UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO.1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. COMMISSION FILE NUMBER: 000-08918
CARNEGIE INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 13-3692114
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(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
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(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
COMMON STOCK AMEX
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(Securities registered pursuant to Section 12(g) of the Act)
None
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(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 No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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/A or any amendment to
this Form 10-KSB /A.
State the issuer's revenues for the most recent fiscal year: 7,302,017.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on November 30, 1999 was approximately $354,000,000 computed by
reference to the last publicly quoted trading price of $6.875 on April 29, 1999
when trading of the Company's securities was halted on the American Stock
Exchange.
The number of shares of the registrant's common stock outstanding as of November
30, 1999 was 60,014,015. 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
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Page
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PART I
ITEM 1. Description of Business
Business Activities as of December 31, 1998
Business Subsequent Events Through December 1, 1999 3
ITEM 2. Description of Property. 23
ITEM 3. Legal Proceedings. 24
ITEM 4. Submission of Matters to a Vote of Security Holders. 27
ITEM 5. Market For Common Equity and Related Stockholder Matters. 27
ITEM 6. Management's Discussion and Analysis or Plan of Operation. 30
ITEM 7. Financial Statements. 41
ITEM 8. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure. 42
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 43
ITEM 10. Executive Compensation. 46
ITEM 11. Security Ownership of Certain Beneficial Owners and Management. 48
ITEM 12. Certain Relationships and Related Transactions. 50
ITEM 13. Exhibits, List and Reports on Form 8-K. 51
SIGNATURES 52
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
CORPORATE HISTORY
GENERAL SUMMARY
Carnegie International Corporation (referred to herein as "Carnegie",
the "Company" and 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
September 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 cards for merchants. DAR owns and licenses a patented
Non-grip Technology(R) for application to a variety of handheld items. Non-Grip
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 the
telecommunications industry rather than financial services. The Board cited
declining profit margins and increased competition in the financial services
industry and greater perceived opportunity for rapid growth in the
telecommunications industry.
On April 29th, 1999 trading in the common stock of the Company by the
American Stock Exchange was suspended, one day after the effective listing. As
of the date of this filing, trading has not resumed. A detailed description of
the events surrounding the cessation and the subsequent effect on the Company is
contained herein.
SUMMARY OF TRANSACTIONS THROUGH 1998
In furtherance of the implementation of a business strategy
concentrating in the telecommunications business, the Corporation effected the
following transactions involving ECAC and DAR:
(i) In April 1997 the Company sold a substantial portion of the
portfolio of Merchant accounts serviced by ECAC to First USA
Bank for approximately three million six hundred thousand
dollars in a cash transaction.
(ii) In September 1997, in keeping with the new corporate strategy
redirecting the Company's business efforts to
telecommunications the Company spun-off DAR through the
formation of TimeCast Corporation, a Nevada Corporation. All
stock held in DAR by Carnegie was distributed to Carnegie's
stockholders of record and Carnegie has had no interest in
TimeCast since the transaction date.
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(iii) In January 1998, the Company sold ECAC, retaining only an
interest in the accounts of one bank, completing the
divestiture to Ewing Partners d/b/a Value Partners for the
assumption of all ECAC debt and one hundred thousand dollars
in cash. This transaction is discussed in further detail
below.
(iv) ECAC (Europe) was sold to the existing management of that
company for a promissory note in the amount of two hundred
fifty thousand dollars. This note has not been paid and the
Company has agreed to extend the payment due date to a
month-to-month call.
In addition, between September 1997 and December 31, 1998 the
Corporation acquired the following companies which are described in greater
detail herein:
On September 29th, 1997 the Company acquired for stock all the
shares of Profit Thru 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. Subsequently the company
has funded the development of a multi-language automated voice response
system (automated attendant and voice mail) referred to as MAVIS(TM).
Talidan Limited, a telecommunications company that creates
call traffic for telecommunication carriers by promoting, through print
media and television, for adult entertainment services using the
telephone lines of such telecommunications carriers. Talidan was
acquired on September 29th, 1997 for stock, options and warrants. The
Company reported impairment of Talidan in the first quarter of 1998.
A detailed description of the events surrounding the impairment of
Talidan is contained herein. In June 1998, the Corporation sold all of
the print media business of Talidan, but retained its television media
business. Talidan print media was sold to Westshire Trading for a two
million three hundred and forty thousand dollar note. One million three
hundred thirty thousand dollars have been collected to date and the
note is past due. A full description of the events relating to this
transaction is contained herein.
Harbor City Corporation doing business and trading under the
name of ACC Telecom ("ACC"), a leading reseller of equipment and
business telephone systems for Comdial, SONY and Sprint, was acquired
on May 18, 1998 for cash and stock.
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," was acquired
on November 20, 1998 for cash and stock. The Company reported
impairment of this entity in the 2nd quarter of 1999. A detailed
description of the events surrounding the impairment of Voice Quest is
contained herein.
The assets of a corporation formerly known as RomNet, Inc., an
Internet, e-business and technical support services (help desk) company
were acquired on December 1, 1998 for cash and stock. These assets were
acquired by a newly formed wholly-owned subsidiary of the Corporation,
RomNet Support Services, Inc. ("RomNet"). The Company
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and the former owners of RomNet have agreed to a binding arbitration of
a non-material dispute of adjustments to the purchase price.
Arbitration is scheduled for March of 2000.
In addition to all of the above transactions the Company also acquired
a non-telecommunications business called Victoria Station ("Victoria")
Restaurants in Virginia Garden, Florida to generate needed cash flow.
Victoria Station was acquired in August of 1997.
SUMMARY OF SUBSEQUENT EVENTS
The following events occurred after December 31, 1998 and are described
in greater detail herein below.
ACQUISITIONS. 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 Carnegie restricted
Common Stock. Pursuant to the Acquisition Agreement, Paramount entered into
employment agreements with each of the four former stockholders of Paramount.
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 and income levels for the
two year period commencing April 1, 1999 and ending March 31, 2001. 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, a major Canadian
telephone company, to provide and receive certain services for its hospitality
industry clients in Canada. As of November 30, 1999, the Memorandum of
Understanding has not been reduced to a contract. The Company expects to
complete and execute this contract in the year 2000, however there can be no
assurance in this regard. (See "Subsequent Acquisition--Paramount") The Company
has also agreed with Bristol Asset Management to assume a $350,000 cash
obligation of Paramount Corporation. This obligation has not been paid by the
Company and is past due.
In April 1999 the Company acquired all of the assets of R.G.G.
Communications, Inc. (RGG) of Rockford, Illinois for the nominal price of
$25,000 in cash. In connection with the acquisition, the Company assigned to one
of its subsidiaries, American Telecommunications & Computers, Inc., a Maryland
corporation, all of such assets and the business of RGG will be conducted by
this corporation.
During 1997 the Company formed a Maryland corporation, Carnegie
Communications, Inc. ("CCI"), for the express purpose of marketing MAVIS(TM) and
other interactive voice response ("IVR") products.
LETTERS OF INTENT. In January 1999, the Corporation executed a
non-binding letter of intent to acquire all of the assets of (i) The Phone Stop,
Inc., ("The Phone Stop") located in Illinois, (which is engaged in sales of
Ameritech cellular phones and services, as well as answering
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machines, cordless phones, pagers and related residential phone products); and
(ii) an affiliated entity of The Phone Stop engaged in the sales and servicing
of Comdial phone equipment, primarily to governmental agencies. The transactions
which are the subject of letters of intent are not expected to be completed
until the shares of the Company resume trading and still require some
negotiation.
In July, 1999, Paramount entered into a non-binding letter of intent to
acquire all of the outstanding stock or assets of Federation of Associated
Health Systems, Inc., a Texas corporation, an outside service provider to
hospitals and other medical facilities of operated assisted ("0+") and credit
card direct dial ("0-") phone services. There is no certainty that a definitive
purchase agreement will be executed.
The Company also entered into letters of intent during the first
quarter of 1999 with Internet Notification Solutions, Inc., a Delaware
corporation, and PC Net, Inc., a Connecticut corporation. The Company does not
anticipate the completion of these acquisitions, however, the Company expects to
resume negotiations as soon as reasonably possible. The Company cites the
cessation of the Company's public stock trading as the principal reason for the
termination of these expected transactions.
SUSPENSION OF TRADING OF COMMON STOCK. On March 29, 1999 the SEC
advised the Corporation of certain accounting comments to its previously filed
Form 10-SB/A. On April 27, 1999, the Corporation, in the belief that the
accounting issues had been resolved, filed its annual report on Form 10-KSB. On
April 28, 1999, the Company's Common Stock was listed on the American Stock
Exchange ("AMEX") and the Corporation's Common Stock began trading there. On
April 29, 1999, the SEC advised the Corporation that it had questions regarding
certain accounting issues and requested additional information. As a result of
this SEC request, trading of the Corporation's Common Stock was suspended by
AMEX pending resolution of such accounting issues. The issues have been
discussed at length with the SEC and the Company has restated 1997 and 1998
audited consolidated financial statements reflecting such discussions, which are
filed as part of this Form 10-KSB/A. ( See "Item 7. Financial Statements").
There can be no assurance that the Company's shares will resume trading
on the AMEX or any other exchange or quotation system. The AMEX formally
notified the Company in October 1999 of a de-listing recommendation by the AMEX
Listing Qualifications staff. The Company appealed the de-listing recommendation
at a hearing before the Executive Committee of the AMEX on December 2, 1999. At
that time, the Company and its professionals, requested the AMEX to await the
result of the then in process filings. The Company acknowledged that it is not
in compliance with the AMEX rules regarding filings but cited extenuating
circumstances beyond the Company's reasonable control. The Company also
addressed the allegations made by Grant Thornton, the Company's prior auditor.
The Company stated its basis for the firing of Grant Thornton citing loss of
their independence among the most compelling reasons. The Company received
written notice on Tuesday, January 18, 2000 of the AMEX decision to proceed with
its delisting of the Company. AMEX filed its intention with the SEC in a letter
dated January 19, 2000. The Company will seek to reapply to the AMEX, or NASDAQ
or return to the OTC bulletin board quotation system. There is no assurance that
the shares will trade on any of these Exchanges.
SHAREHOLDER SUITS. The Corporation and various of its current officers
and directors are
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parties to several lawsuits which purport to be class actions filed on behalf of
non affiliates who purchased or acquired the Corporation's Common Stock in the
period from October 28, 1998 to April 30, 1999. See "Item 3. Legal Proceedings."
The Company has engaged the law firm of Blank, Rome, Comisky & McCauley LLP of
Philadelphia to defend this action.
EXTRAORDINARY EXPENSES. The Corporation estimates that to date it has
incurred expenses in connection with responses to the SEC comments, suspension
of trading of its Common Stock and shareholder suits of approximately
$1,500,000, consisting mainly of professional fees. The Corporation is not
generating sufficient cash flow from current operations to pay and satisfy these
extraordinary expenses and will need to raise additional cash through borrowings
and/or issuances of additional stock. The Corporation believes that once trading
of the Corporation's Common Stock is resumed, it will be able to generate such
additional capital from either or both of such sources. (See "Item 6.
Management's Discussion and Analyses -Working Capital and Liquidity."
TALIDAN. The value of stock, options and warrants used in the purchase
of Talidan have been restated. Before discussion with the SEC and in the
original filing, the Company valued the stock at a discount to market of 85%.
The first recommendation by the staff of the SEC included a discount reflecting
only 15% to market. There was much discussion of this issue and the discount was
in fact valued at 33-1/3 % to market with the staff's agreement. The 1997
financial results of the Company reflect this change. The warrants originally
were valued using a Black Scholls method that was restated to a Monte Carlo
simulation. Subsequent evaluation of the cash flow, however, did not support the
new value. Adverse economic conditions in the Brazilian marketplace, and changes
in the local telephone industry substantially eroded cash flows. Talidan
reported an impairment of goodwill resulting in a charge of $7,786,545 in the
first quarter of 1998. The Company suspended the operations of Talidan in June
1999. See "Business - Call Traffic Marketing - Talidan" and "Item 6.
Management's Discussion and Analysis - Overview: Talidan."
VOICE QUEST. In 1999 irreconcilable differences developed between the
Corporation and Mark Ortner, the founder of Voice Quest and the inventor of its
automated voice attendant system, Personal Operator(TM), as to their respective
duties and responsibilities. As a result, Mr. Ortner resigned on the basis of
alleged failures of the Corporation to perform its obligations under his
employment agreement. The Corporation simultaneously discharged Mr. Ortner
citing cause for failure to perform duties assigned to him. The Company has
endeavored to reacquire Company securities issued to Mr. Ortner and other former
Voice Quest shareholders. Such resolution may include the exchange of the Voice
Quest intellectual property for such securities, however, no definitive
agreement has been reached to date between the parties and there can be no
assurance of the execution of any such agreement during the foreseeable future.
BUSINESS
The Corporation is a holding company that conducts business primarily through
its wholly-owned subsidiaries specializing primarily in telephony,
telecommunications and Internet products and services. The Corporation, through
wholly-owned subsidiaries, owns and operates a restaurant in Miami, Florida, and
also has a subsidiary in the financial services industry although such
subsidiary currently has no reportable revenues. The Corporation has no direct
operating assets or business activity, but does provide management and other
services to its subsidiaries. The
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Corporation's telecommunication's business includes the development of
interactive voice response and voice recognition 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. Since the acquisition of Paramount,
the Company also provides long distance call routing services to the
hospitality, health care, and pay telephone industries. The Corporation retained
an interest in the credit card accounts of one bank through its subsidiary
Electronic Card Processing, Inc. ("ECPI").
SPEECH RECOGNITION AND INTERACTIVE VOICE RESPONSE --PTT
GENERAL. Speech recognition technology converts spoken inputs into
digital electronic signals, and are then decoded by a computer processor into
specific computer instructions or data. Historically, speech recognition
technology and related 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 distinctly, pausing between each word, rather than
allowing natural continuous speech.
The development of more reliable and efficient technology, including an
increase in processor speed, as well as a reduction of chip costs increased
public familiarity with computer automated devices. The integration of human
speech as an interface to telephone and computer applications has become a more
accepted feature of many telecommunications applications. PTT designs, develops,
commercializes and markets proprietary products that exploit recent advances in
speech recognition technologies, including MAVIS(TM), which is a voice activated
telephone auto attendant and voice mail product for business applications.
In addition, PTT has developed interactive voice response ("IVR")
software products and services responding to the caller's voice commands. PTT is
and intends to continue to seek new applications as the telephony and Internet
industry develops. There can be no assurance of PTT's success in this regard.
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/voice mail for businesses that connects callers to an
individual or department using only a normal speaking voice. There is no need to
keypunch numbers or letters. The system will answer all incoming calls
automatically while simply and naturally asking 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 requested extension. The
recipient has the choice to accept or reject the
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announced call. Rejected callers hear a message and are invited to leave a voice
mail message. If the caller chooses he can ask for the operator, whereby
MAVIS(TM) will transfer the call to a live person. On the occasions when
MAVIS(TM) is unsure of the caller's request, it will ask the caller to repeat
himself, exactly as a live operator does before processing the call.
MAVIS(TM) interfaces with Microsoft's Windows NT and Lernout &
Hauspie's ASR Run-Time and TTS Run-Time software programs which are all industry
standard applications. 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. Currently MAVIS(TM) can be programmed for
"American" English, "British" English, French, Spanish, Italian and German.
MAVIS(TM) currently provides voice mail capabilities and on its next version,
expected in the first quarter of 2000, is also expected to provide e-mail
access. The voice mail and e-mail are expected to be accessible remotely through
MAVIS(TM) using text to speech technology to read the 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 keys on the
telephone keypad. MAVIS(TM) can be retrofitted to perform with a wide range of
existing private branch exchange ("PBX") equipment. A MAVIS(TM) software kit is
also available for incorporation in new high speed computer telephony PBX
switchboards through original equipment manufacture licensing.
MARKETING. During 1998, the Company beta tested MAVIS(TM) and prepared
it for distribution, including without limitation, source of supply of
components, drafting of technical manuals and operator manuals, designs of
advertising and marketing programs, public relations initiatives, shipping
preparations and development of support service operators. The Company's
marketing program for MAVIS(TM) which had not commenced until 1999, is discussed
in greater detail below in the Section under the caption "Subsequent Events."
The Corporation has entered into a Distributor Agreement with ALLTEL Supply,
Inc., ("ALLTEL Supply") a business unit of ALLTEL Corp. ("ALLTEL Corp."), an
information technology company that provides line and wireless communications
and information services. ALLTEL Corp. is 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 is one of the nations leading providers of
telecommunications and data communications products. Pursuant to the Distributor
Agreement, ALLTEL Supply will market MAVIS(TM) throughout the United States. CCI
will serve as a liaison to ALLTEL Supply and will work to broaden vertical sales
channels for MAVIS(TM) and other PTT applications. To date, ALLTEL has not been
a material source of sales for MAVIS(TM).
Initial marketing of MAVIS(TM) BY ALLTEL Supply demonstrated that
significant enhancements to MAVIS(TM), particularly to its voice mail
capabilities, would be necessary to its successful commercialization.
Enhancements to make the voice mail aspects of MAVIS(TM) competitive with other
touch-tone voice mail products in the market have been made. In addition,
MAVIS(TM) will have an option to add "unified messaging," This feature provides
for e-mail messages to be read to the subscriber. The new enhanced model of
MAVIS(TM) is currently being tested prior to planned distribution during 1st
Quarter 2000.
The enhanced MAVIS(TM) system is now fully competitive with other voice
mail products in
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the marketplace, and has the additional voice activated auto attendant feature.
The new features on the improved MAVIS (TM) system include a "follow-me" feature
whereby a call can be forwarded to another telephone either hard line or
cellular. Mavis will also feature, erasing or speeding up voice mail messages
when they are retrieved, diverting calls internally by voice and retaining a
party on hold to be connected when the current telephone call is completed.
Accessing messages remotely; and remote changing of greetings and passwords will
also be featured.
To date PTT has entered into distribution agreements with ChannelVox
Ltd. and Brigantia Marketing, a U.K. enterprise. ChannelVox, (who is marketing
MAVIS(TM). MAVIS(TM) under their own brand name of FireVox(TM)) is acknowledged
as the market leader in the UK for the distribution of voice mail and auto
attendant systems. ChannelVox supply to over a thousand computer and telephony
dealers and launched FireVox(TM) at the October 1999 TMA show in the UK.
Brigantia Marketing will be direct marketing MAVIS(TM) to SME (Small to Medium
Enterprises) in the UK and will offer leasing facilities to include hardware,
software, PBX, installation and training. PTT has also entered into a
distribution agreement with Interlink (a Swiss company) who will assist with the
marketing of MAVIS(TM) in Switzerland, France, Germany, Belgium and Spain.
ACC, through its existing relationship with Comdial dealers, expects to
market MAVIS(TM) as an integrated addition to existing PBX systems. The
Corporation also intends to negotiate with major manufacturers of multiple line
business phone systems and switchboards such as Comdial and Sprint for MAVIS(TM)
software to be incorporated directly into their hardware product line. The
Corporation also expects to 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.
MAVIS(TM) will be marketed through Tiller International Corporation
("Tiller International"), a registered company of Monte Carlo, Monaco, in the
former Soviet Union, Poland, Hungary, Czech Republic and other countries of the
Eastern Block (the "Eastern Block").
The Corporation acquired Talidan in a transaction brokered by Tiller
Holdings Limited, an Anguilla company ("Tiller Holdings"). As a part of the
transaction, Tiller Holdings received four-year options to purchase shares of
the Corporation's Common Stock, which options contained certain put rights. To
the extent that these options were not fully exercised within three years, the
holders could thereafter exercise for a period of 30 days the remaining options
in whole or in part and require the Corporation to purchase the resultant shares
at the then-market price of Common Stock (the "put rights"). In December, 1998,
the Corporation entered into a Distributor Agreement designating Tiller
International (which to the best of the Company's knowledge is not an affiliate
of Tiller Holdings) as the exclusive authorized distributor of MAVIS(TM) in the
Eastern Block. The Company provided a master disk from which the distributor was
permitted to produce 1000 copies of MAVIS(TM) software in exchange for the
relinquishment of the put rights which had been acquired by Tiller International
from the prior holders of put rights. As a result of the transaction, the
Corporation cancelled a liability of the discounted value (utilizing a 10%
discount rate) of the obligations represented by the put rights in the amount of
$3,107,564 which had been recorded at the time of the Talidan acquisition.
In addition, Tiller International acquired for nominal consideration
non-exclusive rights to
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sell MAVIS(TM) in Italy, subject to minimum sales requirements. There have been
no sales to date of MAVIS(TM) resulting from the agreement with respect to
Italy. The Company expects MAVIS(TM) to be marketed successfully by Tiller
International, but can give no assurance that such efforts will result in a
material source of revenue.
Carnegie Communications, Inc. ("CCI"), a wholly-owned subsidiary of the
Company was formed in 1997 to market PTT's products including MAVIS(TM) and
other IVR products and services. This company is staffed with 2 sales
professionals who have a combined 25 years experience with 14 years in the
telephony industry. This subsidiary is housed at the Company's corporate offices
in Hunt Valley, Maryland.
PERSONAL OPERATOR(TM)
During the latter part of 1998, the Corporation acquired Voice Quest,
also a developer of speech recognition and voice mail technologies and products
including Personal Operator(TM), an automated attendant system, with a view
toward developing a marketing strategy with MAVIS(TM). However, subsequent
evaluation revealed that Personal Operator(TM)'s intellectual property did not
compliment that of MAVIS(TM) and management accordingly terminated this project.
IVR PRODUCTS
PTT has also developed a variety of IVR software products which are
expected to be marketed in Europe and 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 seamlessly. 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, that is transmitted
to the supplier instantly. PTT charges a fee for handling each order to
the supplier. The Company believes this product will facilitate
customer reductions of internal costs by eliminating cumbersome
overhead and providing timely updating of inventory records.
WageMaster(TM) This product is an automated payroll system 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 report to the client. PTT charges an annual fee and a
calculation fee.
Database Management: This software product can be used to collect (over
the telephone) a variety of information from individuals. Data such as
name, address, telephone number, identity and date of purchase of
products can be included. The initial commercial application will
register purchases. PTT charges a database management fee to the
manufacturer of the product.
Profiling: This IVR software is used to statistically analyze
employees work
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performance for companies.
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
visa requirements and 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 toll 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 security software program will 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 for the market of the Micro DOT
system. PTT is paid a maintenance fee and a per-call support fee for
access to the database.
Call-a-Card(TM):
This interactive software program allows customers to call a special
telephone number and dictate a greeting or 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 off-site services (e.g. a
cleaning service). The employee is required to call a special telephone
number when arriving on-site and again when leaving the customer's
business. The data is recorded and sent to the client. If an employee
does not call at the specified time a supervisor is alerted.
The above list of IVR software products have, to date, not been a source of
material revenue for PTT or the Company. There is no guarantee that future
marketing of these products will result in material revenue for the Company.
TELEPHONE BUSINESS SYSTEMS--ACC
ACC engages in the sale, installation and servicing of telephone
instruments and systems, including without limitation, state-of-the-art telecom
technologies such as computer telephone integration, data cabling, networking,
auto attendant and voice-mail systems, and integrated voice
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response systems. 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 is expected to
open a broader market to ACC.
Sales are made by ACC directly to business end-users by its sales
department, currently consisting of ten employees. The sales department includes
highly trained and experienced personnel with on-going training designed to
facilitate expertise in fast-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 are also relied upon. ACC
currently has approximately 2,700 customer installations.
The market for ACC's products and equipment is subject to rapid
technological development, 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, customer needs and expectations will require ACC to
continuously identify, test and market new equipment with features that keep
pace with the new technology, evolving industry standards and competitive
offerings. These activities are expected to require ACC to make expenditures on
testing equipment and on the training of sales and service personnel. ACC has
been approved as a bidder of contracts for the federal General Services Agency,
the Department of Defense and Maryland's State Department of Procurement, for
all of whom ACC has installed various systems.
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. 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
RomNet is engaged in the business of providing technical support services (help
desk) for CD-ROM products, software and hardware, providing beta testing
services, and providing internet support related products and services for Web
development and e-commerce. RomNet's early development focused on providing
telephone technical support for CD-ROM products. While this service continues to
be the core of the business, the increasing popularity of the Internet in recent
years has given rise to the development of a variety of support service options
that are specially
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designed for a wide range of Internet products and services.
RomNet provides support services for some licensees of its client's products via
telephone, e-mail, on-line chat and fax. RomNet also develops and hosts numerous
customer support Web sites and through the posting of Frequently Asked Question
(FAQ) on the customer's site, and offers clients cost efficient alternative
methods of providing technical and customer support. RomNet's major clients
include Yahoo! Store, Macmillan Publishers Ltd. (UK), Arthur Andersen LLP,
Pitney Bowes, Scientific American Magazine, the American College of Cardiology,
McGraw Hill, Analog Devices, DATA BECKER Corporation and Jones Interactive
Media.
The products supported by RomNet are as varied as its clients and range from
software, including games and entertainment products, to business and financial
applications. Many products operate on a variety of platforms and operating
systems, such as Linux or Microsoft. Additionally, RomNet supports peripherals
such as electronic white boards and video capture devices to Internet computer
based training (CBT) products. RomNet enables on-line access to the archives of
major publications and on-line journals provided by clients, which may include
troubleshooting user problems related to connectivity and browsers.
RomNet customizes all elements of technical support for its clients. For each
client supported product, RomNet develops the strategies and tactics necessary
to maximize support efficiencies and economics for both client and customer
alike. Data is collected and amassed into a knowledge base that defines
technical and demographic information for each caller. RomNet not only
customizes its databases for each client but also provides routine service which
includes internal backup for all data and off premises disaster recovery via
encrypted file transfer. RomNet does not have redundant operations facilities at
this time but expects to develop such redundancy in the future.
Each RomNet client is assigned a product manager and a core group of
technicians, who will be the "front line" of support for all product(s) of the
client. Employees of RomNet include students and recent graduates from
institutions within a three mile radius of RomNet's Boston office such as MIT,
Harvard and Boston University who have major areas of concentration in fields
including engineering and computer science. As a result of the high technology
sophisticated personnel available to RomNet, the Company believes that
operations at RomNet will continue to develop on a state-of-the-art basis as
well as provide a talent pool for the Company's other businesses, however, there
can be no assurance in this regard.
Sales are generated by referrals, attendance at trade shows, direct mail and
cold calling of prospects. Prospects are selected using certain criteria that
include (a) the technical intricacies and uniqueness of the product (b) the
impact that the product will have on technical support due to large distribution
(c) the potential lack of company infrastructure needed to support in-house
staff and the limited time of day for which support is offered.
Changes in technology are expected to impact RomNet's core business by shifting
focus more to the Internet. Technical support for software and hardware
comprises about 55% of RomNet's services. However, Internet activity for 2000
and beyond is projected to comprise almost 40% of the support operation. In
1999, the Company estimates global technical support represents 60%-65% of the
core business. Internet support and Internet services comprise another 20%-25%
of the
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operation while the remaining 10%-20% is devoted to beta testing and e-commerce
related activities. The Company expects that within the next three to five years
Internet technical support will be the dominant source of revenue for RomNet.
Providing technical support for companies seeking to do business on the Internet
provides RomNet the opportunity to sell products available from such companies
or to offer discounts and promotions on behalf of such companies. RomNet also
fulfills product orders for its clients, serving as a telephone distribution
channel to supplement primary and traditional retail sales.
OVERVIEW OF THE BUSINESS OF TALIDAN
Talidan's advertising operations are divided into three segments:
"Talidan Print," which was sold in June of 1998, advertises in adult magazines;
"Talidan TV," which advertises on late-night Brazilian television; and "Talidan
Local," which advertises in the form of a "tag," i.e., an advertisement included
in a recorded message heard by a customer calling the telephone numbers
advertised by Talidan Print or Talidan TV. Both Talidan Print and Talidan TV
advertise the use of long distance telephone service, while Talidan Local
advertises the use of local premium telephone service.
LONG DISTANCE TELEPHONE SERVICE. Talidan's contract with WWT, a Jersey
Corporation ("WWT"), provides for the use of the telephone numbers advertised by
Talidan Print and Talidan TV for service into various "target countries." When
customers call those numbers, they are making a long distance call. WWT
negotiates with foreign telephone companies in certain jurisdictions (e.g., Sao
Tome, Moldova) to provide telephone traffic to the "target" country in exchange
for payments based on the number of calls. WWT obtains phone numbers from the
target country, certain of which phone numbers are allocated for use by Talidan
Print and Talidan TV. When a customer calls one of such provisioned numbers, WWT
pays Talidan an agreed-upon amount per call minute. WWT provides and maintains
the system to "terminate" (i.e., complete) the call either by including the
recording on the system or by switching the call to a location where a live
person is available. WWT also maintains the records used to determine payment.
Talidan is responsible for providing the content for the recording, or the
person to take the customer's call (referred to as "chat" services), and the
advertising content which includes the Talidan numbers. Talidan acts solely in
an intermediary context and fulfills its obligations through third parties; none
of the parties is an affiliate or related party to the Company.
The long distance numbers provisioned to Talidan TV are advertised on
Brazilian late night television (e.g., after 11:00 p.m.), and the numbers
provisioned to Talidan Print are advertised in adult magazines. A customer
watches an ad on television or sees it in a magazine, typically depicting an
adult-oriented situation, and then is invited to call the number displayed in
the magazine ad or on the television screen to hear more. The customer then
makes a long distance call to a target country's exchange where either a
recording or a live person provides adult-oriented content for the customer to
hear. At some point, usually at the end of the recording, the caller is prompted
to call a premium rate 0900 number, which is a local premium call, either to
hear a more explicit recording or speak with a live person. About 10% of long
distance calls result in local premium calls.
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Talidan TV has an oral agreement with WWT, pursuant to which half of
the costs of advertising time purchased by Talidan TV are reimbursed by WWT. In
addition, the Company has an oral agreement with Telecom Brazil, a Brazilian
company, whereby it pays Telecom Brazil U.S. $7,000 per month in exchange for
services related to advertising placement and other management services. Telecom
Brazil is managed by Tom Raffel, who personally owns four percent of the common
stock of the Company.
LOCAL PREMIUM TELEPHONE SERVICE. Talidan Local is allocated local
premium 0900 numbers (analogous to the "900" number in the U.S.) from Telecom
Brazil, which are advertised as a tag included at the end of the recording the
customer hears on the long distance call advertised by Talidan Print or Talidan
TV. When the customer calls the 0900 number, they are making a local call for
which they are charged a premium rate per minute to engage in "chat" with a live
person or hear additional, typically more explicit, recordings. When a customer
calls one of the numbers provisioned to Talidan Local, Telecom Brazil, pursuant
to an oral agreement with Talidan, pays Talidan an agreed-to amount per call
minute. As consideration for the tag, part of the money received by Talidan
Local is remitted to WWT, or is credited against the amounts due Talidan TV from
WWT for shared advertising costs.
There are approximately 30 regional phone companies operating in
Brazil. The national telecom service provider is Embratel, which was state owned
prior to its being acquired by MCI/Worldcom on July 2, 1998. When a customer
makes a 0900 call on one of the numbers provisioned to Talidan Local, the
customer is charged and money is collected by the regional phone company who
remits a portion of such funds to Embratel. Embratel then remits a portion of
the funds it receives to Telecom Brazil as owner of the number, who remits a
portion to Talidan. Talidan then remits (or credits for advertising costs) a
portion to WWT.
ADVERSE CIRCUMSTANCES. Several adverse circumstances negatively
impacted Talidan's business in 1998 and 1999: Long distance rates increased in
Brazil in February 1998 from U.S. $.28 to U.S. $.59; social, religious and
political pressures to curtail the adult telephone business increased
significantly during 1998; and the content of both television advertising and
messages heard by a caller were restricted in the fall of 1998. The rate
increase and restricted content pressures resulted in a decrease in call volume.
Moreover, Embratel was having difficulty in collecting funds from
regional phone companies, and estimated a $40 million payment imbalance at the
time of its privatization resulting in Embratel "temporarily suspending" its
payments to Telecom Brazil, and others under existing contracts, after its last
payment in August of 1998. In October 1998, a judge in Sao Paolo blocked access
to 0900 numbers, so callers could not connect to 0900 services. At that point,
it was uncertain whether other Brazilian jurisdictions would follow suit.
Although the judge's October 1998 decision was ultimately appealed in the state
and federal courts of Brazil, the outcome and timing of such ongoing appeals
were and still are difficult to determine. By November 1998, Embratel cancelled
its existing contracts and planned to enter into new contracts with the regional
phone companies. But in August 1999 some 0900 service providers that accused
Embratel of withholding payment sought legal action to force Embratel into
bankruptcy. Shortly thereafter, Embratel cancelled contracts it had with
approximately 30 such providers, including its contract with Telecom Brazil.
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In addition, while Talidan TV continued to advertise throughout 1998
and the first four months of 1999, amounts spent on ads varied in each month of
1999 and were significantly lower in January and March as the Company attempted
to manage the uncertainties facing Talidan's business. Advertising was cancelled
in late April 1999 due to lack of response. Although advertising ceased,
payments continued to be received through June 1999, albeit at a decreasing
rate. Some payments are expected to continue short-term since it is likely that
some customers have retained telephone numbers, which are still active, from
earlier TV advertisements. In December,1999, WWT notified Talidan that it was
withdrawing the use of Talidan's premium long distance telephone numbers as of
January 1, 2000.
In July of 1999, the Corporation received an unsolicited offer to
purchase the stock of Talidan from three shareholders of the Company in exchange
for 5,676,750 shares of the Corporations common stock. The ability to complete
this transaction is predicated on the Company's shares returning to a trading
status. At that time, the Company expects to resume its negotiation and complete
the transaction. There is no assurance, at this time, that the Company and the
buyer will be able to execute this transaction.
VICTORIA STATION RESTAURANT
Victoria Station Restaurant ("Victoria Station") is located in Virginia
Gardens, Florida near Miami International Airport 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. Victoria Station is operated under two subsidiaries of the
Company, Victoria Station Miami, Inc., a Florida corporation, and Talidan USA,
Inc., a Maryland corporation. The restaurant is a full service steak house
featuring quality steaks, barbecue ribs, chicken, fish, a salad bar and a full
liquor service. Victoria Station 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.
FINANCIAL SERVICES
In May 1996, the Corporation acquired ECAC which was engaged in the
business of processing credit card accounts. In 1997, ECAC experienced declining
profit margins and increased competition in credit card processing. With greater
perceived opportunity for rapid growth in telecommunications, the Corporation
decided to sell ECAC and to utilize the funds derived thereby to finance
acquisitions 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. In
connection with the sale of ECAC stock, the Corporation retained a 40% interest
in the future profit derived by the credit card merchant accounts of Franklin
Bank, which operates in Southfield, Michigan, a suburb of Detroit. The
Corporation and the purchaser of ECAC are in dispute as to the Corporation's
share of revenues derived from its retained interest in the accounts of the
Franklin Bank. As a result, the Corporation has not received any funds derived
from its retained interest and if the dispute is not resolved within a
reasonable period of time, the Corporation expects to file suit for an
accounting and full payment. There is a third party lawsuit pending against the
Company and other parties in connection with the retained interests in the
merchant accounts of Franklin Bank. There can be no assurance that currently due
funds on future revenues will be obtained at any time from the
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Company's interest in the credit card merchant accounts of Franklin Bank. (See
"Legal Proceedings.")
COMPETITION
PTT. 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. Carnegie believes
some of these companies are seeking a partner to integrate and further develop
such systems into their equipment. Most of these companies have greater
financial, technical, personnel and other resources than Carnegie and have
established reputations for success in the development, licensing and sale of
their products and technology. The Corporation believes that MAVIS(TM) can
compete favorably with any similar system being currently marketed. Unlike many
such systems, MAVIS(TM) can be integrated with most existing and all new PBX
equipment. MAVIS(TM) can be produced in a number of different languages. Ongoing
research and product development for voice recognition products is widespread
and highly proprietary, and as a result, the Company cannot know the full extent
of its competition or the stage of its competitors' product development. The
Corporation believes that other 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, is
expected to greatly increase the Corporation's ability to compete with other
large telecommunication dealers that enter the market in the future.
To date the Company's agreement with ALLTEL for distribution and sale
has not been successful. With MAVIS(TM) new features, the Company expects
distribution through ALLTEL Supply to improve. The Company will also look
towards other points of distribution including its own sales force at Carnegie
Communications.
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 PTT or Carnegie. The
Company's competitors in the telephony 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. However, the Company believes it can compete due to the innovation of
the Corporation's products, early marketing, price, relationship with end-users,
and the universality of many of its software products.
ACC. 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, North
Star, and Toshiba. Lucent Technologies, Bell Atlantic, and Executone who sell
directly to customers and through local businesses. The larger companies have
tremendous national advertising resources. Many have greater name recognition,
substantially greater technical,
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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 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. ACC must smoothly and promptly replace requisite
staff positions and oversee the training of new personnel. Barry Hunt, the
founder of ACC in 1979, and its president and chief executive officer, has more
than 20 years of experience in the industry.
ROMNET. There are many companies in the marketplace that offer
technical support services similar to RomNet. Many of the larger outsourcing
companies such as 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 that may be relatively new to
this arena. RomNet believes it offers a more customized approach to technical
support and customer service than the competition. RomNet further believes that
a more flexible approach to the business relationship has attracted clients such
as Arthur Andersen, Macmillan Publishers, as well as others.
VICTORIA STATION. There are many well known "brand" restaurants in the
Miami Airport area. These locations have larger marketing budgets and newer
units. They include, Out Back, Graddy's, Tony Roma's and Lone Star Grill, among
others. Such competition may adversely affect the Company's revenues.
