate(1) 143,129 14,474
------------ -----------
$ 143,129 $ 16,834
============ ===========
Income tax expense (benefit)
Telecommunications - $ -
Financial Services - -
Restaurant - -
Corporate 539,913 (12,279)
------------ -----------
$ 539,913 $ (12,279)
============ ===========
Depreciation and amortization
Telecommunications $ 632,398 $ 182,425
Financial Services - 31,929
Restaurant 51,506 16,627
Corporate 125,459 17,461
------------ -------------
$ 809,363 $ 248,442
============ ============
Segment profit (loss) before taxes
Telecommunications $ 1,419,849 $ (7,612)
Financial Services - 3,123,989
Restaurant 134,150 5,312
Corporate 1,646,841 (1,617,850)
----------- ------------
$ 3,200,840 $ 1,503,839
=========== ===========
F-50
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued
1998 1997
---------------- --------------
Segment assets
Telecommunications $24,312,759 $17,950,863
Financial Services - 420,786
Restaurant 290,303 486,099
Corporate 4,566,240 961,221
----------- ------------
$29,169,302 $19,818,969
Expenditure for segment assets
Telecommunications $ 593,521 $ 100,000
Financial Services - 11,012
Restaurant - 18,032
Corporate 1 998,835 40,964
------------ -------------
$ 1,592,356 $ 170,008
=========== ============
(1) Net of intersegment receivables.
The following geographic area data for trade revenues is based on product or
service delivery location and property, plant, and equipment is based on
physical location.
Geographic Segment Data
-----------------------
1998 1997
----------- ------------
Revenues from external customers
United States $ 5,552,933 $ 5,726,538
Brazil 2,956,651 1,204,872
United Kingdom 3,147,639 14,400
Other foreign countries - -
------------ ------------
$11,657,223 $ 6,945,810
========== ===========
Segment assets
United Kingdom $21,082,721 $18,028,192
United States (1) 8,086,581 1,790,777
----------- -----------
$29,169,302 $19,818,969
=========== ===========
(1) Net of intersegment receivables.
F-51
<PAGE>
Carnegie International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE T - SUBSEQUENT EVENTS
On February 26, 1999, the Company acquired all of the issued and
outstanding stock of Paramount International Telecommunications,
Incorporated (PITI) of Vista, California in exchange for 6,950,000 shares
of common stock. This stock is restricted under rule 144 of the Securities
Act of 1934. PITI serves hotels and other businesses, primarily in
operator assisted telephone call auditing and international one-plus
sectors.
In February 1999, the Company received and accepted a non binding letter
of intent to purchase all of the outstanding stock of Talidan in a stock
for stock exchange. The letter of intent is subject to due diligence by
both parties to the possible transaction.
F-52
<PAGE>
Exhibit 3.1
Illegibility to certain of the following charter documents is due
to the poor condition of the document when microfilmed.
<PAGE>
Filed in the office of the Secretary of State of the
State of Colorado
March 26, 1974
ARTICLES OF INCORPORATION
We, the undersigned natural persons of the age of twenty-one
years or more, acting as incorporated of a corporation under the Colorado
Corporation Act, adopt the following Articles of Incorporation for such
corporation:
FIRST: The name of the corporation is ENTROPY LIMITED
SECOND: The period of its duration is Perpetual
THIRD: The purpose or purposes for which the corporation is
organized are: To research, design, develop, manufacture, market, and provide
consulting services for energy and environmental systems.
FOURTH: The aggregate number of shares which the corporation
shall have authority to issue is fifty thousand (50,000) of no par value.
FIFTH: Cumulative voting of shares of stock ______ is ______
authorized.
SIXTH: Provisions limiting or denying to shareholders the
prescriptive right to acquire additional or treasury shares of the corporation
re: none.
SEVENTH: The address of the initial registered office of the
corporation is 745 S. 44th Boulder, Colorado 80303 and the name of its initial
registered agent at such address is M. W. Frank
EIGHTH: Address of the place of business: same
NINTH: The number of directors constituting the initial board
of directors of the corporation is four (4) and the names and addresses of the
persons who are to serve as directors until the first annual meeting of
shareholders or until their successors are elected and shall qualify are: (At
least 3.)
NAME ADDRESS
M. W. Frank 745 S. 44th Boulder, Co. 80303
- ------------------------- -----------------------------------------
Elisabeth T. Frank 745 S. 44th Boulder, Co. 80303
- ------------------------- -----------------------------------------
Terry N. Fleener 7533 Lee Dr. Arvada, Co. 80005
- ------------------------- -----------------------------------------
Jane A. Fleener 7533 Lee Dr. Arvada, Co. 80005
- ------------------------- -----------------------------------------
TENTH: The name and address of each incorporated is: (At least
3.)
<PAGE>
NAME ADDRESS
M. W. Frank 745 S. 44th Boulder, Co. 80303
- ------------------------ -----------------------------------------
Elisabeth T. Frank 745 S. 44th Boulder, Co. 80303
- ------------------------ -----------------------------------------
Terry N. Fleener 7533 Lee Dr. Arvada, Co. 80005
- ------------------------ -----------------------------------------
Dated: March 22 , 19 74
---------------------- --------
/s/ M. W. Frank
/s/ Elisabeth T. Frank
/s/ Terry N. Fleener
Incorporators
STATE OF Colorado }
} ss.
COUNTY OF Boulder }
I, Martha D. Rolland , a notary public, hereby certify that on
the 22nd day of March , 19 74 , personally appeared before me M. W. Frank,
Elizabeth T. Frank and Terry N. Fleener , who being by me first duly sworn,
severally declared that they are the persons who signed the foregoing document
as incorporators, and that the statements therein contained are true.
In witness whereof I have hereunto set my hand and seal this
22nd day of March , A.C. 19 74 .
My commission expires My Commission expires Sept. 9, 1974.
Submit in duplicate /s/ Martha D. Rolland
------------------------------------
Notary Public
2
<PAGE>
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
ENTROPY LIMITED
Pursuant to the provisions of Article 2 of Title 7 of Colorado
Revised Statutes (137), the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is ENTROPY LIMITED.
SECOND: The following amendments of the Articles of
Incorporation were adopted by the shareholders of the corporation on July 1,
1975, in the manner prescribed by the Colorado Corporation Code:
(1) The Third Article of the original Articles of
Incorporation is amended to read as follows:
THIRD: The purpose for which the corporation is
organized is to transact the business of research, design,
develop, manufacture, market and provide consulting services
for energy and environmental systems and to conduct all other
business not forbidden by law.
(2) Article Sixth of the original Articles of Incorporation is
amended to read as follows:
SIXTH: No shareholders of the corporation shall have
any preemptive or other right to subscribe to, purchase or
acquire any additional issues of shares of stock of the
corporation of any class or any series thereof or any other
rights or securities of the corporation, whether now or
hereafter authorized, and whether or not convertible into or
evidencing or carrying a right to subscribe to, purchase or
acquire any shares of stock, rights or securities of the
corporation.
(3) The Articles of Incorporation are amended by the addition
of a new Article Eleventh as follows:
ELEVENTH: Any contract or other transaction between
the corporation and one or more of its Directors, or between
the corporation and any firm of which one or more of its
Directors are members or employees, or in which they are
interested, or between the corporation and any corporation or
association of which one or more of its Directors are
shareholders, members, directors, officers, or employees, or
in which they are interested, shall be valid for all purposes,
notwithstanding the presence of such Director or Directors at
the meeting of the Board of Directors of the corporation,
which acts upon, or in reference to, such
3
<PAGE>
contract or transaction, and notwithstanding his or their
participation in such action, if the fact of such interest
shall be contained or known to the Board of Directors and the
Board of Directors shall, nevertheless, authorize, approve or
ratify such contract or transaction by a vote of a majority of
the Directors present, such _______ Director or Directors to
be counted in determining whether a quorum is present, but not
to be counted in calculating the majority necessary to _______
such vote. This Section shall not be construed to invalidate
any contract or other transaction which would otherwise be
valid under the common and statutory law applicable thereto.
THIRD: The number of shares of the corporation outstanding at
the time of such adoption was 25,700; and the number of shares entitled to vote
thereon was 25,700.
FOURTH: The number of shares voted for such amendment was
25,700; and the number of shares voted against such amendment was 0.
DATED: July 11, 1975.
ENTROPY LIMITED
By /s/ M. W. Frank
-------------------------
Its President
and /s/
------------------------
Its Secretary
STATE OF COLORADO )
County of Boulder ) ss
I, Mary Ann Baxter, a notary public, do hereby certify that on
this 31st day of July, 1975, personally appeared before me M. W. Frank, who,
being by me first duly sworn, declared that he is the President of Entropy
Limited, that he signed the foregoing document as President of the corporation,
and that the statements therein contained are true.
/s/ Mary Ann Baxter
------------------------------------------
Notary Public
My commission expires: November 6, 1976
4
<PAGE>
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
ENTROPY LIMITED
Pursuant to the provisions of Article 2 of Title 7 of Colorado
Revised Statutes(1973), the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is ENTROPY LIMITED.
SECOND: The following amendments of the Articles of
Incorporation were adopted by the shareholders of the corporation on February
28, 1976, in the manner prescribed by the Colorado Corporation Code:
(1) The Third Article of the Articles of Incorporation is
amended to read as follows:
THIRD: The purpose for which the corporation is
organized is to transact the business of researching,
designing, developing, manufacturing, marketing and providing
consulting services for energy and environmental systems and
to conduct all other business not forbidden by law.
(2) Article Fifth of the Articles of Incorporation is amended
to read as follows:
FIFTH: Cumulative voting of shares of stock is not authorized.
THIRD: The number of shares of the corporation outstanding at
the time of such adoption was 26,293; and the number of shares entitled to vote
thereon was 26,293.
FOURTH: The number of shares voted for such amendment was
26,293; and the number of shares voted against such amendment was 0.
DATED: March 29, 1976.
ENTROPY LIMITED
By /s/ M. W. Frank
-----------------------------------
Its President
and /s/ Henry L. Valentine
----------------------------------
Its Secretary
5
<PAGE>
STATE OF COLORADO )
County of Boulder ) ss
I, George A. _________, a notary public, do hereby certify
that on this 24 day of March, 1976, personally appeared before me M. W. Frank,
who, being by me first duly sworn, declared that he is the President of Entropy
Limited, that he signed the foregoing document as President of the corporation,
and that the statements therein contained are true.
/s/ George A. ?
----------------------------------------
Notary Public
My commission expires Jan. 22, 1980
6
<PAGE>
RESTATED
ARTICLES OF INCORPORATION
OF
ENTROPY LIMITED
Pursuant to Section 7-2-112 of the Colorado Corporation Code,
the unassigned corporation, pursuant to a resolution duly adopted by its Board
of Directors, hereby adopts the following Restated Articles of Incorporation.
ARTICLE ONE
The name of the corporation is:
ENTROPY LIMITED
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The nature of the business, objects and purposes proposed to
be transacted, _______ and _______ on by the corporation are:
. To engage in any business relating directly or indirectly
to the development and ________ of all forms of energy; to build, manufacture,
- ---------------------------.
. ________________________________________________________
_______________________________________________.
. To establish, maintain and operate thermal and solar
energy laboratories, to carry on research of any kind and character and to
produce, manufacture and make, use or sell or otherwise dispose of the articles
and substances invented thereby; to own the inventions developed thereby, to
protect the same by letters patent and to grant licenses or make other lawful
agreements or arrangements for the employment or use of such inventions by other
persons.
. To hold, have, purchase, mortgage and convey real and
personal property of any and all kinds and character, both within and without
the State of Colorado, and to carry on any other lawful business whatsoever
which may seem to the corporation capable of being carried on in connection with
the above or calculated directly or indirectly to promote the interests of the
corporation or to enhance the value of its properties; and to have, enjoy, and
exercise all the rights, powers, and privileges which are now or which may
hereafter be conferred upon corporations organized under the laws of the State
of Colorado.
7
<PAGE>
. To borrow and lend money and negotiate loans; to draw,
accept, endorse, buy, and sell promissory notes, bonds, stock and debentures.
The foregoing ________ shall be construed as the objects,
purposes and powers of the corporation; but the specific enumerations thereof
shall not be _____ to exclude any objects, purposes or powers which are lawful
and in any way incident to the proper conduct of the business of the
corporation.
ARTICLE FOUR
The total amount of authorized __________ stock of the
corporation shall _____________________ no par value common stock.
_______________________________. Each
___________________________________________ to one vote in the election of
directors and upon all corporate questions submitted to the vote of the
stockholders.
The shares of the corporation may be issued by the corporation
from time to time without action by the stockholders for such consideration in
money or property real and personal actually received as well as services
performed necessary or proper for the business of the corporation as may be
determined by the Board of Directors. All or any portion of the shares which may
be issued for cash, property or rights of property or interest therein deemed by
the Board of Directors necessary and proper for carrying on the business of the
corporation shall, when issued, be fully paid and not allowable to further cost
or assessment; and the judgment and discretion of the Board of Directors in all
matters pertaining thereto shall be deemed conclusive for all purposes.
ARTICLE FIVE
Cumulative voting shares of stock is not authorized.
ARTICLE SIX
No shareholder of the corporation shall have any preemptive
right or other right to subscribe to purchase or acquire any additional issues
of shares of stock at the corporation of any class or any series thereof or any
other rights or securities of the corporation whether now or hereafter
authorized and whether or not convertible into or evidencing or carrying the
right to subscribe to purchase or acquire any share of stock, rights or
securities of the corporation.
ARTICLE SEVEN
The ________________ constituting the Board of Directors of
the corporation shall _________________.
ARTICLE EIGHT
Any contract or other transaction between the corporation and
one or more of its directors, or between the corporation and any firm of which
one or more of its directors are members or employees or in which they are
interested, or between the corporation and
8
<PAGE>
any corporation or association of which one or more directors are shareholders,
members, directors, officers, or employees, shall be valid ____ all purposes
notwithstanding the presence of said director or directors at the meeting of the
Board of Directors of the corporation which acts upon or in reliance upon or in
reference to such contract or transaction, and notwithstanding his or their
participation in such action if the facts of such interest shall be disclosed or
known to the Board of Directors, and the Board of Directors shall nevertheless
authorize and approve such contract or transaction by vote of the majority of
the directors present, such interested director or directors to be counted in
determining whether a quorum is present but not to be counted in calculating the
majority necessary to carry such vote. This section shall not be construed to
invalidate any contract or other transaction which otherwise would be valid
under the common and statutory law applicable thereto.
ARTICLE NINE
The corporation shall have the power to indemnify any director
or officer or former director or officer of the corporation, or any person who
has served at its request as a director or officer of another corporation in
which it owns shares of capital stock or of which ________ creditor, and the
personal representative ________________ against _________ actually and
necessarily ________________ the defense of any action or ___________________ a
party by reason of being ________________________, except in relation to matters
as to which he is adjudged in such action or proceeding to be liable for
negligence or misconduct in the performance of duty; but such indemnification
shall not be deemed exclusive of any other rights to which the director or
officer is entitled under any bylaw, agreement, vote of shareholders, or
otherwise.
ARTICLE TEN
The Board of Directors shall have the power to make such
prudent Bylaws as they may deem proper for the management of the affairs of the
corporation, not inconsistent with law, for the purpose of carrying on all of
the business within the objects and purposes of the corporation and to amend,
alter, and repeal the same in whole or in part.
The foregoing Restated Articles of Incorporation correctly set
forth without change the corresponding provisions of the Articles of
Incorporation as heretofore amended and supersede the original Articles of
Incorporation and all amendments thereto.
EXECUTED by the undersigned Entropy Limited in duplicate on
this 29th day September, 1977.
ENTROPY LIMITED
/s/ M. W. Frank
-----------------------------------------
President
/s/ Henry L. Valentine
-----------------------------------------
Secretary
9
<PAGE>
STATE OF COLORADO )
) ss.
CITY AND COUNTY OF DENVER )
I, Deanna K. Johnson, a Notary Public, in and for the State
and County aforesaid, do hereby certify that on this 29th day of September,
1977, before me personally appeared M. W. Frank and Henry L. Valentine,
president and secretary respectively, of Entropy Limited, a Colorado
corporation, to me personally known and known to me to be the same persons
described in and who executed the foregoing instrument, and severally
acknowledged to me that they executed the same as their free act and deed.
/s/ Deanna K. Johnson
-----------------------------------
Notary Public
My commission expires: September 21, 1980
10
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
ENTROPY LIMITED
Pursuant to the provisions of the Colorado Corporation Code,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is
ENTROPY LIMITED
SECOND: The following amendment was adopted by the
shareholders of the corporation on August 31, 1977 in the manner prescribed by
the Colorado Corporation Code:
ARTICLE THREE
The nature of the business, objects and purposes to
be transacted, promoted and carried on by the corporation are:
(a) To engage in any business relating directly or
indirectly to the development and application of all forms of
energy; to build, manufacture, fabricate, design, and develop
equipment and devices for the development of energy and the
application and uses of such energy.
(b) To engage in the research, development,
manufacturing and marketing of heating and cooling systems
utilizing solar energy.
(c) To establish, maintain and operate thermal and
solar energy laboratories, to carry on research of any kind
and character and to produce, manufacture and make, ____ and
sell or otherwise dispose of the articles ___________ invented
thereby; to own the inventions developed thereby, to protect
the same by ___________ and to grant licenses or make other
lawful agreements or arrangements for the employment or use of
such inventions by other persons;
(d) To hold, have, purchase, mortgage and convey real
and personal property of any and all kinds and character, both
within and without the State of Colorado, and to carry on any
other lawful business whatsoever which may seem to the
corporation capable of being carried on in connection with the
above or calculated directly or indirectly to promote the
interests of the corporation or to enhance the value of its
properties; and
11
<PAGE>
to have, enjoy, and exercise all the rights, powers, and
privileges which are now or which may hereafter be conferred
upon corporations organized under the laws of the State of
Colorado.
(e) To borrow and lend money and negotiate loans; to
draw, accept, endorse, buy, and sell promissory notes, bonds,
stock and debentures.
The foregoing clauses shall be construed as the
objects, purposes and powers of the corporation; but the
specific enumerations thereof shall not be held to exclude any
objects, purposes or powers which are lawful and in any way
incident to the proper conduct of the business of the
corporation.
ARTICLE FOUR
The total amount of authorized capital stock of the
corporation shall consist of 1__,000,000 shares of no par
value common stock. Each share shall have the same rights and
privileges as every other share and no distinction between
them shall exist. Each outstanding share of capital stock
shall be entitled to one vote in the election of directors and
upon all corporate questions submitted to the vote of the
stockholders.