TALIDAN. There are many operations such as Talidan in Brazil. To the
knowledge of the Company there are no companies which individually possess
significant market share in Talidan's industry segment. The barriers to entry
into that market are relatively low. The Company believes that notwithstanding
widespread competition and the possibility of new competitors entering the
market, the most significant competitive problems have arisen from social and
judicial changes in Brazil. At the current time, the Company does not reasonably
foresee an ability to continue Talidan's operations in the current business
environment.
INTELLECTUAL PROPERTY
The Corporation's success depends in part on its ability to protect its
proprietary technology. PTT believes that its success will depend on its ability
to design, develop and market new products and new or enhanced applications,
rather than 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 filed in May 1999 a second patent
application for other IVR software products in England and under the Patent
Cooperation Treaty. The Corporation believes that it is likely it will obtain
the patents for
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MAVIS(TM) and other IVR software products, however, there can be no assurance
that patents will in fact ever issue. 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.
The Company has two applications for trademark registration currently pending in
the United States Patent and Trademark Office for 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 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
that require the Corporation to pay ongoing royalties. The Corporation is not
aware of any violation of proprietary rights claimed by any third party relating
to PTT or its 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
In 1998 the Corporation together with its subsidiaries had 138
employees, 107 of which were full-time and 30 part-time as follows:
Carnegie: Twelve (12) full-time employees.
PTT: Eight (8) employees of which 6 were full-time and 2 were part-time
consisting of 4 programmers, 1 salesperson and 3 administrators. 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: One (1) full-time employee.
ACC: Thirty-eight (38) full-time employees, including 8 in
administration, 12 in sales and 18 in service.
RomNet: Twenty-seven (27) employees of which 25 were full-time,
including 4 in administration, 1 in sales and 20 in service; and 2 part-time
employees.
CCI: Two (2) full-time employees.
Talidan did 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.
Victoria: Fifty (50) employees of which 24 were full-time and 26 were
part-time employees.
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None of the Company's employees are covered by a collective bargaining
agreement. The Corporation believes its employee relations are good.
In 1999 the Corporation together with its subsidiaries had 145
employees, 106 of which were full-time and 42 part-time as follows:
Carnegie: Eleven (11) full-time employees.
PTT: Seven (7) employees of which 6 are full-time and 1 was part-time.
The personnel included 3 programmers, 1 salesperson, and 4 administrators. 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: Currently has no employees.
ACC: Thirty-seven (37) full-time employees and 3 part-time, they
included 12 in sales and 21 in service.
RomNet: Twenty-nine (29) employees, they include 22 full-time employees
and 7 part-time; 3 in administration, 1 in sales and 25 in service.
Paramount: Ten (1) full-time employees, of which 4 are in
administration, 2 are in sales and 4 are in service.
American Telecommunications & Computers (d/b/a RGG): Two (2) employees.
CCI: Two (2) employees.
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.
Victoria Station: 47 employees of which 16 are full-time and 31
part-time.
None of the Corporation's employees are covered by a collective
bargaining agreement and the Corporation believes its relations are good.
REGULATORY MATTERS
Except with respect to Victoria Station [and Paramount International
Corporation], the Corporation is not subject to direct regulation by any
government agency. 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. Under such Act, Victoria could be required to expend funds
to modify its restaurant to provide service to
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disabled persons or make reasonable accommodations for the employment of
disabled persons. Paramount has a FCC license that controls tariffs charged on
telephone calls.
SUBSEQUENT ACQUISITIONS
PARAMOUNT
GENERAL. Paramount provides telecommunication billing and clearing
services to the hospitality, health care and pay-telephone industries as an
outside service provider in the United States, Mexico and Canada through the
sale and service of interfacing equipment for Hotel & Hospital PBX systems.
Generally these are the primary systems used by hotels to provide 0+ & 0-
telephone-related services. Hotels provide access to credit card calls and third
party collect calls to their guests. Paramount collects and provides the data
necessary to bill guests for telephone calls and to properly manage 0+ & 0-
telecommunications services in the hotel. Paramount also purchases direct
collect calls and or provides billing and clearing services for third parties
using Paramount's infrastructure and established vender relationships.
Paramount's revenues for 1998 were $11,314,649 and its net income for the same
period was $646,937. Of 1998 revenues about 1/3 came from purchase of direct
collect calls and/or billing and clearing from third parties. Third party
business is subject to more attrition than Paramount's other services. The
company has an active sales force charged with acquiring new customers for this
service, but there can be no assurance that revenues will continue at current
levels. In addition, Paramount expects to market MAVIS(TM) to the hospitality
and the health care industries.
Paramount's 0+ & 0- client base consists of domestic and international
hotels, motels, inns, resorts, hospitals, and publicly accessible telephone
equipment providers as well. In March 1999, Paramount signed a three-year
contract with First Choice Communications of Texas to provide billing, technical
and support services to its hotel clients for 0+ and 0- telephone services. In
addition, in April 1999, Paramount entered into a Memorandum of Understanding
("Memorandum") with a subsidiary of BCT.TELUS, a major Canadian telephone
company, to provide and receive certain services for its hospitality industry
clients in Canada. The Memorandum is subject to the execution of a definitive
agreement that is being negotiated. Paramount expects this agreement to be
completed in year 2000; however, there can be no assurance in this regard.
EMPLOYEES. Paramount has 11 full-time employees, of which seven are
administration and four are service. Michael Eberle, President, David M. Moody
and David Paton, Executive Vice Presidents and Kay Eberle, Secretary (wife of
Michael Eberle), each have five year employment agreements with Paramount, that
expire on January 1, 2004. Each agreement provides for a $130,000 base salary
and a signing bonus of $375,000 plus 12,500 shares of restricted Common Stock of
the Corporation. Additionally, each may 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, 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 technological and
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regulatory changes occur, Paramount anticipates that new and different
competitors will enter the marketplace. Paramount believes that by focusing
primarily on the hospitality industry, it has created its own market niche.
Other companies offering similar services to hotels must divert the phone
traffic to an outside operator service provider ("OSP"), and the hotel is paid a
commission by the OSP. Paramount's systems are located inside the hotel. This
allows each hotel to operate as an OSP. This feature provides a greater profit
margin to the hotel since the hotel may establish its own rates with respect to
O+ calls. An increase in use of cellular telephones by hotel guests, reducing
the number of calls made on the hotel telephones, could have an adverse impact
on Paramount's profitability.
RGG
In April 1999 the Company acquired all of the assets of RGG of
Rockford, Illinois for the nominal price of $25,000 in cash. RGG installs,
supplies and services phone systems in Illinois and southern Wisconsin. Roy
Gustafson, a former owner, has agreed to stay on in a consulting capacity for a
period of one year. RGG is a distributor of COMDIAL products similar to ACC and
is expected to operate as an adjunct to the Company's proposed acquisition of
The Phone Stop described herein. In connection with the acquisition, the Company
assigned to one of its subsidiaries, American Telecommunications & Computers,
Inc., a Maryland corporation, all of such assets and the business of RGG is
expected to be conducted by this corporation. RGG has not had material
operations to date.
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, of approximately 7,700 square feet of
space expires April 30, 2003. The annual rent of $132,000 is subject to
increases of 3.5% per year.
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.
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 by the sublease covers the cost of the
lease to the Corporation. The Company and the Landlord of the above have entered
into a Termination Agreement dated, November 1, 1999, ending any corporate
obligation on the part of Carnegie.
PTT currently leases 1,900 square feet of office space in Sheffield,
England through a three year lease which expires January 2001 The annual rent is
approximately $33,000.
The office of ACC is located in 5,000 square feet of leased space in
Columbia, Maryland. The lease term is for five years expiring in August 2000, at
an annual rent of $59,000. During 1999 the Virginia ACC branch sublet 3,010
square feet in Fairfax, Virginia, however, the space was vacated upon the
Company being informed that the subleasor was insolvent; the Company
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believes it has no further obligation with respect to this lease.
RomNet currently subleases 3,800 square feet in Boston, Massachusetts.
The sublease expires in October 2001. The annual rent is $51,600.
Paramount currently leases 4,000 square feet in Vista, California
through a seven-year lease that expires in October 2005. The annual rent of
$46,624, will increase 5% per year. This lease is with a Corporation owned by
the Eberle Family Trust. The rent terms are below market rate for the space.
The Victoria Station restaurant is located at 6301 Northwest 36th
Street, Virginia Gardens, Florida. The annual rent per a lease, expiring in 2001
is $121,000.
American Telephone & Computer Inc. leases 5054 square feet located at
650 West Grand Avenue Elmhurst, Illinois. The lease is 5 years, expiring in June
2004 with an annual rent of $68,228,88 and 2% per year increase. The location is
sublet on a month to month basis to The Phone Stop for the full monthly rent
obligation.
ITEM 3. LEGAL PROCEEDINGS.
On December 21,1998 Gloria Lucas, personal Representative of the Estate
of John Charles Saah, brought suit against Carnegie, E. David Gable, Carnegie's
Chairman, and David Pearl, a former officer of Carnegie, which was originally
filed in the United States District Court for the Eastern District of Virginia,
Alexandria Division, and has since been removed to the U.S. District Court for
the Northern District of Maryland. This case stems from a series of contracts
and negotiations resulting from the acquisition of ECAC by Grandname, the
assignment to Carnegie and Carnegie's subsequent sale of ECAC. A Settlement
Agreement was entered into and, a Dismissal with Prejudice only with respect to
Carnegie has been filed with the Court. Payments have been made to the Plaintiff
through the sale of Carnegie stock belonging to the Estate of John Charles Saah,
which has been placed in escrow. Currently, there remains a balance due of
approximately $126,000.00 plus a disputed amount of $130,654.
Lisa Kamil, a former broker of ECAC, brought an action against ECAC,
n/a Carnegie International Corporation, and Ewing Partners Corporation, d/b/a
Value Partners, Limited, which is pending in the Circuit Court for Oakland
County, Michigan. This case originates from a number of transactions involving
Carnegie's former subsidiary, ECAC, which was sold to Value Partners Limited in
January of 1998, and a special arrangement between Ms. Kamil, Carnegie and
Franklin Bank. The Complaint in this action seeks damages in the amount of
$150,000.00. The incidents and matters which are the subject of the Complaint
are based on activities caused by First Charter Bank, a subsidiary or affiliate
of Ewing Partners Corporation, d/b/a Value Partners. Although the Plaintiff may
have a valid claim for a smaller sum, Carnegie believes that it is not at fault
in this matter and that Plaintiff is not likely to prevail against Carnegie.
Carnegie has minimal liability and may have a strong cross-claim against Value
Partners and also a strong third party claim against First Charter Bank, which
have not yet been filed. Carnegie intends to vigorously defend itself in this
matter and believes it will be successful in defending this litigation to it
conclusion or otherwise resolving the same in Carnegie's favor.
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In July 1998, the Corporation entered into a contract with Jan Bonner
("Bonner"), doing business as Source Financial of Houston, Texas, providing
public relations services to the Corporation. In April 1999, Bonner filed suit
in the state court in Harris County, Texas, seeking 180,000 shares of the
Corporation's Common Stock as damages. On the Corporation's request, the case
was removed to the United States District Court for the Southern District of
Texas, Houston Division and the discovery process has commenced. The Corporation
believes it has a valid defense as Bonner failed to perform pursuant to the
contract. The Corporation intends to vigorously defend this suit and believes
that it will be successful in this litigation, however, there can be no
assurance in this regard.
On May 28, 1999, the Corporation filed a complaint in the United States
District Court for the District of Maryland against Kelly Allen, Ark Capital,
Inc., G. William Higbee, and an individual using an Internet chat room whose
legal name is unknown. The complaint asserts a claim based on defamatory
statements made over the Internet by the defendants. The defendants stated that
certain officers sold shares of the Common Stock of the Corporation two days
before trading of the Common Stock on AMEX was halted. These statements were
false. In fact the corporate officers did not sell the shares in the market. All
shares referred to in these statements were voluntarily returned to the
Corporation without consideration. Contemporaneously proper forms were filed by
each officer with the Securities and Exchange Commission to such effect. The
Complaint seeks compensatory and punitive damages. Defendant Higbee has entered
into an agreement with the Company retracting these statements as false pursuant
to a Stipulation filed with the Court attached hereto in its entirety as Exhibit
99.4. The Company has dropped its action against Higbee but will pursue the
other defendants vigorously.
On December 23, 1998, Carnegie brought an action against Advanced
Networking, Inc., Richard B. Raphael, Lori A. Raphael, The Richard B. Raphael
Living Trust, The Lori A. Raphael Living Trust, which was originally filed in
the Circuit Court for Baltimore County, Maryland, and was removed by the
Defendants to the United States District Court for the District of Maryland,
Northern Division. This case emanated from an Option Agreement for the purchase
of Advanced Networking, Inc., a Delaware corporation, which was entered into
between Carnegie as purchaser, and the other Defendants as sellers on or about
July 22, 1998. The Defendants failed to complete the transaction, all the terms
of which had been agreed upon in the Option Agreement. The Complaint sought
relief under the theories of breach of contract, promissory estoppel, and
misrepresentation and seeks monetary damages as well as specific performance. At
this point in time the Federal Court granted the Defendants' Motion to Dismiss
Due to Lack of Jurisdiction in the State of Maryland. Carnegie is contemplating
filing an action in the State of Delaware where the Defendants reside and
conduct their businesses. Carnegie initiated this litigation to get the benefit
of its bargain as well as to deploy a strategic maneuver to assist in the
prevention of any claims by the Defendants against Carnegie or former employees
of the Defendants for the opening of an office by ACC in Delaware near the
territory of the Defendants. Carnegie believes that its position is strong and
there is little exposure on any possible counterclaim. Notwithstanding the same,
Carnegie has put off filing said Delaware action so as not to divert its
attentions from other more pressing matters.
On November 16, 1999, Communications Intercambio Mundial, Inc. ("CIM"),
Versatel Communications Corp. ("Versatel"), Edgardo Morelos ("Morelos"), and
Lucio Rodriguez ("Rodriguez") filed a lawsuit against Paramount, Mike Eberle
("Eberle") and ATN
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Communications, Inc. ("ATN") alleging various claims related to a contract
entered into between Paramount, CIM and Versatel on September 18, 1997 for the
provision of international long distance telephone services. Plaintiffs contend
that they were not paid by Paramount all sums due under the contract that were
allegedly paid to Paramount for long distance services provided, which they have
asserted is a sum amounting to $2,194,920.41. Attorneys retained to represent
Paramount, ATN, and Eberle have determined that all claims are defensible and
that Plaintiffs' damage estimate is completely unsubstantiated. Plaintiffs'
claims relate to allegations of fraudulent long distance calls made from Mexico
by unknown third parties that are not attributable to Paramount, ATN or Eberle
under the terms of the parties September 18, 1997. Pursuant to that agreement
Plaintiffs were only entitled to receive payment on calls that were ultimately
paid. These fraudulent calls concern long distance service charges that were not
collected by Paramount or ATN from its end users. Furthermore, Plaintiffs CIM
and Versatel actually received overpayments and loans from Paramount that were
provided by Paramount or to Plaintiffs in an accounting statement forwarded to
the latter in early December, 1999. The amount of the overpayments and loans
received by CIM and Versatel are in excess of $1,350,000.00. Paramount intends
to vigorously pursue an appropriate cross-action to seek return of these
overpayments.
Carnegie is about to commence arbitration with The J-Net Group, former
owners of Carnegie's subsidiary, RomNet, regarding certain payment issues. The
J-Net Group contends that Carnegie is indebted to it in the amount of
$112,000.00 to be paid in four semi-annual installments of $28,000.00 and
Carnegie believes that it is entitled to a setoff in the amount of $71,734
thereby alleviating any present claim and reducing any future claim that The
J-Net Group may have. Arbitration is to begin in New York in March 2000.
Carnegie believes that its position is valid.
A subsidiary of Carnegie terminated one of its key employees, Mark
Ortner, and although most issues have been resolved, no final agreement has been
executed. Carnegie believes that this matter will be resolved through the
completion of ongoing negotiations amicably without the assertion of any further
claims or litigation; however there can be no assurances in this regard.
SHAREHOLDERS SUITS. The Corporation and various of its current
officers and directors are parties to several lawsuits which purport to be class
actions filed on behalf of non affiliates who purchased or acquired the
Corporation's Common Stock for the period from October 28, 1998 and April 30,
1999. The first of these suits, typical of the others, was filed in the U.S.
District Court for the District of Maryland on or about June 11, 1999, titled
Alan Genut, individually and on behalf of all others similarly situated v.
Carnegie International Corporation, et al., Civil No. L-99-1688. Four other
lawsuits of like kind have been filed by other plaintiffs in the same court. A
sixth action has been filed by an individual plaintiff in the U.S.
District Court in Oklahoma. That matter has, for the moment, been stayed.
These class actions purport to allege violations of federal securities
laws in connection with the Corporation's filing with the Securities and
Exchange Commission of a Form 10-SB, on or about October 28, 1998. In
particular, each of the five complaints alleges that the Defendants improperly
recorded certain transactions in violation of generally accepted accounting
principles. The transactions in question are the sale of ECAC, and the purchase
of its subsidiaries, PTT and Talidan.
In August 1999, the Plaintiffs in the several actions which have been
filed in Federal Court
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moved to consolidate their complaints, in accordance with provisions of the
Private Securities Law Reform Act of 1995 (the "PSLRA"). The Company and the
other Defendants in those actions consented to the motion and, on or about
September 1, 1999, the Court entered an Order consolidating the actions and
requiring that a consolidated complaint be filed on or before October 31, 1999.
The parties have since agreed to extend until February 21, 2000 the time within
which such a consolidated complaint must be filed. As a result of the
application of certain statutory provisions, the Corporation's response to these
complaints is, therefore, not yet required. Accordingly, the Corporation has not
yet formally responded.
Certain other pre-trial proceedings have occurred, since the filing of
the complaints. The Company does not expect that the litigation will become
active until a consolidated complaint is filed, in February 2000, or thereafter.
Carnegie intends to vigorously defend the complaints which have been
filed against the Company and its officers and directors, as well as the
consolidated complaint that may be filed later this year. Each of the complaints
filed to date seeks monetary damages and other relief; however, none
specifically allege a defined amount of damages.
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 was traded on the National
Association of Securities Dealers Bulletin Board market ("OTC") from September
1996 until April 29, 1999, when it became listed on the American Stock Exchange
("AMEX"). During the period of the Corporation's inactivity from June 1985
through September 1996, there was no public trading of the Corporation's shares.
The following table reflects the high and low bid prices for the
Corporation's Common Stock for each quarterly period from the first quarter of
1997 to the first quarter of 1999. These quotations are based on information
supplied by OTC market makers of the Corporation's Common Stock, except for the
high price range quoted for the second quarter of 1999 which was provided by
AMEX. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
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<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
PRICE RANGE PRICE RANGE PRICE RANGE
----------- ----------- -----------
LOW HIGH LOW HIGH LOW HIGH
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $2.13 $7.31 $.22 $1.44 $.65 $1.20
2nd Quarter 4.00 6.875(1) .42 .8125 .375 .9375
3rd Quarter - - .48 1.90 .375 1.375
4th Quarter - - .73 2.45 .375 1.00
</TABLE>
(1) Trading of the Corporation's Common Stock was suspended on April 30, 1999
and has not resumed. At the time of the trading halt, the price of the
Corporation's Common Stock was $6.875.
HOLDERS
As of November 30, 1999, there were 1,289 holders of record of the
Corporation's Common Stock. At such date, 60,014,015 shares of Common Stock were
outstanding including 22,137,964 shares held of record by CEDE Corporation on
behalf of investors in the Company.
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) 200,848 shares of non-cumulative Series B preferred stock in consideration
for a consulting agreement with the Vadiari Group International, valued at $1.60
per share at the time of the issuance in July 1998 at a discounted valuation of
$321,356 and currently convertible into 2,008,457 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 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 foreseeable 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 that were not registered under the Securities Act of 1933, as amended
("Securities Act").
(1) On February 1, 1998, the Company issued to two shareholders of ACC, 5,000
shares of
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Common Stock and 200,000 shares of the Company's 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 restrictive transfer legends and to the knowledge of the
Company none of such shares have been transferred.
(2) Through December 31, 1998, the Corporation sold 2,763,688 shares of Common
Stock to 42 purchasers for an aggregate consideration of $968,878 in cash and
the value of services. Of these purchasers, six were not U.S. persons. One
person was an accredited investor and 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. These transactions
were effected without registration under the Securities Act in reliance upon the
exemption provided by SEC Rule 504 of Regulation D. In addition, 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. 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. Of the 18 purchasers who were U.S. persons, 14 were accredited
investors. Three were sophisticated investors who received corporate information
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. To date none of such shares have been transferred in
transactions in public markets of the United States.
(3) 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.
(4) 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
29
<PAGE>
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. The Securities Act has a
one-year statute of limitations for damages or rescission for unregistered sales
of shares for which no exemption from registration was available. The states
generally have a comparable one-year statute of limitations and/or a tolling of
the statute of limitations by a rescission offer. At the date of this filing the
statute of limitations is complete pertaining to these shares.. 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.
OVERVIEW
The current history of the Corporation began on May 3, 1996 with the
acquisition of ECAC and DAR. In early 1997, the Board of Directors determined
that it was in the Corporation's best interests to concentrate its operations
primarily on telecommunications rather than financial services. From such date
through 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 of
1997, the Corporation acquired Victoria Station to provide for interim cash flow
and revenues. In the month of September 1997, the Corporation (i) spun-off DAR
through the formation of TimeCast Corporation. On September 28th 1997 Carnegie
acquired PTT and Talidan. In January 1998, the Corporation sold all of the stock
of ECAC to Ewing Partners Corporation d/b/a Value Partners, Ltd. The Corporation
sold ECAC (Europe) to that company's management. The Corporation acquired ACC in
the month of February 1998. 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,
(accounted for as discontinued operations), Talidan and Victoria Station. For
1998, revenues were contributed principally by Talidan, ACC and Victoria
Station.
As part of the sale of ECAC in January 1998, the Corporation retained
40% of the future profit derived from the servicing of merchants of Franklin
Bank of Southfield, Michigan. These revenues are generated from customers who
have small to mid-size retail and professional businesses in Michigan. The
Corporation and the purchaser of ECAC are in dispute as to the Corporation's
share of revenues derived from its retained interest in the accounts of the
Franklin Bank. As a result, the Corporation has not received any funds derived
from its retained interest and if the dispute is not resolved within a
reasonable period of time, the Corporation expects to file suit for an
accounting and full payment. There is a third party lawsuit pending against the
Company and other parties in connection with the retained interests in the
merchant accounts of
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Franklin Bank. There can be no assurance that currently due funds on future
revenues will be obtained at any time from the Company's interest in the credit
card merchant accounts of Franklin Bank. (See "Legal Proceedings.")
In 1999 the Corporation made the additional acquisition of Paramount.
Paramount provides telecommunications services and systems to the hospitality,
health care and pay-telephone industries as an outside service provider in the
United States, Canada and Mexico. A full description of Paramount set forth
under the caption "Business - Subsequent Acquisitions - Paramount." The Company
also acquired the assets of RGG, an interconnect company similar to ACC,
although with a far smaller scale of operations. RGG has not had material
operations to date.
As a result of the transactions described above, the Corporation became
primarily a telecommunications company whose business units are (i) the
development and marketing of IVR software, including an 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)
providing telecommunications services to the hospitality, health care and
pay-telephone industries.
Income is also to be derived from two other sources. The ownership and
operation of the Victoria Station Restaurant near Miami, Florida, and a portion
of the profit collected by ECAC from the servicing of merchants of Franklin
Bank.
The Corporation believes that MAVIS(TM) and its IVR software products
have significant potential for growth. MAVIS(TM) can integrate with virtually
any PBX whether currently marketed or already in use. MAVIS(TM) can function in
a number of languages. The Corporation intends to initially market MAVIS(TM) in
the United States through marketing relationships planned with ALLTEL Supply and
through other distributors as well as direct marketing by ACC and CCI. In
December 1998, the Corporation entered into a Distributor Agreement designating
Tiller International Corporation as the exclusive authorized distributor of
MAVIS(TM) in the Eastern Block. The recent acquisition of Paramount is expected
to provide the Corporation with capability to market MAVIS(TM) to the
hospitality and health care industries, however, there can be no assurance in
this regard. PTT has also developed a number of IVR software products. These
software products include systems to place orders from suppliers, automate
payrolls, register purchases by customers, profile current employees, protect
merchandise from theft, make hotel reservations, send greeting card messages and
obtain travel information. Voice Quest has also developed IVR software products
consisting of a database query and a prescription refill system. IVR software
has to date not been a source of material revenue for PTT or the Company. There
is no guarantee that future marketing of these products will be a source of
material revenue for the Company.
TALIDAN. Talidan's operations are divided into three segments: "Talidan
Print," which was sold in June of 1998, advertises in adult magazines; "Talidan
TV," which advertises on late-night Brazilian television; and "Talidan Local,"
which advertises in the form of a "tag," i.e., an
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advertisement included in a recorded message heard by a customer calling the
telephone numbers advertised by Talidan Print or Talidan TV. Both Talidan Print
and Talidan TV advertise the use of long distance telephone service, while
Talidan Local advertises the use of local premium telephone service.
LONG DISTANCE TELEPHONE SERVICE. Talidan's contract with WWT, a Jersey
Corporation ("WWT"), provides for the use of the telephone numbers advertised by
Talidan Print and Talidan TV for service into various "target countries." When
customers call those numbers, they are making a long distance call. WWT
negotiates with foreign telephone companies in certain jurisdictions (e.g., Sao
Tome, Moldova) to provide telephone traffic to the "target" country in exchange
for payments based on the number of calls. WWT obtains phone numbers from the
target country, certain of which phone numbers are allocated for use by Talidan
Print and Talidan TV. When a customer calls one of such provisioned numbers, WWT
pays Talidan an agreed-upon amount per call minute. WWT provides and maintains
the system to "terminate" (i.e., complete) the call either by including the
recording on the system or by switching the call to a location where a live
person is available. WWT also maintains the records used to determine payment.
Talidan is responsible for providing the content for the recording, or the
person to take the customer's call (referred to as "chat" services), and the
advertising content which includes the Talidan numbers. Talidan acts solely in a
intermediary context and fulfills its obligations through third parties, none of
these parties is an affiliate or related party to the Company.
The long distance numbers provisioned to Talidan TV are advertised on
Brazilian late night television (e.g., after 11:00 p.m.), and the numbers
provisioned to Talidan Print are advertised in adult magazines. A customer
watches an ad on television or sees it in a magazine, typically depicting an
adult-oriented situation, and then is invited to call the number displayed in
the magazine ad or on the television screen to hear more. The customer then
makes a long distance call to a target country's exchange where either a
recording or a live person provides adult-oriented content for the customer to
hear. At some point, usually at the end of the recording, the caller is prompted
to call a premium rate 0900 number (a local premium call) either to hear a more
explicit recording or speak with a live person. About 10% of long distance calls
result in local premium calls.
Talidan TV has an oral agreement with WWT, pursuant to which half of
the costs of advertising time purchased by Talidan TV are reimbursed by WWT. In
addition, the Company has an oral agreement with Telecom Brazil, a Brazilian
company, whereby it pays Telecom Brazil U.S. $7,000 per month in exchange for
services related to advertising placement and other management services. Telecom
Brazil is managed by Tom Raffel, who personally owns four percent of the common
stock of the Company.
LOCAL PREMIUM TELEPHONE SERVICE. Talidan Local is allocated local
premium 0900 numbers (analogous to the "900" number in the U.S.) from Telecom
Brazil, which are advertised as a tag included at the end of the recording the
customer hears on the long distance call advertised by Talidan Print or Talidan
TV. When the customer calls the 0900 number, they are making a local call for
which they are charged a premium rate per minute to engage in "chat" with a live
person or hear additional, typically more explicit, recordings. When a customer
calls one of the numbers provisioned to Talidan Local, Telecom Brazil, pursuant
to an oral agreement with Talidan, pays Talidan an agreed-to amount per call
minute. As consideration for the tag, part of
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the money received by Talidan Local is remitted to WWT, or is credited against
the amounts due Talidan TV from WWT for shared advertising costs.
There are approximately 30 regional phone companies operating in
Brazil. The national telecom service provider is Embratel, which was state owned
prior to its being acquired by MCI/Worldcom on July 2, 1998. When a customer
makes a 0900 call on one of the numbers provisioned to Talidan Local, the
customer is charged and money is collected by the regional phone company who
remits a portion of such funds to Embratel. Embratel then remits a portion of
the funds it receives to Telecom Brazil as owner of the number, who remits a
portion to Talidan. Talidan then remits (or credits for advertising costs) a
portion to WWT.
ADVERSE CIRCUMSTANCES. Several adverse circumstances negatively
impacted Talidan's business in 1998 and 1999: Long distance rates increased
between Brazil and Sao Tome in February 1998 from U.S. $.28 to U.S. $.59;
social, religious and political pressures to curtail the adult telephone
business increased significantly during 1998; and the content of both television
advertising and messages heard by a caller were restricted in the fall of 1998.
The rate increase and restricted content pressures resulted in a decrease in
call volume.
Moreover, Embratel was having difficulty in collecting funds from
regional phone companies, and estimated a $40 million payment imbalance at the
time of its privatization resulting in Embratel "temporarily suspending" its
payments to Telecom Brazil, and others under existing contracts, after its last
payment in August of 1998. In October 1998, a judge in Sao Paolo blocked access
to 0900 numbers, so callers could not connect to 0900 services. At that point,
it was uncertain whether other Brazilian jurisdictions would follow suit.
Although the judge's October 1998 decision was ultimately appealed in the state
and federal courts of Brazil, the outcome and timing of such ongoing appeals
were and still are difficult to determine. By November 1998, Embratel cancelled
its existing contracts and planned to enter into new contracts with the regional
phone companies. But in August 1999 some 0900 service providers that accused
Embratel of withholding payment sought legal action to force Embratel into
bankruptcy. Shortly thereafter, Embratel cancelled contracts it had with
approximately 30 such providers, including its contract with Telecom Brazil.
In addition, while Talidan TV continued to advertise throughout 1998
and the first four months of 1999, amounts spent on ads varied in each month of
1999 and were significantly lower in January and March as the Company attempted
to manage the uncertainties facing Talidan's business. Advertising was cancelled
in late April 1999 due to lack of response. Although advertising ceased,
payments continued to be received through December 1999, albeit at a decreasing
rate. Some payments are expected to continue short-term since it is likely that
some customers have retained telephone numbers, which are still active, from
earlier TV advertisements. In December, 1999, WWT notified Talidan that it was
withdrawing the use of Talidan's premium long distance telephone as of January
1, 2000.
In July of 1999, the Corporation received an unsolicited offer to
purchase the stock of Talidan from three shareholders of the Company in exchange
for 5,676,750 shares of the Corporations common stock. The ability to complete
this transaction is predicated on the Company's shares returning to a trading
status. At that time, the Company expects to finish its negotiation and complete
the transaction. There is no assurance, at this time, that the Company and the
buyer will be able to execute this transaction.
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RESULTS OF OPERATIONS
The results of operations for the fiscal years ended December 31, 1997
and 1998 described herein are based upon the Corporation's restated Consolidated
Financial Statements for such years.
FISCAL YEAR ENDED DECEMBER 31, 1997. The Corporation realized operating
revenues in 1997 of $3,245,810. 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 a net income from continuing operations of $1,516,118.
After income from sale of service contracts of $3,700,000 relating to the sale
of ECAC and a loss from the spin-off of TimeCast of $100,330, net income for the
year was $1,415,788, or $0.06 per share, diluted.
The profit and cash flow realized by the sale of the ECAC service
contracts provided the funds necessary for the Corporation to pursue
acquisitions in the Telecommunications arena per corporate strategy.
On September 29, 1997, the Company acquired all of the outstanding
stock of PTT and Talidan from Tiller Holdings, a broker, for $4,670,000 and
$10,006,637, respectively. The consideration was comprised of an aggregated
19,340,000 shares of the Company's Common Stock, valued at $9,670,000; warrants
for five million shares, exercisable at 50% of the average market price for the
30 days prior to exercise, valued at $1,250,063; and options for shares valued
at $5 million, exercisable at $0.001 per share, with a related put option,
valued at $3,756,574. To the best knowledge of the Company, none of the parties
are related. The acquisition of Talidan provided the Corporation with access to
financial resources to continue the development of MAVIS(TM) and other software
owned by PTT. More detailed information regarding the foregoing acquisitions may
be found below in Note 3 to the Consolidated Financial Statements under the
caption "PTT and Talidan."
Victoria Station was acquired in 1997 in order to provide cash flow and
revenues to the Corporation during the transition of principal operations to the
telecommunications industry.
For the fiscal years ended December 31, 1998 and 1997:
(1) Revenues from external customers for (a) telecommunications was $5,358,377
and $1,216,912, respectively; (b) financial services was none and $5,056,223,
respectively; and (c) the restaurant was $1,943,640 and $672,675;
(2) Interest expense for (a) telecommunications was $12,847 and none,
respectively; (b) financial services was none and $16,434, respectively; (c) the
restaurant was $760 and $3092, respectively; and (d) corporate was $213,474 and
$29,891, respectively;
(3) Income tax expense (benefit) for telecommunications, financial services and
the restaurant was none and for corporate was $12,279 and ($12,279),
respectively;
(4) Depreciation and amortization for (a) telecommunications was $925,229 and
$182,425,
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respectively; (b) financial services was none and $31,929, respectively; (c) the
restaurant was $36,844 and $16,627, respectively; and (d) corporate was $31,651
and $17,461, respectively.
(5) Segment profit (loss) before taxes for (a) telecommunications was ($9697011)
and ($7,612), respectively; (b) financial services was none and $3,123,989
respectively; (c) the restaurant was $133,950 and $5,312, respectively; and (d)
corporate was ($3,733,960) and ($1,617,850), respectively;
(6) Segment assets for (a) telecommunications was $11,644,430 and $17,950,863,
respectively; (b) financial services was none and $420,786 respectively; (c) the
restaurant was $267,169 and $486,099, respectively; and (d) corporate was
$2,244,074 and $961,221, respectively; and
(7) Expenditure for segment assets for (a) telecommunications was $217,974 and
$100,000, respectively; (b) financial services was none and $11,012,
respectively; (c) the restaurant was none and $18,032, respectively; and (d)
corporate was $212,335 and $40,964, respectively;
With respect to the fiscal years ended December 31, 1998 and 1997, the following
geographic area data for trade revenues is based on product or service delivery
location, and property, plant and equipment is based on principal location;
(1) Revenues from external customers for (a) the United States was $4,057,563
and $5,726,538, respectively; (b) Brazil was $3,204,379 and $1,204,872,
respectively; (c) United Kingdom was $40,075 and $14,400 respectively; and (d)
none for other foreign countries.
(2) Segment assets for the United Kingdom was $5,790,592 and $18,028,192,
respectively; and for the United States, net of intersegment receivables was
$7,071,788 and $1,790,777, respectively, and for Brazil was $1,293,293 and none
respectively.
FISCAL YEAR ENDED DECEMBER 31, 1998. The Corporation realized revenues
for the year ended December 31, 1998 of $7,302,017. Cost of sales for the year
were $2,950,232. Operating expenses were $11,029,785 after impairment expenses,
depreciation and amortization, interest expense (net of interest income) was
($2031). The Corporation also realized other income of $681,367; $646,888 of
which was a net gain attributable to the Sale of Talidan's Print Media business
and the gain on the sale of ECAC, a discontinued operation, net of income taxes
of $1,612,195 resulting in the Corporation realizing a net loss of $13,552,640
or ($.30) per share, diluted.
The Corporation acquired ACC, a distributor of telephone systems to
small and medium-size businesses. Additionally, ACC is expected to provide the
sales and marketing support for the sale of the MAVIS(TM) system to customers
who have existing telephone systems. The revenues of ACC for the period from May
18, 1998 to December 31, 1998 were $[2,015,148]. There were no significant sales
of the MAVIS(TM) system during 1998.
During 1998 management concluded that a segment of Talidan's operations
were not
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consistent with the image that the Corporation wanted to convey. As a result,
the rights to certain telephone numbers and promotional materials with respect
to Talidan's print media business ("Talidan Print") were sold in exchange for a
Note in the amount of $2,340,000 from Westshire Trading Company, Inc.
("Westshire"). The proceeds received to date from this Note have been used by
the Corporation to develop the MAVIS(TM) system for commercialization. In
connection with the sale of the business, the Company agreed to release certain
consultants of the Company from their covenant not-to-compete with the Company.
The Company allocated $640,000 of the selling price to sale of the business and
the balance of $1,700,000 was allocated to the release of the covenant
not-to-compete. The Company charged $662,049 of purchased goodwill attributable
to the original acquisition of this business to operations at the time of sale.
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.
All payments have not been received on the $2,340,000 Note received
from Westshire in consideration for Talidan Print (the "Note"). The terms of the
Note require quarterly payments in the amount of $585,000 plus accrued interest
(at the rate of 7% per annum) commencing December 22, 1998, with payments
applied first to interest and then to principal. Of the amount received to date
as set forth below, $110,072 has been applied to accrued interest due. At
December 1, 1999, the Note had a remaining principal balance of approximately
$1,115,072 plus interest.
Payment Date of Payment Amount
- ------- --------------- ------
1st Quarterly: October 26, 1998 $225,000
October 30, 1998 25,000
January 27, 1999 335,000
2nd Quarterly: March 12, 1999 750,000
----------------
Total Received $1,335,000
In October 1998 the Company requested a partial early payment on the
Note which was received prior to the December 22, 1998 due date as set forth
above. In consideration for such early payment, the Company (a) granted
Westshire warrants to acquire 2,000,000 shares of the Company's common stock at
a purchase price per share of $1.425, well above the then-market value of $.78
and (b) agreed to extend the due date of the balance of the first payment until
January 27, 1999. The balance of the first quarterly payment was made in
accordance with the revised terms of the Note. The second quarterly payment,
which was due March 22, 1999, was made ten days early and in excess of the
required amount. The balance of the third quarterly payment, which was due June
22, 1999, to date has not been made. The Company is in discussion with
representatives of Westshire to secure payment.
Although the Company has no first hand information concerning the
current operations of Talidan Print, based upon the Company's knowledge obtained
while operating that business, the Company does not believe that there exists a
material uncertainty over Westshire's ability to repay the Note. The adverse
conditions in Brazil which have had a negative impact on Talidan TV as
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described above should not have the same effect on Talidan Print since it also
operates in Canada, the United States and the UK, which countries have not been
subject to such adverse conditions.
In addition, neither the Company nor Westshire contemplated that
payment on the Note would be contingent on successful operations of Talidan
Print. In the agreement of sale, Westshire represented the following:
"Buyer acknowledges that the income derived from the assets will be far
below the quarterly payments due to be made by Buyer. Buyer represents
that it has sufficient ability to make the payments due pursuant to the
Promissory Note on time and is not dependent upon the income it
anticipates being generated from these assets."
Moreover, management, always of the belief that Westshire possessed the ability
to pay the full amount of the Note through funds independent of the operations
of Talidan Print, obtained a letter, from Westshire's bank dated October 6, 1998
stating that Westshire, as a member of a group of companies, had balances with
the bank in excess of $6,000,000. The Company's Current Report on Form 8-K filed
with the SEC on September 28, 1999 also discusses Westshire. See also 1998
financial statements in Note 4 - Dispositions - Sale of Certain Talidan Assets.
ACQUISITIONS
In February 1999, the Corporation acquired Paramount, which is expected
to continue to provide telecommunications billing and clearing services to the
hospitality, health care and pay-telephone industries as an outside service
provider in the United States, Mexico and Canada through the sale and service of
interfacing equipment for Hotel & Hospital PBX systems. Generally these are the
primary systems used by hotels to provide 0+ & 0- telephone-related services.
Hotels provide access to credit card calls and third party collect calls to
their guests. Paramount collects and provides the data necessary to bill guests
for telephone calls and to properly manage 0+ & 0- telecommunications services
in the hotel. Paramount also purchases direct collect calls and or provides
billing and clearing services for third parties using Paramount's infrastructure
and established vender relationships. Paramount's revenues for 1998 were
$11,314,649 and its net income for the same period was $646,937. Of 1998
revenues about 1/3 came from purchase of direct collect calls and/or billing and
clearing from third parties. Third party business is subject to more attrition
than Paramount's other services. The company has an active sales force charged
with acquiring new customers for this service, but there can be no assurance
that revenues will continue at current levels. In addition, Paramount expects to
market MAVIS(TM) to the hospitality and the health care industries.
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 billing, technical and support
services to its hotel clients for 0+ and 0- telephone services. In addition, in
April 1999, Paramount entered into a Memorandum of Understanding ("Memorandum")
with a subsidiary of BCT.TELUS, a major Canadian telephone company, to provide
and receive certain services for its hospitality industry clients in Canada. The
Memorandum is subject to the
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execution of a definitive agreement that is being negotiated. Paramount expects
this agreement to be completed in year 2000, however, there can be no assurance
in this regard.
Paramount has 11 full-time employees, of which seven are administration
and four are service. Michael Eberle, President, David M. Moody and David Paton,
Executive Vice Presidents and Kay Eberle, Secretary (wife of Michael Eberle),
each have five year employment agreements with Paramount, that expire on January
1, 2004. Each agreement provides for a $130,000 base salary and a signing bonus
of $375,000 plus 12,500 shares of restricted Common Stock of the Corporation.
Additionally, each may 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.
Paramount's competition includes AT&T, MCI Worldcom, 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 technological and regulatory changes occur, Paramount
anticipates that new and different competitors will enter marketplace. Paramount
believes that by focusing primarily on the hospitality industry, it has created
its own market niche. Other companies offering similar services to hotels must
divert the phone traffic to an OSP, and the hotel is paid a commission by the
OSP. Paramount's systems are located inside the hotel. This allows each hotel to
operate as an OSP. This feature provides a greater profit margin to the hotel
since the Hotel may establish its own rates with respect to O+ calls. An
increase in use of cellular telephones by hotel guests, reducing the number of
calls made on the hotel telephones, could have an adverse impact on Paramount's
profitability.
In April 1999 the Company acquired all of the assets of RGG of
Rockford, Illinois for the nominal price of $25,000 in cash. RGG installs,
supplies and services phone systems in Illinois and southern Wisconsin. Roy
Gustafson, a former owner, has agreed to stay on in a consulting capacity for a
period of one year. RGG is a distributor of COMDIAL products similar to ACC and
is expected to operate as an adjunct to the Company's proposed acquisition of
The Phone Stop described herein. In connection with the acquisition, the Company
assigned to one of its subsidiaries, American Telecommunications & Computers,
Inc., a Maryland corporation, all of such assets and the business of RGG is
expected to be conducted by this corporation. RGG has not had material
operations to date.
The Corporation expects 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, there is no certainty that the Corporation with
respect to either such letter of intent will consummate a purchase. 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) system. In addition the Company expects to market MAVIS(TM) nationally
through ALLTEL Supply, Inc. The Corporation expects that it will take a
combination of stock and cash to acquire any such companies. The cash
requirements are expected to be met by a combination of cash generated by
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the Corporation's operations, by the private and public sales of stock and by
lines of credit. There can be no assurances that the Corporation will obtain
such funding or 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 used in 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
[$7,607,041] and generated $4,282,868 in proceeds from the sale of stock as well
as approximately $100,000 from the sale of ECAC's stock. Cash from borrowings
amounted to $990,568 and $2,058,078for the years ended December 31, 1997 and
December 31, 1998, respectively.
In addition, during 1998 and 1997, the Corporation issued 2,179,268 and
2,290,145 shares of the Company's Common Stock at a value of $922,732 and
$602,192, respectively as compensation for services rendered by various
consultants, attorneys, and others.
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 when making corporate
acquisitions. PTT and Talidan were acquired for stock with no cash used in the
purchases. ACC was acquired for a $1,000,000 note payable over five years and
stock convertible to common stock. Voice Quest was acquired for a $102,084 note
payable over three years and stock. RomNet was acquired for stock and the
assumption of debt obligations up to $577,890. Victoria Station was acquired for
cash in the amount of $140,000, a note payable of $185,000, and stock. Paramount
was acquired for stock. However, the stockholder-employees of Paramount were
paid $1,500,000 in the aggregate as bonuses for entering into employment
agreements in connection with the acquisition of Paramount.
Commencing in the second quarter of 1999 the Corporation incurred
unanticipated expenses in connection with the resolution of the SEC's accounting
comments, the cessation of trading, and shareholders' suits which in the
aggregate are estimated to be $1,500,000. Although the Company believes that the
basis for the shareholder suits are without merit and intends to vigorously
defend itself against them, the outcome of such suits are uncertain at this
time. In addition, the Company is involved in certain other legal proceedings
none of which the Company believes will have a material adverse effect on the
Company, however there can be no assurance in this regard.
The Corporation has not yet achieved any significant level of sales of
the MAVIS(TM) system. The Corporation has not reached the level of revenues that
were expected subsequent to December 31, 1998. The Corporation has expended
resources for the further enhancement of MAVIS(TM). PTT has significantly
increased the capabilities of the voice mail component of the system. With these
enhancements the Corporation expects to realize increased interest in and sales
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of the MAVIS(TM) system in the first quarter of year 2000 and thereafter,
however there can be no assurance in this regard.
During 1999 the Company has expended available cash resources on (1)
the operating requirements of the Corporation and its subsidiaries, (2) the
payment of signing bonuses related to the Paramount Employment Agreements, and
(3) the repayment of short term borrowings.
The Corporation's plans for 2000 include 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. If such acquisitions require substantial amounts of cash the Corporation
intends to issue additional stock or incur additional debt. The ongoing
activities of the Corporation, including those extraordinary in nature, may
require funding in excess of the resources that will be available through
operations. The Corporation believes, that if the Common Stock resumes trading
on AMEX, or another stock exchange or quotation system, the Company expects that
it may be able to generate such additional capital, however, there can be no
assurance in this regard. If acquisitions are funded utilizing bank debt it is
likely that such debt would be secured with the assets of the company to be
acquired but may require additional security through other assets of the
Corporation. There can be no assurance that any such financing will be available
on terms favorable to the Company, or at all.
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 passed. Historically computer hard ware and software allowed only
two digits to identify the year and date. This may indicate the devise will fail
to distinguish dates in the "2000's" from dates in the "1900's" after December
31, 1999.
The Company believes that its software is certified and fully Year 2000
compliant. The Company has done recent modification of existing software and
conversion to new software and/or computer systems. The Company has also
conducted an internal review of all internal computer systems and has contacted
all software suppliers to determine if major areas of exposure to the Year 2000
Issues exist. The Corporation believes that any Year 2000 Issues which may arise
will not be significant and further believe that should any arise, they can
reasonably be expected to be remedied without adverse material effects through
the Corporation's internal technology capability. Notwithstanding the foregoing,
it is possible that the Corporation may experience serious unanticipated
negative consequences and/or material costs incurred by undetected errors or
defects in the technology used in the Corporation's internal systems. These are
composed predominately of third party software and hardware. As a result, the
Corporation could experience a temporary inability to process transactions, send
invoices, or engage in normal business activities. In such event, the Company
plans the use of manual processing, computer software alternatives and a program
to provide billing services through alternate vendors. Any such problems,
however, could have a temporary adverse effect on the Corporation's business.
The Corporation has contacted most of its vendors, suppliers and
significant customers to determine that their operation, products and services
are Year 2000 compliant. The Company has
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monitored their progress toward Year 2000 compliance. Most of the 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. The Company expects to
rely primarily on its own proprietary software. The Corporation acknowledges
that some of its customers may not be Year 2000 compliant and may therefore have
cash flow problems resulting in a potential credit risk for the Corporation
although the Corporation has no actual knowledge of any such risk at the present
time.
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. 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, are forward-looking statements.
Actual events may differ materially from those anticipated in the
forward-looking statements. Important risks that may cause such a difference
include: general domestic and international economic business conditions,
increased competition in the Corporation's markets and products. Other factors
may include, availability and terms of capital, and/or increases in operating
and supply costs. Market acceptance of existing and new products, rapid
technological changes, availability of qualified personnel also could be
factors. Changes in the Corporation's business strategies and development plans
and changes in government regulation could adversely affect the Company.
Although the Corporation believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. 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 that the objectives and
expectations of the Corporation would 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.
The 1997 and 1998 audited Consolidated Financial Statements of the
Corporation have been restated. See "Note B to the Financial Statements" for a
full description of all adjustments to the Financial Statements made as a result
of the restatements.
The effect of the 1997 restatement occurred as operating expenses
increased from $3,592,270 to $3,819,463 and the provision for income taxes
decreased from $50,867 to ($12,279) resulting in net income per share of $.06.
Additionally, the restatement resulted in an increase in the assets of the
Corporation from $8,837,333 to $19,818,969. Liabilities increased from
$4,218,332 to $6,978,232. Stockholders equity increased from $4,619,001 to
$12,840.737.
The effect of the 1998 restatement on total revenues, net income and
net income per share reduced revenues from $11,657,223 to $7,302,017.. Net
Income was reduced from $2,660,927 to a loss of ($13,564,919). Net income per
share from $.06 to a loss of ($.30). Additionally these restatements resulted in
a decrease in assets from $29,169,302 to $14,155,673 and an increase in
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liabilities from $4,622,316 to $5,222,932 Stockholders equity altered from
$24,546,966 to $8,932,741.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On September 21, 1999, the Company replaced its certifying accountant,
Grant Thornton. The decision to replace Grant Thornton was approved by the
Company's Board of Directors. Grant Thornton was notified of the Company's
decision on September 23, 1999.
The Company has engaged Merdinger, Fruchter, Rosen & Corso, P.C. as its
certifying accountant as of September 22, 1999 for the Company's fiscal year
ending December 31, 1999. Merdinger, Fruchter, Rosen & Corso, P.C. previously
audited the December 31, 1998 and 1997 financial statements of Paramount
International Telecommunications, Inc., a wholly-owned subsidiary of the
Company. The Company has not consulted Merdinger, Fruchter, Rosen & Corso, P.C.
previously.
Grant Thornton was engaged by the Company in January 1998, as the
Company's certifying accountant, and previously issued reports concerning the
Company's financial statements for 1997 and 1998. Grant Thornton's report on the
Company's financial statements for each of those years did not contain an
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles. During the two most recent
fiscal years and subsequent interim periods until after the effective date of
dismissal, the Company did not have any disagreements with Grant Thornton on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
The Company's report on Form 8-K dated September 21, 1999 and filed
with the SEC on September 28, 1999, discusses in detail the Company's views with
regard to Grant Thornton's termination, which is incorporated herein by
reference thereto. Grant Thornton's responses to such discussion are set forth
on Forms 8-K/A filed with the SEC on October 13, 1999 and on October 25, 1999,
respectively, which are incorporated herein by reference thereto. The Company's
rebuttals to Grant Thornton's statements are set forth in Exhibit 99.1, attached
hereto.
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 as of December 1, 1999, their ages and positions with the
Corporation.
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Name Age(1) Position(2)
- ---- ------ -----------
E. David Gable(3) 50 Chairman of the Board of Directors
Lowell Farkas(4) 59 Director, President and Chief
Executive Officer
Barry N. Hunt 51 Director
Michael Eberle(5) 53 Executive Vice President
Michael R. Faulks 45 Vice President
Lawrence Gable(3) 54 Vice President
Richard J. Greene, CPA(6) 61 Vice President, Corporate Secretary
and Acting Chief Financial Officer
Anthony Redfern 41 Vice President
Adnan Khan(7) 30 Director
Allan Jay Kovitz(8) 57 Director
Walt Nawrocki(9) 54 Director
- -----------------------------
(1) As of November 30, 1999.
(2) Each Director holds office for one year and until his successor has
been duly elected and qualified.
(3) E. David Gable and Lawrence Gable are brothers. E. David Gable also
serves as a member of the Company's Office of the Chief Operating
Officer.
(4) Pursuant to Lowell Farkas' employment agreement with the Corporation,
he is entitled to be a Director so long as he is the President. Mr.
Farkas also serves as a member of the Company's Office of the Chief
Operating Officer.
(5) Pursuant to terms of the Paramount Acquisition Agreement, Mr. Eberle is
entitled to a seat on the Board of Directors but has not yet exercised
such right. Mr. Eberle also serves as a member of the Company's Office
of the Chief Operating Officer.
(6) Effective February 15, 1999, Richard J. Greene became the Secretary of
the Corporation. (7) As of October 21, 1999.
(8) As of November 16, 1999.
(9) As of November 16, 1999.
BIOGRAPHICAL DATA OF DIRECTORS AND EXECUTIVE OFFICERS
E. DAVID GABLE. Mr. Gable serves as Chairman of the Board of Directors
and as a member of the Company's Office of the Chief Operating Officer. He
served as Chief Operating Officer from May 1997 to March 16, 1999. He was
elected Chairman in September 1996. From September 1996 through May 1997, Mr.
Gable also served as the Acting President and Chief Executive Officer of the
Corporation. From 1988 to 1993, he served in various capacities including Dealer
Principal of All Star Dodge and All Star Chevrolet Buick and President of the
All Star Automotive Group consisting 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 served as a part-time
consultant to the Corporation from October 1996 until May 1997. He was appointed
a Director and President and CEO in May 1997 and continues to serve in these
positions as well as serving as a member of the Company's Office of the Chief
Operating Officer. Prior to joining the Corporation, Mr. Farkas served as
President
43
<PAGE>
and CEO of Mad Martha's Ice Cream, Inc. from 1995 to 1996. From 1992 to 1995,
Mr. Farkas was a management consultant on a full-time basis to A.S. Management
Corporation which operate 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 The Horn & Hardart Company.
ANTONY D. REDFERN. Mr. Redfern has served as a Vice President of the
Corporation since October 1977. 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.
BARRY N. HUNT. Mr. Hunt has served as a 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.
ADNAN KHAN. Mr. Khan has served as a Director of the Corporation and as
a member of its audit Committee since October 1999. He is the owner of IQ
Systems of Laurel, Maryland, which provides corporate technology and information
solutions in the Baltimore/Washington area, and is one of the top beta sites for
new Microsoft business solutions software. IQ Systems, supplies Carnegie with
hardware for its MAVIS(TM) system, along with software support. Mr. Khan has a
dual MBA in finance and computer science from Georgetown University and is a
Microsoft(R) Certified Systems Engineer.
WALT NAWROCKI. Mr. Nawrocki has served as a Director of the Corporation
and a member of its audit committee since November 1999. In November, 1999 he
was named CEO of Intraco Systems, Inc. (OTC BB: INSY - news), of Boca Raton,
Florida, which specializes in convergence of voice and data technologies for
business. Prior to that time he was President, CEO and Director of Registry
Magic for 3 years prior after leaving IBM for many years holding various
positions including manager for Worldwide Product Development and Business
Management. Mr. Nawrocki has received numerous Computer Telephony industry
awards.
ALLAN JAY KOVITZ. Mr. Kovitz has served as a Director of the
Corporation and a member of its audit committee since November 1999. He is the
owner and principal of Allan Jay Kovitz, Certified Public Accountant, with
offices in Islandia, New York, and Hartford, Connecticut, specializing in
taxation, tax audit representation, and business consulting.
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.
MICHAEL R. FAULKS. Mr. Faulks has served as a Vice President of the
Corporation since
44
<PAGE>
October 1998. Mr. Faulks is the creator of the MAVIS(TM) system and serves as
Technical Director of PTT. Mr. Faulks is a member of the Board of Directors of
PTT. As Technical Director, Mr. Faulks is involved in the design and creation of
Voice Response Services and manages a software development team. From 1990 to
1993, he served as the Managing Director of 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.
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. 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 has served as
Acting Chief Financial Officer since September 11, 1999. He served as 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.
CHANGES IN DIRECTORS AND MANAGEMENT DURING 1999
DIRECTORS
On September 24, 1999 the Company received letters of resignation from
Directors Stuart L. Agranoff and from Richard Cohen. These letters cited
personal reasons for leaving and to the knowledge of the Company these Directors
had no controversy with the Company. Each of Messrs. Agranoff and Cohen stated
to the Company that commitments to the Company during the trading halt had
required far more time than originally anticipated at the date they assumed
their positions with the Company. The Company maintains good relationships with
both Richard Cohen and Stuart Agranoff.
Adnan Kahn became a member of the Board on October 21, 1999 and Allan
Jay Kovitz and Walt Nawrocki became members of the Board on November 16, 1999.
Messrs. Khan, Kovitz and Nawrocki are the members of the audit committee.
OFFICERS
The following changes occurred between January 1, 1999 and November 1,
1999:
David Pearl resigned as Corporate Secretary as of January 22, 1999 to
pursue other opportunities.
45
<PAGE>
Bennett Goldstein joined the Company on February 16, 1999 as executive
Vice President and Chief Financial Officer. Prior to joining the Company Mr.
Goldstein was a partner at Grant Thornton LLP and the Audit Partner responsible
for the 1997 restated 1996 audit of the Company. On September 10, 1999 Mr.
Goldstein left full-time employment with the Company under mutually agreed
terms. Pursuant to such agreement, which was signed on September 30, 1999, Mr.
Goldstein is required to provide consulting services to the Company for six
months ending March 10, 2000. Mr. Goldstein has pursued another employment
opportunity since leaving the Company.
B. Chris Schwartz joined the Company as Chief Operating Officer on
March 16, 1999. Mr. Schwartz resigned on September 24, 1999 because the Company
and Mr. Schwartz could not come to terms on an employment agreement.
Michael Eberle became Executive Vice President in September 1999 and
was appointed as a member of the Company's newly constituted Office of the Chief
Operating Officer. He will serve in that role until the Company fills the
position of COO. Mr. Eberle is President of Paramount.
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 reports with
the Securities and Exchange Commission (the "SEC"). These reports include
initial ownership and changes in ownership of Common Stock. Such persons are
required by SEC regulation to furnish the Corporation with copies of all such
reports when filed.
To the Corporation's knowledge, based solely on review of such reports,
furnished to the Corporation (with 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 relating to this form 10-KSB except that the
following directors and executive officers have inadvertently not filed a Form
3: E. David Gable, Lowell Farkas, Barry Hunt, Adnan Khan, Allan Jay Kovitz, Walt
Nawrocki, Michael Eberle, Michael Faulks, and Richard Greene. The following
directors and executive officers have inadvertently not filed a Form 5: E. David
Gable, Lowell Farkas, Barry Hunt and Michael Faulks.
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:
46
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
- ---- ---- ------ ----- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. David Gable 1998 200,000 -- -- 500,000 (1) 1,000,000 --
1997 225,000 -- -- -- -- --
1996 100,000 -- -- -- -- --
Lowell Farkas 1998 150,000 -- -- 300,000 (1) -- --
1997 125,000 -- -- 25,000 900,000 --
Anthony Redfern 1998 115,000 (2) -- -- -- -- --
1997 -- -- -- -- -- --
Michael R. Faulks 1998 120,000 (3) -- -- -- -- --
1997 -- -- -- -- -- --
</TABLE>
(1) All of such shares were issued pursuant to grant of discretionary bonuses by
the Company's Board of Directors, with respect to performance of the Company
during fiscal 1997. The SEC, in reviewing the Company's Form 10-SB, questioned
in writing to the Company's attorney on March 29, 1999 the discounted value on
1997 Company acquisitions. As a result, until such issues were resolved, Company
management voluntarily elected to return all of such shares to the Company
without further consideration.
(2) Mr. Redfern received this compensation from Talidan pursuant to a services
agreement.
(3) This amount reflects conversion of(pound)75,000 received by Mr. Faulks at an
estimated exchange rate of $1.60.
The Chairman and President of the Company have agreed to defer a substantial
portion of their respective salaries and expense reimbursements during 1999. The
Company has undertaken to pay these deferred salaries and expenses in the form
of cash and/or stock to be negotiated in amounts as yet to be determined.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Corporation's executive officers in 1998.
47
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS GRANTED EMPLOYEES IN EXERCISE OR
(#) FISCAL YEAR BASE PRICE EXPIRATION
NAME ($/SH) DATE
<S> <C> <C> <C> <C> <C>
E. David Gable 1,000,000 80% $0.45 12/31/99
</TABLE>
EMPLOYMENT AGREEMENTS
LOWELL FARKAS. Mr. Farkas entered into an employment agreement with the
Company (the "Farkas Agreement") effective May 15, 1997 at an annual salary of
$100,000. His salary increases 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 additional one year terms except upon
notice of termination 90 days prior to the end of the then-current term. As
additional compensation, Mr. Farkas will be paid a discretionary performance
bonus annually, 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 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 that raises at least $5,000,000 or
achieves a net profit of $1,000,000 in 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 for business purposes. Upon termination of his employment with the
Corporation, Mr. Farkas has an option to acquire the rights and title to
Victoria Station restaurant at the same purchase price paid by the Corporation.
The depreciated value of improvements made after the acquisition will be added.
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 90 days prior to the end of
the then-current term. As additional compensation, Mr. Gable will be paid a
discretionary performance bonus annually, 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 that vest when the
Corporation has a consolidated pre-tax net income of at least $1,000,000 in two
consecutive quarters. These options were originally to be exercised no later
than December 31, 1999 however, the Board of Directors has determined to extend
such exercise period for an additional two years. 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 and
compensation in an amount equal to five years of salary per the Gable Agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
48
<PAGE>
The following table reflects the beneficial ownership of the
Corporation's Common Stock as of November 30, 1999. The table includes
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. All directors and executive officers as a group are
included. 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.
<TABLE>
<CAPTION>
5% BENEFICIAL OWNERS NUMBER OF SHARES PERCENT OF CLASS
- -------------------- ---------------- ----------------
<S> <C> <C> <C>
The Greater Metropolitan Corporation (1) 3,133,874 5.22%
333 7th Avenue
New York, NY 10001
</TABLE>
(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) (2) (3) [1,253,100] 2.05%
Lowell Farkas (3) 925,000 1.52
Michael Eberle 2,807,000 4.68
Richard J. Greene (3) [38,058] .06
Michael R. Faulks 370,370 .62
Barry N. Hunt (4) 7,385 .01
Adnan Khan 0 0%
Walt Nawrocki 0 0%
Allan Kovitz 1000 0%
All directors and executive officers 5,402,213 9.0%
as a group (9 persons)
</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 248,000 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) Messrs. Gable, Farkas and Greene were issued 500,000, 300,000 and 175,000
bonus shares of Common Stock, respectively, in 1998 based on 1997 net income.
All of such shares were issued pursuant to grant of discretionary bonuses by the
Company's Board of Directors, with respect to performance of the Company during
fiscal 1997. The shares were returned to the status of
49
<PAGE>
authorized but unissued shares.
(4) Includes shares owned with his wife as tenants by the entirety. 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 has been in excess of $1.00, the conversion right is not
likely to be exercised within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, E. David Gable, the Corporation's Chairman, served as
director of DAR (See "Corporate History"). Mr. Gable resigned from DAR in
December 1998.
On June 25, 1999, American Champion Entertainment, Inc. a Delaware
corporation ("American Champion") loaned the Company $250,000, with an
origination fee of $25,000, fixed interest of $25,000 and warrants to purchase
the Company's Common Stock at an exercise price of $3.50 per share. E. David
Gable, the Corporation's Chairman, serves as a director of American Champion.
The American Champion loan is due December 31, 1999 and is secured by an option
to purchase 100% of the stock of RomNet, exercisable in the event of default of
such loan, at a price equal to two times gross sales for the 12 months prior to
the date such option is exercised, less any unpaid principal and/or loan fees or
interest on the loan. The Company entered into such loan agreement at
arms-length and the Board of Directors of the Company approved the transaction
as being in the best interest of the Corporation with particular reference to
the Company's financial condition and the lack of reasonable alternative sources
of financing. The Company has requested an extension of the payment terms of
such loan with conversion of the interest and origination fee to Common Stock of
the Company. The Company does not believe default on this loan would cause any
material adverse effect on the Company's financial condition.
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 assets and outstanding shares in May 1996. The
Corporation does not intend to make any further advances to DAR.
The Corporation made loans to certain of its officers and directors
from time to time which were non-interest bearing and did not have a specified
repayment date. The Corporation determines whether it will make a loan, attach
any conditions or obligations to the loan, or what the repayment obligations
will be on a case by case basis. Typically, the loans are made at the discretion
of the executive officers. In the event of a large loan prior approval will be
sought from the Board of Directors. The loans are made to help the Corporation's
officers, directors and employees in time of personal need and the Company
believes that all wages may not be to industry standards. The highest loans 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 loans have been paid back to
the Corporation. In the event of termination of employment, either voluntary or
involuntary, any loans made to such officers must be repaid at the time of such
termination.
50
<PAGE>
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/A are
listed in the "Index of Exhibits" on the page following the signature page
hereof.
REPORTS ON FORM 8-K.
No Reports on Form 8-K were filed during the fiscal year ended December 31,
1998. The following Reports on Form 8-K have been filed through December 1,
1999.
Report on Form 8-K as filed with the SEC on May 24, 1999 in connection with the
acquisition of Paramount.
Report on Form 8-K as filed with the SEC on September 28, 1999 in connection
with the acquisition of certain assets of Talidan by Westshire.
Report on Form 8-K/A as filed with the SEC on October 13, 1999 in connection
with the change in the Company's certifying accountant.
Report on Form 8-K/A as filed with the SEC on October 22, 1999 in connection
with a letter from Grant Thornton LLP to the SEC dated October 15, 1999.
Report on Form 8-K/A as filed with the SEC on October 25, 1999 in connection
with a letter from Grant Thornton LLP to the SEC dated October 15, 1999.
51
<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: January 25, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ E. DAVID GABLE Chairman of the Board and Director January 25, 2000
- --------------------------------------
E. David Gable
President, Chief Executive Officer and January 25, 2000
/s/ LOWELL FARKAS Director
- --------------------------------------
Lowell Farkas
/s/ BARRY N. HUNT Director January 25, 2000
- --------------------------------------
Barry N. Hunt
January 25, 2000
Director
- --------------------------------------
Adnan Khan
/s/ WALT NAWROCKI Director January 25, 2000
- --------------------------------------
Walt Nawrocki
/s/ ALLAN JAY KOVITZ Director January 25, 2000
- --------------------------------------
Allan Jay Kovitz
Vice President, Corporate Secretary and January 25, 2000
/s/ RICHARD GREENE Acting Chief Financial Officer
- --------------------------------------
Richard Greene
</TABLE>
52
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Exhibit Description
- ----------- --------------------
3.1 Articles of Incorporation, as amended, (filed as Exhibit 3.1
to the Corporation's form 10-KSB, filed with the Commission on
April 27, 1999 and incorporated by reference herein).
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 as Exhibit 10.3 to the Corporation's form
10-KSB, filed with the Commission on April 27, 1999 and
incorporated by reference herein).
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).
53
<PAGE>
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).
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
54
<PAGE>
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).
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 as Exhibit
10.24 to the Corporation's form 10-KSB, filed with the
Commission on April 27, 1999 and incorporated by reference
herein.)
10.25 Employment Agreement between Paramount International
Telecommunications, Inc. and Michael Eberle, (filed as Exhibit
10.25 to the Corporation's form 10-KSB, filed with the
Commission on April 27, 1999 and incorporated by reference
herein.)
10.26 Agreement of Sale by and between Talidan Limited and Westshire
Trading, Inc.
10.27 Agreement between the Corporation and Bristol Capital, LLC
dated February 27, 1997 in connection with payment of a
finders fee.
10.28 Termination and Consulting Agreement between the Corporation
and Bennett H, Goldstein dated September 30, 1999.
10.29 Loan Agreement between Carnegie and American Champion
Entertainment dated June 25, 1999.
10.30 Letter of Intent between the Corporation and R.G.G.
Communications, Inc. dated April 1, 1999.
10.31 Sublease of The Phone Stop dated May 14, 1999 and underlying
Lease as amended, between American Telecommunications &
Computer Inc. and Korman/Lederer Management Co. dated May 13,
1999.
10.32 Lease Agreement between The Equitable Life Assurance Society
of the United States and the Harbour Financial Mortgage
Corporation t/a New America
55
<PAGE>
Financial.
10.33 Lease Termination Agreement between the Corporation and Centre
1000 Limited Partnership dated as of October 1, 1999.
10.34 Services Agreement between Anthony Redfern and Talidan dated
as of September 1, 1997.
16.1 Company Statement on change of Certifying Accountant, filed as
an Exhibit to Form 8-K on September 28, 1999 and incorporated
herein by reference thereto.
16.2 Letter on change of Certifying Accountant, filed as Exhibit 16
to Form 8-K/A filed on October 13, 1999 and incorporated
herein by reference thereto.
16.3 Letter on change of Certifying Accountant, filed as Exhibit 16
to Form 8-K/A filed on October 22, 1999 and incorporated
herein by reference thereto.
16.4 Letter on change of Certifying Accountant, filed as Exhibit 16
to Form 8-K/A filed on October 25, 1999 and incorporated
herein by reference thereto.
21.1 Subsidiaries of the Registrant, (filed as Exhibit 21.1 to the
Corporation's form 10-KSB, filed with the Commission on April
27, 1999 and incorporated by reference herein.)
27.1 Financial Data Schedule is filed electronically herewith. via
EDGAR.
99.1 Company Public Statement, dated October 23, 1999, responding
to allegations of Grant Thornton LLP.
99.2 Resignation Letter of Director Richard M. Cohen, dated
September 24, 1999
99.3 Resignation Letter of Director Stuart Agranoff, dated
September, 1999.
99.4 Stipulation filed with the United District Court for the
Northern District of Maryland on September 14, 1999 with
respect to G. William Higbee in connection with Carnegie v.
Kelley Allen, Ark Capital Inc., Indianhead and G. William
Higbee.
56
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2 - F- 3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4 - F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) F-6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
CARNEGIE INTERNATIONAL CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of Carnegie
International Corporation and Subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for the year then ended. 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 audit.
The consolidated financial statements of Carnegie International Corporation and
Subsidiaries as of December 31, 1997 were audited by other auditors whose report
dated July 29, 1998, restated on April 22, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carnegie
International Corporation and Subsidiaries as of December 31, 1998, and the
results of their operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO
Certified Public Accountants
New York, New York
December 14, 1999
F-1
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
CURRENT ASSETS ---- ----
<S> <C> <C>
Cash and cash equivalents $ 837,649 $ 226,422
Restricted cash - 400,000
Accounts receivable, net of allowance for
doubtful accounts of $48,000 and $0 699,688 761,464
Due from former subsidiaries 1,568,937 -
Loans receivable 1,058,224 10,200
Inventory 145,128 32,575
Prepaid expenses 56,589 24,620
Refundable income taxes - 12,279
--------- ---------
Total current assets 4,366,215 1,467,560
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization of
$162,506 and $102,042 901,423 471,114
SOFTWARE DEVELOPMENT COSTS, less accumulated
amortization of $156,263 and $0 5,671,174 6,664,953
OTHER ASSETS
Intangibles, less accumulated amortization of
$193,249 and $190,797 3,114,119 10,805,094
Due from related parties 51,986 301,201
Security deposits and other assets 50,756 109,047
------------ ------------
TOTAL ASSETS $ 14,155,673 $ 19,818,969
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY -------------- -------------
CURRENT LIABILITIES
<S> <C> <C>
Notes payable $ 206,951 $ 623,268
Current maturities of long-term debt 1,203,675 969,714
Current maturities of notes payable to stockholders and affiliates 259,898 185,000
Accounts payable and accrued expenses 2,596,448 1,274,064
Deferred revenue 75,043 -
------------- -------------
Total current liabilities 4,342,015 3,052,046
LONG-TERM LIABILITIES
Long-term debt, less current maturities 277,487 169,612
Long-term debt to stockholders and affiliates 603,430 -
Put option obligation - 3,756,574
------------- -------------
TOTAL LIABILITIES 5,222,932 6,978,232
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, B, E and F, $1 par value; 40,000,000
authorized shares; 274,100 issued at December 31, 1998,
none issued at December 31, 1997 274,100 -
Common stock, no par with a stated value of $0.01;
110,000,000 shares authorized; 55,796,154 issued
and 53,018,135 outstanding at December 31, 1998
and 38,835,486 issued and outstanding at
December 31, 1997 557,961 388,355
Additional paid-in capital 23,949,926 14,732,345
Accumulated deficit (14,563,882) ( 998,963)
Foreign currency translation adjustment ( 4,364) -
---------------- -------------------
10,213,741 14,121,737
Less treasury stock at cost (2,778,019 shares) ( 1,281,000) ( 1,281,000)
------------- -------------
8,932,741 12,840,737
-------------- -------------
$ 14,155,673 $ 19,818,969
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-------------------
1998 1997
------------ ------------
REVENUE
Operating $ 7,179,900 $ 3,245,810
Sale of service contracts 122,117 3,700,000
------------ ------------
Total revenue 7,302,017 6,945,810
COST OF SALES 2,950,232 1,589,925
------------ ------------
GROSS PROFIT 4,351,785 5,355,885
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 11,029,785 3,571,021
Impairment Expense 8,176,469 -
Depreciation and amortization 993,764 248,442
------------ ------------
Total operating expenses 20,200,018 3,819,463
------------ ------------
INCOME (LOSS) FROM OPERATIONS (15,848,233) 1,536,422
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense ( 227,081) ( 49,417)
Interest income 229,112 16,834
Other income 681,367 -
Gain on sale of subsidiaries 1,612,195 -
------------ ------------
Total other income (expense) 2,295,593 ( 32,583)
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (13,552,640) 1,503,839
INCOME TAXES (BENEFIT) 12,279 ( 12,279)
------------ ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (13,564,919) 1,516,118
LOSS FROM OPERATION OF TIMECAST - ( 100,330)
------------ ------------
NET INCOME (LOSS) $(13,564,919) $ 1,415,788
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-------------------
1998 1997
---- ----
EARNINGS (LOSS) PER SHARE
BASIC:
CONTINUING OPERATIONS $ (.30) $ 0.07
DISCONTINUED OPERATIONS - (0.01)
---------------- ----------------
NET INCOME $ (.30) $ 0.06
================ ===============
DILUTED:
CONTINUING OPERATIONS $ (.30) $ 0.06
DISCONTINUED OPERATIONS - -
---------------- ---------------
NET INCOME $ (.30) $ 0.06
================ ===============
WEIGHTED AVERAGE COMMON SHARES
BASIC 44,579,804 22,164,134
DILUTED 44,579,804 24,418,814
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended
December 31,
--------------------
1998 1997
---- ----
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $(13,564,919) $ 1,415,788
Foreign currency translation adjustment ( 4,364) -
------------ ------------
COMPREHENSIVE INCOME (LOSS) $(13,569,283) $ 1,415,788
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - 16,574,786 $ 165,748 $ 593,413
Net income for the year - - - - -
Spin-off TimeCast - - - - 99,330
Issuance of common stock - - 420,400 4,204 225,337
Shares issued in lieu of compensation - - 2,290,145 22,901 579,291
Shares and warrants issued in connection
with acquisitions - - 19,340,000 193,400 12,923,350
Note payable converted to common stock - - 210,155 2,102 159,124
Affiliates' forgiveness of note payable - - - - 152,500
Purchase of treasury shares - - - - -
---------- ----------- ---------- ---------- -------------
Balance at December 31, 1997 - as restated - - 38,835,486 388,355 14,732,345
Net loss for the year - - - - -
Foreign currency translation adjustment - - - - -
Issuance of common stock - - 9,227,100 92,270 4,190,234
Shares issued in lieu of compensation and
other cases - - 2,179,268 21,793 900,939
Issuance of warrants - - - - 415,132
Notes payable converted to common stock - - 1,358,000 13,580 270,620
Exercise of stock options - - 3,635,500 36,355 1,000,636
Shares issued in connection with acquisitions 274,100 274,100 560,800 5,608 2,440,020
---------- ----------- ---------- ---------- -------------
Balance at December 31, 1998 274,100 $ 274,100 55,796,154 $ 557,961 $ 23,949,926
========== ========== ========== ========== ============
<CAPTION>
Foreign
Currency
Accumulated Translation Treasury Stockholders'
Deficit Adjustment Stock Equity
----------- ---------- ----- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $(2,414,751) $ - $ - $ (1,655,590)
Net income for the year 1,415,788 - - 1,415,788
Spin-off TimeCast - - - 99,330
Issuance of common stock - - - 229,541
Shares issued in lieu of compensation - - - 602,192
Shares and warrants issued in connection
with acquisitions - - - 13,116,750
Note payable converted to common stock - - - 161,226
Affiliates' forgiveness of note payable - - - 152,500
Purchase of treasury shares - - (1,281,000) (1,281,000)
--------------------------------------------- -----------
Balance at December 31, 1997 - as restated ( 998,963) - (1,281,000) 12,840,737
Net loss for the year (13,564,919) - - (13,564,919)
Foreign currency translation adjustment - ( 4,364) - ( 4,364)
Issuance of common stock - - - 4,282,504
Shares issued in lieu of compensation and
other cases - - - 922,732
Issuance of warrants - - - 415,132
Notes payable converted to common stock - - - 284,200
Exercise of stock options - - - 1,036,991
Shares issued in connection with acquisitions - - - 2,719,728
-----------------------------------------------------------------------
Balance at December 31, 1998 $(14,563,882) $( 4,364) $(1,281,000) $ 8,932,741
============ ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES ---- ----
<S> <C> <C>
Net income (loss) $(13,564,919) $ 1,415,788
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 993,764 248,442
Asset impairment loss 8,176,469 -
Gain on sale of subsidiaries ( 1,612,195) -
Sale of software and distribution rights ( 3,756,574) -
Issuance of stock as compensation 922,732 602,192
Issuance of stock options 1,036,991 -
Accounts receivable - trade 61,776 ( 40,544)
Accounts receivable - former subsidiary (1,568,937)
Changes in assets and liabilities
Due from affiliates 249,215 ( 513,194)
Inventory ( 112,553) ( 20,582)
Prepaid expenses 31,969 ( 24,248)
Refundable income taxes 12,279 ( 12,279)
Other assets 58,291 61,112
Accounts payable and accrued expenses 1,322,384 640,047
Deferred revenue 75,043 -
Others - net 344,291 -
------------- ------------------
Net cash provided by (used in) operating activities ( 7,329,974) 2,356,734
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash (purchase) proceeds 400,000 ( 400,000)
Purchase of property and equipment ( 430,309) ( 170,008)
Capitalized software - net 840,516
Loans receivable ( 1,058,224) -
Notes receivable 10,200 ( 10,200)
Acquisition costs ( 220,759) ( 530,628)
------------- ------------
Net cash used in investing activities ( 458,576) ( 1,110,836)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of warrants 415,132 (1,454,033)
Shares issued in connection with acquisitions 2,719,728 -
Notes payable converted to common stock 284,200 -
Payments on notes payable ( 1,323,577) -
Payments on capital leases ( 1,271) -
Proceeds from issuance of notes payable 1,927,425 990,568
Purchase of treasury shares ( 800,000)
Sale of common stock 4,282,504 229,541
Proceeds from sale of subsidiaries 100,000 -
------------- -----------------
Net cash provided by (used in) financing activities 8,404,141 (1,033,924)
------------ -----------
Effects of exchange rates on cash ( 4,364) -
--------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 611,227 211,974
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 226,422 14,448
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 837,649 $ 226,422
============ ===========
SUPPLEMENTAL INFORMATION:
Interest paid 227,081 -
============ ================
Income taxes paid - -
============ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
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 530,000 shares of common stock and
notes totaling $904,962, representing an aggregate price of $3,534,690;
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, respectively 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 $15,020,387, 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; and
o spun-off a subsidiary with a deficit, which increased stockholders'
equity by $99,330.
o a stockholder also relieved the Company of an obligation to make payment
on a note payable in the amount of $152,500.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Organization and Basis of Presentation
CARNEGIE INTERNATIONAL CORPORATION (formerly A&W Corporation,
Inc., which discontinued operations in September, 1985 (the
"Company" or "Carnegie") was incorporated under the laws of
Colorado in June 1996.