The shares of the corporation ma be issued by the
corporation from time to time without action by the
stockholders for such consideration in money or property real
and personal actually ______ as well as services performed
______________ the business of the corporating party as may be
determined by the Board of Directors. All or any portion of
the shares which may be issued for such property or rights of
property or interest _______ deemed by the Board of Directors
necessary and proper for carrying on the business of the
corporation shall, when issued, be totally paid and not
allowable to further cost or assessment; and the judgment and
discretion of the Board of Directors in all matters pertaining
thereto shall be deemed conclusive for all purposes.
ARTICLE SIX
No shareholder of the corporation shall have any
preemptive right or other right to subscribe to purchase or
acquire any additional issues of shares of stock of the
corporation of any class or any series thereof or any other
rights or securities of the corporation whether now or
hereafter authorized and whether or not convertible into or
evidencing or carrying the right to subscribe to parties or
acquire any share of stock, rights or securities of the
corporation.
12
<PAGE>
ARTICLE TWELVE
The corporation shall have the power to indemnify any
director or officer or former director or officer of the
corporation, or any person who has served at its request as a
director or officer of another corporation in which it owns
shares of capital stock _____ of which it is a creditor,
_______ personal representative of any such persons
___________ and necessarily incurred by him in connection with
the defense of any _______________ is made a party by reason
of _______________ such director or officer, except
_____________ matters as to which he shall be ___________
action or proceeding to be liable _____________ misconduct in
the performance _______________ indemnification shall not be
deemed ________ of any other rights to which such director
______________ entitled under any bylaw, ___________
_____holders, or otherwise.
ARTICLE THIRTEENTH
The Board of Directors shall have the power to make
such prudent Bylaws as they deem proper for the management of
the affairs of the corporation, not inconsistent with law, for
the purpose of carrying on all of the business within the
objects and purposes of the corporation and to amend, alter,
and repeal the same in whole or in part.
THIRD: The number of shares of the corporation outstanding at
the time of such adoption was 50,000; and the number of shares entitled to vote
thereon was 50,000.
FOURTH: The designation and number of outstanding shares of
each class entitled to vote thereon is a class were as follows:
CLASS NUMBER OF SHARES
Common, No Par Value _________
FIFTH: The number of shares voted for such amendment was ___;
and the number of shares voted _____ such amendment was none.
SIXTH: The number of shares of each class entitled to vote
thereon is a class ________ such amendment, ______, was:
CLASS NUMBER OF SHARES
Common, No Par Value ?
13
<PAGE>
SEVENTH: The number, if not set forth in such amendment, in
which any exchange, reclassification, or _______ of issued shares provided for
in the amendment shall be _____________ is as follows:
No change.
EIGHTH: The manner in which such amendment affects a change in
the amount of stated capital, and the amount of stated capital as changed by
such amendment, are as follows:
No change.
ENTROPY LIMITED
By: /s/ M. W. Frank
----------------------------------
President
and /s/ Henry L. Valentine
---------------------------------
Secretary
STATE OF COLORADO )
CITY AND ) ss.
COUNTY OF DENVER )
Before me, Deanna K. Johnson, a Notary Public, in and for the
said County and State, personally appeared M. W. Frank, who acknowledged before
me that he is the President of Entropy Limited.
In witness whereof I have hereunto set my hand and seal this
29th day of September, 1977.
/s/ Deanna K. Johnson
------------------------------------
Notary Public
14
<PAGE>
ARTICLES OF MERGER
OF
ENTROPY LIMITED
AND
SOLENERGY CORPORATION
To the Secretary of State
State of Colorado
Pursuant to the provisions of the Colorado Corporation Code
governing the merger of a foreign business corporation with and into a domestic
business corporation, the corporations hereinafter named do hereby adopt the
following articles of merger.
. The names of the merging corporations are Solenergy
Corporation, which is a business corporation organized under the laws of the
Commonwealth of Massachusetts, and Entropy Limited, which is a business
corporation organized under the laws of the State of Colorado.
. Annexed hereto and made a part hereof is the Agreement
and Plan of Merger for merging Solenergy Corporation with and into Entropy
Limited as approved by resolution of the Board of Directors of each of said
corporations, who duly approved the plan's adoption, the performance of its
terms and other requisite corporate actions.
. The number of shares of Entropy Limited which were
outstanding at the time of the approval of the Agreement and plan of Merger by
the shareholders of Entropy Limited is 15,000,000 shares, all of which are of
one class (common, no par)
. Solenergy outstanding shares of common stock: 4,021,370.
The number of the aforesaid shares which were voted for the
Agreement and Plan of Merger is 11,783,529, and the number of said shares which
were voted against the same is -0- and 20,320 abstained. ***
. The laws of the jurisdiction of organization of Solenergy
Corporation, the Commonwealth of Massachusetts, permit the merger of a business
corporation of the Commonwealth of Massachusetts with and into a business
corporation of another jurisdiction; and the merger of Solenergy Corporation
with and into Entropy Limited is in compliance with the laws of the Commonwealth
of Massachusetts, the jurisdiction of organization of Solenergy Corporation.
. Entropy Limited will continue its existence as the
surviving corporation under the name Solenergy Corporation pursuant to the
provisions of the Colorado Corporation Code.
*** All 4,021,370 shares of Solenergy common stock were voted for the
Agreement and Plan of Merger.
15
<PAGE>
Dated: September 13, 1984
SOLENERGY CORPORATION
By: /s/ Robert W. Willis
-------------------------------
President
ATTEST: /s/
----------------------------
Secretary-Clerk
Dated: September 13, 1984
ENTROPY LIMITED
By: /s/ M. W. Frank
---------------------------------
President
ATTEST: /s/ Shirley K. Hazen
-----------------------------
Secretary
16
<PAGE>
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Corporation Act,
C.R.S. 7-2-107, as amended, the undersigned corporation adopts the following
Articles of Amendment to its Restated Articles of Incorporation:
FIRST: The name of the Corporation is SOLENERGY CORPORATION.
SECOND: The following amendments were adopted by the Shareholders of
the Corporation on September 13, 1984, in the manner
prescribed by the Colorado Corporation Act, C.R.S. 7-2-107, as
amended:
(1) ARTICLE ONE of the Restated Articles of Incorporation of
the Corporation shall be amended to state as follows:
The name of the Corporation is SOLENERGY CORPORATION.
(2) ARTICLE FOUR of the Restated Articles of Incorporation
shall be amended by a new first paragraph to state as follows:
Fifteen million (15,000,000) shares of issued and outstanding
Common Stock, no par value, of the Corporation shall be
reclassified and consolidated to provide that for each twenty
(20) shares issued and outstanding there shall be issued in
exchange one (1) share of New Common Stock, no par value,
which New Common Stock shall have identical rights in all
respects to the Common Stock to be cancelled. The total amount
of authorized capital stock of the Corporation following the
consolidation and reclassification shall consist of 10,000,000
shares of no par value New Common Stock. Each share shall have
the same rights and privileges as every other share and no
distinction between them shall exist. Each outstanding share
of capital stock shall be entitled to one vote in the election
of directors and upon all corporate questions submitted to the
vote of stockholders.
THIRD: 15,000,000 shares are outstanding and 15,000,000 shares are
entitled to vote on the amendment.
FOURTH: 11,783,529 shares voted for the amendment, zero shares voted
against the amendment, and 20,320 shares abstained from
voting.
FIFTH: The amendment provides for a reclassification and
consolidation of the 15,000,000 issued and outstanding shares
of the Corporation.
17
<PAGE>
SIXTH: The amendment does not affect a change in the amount of stated
capital of the Corporation.
Dated: October 1, 1984.
ATTEST: SOLENERGY CORPORATION
/s/ Herbert Lemelman By: /s/ Robert W. Willis
Herbert Lemelman Robert W. Willis
Secretary President
COMMONWEALTH
STATE OF MASSACHUSETTS )
) ss.
COUNTY OF Suffolk )
Before me, Herbert Lemelman, a Notary Public in and for the
said County and State, personally appeared Robert W. Willis, who acknowledged
before me that he is the President of Solenergy Corporation and acknowledged
that he signed the foregoing Articles of Amendment to the Restated Articles of
Incorporation as his free and voluntary act and deed for the uses and purposes
therein set forth, and that the facts contained therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
9th day of October, 1984.
My commission expires: June 10, 1988.
/s/ Herbert Lemelman
------------------------------------
Notary Public - Herbert Lemelman
18
<PAGE>
_________ DIVISION
----------
DENVER, CO 80202
___-894-2251
CERTIFICATE OF RENEWAL
PURSUANT TO PROVISIONS OF THE COLORADO REVISED STATUTES, TITLE 7-8-
124, THE UNDERSIGNED HEREBY EXECUTE THE FOLLOWING CERTIFICATE OF
RENEWAL:
1. The name of the corporation at the time of dissolution SOLENERGY
CORPORATION .
2. New name under which the corporation is to be renamed (applicable only if
corporate name at time of dissolution is no longer available) A&W
Corporation, Inc. .
*3. The address of its registered office and the name of its registered
agent at such address is Company Corporation, 1600 Broadway, Denver, CO
80202.
4. The period of duration is Perpetual .
5. The corporation was organized under the laws of Colorado on March 26, 1974.
(date of incorporation)
6. The corporation was dissolved on Jan. 1992 for reason marked with an X
below:
-------------
X Corporation failed for 60 days to appoint and maintain a
registered agent in this state
____ Corporation failed to file corporate reports and pay requisite
fees
7. The certificate of renewal is filed by authority of the Board of
Directors in the manner indicated with an X below:
X The directors of the corporation at the time the corporation
was dissolved
____ The directors newly elected by the shareholders of the
corporation
By /s/ Anthony W. Adler
-------------------------------------
Its President
AND /s/ Robert W. Willis
------------------------------------
Its Secretary
19
<PAGE>
ARTICLES OF EXCHANGE OF A&W CORPORATION, INC.
WITH DAR PRODUCTS CORPORATION AND ELECTRONIC CARD
ACCEPTANCE CORPORATION, N.A. AND GRANDNAME LIMITED
1. Attached hereto as Exhibit A is that certain Agreement
Concerning the Exchange of Stock between A&W Corporation, Inc. (the
"Corporation") and Grandname Limited ("Grandname"), a British Virgin Islands
corporation, which contains the plan pursuant to which the Corporation shall
exchange up to 16,136,666 shares of its Common Stock in exchange for all of the
issued and outstanding shares of capital stock of DAR Products Corporation
("DAR"), a Maryland corporation, and Electronic Card Acceptance Corporation,
N.A. ("ECAC"), a Virginia corporation; provided that of the shares of the
Corporation to be exchanged pursuant to such plan, 9,000,000 shall be exchanged
upon the filing of these Articles and up to 7,136,666 shall be exchanged upon
the approval of certain amendments to the Corporation's Restated Articles of
Incorporation, as amended (the "Exchange").
2. The name and address of the principal office of the
acquiring corporation is A&W Corporation, Inc., a Colorado corporation, 325
Prospect Avenue, Mamaroneck, New York 10543.
3. Grandname is the sole shareholder of each of DAR and ECAC
and voted in favor of the Exchange. The Corporation has one class of
shareholders, constituting one voting group, and the number of votes cast by the
shareholders of the Corporation was sufficient to approve the Exchange at a
special meeting of shareholders of the Corporation held on May 3, 1996.
3. The effective date of the Exchange shall be the date these
Articles of Exchange are filed with the Secretary of State of Colorado.
IN WITNESS WHEREOF, the undersigned have executed theses
Articles of Exchange as of May 3, 1996.
GRANDNAME LIMITED A&W CORPORATION, INC.
By: /s/ E. David Gable By: /s/ Anthony W. Adler
----------------------------- --------------------------------
Name: E. David Gable Name: Anthony W. Adler
Title: Authorized Signatory Title: President
DAR PRODUCTS CORPORATION ELECTRONIC CARD ACCEPTANCE
CORPORATION, N.A.
By: /s/ David S. Pearl By: /s/ David C. Stinson
------------------------------- --------------------------------
Name: David S. Pearl Name: David C. Stinson
Title: President Title: Executive Vice President
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ARTICLES OF AMENDMENT TO RESTATED
ARTICLES OF INCORPORATION OF A&W CORPORATION, INC.
1. The name of the Corporation is A&W Corporation, Inc. (the
"Corporation").
2. The text of the amendment to the Articles of Incorporation
of the Corporation adopted is as follows:
ARTICLES ONE of the Restated Articles of Incorporation shall
be amended by deleting such ARTICLE in its entirety and
substituting therefor the following:
ARTICLE ONE: The name of the Corporation shall be Carnegie
International Corporation.
3. The foregoing amendment was adopted by a vote of the
shareholders of the Corporation at a meeting thereof held on May 3, 1996.
4. The number of votes cast for the foregoing amendment by the
holders of the Corporation's Common Stock entitled to vote thereon was
sufficient for approval by that voting group, such holders composing the only
voting group of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed these
Articles of Amendment to the Articles of Incorporation of the Corporation on
this 3rd day of May, 1996.
/s/ Anthony W. Adler
-------------------------------------
Anthony W. Adler, President
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AMENDMENT TO RESTATED
ARTICLES OF INCORPORATION OF
CARNEGIE INTERNATIONAL CORPORATION
1. The name of the Corporation is Carnegie International
Corporation (the "Corporation").
2. The text of the amendment to the Restated Articles of
Incorporation of the Corporation adopted is as follows:
ARTICLE FOUR of the Restated Articles of Incorporation shall
be amended by deleting such ARTICLE in its entirety and substituting therefor
the following:
ARTICLE FOUR
The total amount of authorized capital stock of the
Corporation shall consist of One Hundred Ten Million
(110,000,000) shares of Common Stock, no par value per share,
and Forty Million (40,000,000) shares of Preferred Stock,
value $1.00 per share.
The Board of Directors of the Corporation is hereby
expressly authorized to issue in one or more series any shares
of unissued Preferred Stock and to determine the designation,
preferences, conversion rights, voting powers, restrictions,
redemption provisions, limitations as to dividends, and other
terms, provisions and rights. The Board of Directors shall
cause the execution and filing with the Secretary of State of
Colorado of appropriate Articles of Amendment to the Restated
Articles of Incorporation of the Corporation with respect to
any such issuance of Preferred Stock in accordance with the
Colorado Business Corporation Act.
3. The foregoing Amendment was adopted by a vote of the
shareholders of the Corporation at a meeting thereof held on June 28, 1996.
4. The number of votes cast for the foregoing amendment by the
holders of the Corporation's Common Stock entitled to vote thereon was
sufficient for approval by that voting group, such holders comprising the only
voting group of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed these
Articles of Amendment to the Restated Articles of Incorporation of the
Corporation on this 28th day of June 1996.
/s/ Anthony Georgiou
-------------------------------------------
Anthony Georgiou, President
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ARTICLES OF AMENDMENT TO RESTATED
ARTICLES OF INCORPORATION OF
CARNEGIE INTERNATIONAL CORPORATION
Carnegie International Corporation, a Colorado corporation (hereinafter
called the "Corporation"), having its principal office in Hunt Valley, Maryland,
hereby certifies to Secretary of State of Colorado that:
FIRST: The name of the corporation is: CARNEGIE INTERNATIONAL
CORPORATION.
SECOND: The Articles of Incorporation of the Corporation are
hereby amended by deleting in its entirety in the existing Article FOUR and by
substituting in lieu thereof the Article FOUR set forth in Exhibit A attached
hereto.
THIRD: The amendment of the Restated Articles of Incorporation
with respect to Section 2 of Article FOUR was adopted on October 30, 1998, by
the Board of Directors and shareholder action was not required, as prescribed by
the Colorado Business Corporation Act. The amendment of the Restated Articles of
Incorporation with respect to Section 3 of Article FOUR was adopted on November
20, 1998, by the Board of Directors and shareholder action was not required, as
prescribed by the Colorado Business Corporation Act.
IN WITNESS WHEREOF, Carnegie International Corporation has caused these
presents to be signed and acknowledged in its name and on its behalf by its
President and witnessed and attested by its Secretary on this 9th day of
February, 1999, and its President acknowledges that these Articles of Amendment
are the act and deed of said Corporation, and under the penalties of perjury,
that the matters and facts set forth herein with respect to authorization and
approval are true in all material respects to the best of his knowledge,
information and belief.
ATTEST: CARNEGIE INTERNATIONAL CORPORATION
/s/ Lawrence Gable By: /s/ Lowell Farkas (SEAL)
Lawrence Gable, Acting Secretary -------------------------------
Lowell Farkas, President
c76345a.634
23
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Exhibit A
ARTICLE FOUR
The total amount of authorized capital stock of the Corporation shall
consist of One Hundred Ten Million (110,000,000) shares of Common Stock, no par
value per share and Forty Million (40,000,000) shares of Preferred Stock, par
value $1.00 per share.
The Board of Directors is hereby expressly authorized issue, in one or
more series, any shares of unissued Preferred Stock and to determine the
designation, preferences, conversion rights, voting powers, restrictions,
redemption provisions, limitations as to dividends and other terms, provisions
and rights. The Board of Directors shall cause the execution and filing with the
Secretary of State of Colorado of appropriate Articles of Amendment to the
Restated Articles of Incorporation of the Corporation with respect to any such
issuance of Preferred Stock in accordance with the Colorado Business Corporation
Act.
5. Series A Preferred Stock. A series of authorized Preferred Stock,
$1.00 par value is hereby created and shall have the designation, authorized
number of shares thereof and the rights, terms and provisions as set forth
below:
(a) Designation and Amount. The shares of this series shall be
designated as "Series A Preferred Stock" (the "Series A") and the authorized
number of shares constituting the Series A Preferred Stock shall be Two Hundred
Thousand (200,000).
(b) Trading. Series A will not be allowed to trade on the open
market.
(c) Administration. Administration of the Series A will be
conducted within the corporate office and not through the Corporation's transfer
agent.
(d) Voting Rights. Series A will have the right to vote along
with Common Stock shareholders as follows: Each share of Series A will be
counted as ten (10) votes of Common Stock. For purposes of voting, the totality
of voting shares on any issue shall be all Common Stock shares issued and
outstanding plus Series A shares issued and outstanding, Series A to be weighted
ten (10) votes for each one (1) Series A share. For example, if there are
200,000 Series A shares issued and outstanding and there are 40,000,000 shares
of Common Stock issued and outstanding, the total shares eligible to vote is
42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series A) =
42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares
need to be cast from either Series A (weighted 10 votes for 1 Series A share) or
Common Stock issued and outstanding shares to have the motion pass.