During May 1996, Carnegie 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 to a stock purchase agreement with
Grandname, Ltd. For accounting purposes, this transaction was
reflected as a reverse acquisition with DAR and ECAC as the
acquirers.
The accompanying financial statements include the accounts of
Carnegie and its wholly owned subsidiaries:
1) Talidan Limited ("Talidan"), a British Virgin Islands
corporation;
2) Profit Through Telecommunications (Europe) Limited
("PTT"), a United Kingdom corporation;
3) Talidan USA t/a Victoria Station ("Victoria"), a
Florida corporation;
4) Harbor City Corporation t/a ACC Telecom ("ACC
Telecom"), a Maryland corporation;
5) Voice Quest, Inc. ("Voice Quest"), a Florida
corporation;
6) RomNet Support Services, Inc. ("RomNet"), a Maryland
corporation;
7) Carnegie Communications, Inc. ("CCI"), a Maryland
corporation;
8) ECAC Europe ("ECAC Europe"), a United Kingdom
corporation;
9) Electronic Card Processing, Inc. ("ECPI"), a Maryland
corporation;
10) Electronic Card Acceptance Corporation ("ECAC"), a
Virginia corporation; and
11) 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
May 18, 1998 for ACC Telecom, November 20, 1998 for Voice
Quest, and December 1, 1998 for RomNet have been included in
the consolidated financial statements.
(See note 3).
F-10
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a) Basis of Presentation (Continued)
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
included in the consolidated financial statements.
(See note 3).
ECAC, ECAC Europe, TimeCast and certain assets of Talidan were
disposed of as of December 31, 1998 and 1997. (See note 4).
All significant intercompany accounts and transactions have
been eliminated in consolidation.
b) Business Operations
The Company operates primarily in the United States, the
United Kingdom and South America. During 1998, on the basis of
revenue, the Company's business operations were:
28% in the installation and servicing of telephone
systems;
28% in the sale of software and distribution rights;
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 are as follows:
CORPORATE
Carnegie provides management services to its wholly owned
subsidiaries. Carnegie has no direct domestic operating assets
or business activities.
F-11
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Business Operations (Continued)
TELECOMMUNICATIONS
Talidan markets telephone service through international and
local premium (0900) contracts for entertainment services.
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.
ACC Telecom sells, installs and services telephone systems,
voice mail integration, computer technology, Local Area
Network ("LAN") operating systems and cable media in the
Washington, DC, Maryland and Northern Virginia areas.
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.
RomNet is engaged in the business of providing technical
support services for software and hardware, beta testing
services, and Internet support and services.
RESTAURANT
Victoria operates a restaurant in Miami, Florida.
FINANCIAL SERVICES
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 which in turn pays a financial institution for
service. When the portfolio of contracts approximated 1,000 or
more, 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.
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.
F-12
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Business Operations (Continued)
OTHER
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.
c) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
periods presented. Actual results could differ from those
estimates.
d) 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 based on the number of call minutes
of calls that are processed after adjustment for estimated
uncollectible calls, based upon historical information. A
provision for bad debts is recorded when adverse factors with
respect to collection are evident, including chargebacks.
Chargebacks represent credits for service charges that the
network provided and has been unable to collect from the
customer.
PTT recognizes product revenues upon shipment to the customer.
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.
F-13
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Revenue Recognition (Continued)
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.
e) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
f) Concentration of Credit Risk
The Company places its cash in what it believes to be
credit-worthy financial institutions. However, cash balances
exceeded FDIC insured levels at various times during the year.
g) 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.
h) 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.
i) Property and Equipment
Property and equipment is stated at cost. 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.
F-14
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Property and Equipment (Continued)
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.
j) 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 three years, commencing with product release. There
was no amortization in 1997, as none of the software had been
released. The Company began amortizing software development
costs on December 1, 1998, the date that the software was
released.
k) Research and Development
Cost incurred in research and development activities are
charged to expense as incurred.
l) Intangibles
Intangibles consist of goodwill, covenants not to compete,
assembled workforce and customer lists. Goodwill represent
costs in excess of net assets acquired in connection with
businesses acquired. Goodwill is being amortized to operations
over 15 years. Noncompete agreements are being amortized over
the term of the contracts, on a straight-line basis. Assembled
workforce is being amortized over a period of three years on a
straight line basis. Customer lists are being amortized over a
period between 2-7 years. Should events or circumstances occur
subsequent to the acquisition of a business which bring into
question the realizable value or impairment of the related
goodwill, the Company will evaluate the remaining useful life
and balance of goodwill and make adjustments, if required. The
Company's principal consideration in determining an impairment
includes the strategic benefit to the Company of the
particular assets as measured by undiscounted current and
expected future operating income of that specified groups of
assets and expected undiscounted future cash flows. Should an
impairment be identified, a loss would be reported to the
extent that the carrying value of the related goodwill exceeds
the fair value of that goodwill as determined by valuation
techniques available in the circumstances.
F-15
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
m) Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". The
liability method requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the reported
amount of assets and liabilities and their tax basis.
n) Offering Costs
Offering costs consist primarily of professional fees. These
costs are charged against the proceeds of the sale of common
stock in the periods in which they occur.
o) Advertising Costs
Advertising costs are expensed as incurred and included in
selling, general and administrative expenses. For the years
ended December 31, 1998 and 1997, advertising expense amounted
to $1,164,698 and $359,966, respectively.
p) Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and income
taxes payable approximate fair value due to the relatively
short maturity of these instruments. The fair value of
long-term borrowings was determined based upon interest rates
currently available to the Company for borrowings with similar
terms. The fair value of long-term approximates the carry
amounts as of December 31, 1998 and 1997.
q) Long-lived Assets
Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances
indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be
held and used are recognized based on the fair value of the
assets and long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
r) Translation of Foreign Currency
The Company translates the foreign currency financial
statements of its United Kingdom subsidiary in accordance with
the requirements of SFAS No. 52, "Foreign Currency
Translation". Assets and liabilities are translated at current
exchange rates, and related revenue and expenses are
translated at average exchange rates in effect during the
period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
operations.
F-16
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
s) Stock-Based Compensation
The Company has adopted the intrinsic value method of
accounting for stock-based compensation in accordance with
Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations.
t) Earnings Per Share
SFAS No. 128, "Earnings Per Share" requires presentation of
basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS").
The computation of basic earnings per share is computed by
dividing earnings available to common stockholders by the
weighted average number of outstanding common shares during
the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period. The computation
of diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an
anti-dilutive effect on losses.
The shares used in the computation of earnings per share were
as follows:
December 31,
--------------------
1998 1997
---------- ----------
Basic 44,579,804 22,164,134
========== ==========
Diluted 44,579,804 24,418,814
========== ==========
u) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its
components in the financial statements.
v) Impact of Year 2000 Issue
During the year ended December 31, 1998, the Company conducted
an assessment of issues related to the Year 2000 and
determined that it was necessary to modify or replace portions
of its software in order to ensure that its computer systems
will properly utilize dates beyond December 31, 1999. The
Company completed Year 2000 systems modifications and
conversions in 1999. Costs associated with becoming Year 2000
compliant were not material. At this time, the Company cannot
determine the impact the Year 2000 will have on its key
customers or suppliers. If the Company's customers or
suppliers don't convert their systems to become Year 2000
compliant, the Company may be adversely impacted. The Company
is addressing these risks in order to reduce the impact on the
Company.
F-17
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
w) Reclassification
Certain prior year amounts have been reclassified to conform
with current year presentation.
x) Recent Accounting Pronouncements
In June 1997, SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" was issued, which changes
the way public companies report information about segments.
SFAS No. 131 is based on the selected segment information and
requires quarterly and entity-wide disclosures about products
and services, major customers, and the material countries in
which the entity holds assets and reports revenue. This
statement is effective for the Company's 1998 fiscal year.
SFAS No. 132, "Employers' Disclosures about Pension and Other
Post Employment Benefits," was issued in February 1998 and
specifies amended disclosure requirements regarding such
obligations. SFAS No. 132 does not effect the Company as of
December 31, 1998.
In March 1998, Statement of Position No. 98-1 was issued,
which specifies the appropriate accounting for costs incurred
to develop or obtain computer software for internal use. The
new pronouncement provides guidance on which costs should be
capitalized, and over what period such costs should be
amortized and what disclosures should be made regarding such
costs. This pronouncement is effective for fiscal years
beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted.
The Company believes that it is already in substantial
compliance with the accounting requirements as set forth in
this new pronouncement, and therefore believes that adoption
will not have a material effect on financial condition or
operating results.
In April 1998, Statement of Position No. 98-5 was issued which
requires that companies write-off defined previously
capitalized start-up costs including organization costs and
expense future start-up costs as incurred. Adoption of this
statement does not have an effect on financial condition or
operating results.
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities". This new
pronouncement requires that certain derivative instruments be
recognized in balance sheets at fair value and for changes in
fair value to be recognized in operations.
F-18
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
x) Recent Accounting Pronouncements (Continued)
Additional guidance is also provided to determine when hedge
accounting treatment is appropriate whereby hedging gains and
losses are offset by losses and gains related directly to the
hedged item. While the standard, as amended, must be adopted
in the fiscal year beginning after June 15, 2000, its impact
on the Company's consolidated financial statements is not
expected to be material as the Company has not historically
used derivative and hedge instruments.
NOTE 2 - RESTATEMENT AND CORRECTION
The Company has restated its financial statements for the year
ended December 31, 1997 as a result of the following:
The Company has revalued shares issued in 1997 based on
revised estimates of the fair market value of the stock. 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.
The 1998 financial statements reflect an additional correction
of the fair value assigned to the stock issued in certain 1997
acquisitions.
The effect of this correction is to decrease goodwill and
capitalized software costs by $912,437 and $1,284,350,
respectively. The effect of this correction on 1997 operations
is immaterial.
NOTE 3 - ACQUISITIONS
During 1998, the Company made the following acquisitions:
ACC Telecom
On May 18, 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 of 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-19
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - ACQUISITIONS (Continued)
Voice Quest
On November 20, 1998, the Company acquired all of the
outstanding stock of Voice Quest, a Florida corporation, for
$506,985. Voice Quest is involved in the development of voice
activated software applications that are compatible with the
Company's MAVIS(TM) product. Consideration consisted of 21,600
shares of Series E Preferred Stock that is convertible into
the Company's 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 $700,000. 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 of $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
$577,890. This acquisition was accounted for as a purchase.
The fair value of assets acquired and liabilities assumed
during 1998 are summarized as follows:
<TABLE>
<CAPTION>
ACC Telecom Voice Quest Rom Net
----------- ------------ ------------
<S> <C> <C> <C>
Current assets $ 773,303 $ 7,632 $ 42,761
Property and equipment 163,935 14,012 94,200
Other assets 727,259 379 428,552
Goodwill 1,376,591 489,228 712,377
Liabilities ( 573,233) ( 4,266) ( 577,890)
----------- ----------- -----------
Purchase price $ 2,467,855 $ 506,985 $ 700,000
=========== =========== ===========
</TABLE>
F-20
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - ACQUISITIONS (Continued)
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 $4,670,000 and $10,006,637,
respectively. The consideration was comprised of 19,340,000
shares of the Company's common stock, valued at $9,670,000;
warrants for five million shares, exercisable at 50% of the
average market price for the 30 days prior to exercise, valued
at $1,250,063; and options for shares valued at $5 million,
exercisable at $0.001 per share, with a related put option,
valued at $3,756,574. None of the parties are related. The
consideration paid to the parties associated with the
transaction are as follows:
<TABLE>
<CAPTION>
Former Former
Stockholders Stockholders
Tiller OF Talidan oF PTT Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Common Stock $ 3,447,778 $ 4,000,000 $ 2,222,222 $ 9,670,000
Warrants 625,032 625,031 - 1,250,063
Stock Options 2,817,430 939,144 - 3,756,574
----------- ----------- ----------- -------------
Total $ 6,890,240 $ 5,564,175 $ 2,222,222 $ 14,676,637
=========== =========== =========== ============
</TABLE>
The value of the consideration issued in the transaction was
determined as follows:
Common stock was valued at $0.50 per share, which represents
a one-third discount to the market price of $0.75 on the date
of the transaction. The Company analyzed third party sales to
unrelated third parties at the time of the transaction,
evaluated the appropriate discount to reflect the
restrictions on the value of the common stock issued, and
considered whether a further discount related to blockage
would be appropriate. The Company concluded that based on the
average of the weighted average cash sales and the weighted
average sales in the OTC market, a discount of $0.14 or
approximately 19% from the quoted market price was
appropriate. The remaining $0.11 discount or approximately
15% was taken to reflect the resale restrictions on the stock
issued. No discount was taken to reflect the large amount of
stock issued because the market price had declined from
approximately $1.00 to $0.75 in the month prior to the
transaction, which the Company believes reflects the market
response to the disclosure to the public of the transaction.
The warrants were valued by an independent appraiser using a
Monte Carlo simulation. The warrant value equals $0.25 each
or one-half the value of the common stock on the date of
issue.
The stock options were valued at the present value of the $5
million guaranteed redemption value discounted at 10% over
the 3 year redemption period.
F-21
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - ACQUISITIONS (Continued)
Of the total shares of common stock issued and outstanding
after taking into consideration the above transaction, 28.3%,
25.0%, and 9.4% of the outstanding common stock of the
Company was held by Tiller, the Former stockholders of
Talidan, and the Former stockholders of PTT, respectively.
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).
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 on August
18, 1997.
The fair value of assets acquired and liabilities assumed
during 1997 are summarized as follows:
<TABLE>
<CAPTION>
PTT Talidan Victoria
----------- ------------- -----------
<S> <C> <C> <C>
Current assets $ 16,000 $ 575,379 $ -
Property and equipment 32,000 - 225,000
Software 5,367,600 - -
Other assets - 1,003,341 75,000
Goodwill - 8,649,076 43,750
Liabilities ( 745,600) ( 221,159) -
----------- ------------- -----------
Purchase price $ 4,670,000 $ 10,006,637 $ 343,750
=========== ============ ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenue $ 7,511,441 $ 11,180,677
============= ============
Income (loss) from continuing operations (13,618,508) 2,304,810
Loss from discontinued operations - ( 100,330)
------------- ------------
Net income (loss) $ (13,618,508) $ 2,204,480
============= ============
</TABLE>
F-22
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - ACQUISITIONS (Continued)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
Earnings (loss) per common share: ---- ----
Basic
<S> <C> <C> <C>
Continuing operations $ (.30) $ 0.06
Discontinued operations - -
--------------- ----------------
Net income (loss) $ (.30) $ 0.06
=============== ================
Diluted
Continuing operations $ (.30) $ 0.05
Discontinued operations - -
--------------- ---------------
Net income (loss) $ (.30) $ 0.05
=============== ===============
</TABLE>
In management's opinion, the unaudited pro forma combined
results of operations are not necessarily 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 4 - DISPOSITIONS
ECAC
On January 30, 1998, the Company entered into an agreement to
sell all of the outstanding shares of ECAC, its credit card
processing subsidiary. Consideration for the sale was $100,000
paid at closing. The Company realized a gain on sale of the
stock of approximately $1.4 million. At the time of the sale
the liabilities of ECAC exceeded its assets by approximately
$1.3 million. Accordingly the total of the sales proceeds and
the underlying net asset value of the company sold represent
the gain reported.
At the time of sale, ECAC owed the Company approximately $1.6
million 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% per annum on the
obligation and is classified on the balance sheet as Accounts
Receivable - former subsidiaries.
F-23
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 - DISPOSITIONS (Continued)
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.
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. Revenue 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% per annum, that
matures in June 1999. A gain of $250,000 has been recorded on
the sale. The note has not been paid and a bad debt expense of
$250,000 has been recorded.
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.
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)
===========
F-24
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 - DISPOSITIONS (Continued)
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 a certain consultant to the
Company from its covenant not to compete with the Company.
Operations of the Print Media Business is summarized as
follows:
1998 1997
------------- -------------
Revenue $ 263,257 $ 1,650,682
============ ===========
Cost of sales $ 210,606 $ 1,320,546
============ ===========
Operating expenses $ 71,684 $ 74,064
============= =============
The goodwill written off on the sale of the print media
business was based on an allocation of print media income
compared to the total income of Talidan. The resulting
percentage of 17% was used to allocate goodwill in the amount
of $1,380,572 to the gain on the sale of the print media
portion of the business. The Company also wrote off the net
book value in the amount of $312,500 of the covenant not to
compete with one consultant with whom the contract was
terminated.
Payments on the $2,340,000 note are due quarterly commencing
on December 22, 1998 in the amount of $585,000 plus accrued
interest. The Company received a portion of the first payment
on October 26, 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 $1,335,000 of principal and
interest had been collected on the note and the collectible
balance at December 31, 1998 has been adjusted to a principal
amount of $1,032,724. 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.
F-25
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - RESTRICTED CASH
As of 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.
NOTE 6 - DUE FROM FORMER SUBSIDIARIES
Amounts due from former subsidiaries consist of the following
at December 31, 1998:
ECAC (See Note 4) $ 1,512,195
Timecast 56,742
--------------
$ 1,568,937
NOTE 7 - DUE FROM RELATED PARTIES
The Company made advances to and has receivables from current
and former officers, employees and consultants that amount to
$51,986 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 8 - LOANS RECEIVABLE
Loans receivable consist of the following at December 31,
1998 1997
----------- -----------
Talidan asset sale $ 1,058,224 $ -
Other - 10,200
----------- -----------
$ 1,058,224 $ 10,200
=========== ===========
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
------------ --------------
<S> <C> <C>
Vehicles $ 202,594 $ 4,170
Computer equipment and software 431,969 176,026
Furniture and office equipment 275,188 231,160
Equipment 114,178 -
Leasehold improvements 40,000 40,000
Equipment held for lease - 121,800
------------ --------------
1,063,929 573,156
Less: Accumulated depreciation 162,506 102,042
------------ --------------
Property and equipment, net $ 901,423 $ 471,114
============ ==============
</TABLE>
Depreciation expense for the years ended December 31, 1998
and 1997 was $60,464 and $57,645, respectively.
F-26
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - INTANGIBLES
Intangibles are summarized as follows as of:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
------------ -------------
<S> <C> <C>
Goodwill $ 2,082,490 $ 9,990,891
Acquisition cost 73,526
Covenants not to compete 5,000 1,005,000
Assembled workforce 466,242 -
Customer lists 680,943 -
------------ ------------
3,308,201 10,995,891
Less: accumulated amortization expense 194,082 190,797
------------ ------------
Total intangibles $ 3,114,119 $ 10,805,094
============ ============
</TABLE>
The Company determined the fair value assets and liabilities
acquired as follows:
The value of the assembled work force was determined based on
the salary cost. Fringe benefits, training time, and
recruiting costs that the Company would expect to incur over
the six month period, management estimates that it would take
to recruit and assemble the necessary personnel in order to
conduct operations.
The value of the customer lists is based on the projection of
discounted cash flows from sales made to customers of the
Company over the average life of the customers.
The following describes the allocations of the purchase price
related to intangibles for the companies acquired over the
past two years.
ACC TELECOM
Amount Period
----------- --------
Goodwill $ 1,376,591 15 years
Customer List 252,391 7 years
Assembled Workforce 466,242 3 years
-----------
Total $ 2,095,224
===========
ACC Telcom is a telephone interconnect company selling
telephone systems to small businesses. ACC Telecom distributes
products manufactured by others and purchases these products
directly from the manufacturers and from distributors.
ACC Telecom's customers do not replace telephone systems with
any regularity. However, additional products are sold to
existing customers and service agreements are sold at the time
of the original sale of equipment. Revenue is recognized over
the term of the contract. The value of the customer list,
based on discounted cash flow derived from sales other than
system sales, was determined by management to be $252,391 and
is being amortized over 7 years, which is the average
historical business life of a customer of ACC.
F-27
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - INTANGIBLES (Continued)
ACC Telecom had 27 employees at the time it was acquired.
Other than the shareholder/operator, the employees consisted
of sales personnel, service technicians, service helpers and
general office personnel. Sales and service technicians
possess certain levels of technical expertise. Similar skills
are found in sales and service personnel in the computer
industry. Often these personnel will migrate from one industry
to another. Nevertheless, the Company believes there is value
to the assembled workforce. The value arrived at was based on
existing salary levels, recruiting costs, normal turnover, and
training time. The total tangible cost assigned to the
assembled workforce is $466,242. The cost is being amortized
over three years.
There are not other identifiable intangibles. ACC Telecom does
not have any contracts with any of its suppliers. ACC Telecom
does not own any patents nor does it own any proprietary
technology.
PTT
PTT had no identifiable intangible assets or goodwill.
VOICE QUEST
Voice Quest has no identifiable intangible assets. The
goodwill associated with the acquisition of Voice Quest of
$489,228 is being amortized over fifteen years. Voice Quest
does not have any contracts with any of its suppliers. Voice
Quest does not own any patents or any proprietary technology
that has reached the point of commercial feasibility.
The Company determined complete impairment of goodwill of
Voice Quest at December 31, 1998 and accordingly, wrote-off
this asset to operations.
ROMNET
Amount Period
------------ --------
Goodwill $ 712,377 15 years
Customer List 428,552 2 years
-----------
Total $ 1,140,929
===========
The value of the customer list, based on historical income
derived from continuing customers, was determined by
management to be $428,552, using a discounted cash flow
approach. The customer list is being amortized over 2 years
based on the expected business life of a customer of the
Company. RomNet does not have any contracts with any of its
suppliers. RomNet does not own any patents any proprietary
technology.
F-28
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - INTANGIBLES (Continued)
VICTORIA STATION
Victoria Station is a family style restaurant. It owns
furniture and fixtures and kitchen equipment. The company does
not have any contracts, patents, technology or other
identifiable intangible assets. Goodwill of $20,000 is being
amortized over fifteen years.
TALIDAN
The business of Talidan has four distinct operational
elements, all of which contribute to the generation of
revenue. They are (a) television (and formerly print)
advertising and promotion, (b) agreements with reliable
telephone switch operators, (c) telephone carriers that have
the ability to record, track and bill "900" and long distance
telephone calls and (d) access to financial resources to buy
media and place advertising. Elements (a) and (b) were
provided by consultants to the Company. Elements (c) and (d)
were an inherent part of the nature of the business and were
totally outside of the control of any of the consultants. The
tangible net assets acquired on September 29, 1997 amounted to
$357,561. The acquisition included the execution of covenants
not to compete with two consultants that were providing
service to Talidan. The consulting agreements were for a
period of one year and may be canceled by either party on one
year's notice. These consultants were:
Anthony Redfern - Contacts and service arrangements
with switch operators
Matys Media, Inc. Print media advertising and promotion
Management allocated the purchase price of Talidan as follows:
Amount Period
Covenant Redfern $ 500,000 2 Years
Covenant Matys Media 500,000 2 Years
Goodwill (includes net
liabilities assumed) 8,649,076 15 Years
------------
Total $ 9,649,076
===========
The value assigned to the covenants represents additional
imputed compensation cost based on the historical compensation
of the consultants over the amounts set forth in the
consultants' service agreements. The covenants are being
amortized over two years, which considers the notice provision
described above.
F-29
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - INTANGIBLES (Continued)
Talidan does not have patents, trademarks, technology
contracts or other identifiable intangibles.
The Company determined complete impairment of the intangible
assets of Talidan at December 31, 1998 and accordingly,
wrote-off these assets to operations.
NOTE 11 - NOTES PAYABLE
Notes payable consist of the following at:
December 31,
------------
1998 1997
------------ -----------
Unaffiliated individuals $ - $ 366,155
Affiliated Individuals - 257,113
First Union National Bank 57,000 -
Cambridge Trust Company 149,951 -
------------ -----------
$ 206,951 $ 623,268
============ ===========
The Company has a $100,000 demand line-of-credit with First
Union National Bank. Interest is due monthly at a rate of 2%
over the prime rate (effective rate of 9.75% 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 10.5% to 12.75%
per annum.
Notes payable to unaffiliated individuals have outstanding
balances aggregating $366,155 at December 31, 1997. The notes
are due on demand and accrue interest at rates that vary from
10% to 20% per annum.
The Company has other notes payable to affiliated individuals
and entities with aggregate outstanding balances of $257,113
at December 31, 1997. These notes are due on demand and accrue
interest at rates that vary from 10% to 12% per annum.
F-30
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 12 - LONG-TERM DEBT
Long-term debt consists of the following as of:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
------------ ----------
<S> <C> <C>
Lloyds Bank $ 18,437 $ -
Former shareholder of PTT 91,098 -
CNI 320,586 -
Estate of former owner of ECAC 126,000 151,000
First Marine Bank - Auto loans 85,021 -
Union Planter Bank 160,333 -
Preferred Investments 168,612 -
Preferred Investments - Trident 180,787 -
Sixteen Six, Inc. 171,600 -
Various Capital Leases 116,811 -
Strongput International, Inc. - 180,484
Various Auto Loans 11,877 -
Miscellaneous 30,000 -
Convertible Note - 250,000
Envoy Medical Corporation - 109,786
First Mariner Bank - 398,665
Security Financial and Investment Corporation - 49,391
----------- -----------
1,481,162 1,139,326
Less: current maturities 1,203,675 969,714
----------- -----------
$ 277,487 $ 169,612
=========== ===========
</TABLE>
The Company is obligated on a $43,233 note to Lloyds Bank. The
note bears interest at 9.99% and is payable in equal monthly
installments of $918. This working capital loan is guaranteed
by the Department of Trade and Industry, a branch of the
United Kingdom. A balance of $18,437 was outstanding at
December 31, 1998.
The Company is obligated under several notes payable due to
former shareholders of PTT. The notes are payable on demand,
non-interest bearing and had a balance due of $91,098 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 $5,714.
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
notes are due on demand and accrue interest from 12% to 25%
per annum.
F-31
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 12 - LONG-TERM DEBT (Continued)
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. The Company has
accrued an additional $130,653 at December 31, 1998 for a
disputed amount on this note.
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% per annum and are payable in monthly
installments totaling $1,938, including interest through
October 2003. The total balance of these notes was $85,021 at
December 31, 1998.
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 several notes to Preferred
Investments, Limited totaling $168,612 at December 31, 1998.
The notes bear interest ranging from 8% to 12% and have
maturities ranging from 60 to 180 days.
The Company is obligated to Trident, Ltd. on a note of
$180,787 at December 31, 1998. The note bears interest at 18%
per annum.
The Company has a note payable to Sixteen Six, Inc. with an
unpaid balance of $171,600 at December 31, 1998. The note is
due on March 15, 1999 and accrues interest at 10% per annum.
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% per
annum.
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.
F-32
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 12 - 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% per annum 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 20% 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.
Scheduled annual maturities of long-term debt as of December
31, 1998 are as follows:
Debt Lease
Year Amount Obligation
------------ ------------ ----------
1999 $ 1,163,345 $ 40,330
2000 63,576 37,688
2001 105,789 24,340
2002 18,735 14,453
2003 12,906 -
----------- ----------
$ 1,364,351 $ 116,811
=========== ==========
The aggregate carrying value of the long-term debt at December
31, 1998 and 1997 approximates market value.
F-33
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES
Notes payable to stockholder and affiliates are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- ----------
<S> <C> <C>
Former shareholder of Victoria $ - $ 185,000
Former shareholders of ACC Telecom 683,298 -
Former shareholders of Voice Quest 107,500 -
Former shareholders of RomNet 72,530 -
----------- ----------
863,328 185,000
Less: current maturities 259,898 185,000
----------- ----------
$ 603,430 $ -
=========== ===========
</TABLE>
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.
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.
In connection with the acquisition of RomNet in December 1998,
the Company assumed certain liabilities owed to a former
shareholder of RomNet. The outstanding balance was $72,530 at
December 31, 1998.
Scheduled annual maturities of these obligations at December
31, 1998 are as follows:
Debt
Year Amount
------ -----------
1999 $ 259,898
2000 184,480
2001 201,564
2002 185,073
2003 32,313
----------
$ 863,328
==========
The aggregate carrying value of the long-term debt at December
31, 1998 approximates market value.
F-34
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following
as of:
December 31,
1998 1997
----------- -----------
Accounts payable $ 1,191,778 $ 1,090,660
Accrued liabilities 1,404,670 183,404
----------- -----------
$ 2,596,448 $ 1,274,064
=========== ===========
NOTE 15 - PUT OPTION/SALE OF DISTRIBUTION RIGHTS
On December 8, 1998, the Company entered into a Distributor
Agreement with Tiller International Limited, whereby, in
exchange for a release on a put option which it had acquired
(see Note 3 - "PTT and Talidan"), the Company appointed and
designated Tiller International Limited as the exclusive
authorized distributor of the MAVIS(TM) software in certain
countries of Eastern Europe.
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: support the distributor by providing it, upon
request, with all reasonable quantities of literature,
catalogs, advertisements, circulars, and 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(TM) software.
The Company was relieved of the put obligation contained in
the option agreement. However, the options were not cancelled
and were subsequently exercised. The amount attributable to
the put feature, $3,107,564, has been credited to equity.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Operating leases
The Company's future minimum annual aggregate rental payments,
for office space, required under operating leases that have
initial or remaining non-cancelable lease terms in excess of
one year are as follows:
1999 $ 496,046
2000 542,813
2001 484,848
2002 400,841
2003 195,895
-------------
$ 2,120,443
=============
Rent expense under operating leases for the year ended
December 31, 1998 and 1997 was approximately $303,449 and
$45,623, respectively.
F-35
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
The Company is also a party to claims and lawsuits arising in
the normal course of operations. Management is of the opinion
that exposure from these claims and lawsuits have either been
provided for or do not have a material effect on the financial
position of the Company at December 31, 1998.
F-36
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
The Company has entered into various employment agreements as
follows:
o A two year agreement commencing May 15, 1997,
providing for an annual salary of $100,000 - $155,000.
The agreement will be extended on the same terms
unless sooner terminated.
o A five year agreement commencing April 8, 1998
providing for an annual salary of $200,000, plus
bonus.
o A five year agreement commencing May 18, 1998
providing for an annual salary of $125,000.
o A five year agreement commencing July 31, 1998
providing for an annual salary of $75,000.
Common Stock Subject to Recission
Certain of the stock issuances of the company during 1996,
1997, and 1998 may not have been in full compliance with the
rules and regulations under the Securities Act and applicable
state securities laws. The Corporation offered to the
purchasers of such stock issuances a right to rescind their
purchases and receive a full refund of their purchase price,
plus interest. No purchaser has elected to rescind. At
December 31, 1997 and 1998, the statute of limitations had not
expired on the shares issued in 1997 and 1998, respectively.
The Company acknowledges that it is possible that the Company
may be subject to regulatory action by federal and state
securities regulatory authorities in connection with such
sales. Management and the Company's counsel believe that the
effect of any possible regulatory action would not have a
materially adverse effect on the financial position and
results of operations of the Company.
No purchaser elected to rescind and the statute of limitations
expired in 1999. Accordingly, these shares have been
classified within permanent equity in these financial
statements.
F-37
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 17 - CONVERTIBLE PREFERRED STOCK
The following Convertible Preferred stock shares were issued
and outstanding as of:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- --------------
<S> <C> <C>
Series A, $1 par value; 200,000 shares authorized 200,000 -
Series E, $1 par value; 21,600 shares authorized 21,600 -
Series F, $1 par value; 52,500 shares authorized 52,500 -
----------- -------------
274,100 -
========== =============
</TABLE>
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 the
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
$1,700,000.
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 greatest of $270,000 worth or 216,600 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
$700,000 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 $316,182.
NOTE 18 - COMMON STOCK
During 1998 and 1997, the Company entered into various
transactions that include 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.
F-39
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 18 - COMMON STOCK (Continued)
Of the 55,796,154 and 38,835,486 common shares issued as of
December 31, 1998 and 1997, respectively, 46,848,462 and
33,003,803 shares are restricted pursuant to the Securities
Act of 1933 as amended, and 8,947,692 and 5,831,683 shares
were issued pursuant to Rule 504 of the Securities Act of 1933
and are exempt from registration
NOTE 19 - TREASURY STOCK
During 1997, the Company acquired 1,700,000 shares of common
stock for $800,000 ($0.47 per share) in cash and 1,078,019
shares of its common stock in settlement of notes receivable
for $481,000 ($0.45 per share) from affiliates.
NOTE 20 - STOCK OPTIONS
1998 Stock Options Plan
On July 15, 1998, the Board of Directors of the Company
approved the Carnegie Internationals 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
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.
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 $0.45
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 the 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.
F-40
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 20 - STOCK OPTIONS (Continued)
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 additional 100,000 shares of common stock for 0.10
per share. As of December 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 the 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 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.
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 ($0.001) 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 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-41
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 20 - STOCK OPTIONS (Continued)
The following table summarizes the 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 1,950,000 0.350 6,108,334 0.02
Options forfeited/expired - - - -
------------------ ----------------------------- --------
Option outstanding at end of year 2,850,000 $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 1,750,000 5,508,334
</TABLE>
(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:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number Average Remaining
Outstanding Exercise prices Exercise prices Contractual life
----------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
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
100,000 $0.75 to $1.13 $0.94 2.22
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------
<S> <C> <C>
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
</TABLE>
F-42
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 20 - STOCK OPTIONS (Continued)
The following table represents the proforma 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
------------- ------------
Proforma
Net earnings (loss) $(13,909,395) $ 1,343,321
Earnings (loss) per share
Basic $ (.31) $ 0.06
Diluted $ (.31) $ 0.06
NOTE 21 - WARRANTS
In December 1998, the Company issued warrants to purchase
250,000 shares of common stock, with 125,000 of the warrants
having an exercise price of $0.71 per share and 125,000 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
a 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.
NOTE 22 - RELATED PARTY TRANSACTIONS
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.
F-43
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 22 - RELATED PARTY TRANSACTIONS (Continued)
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.
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 was 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% per annum. Some of
these notes were satisfied by the issuance of 108,000 shares
of the Company's common stock valued at $34,200.
NOTE 23 - INCOME TAXES
The components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
For The Years Ended
December 31,
------------
1998 1997
Current Tax Expense ---- ----
<S> <C> <C>
U.S. Federal $ - $ -
State and Local - -
-------------- --------------
Total Current - -
-------------- --------------
Deferred Tax Expense
U.S. Federal - -
State and Local - -
-------------- --------------
Total Deferred - -
--------------- --------------
Total Tax Provision (Benefit) from
Continuing Operations $ - $ -
============== =============
</TABLE>
F-44
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 23 - INCOME TAXES (Continued)
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows for the years ended
December 31, 1998 and 1997:
Federal Income Tax Rate ( 34.0)%
Effect of Valuation Allowance 34.0%
-----------
Effective Income Tax Rate 0.0%
============
At December 31, 1998 and 1997, the Company had net
carryforward losses of approximately $6,211,000 and
$2,300,000, respectively. Because of the current uncertainty
of realizing the benefit of the tax carryforwards, a valuation
allowance equal to the tax benefit for deferred taxes has been
established. The full realization of the tax benefit
associated with the carryforwards depends predominantly upon
the Company's ability to generate taxable income during the
carryforward period.
Deferred tax assets and liabilities reflect the net tax effect
of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and amounts
used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
December 31,
------------
1998 1997
----------- -----------
Deferred Tax Assets
Loss Carryforwards $ 2,112,000 $ 793,674
Less: Valuation Allowance 2,112,000 793,674
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ============
Net operating loss carryforwards expire starting in 2007
through 2018. Per year availability is subject to change of
ownership limitations under Internal Revenue Code Section 382.
NOTE 24 - SEGMENT INFORMATION
During 1998 and 1997, the Company operated in three principal
industries;
a) Telecommunications
b) Financial Services
c) Restaurant
Telecommunications include the development and distribution of
software, and telephone operations. Corporate and other
includes unallocated corporate costs.
F-45
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 24 - SEGMENT INFORMATION (Continued)
The Company's foreign operations are conducted by Talidan and
PTT.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1998 1997
------------- -------------
Revenues from external customers:
<S> <C> <C>
Telecommunications $ 5,358,377 $ 1,216,912
Financial services - 5,056,223
Restaurant 1,943,640 672,675
Corporate - -
------------- -------------
$ 7,302,017 $ 6,945,810
=========== ===========
Years Ended December 31,
---------------------------------
1998 1997
------------- -------------
Interest expense:
Telecommunications $ 12,847 $ -
Financial services - 16,434
Restaurant 760 3,092
Corporate 213,474 29,891
------------- -------------
$ 227,081 $ 49,417
============= =============
Income tax expense (benefit):
Telecommunications $ - $ -
Financial services - -
Restaurant - -
Corporate 12,279 ( 12,279)
------------- -------------
$ 12,279 $( 12,279)
============== =============
Depreciation and amortization:
Telecommunications $ 925,229 $ 182,425
Financial services - 31,929
Restaurant 36,844 16,627
Corporate 31,651 17,461
------------- -------------
$ 993,764 $ 248,442
============ ============
Segment profit (loss) before taxes:
Telecommunications $( 9,697,009) $( 7,612)
Financial services - 0 3,123,989
Restaurant ( 133,950) 5,312
Corporate ( 3,733,960) (1,617,850)
------------- -------------
$(13,564,919) $ 1,503,839
============ ===========
</TABLE>
F-46
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 24 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
------------- -------------
Segment assets:
<S> <C> <C>
Telecommunications $ 11,644,430 $ 17,950,863
Financial services - 420,786
Restaurant 267,169 486,099
Corporate 2,244,074 961,221
------------- -------------
$ 14,155,673 $ 19,818,969
============= ============
Expenditure for segment assets:
Telecommunications $ 217,974 $ 100,000
Financial services - 11,012
Restaurant - 18,032
Corporate 212,335 40,964
------------- -------------
$ 430,309 $ 170,008
============== =============
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.
Years Ended December 31,
1998 1997
------------- -------------
Revenues from external customers:
United States $ 4,057,563 $ 5,726,538
Brazil 3,204,379 1,204,872
United Kingdom 40,075 14,400
Other foreign countries - -
------------- --------------
$ 7,302,017 $ 6,945,810
============= ==============
Segment assets:
Brazil $ 1,293,293$ -
United Kingdom 5,790,592 18,028,192
United States, net of intersegment receivables 7,071,788 1,790,777
------------- ------------
$ 14,155,673 $ 19,818,969
============= ============
</TABLE>
NOTE 25 - 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.
F-47
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 25 - SUBSEQUENT EVENTS (Continued)
Pursuant to the Acquisition Agreement, Paramount entered into
employment agreements with each of the four former
stockholders of Paramount, providing for a $130,000 base
salary, a signing bonus of $375,000 and 12,500 shares of
restricted Common shares of the Corporation.
In connection with the purchase of Paramount, the Company
agreed to assume a $350,000 finder's fee to which Paramount
had agreed in December 1998.
In April 1999, the Company acquired all assets of RGG
Communications of Rockford, Illinois, for $25,000 cash.
In January 1999, the Corporation executed a non-binding letter
of intent to acquire all of the assets of The Phone Stop, Inc.
and an affiliated entity. In July 1999, Paramount entered into
a non-binding letter of intent to acquire all of the
outstanding stock or assets of Federation of Associated Health
Systems, Inc, a Texas Corporation. The transactions subject to
these letters of intent have not been consummated as of
January 2000.
After trading on the AMEX for one day, the SEC advised the
Corporation on April 29, 1999 that certain accounting issued
remained unresolved from the Company's prior filing of Form
10-SB/A with the SEC and trading of the Corporation's Common
Stock on AMEX was suspended. In October 1999, the Company was
notified by the AMEX of a de-listing recommendation by the
AMEX listing staff. The Company had filed an appeal with the
AMEX. To date, the Company has not been advised on the result
of its appeal.
The corporation and a number of its current officers and
directors are parties to several lawsuits which purport to be
class actions filed on behalf of shareholders of the
Corporation. The Company's insurer under its Directors,
Officers and Corporate Liability Insurance Policy has
undertaken representation of all of the defendants in the
several lawsuits. The Policy contains a $150,000 retention,
applicable to defense costs which the insurance company has
waived.
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. The transaction subject to this letter
of intent have not been consummated as of January 2000.
F-48
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 25 - SUBSEQUENT EVENTS (Continued)
In September 1999, the former shareholders of Paramount
International Telecommunications, Inc. filed liens against all
accounts receivable, all contracts current as of September
1999, furniture, fixtures, equipment and inventory of
Paramount International Telecommunications, Inc. to secure a
note payable of $1,224,749 plus interest and payments of
$1,200,000 plus interest in connection with the sale of
Paramount to Carnegie in February 1999.
In November 1999, Victoria Station entered into a financing
arrangement with IGT Services, Inc., a discount credit card
company, whereby IGT advances funds and is reimbursed a
portion of revenues generated by customers who use the IGT
credit card. IGT has effected a lien on all Victoria Station
assets.
In December 1999, the former shareholders of ACC Telecom filed
liens against all the assets of ACC Telecom and the corporate
stock, representing said ownership to secure a note payable of
$683,298 due them in connection with the sale of ACC Telecom
in May 1998.
F-49
EXHIBIT 10.26
AGREEMENT OF SALE
----------------
THIS AGREEMENT OF SALE made this 22nd day of June 1998, by and between
Talidan Limited (hereinafter called "Seller" or "Talidan") and Westshire Trading
Company, Inc. (hereinafter called "Buyer" or "Westshire").
W I T N E S S E T H:
1. That said Seller does hereby bargain and sell unto said Buyer, and the latter
does hereby purchase from the former the following described property, viz:
A. All assets attached hereto as Exhibit A, which is made a part hereof
and fully incorporated herein, sometimes referred to herein as the "Talidan
Client Business".
B. A release and discharge of the covenants to compete for those
consultants of Talidan which are bound by such covenants so that said
consultants may complete against Talidan and specifically consult with Buyer
relative to the business identified as the "Talidan Client Business" only.
At and for the total purchase price or consideration of Two Million
Three Hundred Forty Thousand Dollars US ($2,340,000). For allocation purposes,
it is agreed that the value of assets described in Exhibit A is valued at
$640,000 and the value of the Release of the Covenant not to Compete is
$1,700,000.
2. A Promissory Note made by Buyer and payable to Seller for the full
consideration is attached as Exhibit B. All payments shall be paid directly to
Carnegie International Corporation, the 100% shareholder of Seller. Payments
shall be made quarterly, with interest calculated at 7% per annum. The
Promissory Note is secured by a Security Agreement, attached hereto as
Exhibit C.
3. Legal title to the assets sold is being transferred to the Buyer on this
date.
4. It is acknowledged that it will take a period of undetermined time before the
assets can be switched over to the control of the Buyer.
5. All income derived from the assets from this date forward shall be paid to
the Buyer. All expenses associated with ownership and management of the assets
are the responsibility of the Buyer.
6. The Buyer is free to contract with Talidan's consultants for the management
of the assets.
7. Carnegie and Talidan do hereby release consultants from their covenants
against competition for the purposes hereunder. (Exhibit D)
8. While the assets are under the control of Talidan (pending their transfer),
no decisions or
<PAGE>
interruption of the business shall be made by Talidan or Carnegie without the
express direction of the Buyer.
9. The first payment on the Promissory Note is due ninety (90) days after buyer
derives its first income payments from the assets but, in no event, after
December 22, 1998. Buyer acknowledges that the income derived from the asset
will be far below the quarterly payments due to be made by Buyer. Buyer
represents that it has sufficient ability to make the payments due pursuant to
the Promissory Note on time and is not dependent upon the income it anticipates
being generated from these assets.
10. This Agreement is made subject to, and in accordance with, the following
additional terms, covenants and conditions:
A. Seller warrants and represents to Buyer as follows:
(i) That it has been duly authorized to enter into the within Agreement and to
execute all instruments necessary to consummate this Agreement, including a Bill
of Sale (Exhibit D) for the properties hereby sold.
(ii) All debts, liens, encumbrances and other obligations against, arising out
of or affecting the business and assets which are the subject matter of this
sale shall be fully paid and satisfied by Seller within seven (7) days after
Seller receives the income derived from the assets through today's date.
(iii) Seller has not and will not warrant or represent what the gross income,
profits, receipts or expenses of the assets will be after closing hereunder.
B. Seller shall execute and deliver to Buyer a Bill of Sale (Exhibit E) which
includes:
(i) An assignment of all of Seller's right, title and interest in and to the
aforesaid assets, together with all security deposits or prepaid expenses
appertaining to the assets sold.
(ii) Warranties to the effect that all such property is being transferred free
and clear of all liens and encumbrances.
(iii) All instruments necessary to be executed in order to transfer any licenses
needed to operate the assets, if any.
C. Seller agrees that Buyer shall be permitted to assign all of its rights,
title and interest to the assets bought hereunder, but notwithstanding such
assignment, Buyer shall remain liable for, the performance of all obligations
hereunder on the Promissory Note and Security Agreement.
4. This Contract and the documents referred to herein contain the entire
agreement between the parties hereto and neither they nor their agents or
representatives shall be liable for any terms, covenants or conditions not
herein contained. This Contract shall be binding upon the parties
<PAGE>
hereto and their successors, personal representatives and assigns. Time is of
the essence of this Contract.
5. This Agreement shall be subject to and governed by the laws of the
Commonwealth of the Bahamas.
AS WITNESS the signatures of the parties hereto the day and year first
above written.
WITNESS: Westshire Trading Company, Inc.
/s/ By: /s/ Sidney S. Collie
----------------------------- -------------------------
Sidney S. Collie, Esq. Authorized Agent
Talidan, Ltd.
/s/ By: /s/ David Gable
---------------------------- David Gable, Director
Agreed and consented to all terms and conditions:
Carnegie International Corporation
By: /s/ Lowell Farkas
--------------------
Lowell Farkas, President
Exhibits Attached:
Exhibit A: List of Assets sold
Exhibit B: Confessed Judgment Note
Exhibit C: Security Agreement
Exhibit D: Consultants Release
Exhibit E: Bill of Sale
Exhibit 10.27
AGREEMENT - Bristol Capital, LLC
THIS AGREEMENT (the "Agreement") is made on, and has effect as of, this 27th day
of February. 1999, by and among Carnegie International Corporation, a Colorado
Corporation (the "Buyer"), Paramount International Telecommunications, Inc. (the
"Company"), and Bristol Capital, LLC ("Bristol). Defined terms in this Agreement
shall have the meanings ascribed to them in the Stock Purchase Agreement between
the Buyer and Michael Eberle, David Moody, David Paton and Kay Eberle, dated
February 26, 1999 (the "Stock Purchase Agreement).
RECITALS
A. The Company and Bristol entered into a Consulting Agreement, dated December
1, 1998, as amended, (the "'Consulting Agreement), whereby upon the
provision by Consultant of certain finder services (the "Services"), Company
agreed to compensate Bristol in the form of a finder's fee.
B. The Services of Bristol resulted in the Stock Purchase Agreement whereby the
stock of Company was sold to Buyer.
C. Having completed the services, Consultant is entitled to receive a finder's
fee in the form of securities and cash.
D. The securities portion of the finder's fee having been paid, the parties
desire to state the terms upon which the cash portion of the finder's fee
shall be paid as well as other terms and conditions relating to the
securities.
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 agree as follows:
I. Buyer and Company agree that Buyer shall pay to Bristol the sum of Three
Hundred and Fifty Thousand Dollars ($350,000) concurrently with the payment of
the cash consideration to Sellers pursuant to Sections 2.2 and 2.6 of the Stock
Purchase Agreement. Payment shall be made by wire transfer of U.S. dollar
denominated currency to the account of Bristol's designee as follows: Law
Offices of Diana Derycz, Wells Fargo Bank Attorney Trust Account No.
0465-420826, ABA No. 121 -000-248.
2. Upon the payment indicated immediately above, Company's cash obligation to
Bristol under the Consulting Agreement shall be satisfied.
3. This Agreement shall be a binding agreement among the parties and the Stock
Purchase Agreement including but not limited to Sections 3.26, 4.5, 11.8, shall
in no way prevent, prohibit, restrict, or otherwise limit this Agreement and/or
the payment to Bristol or its designee referred to Section 1 above.
4. The parties will maintain this Agreement in confidence and shall not divulge
the same unless (a) such information is already known to such party or to others
not bound by a duty of confidentiality or such information become publicly
available through no fault of such party, (b) the use of such information is
necessary or appropriate in making any filing, announcement 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, or reporting
requirements.
5. This Agreement will be governed by the laws of the State Of California,
without regards to conflicts of law principles. The parties hereby submit
themselves to the federal and state courts in the State of California. The
prevailing party in any action, suit, claim, or proceeding shall be entitled
attorney's fees from the non-prevailing party.
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
BRISTOL CAPITAL, LLC
By: /s/ Paul Kessler
-----------------
Title: President
CARNEGIE INTERNATIONAL CORPORATION
By: /s/ Lowell Farkas
-----------------
TITLE: PRESIDENT
PARAMOUNT INTERNATIONAL TELECOMMUNICATIONS, INC.
BY: /S/ MICHAEL EBERLE
------------------
Title: President
EXHIBIT 10.28
TERMINATION AND CONSULTING AGREEMENT - Bennett Goldstein
This Termination and Consulting Agreement (hereinafter "Agreement") is
entered into under seal this 27th day of September 1999, by Bennett H. Goldstein
("Goldstein") and Carnegie International Corporation ("Carnegie" or the
"Company") (Goldstein and Carnegie are sometimes referred to herein collectively
as the "Parties").
RECITALS
--------
WHEREAS, Goldstein and Carnegie entered into an Employee Agreement
("Employment Agreement") dated February 1999, by which Goldstein agreed to
become employed by Carnegie and Carnegie agreed to employ Goldstein in the
capacity of Executive Vice President and Chief Financial Officer of Carnegie,
commencing on or about February 15, 1999.
WHEREAS, Carnegie has employed Goldstein and Goldstein has served in
the capacity as Executive Vice President and Chief Financial Officer of Carnegie
from on or about February 15, 1999 through the date of this Agreement.
WHEREAS, Carnegie and Goldstein have mutually agreed to terminate
Goldstein's employment with Carnegie, to terminate and cancel the terms of the
Employment Agreement, to enter into an independent consulting arrangement, and
to provide each other with certain further agreements in connection with the
termination of the employment relationship, all as set forth herein.
NOW, THEREFORE, in consideration of the mutual undertakings and
agreements of the Parties hereto, the receipt and adequacy of which
consideration is hereby expressly acknowledged, the Parties hereto agree under
seal as follows:
1. Termination of Employment. Goldstein and Carnegie agree that
Goldstein's employment with Carnegie was terminated effective September 10,
1999, by mutual agreement of the Parties. Goldstein shall confirm his
resignation from the position of Executive Vice President and Chief Financial
Officer of Carnegie, together with all other offices or positions he holds with
Carnegie, by letter dated and delivered on or before September 30, 1999.
2. Cancellation of Employment Agreement. Goldstein and Carnegie hereby
agree and acknowledge
<PAGE>
that the Employment Agreement, together with all of its covenants, promises and
terms, shall be and is terminated, cancelled and voided, so that it shall no
longer be legally operative or of any force and effect.
3. Consulting Agreement. Goldstein and Carnegie agree that for a period
of six months from September 10, 1999 he will perform certain consulting
services for Carnegie, and will be available during regular business hours to
advise, counsel and inform designated officers and employees of Carnegie about
the industry, business, customers, budgeting, finances, expenses, marketing and
other aspects of or concerning Carnegie's business about which Goldstein has
knowledge or expertise. Goldstein shall provide such services if and when
requested, from time to time, by Carnegie's executive officers or by its board
of directors. Notwithstanding the foregoing, Goldstein shall have no obligation
to perform a specified number of hours of consulting services per week.
Goldstein and Carnegie agree that the consulting services to be provided by
Goldstein to the Company will be performed in a capacity as independent
contractor, and not as an employee. Goldstein and Carnegie also agree that
Goldstein shall have no right or authority at any time to make any contract or
binding promise of any nature on behalf of Carnegie, either oral or written,
without the advance express written consent of an authorized representative of
the Company.
4. Compensation as Consultant and Severance Benefits. Goldstein and
Carnegie agree that Carnegie shall provide to Goldstein the following
consideration in connection with the consulting services, the termination of the
employment and the cancellation of the Employment Agreement, as described in
paragraphs 1, 2 and 3 above.
a. Carnegie shall continue to pay to Goldstein, for a period of
six months from September 13, 1999, compensation totaling $87,500 in thirteen
equal bi-weekly installments of $6,730.77, without withholding.
b. Subject to the qualification set forth in the last sentence
of this paragraph, Carnegie will continue to pay health insurance premiums under
its health plan on behalf of Goldstein for six months following the date of this
Agreement, so as to provide to the extent feasible the same or equivalent
coverage to that which Goldstein currently receives under Carnegie's health care
insurance plan. The Parties acknowledge that the health care coverage may be
provided by Carnegie's insurance carrier through Goldstein's COBRA rights and,
if so, Goldstein agrees that Carnegie may comply with the obligations set forth
in this subparagraph in that manner with the proviso and understanding that
Carnegie shall pay the premiums as provided in this subparagraph. Carnegie will
have no obligation to provide or pay for health insurance coverage in the event
he becomes employed by an entity that offers health insurance as a benefit
generally to its employees.
<PAGE>
c. Carnegie agrees to provide, promptly after seven (7) days
following the final execution of this Agreement, purchase warrants entitling
Goldstein to purchase 100,000 shares of the common stock of Carnegie at the
price of $2.50 per share. It is agreed and understood between Carnegie and
Goldstein that the warrants shall have a cashless exercise provision or feature,
and that warrants for 33,334 shares will vest on the first anniversary of the
date of this Agreement, warrants for 33,333 shares of Carnegie stock will vest
on the second anniversary of the date of this Agreement, and warrants for 33,333
shares of common stock of Carnegie shall vest on the third anniversary of the
date of this Agreement. The warrants for all 100,000 shares of common stock
shall expire thirty (30) days after the third anniversary of this Agreement. The
specific terms of the warrants shall be governed by a separate Warrant Agreement
or the warrants themselves, the economic terms of which shall be in substance
identical to those stated in this paragraph, and which otherwise shall contain
ordinary and customary terms for warrants issued by Carnegie.
5. Accrued and Unpaid Benefits. Carnegie will pay Goldstein for any
accrued but unpaid benefits, if any, through September 10, 1999, in accordance
with Carnegie's established policies, including but not limited to auto
allowance, professional dues, life insurance and disability insurance.
6. Expense Reimbursements and Refunds. Carnegie agrees to reimburse
Goldstein for all reasonable, legitimate and authorized business expenses
incurred by Goldstein in connection with his duties as Executive Vice President
and Chief Financial Officer of Carnegie prior to September 10, 1999. Such
expenses shall be reimbursed in the ordinary course of business consistent with
standard internal practices and policies of Carnegie. Goldstein agrees to
reimburse or refund to Carnegie any expenses he has incurred with Company funds,
through the use of Company credit cards, cash advances or any other means, which
were personal in nature and/or not reasonable, legitimate and authorized
business expenses of Carnegie. The Company and Goldstein agree to work with each
other reasonably and cooperatively to identify any such business expenses or
personal expenses, and in connection therewith, Goldstein agrees to provide
sufficient information and documentary backup to document his claim to business
expenses.
7. Return of Company Property. Goldstein agrees to return promptly, and
in no event later than seven (7) days after the date of this Agreement, all
credit cards, keys, records, documents, files of every nature, policy manuals,
security access cards, computer-stored material, financial information,
equipment (including mobile telephones and computers) and all other property of,
or relating to the operations and affairs of, Carnegie. Any
<PAGE>
records, files or documents relating in any manner to the operations and affairs
of Carnegie, or copies thereof, which Goldstein desires to maintain in his
possession shall be provided to the President of Carnegie, and permission shall
be obtained from the President by Goldstein before such records, files or
documents shall or may be retained by Goldstein. Notwithstanding any provision
of this paragraph to the contrary, Goldstein shall prepare a schedule of
property and documents returned to the Company, which schedule shall be
acknowledged by the President, in writing. Goldstein and Carnegie shall each be
entitled to retain copies of said schedule.
8. Acknowledgement of Return of Confidential Property. Goldstein
acknowledges that the records, files and documents relating to the operations
and affairs of Carnegie which he has used, reviewed or prepared in conjunction
with his employment as Executive Vice President and Chief Financial Officer of
Carnegie, and any copies thereof, are proprietary to Carnegie and confidential
in nature. Goldstein hereby acknowledges that all such records, files and
documentation constitute the property of Carnegie and that he has or will,
consistent with paragraph 6 hereof, return all such property to the President of
Carnegie or obtain express permission from the President to retain such
materials.
9. Covenants to Cooperate and Representations and Waivers Regarding
Possible Conflicts of Interest.
a. Goldstein hereby covenants and agrees to cooperate in all
reasonable ways with Carnegie in the defense of certain lawsuits brought as
putative class actions by certain shareholders of Carnegie (the "Putative Class
Action Lawsuits"). Such cooperation will include, but not be limited to, making
himself available at reasonable times and upon reasonable notice to the Company
and its counsel to consult with regard to issues raised in the lawsuits, to
provide full and accurate information and input relating to the issues in the
lawsuit, and to make himself available for deposition and trial testimony, to
the extent requested by the Company or its counsel.
b. Goldstein hereby covenants and agrees that, as of the date of
this Agreement, he is aware of no conflicting interests between the Company or
its various officers and directors, on the one hand, and Goldstein, on the other
hand, relating to the issues raised in the Putative Class Action Lawsuits and
that consequently, he is aware of no circumstances at the present time which
would give rise to a conflict of interest on the part of legal counsel currently
representing the Company and various directors and officers (including
Goldstein) who are defendants in the Putative Class Action Lawsuits.
Furthermore, Goldstein hereby covenants and agrees that, to the extent in the
future conflicting interests arise between the Company and/or any of its
directors or officers and
<PAGE>
Goldstein such that current legal counsel representing these parties can no
longer continue to represent all of these parties, then in that event Goldstein
will seek new legal counsel and will not argue or maintain that the current
legal counsel for the Company and its various officers and directors are
required to withdraw from their representation of any of the other parties
because or by virtue of their prior representation of Goldstein in the Putative
Class Action Lawsuits. Goldstein hereby waives any such conflict of interest and
consents to legal counsel's continued representation of the Company and other
officers and directors of the Company in the event such future conflict may
appear or arise. In addition, in the event a conflict of interest arises in the
future, Goldstein agrees to continue to cooperate, in the manner described
above, with the Company and its counsel in the defense of the claims asserted in
the Putative Class Action Lawsuit, and further agrees to continue to abide by
the terms of any joint defense agreement which may have been entered into by
Goldstein and other parties prior to the time any such future conflict appears
or, in the event no such joint defense agreement has at that time been entered
into, to enter into a joint defense agreement with the Company and its directors
and officers containing standard terms and conditions.
10. Releases.
a. In consideration of the agreements set forth herein and other
good and valuable consideration, Goldstein, together with his heirs, successors
and assigns, hereby release and forever discharge Carnegie, its affiliate and
subsidiary corporations, and its directors, officers, employees, representatives
and attorneys, from any and all manner of action, cause and causes of action,
suits, debts, dues, duties, sums and sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, agreements, promises, warranties,
damages, judgments, expenses, execution, claims and demands whatsoever, in law,
equity or mixed, whether known or unknown, whether appreciated or unappreciated,
which Goldstein ever had, now has or which he or his heirs, successors or
assigns can, shall or may have, in connection with any matter relating to or
arising out of or in connection with Goldstein's employment with Carnegie, the
Employment Agreement, or any statements, actions or inactions on the part of
Carnegie in connection with the employment relationship. This release includes,
but is not limited to, any such claim under Title VII of the Civil Rights Act of
1964, as amended, any state or local fair employment practices law, the
Rehabilitation Act of 1973, the Americans With Disabilities Act, any state or
federal law regarding wages, benefits or employment practices, The Family and
Medical Leave Act, the Employee Retirement Income Security Act, the Age
Discrimination in Employment Act, or any other federal, state or local law or
common law, whether before any state or federal court, administrative agency,
civil rights commission or other
<PAGE>
forum.
b. In consideration of the agreements set forth herein and other
good and valuable consideration, Carnegie, together with its successors and
assigns, hereby releases and forever discharges Goldstein, and his heirs,
successors and assigns, from any and all manner of action, cause and causes of
action, suits, debts, dues, duties, sums and sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, agreements,
promises, warranties, damages, judgments, expenses, executions, claims, and
demands whatsoever, in law, equity or mixed, whether known or unknown, whether
appreciated or unappreciated, which Carnegie ever had, now has or which Carnegie
or its successors or assigns can, shall or may have in connection with any
matter relating to or arising from Goldstein's employment with Carnegie, the
Employment Agreement, or any statement, action or inaction on the part of
Goldstein in connection with the employment relationship. It is expressly agreed
and understood that the scope of this release by Carnegie of Goldstein does not
include any of his actions or any potential claims the Company may have against
Goldstein arising in connection with matters other than Goldstein's employment
with Carnegie.
11. Covenant Not to Sue.
a. Goldstein hereby covenants not to sue Carnegie, its affiliate
or subsidiary corporations, or its directors, officers, employees,
representatives and attorneys, for any of the claims or other matters which are
the subject of the release provided by Goldstein in paragraph 10 a. above.
b. Carnegie hereby covenants not to sue Goldstein, in his
individual capacity, for any matters relating to or arising in connection with
Goldstein's work for Grant Thornton prior to the time Goldstein became employed
by Carnegie. This provision shall not be construed to limit in any manner
Carnegie's right or ability to maintain any claims it might have against Grant
Thornton in connection with the services rendered by Grant Thornton (through
Goldstein or otherwise) to the Company at any time.
12. Certain Notices to Goldstein. Carnegie hereby provides notice to
Goldstein that he has twenty-one (21) days from the date this Agreement is
furnished to him to consider the terms of this Agreement before signing it.
Carnegie has further advised Goldstein that he may wish to discuss this
Agreement with an attorney, and Carnegie understands that Goldstein is, indeed,
represented by counsel in connection with the negotiation and consummation of
this Agreement. Further, Carnegie hereby provides notice that, for a period of
seven (7) days following the execution of this Agreement, Goldstein may revoke
it, and this Agreement shall not become finally effective and
<PAGE>
enforceable until the revocation period has expired.
13. Agreements Relating to Indemnification. The Company and Goldstein
agree that the contractual indemnity provision set forth in paragraph 12 of the
Employment Agreement, consistent with paragraph 2 of this Agreement, shall be
deemed terminated, cancelled and voided, and of no further effect. Carnegie
shall indemnify and hold Goldstein harmless from any and all claims or demands
made against him by any party as a result of any act, omission, or decision made
by him in good faith during the term of his employment by the Company. Carnegie
shall maintain Directors and Officers insurance coverage for any such acts,
omissions or decisions. In the event that insurance coverage is unavailable
and/or inadequate to provide a defense to any such claim, Carnegie shall pay all
expenses, including reasonable fees and related disbursements of attorneys and
other professionals actually and necessarily incurred by Goldstein in connection
with the defense of such act, omission or decision in any threatened or actual
suit or proceeding.
14. Acknowledgments and Representations by Goldstein. Goldstein hereby
acknowledges, covenants and represents that he is aware of no improper or
illegal actions having been committed by any of the officers, directors or
employees of Carnegie in connection with the affairs and business of Carnegie.
By "improper or illegal actions," Goldstein means any actions which would
constitute a violation of any federal or state law (including without limitation
any laws regulating the purchase or sale of securities), any actions committed
by a director, officer or employee inconsistent with such person's fiduciary
duties to Carnegie, or any action taken by the Company, or any of its directors,
officers or employees, which would give rise to a clear cause of action on the
part of a third party against the Company for any liability. Goldstein hereby
acknowledges that he is voluntarily agreeing to terminate his employment with
the Company for personal reasons and in order to pursue other employment and
professional opportunities.
15. Payment of Goldstein's Attorney's Fees. Carnegie shall pay within
seven (7) days of the date of this Agreement, directly to Goldstein's counsel,
Rudnick & Wolfe, Goldstein's attorney's fees incurred to date in connection with
the defense of the class action lawsuits, interpretation of his rights under his
Employment Agreement, and representation in connection with work performed by
Grant Thornton. This payment obligation shall in no event exceed Twelve Thousand
Five Hundred Dollars ($12,500.00). Rudnick & Wolfe shall provide to Carnegie and
its counsel, within three (3) days of the date of this Agreement, a copy of its
bill, showing in reasonable detail the fees and expenses incurred on a daily
basis.
<PAGE>
16. Withholding Taxes. Carnegie shall indemnify and hold Goldstein
harmless from any and all claims, irrespective of how asserted, in connection
with any nonpayment of withholding taxes or other trust fund contributions
incurred on account of compensation paid to Carnegie employees.
17. Miscellaneous Provisions
a. Further Assurances. The Parties hereto hereby agree to do
such further acts and things, and to execute and deliver such additional
conveyances, assignments, agreements and instruments from time to time, as
either of them may at any time reasonably request in order to better assure and
confirm unto each party their respective rights, powers and remedies conferred
hereunder.
b. No Agency. This Agreement shall not be deemed to constitute
the Parties hereto as partners or joint ventures, nor shall either party hereto
be deemed to be an agent of any nature, kind or description whatsoever of the
other.
c. Severability. If any term or condition of this Agreement
shall be held invalid by a court, arbitrator or tribunal of competent
jurisdiction in any respect, such invalidity shall not affect the validity of
any other term or condition hereof. If any term or condition of this Agreement
shall be held to be unreasonable as to time, scope or otherwise by such a court,
arbitrator or tribunal, it shall be construed by limiting or reducing it to the
minimum extent so as to be enforceable under the then applicable law. The
Parties hereto acknowledge that they would have executed this Agreement with any
such invalid term or condition excluded or with any such unreasonable term or
condition so limited or reduced.
d. Entire Agreement; Amendment. This Agreement constitutes the
entire agreement of the Parties with regard to the specific subject matter
hereof and supersedes all prior written and/or oral understandings between the
Parties. As the final written expression of all of the agreements and
understandings among the Parties hereto, this Agreement is an exhaustive and
complete expression of the Parties' intent and, therefore, may be modified only
by a writing signed by all of the Parties.
e. Waiver. Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall neither be considered a
waiver nor deprive that party of any right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in writing and signed by
<PAGE>
the party to be charged therewith.
f. Binding Effect. This Agreement shall be binding upon, and
inure to the benefit of, the heirs, personal representatives, legal successors
and assigns of the respective Parties hereto. Nothing in this Agreement shall be
construed as granting to any person or entity whatsoever other than the Parties
hereto and their respective heirs, successors and assigns, any remedy, claim or
other privilege or right under or in respect of this Agreement or any provision
hereof.
g. Construction. This Agreement shall be governed, enforced,
performed and construed in accordance with the laws of the State of Maryland
(excepting those conflicts of laws provisions which would serve to defeat
application of Maryland substantive law).
h. Counterparts. Provided that all Parties hereto execute a copy
of this Agreement, this Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument. Executed copies of this Agreement may be delivered by
facsimile transmission or other comparable means.
i. Headings; Recitals. The headings contained herein are
included solely for the ease of reference and in no way shall limit, expand or
otherwise affect either the substance or construction of the terms and
conditions of this Agreement or the intent of the Parties hereto. The Recitals
set forth on the first page of this Agreement are an integral part hereof.
j. Voluntary Agreement. The Parties hereto represent that they
have carefully read the foregoing Agreement, understand its terms, consulted
with an attorney of their choice, and voluntarily signed the Agreement as their
own free act with intent to be fully and legally bound thereby. The terms of
this Agreement are contractual and not a mere recital.
k. Authority. Each of the Parties hereto represents unto the
other that the person executing this Agreement on his or its behalf has full
authority to bind that party to the terms of this Agreement.
l. Time of the Essence. Time is of the essence with respect to
the performance of this Agreement.
m. Notices. Any notice, demand or other communication required
or permitted by this Agreement shall be either in writing and mailed, forwarded
by telecopy or delivered by hand to the applicable party or Parties at the
addresses indicated below:
<PAGE>
If to Goldstein:
----------------
Bennett H. Goldstein
29 Stonegate Court
Baltimore, MD 21208
with a copy to:
Steven Fedder
Rudnick & Wolfe
1201 New York Avenue, N.W.
Penthouse
Washington, DC 20005
If to Carnegie:
---------------
Lowell Farkas
President
Executive Plaza 3, Suite 1001
Carnegie International Corporation
11350 McCormick Road
Hunt Valley, MD 21031
with a copy to:
Jefferson V. Wright, Esq.
Miles & Stockbridge P.C.
10 Light Street
Baltimore, Maryland 21202
IN WITNESS WHEREOF, the undersigned Parties have executed this
Agreement under seal as of the date first above written:
WITNESS/ATTEST:
Exhibit 10.29
Loan Agreement - American Champion Entertainment
Anthony K. Chan
President and CEO
American Champion Entertainment
1694 The Alemeda, Suite 100
San Jose, California 95126
Re: Loan Amount: $250,000.00
Dear Mr. Chan:
The purpose of this letter is to serve as a follow-up to our recent discussions
and memorialize our understanding reflecting a loan transaction between your
Company, American Champion Entertainment as Lender and Carnegie International
Corporation ("Carnegie") as Borrower. To secure any default in payment Carnegie
has agreed to provide American with an option to acquire fifty percent (50%) of
RomNet, Inc. ("RomNet"), a wholly owned subsidiary, from Carnegie (the
"Option").
1. LOAN AMOUNT: The amount of the Loan is Two Hundred Fifty Thousand Dollars
($250,000.00) which shall be paid in cash upon the execution and delivery of
this Loan Agreement Letter (the "Agreement").
2. LOAN TERM AND FEE: Repayment of the Loan shall be due December 31, 1999
along with a set up fee of $25,000.00 plus fixed interest of $25,000.00.
3. DEFAULT: In the event Carnegie fails to repay the Loan plus Fees and
interest as set forth above American shall, in lieu of any other legal remedies
available to it, exercise its Option to purchase one hundred percent (100%) of
the outstanding corporate stock of RomNet which shall be based on two times the
gross sales for the twelve (12) month period prior to the date the Option is
exercised, less any unpaid principal and/or Loan Fee.
4. OPTION PURCHASE CONSIDERATION: The Option consideration shall be paid in
shares of American with the number of shares to be computed based upon the
average closing price for the fifteen (15) days prior to the date of closing.
5. CLOSING: Closing of the Option purchase shall occur within thirty (30)
days from the date the Option is exercised.
6. DEFINITIVE AGREEMENTS: The parties shall exercise their best efforts
following the exercise of the Option to promptly negotiate, draft and execute a
definitive Stock Purchase Agreement which shall be consistent with the terms of
this letter and shall contain the usual and customary representations and
warranties appropriate for a transaction of this nature.
7. WARRANTS: In addition to the Loan Fee noted above American Champion
Entertainment shall be issued warrants to purchase 75,000 at an exercise price
of $3.50 per share. The warrants may be exercised any time prior to the third
anniversary of the execution of this Agreement.