(e) Conversion Rights. Series A will have a "right of
conversion" as follows: On May 18, 2000, the 200,000 shares of Series A shall be
convertible to the greater of $2,000,000 worth of Common Stock or 2,000,000
shares of Common Stock, to be issued and legended in accordance with Rule 144
(hereinafter Rule 144 stock). Series A shareholder shall have the right to
convert the shares prior to May 18, 2000 in the event the Common Stock price of
Carnegie closes above $2.00 per share (hereinafter "early conversion"). In the
event of an early conversion, Series A shareholder shall receive $2,000,000
worth of Rule 144 stock. The value of the Rule 144 stock, for conversion
purposes shall be based on the average Market
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closing price of the Common Stock for the five business days immediately
preceding the conversion date. Market is defined as the price quoted for the
Company's Common Stock by the NASD Over the Counter Bulletin Board Service
(OTCBB), or any other US public market that trades the Common Stock on a daily
basis. The shares issued in the event of an early conversion will be Rule 144
stock.
(f) Liquidation. Series A will have a preference over shares
of Common Stock in the event of a corporate liquidation.
(g) Dividends. Series A will not be entitled to dividends. If
however the Corporation deems that a dividend be declared, the Series A
shareholder shall be given at least five (5) days written notice and at that
time can opt to convert Series A shares into shares of Common Stock, in
accordance with the conversion formula described in Section 1(e) of this Article
4.
(h) Stock Split. In the event of a stock split, either reverse
or otherwise, the Series A and/or the shares of Common Stock that will be
obtained upon conversion are to be proportionately split.
6. Series B Preferred Stock. A series of authorized Preferred Stock,
$1.00 par value is hereby created and shall have the designation, authorized
number of shares thereof and the rights, terms and provisions as set forth
below:
(a) Designation and Amount. The shares of this series shall be
designated as "Series B Preferred Stock" (the "Series B") and the authorized
number of shares constituting the Series B Preferred Stock shall be Two Hundred
Thousand Eight Hundred Forty-Seven and One- Half (200,847.5).
(b) Voting Rights. Series B will have the right to vote along
with Common Stock shareholders as follows: Each share of Series B will be
counted as ten (10) votes of Common Stock. For purposes of voting, the totality
of voting shares on any issue shall be all Common Stock shares issued and
outstanding plus Series B shares issued and outstanding, Series B to be weighted
ten (10) votes for each one (1) Series B share. For example, if there are
200,000 Series B shares issued and outstanding and there are 40,000,000 shares
of Common Stock issued and outstanding, the total shares eligible to vote is
42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series B) =
42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares
need to be cast from either Series B (weighted 10 votes for 1 Series B share) or
Common Stock issued and outstanding shares to have the motion pass.
(c) Conversion Rights. Series B will have a "right of
conversion" as follows:
(i) The 21,600 shares of Series B shall be convertible to
Common Stock of the Corporation upon the common share price of the Corporation
maintaining an average bid trading price of Two Dollars ($2.00) per share for a
period of at least thirty (30) days, provided that said trading price reaches
Two Dollars ($2.00) per share by December 31, 1998 and the thirty (30) day
common share price holds at Two Dollars ($2.00) per share for more than 30 days
on or before February 15, 1999. Said Common Stock shall constitute restricted
securities as defined in 17 C.F.R. ss. 230.144(a)(3) (hereinafter "Rule 144
Stock") and shares of Rule 144
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<PAGE>
Stock received in the conversion shall be Two Million Eight Thousand Four
Hundred Seventy- Five (2,008,475) shares of Rule 144 Stock.
(d) Dividends. Series B will not be entitled to dividends.
(e) Stock Split. In the event of a stock split, either reverse
or otherwise, the Series B and/or the shares of Common Stock that will be
obtained upon conversion are to be proportionately split.
7. Series E Preferred Stock. A series of authorized Preferred Stock,
$1.00 par value is hereby created and shall have the designation, authorized
number of shares thereof and the rights, terms and provisions as set forth
below:
(a) Designation and Amount. The shares of this series shall be
designated as "Series E Preferred Stock" (the "Series E") and the authorized
number of shares constituting the Series E Preferred Stock shall be Twenty-One
Thousand Six Hundred (21,600).
(b) Voting Rights. Series E will have the right to vote along
with Common Stock shareholders as follows: Each share of Series E will be
counted as ten (10) votes of Common Stock. For purposes of voting, the totality
of voting shares on any issue shall be all Common Stock shares issued and
outstanding plus Series E shares issued and outstanding, Series E to be weighted
ten (10) votes for each one (1) Series E share. For example, if there are
200,000 Series E shares issued and outstanding and there are 40,000,000 shares
of Common Stock issued and outstanding, the total shares eligible to vote is
42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series E) =
42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares
need to be cast from either Series E (weighted 10 votes for 1 Series E share) or
Common Stock issued and outstanding shares to have the motion pass.
(c) Conversion Rights. Series E will have a "right of
conversion" as follows:
(i) On November 20, 2000, the 21,600 shares of Series E
shall be convertible to Rule 144 Restricted Legend Common Stock of the
Corporation (hereinafter "Rule 144 Stock") and shares of Rule 144 Stock received
in the conversion shall be the greater of:
a) Rule 144 Stock with a value of $270,000 based
upon the conversion Value set forth in forth in paragraph (ii) below; or
b) 216,000 shares of Rule 144 Stock, which shall be
considered higher in Value than the Value under a) above if the Value of the
Common Stock of the Corporation is above an average closing price of $1.25
per share as computed on the business day immediately preceding November 20,
2000.
(ii) The Value of each share of Rule 144 Stock, for
conversion calculation purposes shall be based on the average Market closing
price of the Common Stock for the five (5) business days immediately preceding
the conversion date. "Market" is defined as the price quoted for the
Corporation's Common Stock by the NASD Over the Counter Bulletin Board Service
(OTCBB), or the closing trading price on the exchange on which the Corporation's
Common Stock is traded if said stock is no longer quoted on the OTCBB.
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<PAGE>
(d) Dividends. Series E will not be entitled to dividends.
(e) Stock Split. In the event of a stock split, either reverse
or otherwise, the Series E and/or the shares of Common Stock that will be
obtained upon conversion are to be proportionately split.
8. Series F Preferred Stock. A series of authorized Preferred Stock,
$1.00 par value is hereby created and shall have the designation, authorized
number of shares thereof and the rights, terms and provisions as set forth
below:
(a) Designation and Amount. The shares of this series shall be
designated as "Series F Preferred Stock" (the "Series F") and the authorized
number of shares constituting the Series F Preferred Stock shall be Fifty Two
Thousand Five Hundred (52,500).
(b) Trading. Series F will not be allowed to trade on the open
market.
(c) Administration. Administration of the Series F will be
conducted within the corporate office and not through the Corporation's transfer
agent.
(d) Voting Rights. Series F will have the right to vote along
with Common Stock shareholders as follows: Each share of Series F will be
counted as ten (10) votes of Common Stock. For purposes of voting, the totality
of voting shares on any issue shall be all Common Stock shares issued and
outstanding plus Series F shares issued and outstanding, Series F to be weighted
ten (10) votes for each one (1) Series F share. For example, if there are
200,000 Series F shares issued and outstanding and there are 40,000,000 shares
of Common Stock issued and outstanding, the total shares eligible to vote is
42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series F) =
42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares
need to be cast from either Series F (weighted 10 votes for 1 Series F share) or
Common Stock issued and outstanding shares to have the motion pass.
(e) Liquidation. Series F will have a preference over shares
of Common Stock in the event of a corporate liquidation, at up to $1.33 per
share. Preferred shares shall have preference over other Preferred shares in the
event of a corporate liquidation in order of alphabetical issuance, such that
Series A shall have preference over Series B, Series B shall have preference
over Series C. etc. The cumulative preferences of Series A through E Preferred
over Series F shall not exceed Twenty Million Dollars ($20,000,000).
(f) Dividends. Series F will not be entitled to dividends.
(g) Conversion Rights. Series F will have a "right of
conversion" as follows:
(i) On December 1, 2000, the 52,500 shares of Series
F shall be converted automatically to Common Stock of the Company, which Common
Stock shall constitute restricted securities as defined in 17 C.F.R. ss.
230.144(a)(3) (hereinafter "Rule 144 Stock"). The Common Stock shall be
converted to the greater of:
a) Rule 144 Stock with a Value of $7,000,000,
based upon the conversion Value set forth in paragraph (ii) below; or
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b) 525,000 shares of Rule 144 Stock, which shall
be considered higher in Value than the Value under a) above if the Value of the
Common Stock of the Company is above an average closing price of $1.33 per share
as computed for five (5) business days immediately preceding December 1, 2000.
(ii) The Value of each share of Rule 144 Stock, for
conversion calculation purposes shall be based on the average Market closing
price of the Common Stock for the five business days immediately preceding the
conversion date. Market is defined as the price quoted for the Company's Common
Stock by the NASD Over the Counter Bulletin Board Service (OTCBB), or the
closing trading price on the exchange on which the Company Common Stock is
traded if said stock is no longer quoted on the OTCBB.
(h) Stock Split. In the event of a stock split, either reverse
or otherwise, the Series F and/or the shares of Common Stock that will be
obtained upon conversion are to be proportionately split.
28
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CERTIFICATE OF CORRECTION
Pursuant to the Colorado Business Corporation Act, Carnegie
International Corporation (hereinafter called the "Corporation"), hereby
executes the following certificate of correction:
FIRST: The name of the corporation is: CARNEGIE INTERNATIONAL
CORPORATION, organized under the laws of Colorado.
SECOND: Description of the documents being corrected: The Articles of
Amendment to the Restated Articles of Incorporation of the Corporation.
THIRD: Date document was filed: February 10, 1999
FOURTH: Statement of incorrect information:
Due to a clerical error, Section 2(c)(i) incorrectly states:
"The 21,600 shares of Series B shall be convertible to Common
Stock of the Corporation upon the common share price of the
Corporation maintaining an average bid trading price of Two
Dollars ($2.00) per share for a period of at least thirty (30)
days, provided that said trading price reaches Two Dollars
($2.00) by December 31, 1998 and the thirty (30) day common
share price holds at Two Dollars ($2.00) per share for more
than 30 days on or before February 15, 1999."
Due to a clerical error, Section 4(g)(i)a) incorrectly states:
"Rule 144 Stock with a Value of $7,000,000, based upon the
conversion Value set forth in paragraph (ii) below; or"
FIFTH: Statement of corrected information
Section 2(c)(i) is hereby corrected by deleting the reference
to "21,600 shares" and replacing it with "200,847.5 shares".
Section 4(g)(i)a) is hereby corrected by deleting the
reference to "$7,000,000" and replacing it with "$700,000".
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IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed and acknowledged in its name and on its behalf by its President and
witnessed and attested by its Secretary on this 5th day of April, 1999, and its
President acknowledges that this Certificate of Correction is the act and deed
of said Corporation, and under the penalties of perjury, that the matters and
facts set forth herein with respect to authorization and approval are true in
all material respects to the best of his knowledge, information and belief.
ATTEST: CARNEGIE INTERNATIONAL CORPORATION
/s/ Richard Greene By: /s/ Lowell Farkas (SEAL)
- -------------------------- ------------------------------
Richard Greene, Secretary Lowell Farkas, President
c77203.634
30
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Exhibit 10.3
<PAGE>
EMPLOYMENT AGREEMENT
Carnegie: Goldstein
THIS EMPLOYMENT AGREEMENT, made this 2nd day of February,
1999, by and between Carnegie International Corporation, a Colorado corporation,
with its office and principal place of business at Executive Plaza 3, Suite
1001, 11350 McCormick Road, Hunt Valley, Maryland 21031 (hereinafter referred to
as the "Corporation"), and Bennett Goldstein, of Baltimore, Maryland
(hereinafter referred to as the "Employee").
WHEREAS, Corporation desires to employ Employee as Executive
Vice President and Chief Financial Officer of the Corporation under the terms
and conditions set forth herein Employee desires to be so employed.
NOW THEREFORE, the Parties agree as follows:
1. EMPLOYMENT: Corporation agrees to employ Employee and
Employee agrees to be so employed in the capacity, and with the title of
Executive Vice President and Chief Financial Officer of the Corporation during
the term of this Employment Agreement ("Agreement").
2. TERM:
a. Employment shall be for a term of five (5) years
commencing on or before February 15, 1999, unless terminated sooner as provided
in this Agreement (the "Initial Term").
b. At the end of the Initial Term, the term of this
Agreement shall be extended for additional one-year periods (the "Extended
Term"), unless either party hereto gives a notice not less than one hundred
twenty (120) days prior to the end of the Initial Term or the Extended Term, as
the case may be. The period commencing with the Effective Date and ending on the
date this Agreement expires or is terminated is hereinafter referred to as the
"Term."
<PAGE>
3. CHIEF FINANCIAL OFFICER: Employee shall report to such
Executive Officers of the Corporation and in such capacity at all times shall
discharge his duties in consultation with and under the supervision of said
Executive Officers. In the performance of his duties, Employee shall make his
principal office in such place as the Corporation's Board of Directors ("Board")
and Employee may from time to time agree.
4. BASE SALARY: Effective on the date hereof, Corporation
shall pay to Employee as base salary for his services the sum of One Hundred
Forty Thousand Dollars ($140,000.00) per year. Such base salary shall be subject
to annual merit increases at the discretion of the Corporation's Board. Base
salary due to the Employee shall be paid consistent with company policy.
5. ADDITIONAL COMPENSATION: A bonus shall also be paid annual
to the Employee, based upon the Company's performance or other criteria
determined by the Board. The criteria and amount of such bonus shall be
consistent with bonuses paid to other Executive Officers of the Corporation.
Such bonus shall be paid consistent with the Corporation's policy.
Notwithstanding the foregoing, the Company will guarantee a minimum yearly
additional amount to the Employee of $35,000.00 (the "Minimum Bonus") during the
term of this Agreement. The Employee may draw against the Minimum Bonus at a
maximum rate of $1,350.00 per bi-weekly pay period, subject to any adjustment
due to merit pay increases.
6. STOCK OPTION: The Corporation hereby grants to Employee an
option (the "Option") to purchase a total of Two Hundred Thousand (200,000)
shares ("Optional Shares") of common stock of the Corporation at the price of
$2.50 per share (the "Option Price"), subject to the following terms and
conditions. Employee shall have the right to exercise such Option on
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or before the tenth anniversary of the date of this Agreement by purchasing the
maximum amount of Option Shares as follows:
a. Thirty Thousand (30,000) shares after the first
anniversary date of this Agreement; and
b. Thirty Thousand (30,000) additional shares after
the second anniversary date of this Agreement; and
c. Thirty Thousand (30,000) additional shares after
the third anniversary date of this Agreement; and
d. Thirty Thousand (30,000) additional shares after
the fourth anniversary date of this Agreement; and
e. Eighty Thousand (80,000) additional shares after
the fifth anniversary date of this Agreement.
In order for Employee to exercise the Option, in whole or in part,
Employee shall deliver to the Corporation written notice of his exercise,
specifying the number of Option Shares as to which the Option is being
exercised. Upon an exercise, the purchase price may be paid in cash or in common
stock of the Corporation or a combination thereof. Each share of common stock
received by the Corporation in payment of all or a portion of the purchase price
specified in the Option shall be valued at its fair market value (as defined
below) on the date of exercise.
For purposes of this Agreement, the term fair market value
shall be defined as follows: (1) if the common stock of the Corporation is
listed on a national securities exchange or quoted on Nasdaq, the closing price
of the common stock on the relevant date (or, if such date is not a business day
or a day on which quotations are reported, then on the immediately preceding
date on which quotations were reported), as reported by the principal national
exchange
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on which such shares are traded (or in the case of an exchange) or by Nasdaq, as
the case may be; (2) if the common stock is not listed on a national securities
exchange or quoted on Nasdaq, but is actively traded in the over-the-counter
market, the average of the closing bid and asked prices for the common stock on
the relevant date (of, if such date is not a business day or a day on which
quotations are reported, then on the immediately preceding date on which
quotations were reported), or the most recent preceding date for which such
quotations are reported; and (3) if, on the relevant date, the common stock is
not publicly traded or reported as described in (1) or (2), the value determined
in good faith by the Board.
If Employee ceases to be employed by the Corporation or any of its
subsidiaries, the Option shall terminate as to the Option Shares for which
Employee shall not then have made payment as provided herein, except as provided
herein in the event of Employee's death, disability (as defined in Section 10(b)
hereof) or termination by reason of Convenience of the Corporation (as defined
in Section 10(c) hereof) and except that within ninety (90) days after the date
Employee ceases to be so employed, but in no event later than the expiration
date of the Option. Employee may pay for and receive all or any of the shares
constituting the installment or installments set forth above that shall have
accrued at the date Employee ceases to be so employed and for which Employee
shall not then have made payment as provided herein.
If Employee ceases to be employed by the Corporation or any of its
subsidiaries by reason of Employee's disability (as defined in Section 10(b)
hereof) or by reason of Convenience of the Corporation pursuant to Section 10(c)
hereof, then within one (1) year after the date Employee becomes disabled or is
terminated by reason of Convenience of the Corporation (as the case may be), but
in no event later than the expiration date of the Option, Employee may pay for
and receive all or any of the Option Shares set forth above for which Employee
shall not then have
4
<PAGE>
made payment as provided herein whether or not accrued. In the event of
Employee's death while employed by the Corporation or any of subsidiaries or
within ninety (90) days following termination of Employee's employment, the
executor or administrator of employee's estate may, within one (1) year after
the day of Employee's death, but in no event later than the expiration date of
the Option, pay for and receive all or any of the shares included in any
installments set forth above for which Employee shall not then have made payment
as provided herein whether or not accrued. Notwithstanding the foregoing, if
Employee's employment is terminated for Cause (as defined in Section 10(a)
hereof), the Option shall terminate on the date of Employee's termination of
employment as to the Option Shares for which Employee shall not have therefor
made payment and Employee shall have no right thereafter for any reason to pay
for or receive any of the Option Shares accrued as of the date of Employee's
termination of employment and for which Employee shall not then have made
payment as provided herein.