8. CONFIDENTIALITY: Notwithstanding anything to the contrary herein, each of
the parties hereby agree to maintain complete confidence and to consider as
confidential any materials provided by the other party which are not otherwise
in the public domain consistent with the terms of a mutual Confidentiality
Non-disclosure Agreement which shall be executed between the parties immediately
following the execution hereof. Each of the parties hereby agree to allow such
access to the other party's
<PAGE>
information to such persons on a need to know basis only and in the event the
transaction contemplated herein is not consummated the parties agree to return
all such information to the provider thereof.
9. ASSIGNMENT: American shall not assign its Option rights under this Loan
Agreement without obtaining the prior written consent of Carnegie.
10. CAPTIONS: The sectional or marginal titles or captions contained herein
shall be used for convenience and easy reference only, and shall in no way
define or limit the substance of any provisions or sections hereof.
If the aforegoing is in accordance with your understanding of the Loan Agreement
and security Option noted above, please so indicate by signing a copy of this
letter and returning the same to me by facsimile and regular mail and contact me
so that I may provide you with wire instructions relative to receiving the Loan
proceeds.
We look forward to working with you.
Very truly yours,
CARNEGIE INTERNATIONAL CORPORATION
By: /s/ Lowell Farkas
------------------------------ --------------------------------
Lowell Farkas, President and CEO
AGREED AND ACCEPTED:
AMERICAN CHAMPION
ENTERTAINMENT, INC.
Date: _______________ By: /s/ Anthony Chan
----------------------------------
Anthony K. Chan, President and CEO
Exhibit 10.30
LETTER OF INTENT - R.G.G. COMMUNICATIONS, INC.
April 1, 1999
Roy G. Gustafson, President
R.G.G. Communications, Inc.
129 & Phelps, Building 8
P.O. Box 6202
Rockford, IL 61125-1202 Re: Purchase of Assets of R.G.G.
Communications, Inc. by Carnegie International Corporation
Dear Mr. Gustafson:
This letter shall serve as a modification of the February 25, 1999
Letter of Intent with respect to the above referenced purchase. My client,
Carnegie International Corporation ("Carnegie"), has directed me to inform you
that they are willing to remove several contingencies from the aforementioned
Letter of Intent. The first such contingency is in regards to review and
acceptance by Carnegie of the list of Assets of R.G.G. It is my understanding
that Carnegie has reviewed the Assets and has found them to be acceptable except
as noted below, therefore, this contingency no longer applies. It should be
noted that the Asset listing does not contain a reference to the goodwill of
R.G.G. Communications, Inc. as well as a statement that the name R.G.G.
Communications shall be used by Carnegie. Both the goodwill and the use of the
name were significant components of the Assets being purchased by Carnegie.
Secondly, Carnegie has instructed me to inform you that it will no longer
require completion of the acquisition of TeleResources, Inc. as a condition for
the purchase of the Assets of R.G.G.
I am also attaching hereto a Bill of Sale covering the Assets being
purchased by Carnegie. If you are in agreement with the terms contained therein,
please execute same and return it to my office. It is my understanding that the
parties to the purchase have decided to forego definitive agreements due to the
size of this transaction and to allow the Letter of Intent to serve as the
agreement between the parties.
Should you have any questions, please feel free to contact me,
Otherwise, if you are in agreement with the removal of aforementioned
contingencies from the Letter of Intent and inclusion of the goodwill and name
usage as part of the Assets, please sign in the space provided below and return
this letter along with the attached Bill of Sale for the Assets to my office by
facsimile and regular mail.
Very truly yours,
By: /s/ Lewis A. Dardick
--------------------
Lewis A. Dardick
AGREED AND ACCEPTED: R. G. G. COMMUNICATIONS, INC.
Date: By: /s/ Roy G. Gustafson
--------------------
Roy G. Gustafson, President
Exhibit 10.31
SUBLEASE - THE PHONE STOP, INC.
May 14,1999
To whom it may concern:
The Phone Stop Inc. is leasing suits 207 at 650 W. Grand Ave. in
Elmhurst, from American Telephone and Computer on a month-to-month
basis for $5685.75 per/mo,
Sincerely,
By: /s/ Hans Herrmann
Hans Herrmann
<PAGE>
FIRST AMENDMENT DATED JUNE 01, 1999
FIRST AMENDMENT to Lease dated May 3, 1999, by and between Korman/Lederer
Management Co., as agents for the beneficiaries of LaSalle National Bank, as
successor trustee to LaSalle National Trust, N.A, as Trustee under Trust #107031
(hereinafter known as "Lessor" and Chicago Telecom, Inc., (hereinafter known as
"Lessee") for the premises known as 650 West Grand Avenue, Suites 207, 208, 209,
Elmhurst, Il (hereinafter known as the "Premises") and Lease dated May 13, 1999,
(hereinafter known as the "Lease").
Lessor and Lessee agree that the Lease made between Lessor and Lessee concerning
the "Premises" is hereby amended as follows:
1. Terms of Lease are changed as follows:
PERIOD PER MONTH ANNUAL
------ --------- ------
JULY 15, 1999 - JULY 31, 1999 NO RENT N/A
AUGUST 01, 1999 - JUNE 30, 2000 $5,685.75 $ 68,228.88
JULY 01, 2000 - JUNE 30, 2001 $5,799.47 $69,593.46
JULY 01, 2001 - JUNE 30, 2002 $5,915.46 $70,985.52
JULY 01, 2002 - JUNE 30, 2003 $6,3003.77 $72,405.24
JULY 01, 2003 - JUNE 30, 2004 $6,154.35 $73,852.20
2. Except as provided herein, the terms and conditions of the original
Lease dated May 13, 1999 are confirmed and are incorporated herein.
IN WITNESS HEREOF, the Lessor and Lessee have executed this Second Amendment to
Lease this 18th day of June, 1999.
LESSOR: LESSEE:
Korman/Lederer Management Co., Chicago Telecom, Inc.
as agents for the beneficiaries
of LaSalle National Bank, as
successor trustee to LaSalle
National Trust, N.A., as Trustee
under Trust # 107031
BY: /S/ LESLIE H. KORMAN BY: /S/ LAWRENCE E. GABLE
-------------------- ---------------------
LESLIE H. KORMAN LAWRENCE E. GABLE
ITS: CORPORATE PRESIDENT
<PAGE>
LEASE SUMMARY
MULTI-TENANT BUILDING LEASE
Lessor: Korman/Lederer Management Co., as agents for the beneficiaries of
LaSalle National Bank, as successor trustee to
LaSalle National Trust , N.A., as trustee under Trust #107031
Lessee: Chicago Telecom, Inc.
---------------------
Lease Dated: May 13, 1999
Leased Premises: 650 West Grand Avenue, Units 207/208/209
Elmhurst, Illinois 60126
------------------------
Specified Use: Office & Warehouse
------------------
Lessee's Square Footage: 5054 Square Feet
----------------
Term: June 15, 1999 - May 31, 2004
Occupancy: June 15, 1999 - May 31, 2004
Monthly Rental: See Page 2
Additional Rental:
Taxes in excess of - $.87 per square foot.
Common Area Maintenance costs in excess of $.66 per square foot.
HVAC Maintenance costs in excess of $.40 per square foot.
Security Deposit: $5685.75, PLUS GUARANTY BY CARNEGIE INTERNATIONAL CORPORATION
-------------------------------------------------------------
Lessee Pro Rata Share 3.56%
Total Building Area: 142,095 Square Feet
-------------------
Rent Payments To: Korman/Lederer Management Co.
P. 0. Box 71930
Chicago, Illinois 60694-1930
(The above is a brief summary of the provisions in the attached lease, but the
provisions in the attached lease are controlling.)
PLEASE INITIAL
Lessor, Lessee
--------------
MULTI-TENANT BUILDING LEASE
THIS LEASE, dated this 13th day of May 1999 , by and between Korman/Lederer
Management Co., as agents for the beneficiaries of LaSalle National Bank, as
successor trustee to LaSalle National Trust, N.A., as trustee under Trust
#107031 hereinafter referred to as "Lessor" and Chicago Telecom, Inc.
hereinafter referred to as "Lessee".
WITNESSETH
Lessor, in consideration of the rents and covenants hereinafter set forth,
hereby leases to Lessee and Lessee hereby accepts, that certain space shown and
designated on the floor plan attached hereto and made a part hereof as Exhibit
<PAGE>
A (the "Premises"), located in the Building known and described as 650 West
Grand Avenue, Units 207/208/209 Elmhurst, Illinois (the "Building"). The land
including all appurtenant easement areas upon which the Building is located is
hereinafter referred to as the "Property".
TO HAVE AND TO HOLD for a term ("the Lease Term") of, Five (5) Years commencing
on the 15th day of June, 1999, and ending on the 31st day of May 2004, unless
sooner terminated, as provided herein, subject to the covenants and agreements
hereinafter contained.
ARTICLE I. BASE RENT:
1.1 In the event the Lease Term does exceed five (5) years, Lessee shall pay to
Lessor annual Base Rent of See Below in equal monthly installments of See Below
each in advance on the first day of each and every calendar month during the
Lease Term. If the Lease Term commences on a day other than the first day of a
calendar month, or ends on a day other than the last day of a month, then the
Base Rent for such fractional month shall be prorated on the basis of 1/365th of
the annual Base Rent for each day of such fractional month. Base Rent shall be
payable without any demand therefore and without any deductions or set-offs
whatsoever.
PERIOD PER MONTH ANNUAL
June 15, 1999 - June 30, 1999 No Rent N/A
July 01, 1999 - May 31, 2000 $5685.75 $68,228.88
June 01, 2000 - May 31, 2001 $5799.47 $69,593.46
June 01, 2001 - May 31, 2002 $5915.46 $70,985.52
June 01, 2002 - May 31, 2003 $6033.77 $72,405.24
June 01, 2003 - May 31, 2004 $6154.35 $73,852.20
ARTICLE 2. ADDITIONAL RENT DEFINITIONS:
For purposes of this Article 2, the parties hereto agree upon the following
Definitions:
2.1 The term "Lease Year" shall mean each of those calendar years commencing
with and including the year during which the Lease Term commences, and ending
with the calendar year during which the Lease Term (including any extensions or
renewals) terminates.
2.2 The Term "Taxes" shall mean real estate taxes, assessments, sewer rents,
rates and charges, transit taxes, taxes based upon the receipt of rent, and any
other federal, state or local government charge, general special, ordinary or
extraordinary, foreseen or unforeseen, of any kind and nature whatsoever (but
not including income or franchise taxes or any other taxes imposed upon or
measured by Lessor's income or profits, unless the same shall be imposed in lieu
of real estate taxes), which may now or hereafter be levied or assessed against
the Property. Taxes shall also include attorney's fees and other expenses
reasonably incurred by Lessor for the purpose of obtaining reductions in the
Taxes previously described above. In the case of special taxes or assessments
which may be payable in installments, only the amount of each installment due
and payable during a Lease Year shall be included in "Taxes" for that year.
"Taxes" shall also include any personal property taxes relating to Lessor's
personal property located on the Property and used in connection with the
operation and maintenance thereof.
2.3 The term "Excess Taxes" shall mean the amount of Taxes for the applicable
Lease Year in excess of the sum of $.87 per square foot of the Building.
2.4 The term "Common Area Maintenance Costs" (sometimes referred to herein as
"CAM Costs") shall mean all costs or expenses of any kind or nature reasonably
incurred for the applicable Lease Year for the upkeep, maintenance, repair,
replacement and operation of the Premises, Building and Property or any or all
of them in any combination, in first class condition and operation as determined
in accordance with Lessor's regular practices, including but not limited to,
property insurance premiums (all risk in an amount equal to the full replacement
value), Liability Insurance, rental abatement insurance, (including additional
rental and taxes for one year), snow removal, landscaping maintenance,
maintenance repair and replacement costs, electricity, water, sewer, gas, and
other utility
<PAGE>
charges, fuel, lighting, window washing, trash (if not separately arranged) and
rubbish removal, common area maintenance clean up, reasonably allowable, wages
payable to employees of Lessor whose duties are connected with the upkeep,
maintenance, repair or operation of all or any part of the Premises, Building,
and property, amounts paid to contractors, subcontractors and material men for
work or services performed and materials supplied in connection with the
maintenance, repair, replacement and operation of all or any part of the
Premises, Building and Property. All services, supplies, repairs, replacement or
other expenses or maintaining, repairing and replacing all or any part of the
Building and the Property, other mechanical systems, fire alarm maintenance,
fees and other security costs including telephone charges, central station and
police and fire station connection and periodic charges for landscaping, snow
removal, parking lot maintenance and such other expenses as may be ordinarily
incurred in the maintenance, repair, replacement and operation of all or any
part of the Property and the Building not specifically set forth herein. The
term "Common Area Maintenance Costs" shall not include Taxes as defined above,
any improvements to the Building or Property other than replacement costs
required for normal maintenance and repair, and shall not include repairs,
restoration or other work occasioned by fire, windstorm or other insured
casualty losses, expenses incurred in leasing or procuring tenants, leasing or
real estate brokers commissions, advertising expenses, expenses for renovating
space for new tenants, legal expenses incurred in enforcing the terms of any
lease, interest or principal payment on any mortgage or other indebtedness of
Lessor, compensation paid to any employee of Lessor, above the grade of Building
superintendent or depreciation allowance or expense. Notwithstanding the
foregoing, in the event Lessor installs equipment on or makes improvements or
alterations to the Building or Property for the purpose of reducing energy
costs, maintenance costs or other Common Area Maintenance Costs, Lessor may
include in Common Area Maintenance Costs a reasonable charge for depreciation of
the same so as to amortize such investment over the reasonable life of such
equipment, improvement or alteration on a straight life basis not to exceed 10
years, provided said amount is less than the savings. The term "Common Area
Maintenance Costs" shall not include any amount separately charged to any
individual Lessee. The term "Common Area Maintenance Costs" shall mean the
amount of Common Area Maintenance Costs for the applicable Lease Year in excess
of the sum of S.66 per square foot. Roof, structural and parking lots are not
Common Area Maintenance Costs.
2.5 Lessee shall pay for the cost of operating the HVAC system including the
cost of a repair and maintenance contract with a reliable service company for,
on an annual or other basis, the maintenance of the HVAC systems. Lessor will
contract with such service company and Lessee shall pay said costs involved
either to Lessor or as Lessor shall direct. Replacement costs of heat
exchangers, condensers and compressors will be Lessor's expense and shall not be
part of said HVAC maintenance contract. Lessee agrees to cooperate with any
service people and make the Premises available to them on a reasonable basis.
Lessee will not do, suffer or commit any act or omission, whether upon the
Premises or otherwise, which might or would result in voiding or impairing the
obligations of any such maintenance contract. The term "HVAC Maintenance Costs"
shall mean the amount of HVAC maintenance costs for the applicable Lease Year in
excess of the sum of $.40 per square foot.
2.6 The term "Lessee's Pro Rata Share" shall mean Three & 56/100ths percent
3.56%) of the Excess Taxes imposed or levied against the Property for the
applicable Lease Year, and the Common Area Maintenance and HVAC Costs paid or
payable by Lessor in any Lease Year. Said percentage has been agreed upon by the
parties hereto after due consideration of the area of the Premises compared to
the area of the Building and other factors deemed relevant to the parties
hereto, including but not limited to, the location type, and quality of the
Premises. The parties agree that the Building contains 142,095 square feet.
ARTICLE 3. ADDITIONAL RENT: In addition to the Base Rent payable by Tenant under
the provisions of Article I hereof, Lessee shall pay to Lessor "Additional Rent"
as hereinafter provided for in this Article 3.
3.1 As to each Lease Year Lessor at its election may estimate for each such
Lease Year (1) the total amount of Excess Taxes, Excess CAM and Excess HVAC
costs: and (ii) Lessee's Pro Rata share thereof. Said estimate shall be in
writing and shall be delivered or mailed to Lessee at the Premises.
3.2 Lessee shall pay, as Additional Rent, the amount of Lessee's Pro Rata Share
of Excess Taxes, Excess CAM and Excess HVAC costs for each Lease Year, so
estimated, in equal monthly installments, in advance on the I st day of each
month during each applicable Lease Year. In the event that said estimate is
delivered to Lessee after the 1st day of January of the applicable Lease Year,
said amount, so estimated, shall be payable as Additional Rent, in equal monthly
installments, in advance, on the 1st day of each month over the balance of such
Lease Year with the number
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of installments being equal to the number of full calendar months remaining in
such Lease Year.
3.3 From time to time during any applicable Lease Year, Lessor may re-estimate
the amount of Excess Taxes, Excess CAM and Excess HVAC costs and Lessee's Pro
Rata Share thereof, and in such event Lessor shall notify Lessee, in writing, of
such re-estimate in the manner above set forth and shall fix monthly
installments for the then remaining balance of such Lease Year in an amount
sufficient to pay the re-estimated amount over the balance of such Lease Year
after giving credit for payments made by Lessee on the previous estimate.
3.4 During, and upon completion of each Lease Year, Lessor shall determine the
actual amount of Excess Taxes, Excess CAM and Excess HVAC for such Lease Year
and Lessee's Pro Rata Share thereof and shall deliver a written certification of
the amounts thereof to Lessee. If Lessee had paid less than Lessee's Pro Rata
Share of Excess Taxes, Excess CAM and Excess HVAC for any Lease Year, Lessee
shall pay the balance of Lessee's Pro Rata Share of the same within ten (10)
days after the receipt of such statement. If Lessee had paid more than Lessee's
Pro Rata Share of Excess Taxes, Excess CAM and Excess HVAC for any Lease Year,
Lessor shall either (1) refund such excess, or (ii) credit such excess against
the most current monthly installment or installments due Lessor for its estimate
of Lessee's Pro Rata Share of such excess costs for the next following Lease
Year. A pro rata adjustment shall be made for a fractional Lease Year occurring
during the term of this Lease or any renewal or extension thereof based upon the
number of days of the term of this Lease during said Lease Year as compared to
three hundred sixty-five (365) days and all additional sums payable by Lessee or
credits due Lessee as a result of the provisions of this Article 3 shall be
adjusted accordingly.
Further, Lessee shall pay, also as Additional Rent, any tax or excise on rents,
gross receipts tax, or other tax (other than Lessor's income taxes), however
described, which is levied or assessed by the United States of America or the
state in which the Property is located or any political subdivision thereof,
against Lessor in respect to the Base Rent, Additional Rent, or other charges
reserved under this Lease or as a result of Lessor's receipt of such rents or
other charges accruing under this Lease.
ARTICLE 4. OVERDUE AMOUNTS - RENT INDEPENDENT:
Any installments of Base Rent, Additional Rent, or other charges to be paid by
Lessee accruing under the provisions of this Lease, which shall not be paid ten
(10) days after due date, shall bear interest at the rate of Eighteen percent
(18%) per annum. from the date when the same is due until the same shall be
paid, but if such rate exceeds the maximum interest rate permitted by law, such
rate shall be reduced to the highest rate allowed by law under the
circumstances. Provided, however, a minimum late rent charge in the amount of
fifty ($50) dollars shall be due and payable if any payment of Annual Base Rent
or Additional Rent is not paid on or before ten (10) days after the due date
thereof. In additional to this late rent charge, Lessee shall pay Lessor as
Additional Rent on the next rental due date a returned check charge of the sum
of fifty ($50) dollars for each of Lessee's checks, if any, which may be
returned by Lessee's bank for insufficient funds or other refusal by Lessee's
bank to pay upon presentation of Lessee's check. Lessee covenants to pay the
Base Rent and the Additional Rent are independent of any other covenant,
condition, provision or agreement herein contained, and shall survive the
termination of this Lease.
ARTICLE 5. POSSESSION OF PREMISES:
5.1 If Lessor is unable to give possession of the Premises on the date of the
commencement of the term because the construction of the Building or the
completion of the Premises has not been sufficiently completed to make the
Premises ready for occupancy, or for any other reason, except due to the
negligence of Lessor, Lessor shall not be subject to any claims, damages or
liabilities for the failure to give possession on said date, provided that the
rent reserved and covenant to pay rent shall not commence until possession of
the Premises is given or the Premises are ready for occupancy, whichever is
earlier. Failure to give possession on the date of commencement of the term
shall in no way affect the validity of this Lease or the obligations of Lessee
hereunder, nor shall the same be construed in any way to extend the expiration
date of the term.
5.2 If Lessee is given and accepts possession of the Premises on a date earlier
than the date above specified for commencement of the term, the rent reserved
herein and all covenants, Agreements and obligations herein and the term of this
Lease shall commence on the date that possession of the Premises is given to
Lessee.
<PAGE>
ARTICLE 6. SECURITY DEPOSIT: As additional security for the full and prompt
performance by Lessee of all of Lessee's obligations hereunder, Lessee has upon
execution of this Lease paid to Lessor the sum of Five Thousand Six Hundred
Eighty Five & 75/ 100 Dollars ($5685.75 ') which sum may be applied by Lessor
for the purpose of curing any default or defaults, under this Lease. If Lessee
has not defaulted hereunder or if Lessor has not applied this security deposit
to any defaults, then this security deposit or any portion thereof not so
applied by Lessor shall be paid in cash to Lessee at the time of the termination
of this Lease or any extension or renewals thereof. If the whole or any part of
said security deposit is used or applied for the curing of any defaults, Lessee
shall immediately deposit with Lessor an amount of cash equal to the amount so
used or applied so that Lessee shall at all times have on deposit with Lessor an
amount equal to such original deposit as security as aforesaid. In no event
shall Lessee use such security deposit as a payment for Rent or Additional Rent,
and any attempted use of such deposit shall constitute a default under this
Lease, plus Guaranty by Carnegie International Corporation.
ARTICLE 7. UTILITY SERVICES:
7.1 Lessee shall promptly pay for all public utilities, including, without
limitation, electricity and water, rendered or furnished and metered to the
Leased Premises during the Term of this Lease.
7.2 Lessor shall furnish heating and air-conditioning units for the Premises.
Lessee shall be responsible for any damage to said units arising out of its
negligence or misuse. Lessee shall pay for the cost of operating said units.
Lessee shall clean the Premises.
7.3 Lessor shall not be liable for damages, by abatement of rent or otherwise,
for Interruption or failure of, or delay in, furnishing any service or utility,
whether the responsibility of Lessor or of others, when the same is occasioned
by causes beyond the reasonable control of Lessor.
ARTICLES. USE: Office & Warehouse
8.1 Lessee may use the Premises for the Specified Use but Lessee shall not
injure, overload, deface or otherwise harm the Property, Building, or the
Premises nor permit the same, nor commit any nuisance; nor permit the emitting
of any objectionable noise or odor; nor bum any trash or refuse thereon or
therein, nor sell, display, distribute or give away any alcoholic liquors or
beverages; nor make or permit any use of the Premises which is improper,
offensive, or contrary to any law or ordinance, or which will invalidate or
increase the cost of any of the Lessor's insurance (including the keeping or
storage of any article dangerous, inflammable or explosive character) or which
would increase the danger of fire in the Premises or in Building in which the
same is located; nor obstruct or permit he obstruction of driveways, walks,
parking areas and other common areas on the Property.
8.2 Lessee shall not place any painting or exterior sign, placard, or other
advertising media, banners, pennants, aerials, antennas, projections, awnings,
or devices, of any kind whatsoever, on the Property or on the exterior of the
Building, except a sign on the front door of the Premises, which sign shall
consist of letters of no more than four inches in height and the design and
conformity of which shall be approved in writing by Lessor prior to
installation. The installation of such sign shall be accomplished by the sign
company regularly employed by Lessor but at Lessee's expense.
8.3 In the event that Lessee's use of the Premises result in an increase of
Lessor's insurance, and Lessor allows said use, Lessee shall pay Lessor said
increase in insurance upon presentation of a receipt for a bill from Lessor for
said increase in insurance and said increase of insurance shall be deemed to be
Additional Rent.
ARTICLE 9. CONDITION AND MAINTENANCE OF THE PROPERTY, BUILDING AND THE PREMISES:
9.1 Repairs and Maintenance
Tenant Repairs and Maintenance. Lessee shall, at its expense, throughout the
Term, maintain and preserve, in first lass condition, the Premises and the
fixtures and appurtenances therein (including but not limited to, the Premises'
<PAGE>
plumbing and HVAC systems and excluding, however, those components of the
Premises for which Lessor is expressly responsible under the terms of this
Lease, Lessee shall also be responsible for all repairs and replacements
(whether structural or non-structural; interior or exterior; and ordinary or
extraordinary), in and to the Premises and the Property and the facilities and
systems, thereof if and to the extent that the need for such repairs or
replacements arises directly or indirectly from (a.) the performance or
existence of any Alterations, (b.) the installation, use or operation of
Lessee's Property in the Premises, (c.) The moving of Lessee's Property in or
out of the Premises and/or the Property, or (d.) Any act, omission, misuse, or
neglect of Lessee or any of its subtenants or its or their respective employees,
agents, contractors, invitees, or other entering into the Premises by act or
omission of Lessee or any subtenant. Without limiting the generality of the
foregoing, Lessee, at its expense, shall promptly place or repair all scratched,
damaged, or broken doors and glass in and about the Premises and floor coverings
in the Premises and repair and maintain all sanitary and electrical fixtures
therein, provided, however, that all replacements, materials and methods of
replacement shall be approved in writing by Lessor prior to installation. Any
repairs or replacements required to be made by Lessee to the mechanical,
electrical, sanitary, HVAC, or other systems of the Property or Premises shall
be performed by appropriately licensed contractors approved by Lessor which
approval shall not be unreasonably withheld. All such repairs or replacements
shall be subject to the supervision and control of Lessor or agent, and all
errors and replacements shall be made with materials of equal or better quality
than the items being repaired or replaced.
9.2 Except for repairs required in Article 9.3 hereof to be performed by Lessor,
Lessee agrees at its sole cost and expense, to keep Leased Premises, equipment,
facilities, light bulbs, ballasts and fixtures therein (including that in
windows, door and skylights), clean and in good condition and to replace any
glass which may be damaged or broken, with glass of the same quality; to make
all repairs, alterations, additions or replacements required by any law or
ordinance or any order or regulation of any public authority because of Lessee's
use of Leased Premises and to keep the Premises equipped with all safety
appliances required because of such use and to furnish any licenses and permits
required for any such use and to comply with the orders and regulations of all
governmental authorities. Lessee also shall repair any damage to the property or
Building caused by Lessee's fault or negligence.
9.3 Lessor Repairs. Notwithstanding anything contained herein to the contrary,
Lessor (and not Lessee) shall be responsible for the repair, replacement and
restoration of the foundation, exterior and interior load-bearing walls, roof
structure and roof covering and tuck pointing of the Property; provided,
however, that in the event that any such repair, replacement of restoration is
necessitated by any or all of the matters set forth in Article 9. 1, (a.), (b.),
(c.) or (d.) collectively.("Lessee Necessitated Repairs), then Lessee shall be
required to reimburse Lessor for all costs and expenses that Lessor incurs in
order to perform such tenant Necessitated Repairs, and such reimbursement shall
be paid, in full, within ten (10) days after Lessor's delivery of demand
therefore. Lessor agrees to commence the repairs, replacements or restoration
descried in this section 9.3 within a reasonable period of time after receiving
from Lessee written notice of the need for such repairs.
9.4 The Lessee at its sole expense shall comply with all laws, orders and
regulations of Federal, State and Municipal authorities and with any direction
of any public officer, pursuant to law, which shall impose any duty upon the
Lessor or the Lessee with respect to the leased property. The Lessee, at its
sole expense, shall obtain all licenses or permits which may be required for the
conduct of its business within the terms of this Lease, or for the making of
repairs, alterations, improvements, or additions and the Lessor, where
necessary, will join with the Lessee in applying for all such permits or
licenses.
9.5 Lessee shall have the right during the term of this Lease, to make, at its
sole expense, interior nonstructural changes and alterations in or of the
Premises, subject, however, to Lessor's prior written consent (which consent
shall not be unreasonably withheld) and subject in all cases to the following:
9.5.1. Any change or alteration shall be done in a good and workmanlike manner
and in compliance with all applicable permits and authorization and building and
zoning laws, and all other laws, ordinances, rules, regulations and requirements
of all Federal, State and Municipal governments, departments, commissions,
boards and officers, in accordance with the orders, rules and regulations of the
National Board of Fire Underwriters or any other body exercising similar
functions.
9.5.2. The cost of any change or alteration shall be paid, in cash, or its
equivalent and shall be subject to such
<PAGE>
other requirements as Lessor may reasonably impose, so that the Premises,
Building, and the property shall at all times be free of liens for labor and
materials supplied or claimed to have been supplied to the Premises.
9.5.3. Workers Compensation insurance covering all persons employed in
connection with the work and with respect to whom death or bodily injury claims
could be asserted against Lessor or its beneficiaries, as well as mortgagees of
the Premises, shall be maintained by Lessee at Lessee's sole cost and expense at
all times when any work is in process in connection with any change, or
alteration such insurance shall be in a company or companies of recognized
responsibility licensed to do business in Illinois, and all policies or
certificates therefore issued by the respective insurers bearing notations
evidencing the payment of premiums or accomplished by other evidence
satisfactory to Lessor of such payment, shall be delivered to Lessor.
9.5.4. Any and all alterations including wall covers, special paints or company
logo shall be removed before return of demised premises to Lessor at the
termination of the Lease Term. At the Lessor's option, such improvements may
remain so long as this is indicated in writing by Lessor or his bona fide agent.
Thus, the Premises shall be tendered to the Lessor as they were at the time of
tenancy.
9.6 HAZARDOUS MATERIALS:
The Lessee shall not use any materials or substances for which Material Safety
Data Sheets ("MODS") are required under OSHA's Hazardous Communication Standard
(29 CAR 1910.1200), as amended. The Lessee covenants and agrees (I) not to use
materials or substances for which an MODS is required, (ii) the Lessee is
absolutely prohibited from disposing of any Hazardous Materials, as hereinafter
defined, on the Premises and/or the Property, (iii) the Lessee shall comply with
all Environmental Laws, as hereinafter defined, and (iv) the Lessee shall
immediately notify the Lessor of any release of any Hazardous Materials at the
Premises and/or the Property.
For purposes hereof "Environmental Laws" shall mean and include all federal,
state and local environmental protection, occupational, health, safety and
similar laws, ordinances, restrictions, licenses, and regulations, including,
without limitation, the Federal Water Pollution Control Act (33 U.S.C. Sec. 1251
et seq .), Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq . ),
Safe Drinking Water Act (42 U.S.C. Sec 30OF et M ), Toxic Substances Control Act
( 15 U. S. C. Sec. 2601 et. seq.) (Environmental Response, Compensation and
Liability Act(49 U. S. C. Sec. 9601 et. seq.), Hazardous Materials
Transportation Act (49 U.S.C. Section 1802 et. seq.), the Illinois Environmental
Protection Act (I I I.Rev.Stat. ch. 111 1/2, par. 1001 et. seq.), and other
comparable federal, state or local laws, statutes, ordinances, order, decrees,
rules and/or regulations, regulating, relating to or imposing liability or
standards of conduct concerning any hazardous, toxic or dangerous waste,
substance or material as now or at any time hereafter in effect.
For purposes hereof "Hazardous Materials" shall mean and include any hazardous,
toxic or dangerous waste, substance or material, contaminant or pollutant
defined as such in or for purposes of the Environmental Laws.
ARTICLE 10. INDEMNIFICATION AND RELEASE OF CLAIMS:
10.1 Lessee will hold Lessor and its beneficiaries, if any, and the management
of the Building harmless and indemnified at all times against any loss, damage,
cost, expense or liability resulting to any person or property by reason of any
use which may be made of the Leased Premises or any part thereof, or by reason
of any act or thing done or omitted to be done in, upon or about the Premises or
any part thereof including, without limitation, the sale, gift or use of any
alcoholic beverages; and Lessee will hold Lessor and the property, Building and
the premises harmless and free and clear of any and all claims, demands,
penalties, liabilities, judgments, costs and expenses, including reasonable
attorney's fees, arising in connection with any use of the Premises.
10.2 Neither Lessor or Lessee shall be liable to the other for any business
interruption or any loss or damage to property or injury to or death of persons
occurring on the property or in the Building (includes the Premises), or in any
manner growing out of or connected with the Lessee's use and occupation of the
Premises, Building and the property, or the condition thereof, whether or not
caused by the negligence or other fault of Lessor or Lessee, or of their
respective agents, employees, sub-tenants, licenses, or assignees. This release
shall apply only to the extent that such business interruption, loss or damage
to property or injury to or death of persons is covered by insurance, regardless
of whether such insurance is payable to or protects Lessor or Lessee, or both.
Nothing in Article 10.2 shall
<PAGE>
be construed to impose any other or greater liability upon either Lessor or
Lessee than would have existed in the absence of Article 10.2. This release
shall be in effect only so long as the applicable insurance policies contain a
clause to the effect that this release shall not affect the right of the insured
to recover under such policies. Such clauses shall be obtained by the parties
whenever possible. The release in favor of Lessor contained herein, is in
addition to, and not in substitution for, or in diminution of the hold harmless,
and indemnification provisions of Article 10. 1 hereof.
ARTICLE 11. LESSEE INSURANCE:
11.1 At all times subsequent to Lessee taking possession of the Premises, Lessee
shall, at its sole cost and expense maintain:
11.1.1 Comprehensive General Public Liability Insurance against claims for
personal injury, death or property damage occurring in connection with the use
and occupancy of the Leased Premises, naming Lessee and Lessor and Lessor
beneficiaries, if any, management of the Building, and holders of all mortgages
on the Premises, as the additional insured, which limits of liability not less
than the following, unless otherwise agreed in writing by Lessor.
Bodily Injury: One Person $1,000,000
Aggregate $2,000,000
Property Damage: One Accident $ 500,000
11. 1. 2 Fire and Extended coverage Insurance (contents broad form) on Lessee's
personal property located in the Premises in amounts reasonable deemed adequate
by Lessee to fully insure such personal property.
11.2 With respect to policies which Lessee is required to procure and maintain
hereunder:
11.2.1 Each such policy shall contain an agreement or endorsement that it will
not be canceled by insurer without at least ten (10) days' prior written notice
to Lessor and all mortgage holders.
11.2.2 Each such policy or a certificate therefore issued by insurer hereunder,
shall be deposited by Lessee with Lessor.
11.2.3 If Lessee furnishes any insurance in the form of a blanket policy, it
will furnish satisfactory proof that such blanket policy complies in all
respects with the provisions of this Lease, and that the coverage thereunder is
at least equal to the coverage which would be provided under a separate policy
covering only the Premises.
11.2.4 Each such policy shall be issued by insurers of recognized responsibility
licensed to do business in Illinois.
11.2.5 Not less than (10) days prior to the expiration date of any such policy,
Lessee will furnish Lessor with a new policy or certificate therefore or a
renewal thereof, in substitution of the expiring policy.
11.2.6 Lessee will not do, suffer or permit any act or omission, whether upon
the Premises or otherwise, which might or would result in voiding or impairing
the obligation of such policy of insurance.
ARTICLE 12. REPAIR OF BUILDING IN THE EVENT OF FIRE OR CASUALTY:
12.1 In the event the Leased Premises or any structures or improvements thereon
are damaged or destroyed during the term thereof, Lessor shall determine in its
sole discretion, whether to promptly cause the said damage or destruction to be
repaired and if so determined, shall cause the Premises to be restored to a
condition substantially equivalent to the existing immediately preceding the
occurrence. If so decided, such repair and restoration shall be at Lessor's
expense, excepting the cost of replacing or repairing Lessee's fixtures or
personal property.
12.2 Lessor shall determine whether to repair or not within sixty (60) days from
the date of the damage or destruction. In the event Lessor decides to repair,
Lessor shall have one hundred twenty (120) days from the date of the decision to
complete repairs. In the event Lessor determines not to repair, then both Lessor
and Lessee shall at
<PAGE>
such time have the option to terminate this Lease. All insurance proceeds which
relate to the Building and improvements and not Lessee's contents in excess of
the costs to restore and repair shall be the property of the Lessor. Lessor
shall abate the rent payable from the date of loss and during the period in
which repairs and restoration are taking place. If Lessor decides not to repair,
the Lease shall terminate in the 30 days following notice from Lessor and all
amounts payable by Lessee under this Lease shall be pro-rated to the last date
that the Lessee shall have had use and occupancy of the Premises.
ARTICLE 13. CONDEMNATION:
13.1 If the whole of the Premises shall be taken for any public or quasi-public
use under statute or by right of eminent domain or by private purchase in lieu
thereof, then this Lease shall automatically terminate as of the date that title
shall be taken. If any portion of the Building in which the Premises are located
shall be taken so as to render the Premises unusable for the Specified Use for
which the Premises were leased, then either Lessor or Lessee may terminate this
Lease upon the giving of written notice to the other party, within sixty (60)
days from the date of such taking. Any notice given within said sixty (60) day
period shall not be effective until the expiration of thirty (30) days after the
giving of said notice as provided in Article 21 hereof. Rent shall be abated
from the date the Leased Premises are no longer used or usable by Lessee.
13.2 If any part of the Premises shall be so taken and this Lease shall not
terminate under the provisions of Article 13.1 hereof, then the rent payable
under this Lease shall be equitably apportioned according to the space so taken,
and if the reduction in rental cannot be agreed upon by the parties that matter
shall be submitted to arbitration and Lessor shall, at its own cost and expense,
restore the remaining portion of the Premises to the extent necessary to render
it reasonably suitable for the purpose for which it was leased and shall make
all repairs to Building in which the Premises are located to the extent
necessary to constitute building a complete architectural unit, provided that
the cost thereof shall not exceed the proceeds of Lessor's condemnation award.
13.3 All compensations awarded or paid upon such a total or partial taking of
the Premises shall belong to and be the property of Lessor without any
participation by Lessee, provided, however that nothing contained herein shall
be construed to preclude Lessee from prosecuting any claim against the
condemning authority in such condemnation proceedings for loss of business, or
depreciation to, damage to, or cost of removal of, or for the value of stock,
trade fixtures, furniture and other personal property belongings to Lessee;
provided however, that no such claim shall diminish or otherwise adversely
affect Lessor's award or the award to any fee mortgages.
ARTICLE 14. ASSIGNMENT AND SUBLETTING:
14.1 Lessee shall not, without the prior written consent of Lessor, which
consent shall not be unreasonably withheld: (1) transfer, pledge, mortgage or
assign this Lease or any interest hereunder; (ii) permit any assignment of this
Lease by voluntary act, operation of law or otherwise; (iii) sublet the Premises
or any part thereof; or (iv) permit the use of the Premises by any parties other
than Lessee, its agents and employees. Lessee shall, by notice in writing,
advise Lessor o its intention from, on and after a stated date (which shall not
be less than thirty (30) days after date of Lessee's notice), to assign this
Lease or to sublet any part or all of the Premises for the balance or any part
of the term. Lessee's notice shall include all of the terms of the proposed
assignment or sublease and shall state the consideration therefore.
14.2 In such event, Lessor shall have the right to be exercised by giving
written notice to Lessee within ten (10) days after receipt of Lessee's notice,
to recapture the space described in Lessee's notice and to enter into a direct
lease with any such proposed assignee or sub-lessee. Effective on the
commencement date of such direct lease, this Lease shall be canceled and
terminated with respect to the space therein described.
14.3 Lessee's notice shall state the name and address of the proposed assignee
or subtenant and a true and complete copy of the proposed assignment or sublease
shall be delivered to Lessor with Lessee's notice.
14.4 If Lessee's notice shall cover all of the Premises, and Lessor shall have
exercised its foregoing recapture right, the term of this Lease shall expire and
end on the commencement date of any direct lease entered into by Lessor with
such proposed sub-lessee or assignee as fully and completely as if that date had
been herein definitely
<PAGE>
fixed for the expiration of the term. If, however, this Lease shall be canceled
with respect to less than the entire Premises, Base Rent and Additional Rent
reserved herein shall be adjusted on the basis of the number of square feet
retained by Lessee in proportion to the number of square feet contained in the
Premises, as described in this Lease, and this Lease as so amended shall
continue thereafter in full force and effect.
14.5 If Lessor, upon receiving Lessee's notice with respect to any such space,
shall not exercise its right to recapture as aforesaid, Lessor will not
unreasonably withhold its consent to Lessee's assignment of the Lease or
subletting such space to the party identified in Lessee's notice.
14.6 Any subletting or assignment hereunder shall not release or discharge
Lessee of or from any liability, whether past, present or future, under this
Lease, and Lessee shall continue fully liable hereunder. The subtenant or
subtenants or assignee shall agree in a form satisfactory to Lessor to comply
with and be bound by all of the terms, covenants, conditions, provisions and
agreements of this Lease to the extent of the space sublet or assigned, and
Lessee shall deliver to Lessor promptly after execution, an executed copy of
each such sublease or assignment and an agreement of compliance by each such
subtenant or assignee.
14.7 Any assignment, transfer, or subletting of this Lease which is not in
compliance with the provisions of this Article 14 shall be of no effect and
void. Lessor's right to assign its interest in this Lease shall remain
unqualified.
ARTICLE 15. LESSOR'S PERFORMANCE OF LESSEE'S COVENANTS:
15.1 Should Lessee at any time fail or omit to do any act or thing provided
under this Lease to be done by Lessee, Lessor may in its sole discretion after
ten (10) days advance written notice to Lessee, itself do or cause to be done
such act or thing, including the payment of any and all water rates and other
governmental impositions, any and all governmental permits and other licenses
fees and change, the cost of maintenance and operation, or any addition to or
alteration or repair or improvements in the Premises, any insurance premium, any
claim against or lien upon the Premises made or filed by any labor, supplier,
material-man, principal contractor, subcontractor, or other person, whether for
work, labor or service performed upon, or materials supplied to the Premises,
any public utility bill or charge and any and all other sums payable by Lessee
under this Lease.
15.2 All monies paid by Lessor pursuant to the provisions of Article 15.1 shall
be and constitute so much Additional Rent use hereunder from Lessee to Lessor to
be due and payable upon notice given by Lessor of the nature and amount thereof,
on the first day of the calendar month next succeeding the month during which
Lessor shall have given notice with interest upon any such amount at the
applicable maximum legal rate and if none, then at the rate of eighteen (18%)
percent per annum from the date of payment by Lessor until repayment to Lessor
by Lessee.
ARTICLE 16. CERTAIN RIGHTS RESERVED TO LESSOR:
Lessor reserves the following rights:
16.1 To have pass key to the Premises and no locks shall be changed without
prior written consent of Lessor.
16.2 To take any and all measures, including inspections, repairs, alterations
and improvements to the Premises, or to building as may be necessary or
desirable for the operation, safety, protection or preservation thereof,
provided that no such work shall permanently reduce the area rented by Lessee.
16.3 To show the Premises to prospective Lessees or brokers during the last six
months of the Term of this Lease (and if vacated during such period, to prepare
the Premises for occupancy) and to prospective purchasers at all reasonable
times, provided prior notice is given to Lessee in each case.
16.4 To designate and/or approve, prior to installation, all types of window
shades, blinds, drapes, awnings, window ventilators and other similar equipment,
and to control all internal lighting that my be visible from the exterior of
building.
ARTICLE 17. SUBORDINATION TO EXISTING AND FUTURE MORTGAGES
<PAGE>
17.1 Unless otherwise directed in writing by the holder of any mortgage on the
property or Building, this Lease shall be subject and subordinate at all times
to the lien of any existing mortgage or mortgages which hereafter may be made a
lien on the property or Building; provided that so long as Lessee is not in
default under this Lease, its possession of the Premises and its rights and
privileges hereunder shall not be interfered with by the mortgagee or any
Purchaser upon a foreclosure of such mortgage. Although no instrument or act on
the part of the Lessee shall be necessary to effectuate such subordination, the
Lessee shall nevertheless execute and deliver further instruments subordinating
this Lease to the lien of any such mortgages as may be desired by the mortgagee,
provided the same acknowledges Lessee's rights as hereinbefore described. The
Lessee hereby appoints the Lessor its attorney- in- fact irrevocably to execute
and deliver any such instrument for the Lessee. Notwithstanding anything herein
provided to the contrary, this Lease shall not be subject or subordinate to any
junior mortgage or mortgages on the property and/or Building.
17.2 If any mortgagee or committed financier of Lessor should require, as a
condition precedent to the closing of any loan or the disbursal of any money
under any loan, that this Lease be amended or supplemented in any manner (other
than in the description of the Leased Premises, the terms, the purpose or the
Rent, Additional Rent or other charges hereunder), Lessor shall give written
notice thereof to Lessee, which notice shall be accompanied by a Lease
Supplement Agreement embodying such amendments or supplements. Lessee shall
within ten (10) days after the effective date of the Lessor's notice, either
consent to such amendments or supplements (which consent shall not be
unreasonably withheld) and execute the tendered Lease Supplement Agreement, or
deliver to Lessor a written statement of its reason or reasons for refusing to
so consent and execute. Failure of Lessee to respond within said ten (10) day
period shall be a default under this Lease without further notice. If Lessor and
Lessee are then unable to agree on a Lease Supplement Agreement satisfactory to
each of them and to the Lender within thirty (30) days after delivery of
Lessee's written statement, Lessor shall have the right to terminate this Lease
within sixty (60) days after the end of said thirty (30) day period.
ARTICLE 18. LESSOR'S REMEDIES:
18.1 If default shall be made in the payment of any money to be paid by Lessee
under this Lease: Provided THAT same is not cured within thirty (30) day's of
receipt of written notice to Lessee from Lessor, or default shall be made in the
performance of any of the other covenants or conditions which Lessee is required
to observe and perform, or if the interest of Lessee under this Lease shall be
levied on under execution or other legal process, or if any petition shall be
filed by or against Lessee to declare Lessee a bankrupt or to delay, reduce or
modify Lessee's debts or obligations, or if any petition shall be filed or other
action taken to reorganize or modify Lessee's capital structure if Lessee be a
corporation or other entity, or if Lessee be declared insolvent according to
law, or if any assignment of Lessee's property shall be made for the benefit of
creditors or if a receiver or trustee is appointed for Lessee or its property,
or if Lessee shall abandon the Premises during the term of this Lease, then
Lessor may treat the occurrence of any one or more of the foregoing events as a
breach of this Lease (provided that no such levy, execution, legal process or
petition filed against Lessee shall constitute a breach of this Lease if Lessee
shall vigorously contest the same by appropriate proceedings and shall remove or
vacate the same within thirty (30) days from the date of its creation, service
or filing) and thereupon, at its option, may, without notice or demand of any
kind to Lessee or any other person, have anyone or more of the following
described remedies in addition to all other rights and remedies provided at law
or in equity:
18.1.1 Lessor may terminate this Lease and forthwith repossess the Premises and
be entitled to recover forthwith as damages a sum of money equal to the balance
of the Term Rent then remaining unpaid hereunder, less the fair rental value of
the Premises for said period and any other sum of money and damages owed by
Lessee to Lessor.
18.1.2 Lessor may terminate Lessee's right of possession and may repossess the
Premises by forcible entry or detainer suit or otherwise, without demand or
notice of any kind to Lessee and without terminating this Lease, in which event
Lessor may, but shall be under no obligation so to do, re-let the same for the
account of Lessee for such rent and upon such terms as shall be satisfactory to
Lessor. For the purpose of such re-letting Lessor is authorized to decorate or
make any reasonable repairs, changes, alterations or additions in or to the
Premises that may be necessary or convenient and if Lessor shall fail or refuse
to re-let the Premises, or if the same are re-let and a sufficient sum shall not
be realized from such re-letting after paying all of the costs and expenses of
such decorations, repairs, changes, alterations and additions and the expense of
such re-letting and of the collection of the
<PAGE>
rent accruing there-from to satisfy the rent provided for in this Lease to be
paid, then Lessee shall pay to Lessor as damages a sum equal to the amount of
the rental reserved in this Lease for such period or periods, or if the Premises
have been relet the Lessee shall satisfy and pay any such deficiency upon demand
therefore from time to time and Lessee agrees that Lessor may file suit to
recover any sums falling due hereunder from time to time, and that no delivery
or recovery of any portion due Lessor hereunder shall be any defense to any
subsequent action brought for any amount not therefore reduced to judgment in
favor of Lessor.
ARTICLE 19. SURRENDER OF POSSESSION:
19.1 Upon the termination of this Lease or upon the termination of Lessee's
right of possession, Lessee shall at once surrender possession of the Premises
to Lessor and remove all effects there-from, and if such possession is not
immediately surrendered Lessor may forthwith re-enter the premises and repossess
itself thereof as of its former estate and remove all persons and effects
there-from, using such force as may be necessary without being guilty of any
manner of trespass or forcible entry or detainer, without limiting the
generality of the foregoing, Lessee agrees to remove at the termination of the
Lease, Lessee's movable office furniture, trade fixtures and office equipment
and such alterations, improvements and additions as may be requested by Lessor.
If Lessee shall fail or refuse to remove all such property from the Premises,
Lessee shall be conclusively presumed to have abandoned the same and title
thereto shall thereupon pass to Lessor without any cost, either by set off,
credit, allowance or otherwise and Lessor may, at its option accept title to
such property or at Lessee's expense, may remove the same, or any part thereof,
in any manner that Lessor shall choose, and store the same without incurring
liability to Lessor or any other person. Lessee agrees to pay Lessor the cost of
restoring the walls, ceilings, floors and all light bulbs, ballasts, exit lights
and/or battery packs of the Premises to the same condition that existed prior to
the date of the commencement. Any unauthorized alterations, improvements and
additions made for Lessee's occupancy of the Premises shall also be removed and
the Premises repaired.
ARTICLE 20. HOLDING OVER:
20.1 In the event Lessee remains in possession of the Premises after expiration
of this Lease, and without the execution of a new Lease, but with Lessor's
written consent, it shall be deemed to be occupying the Premises as a Lessee
from month-to-month, subject to all the provisions, conditions and obligations
of this Lease insofar as the same can be applicable to a month-to-month tenancy,
except that the Base Rent shall be escalated to Lessor's then current Base Rent
for the Premises according to Lessor's then current Rental rate schedule for
prospective lessees. In the event Lessee remains in possession of the Premises
after expiration of this Lease and without the execution of a new Lease and
without Lessor's written consent, Lessee shall be deemed to be occupying the
Premises without claim of right and Lessee shall pay Lessor for all costs
arising out of loss or liability resulting from delay by Lessee in so
surrendering the Premises as above provided and shall pay as a charge for each
day of occupancy an amount equal to 150% of the Base Rent and Additional Rent
(on a daily basis then currently being charged by Lessor on new Leases in the
Building for space similar to the Premises.)
ARTICLE 21. NOTICES:
21.1 All notices to be given by one party to the other under this Lease shall be
in writing, mailed or delivered as follows:
Korman/Lederer Management Co.
To Lessor: 3 100 Dundee Road # 116
Northbrook, Illinois 60062
To Lessee: To the Premises, or to such other address subsequently
designated by notice sent by one party to the other.
Mailed notices shall be sent by United States certified or registered mail,
postage prepaid. Such notices shall have been deemed to have been given by
posting in the United States Mails, unless provided to the contrary herein.
ARTICLE 22. ESTOPPEL CERTIEFICATE:
<PAGE>
Lessee agrees that from time to time, upon not less than five (5) days prior
request by Lessor, it will deliver a statement in writing certifying:
22.1 That this Lease is unmodified and in full force and effect (or if there
have been modifications that the Lease, as modified, is in full force and
effect);
22.2 The dates to which rent and other charged have been paid; and
22.3 That Lessor is not in default under any provisions of this Lease or, if in
default, the nature thereof in detail.
ARTICLE 23. MISCELLANEOUS:
23.1 All rights and remedies of Lessor under this Lease shall be cumulative and
none shall exclude any other rights and remedies, allowed by law.
23.2 Each of the provisions of this Lease shall extend to and shall, as the case
may require, bind or inure to the benefit, not only of Lessor and of Lessee, but
also of their respective heirs, legal representatives, successors and assigns,
provided this clause shall not permit any transfer, assignment or sublease
contrary to the provisions of Article 14 thereof.
23.3 All of the representations and obligations of Lessor are contained herein
and no modification, waiver or amendment of this Lease, or of any of its
conditions or provisions, shall be binding upon the Lessor unless in writing,
signed by Lessor, or by a duly authorized agent of Lessor.
23.4 This Lease may be executed in any number of counterparts. Each such
executed counterpart shall be deemed an original hereof and all such executed
counterparts shall together constitute but one and the same instrument, which
instrument shall for all purposes be sufficiently evidenced by any such executed
counterpart.
23.5 This Lease is executed by Korman/Lederer Management Co. not personally, but
as agent for the Beneficiaries of said LaSalle National Bank, as successor
trustee to LaSalle National Trust, N.A., as Trustee under Trust #107031 - in the
exercise of power and authority conferred upon it as such Agent and under the
express direction of the beneficiaries of said Trust #107031. It is expressly
understood and agreed that nothing herein or in said Lease contained shall be
construed as creating any liability whatsoever against said Agent personally. If
said Trust #107031 shall cease to own the Leased Premises or the Buildings, said
Trust and the beneficiaries of said Trust shall thereafter have no liabilities
and obligations hereunder shall continue in favor of the successors in title.
23.6 The non-prevailing party shall pay, upon demand, all of the other parties
costs, charges and expenses, including the reasonable fees of counsel, agents
and others retained by the other party incurred in enforcing the non-prevailing
parties obligations hereunder. Either party shall pay, upon demand, all of the
other party's costs, charges and expenses including, fees of agents and
attorneys incurred in any litigation, negotiations or transactions in which such
other party, without its fault, was caused to become involved.
23.7 Should Lessor be compelled to commence or sustain an action at law to
collect said rents or parts thereof or to dispossess the Lessee or to recover
possession of said premises, or to recover damages done to Premises, Building or
fixtures, or from any other cause arising from said Lease, the Lessee shall pay
all costs in connection therewith including reasonable attorney's fees of said
Lessor.
23.8 Lessee, its employees, and invitees shall have the non-exclusive right to
use the common driveways and parking lots along with the other tenants and
customers of the building. The use of such driveways and parking facilities are
subject to such reasonable rules and regulations as the Lessor may impose.
Lessee further agrees not to use, or permit the use by its employees, the
parking areas for the overnight storage of automobiles or other vehicles without
the written permission of Lessor.
23.9 If Lessee is a corporation, then upon execution of this Lease and after any
amendments hereto, Lessee shall deliver to Lessor certified copies of the
corporate resolutions of Lessee authorizing the execution of this Lease or said
amendments.
<PAGE>
23.10 This Lease shall not be recorded but the parties agree, at the request of
either of them, to execute a Short Form Lease for recording containing the name
of the parties, the legal description, and the terms of the Lease.
ARTICLE 24. COVENANT AGAINST LIENS:
24.1 Lessee covenants and agrees not to suffer or permit any lien of mechanics
or material men to be placed against the Building or Premises, and in case of
any such lien attaching to, immediately pay off and remove the same. Lessee has
no authority or power to cause or permit any lien or encumbrance of any kind
whatsoever, whether created by act of Lessee, operation of law or otherwise, to
attach to or be placed upon Lessor's title or interest in the Premises, and any
and all liens and encumbrances created by Lessee shall attach to Lessee's
interest only.
ARTICLE 25. NONWAIVER:
25.1 No waiver of any condition expressed in this Lease shall be implied by any
neglect of Lessor to declare a forfeiture on account of the violation of such
condition if such violation be continued or repeated subsequently, and no
express waiver shall affect any condition other than the one specified in such
waiver and that one only for the time and in the manner specifically stated. No
receipt of moneys by Lessor from Lessee after the termination in any way of the
term of this Lease or of Lessee's right of possession hereunder or after the
giving of any notice shall reinstate, continue or extend the term of this Lease
or affect any notice given to Lessee prior to the receipt of such moneys, it
being agreed that after the service of notice or the commencement of a suit or
after final judgment for possession of the premises Lessor may receive and
collect any rent due, and the payment of said rent shall not waive or affect
said notice, suit or judgment.
ARTICLE 26. DEFAULT:
26.1 In the event that Lessor shall default on any of its obligations hereunder,
Lessee shall, in addition to any notice and opportunity to cure given to Lessor,
give notice of such default to Aid Association For Lutherans ("AAL"), and AAL
shall have a reasonable opportunity (not less than thirty (30) days to cure
same.
ARTICLE 27. SUBORDINATION:
27.1 Lessee covenants and agrees that all of Lessee's rights hereunder are and
shall be subject and subordinate to the lien of any first mortgage or first deed
of trust now or hereafter placed on the Premises or any part thereof, except the
Lessee's property or trade fixtures, and to any and all renewals, modifications,
consolidations, replacements, extensions or substitutions of any first mortgage
or first deed of trust (which is hereinafter termed the "mortgage"). The
Lessee's covenant of subordination hereunder shall be subject to Lessor's
mortgagee agreeing that if Lessee is not in default hereunder the Lessee's
tenancy shall not be disturbed. Such subordination shall be automatic, without
the execution of any further subordination agreement by Lessee. If, however, a
written subordination agreement, consistent with this provision, is required by
a mortgagee or beneficiary of a deed of trust, Lessee agrees to execute,
acknowledge and deliver the same and in the event of failure so to do, Lessor
may, in addition to any other remedies for breach of covenant hereunder,
execute, acknowledge and deliver the same as the agent or attorney in fact of
Lessee, and Lessee hereby irrevocably constitutes Lessor its attorney - in- fact
for such purpose.
ARTICLE 28. ATTORNMENT:
28.1 If, at any time during the term of this Lease, the Lessor of the Premises
shall be the holder of a leasehold estate covering the premises which include
the Premises, and if such leasehold shall terminate or be terminated for any
reason, or if, at any time during the term of Lease a mortgage to which this
Lease is subordinate shall be foreclosed, Lessee agrees at the election and upon
demand of any owner of the premises which include the Premises, or of any
mortgagee or beneficiary of a deed of trust in possession thereof, or of any
holder of a leasehold thereafter
<PAGE>
affecting premises which include the Premises, or of any purchaser at
foreclosure or trustee's sale, to attorn, from time to time, to any such owner,
mortgagee, beneficiary, holder or purchases upon the terms and conditions set
forth herein for the remainder of the term demised in this Lease.
ARTICLE 29. NOTICES:
29.1 All notices required or desired to be given hereunder by either party to
the other shall be given by certified or registered mail, first-class postage
prepaid, return receipt requested. Notices to the respective parties shall be
addressed as follows:
If to the Lessor Korman/Lederer Management Co.
3100 Dundee Road, Suite 116
Northbrook, Illinois 60062
With a copy to Aid Association for Lutherans
4321 North Ballard Road
Appleton, W1 54919
Attention: Investment Division
If to the Lessee To the Premises
Either party may, by like written notice, designate a new address to
which such notices can be directed. Such notice shall have been deemed
to have been given by posting in the United States mail.
Any mortgagee of Lessor, or purchaser of the Premises, or beneficiary of a deed
of trust, shall be relieved and released from any obligation to return such
security in the event such mortgagee, beneficiary of a deed of trust, or
purchaser comes into possession of the Premises by reason of foreclosure or
trustee's sale (including deed in lieu thereof) or proceeding in lieu of
foreclosure unless such security deposit shall have been actually delivered to
such mortgagee or purchaser. Such release does not relieve Lessor of any
obligation it may have to return the security deposit.
ARTICLE 31. AMERICAN WITH DISABILITIES ACT:
Lessee shall at all times keep the Premises in compliance with the Americans
With Disabilities Act and its supporting regulations, and all similar federal,
state or local laws, regulations and ordinances ("ADA"). Provided that the
premises were in compliance at the inception of this Lease. If Lessor's consent
would be required for alterations to bring the Premises into compliance, Lessor
agrees not to unreasonably withhold its consent. Lessee shall indemnify and hold
harmless Lessor from all loss, claims, suits, actions, and liability relating to
the ADA that is the result of the use of the Premises by Lessee, its employees,
agents, guests or invitees.
ARTICLE 32. ESTOPPEL CERTIFICATE OR THREE-PARTY AGREEMENT:
At Lessor's request at any time or from time to time, Lessee will execute either
an estoppel certificate or a three-party agreement among Lessor, Lessee and
Lessor's mortgagee or beneficiary of a deed of trust certifying to such facts
(if true) and agreeing to such notice provisions and other matters as such
mortgagee or beneficiary of a deed of trust may reasonably require in connection
with Lessor's financing, including, but not limited to, damages, liabilities and
expenses in connection with Lessee's breach of this provision.
ARTICLE 33. LESSOR WILL DO THE FOLLOWING AT NO COST TO LESSEE:
33.1 Paint office and clean carpet.
33.2 LESSOR TO INSTALL DUCTS TO BRING AIR CONDITIONING TO THE WAREHOUSE.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Lease on
the date first above written.
LESSOR: LESSEE:
<PAGE>
Korman/Lederer Management Co. Chicago Telecom, Inc.
as agent for the beneficiaries of
LaSalle National Bank,
as successor trustee to LaSalle
National Trust, N.A., as Trustee
under Trust #107031
BY:/s/ Leslie H. Korman BY: /s/Lawrence E. Gable
-------------------- --------------------
Leslie H Korman Lawrence E. Gable
Its: President
<PAGE>
EXHIBIT "C"
GUARANTY OF LEASE
-----------------
WHEREAS, Korman/Lederer Management Co., as agents for the beneficiaries of
LaSalle National Bank, as successor trustee to LaSalle National Trust, N.A. as
Trustee under Trust #107031, hereinafter referred to as "Lessor", and Chicago
Telecom, Inc. hereinafter referred to as "Lessee", are about to execute a
document entitled Multi-Tenant Building Lease, dated May 13, 1999, hereinafter
referred to as the "Lease", by which Lessor will lease the premises commonly
known as 650 West Grand Avenue, Units 207/208/209, Elmhurst, Illinois.
WHEREAS, Carnegie International Corporation, hereinafter referred to as
"Guarantor", has a financial interest in Lessee; and
WHEREAS, Lessor would not execute the Lease if Guarantor did not execute and
deliver to Lessor this Guaranty of Lease;
NOW THEREFORE, for and in consideration of the execution of the foregoing Lease
by Lessor and as a material inducement to Lessor to execute said Lease,
Guarantor hereby unconditionally and irrevocably guarantees the prompt payment
by Lessee of all rentals and all other sums payable by Lessee under said Lease
and the faithful and prompt performance by Lessee of each and every one of the
terms and conditions and covenants of said Lease to be kept and performed by
Lessee. Lessor's right of recovery against Guarantor is, however, limited to
Three Hundred Fifty Five Thousand Sixty Five & 30/100 Dollars ($355,065.30),
plus attorneys' fees hereinafter provided for.
It is specifically agreed and understood that the terms of the foregoing Lease
may be altered, affected, modified or changed by agreement between Lessor and
Lessee or by a course of conduct, and said Lease may be assigned by Lessor or
any assignee of Lessor without consent of notice to Guarantor and shall this
Guaranty shall thereupon and thereafter guaranty the performance of said Lease
as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure or delay on
the part of Lessor to enforce any of the rights or remedies of the Lessor under
said Lease, whether pursuant to the terms thereof or at law or in equity.
No notice of default need to be given to Guarantor, it being specifically agreed
and understood that the guaranty of the undersigned is a continuing guaranty
under which Lessor may proceed forthwith and immediately against Guarantor under
the terms of the Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantor hereunder following any
breach or default by Lessee without first proceeding against Lessee and without
previous notice to or demand upon Guarantor.
Guarantor hereby waives notice of acceptance of this Guaranty; demand of
payment, presentation and protest; all right or assert or plead any statute of
limitations as to relating to this Guaranty and the Lease; any right to require
the Lessor to proceed against the Lessee or any other Guarantor or any other
person of entity liable to Lessor; any right to require Lessor to apply to any
default any security deposit or other security it may hold under the Lease; any
right to require Lessor to pursue any other remedy Lessor may have before
proceeding against Guarantor; and any right of subrogation.
Guarantor does hereby subrogate all existing or future indebtedness of Lessee to
Guarantor to the obligations owned to Lessor under the Lease and this Guaranty.
The obligations of Lessee under the Lease to execute and deliver estoppel
statements, as therein provided, shall be deemed to also require the Guarantor
to provide the same relative to Guarantor.
The term "Lessor" whenever hereinabove used refers to and means the Lessor in
the foregoing Lease specifically named and also any assignee of said Lessor,
whether by outright assignment or by assignment for security, and also any
successor to the interest of said Lessor or of any assignee in such Lease or any
part thereof, whether by assignment or otherwise. So long as the Lessor's
interest in or to the leased premises or the rents, issue and profits
<PAGE>
therefrom, or in, to or under said Lease, are subject to any mortgage or deed of
trust or assignment for security, no acquisition by Guarantor of the Lessor's
interest in the leased premises or under said Lease shall affect the continuing
obligation of Guarantor under this Guaranty which shall nevertheless continue in
full force and effect for the benefit of the mortgagee, beneficiary, trustee or
assignee under such mortgage, deed of trust or assignment, of any purchase at
sale by judicial foreclosure or under private power of sale, and of the
successors and assigns of any such mortgagee, beneficiary trustee assignee or
purchaser.
The term "Lessee" whenever hereinabove used refers to and means the Lessee in
the foregoing Lease specifically named and also any assignee or sublessee of
said Lease, and also any successor to the interest of said Lessee, assignee or
sublease of such lease or any part thereof, whether by assignment, sublease or
otherwise.
In the event that any action is brought by Lessor against Guarantor to enforce
the obligation of Guarantor hereunder, the unsuccessful party in such actions
shall pay to the prevailing party therein reasonable attorneys' fees which shall
be fixed by the court.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty of Lease as of
this 14th day of May, 1999.
Carnegie International Corporation
By: /s/ Lawrence E. Gable
---------------------
Lawrence E. Gable
Its: VP Carnegie International Corporation
--------------------------------------
Exhibit 10.32
ACC LEASE
MEMO TO: THE HARBOR CITY CORP./ACC TELECOM
6410 Dobbin Road, Suite A
Columbia, Md 21045
1. Occupancy Date: July 5, 1995
II. Commencement of Rent: October 19, 1995
III. Expiration Date: October 31, 2002
I . Payments
A. Prorata
B.Prorate Amounts
1. Dates September 19, 1995 to September 30, 1995
Rent -0
Common Area & HVAC $298-20
Taxes & Insurance 196.20
Total $494.40
1. Dates October 19,1995 to October 31, 1995
Rent $1,566.76
Common Area & HVAC 755.68
Taxes & Insurance 496.82
Total $2,819.26
C.Actual Amounts
1. Dates November 1, 1995 to October 31, 2000
Rent $3,665.65
Common Area & HVAC 755.68
Taxes & Insurance 496.92
Total $4,918.15
D. Please remit checks to M.O.R. Columbia Ltd. Partnership c/o Manekin
Corporation 7165 Columbia Gateway Drive Columbia, Maryland
21046
E. Amounts are due in advance on the 25th day of the month preceding
the month for which payment is due (e.g., November's rent is due on
or before October 25).
V. Rent increases with effective dates $3,966.25 Effective date
November 1, 2000
VI. Option (s) to renew with client notification date (s) Notification
date May 25, 2002
VII. Entity acknowledgment and signature M.O.R. COLUMBIA LIMITED
PARTNERSHIP
Signature
date
VIII. Company acknowledgment and signature
THE HARBOR CITY CORP.
Signature
date
<PAGE>
LEASE AGREEMENT
Between
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
and
HARBOUR FINANCIAL MORTGAGE CORPORATION
t/a New America Financial
Table of Contents
- -----------------
SECTION PAGE
1.DEFINITIONS 1-
2.LEASE TERM 2-
3.BASIC RENTAL 2-
4.BASIC RENTAL ESCALATION 3-
5.SECURITY DEPOSIT 3-
6.LANDLORD'S OBLIGATIONS 3-
7.IMPROVEMENT OF THE PREMISES 4-
8.OPERATING EXPENSES 4-
9.USE 5-
10 TENANT'S-REPAIRS AND ALTERATION 5-
11.ASSIGNMENT AND SUBLETTING 5-
12.INDEMNITY 7-
13.SUBORDINATION 7-
14.RULES AND REGULATIONS 8-
15.INSPECTION 8-
16.CONDEMNATION . 8-
17.FIRE OR OTHER-CASUALTY 8-
18.HOLDING OVER 9-
19.TAXE S 9-
20.EVENTS OR DEFAUL 10-
21REMEDIES 11-
22.SURRENDER OF PREMISES 12-
23.ATTORNEYS' FEES 12-
24.LANDLORD'S LIEN 12-
25.MECHANICS' LIENS 12
26.WAIVER OF SUBROGATION: INSURANCE 13-
27.SUBSTITUTION SPACE 13-
28.BROKERAGE 13-
29.ESTOPPEL CERTIFICATES 13
30.NOTICES 14
31. FORCE MAJEURE 14-
32. SEVERABILITY 14-
33. AMENDMENTS; WAIVER; BINDING EFFECT 14-
34. QUIET ENJOYMENT
15-
35. LIABILITY OF TENANT 15-
<PAGE>
LEASE AGREEMENT
between
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
and
HARBOUR FINANCIAL MORTGAGE CORPORATION
t/a New America Financial
DATA SHEET
This Data Sheet is an integral part of this Lease and all of the terms hereof
are incorporated into this Lease in all respects. In addition to the other
provisions which are elsewhere in this Lease, the following, whenever used In
this Lease, shall have the meanings set forth in this Data Sheet.
(a) Premises Suite No. 170 in the Building., generally outlined on the
floor plan attached hereto as Exhibit A (Section l(l)). (b) Area of Premises
Approximately 3,080 renteable square feet on the first (1st) floor of the
Building (Exhibit A and section l(l)). Building Willow Wood I, located at 10300
Eaton Place, Fairfax, Virginia (Section l(d)).(d)Basic Rental $16.75 per
renteable square foot per year payable in equal monthly installments of $
4,303.35, subject to adjustment as herein provided (Sections l (b) and
3).(e)Annual Basic rent escalation $51,640.25 (Section 3). $4303.35 mo - yr. 1
$4432.45 mo - yr. 2 $4565.43 mo. - yr. 3 (f) Annual Basic Rent escalation. Three
percent (3%) of the escalated Basic Rental then in effect (Section 4). $4702.39
mo. - yr. 4 4$843.46 mo. - yr. 5 (g) Additional Rent See Section 41.(h)Lease
Term - Five years and zero months, commencing on the Commencement Date (Sections
1(j) and 2).Start (I)Commencement Date See Section 1(f). (j) Building Operation
Hours Monday through Friday, 8:00 a.m. to 6:00 p.m. and Saturday, 8:00 a.m. to
1:00 p.m. (k)Permitted Use Any general business office purposes and for no other
purpose (Sections l(k) and 9). (I) Tenant's Proportionate Share of Building
Space 2.53% (See Section 1(o) and (p ) (m) Tenant's Proportionate Share of
Parking Spaces 10 unreserved spaces (Section47) (n)Brokers Involved C.B.
Commercial Real Estate Group, Inc. and The Fred Ezra Company (o) Security
Deposit See Section l(n) and 5.(p)Notice If to Landlord: The Equitable Life
Assurance Society of the United States c/o C.B. Commercial Real Estate Group,
Inc. 11781 Lee Jackson Highway, Suite Fairfax, Virginia 22030
If to Tenant:
At the Premises
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the day of 1996, between THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York corporation
(hereinafter called "Landlord"), whose address for purposes hereof in 1875 Eye
Street, N.W., Suits 900, Washington, D.C. 20006 and HARBOUR INANCIAL MORTGAGE
CORPORATION, t/a New America Financial, a corporation (hereinafter called
"Tenant"), whose address for purposes hereof is in care of the Premises.
1.DEFINITIONS.
(a) "Basic Cost": The actual costs incurred by the Landlord in
operating and maintaining the Building and the Land during each
calendar year of the Lease Term for which Landlord has not been
reimbursed by insurance proceeds, condemnation awards or otherwise.
Such costs shall include, by way of example rather than of limitation,
(I) charges or fees for, and taxes on, the furnishing of electricity, water,
sewer service, gas, fuel, or other utility services to the Building and the
Land; (ii) costs of providing elevator, janitorial and trash removal service,
restriping, resurfacing, maintaining and repairing all walkways, roadways and
parking areas on the Land, security costs, and cost of maintaining grounds,
common areas and mechanical systems of the Building and the Land; (III) all
other costs of maintaining and repairing any or all of the Building or Land;
(iv) all costs reasonably allocated by Landlord to the common areas of the
Building and the Land in a multi-building development; (v) charges or fees for
any necessary governmental permits and licenses; (vi) management fees, overhead
and expenses reasonably related to management of the Building (including
salaries for personnel directly responsible for management of the Building);
(vii) premiums for hazard, liability, workmen's compensation or similar
insurance upon any or all of the Building and the Land; (viii) costs arising
under service contracts with independent contractors; and (ix) the cost of any
other items which, under generally accepted accounting principles consistently
applied from year to year with respect to the Building or the Land, constitute
operating or maintenance costs attributable to any or all of the Building or the
Land.
Such costs shall not include (I) the expense of principal and interest
payments made by the Landlord pursuant to the provisions of any mortgage or deed
of trust covering the Building or the Land; (ii) any deduction for depreciation
of the Building taken on the landlord's income tax returns; or (iii) the cost of
capital improvements made to the Building, other than capital improvements,
modifications or equipment required by federal, state or local ordinance, rule,
regulation or law or determined by Landlord in good faith to result in savings
or reductions in Basic Cost generally, in which case the cost thereof shall be
included in Basic Cost for-the calendar year in which the cost shall have been
incurred and in subsequent calendar years, on a straight line basis, such items
will be amortized over an appropriate period and with an appropriate interest
factor selected in good faith by Landlord. If Landlord shall have leased any
such items of capital equipment designed to result in savings or reductions in
Basic Cost, then the rental and other costs paid pursuant to such leasing shall
be included in Basic Cost for each calendar year in which they shall have been
incurred.
In determining Basic Cost, where less than 95% of the Building's
rentable square footage is occupied during all or any part of a year, those
items of the Basic Cost which vary according to occupancy such as electricity
and janitorial services, shall be increased to that amount which would have been
incurred had the Building been 95% occupied during the entire year.
b. Basic Rental": $16.75 per rentable square foot per year payable in equal
monthly installments of $4,303.35, subject to adjustment as herein
provided.
c. Real Estate Taxes": The Real Estate Taxes payable in the calendar year 1996.
d. Base Year Stop": The Basic Cost incurred during the calendar year 1996
divided by the number of
<PAGE>
rentable square feet in the Building.
e. Building": The office building which has been constructed on land located at
10300 Eaton Place, Fairfax, Virginia, and known as WillowWood Plaza I.
f. "Commencement Date": September 1, 1996, provided Tenant is legally
authorized to occupy the Premises
g. "Event of Default": As defined in Section 20 of this Lease.
h. "Excess": As defined in Section 8 of this Lease.
i "Land":The entire tract of land on which the Building is located and upon
which other buildings are located which have shared common facilities, and
subject from time to time, to (i) increase through the acquisition of
adjoining properties, and (ii) reduction through the sale or transfer by
Landlord or the reservations of any such property from the development of
which the Building is a part.The term Land shall also include any property
that must be maintained by Landlord due to the existence of any public or
private easement.
(j) "Lease Term": The period commencing on the Commencement Date and
continuing for five (5) years and zero (0) months thereafter.
(k) "Permitted Use": Any general business office purposes and for no other
purpose.
(1)"Premises": Suite No. 170 in the Building, generally outlined
on the floor plan attached hereto as Exhibit A and consisting of
approximately 3,083 rentable square feet. The Premises shall be
measured in accordance with the Modified BOMA Method of Measurement for
Office Buildings, and may be confirmed by Tenant's architect, at
Tenant's expense.