In the event that the outstanding shares of common stock of the
Corporation shall be changed in number or class by reason of stock splits,
combination or exchange of shares, or similar capital adjustments occurring
after the date hereof and prior to the exercise of the Option in full, the
number of shares for which the Option may then be exercised and the Option Price
per share may be proportionately and appropriately adjusted so as to reflect
such change, all as determined by the Board. Further, in the event of a merger,
consolidation, reorganization, recapitalization or a sale or exchange of
substantially all assets, or dissolution of the Corporation, the Board may, in
its discretion, make reasonable efforts to have the Corporation (or any other
surviving company in a transaction or series of transactions) substitute its
options or any unexercised portion of the Option upon appropriate and equitable
terms and provide for a period of exercise equal to the remaining term of the
Option.
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In the event that the Corporation shall cause to be filed with the
Securities and Exchange Commission ("SEC") a Registration Statement on Form S-8,
the Corporation will use all reasonable efforts to effect, in connection with
such registration, the registration under the Securities Act of 1933, as amended
(the "Securities Act") of the sale by the Corporation to the Employee of the
Option Shares. The Corporation agrees to use its reasonable efforts to keep the
Registration Statement continuously effective under the Securities Act for a
period expiring on the date ten (10) years from the date hereof or such earlier
date as the Option is exercised in full, and further agrees to supplement or
amend the Registration Statement, if and as required by the rules, regulations
or instructions applicable to the Form S-8 or by the Securities Act or by any
other rules and regulations thereunder for shelf registration. The Corporation
shall pay all registration expenses in connection with any such registration.
7. BENEFITS:
a. The Employee shall be entitled to all employee
benefits provided by the Corporation both as of the date of this Agreement as
well as any additional employee benefits which may be awarded or offered during
the term of this Agreement. Until such time as life and disability insurance is
provided by the Company, Employee will be reimbursed for the full cost of
Employee's current coverage. b. The Corporation shall pay all premiums on health
insurance (medical and dental) for the Employee and his spouse and family,
consistent with the policies provided to other Executives of the Corporation. c.
Employee shall be entitled to such paid vacation and sick days as approved by
the Board of Directors of the Corporation consistent with that given to the
other Executive Officers of the Corporation.
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8. EXPENSES:
Reimbursement: The Corporation shall reimburse
Employee for all reasonable and necessary expenses incurred in carrying out his
duties under this Agreement. In any event, Employee shall present to the
Corporation from time to time an itemized account of such expenses in any form
required by the Corporation.
9. AUTOMOBILE: The Corporation shall provide the Employee
with an automobile allowance of Five Hundred Dollars ($500.00) per month.
10. TERMINATION BY THE CORPORATION: This Agreement may be
terminated by the Corporation for the following reasons:
a. For Cause: Corporation may terminate this
Agreement for cause because of Employee's gross negligence or intentional,
substantive failure to perform the duties of Chief Financial Officer.
b. Disability: Corporation shall have the right to
terminate this Agreement on thirty (30) days notice to Employee if, because of
mental or physical disability Employee shall be determined by competent medical
authority selected by Employee to be incapable for a period of one hundred
twenty (120) days from fully performing any or all his obligations of his
position within the Corporation. In this event Corporation's obligation under
this Agreement (including but not limited to, the obligation to pay salary and
bonus) shall terminate no earlier than fifty-two (52) weeks after the onset of
such disability.
c. Convenience of the Corporation. In the event
Employee's employment is terminated by the Corporation for reasons not due to
any cause as provided above, the Corporation agrees to provide to Employee
written notice ninety (90) days prior to the effective date of such termination
plus two (2) years salary in addition to the balance of salary
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and benefits due under the terms of this Agreement (including any earned but
unpaid vacation pay).
11. TERMINATION BY THE EMPLOYEE: This Agreement may be
terminated for Good Reason (as defined below) at any time by the Employee, or
terminated without Good Reason by the Employee at any time after either
extension of the Initial Term as provided in Section 2 of this Agreement upon at
least sixty (60) days' written notice to the Employer. If the Employee
terminates his employment under this Section 11 other than for Good Reason, the
Corporation shall have no further obligations to pay hereunder except to pay the
Employee base salary and other benefits that have fully accrued and vested but
have not been paid as of the effective date of such termination (including any
earned but unpaid vacation pay). If the Employee terminates his employment under
this Section 11 for Good Reasons, such termination shall be treated as if it
were a termination for the Convenience of the Corporation pursuant to Section
10(c) hereof.
As used herein, "Good Reason" shall mean (a) the material
breach by the Corporation of any of its agreements set forth in this Agreement
that continues unremedied for a period of thirty (30) days after receipt by the
Corporation of a written demand for performance from the Employee, which written
demand specifically identifies in reasonable detail the manner in which Employee
believes that the Corporation has not performed its obligations: provided,
however, that no notice or grace period shall be required with respect to the
failure of the Corporation to pay the base salary when due, or (b) a material
change in the significant responsibilities of the Employee hereunder.
12. INDEMNITY: Corporation shall indemnify Employee and hold
him harmless for all acts or decisions made by him in good faith while
performing services for the
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Corporation. Corporation shall obtain Directors and Officers insurance coverage
that covers the Employee's acts or decisions during the term of his employment
against lawsuits; but the Corporation's failure to obtain such insurance shall
not limit its obligations to the Employee under this paragraph. Corporation
shall pay all expenses including reasonable fees and related disbursements of
attorneys and of other professionals actually and necessarily incurred by
Employee in connection with the defense of such act or decision in any
threatened or actual suit or proceeding and/or in connection with any related
appeal including the cost of settlement and/or in connection with the Employee's
involvement as an actual or prospective witness in any company-related
litigation and/or in enforcing the Employee's rights under this Agreement in the
face of actual or threatened breach or default by the Corporation.
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13. NOTICES: All notices required or permitted to be given
under this Agreement shall be given by certified mail, return receipt requested
to the parties at the following addresses or to such other addresses as either
may from time to time designate in writing to the other party:
If to the Corporation:
Carnegie International Corporation
Executive Plaza 3, Suite 1001
11350 McCormick Road
Hunt Valley, Maryland 21031
Attention: Chief Executive Officer
If to the Employee:
Bennett Goldstein
29 Stone Gate Court
Baltimore, Maryland 21208
14. GOVERNING LAW: This Agreement shall be construed and
enforced in accordance with the laws of the State of Maryland.
15. ENTIRE CONTRACT: This Agreement constitutes the entire
understanding and agreement between the Corporation and Employee with regards to
all matters herein. There are no other agreements, conditions or
representations, oral or written, express or implied, with regard thereto.
16. AMENDMENT OR MODIFICATION: This Agreement may be amended
or modified only in writing, signed by both parties.
17. HEADINGS: Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
18. COUNTERPARTS: This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original.
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19. BINDING EFFECT: The provisions of this Agreement shall be
binding upon an inure to the benefit of both parties and their respective
successors and assigns.
20. WAIVER: A waiver by any party of any of the terms and
conditions of this Agreement in any instance shall not be deemed or construed to
be a waiver of such terms and conditions for the future, or of any subsequent
breach thereof.
21. IN WITNESS WHEREOF, Corporation has by its appropriate
Officer, signed and affixed its seal and Employee has signed and sealed this
Agreement as of the date first above written.
ATTEST: CORPORATION:
CARNEGIE INTERNATIONAL CORPORATION
/s/ By: /s/ Lowell Farkas
- ---------------------------- -------------------------(SEAL)
Lowell Farkas, President
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WITNESS:
/s/ By: /s/ Bennett Goldstein
- ---------------------------- -------------------------(SEAL)
BENNETT GOLDSTEIN
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Exhibit 10.24
<PAGE>
ACQUISITION AGREEMENT
(Paramount International Telecommunications Inc.)
THIS AGREEMENT (the "Agreement") is made this 26th day of February,
1999, by between Carnegie International Corporation, a Colorado corporation (the
"Buyer") and Michael Eberle, David Moody, David Paton and Kay Eberle (sometimes
referred to collectively as the "Sellers" and each individually a "Seller").
RECITALS
I. Sellers own all of the issued and outstanding shares (the "Shares")
of capital stock of Paramount International Telecommunications Inc., a Nevada
corporation (the "Company").
II. Sellers and the Company believe that it will be in the best
interests of the Sellers and the Company to sell all the Shares to the Buyer;
and
III. Sellers and the Company desire to sell, and the Buyer desires to
purchase, all of the Shares, as hereinafter set forth.
IV. Capitalized terms used herein have the meanings set forth in
Section 12.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants, agreements, representations and warranties contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
A. PURCHASE OF SHARES
On the terms and subject to the conditions set forth in this Agreement,
the Sellers hereby agree to sell, transfer and assign to the Buyer and the Buyer
hereby agrees to purchase from the Sellers, on the Closing Date (as defined in
Section 2 hereof), all of the Shares. The Shares shall be conveyed free and
clear of all Encumbrances.
B. CONSIDERATION; CLOSING
1. CONSIDERATION
The sole consideration for the Shares shall be paid in shares
of common stock of Buyer, payable to Sellers in proportion to the Shares owned
by each, except for the additional transferees as noted on Exhibit 2.1 attached
hereto and incorporated herein by reference.
The consideration shall be Six Million Nine Hundred Fifty
Thousand (6,950,000) shares of common stock, without par value (the "Common
Stock"). The Common Stock shall be "restricted securities" as defined in
Securities and Exchange Commission Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act"). The certificates representing the
shares of Common Stock shall contain the following restrictive legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES
<PAGE>
LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER
THE PROVISIONS OF THAT ACT AND THE STATE SECURITIES LAWS OR UPON
PRESENTATION OF EVIDENCE SATISFACTORY TO THE CORPORATION THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
2. CLOSING
The purchase and sale (the "Closing") provided for in this
Agreement will take place at the offices of Buyer at Carnegie International
Corporation, Executive Plaza 3, Suite 1001, 11350 McCormick Road, Hunt Valley,
Maryland 21031 at 12:00 noon. (local time) on February 26, 1999, or at such
other time and place as the parties may agree (the "Closing Date"). Subject to
the provisions of Section 9, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this Section 2.6 will not result in the termination of this
Agreement and will not relieve any party of any obligation under this Agreement.
3. CLOSING OBLIGATIONS
At the Closing:
a. Sellers will deliver to Buyer:
(1) certificates representing the Shares,
duly endorsed (or accompanied by duly executed stock powers), with signatures
guaranteed by a commercial bank or by a member firm of the New York Stock
Exchange, for transfer to Buyer;
(2) all of the documents, certificates and
instruments required to be delivered, or caused to be delivered by such Seller
pursuant to Section 7.4 hereof;
(3) All records, documents and files of the
Company, including without limitation, all minute books, stock records and
internal account records.
b. Buyer will deliver to Sellers:
(1) certificates representing the Common
Stock duly executed by Buyer;
(2) all of the documents, certificates and
instruments required to be delivered, or caused to be delivered by Buyer
pursuant to Section 8.4 hereof.
C. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers represent and warrant to Buyer as follows:
1. ORGANIZATION AND GOOD STANDING; SUBSIDIARIES
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a. Schedule 3.1 contains a complete and accurate list for each
of the Company, the Subsidiary (as defined in Section 3.1(c)) and PMT (as
defined in Section 3.1(d)) of its name, its state or jurisdiction of
incorporation, other jurisdictions in which it is authorized to do business, and
its capitalization. Each of the Company and the Subsidiary is a corporation duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority to
conduct its business as it is now being conducted, to own or use the properties
and assets that it purports to own or use, and to perform all its obligations
under all Contracts. Each of the Company and the Subsidiary is duly qualified to
do business as a foreign corporation and is in good standing under the laws of
each state or other jurisdiction (including Canada and its Provinces and Mexico)
in which either the ownership or use of the properties owned or used by it, or
the nature of the activities conducted by it, requires such qualification.
b. Sellers have delivered to Buyer true and complete copies of
the charter and bylaws or other governing instruments (collective,
"Organizational Documents") of the Company and the Subsidiary as presently in
effect, and neither the Company nor the Subsidiary is in default in the
performance, observation or fulfillment of its Organizational Documents.
c. Call Data Clearing, Inc., a California corporation, is the
Company's sole operating subsidiary (the "Subsidiary"). The Company currently
owns 85% of the shares of outstanding capital stock of the Subsidiary, and the
Sellers shall utilize their best efforts to effectuate the Company's acquisition
of the remaining 15% of the shares of outstanding capital stock of the
Subsidiary within one hundred twenty (120) days from the date of Closing,
resulting in the Company having a 100% ownership interest in the outstanding
capital stock of the Subsidiary (the Company and the Subsidiary are sometimes
referred to jointly as the "Acquired Companies" and each individually an
"Acquired Company").
(1) Sellers hereby agree to indemnify and hold Buyer
harmless from any and all fees and expenses relating to said acquisition and any
and all claims arising, directly or indirectly, from the Company's acquisition
of the remaining fifteen percent (15%) of the Subsidiary, including the payment
of reasonable attorneys fees and expenses incurred by Buyer in defending any
such claim, including but not limited to, any claim from any former
stockholders, vendors or creditors of the Subsidiary, or in prosecuting any such
claim to enforce its rights herein. This provision shall survive Closing. Buyer
hereby agrees that in the event of any such claim requiring indemnification,
Sellers shall have the right to provide counsel of Sellers' choosing, subject to
Buyer's approval, which shall not be unreasonably withheld.
(2) The Parties hereby agree that the Parties shall
establish an escrow with Gershberg & Associates, LLC serving as escrow agent,
into which Sellers shall deposit Nine Hundred Twenty-Six Thousand Two Hundred
(926,200) shares of the Common Stock, (the "Escrow") which shall be released to
Sellers in proportion to their ownership of the Shares of the Company upon the
submission to Buyer of such documentation as shall reasonably reflect that the
Company has acquired said remaining 15% of the Subsidiary.
(3) The Parties hereby agree to use their best
efforts in maintaining as confidential the existence of the escrow established
herein, subject to any reporting requirements or obligations the Buyer may have
by virtue of its reporting, public company status.
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d. Sellers own all of the outstanding capital stock of
Paramount Marketing & Telecommunications, Inc. ("PMT"), a California
corporation. Sellers have caused PMT to cease all operations. PMT has no assets
and conducts no business. All of PMT's assets and business have been acquired by
the Company. The Company has no liabilities of any nature whatsoever which were
attributable to PMT.
2. AUTHORITY; NO CONFLICT
a. This Agreement constitutes the legal, valid, and binding
obligation of Sellers, enforceable against Sellers in accordance with their
terms. Upon the execution and delivery by Sellers of all of the documents
required to be delivered in Section 7.4 herein (collectively, the "Sellers'
Closing Documents"), the Sellers' Closing Documents will constitute the legal,
valid, and binding obligations of Sellers, enforceable against Sellers in
accordance with their respective terms. Sellers have the absolute and
unrestricted right, power, authority, and capacity to execute and deliver this
Agreement and the Sellers' Closing Documents and to perform their obligations
under this Agreement and the Sellers' Closing Documents.
b. Except as set forth in Schedule 3.2, the execution,
delivery, and performance of this Agreement and of the Exhibits hereto and the
consummation of the transactions contemplated hereby and thereby will not
violate (with or without the giving of notice or the lapse of time, or both) or
require any registration, qualification, consent, approval, or filing under, any
Legal Requirement. Except as set forth in Schedule 3.2, the execution, delivery,
and performance of this Agreement and the Exhibits hereto and the consummation
of the transactions contemplated hereby and thereby will not conflict with,
require any consent or approval under, result in the breach or termination of
any provision of, constitute a default under, result in the acceleration of the
performance of either Acquired Company's obligations under, or result in the
creation of any Encumbrance upon, any of either Acquired Company's properties,
assets, or businesses pursuant to (i) the Organizational Documents of the
Acquired Companies or any resolution adopted by the board of directors or the
stockholders of either Acquired Company; (ii) any indentures, mortgage, deed of
trust, license, permit, franchise, lease, permit, franchise, lease, Contract, or
other instrument or agreement to which either Acquired Company is a party, or
(iii) any Order by which either Acquired Company or any of its assets or
properties is bound.
Except as set forth in Schedule 4.2 attached hereto and made a part
hereof, Sellers are not and will not be required to obtain any Consent from any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the transactions contemplated under this
Agreement.
c. Sellers are acquiring the Common Stock for investment
purposes, for their own account and not with a view to their distribution with
the meaning of Section 2(11) of the Securities Act. Each Seller is an
"accredited investor" as such term is defined in Rule 501(a) under the
Securities Act.
3. CAPITALIZATION
a. The authorized equity securities of the Company consist of
25,000 shares of common stock, no par value, of which 2,000 shares are issued
and outstanding and constitute
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the Shares. Sellers are and will be on the Closing Date the record and
beneficial owners and holders of all the Shares, free and clear of all
Encumbrances. The names of the Sellers and the number of Shares owned by each of
them is set forth in Schedule 3.3(a) attached hereto and made a part hereof. No
legend or other reference to any purported Encumbrance appears upon any
certificate representing equity securities of either Acquired Company. All of
the outstanding equity securities of each Acquired Company have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
Contracts relating to the issuance, sale, or transfer of any equity securities
or other securities of either Acquired Company. None of the outstanding equity
securities or other securities of each Acquired Company was issued in violation
of the Securities Act or any other legal requirement. Except for the Subsidiary,
the Company does not own, or have any Contract to acquire, any debt or equity
investment or interest, direct or indirect, in any corporation, association,
partnership, joint venture or other entity. Delivery of the Shares by the
Sellers at the Closing pursuant to Section 2 of this Agreement will transfer to
the Buyer the legal and valid title to 100% of the issued and outstanding
capital stock of the Company, free and clear of all Encumbrances.
b. Except as set forth in Schedule 3.3(b) attached hereto and
made a part hereof, neither Acquired Company has any outstanding or authorized
options, warrants, calls, subscriptions, rights, convertible securities,
commitments, agreements, or understandings of any character obligating it to
issue shares of its capital stock or securities convertible into or evidencing
the right to purchase shares of its capital stock. Except as set forth in
Schedule 3.3(b) hereto attached hereto and made a part hereof, the number of
shares issuable upon exercise or conversion of the options, warrants, calls,
subscriptions, rights, convertible securities, commitments, agreements, and
understandings set forth in Schedule 3.3(b) hereto is not subject to adjustment
by reason of the issuance of any of the Shares pursuant to this Agreement, the
conversion of any convertible securities outstanding on the date hereof or to be
outstanding immediately after the Closing Date, or the exercise of any warrants
or options outstanding on the date hereof or to be outstanding immediately after
the Closing Date. Neither Sellers nor either Acquired Company is a part to any
Contract, or bound by any certificate or incorporation or by-law provision,
which creates any rights in any person or entity with respect to shares of each
Acquired Company's capital stock, or which relates to the voting, sale, or
transfer of any shares of each Acquired Company's capital stock.
4. FINANCIAL STATEMENTS
Sellers have delivered to Buyer: (a) Audited consolidated
balance sheets of the Company, the Subsidiary and PMT as at December 31, 1996,
1997 and 1998 (including the notes thereto, the "Balance Sheet"), and the
related consolidated statements of operations, statements of stockholders'
deficiency, and cash flow for the fiscal year then ended, together with the
report thereon of Merdinger, Pruchter, Rosen & Corso, P.C., independent
certified public accountants, and (b) an unaudited consolidated balance sheet of
the Acquired Companies as at September 30, 1998 (the "Interim Balance Sheet")
and the related unaudited consolidated statements of operations, statements of
stockholders' deficiency, and cash flow for the nine months then ended,
including in each case the notes thereto. Such financial statements and notes
fairly present the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Acquired Companies as at the
respective dates of and for the periods referred to in such financial
statements, all in accordance with GAAP, subject, in the case of interim
financial statements, to normal recurring year-end adjustments (the effect of
which will not, individually
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<PAGE>
or in the aggregate, be materially adverse); the financial statements referred
to in this Section 3.4 reflect the consistent application of such accounting
principles throughout the periods involved, except as disclosed in the notes to
such financial statements. No financial statements of any Person other than the
Acquired Companies are required by GAAP to be included in the consolidated
financial statements of the Company.
5. BOOKS AND RECORDS
The books of account, minute books, stock record books, and
other records of the Acquired Companies, all of which have been made available
to Buyer, are complete and correct and have been maintained in accordance with
sound business practices and the requirements of Section 13(b)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (regardless of
whether or not the Acquired Companies are subject to that Section), including
the maintenance of an adequate system of internal controls. The minute books of
the Acquired Companies contain accurate and complete records of all meetings
held of, and corporate action taken by, the stockholders, the Boards of
Directors, and committees of the Boards of Directors of the Acquired Companies,
and no meeting of any such stockholders, Board of Directors, or committee has
been held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of those books and records will be in the
possession of the Acquired Companies.
6. TITLE TO PROPERTIES; ENCUMBRANCES
a. Neither Acquired Company owns any real property. Schedule
3.6(a) attached hereto and made a part hereof, contains a complete and accurate
list of all the Acquired Companies' interest in any leasehold property, together
with all improvements and structures thereon (the "Leased Premises"). The Leased
Premises are all of the real property used in the business of each Acquired
Company. The Acquired Companies have good and marketable leasehold title to the
Leased Premises, free of any Encumbrances. Sellers have delivered or made
available to Buyer copies of the Acquired Companies' leases.
b. Schedule 3.6(b) attached hereto and made a part hereof,
contains a complete and accurate list of all personal property, including but
not limited to all equipment, machinery an fixtures, owned by Buyer or used by
Buyer in the conduct of its business (the "Personal Property"), indicating
whether it is owned or leased by Buyer. Buyer has good and marketable title to
the Personal Property owned by it, free and clear of Encumbrances of any nature
except (i) matters specified in Schedule 3.6(b) attached hereto and made a part
hereof; (ii) materialmen's, mechanics', carriers', workmen's, warehousemen's,
repairmen's or other like Encumbrances arising in the Ordinary Course of
Business; and (iii) Encumbrances for current taxes not yet due.
7. CONDITION AND SUFFICIENCY OF ASSETS
The Leased Premises and equipment of the Acquired Companies
are in good operating condition and repair, and are adequate for the uses to
which they are being put, and none of such Leased Premises or equipment is in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The Leased Premises and
equipment of the Acquired Companies are sufficient for the continued conduct of
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the Acquired Companies' businesses after the Closing in substantially the same
manner as conducted prior to the Closing.
8. ACCOUNTS RECEIVABLE
Schedule 3.8 attached hereto and made a part hereof, contains
a complete and accurate list of all accounts receivable of the Acquired
Companies as of December 3, 1998 (collectively, the "Accounts Receivables"),
which list sets forth the aging of such Accounts Receivable. All Accounts
Receivable represent or will represent valid obligations arising from sales
actually made or services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date, the Accounts Receivable are or will be as
of the Closing Date current and collectible. Each of the Accounts Receivable
either has been or will be collected in full, without any set-off, within ninety
days after the day on which it first becomes due and payable. There is no
contest, claim, or right of set-off, other than returns in the Ordinary Course
of Business, under any Contract with any obligor of any Accounts Receivable
relating to the amount or validity of such Accounts Receivable.
9. INVENTORY
All inventory of the Acquired Companies, whether or not
reflected in the Balance Sheet or the Interim Balance Sheet, consists of a
quality and quantity usable and salable in the Ordinary Course of Business,
except for obsolete items and items of below-standard quality, all of which have
been written off or written down to net realizable value in the Balance Sheet or
the Interim Balance Sheet or on the accounting records of the Acquired Companies
as of the Closing Date, as the case may be. The quantities of each item of
inventory (whether raw materials, work-in-process, or finished goods) are not
excessive, but are reasonable in the present circumstances of the Acquired
Companies.
10. NO UNDISCLOSED LIABILITIES
Except as set forth in Schedule 3.10 attached hereto and made
a part hereof, the Acquired Companies have no liabilities or obligations of any
nature (whether known or unknown and whether absolute, accrued, contingent, or
otherwise) except for liabilities or obligations reflected or reserved against
in the Balance Sheet or the Interim Balance Sheet and current liabilities
incurred in the Ordinary Course of Business since the respective dates thereof.
11. TAXES
a. The Acquired Companies have filed or caused to be filed all
United States Federal, state, local and foreign tax returns that are or were
required to be filed by or with respect to it. Sellers have delivered to Buyer
copies of, and Schedule 3.11 attached hereto and made a part hereof, contains a
complete and accurate list of, all such tax returns filed since the year ended
December 31, 1996. The Acquired Companies have paid, or made provision for the
payment of, all taxes that have or may have become due pursuant to those tax
returns or otherwise, or pursuant to any assessment received by Sellers or the
Acquired Companies, except such taxes, if any, as are listed in Schedule 3.11
attached hereto and made a part hereof, and are being contested in good faith
and as to which adequate reserves (determined in accordance with GAAP) have been
provided in the Balance Sheet and the Interim Balance Sheet.
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b. Except as set forth in Schedule 3.11, none of the Federal,
state, local or foreign tax returns have been audited by any taxing authority,
including, without limitation the Untied States Internal Revenue Service ("IRS")
or relevant state tax authorities. Schedule 3.11 attached hereto and made a part
hereof, contains a complete and accurate list of all audits of all such tax
returns, including a reasonably detailed description of the nature and outcome
of each audit. All deficiencies proposed as a result of such audits have been
paid, reserved against, settled, or, as described in Schedule 3.11, attached
hereto and made a part hereof, are being contested in good faith by appropriate
proceedings. Schedule 3.11 attached hereto and made a part hereof, describes all
adjustments to the United States Federal income tax returns filed by either
Acquired Company or any group of corporations including either Acquired Company
for all taxable years since December 31, 1996, and the resulting deficiencies
proposed by the IRS. Except as described in Schedule 3.11 attached hereto and
made a part hereof, no Seller or Acquired Company has given or been requested to
give waivers or extensions (or is or would be subject to a waiver or extension
given by any other Person) of any statute of limitations relating to the payment
of taxes of either Acquired Company or for which the Company may be liable.
c. The charges, accruals, and reserves with respect to taxes
on the books of each Acquired Company are adequate (determined in accordance
with GAAP) and are at least equal to that Acquired Company's liability for
taxes. There exists no proposed tax assessment against any of the Acquired
Companies except as disclosed in the Balance Sheet or in Schedule 3.11 attached
hereto and made a part hereof. No consent to the application of Section
341(f)(2) of the Internal Revenue Code ("IRC") has been filed with respect to
any property or assets held, acquired, or to be acquired by any of the Acquired
Companies. All taxes that either Acquired Company is or was required by legal
requirements to withhold or collect have been duly withheld or collected and, to
the extent required, have been paid to the proper governmental body.
d. All tax returns filed by (or that include on a consolidated
basis) either Acquired Company are true, correct, and complete. There is no tax
sharing agreement that will require any payment by either Acquired Company after
the date of this Agreement.
12. NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, there has not been any
material adverse change in the business, operations, properties, prospects,
assets, or condition of either Acquired Company, and no event has occurred or
circumstance exists that may result in such a material adverse change.
13. EMPLOYEE BENEFITS
Schedule 3.13 attached hereto and made a part hereof, is a
complete and correct list of all stock option, stock purchase, stock
appreciation right, bonus, incentive, deferred compensation, severance, profit
sharing, vacation, retirement, health, life or disability insurance, employee
benefit plan, program or arrangement (including, without limitation, any
"employee benefit plan," as defined in Section 3(3) of ERISA of each Acquired
Company, true and correct copies of each of which were delivered to the Buyer
prior to the date hereof. Neither Acquired Company maintains, and has no
obligation or liability with respect to, any employee welfare benefit plan or
any employee pension benefit plan, as such terms are defined in Sections 3(1)
and 3(2), respectively, of ERISA. All reasonably anticipated obligations of the
Acquired Companies,
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whether arising by operation of law, by Contract, by past custom or practice or
otherwise, for salaries, vacation and holiday pay, bonuses and other forms of
compensation which were payable to its officers, directors or employees as of
the date of the Balance Sheet or properly accruable as at such date have been
paid as of the date hereof or adequate accruals have been made therefor in such
Balance Sheet.
14. COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS
a. Except as set forth in Schedule 3.14(a), attached hereto
and made a part hereof;
(1) each Acquired Company is, and at all times since
December 31, 1995 has been, in full compliance with any Legal Requirement that
is or was applicable to it or to the conduct or operation of its business or the
ownership or use of any of its assets;
(2) no event has occurred or circumstance exists that
(with or without notice or lapse of time) (A) may constitute or result in a
violation by either Acquired Company of, or a failure on the part of either
Acquired Company to comply with, any Legal Requirement, or (B) may give rise to
any obligation on the part of either Acquired Company to undertake, or to bear
all or any portion of the cost of, any remedial action of any nature; and
(3) neither Acquired Company has received, at any
time since December 31, 1995, any notice or other communication (whether oral or
written) from any Governmental Body regarding (A) any actual, alleged, possible,
or potential violation of, or failure to comply with, any Legal Requirement, or
(B) any actual, alleged, possible, or potential obligation on the part of either
Acquired Company to undertaken, or to bear all or any portion of the cost of,
any remedial action of any nature.
b. Each Acquired Company has all Governmental Authorizations,
including those in Canada and Mexico, that are required in order to permit them
to own or lease their properties and to conduct their businesses as presently
conducted. Schedule 3.13(b) attached hereto and made a part hereof, contains a
complete and accurate list of each Governmental Authorization that is held by
either Acquired Company or that otherwise relates to the business of, or to any
of the assets owned or used by, either Acquired Company. Each Governmental
Authorization is in full force and effect and, to each Seller's and each
Acquired Company's knowledge, no suspension or cancellation of any of them is
threatened. The Governmental Authorizations listed in Schedule 3.14 attached
hereto and made a part hereof, collectively constitute all of the Governmental
Authorizations necessary to permit the Acquired Companies to lawfully conduct
and operate their businesses in the manner they currently conduct and operate
such businesses and to permit the Acquired Companies to own and use their assets
in the manner in which they currently own and use such assets.
15. LEGAL PROCEEDINGS; ORDERS
Except as set forth in Schedule 3.15 attached hereto and made
a part hereof:
a. There is no (i) Order of any Governmental Body or
arbitrator to which either of the Acquired Companies, or any of the assets owned
or used by either Acquired
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Company, is subject; (ii) Order to which any of the Sellers is subject that
relates to the business of, or any of the assets owned or used by, either
Acquired Company; or (iii) Proceeding pending that has been commenced by or
against either Acquired Company or that otherwise relates to or may affect the
business of, or any of the assets owned or used by, either Acquired Company or
that challenges, or that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, any of the transactions contemplated by
this Agreement (the "contemplated Transactions");
b. To the knowledge of Sellers and the Acquired Companies,
there is no (i) Order against or affecting any officer, director or employee of
either Acquired Company relating to such Acquired Company or its business; (ii)
Proceeding threatened against or affecting either Acquired Company or its
properties, assets or business; (iii) Proceeding threatened against either
Acquired Company's officers, directors or employees relating to such Acquired
Company or its business or (iv) basis for the commencement of any Proceeding
against either Acquired Company or any of such Acquired Company's officers,
directors or employees or assets owned or used by either Acquired Company.
Sellers have delivered to Buyer copies of all pleadings, correspondence, and
other documents relating to each Proceeding listed in Schedule 3.15 attached
hereto and made a part hereof. The Proceedings listed in Schedule 3.15 attached
hereto and made a part hereof, will not have a material adverse effect on the
business, operations, assets, condition, or prospects of either Acquired
Company.
16. ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Schedule 3.16 attached hereto and made
a part hereto, since the date of the Balance Sheet, the Acquired Companies have
conducted their businesses only in the Ordinary Course of Business and there has
not been any:
a. change in either Acquired Company's authorized or issued
capital stock; grant of any stock option or right to purchase shares of capital
stock of either Acquired Company; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by either Acquired Company of any shares of any
such capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock;
b. amendment to the Organizational Documents of either
Acquired Company;
c. payment or increase by either Acquired Company of any
bonuses, salaries, or other compensation to any stockholder, director, officer,
or (except in the Ordinary Course of Business) employee or entry into any
employment, severance, or similar Contract with any director, officer, or
employee;
d. adoption of, or increase in the payments to or benefits
under, any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement, or other employee benefit plan for or with any employees of
either Acquired Company;
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e. damage to or destruction or loss of any asset or property
of either Acquired Company, whether or not covered in insurance, materially and
adversely affecting the properties, assets, business, financial condition, or
prospects of the Acquired Companies, taken as a whole;
f. entry into, termination of, or receipt of notice of
termination of (i) any license, distributorship, dealer, sales representative,
joint venture, credit, or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to either Acquired Company of at
least $5,000;
g. sale, lease, or other disposition of any asset or property
of either Acquired Company or mortgage, pledge, or imposition of any Encumbrance
on any material asset or property of either Acquired Company, including the
sale, lease, or other disposition of any of the Registered Rights and
Proprietary Information (as defined in Section 3.22);
h. cancellation or waiver of any claims or rights with a value
to either Acquired Company in excess of $5,000;
i. material change in the accounting methods used by either
Acquired Company; or
j. agreement, whether oral or written, by either Acquired
Company to do any of the foregoing.
17. CONTRACTS; NO DEFAULTS
a. Schedule 3.17 attached hereto and made a part hereof,
contains a complete and accurate list, and Sellers have delivered to buyer true
and complete copies, of:
(1) each Contract that involves performance of
services or delivery of goods or materials to one or more Acquired Companies of
an amount or value in excess of $5,000;
(2) each Contract that involves the performance of
services by either Acquired Company to the hospitality and hospital industries
in the Ordinary Course of Business;
(3) each Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of one or
more Acquired Companies in excess of $5,000;
(4) each lease, rental or occupancy agreement,
license, installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales agreements having a value per item
or aggregate payments of less than $5,000 and with terms of less than one year);
(5) each Contract containing covenants that in any
way purport to restrict the business activity of either Acquired Company or
limit the freedom of either Acquired Company to engage in any line of business
or to compete with any Person;
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(6) each Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments for
goods;
(7) each power of attorney that is currently
effective and outstanding;
(8) each Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express undertaking
by either Acquired Company to be responsible for consequential damages;
(9) each Contract for capital expenditures in excess
of $5,000;
(10) each written warranty, guaranty, and or other
similar undertaking with respect to contractual performance extended by either
Acquired Company other than in the Ordinary Course of Business; and
(11) each amendment, supplement, and modification
(whether oral or written) in respect of any of the foregoing.
Each Contract is in full force and effect, is valid and
binding upon each of the parties thereto and enforceable in accordance with its
terms, subject (as to the enforcement of remedies) to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and (as
to the availability of equitable remedies) to the discretion of the equity
tribunal having jurisdiction, no Seller has any reason to believe that there is
or has been any actual or contemplated termination, cancellation or limitation
of, or any modification or change in, any of the Contracts. There has not
occurred any default or any event which, with the lapse of time or the election
of any Person other than an Acquired Company, or any combination thereof, will
become a default, by either Acquired Company or any other party under any of the
Contracts. Each Acquired Company has the right to quiet enjoyment of the Leased
Premises for the full term of the lease thereof. There are no Legal Requirements
or Orders, existing or proposed, which adversely affect or might adversely
affect either Acquired Company's rights under any of the Contracts.
18. INSURANCE
Schedule 3.18 attached hereto and made a part hereof, is a
list of all insurance policies to which either Acquired Company is a party or
that provide coverage to Sellers, either Acquired Company or any director or
officer of an Acquired Company, setting forth the name of the insurer, a
description of the policy, the amount of coverage, the amount of the premium and
the expiration date of the policy. Sellers have delivered to Buyer true and
complete copies of all policies of insurance to which either Acquired Company is
a party or under which either Acquired Company, or any director of either
Acquired Company, is or has been covered at any time within the three years
preceding the date of this Agreement. Each insurance policy relating to the
insurance referred to in this Section 3.18 is valid and enforceable; will
continue in full force and effect following the consummation of the Contemplated
Transactions; and does not provide for any retrospective premium adjustment or
other experienced-based liability on the part of either Acquired Company.
Neither Acquired Company has failed to give any notice or to present any claim
under any insurance policy in a due and timely fashion, nor has it permitted a
lapse in any of its insurance policies at any time. Schedule 3.18 attached
hereto and made a
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part hereof, is a list and brief description of all claims filed or threatened
to be filed by the insureds or third-parties under any insurance policies.
19. ENVIRONMENTAL MATTERS
Except as set forth in Schedule 3.19 attached hereto and made
a part hereof, neither the conduct nor operation of either Acquired Company nor
any condition of any property presently or previously owned, leased or operated
by any of them (including, without limitation, in a fiduciary or agency
capacity), or on which any of them holds an Encumbrance, violates or violated
during the period of such ownership, lease or operation Environmental Laws and
no condition has existed or event has occurred with respect to any of them or
any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability under Environmental Laws. Neither
Acquired Company has received any notice from any person or entity that either
Acquired Company or the operation or condition of any property ever owned,
leased, operated, or held as collateral or in a fiduciary capacity by any of
them are or were in violation of or otherwise are alleged to have liability
under any Environmental Law, including, but not limited to, responsibility (or
potential responsibility) for the cleanup or other remediation of any
pollutants, contaminants, or hazardous or toxic wastes, substances or materials
at, on, beneath, or originating from any such property.
20. EMPLOYEES
a. Schedule 3.20 attached hereto and made a part hereof,
contains a complete and accurate list of the following information for each
employee or director of the Acquired Companies: employer; name; job title;
current compensation paid or payable and any change in compensation since his or
her initial hire date; vacation accrued; and service credited for purposes of
vesting and eligibility to participate under either Acquired Company's pension,
retirement, profit-sharing, thrift-savings, deferred compensation, stock bonus,
stock option, cash bonus, employee stock ownership (including investment credit
or payroll stock ownership), severance pay, insurance, medical, welfare, or
vacation plan, or any other employee benefit plan or any director plan.
b. No employee or director of either Acquired Company is a
party to, or is otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, between such
employee or director and any other Person ("Proprietary Rights Agreement") that
in any way adversely affects or will affect (i) the performance of his duties as
an employee or director of the Acquired Companies, or (ii) the ability of either
Acquired Company to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Acquired Companies by any such employee or
director. To Sellers' knowledge, no director, officer, or other key employee of
either Acquired Company intends to terminate his employment with such Acquired
Company.
21. LABOR RELATIONS; COMPLIANCE
Neither Acquired Company is a party to or is bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is either Acquired Company the
subject of a proceeding asserting that it has committed an unfair labor practice
(within the meaning of the National Labor Relations Act). Each Acquired
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Company has complied in all respects with all Legal Requirements relating to
employment, equal employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining, the payment of social security and
similar taxes, occupational safety and health, and plant closing. Neither
Acquired Company is liable for the payment of any compensation, damages, taxes,
fines, penalties, or other amounts, however designated, for failure to comply
with any of the foregoing Legal Requirements.
22. INTELLECTUAL PROPERTY
a. The term "Registered Rights" includes: all letters patent,
patent applications, trade names, trademarks, service marks, trademark and
service mark registrations and applications, copyrights, copyright registrations
and applications, grants of a license or a right of one or more of the Acquired
Companies with respect to the foregoing, both domestic and foreign, claimed by
one or more of the Acquired Companies or used or proposed to be used by one or
more of the Acquired Companies in the conduct of its business, whether
registered or not. Schedule 3.22(a) attached hereto and made a part hereof
contains a true and complete list of all Registered Rights. The Contemplated
Transactions will not adversely affect the right, title and knowledge, the
Registered Rights do not infringe on or conflict with the rights or intellectual
property of any third party.
b. The term "Proprietary Information" includes: every trade
secret, know-how, process, discovery, development, design, technique, customer
and supplier list, promotional idea, marketing and purchasing strategy,
invention, process, confidential data, and other information. Except as
described in Schedule 3.22(b) attached hereto and made a part hereof, one or
more of the Acquired Companies own and have the unrestricted right to use the
Registered Rights and Proprietary Information required for or incident to the
design, development, manufacture, operation, sale and use of all products and
services sold or rendered or proposed to be sold or rendered by one or more of
the Acquired Companies, free and clear of any right, equity or claim of others.
Each Acquired Company has taken reasonable security measures to protect the
secrecy, confidentiality and value of all Proprietary Information.
c. Schedule 3.22(c) attached hereto and made a part hereof,
contains a true and complete list and description of all licenses of or rights
to Proprietary Information or Registered Rights granted to one or more of the
Acquired Companies by others or to others by one or more of the Acquired
Companies. Except as described in Schedule 3.22(c) attached hereto and made a
part hereof, (i) neither Acquired Company has sold, transferred, assigned,
licensed or subjected to any Encumbrance, any Registered Right or Proprietary
Information or any interest therein, and (ii) neither Acquired Company is
obligated or under any liability whatever to make payments by way of royalties,
fees or otherwise to any owner or licensor of, or other claimant to, any
Registered Right or Proprietary Information.
d. There is no claim or demand of any Person pertaining to, or
any Proceeding that is pending, or to the Sellers' knowledge, threatened, which
challenges the rights of one or more of the Acquired Companies in respect of any
Registered Right or Proprietary Information.
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23. CERTAIN PAYMENTS
Since December 31, 1995, neither Acquired Company or director,
officer, agent, or employee of either Acquired Company, or to Sellers' knowledge
any other Person associated with or acting for or on behalf of either Acquired
Company, has directly or indirectly (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(i) to obtain favorable treatment in securing business; (ii) to pay for
favorable treatment for business secured; (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of either Acquired
Company or any Affiliate (as such term is defined by Rule 12b-2 of the
regulations promulgated pursuant to the Exchange Act) of an Acquired Company; or
(iv) in violation of any Legal Requirement; or (b) established or maintained any
fund or asset that has not been recorded in the books and records of the
Acquired Companies.
24. DISCLOSURE
a. No representation or warranty of Sellers in this Agreement
(including the Exhibits and Schedules hereto) omits to state a material fact
necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
b. No notice given pursuant to Section 5.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
c. There is no fact known to either Seller that has specific
application to either Seller or either Acquired Company (other than general
economic or industry conditions) and that materially adversely affects or, as
far as any Seller can reasonably foresee, materially threatens, the assets,
business, prospects, financial condition, or results of operations of the
Acquired Companies (on a consolidated basis) that has not been set forth in this
Agreement.
25. RELATIONSHIPS WITH AFFILIATES
No Seller or any Affiliate of Sellers or of either Acquired
Company has, or since the first day of the next to last completed fiscal year of
the Acquired Companies has had, any interest in any property (whether real,
personal, or mixed and whether tangible or intangible), used in or pertaining to
the Acquired Companies' businesses. No Seller or any Affiliate of Sellers or of
either Acquired Company is, or since the first day of the next to last completed
fiscal year of the Acquired Companies has owned (of record or as a beneficial
owner) an equity interest of any other financial or profit interest in, a Person
that has (i) had business dealings or a material financial interest in any
transaction with either Acquired Company, other than business dealings or
transactions conducted in the Ordinary Course of Business with the Acquired
Companies at substantially prevailing market prices and on substantially
prevailing market terms, or (ii) engaged in competition with either Acquired
Company with respect to any line of the products or services of such Acquired
Company (a "Competing Business") in any market presently served by such Acquired
Company except for less than one percent of the outstanding capital stock of any
Competing Business that is publicly traded on any recognized exchange or in the
over-the-counter market. Except as set forth in Schedule 3.25 attached hereto
and made a part hereof, no Seller
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or any Affiliate of Sellers or of either Acquired Company is a party to any
Contract with, or has any claim or right against, either Acquired Company.
26. BROKERS OR FINDERS
With the exception of obligations assumed by the Company owed
to Bristol Capital, LLC ("Bristol"), Sellers and their agents have incurred no
obligation or liability, contingent or otherwise, for brokerage of finders fees
or agent's commissions or other similar payments in connection with this
Agreement. As it relates to the Bristol obligation, the Company has committed
eight percent (8%) of the stock consideration referenced in Section 2.1 herein
to Bristol, or its designee, in consideration for services provided herein.
Bristol is not entitled to any part of the value of the note or any of the
proceeds being paid to Eberle Family Trust referenced in Section 6.4 below.
Bristol's rights and obligations with respect to the stock consideration shall
be consistent with those of the Sellers. Sellers hereby agree to indemnify and
hold Buyer harmless from any claims resulting from Sellers' obligation to
Bristol with the exception of a claim against Buyer for failure to issue
securities to Bristol consistent with the terms hereof. Upon the issuance by
Buyer of 560,000 Common Stock to Bristol or its designee, Buyer's obligation
hereunder shall be satisfied and Sellers' obligation to indemnify Buyer
hereunder shall be unqualified.
27. YEAR 2000
The Acquired Companies have exercised due care in assessing
the Year 2000 compliance status of all material computer software and hardware
used in the Ordinary Course of Business and in assessing the Year 2000
compliance status of their customers and counterparties. Each Acquired Company
has taken reasonable steps necessary for its software and hardware used in the
business of such Acquired Company to be Year 2000 compliant on or before the end
of 1999 and the Company does not expect the future cost of addressing such
issues to be material.
28. INVESTMENT INTENT
Sellers are acquiring the consideration securities reflected
herein for investment purposes only, for their own account and not with a view
to the distribution of those securities within the meaning of Section 2(11) of
the Securities Act.
D. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
1. ORGANIZATION AND GOOD STANDING
Buyer is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Colorado.
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2. AUTHORITY; NO CONFLICT
a. This Agreement and the Escrow Agreement constitute the
legal, valid, and binding obligations of Buyer, enforceable against Buyer in
accordance with their terms. Upon the execution and delivery by Buyer of all of
the documents required to be delivered in Section 8.4 herein (collectively, the
"Buyer's Closing Documents"), the Buyer's Closing Documents will constitute the
legal, valid, and binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms. Buyer has the absolute and unrestricted
right, power, and authority to execute and deliver this Agreement and the
Buyer's Closing Documents and to perform its obligations under this Agreement
and the Buyer's Closing Documents.
b. Except as set forth in Schedule 4.2 attached hereto and
made a part hereof, neither the execution and delivery of this Agreement by
Buyer nor the consummation or performance of any of the Contemplated
Transactions by Buyer will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(1) any provision of Buyer's Organizational
Documents;
(2) any resolution adopted by the board of directors
or the stockholders of Buyer;
(3) any Legal Requirement or Order to which Buyer may
be subject; or
(4) any Contract to which Buyer is a party or by
which Buyer may be bound.
Except as set forth in Schedule 4.2 attached hereto and made a
part hereof, Buyer is not and will not be required to obtain any Consent from
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions.
3. INVESTMENT INTENT
Buyer is acquiring the Shares for investment purposes only,
for its own account and not with a view to their distribution within the meaning
of Section 2(11) of the Securities Act.
4. CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against
Buyer and that challenges, or may have the effect of preventing, delaying,
making illegal, or otherwise interfering with, any of the Contemplated
Transactions. To Buyer's knowledge, no such Proceeding has been threatened.
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5. BROKERS OR FINDERS
Buyer and its officers and agents have incurred no obligation
or liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold Sellers harmless from any such payment alleged to be due by
or through buyer as a result of the action of Buyer or its officers or agents.
E. COVENANTS OF SELLERS
1. ACCESS AND INVESTIGATION
Sellers shall cause each Acquired Company and any
Representatives to (a) afford Buyer and its Representatives and prospective
lenders and their Representatives full and free access to each Acquired
Company's personnel, properties (including subsurface testing), contracts, books
and records, and other documents and data, (b) furnish Buyer with copies of all
such contracts, books and records, and other existing documents and data as
Buyer may reasonably request, and (c) furnish Buyer with such additional
financial, operating, and other data and information as Buyer may reasonably
request.
2. OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES
Sellers shall cause each Acquired Company to:
a. conduct the business of such Acquired Company only in the
Ordinary Course of Business;
b. use their best efforts to preserve intact the current
business organization of such Acquired Company, keep available the services of
the current officers, employees, and agents of such Acquired Company, and
maintain the relations and good will with suppliers, customers, landlords,
creditors, employees, agents, and others having business relationships with such
Acquired Company;
c. confer with Buyer concerning operational matters of a
material nature; and
d. otherwise report periodically to Buyer concerning the
status of the business, operations, and finances of such Acquired Company.
3. NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement,
Sellers shall not cause each Acquired Company to, without the prior consent of
Buyer, take any affirmative action, or fail to take any reasonable action within
their or its control, as a result of which any of the changes or events listed
in Section 3.16 is likely to occur.
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4. REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement,
Sellers will, and will cause each Acquired Company to, make all filings required
by Legal Requirements to be made by them in order to consummate the Contemplated
Transactions. Sellers shall cause each Acquired Company to, (a) cooperate with
Buyer with respect to all filings that Buyer elects to make or is required by
Legal Requirements to make in connection with the Contemplated Transactions, and
(b) cooperate with Buyer in obtaining all consents identified in Schedule 4.2
attached hereto and made a part hereof.
5. NOTIFICATION
Each Seller shall promptly notify Buyer in writing if such
Seller or either Acquired Company becomes aware of any fact or condition that
causes or constitutes a Breach of any of Sellers' representations and warranties
as of the date of this Agreement, or if such Seller or either Acquired Company
becomes aware of the occurrence after the date of this Agreement of any fact or
condition that would (except as expressly contemplated by this Agreement) cause
or constitute a Breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Schedules if the Schedules were dated the date of the occurrence or
discovery of any such fact or condition, Sellers will promptly deliver to Buyer
a supplement to the Schedules specifying such change. During the same period,
each Seller will promptly notify Buyer of the occurrence of any Breach of any
covenant of Sellers in this Section 5 or of the occurrence of any event that may
make the satisfaction of the conditions in Section 7 impossible or unlikely.
6. PAYMENT OF INDEBTEDNESS BY AFFILIATES
Except as expressly provided in this Agreement, Sellers will
cause all indebtedness owed to an Acquired Company by any Seller or any
Affiliate of any Seller to be paid in full prior to Closing.
7. NO NEGOTIATION
Until such time, if any, as this Agreement is terminated
pursuant to Section 9, Sellers will not, and will cause each Acquired Company
and each of their Representatives not to, directly or indirectly solicit,
initiate, or encourage any inquiries or proposals from, discuss or negotiate
with, provide any non-public information to, or consider the merits of any
unsolicited inquiries or proposals from, any Person (other than Buyer) relating
to any transaction involving the sale of the business or assets (other than in
the Ordinary Course of Business) of either Acquired Company, or any of the
capital stock of either Acquired Company, or any merger, consolidation, business
combination, or similar transaction involving either Acquired Company.
8. BEST EFFORTS
Sellers shall use their best efforts to cause the conditions
in Sections 7 and 8 to be satisfied.
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9. OWNERSHIP OF SUBSIDIARY
As of the Closing Date, the Company shall own 85% of the
outstanding capital stock of the Subsidiary. The Company shall acquire the
remaining 15% of the outstanding capital stock of the Subsidiary which is not
owned by the Company in accordance with Section 3.1(c) hereof and in accordance
with the provisions of the Stock Purchase Agreement between the Company and the
Majority Shareholders of the Subsidiary, dated as of August 14, 1998.
10. NO BUSINESS TRANSACTED BY PMT
Sellers shall not cause PMT to transact any business or exist
as an operating entity.
11. BOARD OF DIRECTOR SEATS
Sellers shall cause the Company to select E. David Gable and
Lowell Farkas to the Board of Directors of the Company.
F. COVENANTS OF BUYER
1. APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement,
Buyer will, and will cause each of its Affiliates to, make all filings required
by Legal Requirements to be made by them to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will, and will cause each Affiliate to, (i) cooperate with Sellers with respect
to all filings that Sellers are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with Sellers
in obtaining all consents identified in Schedule 3.2 attached hereto and made a
part hereof; provided that this Agreement will not require Buyer to dispose of
or make any change in any portion of its business or to incur any other burden
to obtain a Governmental Authorization.
2. BEST EFFORTS
Except as set forth in the proviso to Section 6.1, between the
date of this Agreement and the Closing Date, Buyer will use its Best Efforts to
cause the conditions in Sections 7 and 8 to be satisfied.
3. BOARD OF DIRECTOR SEATS
Buyer shall facilitate the nomination of Michael Eberle to the
Board of Directors of Buyer as soon as practicable. Buyer shall further use its
best efforts to facilitate the expansion of the Buyer's Board to accommodate an
additional position which may be filled as the designation of Sellers.
4. EBERLE FAMILY TRUST
The Company is indebted to the Eberle Family Trust (the
"Trust") in the amount of One Million Two Hundred Forty-four Thousand Seven
Hundred Seventy-four Dollars and
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Forty-eight Cents ($1,244,774.48) (the "Eberle Debt") and such Eberle Debt is
currently due and payable. To the extent the Debt and the accrued interest
thereon have not been paid in full at the end of ninety (90) days from the date
of Closing, the Company shall pay the entire remaining principal balance due
plus any accrued interest. Buyer will guaranty the Company's payment.
5. OPERATION OF COMPANY
The Buyer hereby agrees that it shall maintain the Company as
a wholly owned subsidiary and for a period of two (2) years will not sell,
transfer or encumber the Shares of the Company without the prior written consent
of Sellers. Buyer further acknowledges that the Company shall maintain its
current management, consistent with the Employment Agreements referred to in
Section 7.4 hereof provided the Company reasonably performs in accordance with
its projections which projections shall be agreed upon by the Company and Buyer
and are attached hereto and incorporated herein as Exhibit 6.5. The Buyer hereby
acknowledges that is has no intention of changing the management of the Company,
dismantling the Company or selling off its assets.
a. For purposes herein the projections referred to as Exhibit
6.5 (hereinafter referred to as the "Projections") shall be reviewed and
compared with the actual financial statements of the Company prepared by the
Company not less often than on a quarterly basis. In the event the actual
statements reflect the performance of the Company to be less than ten percent
(10%) of Projections, Buyer shall have the absolute discretion to make changes
in management.
G. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
1. ACCURACY OF REPRESENTATIONS
All of Sellers' representations and warranties in this
Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Schedules.
2. SELLERS' PERFORMANCE
a. All of the covenants and obligations that Sellers are
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
b. Each document required to be delivered pursuant to Section
2.7 must have been delivered, and each of the other covenants and obligations in
Section 5.4 and 5.8 must have been performed and complied with in all respects.
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3. CONSENTS
Each of the Consents identified in Schedule 3.2 attached
hereto and made a part hereof, and each Consent identified in Schedule 4.2
attached hereto and made a part hereof, must have been obtained and must be in
full force and effect.
4. ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to
Buyer:
a. an opinion of Perkins and Miltner, dated the Closing Date,
in the form of Exhibit 7.4(a);
b. employment agreements in the form of Exhibit 7.4(b),
executed by Sellers (collectively, "Employment Agreements");
c. certificate executed by each Seller and the Company
representing and warranting to Buyer that each of Sellers' representations and
warranties in this Agreement was accurate in all respects as of the date of this
Agreement and is accurate in all respects as of the Closing Date as if made on
the Closing Date (giving full effect to any supplements to the Schedules that
were delivered by Sellers to Buyer prior to the Closing Date in accordance with
Section 5.5);
d. a good standing certificate for each Acquired Company from
the jurisdiction of its incorporation and from every jurisdiction in which it is
required to qualify to do business as a foreign corporation dated not earlier
than 10 days prior to Closing;
e. all notes and other instruments evidencing or securing the
Eberle Debt;
f. certified copies of resolutions of the Company's Board of
Directors appointing E. David Gable and Lowell Farkas by Buyer to the Board of
Directors of the Company; and
g. such other documents as Buyer may reasonably request for
the purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of Sellers' representations
and warranties, (iii) evidencing the performance by either Seller of, or the
compliance by either Seller with, any covenant or obligation required to be
performed or complied with by such Seller, (iv) evidencing the satisfaction of
any condition referred to in this Section 7, or (v) otherwise facilitating the
consummation or performance of any of the Contemplated Transaction hereby.
5. NO PROCEEDINGS
Since the date of this Agreement, there must not have been
commenced or threatened against Buyer, or against any Person affiliated with
Buyer, any Proceeding (a) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or (b)
that may have the effect of preventing, delaying, making illegal, or otherwise
interfering with any of the Contemplated Transactions.
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6. NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS
There must not have been made or threatened by any Person any
claim asserting that such Person (a) is the holder or the beneficial owner of,
or has the right to acquire or to obtain beneficial ownership of, any stock of,
or any other voting, equity, or ownership interest in, any of the Acquired
Companies, or (b) is entitled to all or any portion of the Purchase Price
payable for the Shares.
7. NO PROHIBITION
Neither the consummation nor the performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time), materially contravene, or conflict with, or result in a
material violation of, or cause Buyer or any Person affiliated with Buyer to
suffer any material adverse consequence under, (a) any applicable Legal
Requirement or Order, or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.
H. CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers, in whole or in part):
1. ACCURACY OF REPRESENTATIONS
All of Buyer's representations and warranties in this
Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date.
2. BUYER'S PERFORMANCE
a. All of the covenants and obligations that Buyer is required
to perform or to comply with pursuant to this Agreement at or prior to the
Closing (considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
b. Buyer must have delivered each of the documents required to
be delivered by Buyer pursuant to Section 2.7 and must have made the cash
payments required to be made by Buyer pursuant to Sections 2.2 and 2.7(b)(i).
3. CONSENTS
Each of the Consents identified in Schedule 3.2 must have been
obtained and must be in full force and effect.
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4. ADDITIONAL DOCUMENTS
Buyer must have caused the following documents to be delivered
to Sellers:
a. an opinion of Gershberg & Associates, LLC dated the Closing
Date, in the form of Exhibit 8.4(a);
b. the Employment Agreements, executed by Buyer;
c. a certificate executed by Buyer to the effect that, except
as otherwise stated in such certificate, each of Buyer's representations and
warranties in this Agreement was accurate in all respects as of the date of this
Agreement and is accurate in all respects as of the Closing Date as if made on
the Closing Date;
d. a good standing certificate for Buyer from the State of
Colorado or the State of Maryland as the jurisdiction in which it is required to
qualify to do business as a foreign corporation;
e. certified copies of resolutions of Buyer's Board of
Directors appointing Michael Eberle to the Board of Directors of Buyer; and
f. such other documents as Sellers may reasonably request for
the purpose of (i) enabling their counsel to provide the opinion referred to in
Section 7.4(a), (ii) evidencing the accuracy of any representation or warranty
of Buyer, (iii) evidencing the performance by Buyer of, or the compliance by
Buyer with, any covenant or obligation required to be performed or complied with
by Buyer, (iv) evidencing the satisfaction of any condition referred to in this
Section 8, or (v) otherwise facilitating the consummation of any of the
Contemplated Transactions.
5. NO INJUNCTION
There must not be in effect any Legal Requirement or any
injunction or other Order that (a) prohibits the sale of the Shares by Sellers
to Buyer, and (b) has been adapted or issued, or has otherwise become effective,
since the date of this Agreement.
I. TERMINATION
1. TERMINATION EVENTS
This Agreement may, by notice given prior to at the Closing,
be terminated:
a. by either Buyer or Sellers if a material breach of any
provision of this Agreement has been committed by the other party and such
branch has not been waived;
b. (1) by Buyer if any of the conditions in Section 7 has not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Buyer to comply with
its obligations under this Agreement) and Buyer has not waived such condition on
or before the Closing Date; or (ii) by Sellers, if any of the
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conditions in Section 8 has not been satisfied of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of Sellers to comply with their obligations under this Agreement)
and Sellers have not waived such condition on or before the Closing Date;
c. by mutual consent of Buyer and Sellers; or
2. EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in
addition to any other rights it may have under this Agreement or otherwise, and
the exercise of a right of termination will not be an election of remedies. If
this Agreement is terminated pursuant to Section 9.1, all further obligations of
the parties under this Agreement will terminate, except that the obligations in
Sections 11.1 and 11.3 will survive; provided, however, that if this Agreement
is terminated by a party because of the breach of the Agreement by the other
party or because one or more of the conditions to the terminating party's
obligations under this Agreement is not satisfied as a result of the other
party's failure to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired.
J. INDEMNIFICATION; REMEDIES
1. SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY
KNOWLEDGE
All representations, warranties, covenants, and obligations in
this Agreement, the Schedules, the supplements to the Schedules, the
certificates delivered pursuant to Section 7.4(c) and 8.4(c), and any other
certificate or document delivered pursuant to this Agreement will survive the
Closing and the consummation of the Contemplated Transactions hereby (and any
examination or investigation by or on behalf of any party hereto) until the
expiration of any applicable statute of limitations. A claim for indemnification
or reimbursement not based upon any representation or warranty or any covenant
or obligation to be performed and complied with prior to the Closing Date, may
be made at any time. The right to indemnification, payment of damages or other
remedy based on such representations, warranties, covenants, and obligations
will not be affected by any investigation conducted with respect to, or any
knowledge acquired (or capable of being acquired) at any time, whether before or
after the execution and delivery of this Agreement or the Closing Date, with
respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant, or obligation. The waiver of any condition
based on the accuracy of any representation or warranty, or on the performance
of or compliance with any covenant or obligation, will not affect the right to
indemnification, payment of damages, or other remedy based on such
representations, warranties, covenants, and obligations.
2. INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS
Sellers, jointly and severally, will indemnify and hold
harmless Buyer for, and will pay to Buyer the amount of, any loss, liability,
claim, damage (including incidental and consequential damages), expense
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value, whether or not involving a third-party claim (collectively,
"Damages"), arising, directly or indirectly, from or in connection with:
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a. any breach of any representation or warranty made by
Sellers in this Agreement (without giving effect to any supplement to the
Schedules), the Schedules, the supplements to the Schedules, or any other
certificate or document delivered by Sellers pursuant to this Agreement;
b. any breach of any representation or warranty made by
Sellers in this Agreement as if such representation or warranty were made on and
as of the Closing Date without giving effect to any supplement to the Schedules,
other than any such Breach that is disclosed in a supplement to the Schedules
and is expressly identified in the certificate delivered pursuant to Section
7.4(c) as having caused the condition specified in Section 7.1 not to be
satisfied; and
c. any breach by any Seller of any covenant or obligation of
such Seller in this Agreement.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Buyer.
3. INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
Buyer will indemnify and hold harmless Sellers, and will pay
to Sellers the amount of any Damages arising, directly or indirectly, from or in
connection with (a) any breach of any representation or warranty made by Buyer
in this Agreement or in any certificate delivered by Buyer pursuant to this
Agreement, or (b) any breach by Buyer of any covenant or obligation of Buyer in
this Agreement.
4. PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
a. Promptly after receipt by an indemnified party under
Section 10.2 or 10.3 of notice of the commencement of any Proceeding against it,
such indemnified party will, if a claim is to be made against an indemnifying
party under such Section, give notice to the indemnifying party of the
commencing of such claim, but the failure to notify the indemnifying party will
not relieve the indemnifying party of any liability that it may have to any
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying party's
failure to give such notice.
b. If any Proceeding referred to in Section 10.4(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense
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of such Proceeding, in each case subsequently incurred by the indemnified party
in connection with the defense of such Proceeding, other than reasonable costs
of investigation. If the indemnifying party assumes the defense of a Proceeding,
(i) it will be conclusively established for purposes of this Agreement that the
claims made in that Proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be effected
by the indemnifying party without the indemnified party's consent unless (A)
there is no finding or admission of any violation of Legal Requirements or any
violation of the rights of any Person and no effect on any other claims that may
be made against the indemnified party; and (B) the sole relief provided is
monetary damages that are paid in full by the indemnifying party; and (iii) the
indemnified party will have no liability with respect to any compromise or
settlement of such claims effected without its consent. If notice is given to an
indemnifying party of the commencement of any Proceeding and the indemnifying
party does not, within ten days after the indemnified party's notice is given,
give notice to the indemnified party of its election to assume the defense of
such Proceeding, the indemnifying party will be bound by any determination made
in such Proceeding or any compromise or settlement effected by the indemnified
party.
c. Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its Affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
d. Sellers hereby consent to the non-exclusive jurisdiction of
any court in which a Proceeding is brought against any Indemnified Person for
purposes of any claim that an Indemnified Person may have under this Agreement
with respect to such Proceeding or the matters alleged therein, and agree that
process may be served on Sellers with respect to such a claim anywhere in the
world.
5. PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS
A claim for indemnification for any matter not involving a
third-party claim may be asserted by notice to the party from whom
indemnification is sought.
6. DAMAGE CAP - NON-FRAUD CLAIMS
Notwithstanding anything to the contrary herein, the Parties
hereby agree that the Sellers' liability for damages arising out of a breach of
any representation or warranty set forth in this Agreement, which does not
amount to fraud, deceit or any intentional tort shall not exceed ten percent
(10%) of the Common Stock for any event which constitutes a breach of a
representation, warranty, covenant or other term of this Agreement. There shall
be no limitation however on any claim for damages as a result of fraud, deceit,
intentional misrepresentation or other intentional acts.
K. GENERAL PROVISIONS
1. EXPENSES
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Except as otherwise expressly provided in this Agreement, each
party to this Agreement will bear its respective expenses incurred in connection
with the preparation, execution, and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel, and accountants. Sellers will cause the Acquired
Companies not to incur any out-of-pocket expenses in connection with this
Agreement. In the event of termination of this Agreement, the obligation of each
party to pay its own expenses will be subject to any rights of such party
arising from a breach of this Agreement by another party.
2. PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to
this Agreement or the Contemplated Transactions will be issued, if at all, at
such time and in such manner as Buyer determines. Unless consented to by Buyer
in advance or required by Legal Requirements, prior to the Closing Sellers
shall, and shall cause the Acquired Companies to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any Person.
3. CONFIDENTIALITY
Subject to the provisions of Section 11.2, between the date of
this Agreement and the Closing Date, Buyer and Sellers will maintain in
confidence, and will cause the directors, officers, employees, agents, and
advisors of Buyer and the Acquired Companies to maintain in confidence, and not
use to the detriment of another party or any Acquired Company, any written,
oral, or other information obtained in confidence from another party or an
Acquired Company in connection with this Agreement or the Contemplated
Transactions, unless (a) such information is already known to such party or to
others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of such party, (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the Contemplated
Transactions, or (c) the furnishing or use of such information is required by or
necessary or appropriate in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each
party will return or destroy as much of such written information as the other
party may reasonably request. Whether or not the Closing takes place, Sellers
waive, and will upon Buyer's request cause the Acquired Companies to waive, any
cause of action, right, or claim arising out of the access of Buyer or its
Representatives to any trade secrets or other confidential information of the
Acquired Companies except for the intentional competitive misuse by Buyer of
such trade secrets or confidential information.
4. NOTICES
All notices, consents, waivers, and other communications under
this Agreement must be in writing and will be deemed to have been duly given
when (a) delivered by hand (with written confirmation of receipt), (b) sent by
telecopier (with written confirmation of receipt), provided that a copy is
mailed by registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
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Sellers: c/o Paramount International Telecommunications,
Inc.
2540 Fortune Way
Vista, California 92803
Attn: Michael Eberle
Facsimile No.: (760) 599-1930
with a copy to:
William L. Miltner, Esquire
Perkins & Miltner
Suite 2800
750 B Street
San Diego, CA 92101
Facsimile No.: 619-615-5334
Buyer: Carnegie International Corporation
Executive Plaza 3, Ste. 1001
11350 McCormick Road
Hunt Valley, Maryland 21031
Attn: Lowell Farkas, President
Facsimile No.: (410) 785-7412
with a copy to:
Richard L. Gershberg, Esquire
Gershberg & Associates, LLC
11419 Cronridge Drive, Suite 7
Owings Mills, Maryland 21117
Facsimile No.: (410) 654-3880
5. JURISDICTION; SERVICE OF PROCESS
Any action or proceeding seeking to enforce any provision of,
or based on any right arising out of, this Agreement may be brought against any
of the parties in the courts of the State of Maryland, County of Baltimore, or,
if it has or can acquire jurisdiction, in the United States District Court for
the District of Maryland (Northern Division), and each of the parties consents
to the jurisdiction of such courts (and of the appropriate appellate courts) in
any such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world. THE PARTIES HEREBY WAIVE THE RIGHT TO
TRIAL BY JURY IN ANY SUCH ACTION OR PROCEEDING.
6. FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other
such further information, (b) to execute and deliver to each other such other
documents, and (c) to do such other acts and
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things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to in this
Agreement.
7. WAIVER
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power or privilege. To the maximum
extent permitted by applicable law, (a) no claim or right arising out of this
Agreement or the documents referred to in this Agreement can be discharged by
one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
8. ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the
parties with respect to its subject matter (including the Letter of Intent
between Buyer and Sellers dated December 15,1998) and constitutes (along with
the documents referred to in this Agreement) a complete and exclusive statement
of the terms of the agreement between the parties with respect to its subject
matter. This Agreement may not be amended except by a written agreement executed
by the party to be charged with the amendment.
9. ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this
Agreement without the prior consent of the other parties, which will not be
unreasonably withheld, except that Buyer may assign any of its rights under this
Agreement to any Subsidiary of Buyer. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns.
a. Notwithstanding anything to the contrary herein each of the
Sellers shall have the right to assign a portion of the consideration received
or to be received in accordance with the terms of this Agreement to such member
or members of that Seller's family including spouses, children, grandchildren,
spouses of children or grandchildren, nieces or nephews or such entity provided
such assignment or transfer is performed to facilitate appropriate gift, estate
and/or income tax planning goals and not contrary to Seller's statement of
investment intent as warranted in section 3.28 of this Agreement. Each of the
Sellers shall also have the right to assign a portion
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of said consideration to not more than five (5) non-related persons or entities
with Buyer's prior written consent, which shall not be unreasonably withheld.
10. SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
11. SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for
convenience only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.
12. TIME OF ESSENCE
With regard to all dates and time periods set forth or
referred to in this Agreement, time is of the essence.
13. GOVERNING LAW
This Agreement will be governed by the laws of the State of
Maryland without regard to conflicts of laws principles.
14. COUNTERPARTS
This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
L. DEFINITIONS
The following terms, as used herein, have the following meanings:
"Contract" shall mean any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"Encumbrance" shall mean any charge, claim, community property
interest, condition, equitable interest, lien, option, pledge, security
interest, right of first refusal, or restriction of any kind, including any
restriction on use, voting, transfer, receipt of income, or exercise of any
other attribute of ownership.
"Environmental Laws" shall mean all Legal Requirements pertaining to
the protection of the environment, the treatment, emission and discharge of
gaseous, particulate and effluent
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pollutants and the use, handling, storage, treatment, removal, transport,
transloading, cleanup, decontamination, discharge and disposal of "hazardous
substances" or "hazardous materials", as such terms are defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
or any successor law, and regulations and rules issued pursuant to that Act or
any successor law.
"GAAP" shall mean generally accepted United States accounting
principles, applied on a basis consistent with the basis on which the Balance
Sheet and other financial statements referred to in Section 3.4(b) were
prepared.
"Governmental Authorization" shall mean any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body" shall mean any:
a. nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
b. federal, state, local, municipal, foreign, or other government;
c. governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
d. multi-national organization or body; or
e. body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"Legal Requirement" shall mean all applicable federal, state, local,
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees.
"Order" shall mean any award, decision, injunction, judgment, order,
ruling, subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" shall mean an action taken by a Person
will be deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) Such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority)[and is not required to be specifically authorized by the
parent company (if any) of such person]; and
32
<PAGE>
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Persons or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of businesses as such Person.
"Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, labor union,
or other entity or Governmental Body.
"Proceeding" shall mean any actual or threatened claim, action, suit,
arbitration, audit, hearing, inquiry, litigation, proceeding, complaint, charge
or investigation by or before any Governmental Body or arbitrator.
"Representative" shall mean, with respect to a particular Person, any
director, officer, employee, agent, consultant, advisor, or other representative
of such Person, including legal counsel, accountants, and financial advisors.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first written above.
WITNESS: SELLERS:
/s/ /s/ Michael Eberle
- -------------------------- ----------------------------------
Michael Eberle
/s/ /s/ David Moody
- -------------------------- ----------------------------------
David Moody
/s/ /s/ David Paton
- -------------------------- ----------------------------------
David Paton
/s/ /s/ Kay Eberle
- -------------------------- ----------------------------------
Kay Eberle
ATTEST: BUYER:
CARNEGIE INTERNATIONAL CORPORATION
/s/ By: /s/ Lowell Farkas
- -------------------------- ------------------------------
Lowell Farkas, President
ACKNOWLEDGMENT BY COMPANY
PARAMOUNT INTERNATIONAL TELECOMMUNICATIONS, INC.
The undersigned officer acknowledges on behalf of Paramount
International Telecommunications, Inc. that Paramount consents to the transfer
effectuated herein.
PARAMOUNT INTERNATIONAL
TELECOMMUNICATIONS, INC.
/s/ By: /s/
- -------------------------- ------------------------------
ACKNOWLEDGMENT OF ESCROW AGENT
In accordance with the terms of Section 3.1(c)(ii) hereof,
Gershberg & Associates, LLC, hereby agrees to serve as escrow agent.
34
<PAGE>
GERSHBERG & ASSOCIATES, LLC
By: /s/ Richard L. Gershberg
------------------------
Richard L. Gershberg, Member
35
<PAGE>
Exhibit 10.25
<PAGE>
EMPLOYMENT AGREEMENT
(Michael Eberle)
THIS EMPLOYMENT AGREEMENT, made this 26 day of February, 1999,
by and between Paramount International Telecommunications, Inc., a Nevada
Corporation, with its office and principal place of business at 2540 Fortune
Way, Vista, California, 92083, (hereinafter referred to as the "Corporation"),
and Michael Eberle (hereinafter referred to as the "Employee").
WHEREAS, Corporation desires to employ Employee as President
of the Corporation under the terms and conditions set forth herein and Employee
desires to be so employed.
NOW THEREFORE, the Parties agree as follows:
1. EMPLOYMENT: Corporation agrees to employ Employee, and
Employee agrees to be so employed in the capacity and with the title of
President during the term of this Employment Agreement ("Agreement").
2. TERM:
a. Employment shall be for a term of five (5) years
commencing on before January 1, 1999.
b. Unless the Employee shall have received written
notification from the Board of Directors of the Corporation that this Employment
Agreement will not be renewed at least One Hundred Twenty (120) days prior to
its expiration, then this Agreement shall be extended for additional terms of
one (1) year each, without further formalities on the
1
<PAGE>
same terms and conditions and as if this Agreement, adjusted for increased
salary levels, had just become effective.
3. DUTIES:
a. Employee shall serve as the President of Paramount
International Telecommunications, Inc. In that capacity, Employee shall do and
perform all services, acts, or things necessary or advisable to fulfill the
duties of a President.
b. Employee agrees that to the best of his ability
and experience he will at all times loyally and conscientiously perform all of
the duties and obligations required of him either expressly or implicitly by the
terms of this Agreement.
4. EXTENT OF SERVICES: The Employee shall devote substantially
his entire working time, attention and energies to the Employer's business and
shall not during the term of this Agreement be engaged in any employment
activities, undertake to work for compensation or accept employment with another
entity for gain, profit, or other pecuniary advantage. However, the Employee may
invest his assets in such form or manner as will not require his services in the
operation of the affairs of the companies in which such investments are made.
5. COMPENSATION:
A. SIGNING BONUS: The Company shall deliver to the
Employee as signing bonus upon execution of the Agreement the following:
i) The cash amount of Three Hundred
Seventy-five Thousand Dollars ($375,000.00); and
2
<PAGE>
ii) Twelve Thousand Five Hundred (12,500)
shares of the Common Stock of Carnegie International Corporation which shares
shall be subject to restrictions on transferability in accordance with the
Securities Act of 1933 and Rule 144 promulgated thereunder.
B. BASE SALARY: Effective on the date hereof,
Corporation shall pay to Employee as base salary for his services the sum of One
Hundred Thirty Thousand Dollars ($130,000.00) per year. Base salary due to the
Employee shall be paid bi-weekly.
C. BONUS SHARES: In addition to the consideration set
forth heretofore, the Corporation shall deliver to Employee additional shares of
common stock of Carnegie International Corporation ("CIC") (the "Bonus Shares")
based on sales revenue earned by the Corporation for each of the annual periods,
by quarter, for the two year period commencing April 1, 1999 and ending March
31, 2001, (the "Period") provided the Corporation maintains a profit margin of
at least eight percent (8%) earnings before income taxes ("EBIT") (the 8%
Margin") for each of the quarters in which the gross sales revenue for the
Corporation reach certain levels noted below (the "Sales Level") and all
quarters within the Period prior thereto according to generally accepted
accounting principles (GAAP). For purposes of this Section 5C, the Employee may
be eligible to receive Bonus Shares only once during the Period for each of the
Sales Levels of $25M, $35M, and $50M, computed on an annual basis. There shall
be no carryover of gross sales from the first year to the second year of the
Period. The number of Bonus Shares to be issued and dates of issuance shall be
based on the criteria and computations noted below:
3
<PAGE>
i) At the end of any quarter of the Period
during which the Corporation has continuously maintained the 8% Margin and
attained cumulatively through that quarter the Sales Level of not less than
$25,000,000.00, the Corporation shall deliver to Employee twenty-five percent
(25%) of that number of Bonus Shares to be computed beginning with the number
representing the increase in gross sales revenue above $16,000,000.00, divided
by the average closing bid price of the Common Stock for the fifteen (15)
trading days prior to the end of said quarter reduced by fifteen percent (15%).
The parties hereby incorporate by reference the spread sheet entitled "Examples
Of Bonus Shares" which is attached hereto as Exhibit A, which reflects 400% of
the number of Bonus Shares to be issued hereunder based on different stock
prices.
ii) At the end of any quarter during which
the Corporation has continuously maintained the 8% Margin and attained the Sales
Level of not less than $35,000,000.00 in either the first four or the last four
quarters of the Period, the Corporation shall deliver to Employee twenty-five
percent (25%) of that number of additional Bonus Shares to be computed beginning
with the increase in sales revenue above $25,000,000.00 divided by the average
closing bid price of the Common Stock for the fifteen (15) trading days prior to
the end of said quarter reduced by fifteen percent (15%).
iii) At the end of any quarter during which
the Corporation has continuously maintained the 8% Margin and attained the Sales
Level of not less than $500,000.00 in either the first four or the last four
quarters of the Period, the Corporation shall deliver to Employee twenty-five
percent (25%) of that number of additional Bonus Shares to be computed beginning
with the increase in sales revenues above $35,000,000.00
4
<PAGE>
divided by the average closing bid price of the Common Stock for the fifteen
(15) trading days prior to the end of said quarter reduced by fifteen percent
(15%).
iv) If at the end of the eighth quarter, the
Corporation has not attained the Sales Level of $50,000,000.00 for the Period
the Corporation shall deliver to Employee twenty-five percent (25%) of that
number of additional Bonus Shares to be computed beginning with the excess above
the highest Sales Level attained plus one-half of the difference between the
actual aggregate gross sales revenues for the year and the next higher Sales
Level divided by the average closing bid price of the Common Stock for the
fifteen (15) trading days prior to the end of the Period reduced by fifteen
percent (15%).
v) All of the Bonus Shares to be delivered
to Employee hereunder shall be restricted shares pursuant to Rule 144 of the
Securities Act of 1933 (the "Act"). CIC will provide piggy-back registration
rights for fifty percent (50%) of the Bonus Shares so that such Bonus Shares
shall be freely tradeable as soon as practicable after the SEC declares any such
registration effective.
vi) The Corporation hereby agrees that the
determination of eligibility and computation of Bonus Shares to be issue shall
be made forty-five (45) days after each quarter with any Bonus Shares to be
issued within fifteen (5) days thereafter.
D. FIRST CALL COMMUNICATION BONUS: In the event that
the Corporation is successful in obtaining the contemplated International
Operator Services Agreement between the Corporation and First Call Communication
("First Call Communication Agreement"), the Corporation shall pay Employee the
cash sum of Three
5
<PAGE>
Hundred Thousand Dollars ($300,000.00) on the sixth month anniversary of the
date of the First Call Communication Agreement.
6. ADDITIONAL COMPENSATION: A performance bonus shall also be
paid annually to the Employee. The bonus will be determined by the President and
Board of Carnegie International Corporation (hereinafter referred to as
"Carnegie")
7. STOCK OPTION: The Employee shall participate in future
stock option plans as approved by the Board of Carnegie which plans shall be
consistent with those of similarly situated officers of subsidiaries of
Carnegie.
8. BENEFITS:
a. The Employee shall be entitled to benefits as
provided by the Carnegie senior executives of subsidiaries of Carnegie both as
of the date of this Agreement as well as any additional employee benefits which
may be awarded or offered during the term of this Agreement.
b. The Corporation shall pay premiums on health
insurance (medical and dental) for the Employee and his spouse, consistent with
the policies provided to other Executives of subsidiaries of Carnegie.
c. Employee shall be entitled to such paid vacation
and sick days as approved by the Board of Directors of Carnegie consistent with
that given to the other Executive Officers of Carnegie.
9. EXPENSES: Reimbursement: The Corporation shall reimburse
Employee for all reasonable and necessary expenses incurred in carrying out his
duties under this Agreement except for expenses relating to the maintenance of
an automobile as those
6
<PAGE>
expenses are encompassed in Paragraph 10 of this Agreement. In any event,
Employee shall present to the Corporation from time to time an itemized account
of such expenses in any form required by the Corporation.
10. AUTOMOBILE: The Corporation shall provide the Employee
with an automobile allowance of Seven Hundred Fifty Dollars ($750.00) per month,
from which Employee is to pay any purchase or lease payment, maintenance,
insurance, gas, oil and repairs.
11. TERMINATION BY THE CORPORATION: This Agreement may be
terminated by the Corporation for the following reasons:
a. For Cause: Corporation may terminate this
Agreement for cause because of Employee's gross negligence or intentional
failure to perform the Employee's duties.
b. Disability: Corporation shall have the right to
terminate this Agreement on thirty (30) days notice to Employee if, because of
mental or physical disability Employee shall be determined by competent medical
authority to be incapable for a period of ninety (90 ) days from fully
performing any or all his obligations of his position within the Corporation. In
this event Corporation's obligations under this Agreement shall terminate
fifty-two (52) weeks after the onset of such disability.
c. Convenience of the Corporation. In the event
Employee's employment is terminated by the Corporation for reasons of
convenience of the Corporation and not due to any causes as provided above, the
Corporation agrees to continue Employee's full salary for the remainder of the
Agreement, or one year's salary, whichever is greater.
7
<PAGE>
d. Notwithstanding anything to the contrary, any
termination hereunder shall not alleviate Employer's obligations to Employee
under Sections 5(a), 5(c) & 5(d) of the instant agreement.
12. TERMINATION BY THE EMPLOYEE: This Agreement may be
terminated for cause at any time by the Employee, or terminated without cause by
the Employee at any time after either renewal of this Agreement as provided in
Section 2 of this Agreement upon at least sixty (60) days' written notice to the
Employer. The Employee's exercise of his termination rights hereunder shall not
affect the Employee's entitlement to all salary and other benefits of employment
or of this Agreement up to the effective date of such termination.
13. INDEMNITY: Corporation shall indemnify Employee and hold
him harmless for all acts or decisions made by him in good faith while
performing services for the Corporation. Corporation shall use its best efforts
to obtain insurance coverage for the Employee covering his acts or decisions
during the term of his employment against lawsuits; but the Corporation's
failure to obtain such insurance shall not limit its obligations to the Employee
under this paragraph. Corporation shall pay all expenses including reasonable
fees and related disbursements of attorneys and of other professionals actually
and necessarily incurred by Employee in connection with the defense of such act
or decision in any threatened or actual suit or proceeding and/or in connection
with any related appeal including the cost of settlement and/or in connection
with the Employee's involvement as an actual or prospective witness in any
company-related litigation and/or enforcing the Employee's rights under this
Agreement in the face of actual or threatened breach or default by the
Corporation.
8
<PAGE>
14. DISCLOSURE OF CONFIDENTIAL INFORMATION: The employee
acknowledges that he will have access to significant amounts of confidential
information of Employer and its Parent Company, Carnegie International
Corporation and affiliates of Carnegie, including such information as lists of
customers, sources of supply, production information, product information,
service information, formulas, computer programs and development ideas related
thereto, work in progress, trade secrets technical information acquired by
Employee from Employer or Carnegie from the inspection of Employer's or
Carnegie's property, confidential information disclosed to Employee by third
parties, and all documents, things and record bearing media disclosing or
containing the aforegoing information, including any confidential materials
prepared by the parties hereto which contain or otherwise relate to such
information concerning the Employer's and/or Carnegie's (including affiliates of
Carnegie) financial, intellectual, technical and commercial information
(collectively hereafter referred to as "Confidential Information") shall be and
remain confidential. The Employee will not during or after the term of this
employment, disclose the Confidential Information or any part thereto to any
person, firm, corporation, association, or other entity for any reason or
purpose whatsoever. In the event of a breach or threatened breach by the
Employee of the provisions of this paragraph, the Employer shall be entitled to
an injunction restraining the Employee from disclosing, in whole or in part, the
Confidential Information, or from rendering any services in connection with the
telecommunications industry to any person, corporation, association, or other
entity to whom such Confidential Information, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein shall be construed as
prohibiting the Employer or Carnegie from pursuing any of the
9
<PAGE>
remedies available to the Employer for such breach or threatened breach,
including the recovery of damages from the Employee. The Employee shall be
responsible to Employer and Carnegie for reasonable attorneys fees and costs
incurred in connection with the enforcement of this provision should a Court of
competent jurisdiction rule in favor of Employer or Carnegie in connection with
a cause of action brought for enforcement of said provision.
15. RESTRICTIVE COVENANTS: In consideration of the
compensation reflected herein as well as the consideration securities to be
received by the Employee, for a period of five (5) years, after the termination
or expiration of this Agreement and any extension thereof, the Employee will not
within the, geographical customer market of North America, including Canada;
Latin America, and Mexico; and/or any other country in which the Company is
doing business or activity pursuing business leads at the time of Employee's
termination or expiration of the Agreement, directly or indirectly, own manage,
operate, control, be employed by or participate in any business that competes
with and or sells similar products and or services as the business conducted by
the Employer at the time of the termination of this Agreement. In the event of
the Employee's actual or threatened breach of the provisions of this paragraph,
the Employer shall be entitled to an injunction restraining the Employee
therefrom. Nothing shall be construed as prohibiting the Employer from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages from the Employee. The Employee acknowledges that the
restrictions set forth in this Agreement are reasonable as to territory and
scope in light of the technological nature of the Company's business.
10
<PAGE>
16. UNIQUENESS OF EMPLOYEE'S SERVICES: Employee hereby
represents and agrees that the services to be performed under the terms of this
Agreement are of a special, unique, unusual, extraordinary, and intellectual
character that gives them a peculiar value, the loss of which cannot be
reasonably or adequately compensated in damages in an action at law. Employee
therefore, expressly agrees that Employer, in addition to any other rights or
remedies which Employer may possess, shall be entitled to injunctive and other
equitable relief to prevent or remedy a breach of this agreement by Employee.
17. NOTICES: All notices required or permitted to be given
under this Agreement shall be given by certified mail, return receipt requested,
to the parties at the following addresses or to such other addresses as either
may from time to time designate in writing to the other party: If to the
Corporation: Paramount International Telecommunications, Inc.
2540 Fortune Way
Vista, California 92083
With a Copy to its Parent Corporation: Carnegie International Corporation
Executive Plaza 3
Suite 1001
11350 McCormick Road
Hunt Valley, Maryland 21031
and
If to Employee: Mr. Michael Eberle
2540 Fortune Way
Vista, California 92083
18. GOVERNING LAW: This Agreement shall be construed and
enforced in accordance with the laws of the State of Maryland.
11
<PAGE>
19. JURISDICTION: SERVICE OF PROCESS: Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Maryland, County of Baltimore, or if it has or can acquire jurisdiction, in
the United States District Court for the District of Maryland (Northern
Division), and each of the parties consents to the jurisdiction of such courts
(and of the appropriate appellate courts) in any such action or proceedings and
waivers any objection to venue laid therein. Process in any action or proceeding
referred to in the preceding sentence may be served on any party anywhere in the
world. THE PARTIES WAIVE THE RIGHT TO TRIAL BY JURY IN ANY SUCH ACTION OR
PROCEEDING.
20. ENTIRE CONTRACT: This Agreement constitutes the entire
understanding and agreement between the Corporation and Employee with regard to
all matters herein. There are no other agreements, conditions or
representations, oral or written, express or implied, with regard thereto. This
Agreement supersedes any prior executed Employment Agreement between the Company
and the Employee.
21. AMENDMENT OR MODIFICATION: This Agreement may be amended
or modified only in writing, signed by both parties.
22. HEADINGS: Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
23. COUNTERPARTS: This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original.
24. BINDING EFFECT: The provisions of this Agreement shall be
binding upon and inure to the benefit of both parties and their respective
successors an assigns.
12
<PAGE>
IN WITNESS WHEREOF, Corporation has by its appropriate
Officer, signed and affixed its seal and Employee has signed and sealed this
Agreement as of the date first above written.
ATTEST: CORPORATION:
PARAMOUNT INTERNATIONAL
TELECOMMUNICATIONS, INC.
/s/ BY: /s/ Michael Eberle (SEAL)
---------------------------- ---------------------------------
, President
WITNESS: EMPLOYEE:
/s/ BY: /s/ Michael Eberle (SEAL)
---------------------------- ---------------------------------
Michael Eberle
13
<PAGE>
Exhibit 21.1
<PAGE>
Subsidiaries of the Registrant
1. Profit Thru Telecommunications (Europe) Limited
2. Talidan Limited
3. Harbor City Corporation, t/a ACC Telecom
4. Talidan USA, Inc.
5. Victoria Station, Miami, Inc.
6. Electronic Card Processing, Inc.
7. Voice Quest, Inc.
8. RomNet Support Services, Inc.
9. Paramount International Telecommunications, Inc.
10. Carnegie Communications Inc.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000311172
<NAME> CARNEGIE INTERNATIONAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-1-1998 JAN-1-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 789,068 226,422
<SECURITIES> 0 400,000
<RECEIVABLES> 4,824,510 771,664
<ALLOWANCES> 0 0
<INVENTORY> 163,686 32,575
<CURRENT-ASSETS> 6,409,861 1,467,560
<PP&E> 950,360 573,156
<DEPRECIATION> 135,239 102,042
<TOTAL-ASSETS> 29,169,302 19,818,969
<CURRENT-LIABILITIES> 3,247,154 3,052,046
<BONDS> 0 0
0 0
474,948 0
<COMMON> 545,212 388,355
<OTHER-SE> 23,526,806 12,452,382
<TOTAL-LIABILITY-AND-EQUITY> 29,169,302 19,818,969
<SALES> 11,657,223 6,945,810
<TOTAL-REVENUES> 11,657,223 6,945,810
<CGS> 3,679,506 1,589,925
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,299,322 3,819,463
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 608,838 49,417
<INCOME-PRETAX> 3,200,840 1,503,839
<INCOME-TAX> 539,913 (12,279)
<INCOME-CONTINUING> 2,660,927 1,516,118
<DISCONTINUED> 0 (100,330)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,660,927 1,415,788
<EPS-PRIMARY> .06 .06
<EPS-DILUTED> .06 .06
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