(m) "Rules and Regulations": The Landlord's rules and
regulations sent to Tenant in writing from time to time, as amended or
substituted for from time to time, the current form of which is
attached hereto as Exhibit C.
(n) "Security Deposit": $4,303.35.
(o)"Tenant's Proportionate Share for Basic Cost": 2.53%. Such
percentage is equal to a fraction, the numerator of which equals the
number of rentable square feet within the Premises and the denominator
of which equals the total number of rentable square feet of office
space in the Building.
(p) "Tenant's Proportionate Share for Real Estate Taxes":2.53%.
Such percentage is equal to a fraction, he numerator of which equals
the number of rentable square feet within the Premises and the
denominator of which equals the total number of rentable square feet in
the Building.
2. LEASE TERM.
(a)Landlord, in consideration of the rent to be paid and the other
covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the Premises,
as defined herein and generally outlined on the floor plan attached hereto as
Exhibit A, commencing on the Commencement Date and ending, without the necessity
of notice from either party to the other, such notice being expressly waived, on
the last day of the Lease Term, unless sooner terminated as herein provided.
(b)If the Landlord shall be unable to tender possession of the Premises
on the anticipated Commencement Date, the Landlord shall not be liable for any
damage caused thereby, nor shall this Lease be void or voidable by Tenant, but
in such event, unless the delay results (i) from failure of Tenant to provide
plans or otherwise perform in accordance with the requirements of the Lease or
(ii) from any delay in Landlord's ability to tender possession of the Premises
caused by Tenant, no rental shall be payable by Tenant prior to actual tender to
Tenant of possession of the Premises.
<PAGE>
(c) By occupying the Premises, Tenant shall be deemed to have accepted
the same as suitable for the purpose herein intended and to have acknowledged
that the Premises comply fully with Landlord's obligations. Prior to occupancy
or within three (3) business days of delivery to Tenant by Landlord, whichever
is shorter, ...as to execute and return to Landlord a letter prepared by
Landlord determining the Commencement Date, a copy of which is attached hereto
as Exhibit B, certifying that Tenant has accepted delivery of the Premises and
that the condition of the Premises complies with Landlord's obligations hereon.
Notwithstanding the foregoing, Tenant shall be permitted to enter the Premises
... the Commencement Date to move in furniture and other personal property,
providing however, that (i) Landlord shall designate the day or days on which
Tenant may so enter the Premises, and (ii) all waiver and indemnity provisions
of this Lease (including, but not limited to, those contained in Section 12)
shall apply to such early entry.
3.BASIC RENTAL
(a) Tenant promises and agrees to pay Landlord the Basic Rental
(subject to adjustment as hereinafter provided) without demand, notice,
deduction, counterclaim, recoupment or set-off, for each month of the
entire Lease Term. The first monthly installment shall be due and
payable upon execution of this Lease. The Basic Rental for each
subsequent month shall be paid in advance beginning on the first day of
the calendar month following the expiration of the first calendar month
of the Lease Term and continuing thereafter on or before the first day
of each succeeding calendar month during the term hereof.
(b) In the event any installment of the Basic Rental, or any other sums
which became owing by Tenant to Landlord under the provisions hereof,
are not received within ten (10) days after the due date thereof,
(without in any way implying Landlord's consent to such late payment),
Tenant shall pay, in addition to such installment of the Basic Rental
or such other sums owed, and not as a penalty, additional rent in the
form of a late payment charge equal to five percent (5%) of such
monthly installment of the Basic Rental or such other sums owed for
each month or part thereof such payment is overdue. Notwithstanding the
foregoing, the foregoing late charges shall not apply to any sums which
may have been advanced by Landlord to or for the benefit of Tenant
pursuant to the provisions of this Lease, it being understood that such
sums shall bear interest from the date of the advance until paid in
full, which Tenant hereby agrees to pay to Landlord, at the rate of
fourteen percent (14%) per annum or the highest rate permitted by law,
whichever is less.
4. BASIC RENTAL ESCALATION.
The Basic Rental shall be increased annually, effective on each
anniversary of the Commencement Date during the term hereof, by an amount equal
to three percent (3%) of the escalated Basic Rental then in effect, payable as
follows:
Year Annualized Rent
Monthly Rent
2 $53,189.46
$4,432.45
3
$54,785.14
<PAGE>
$4,565.43
4
$56,428.70
$4,702.39
5
$58,121.56
$4,843.46
5. SECURITY DEPOSIT.
The Security Deposit, which shall be paid upon execution of this Lease,
shall be held by Landlord without liability for interest and not in trust or in
a separate account, as security for the performance by Tenant of Tenant's
covenants and obligations under this Lease. The Security Deposit shall not be
considered an advance payment of rental or a measure of Landlord's damages in
case of default by Tenant. Upon the occurrence of any Event of Default by
Tenant, Landlord may, from time to time in its sole discretion, without
prejudice to any other remedy, use and apply the Security Deposit to the extent
necessary to make good any arrearages of rent and any other damage, injury,
expense or liability suffered by Landlord by such Event of Default. Following
any such application of the Security Deposit, Tenant shall pay to Landlord on
demand as additional rent the amount so applied in order to restore the Security
Deposit to its original amount. If Tenant is not then in default hereunder, any
remaining balance of the Security Deposit shall be returned by Landlord to
Tenant within a reasonable period of time after the termination of this Lease
and (i) Tenant shall have surrendered the entire Premises to Landlord, (ii)
Landlord shall have inspected the Premises after such vacation, and (iii) Tenant
shall have complied with all of the terms, conditions and covenants in the
Lease. If Landlord transfers its interest in the Premises during the Lease Term,
Landlord may assign the Security Deposit to the transferee and thereafter shall
have no further liability for the return of such Security Deposit.
6. LANDLORD'S OBLIGATIONS.
(a) Subject to the limitations hereinafter set forth, Landlord agrees,
while Tenant is occupying the Premises and is not in breach of, or default
under, this Lease, to furnish to Tenant: (i) facilities to provide water at
those points of supply both within the Premises and those provided for general
use of tenants of the Building; (ii) facilities to provide a supply of
electrical current reasonably necessary for general business office use and
occupancy of the Premises and electric lighting and a supply of electrical
current to the common areas of the Building; (iii) heating and refrigerated air
conditioning in season; and (iv) elevator and janitorial service to the
Premises,, all such services to be provided in scope, quality, and frequency to
those services being customarily provided by landlords in comparable office
buildings in the surrounding area. Heating, ventilation and air conditioning
requirements and standards under this Lease shall be subject, however, to such
regulations as the Department of Energy or other local, State or federal agency,
Board or commission shall adopt from time to time...Landlord agrees to maintain
the public and common areas of the Building such as...stairs, corridors and
restrooms, in reasonably good order and condition; provided, however, that
Tenant shall reimburse Landlord, upon demand, for all repairs and additional
maintenance resulting from damages to such public or common areas caused by
Tenant, or its employees, agents or invitees. Landlord reserves the right,
exercisable without notice and without liability to Tenant for damage or injury
to property, persons or business and without effecting an eviction, constructive
or actual, or disturbance of Tenant's use or possession of the Premises, or
giving rise to any claim by Tenant for setoff or abatement of rent, to decorate
and to make repairs, alterations, additions, modifications, changes or
improvements, whether structural or otherwise, in and about the Building, or any
part thereof, and for such purposes to enter upon the Premises and, during the
continuance of any such work, to temporarily close doors, entryways, public
space and corridors in the Building and to interrupt or temporarily suspend
Building services and facilities.
(b)If Landlord, to any extent, fails to make available any of the
services to be
<PAGE>
provided by Landlord expressly set forth above or if any slowdown, stoppage or
interruption of, or any change in the quantity, character or availability of,
the services to be provided by Landlord expressly set forth above occurs, such
failure or occurrence shall not render Landlord liable in any respect for
damages to either person, property or business, nor be construed as an eviction
of Tenant or work an abatement of rent, nor relieve Tenant from fulfillment of
any covenant or agreement hereof. Should any equipment or machinery furnished by
Landlord break down or for any cause beyond Landlord's. reasonable control cease
to function properly, Landlord shall use reasonable diligence to repair same
promptly, but Tenant shall have no claim for abatement of rent or damages on
account of any interruptions in service occasioned thereby or resulting
therefrom.
7. IMPROVEMENT OF THE PREMISES.
Tenant agrees to accept the Premises in its current "as is" condition;
provided, however, that Landlord agrees to repaint the kitchen in the Premises
and to clean the carpet in one room of the Premises as designated by Tenant.
8. OPERATING EXPENSES.
(a)During the term of this Lease, Tenant shall pay as additional rent
an amount (per each square foot within the Premises) equal to the excess
("Excess") from time to time by which the per square foot Basic Cost (which
shall be calculated by dividing the Basic Cost by the total rentable square feet
in the Building) exceeds the Base Year Stop. Landlord, at its option, may
collect such additional rent for each calendar year in a lump sum, to be due and
payable within thirty (30) days after Landlord furnishes to Tenant a statement
of actual Basic Cost for the previous year, or, beginning with the first day of
the thirteenth month following the Commencement Date, and on each January 1,
thereafter, Landlord shall also have the option to make a good faith estimate of
the Excess for each upcoming calendar year and may require the monthly payment
of such additional rent equal to one-twelfth (1/12) of such estimate.
(b)By May 1 of each calendar year during Tenant's occupancy and the
calendar year following termination of this Lease, or as soon thereafter as
practical, Landlord shall furnish to Tenant a statement of Landlord's actual
Basic Cost for the previous year. If for any calendar year additional rent
collected for the prior year as a result of Landlord's estimate of Basic Cost is
(i) in excess of the additional rent actually due during such prior year, then
Landlord shall either credit such overpayment towards Tenant's estimated share
of operating expenses for the next year or refund to Tenant any overpayment, or
(ii) leis than the additional rent-actually due during such prior year, then
Tenant shall pay to Landlord, on demand, any underpayment with respect to the
prior year.
(c)Each statement furnished by Landlord to Tenant shall be conclusive
and binding upon Tenant unless, within thirty (30) days after receipt of such
statement, Tenant delivers to Landlord a written notice specifying the
particular details for which such statement is claimed to be incorrect. Pending
the determination of such dispute, Tenant shall pay without delay the full
amount of the additional rent payable by Tenant in accordance with each such
statement that Tenant is disputing. Without limiting the preceding sentence,
Tenant, or a certified public accountant acting as Tenant's agent, shall have
the right, during Landlord's normal business hours and after reasonable notice,
to inspect the books and records of Landlord applicable to the determination of
the statement of additional rent payable by Tenant for the purpose of verifying
in good faith the information contained in such statement for a period of up to
one year after the receipt of such statement by Tenant.
(d) Should Tenant require any additionalwork or service, including, but
not limited to heating, ventilation and air conditioning ("HVAC") furnished
outside Landlord's normal operating hours of 8:00 a.m. to 6:00 p.m., Monday
through Friday, 8:00 a.m. to 1:00 p.m. Saturday, including holidays, Landlord
may, upon reasonable advance notice, ...further such additional services at a
charge not less than Landlord's actual cost, plus overhead for the additional
<PAGE>
services provided, it being agreed that thecost to the Landlord of such
additional services shall not be ....treated as Basic Cost.
(e)Landlord may, at any its reasonable discretion, require separate
metering for gas, electric power or for any other utility service required by
Tenant if such service is deemed by Landlord to be in excess of Building
standard usage or for any other reason, in which case the cost of such metering
shall be at Tenant's sole cost and expense, due and payable upon demand by
Landlord, and in which event Tenant shall pay for all such utility service in
excess of its normal and customary usage, as metered. For any utility services
that are separately metered as prescribed herein, the amount of said services
which had been included in the calculation of the Base Year Stop or the
calculation of Basic Cost shall be excluded therefrom.
(f)Notwithstanding any expiration or termination of this Lease prior to
the end of the Lease Term, Tenant's obligations to pay any and all additional
rent pursuant to this Lease shall continue and shall cover all periods up to the
expiration or termination of this Lease. Tenant's obligation to pay any and all
additional rent or other sums owing by Tenant to Landlord under this Lease shall
survive any expiration or termination of this Lease.
9. USE
Tenant shall use the Promises only for the Permitted Use. Tenant will
not occupy or use the Premises, or permit any portion of the Premises to be
occupied or used, for any business or purpose other than the Permitted Use or
for any use or purpose which is unlawful, in part or in whole, disreputable in
any manner, or extra hazardous, nor will Tenant permit anything to be done which
shall in any way cause substantial noise, vibrations or fumes, or increase the
rate of insurance on the Building or contents or cause any cancellation of any
insurance policy covering the Building or any portion of its contents. In the
event that, by reason of acts or omissions of Tenant, there shall be any
increase in the rate of insurance on the Building or contents created by
Tenant's acts, omissions or conduct of business, Tenant hereby agrees to pay to
Landlord the amount of-such increase on demand. Tenant will conduct its business
and control its agents, employees and invitees in such a manner as not to create
any nuisance, nor interfere with or disturb the possession of other tenants or
Landlord in the management of the Building. Tenant shall not, without the prior
written consent of Landlord, paint, install lighting or decorations, or Install
any signs, window or door lettering or advertising media of any type on or about
the Premises or any part thereof.
10. TENANT'S REPAIRS AND ALTERATIONS.
Tenant shall not in any manner deface or Injure or make unapproved
modifications of the Premises or the Building and will pay the cost of repairing
any damage or injury done to the Premises or the Building or any part thereof by
Tenant or Tenant's agents, employees or invitees. Tenant shall throughout the
Lease Term take good care of the Premises and keep them free from waste and
nuisance of any kind. Tenant agrees, at Tenant's sole cost and expense, to keep
the Premises, including, without limitation, all fixtures installed by Tenant
and any plate glass and special store fronts, In good condition and make all
necessary non-structural repairs and replacements except those caused by fire,
casualty or acts of God covered by Landlord's fire insurance policy covering the
Building. Such repairs and replacements shall be in quality equal to the
original work and installation. If Tenant fails to make such repairs within
fifteen (15) days after the occurrence of the damage or injury, Landlord may, at
its sole option, make such repair, and Tenant shall, upon demand therefor, pay
Landlord for Landlord's cost thereof plus fifteen percent (l5%) for overhead
costs.
Notwithstanding anything in the Lease to the contrary, Tenant will not
make or allow to be made any alterations or physical additions in or to the
Premises, including changes in locks on doors, plumbing, lighting, wiring or
partitions, without the prior written consent of
<PAGE>
Landlord. All maintenance, repairs, alterations, additions or Improvements shall
be conducted only by contractors or subcontractors approved in advance in
writing by Landlord, it being understood that Tenant shall procure and maintain,
and shall cause such contractors and subcontractors engaged by or on behalf of
Tenant to procure and maintain, insurance coverage against such risks, in such
amounts and with such companies as Landlord may require in connection with any
such maintenance, repair, alteration, addition or improvement.
At the end or other termination of this Lease, Tenant shall deliver up
the Premises with all improvements located therein in good repair and condition,
reasonable wear and tear excepted, and shall deliver to Landlord all keys to the
Promises. All alterations, additions or improvements (whether temporary or
permanent in character) made in or upon the Premises by Landlord or Tenant shall
be Landlord's property upon termination of this Lease and shall remain on the
Premises without compensation to Tenant; provided, however, that if Landlord so
elects on or prior to the termination or upon earlier vacation of the Premises,
Tenant shall remove all alterations, additions, improvements and partitions
erected by Landlord or Tenant (i) ... the Commencement Date and(ii) prior to the
Commencement Date, if such alterations, additions, or improvements are so
designated for removal by Landlord on the Space Plan, and shall restore the
Premises to its original condition by the date of termination of this Lease or
upon earlier vacation of the Premises except as provided herein. Landlord hereby
elects...and/or telephone cables installed by Tenant or which may be in the
...installed by Tenant, removed upon the termination of the Lease or upon
Tenant's earlier vacating of the Premises. If Tenant fails to restore the
Premises upon Landlord's request, Landlord shall have the right to perform such
restoration and Tenant shall be liable for all costs and expenses incurred by
Landlord therefor.
11. ASSIGNMENT AND SUBLETTING.
(a) Landlord's Prior Consent Required.Neither Tenant nor Tenant's
representatives, successors and assigns nor any subtenant or assignee will
assign, transfer, mortgage or otherwise encumber this Lease or sublet or rent
(or permit the occupancy or use of) the Premises, or any part thereof, without
obtaining the prior written consent of Landlord. Landlord's consent to assign
this Lease or sublet the Premises will not be unreasonably withheld, provided
Tenant satisfies all applicable provisions of subsection (b) below, nor shall
any assignment or transfer of this Lease or the right of occupancy hereunder be
effectuated by operation of law or otherwise without the prior written consent
of Landlord. Any reasonable expenses incurred by Landlord with respect to the
review and consent or denial of consent of the foregoing shall be paid by Tenant
to Landlord as additional rent, and shall be due and payable with the monthly
installment of rent when billed.
(b)Qualification of Assignee or Subtenant. Subject to the provisions of
Section 11(c) hereof, Landlord shall not unreasonably withhold its t hereunder
to any assignment or sublease by Tenant, provided that (x) in the event of a
sublease Tenant shall satisfy each of the following conditions prior to any such
sublease becoming effective; and (y) in the event of an assignment, Tenant shall
satisfy the conditions of subsections-(i), (ii), (iv), (v) and (vi) prior to any
such assignment becoming effective:
(i)Tenant must first notify Landlord, in writing, of any proposed
assignment or sublease, at least thirty (30) days prior to the effective date of
such proposed assignment or sublease. The notice to Landlord must include a copy
of the proposed assignment or sublease and a copy of the proposed assignee's or
subtenant's financial statement for its most recent fiscal year, prepared in
accordance with generally accepted accounting principles and certified by a
public accountant or an executive officer of the proposed assignee or subtenant.
(ii)The assignee or subtenant must have a credit rating satisfactory to
Landlord (in Landlord's reasonable j9dgment).
(iii)The sublease must (A) be expressly subject and subordinate to this
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Lease, (B) require that any subtenant comply with and abide by all of the terms
of the Lease, and (C) provide that any termination of this Lease shall
extinguish the sublease as well.
(iv)The Assignee or subtenant may not propose to change the use of the
premises to a purpose other than as stated in Section 9 hereof, may not be a
place of public accommodation as defined under the Americans with Disabilities
Act, nor conduct its business in a manner which, in Landlord's reasonable
judgment, is not appropriate for comparable office buildings in the metropolitan
Washington, D.C. area.
(v)The assignee or subtenant may not be a tenant, subtenant, or other
occupant of any part of the Building, unless Landlord is unable to offer such
occupant comparable space elsewhere in the Building.
(vi) The Tenant may not be in default under this Lease, or have
committed two events of default hereunder during the previous twelve (12)
months, whether cured or not.
(vii) The sublease shall contain the following clause:
"Underlying Lease Agreement. This Sublease and Subtenant's rights under
this Sublease shall at all times be subject 'and subordinate to the underlying
Lease identified in Paragraph ___hereof, and Subtenant shall perform all
obligations of Tenant underaid said Lease, with respect to the Sublease
Premises. Subtenant acknowledges that any termination of the underlying Lease
shall extinguish this Sublease. Landlord's consent to this sublease shall not
make Landlord a party to this Sublease, shall not create any privity of contract
between Landlord and Subtenant or other contractual liability or duty on the
part of the Landlord to the Subtenant, shall not constitute its consent or
waiver of consent to any subsequent sublease or sub-sublease, and shall not in
any manner increase, decrease or otherwise affect the rights and obligations of
Landlord and Tenant under the underlying Lease, in respect of the Sublease
Premises. Subtenant shall have no right to assign this Sublease or further
sublet the Premises without the prior written consent 6f Landlord. Any term of
this Sublease that in any way conflicts with or alters the provisions of the
underlying Lease shall be of no effect as to Landlord and Landlord shall not
assume any obligations as landlord under the Sublease and Tenant shall not
acquire any rights under the Sublease directly asserting against Landlord under
the underlying Lease. ...assigns to Landlord this Sublease and any and all
payments due Tenant from Subtenant as additional security for Tenant's
performance of all of its covenants and obligations under the underlying Lease,
and authorizes Landlord to collect the same directly from Subtenant and
otherwise administer the provisions of this Sublease, at the option of Landlord.
Subtenant hereby consents to such collateral assignment of this Sublease to
Landlord and agrees to observe its obligations created hereby."
(c)Landlord's Right of First Refusal.Landlord shall have the right,
within thirty (30) days after receipt of the notice from Tenant, required under
Section 11(b)(i) above, to elect: (1) if Tenant proposes to assign the Lease or
sublease all or substantially all of the Premises, to terminate the Lease in its
entirety, in which event the Lease shall terminate upon the effective date of
the proposed assignment or sublease, and Tenant shall vacate the Premises as of
such effective date in accordance with the applicable provisions of this Lease;
(ii) if Tenant intends to sublet a portion of the Premises, to terminate this
Lease only with respect to such portion of the Premises, in which case Tenant
shall vacate such portion as provided in subsection (i) above; or (iii) to
require Tenant to pay Landlord, within (10) days of receipt, one-half (1/2) of
the amount of rent payable under such assignment or sublease in excess of the
amount of rent payable by Tenant hereunder with respect to the Premises or, in
the event of a sublease, the portion of the Premises sublet, offset by any
direct expenses incurred by Tenant actually incurred in assigning the Lease or
subleasing such portion of the Premises (amortized in equal monthly payments
over the remaining term of the Lease, if assigned, or, if applicable, over the
initial term of such sublease). Upon exercise by Landlord of either of the
options set forth in subsection (i) or (ii) above, Tenant shall surrender the
Premises or such portion of the Premises, as the case may be,
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to Landlord, and thereafter the rent to be paid by Tenant pursuant to Section 3
above shall be that portion of the total rent which the amount of square foot
area remaining in the possession of Tenant bears to the total square foot area
of the Premises. In the event that Landlord does not exercise Its right to
terminate this Lease, or any applicable portion thereof, within said thirty (30)
day period, Tenant shall have the right, subject to the provisions of subsection
(iii) above, to assign the Lease or sublet the Premises or a portion thereof
after first obtaining the written consent of Landlord as provided in Section
11(a) above. Upon exercise by Landlord of the option set forth in subsection
(iii) above, Tenant covenants and agrees to provide Landlord with semi-annual
statements, prepared and verified by a certified public accountant or executive
officer of Tenant, stating the amount of rent or other consideration received by
Tenant from its assignee or subtenant(s) during such semi-annual period. If such
statement shows Tenant failed to make the full payment to Landlord required by
subsection (iii) above, a late charge equal to ten percent (10%) of the amount
due shall be paid by Tenant to Landlord as additional rent, and shall be due and
payable by the assignee or Tenant with the monthly installment of rent next
becoming due.
(d)No Waiver or Release. The consent by Landlord to any assignment or
subletting shall not be construed as a waiver or release of Tenant from the
terms of any covenant or obligation under this Lease, nor shall the collection
or acceptance of rent from any such assignee, subtenant or occupant constitute a
waiver or release of Tenant of any covenant or obligation contained in this
Lease, nor shall any such assignment or subletting be construed to relieve
Tenant from obtaining the consent in writing of Landlord to any further
assignment or subletting. Tenant hereby assigns to Landlord the rent due from
any subtenant of Tenant and hereby authorizes each such subtenant to pay said
rent directly to Landlord, at Landlord's option, in the event of any default by
Tenant under the terms of this Lease.
12. INDEMNITY.
(a)Landlord shall not be liable for, and Tenant shall indemnify and
save harmless Landlord, ground lessor, if any, and Landlord's managing agent, if
any, from and against and from all fines, damages, suits, claims, demands,
losses and actions (including reasonable attorneys, fees) for any injury to
person (including death) or damage to or loss of property on or about the
Premises caused by Tenant, its employees, contractors, subtenants, invitees or
by any other person entering the Premises or the Building under the express or
implied invitation of Tenant, or arising out of Tenant's use of the Premises.
Landlord shall not be liable or responsible for any loss or damage to any
property or death or injury to any person occasioned by theft, fire, act of God,
public enemy, criminal conduct of third parties, injunction, riot, strike,
insurrection, war, court order, requisition or other governmental body or
authority, by other tenants of the Building or any other matter beyond the
reasonable control of Landlord, or for any injury or damage or inconvenience
which may arise through repair or alteration of any part of the Building, or
failure to make repairs, or from any cause whatever except Landlord's negligence
or willful misconduct.
(b) Tenant shall not be liable for, and Landlord shall indemnify and save
harmless Tenant from and against all fines, damages, suits, ...losses and
actions (including reasonable attorneys' fees) for any injury to person
(including death) or damage to or loss of property on or about the common areas
of the Building caused. by the negligence or willful misconduct of Landlord, its
employees, contractors, invitees or by any other person entering the common
areas of the Building under the express or implied invitation of...arising out
of Landlord's use of the common areas. Tenant shall not be liable or responsible
for any loss or damage to any property or death or injury to any person
occasioned by theft, fire, act of God, public enemy, criminal conduct of third
parties, injunction, riot, strike, insurrection, war, court order, requisition
or other governmental body or authority, by other tenants of the Building or any
other matter beyond the reasonable control of Tenant, except the negligence or
willful misconduct of Tenant, its agents, employees, invitees and contractors.
13. SUBORDINATION:
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This Lease and all rights of Tenant hereunder shall be and are subject and
subordinate at all times to any deeds of trust, mortgage, installment sale
agreements and other instruments or encumbrances, as well as to any ground
leases or primary leases, that now or hereafter cover all or any part of the
Building, the Land or an interest of Landlord therein, and to any and all
advances made on the security thereof, and to any and all increases, renewals,
modifications, consolidations, replacements and extensions of any of such deeds
of trust, mortgages, installment sale agreements, instruments, encumbrances or
leases, as well as any substitutions therefor, all automatically and without the
necessity of any further action on the part of Tenant to effectuate such
subordination. Tenant shall, however, upon demand at any time or times execute,
acknowledge and deliver to Landlord any and all instruments and certificates
that in the reasonable judgment of Landlord may be necessary or proper to
confirm or evidence such subordination. Notwithstanding the foregoing, if any
mortgagee, trust beneficiary or ground lessor shall elect to have this Lease
treated as if it became effective and Tenant had taken possession prior to the
lien of its mortgage or deed of trust or prior to its ground lease, and shall
give notice thereof to Tenant ' this Lease shall be deemed to have become
effective and Tenant's right to possession shall be considered prior to such
mortgage, deed of trust, or prior to its ground lease whether this Lease is
dated prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof. In the event any mortgage or deed of
trust to which this Lease is subordinate is foreclosed-or a deed in lieu of
foreclosure is given to the mortgagee or beneficiary, Tenant shall attorn to the
purchaser at the foreclosure sale or to the grantee under the deed in lieu of
foreclosure; in the event any ground lease to which this Lease is subordinate is
terminated, Tenant shall attorn to the ground lessor. Tenant shall upon demand
at any time execute, acknowledge and deliver to Landlord's mortgagee (including
the beneficiary under any deed of trust) or other holder any and all instruments
and certificates that in the judgment of Landlord's mortgagee may be necessary
or proper to confirm or evidence such attornment.
14. RULES AND REGULATIONS.
Tenant and Tenant's agents, contractors, employees and invitees will
comply fully with all requirements of the Rules and Regulations of the Building
and related facilities, as specified in the Rules and Regulations now or
hereafter sent by Landlord to Tenant. Landlord shall at all times have the right
to change such rules and regulations to promulgate other Rules and Regulations
in such manner as Landlord may deem advisable, in its reasonable discretion, for
safety, care or cleanliness of the Building and related facilities or the
Premises, and for preservation of good order therein, all of which Rules and
Regulations, changes and amendments will be forwarded to Tenant in writing and
shall be carried out and observed by Tenant. Tenant shall be responsible for
compliance therewith by the agents, contractors, employees and invitees of
Tenant.
15. INSPECTION
Landlord or its officers, agents and representatives, and any ground
lessor or mortgagee thereof, shall have the right to enter into and upon any and
all parts of the Promises at all reasonable hours upon reasonable advance notice
(or, in any emergency or for the purpose of performing routine maintenance, at
any hour and without advance notice) to (a) inspect the Premises at any time
(including the right to perform periodic environmental studies, audits and
reports), (b) clean or make repairs or alterations or additions as Landlord may
deem necessary (but without any obligation to do so, except as expressly
provided for herein), or (c) show the Premises to prospective tenants,
purchasers or lenders; and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof, nor shall such be deemed to be an actual or
constructive eviction.
16. CONDEMNATION.
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If the whole or, as determined by Landlord in its sole discretion, any
substantial part of the Land or the Building should be taken for any public or
quasi-public use under governmental law, ordinance or regulation, or by right of
eminent domain, or by private purchase in lieu thereof and the taking would
prevent or materially interfere with the use of the Premises for the purpose for
which they are being used, as determined by Landlord, this Lease shall terminate
and the rent shall be abated during the unexpired portion of this Lease
effective when the physical taking of said Land or the Building shall occur. If
part of the Land or Building shall be taken for any public or quasi-public use
under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this Lease is not terminated
as provided in the sentence above, this Lease shall not terminate but the rent
payable hereunder during the unexpired portion of this Lease shall be reduced to
such extent as Landlord shall determine may be fair and reasonable under all of
the circumstances. In the event of any such taking or private purchase in lieu
thereof, Landlord and Tenant shall each be entitled to all remedies provided by
law; provided, however, that any award paid to Tenant shall not detract from any
award which Landlord is entitled to receive; and if Landlord's award is reduced
to any extent as a result of any award to Tenant, then Tenant shall assign and
pay over to Landlord the amount by which Landlord's award was so reduced.
17. FIRE OR OTHER CASUALTY.
In the event of damage to or destruction of the Premises or the Building, or the
entrances and other common facilities necessary to provide normal access to the
Premises, caused by fire or other casualty, Tenant shall provide immediate
notice thereof to Landlord, and Landlord shall make repairs and restorations as
hereafter expressly provided, unless this Lease shall be terminated by Landlord
or unless any mortgagee which is entitled to receive casualty insurance proceeds
fails to make available to Landlord a sufficient amount of such proceeds to
cover the cost of such repairs and restoration.
If (1) the damage is of such nature or extent, in the judgment of
Landlord's architect, that more than two hundred ten (210) consecutive days,
after commencement of the work, would be required (with normal work crews and
hours) to repair and restore the part of the Premises or Building which has been
damaged, or (ii) a substantial portion of the Premises or the Building is so
damaged that, in Landlord's sole Judgment, it is uneconomic to restore or repair
the Premises or the Building, as the case may be, Landlord shall so advise
Tenant promptly; and Landlord or Tenant, for a period of ten (10) days
thereafter, shall have the right to terminate this Lease by written notice to
the other, an of the date specified in such notice, which termination date shall
be no later than thirty (30) days after the date of such notice. In the event of
such fire or other casualty, if this Lease is not terminated pursuant to the
terms of this Section 17, and if (i) sufficient casualty insurance proceeds are
available for use for such restoration or repair, and.(ii) this Lease is then in
full force and effect, Landlord shall proceed promptly and diligently to restore
the Premises to its substantially similar condition prior to the occurrence of
the damage, provided that Landlord shall not be obligated to repair or restore
any alterations, additions or fixtures which Tenant or any other tenant may have
installed unless Tenant, in a manner satisfactory to Landlord, assures payment
in full of all costs which may be incurred by Landlord in connection therewith.
Landlord shall not insure any improvements or alterations to the Premises in
excess of Standard Tenant Work, or any fixtures, equipment or other property of
Tenant. Tenant shall, at its sole expense, insure the value of its leasehold
improvements, fixtures, equipment or other property located in the Premises, for
the purpose of providing funds to Landlord to repair and restore the Premises to
its substantially similar condition prior to occurrence of the damage. If there
be any ouch alteration, fixtures or additions and Tenant does not assure or
agree to assure payment of the cost or restoration or repair as aforesaid,
Landlord shall have the right to determine the manner in which the Premises
shall be restored so as to be substantially the same as the Premises existed
prior to the damage 6ccurring, as if such alterations, additions or fixtures h4d
not been made or installed. The validity and effect of this Lease shall not be
impaired in any way by, and Landlord
<PAGE>
shall have no liability as a result of, the failure of Landlord to complete
repairs and restoration of the Premises or of the Building within two hundred
ten (210) consecutive days after commencement of work, even if Landlord had in
good faith notified Tenant that it estimated that the repair and restoration
would be completed within such period, provided that Landlord proceeds
diligently with such repair and restoration.
In the case of damage to the Premises not caused by the negligence or
willful misconduct of the Tenant or any of its agents, employees or invitees,
and which is of a nature or extent that Tenant's continued occupancy is
substantially impaired, the rent otherwise payable by Tenant hereunder shall be
equitably abated or adjusted for the duration of such impairment as determined
by Landlord. In no event, however, shall any damages be payable by Landlord to
Tenant in respect of business interruption resulting from any fire or
other-casualty on the Premises or Building. Tenant shall be responsible to
insure and/or repair all of Tenant's leasehold improvements and all equipment,
fixtures and personal property located in the Premises.
18. HOLDING OVER.
Tenant shall, at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Tenant holds over after
the expiration or termination of this Lease, all of the other terms and
provisions of this Lease shall be applicable during such period, except that
Tenant shall pay Landlord from time to time upon demand, as partial damages for
the period of any holdover, an amount equal to one hundred fifty percent (150%)
of the Basic Rental in effect on the termination date, computed on a daily basis
for each day of the holdover period. No holding over by Tenant shall operate to
extend this Lease except as otherwise expressly provided in this Lease. The
foregoing notwithstanding, Landlord, in addition to accepting the daily damages
during the period of such holding over, shall be entitled to pursue all remedies
at law or equity, including, without limitation, rights to ejectment and
damages.
19. TAXES.
(a)During each calendar year or portion thereof included in the Lease
Term, and any renewal thereof, Tenant shall pay to Landlord as additional rent,
Tenant's Proportionate Share of Real Estate Taxes which exceed the Base Real
Estate Taxes. Real Estate Taxes shall mean (i) all real estate taxes, including
general and special assessments, if any, which are imposed upon Landlord or
assessed against the Building and/or the Land during any calendar year, and (ii)
any other present or future taxes or governmental charges that are imposed upon
Landlord or assessed against the Building and/or the Land during any calendar
year which are in the nature of, in addition to or in substitution for real
estate taxes, including, without limitation, any license fees, tax measured by
or imposed upon rents, or other tax or charge upon Landlord's business of
leasing the Building, but shall not include any federal, state or local income
tax. Real Estate Taxes shall also include all expenses incurred by Landlord in
obtaining or attempting to obtain a reduction of Real Estate Taxes, including,
but not limited to, legal fees.
(b)Commencing with the 1997 calendar year, and in each calendar year
thereafter during the Lease Term, Landlord may deliver to Tenant a statement of
Landlord's estimate of any increase in the annual Real Estate Taxes for the then
current calendar year over the Base Real Estate Taxes and Tenant's percentage
thereof, such statement to be delivered on or before April lot of said calendar
year, or as soon thereafter as possible. Within thirty (30) days after delivery
of such statement (Including any statement delivered after the expiration or
termination of this Lease), Tenant shall pay to Landlord, as additional rent,
Tenant's aforesaid percentage share of such estimated Increase in the annual
Real Estate Taxes, except that Tenant's first payment shall include the (1/12th)
monthly shares for the months from January lot through the month in which
Landlord submitted the estimate of the increase in the annual Real Estate Taxes
for the then current calendar year.
(c)Commencing with the 1998 calendar year, Landlord shall deliver to
Tenant a
<PAGE>
statement showing the determination of the increase in the annual Real Estate
Taxes for the preceding calendar year and Tenant's total percentage thereof,
such statement to be delivered on or before April lot of the then current
6ilendar year, or as soon thereafter as reasonably practicable. If such
statement shows that Tenant's payments, If any, of the estimated monthly
Increase in the annual Real Estate Taxes for said preceding calendar year
exceeded Tenant's actual increases for said year, then Tenant may deduct such
overpayment from Its next payment or payments of monthly rent. If such statement
shows that Tenant's percentage share of Landlord's actual increase In the annual
Real Estate Taxes exceeded Tenant's payments, if any, of the estimated monthly
Increase In the annual Real Estate Taxes for said preceding calendar year, then
Tenant shall pay the total amount due to Landlord, which amount shall constitute
additional rent hereunder due and payable with the first monthly installment of
rent due after delivery of said statement.
(d)In the event that the expiration date or other date of termination
of this Lease is not December 31st, the increase to be paid by Tenant for the
calendar year in which the expiration date occurs shall be determined by
multiplying the amount of Tenant's share thereof for the full calendar year by a
fraction with the number of days during such calendar year prior to the
expiration date as the numerator, and with 365 as the denominator. The
termination of this Lease shall not affect the obligations of Landlord and
Tenant pursuant to this Section to be performed after such termination.
(e)Tenant shall be liable for all taxes levied or assessed against
personal property, furniture or fixtures placed by Tenant In the Premises, and
if any such taxes for which Tenant is liable are in any way levied or assessed
against Landlord, Tenant shall pay the Landlord upon demand that part of such
taxes for which Tenant is Primarily liable hereunder.
20. EVENTS OF DEFAULT
The occurrence of any of the following events shall be deemed to be an
event of default ("Event of Default") by Tenant under this Lease:
(a)Tenant shall fail to pay when due any rental or other sums payable
by Tenant hereunder (or under any other lease now or hereafter executed by
Tenant In connection with space in the Building), and same is not cured within
ten (10) days after Landlord's written notice thereof to Tenant.
(b)Tenant shall fail to comply with or observe Section 46 of this Lease
(or a comparable section of any other lease now or hereafter executed by Tenant
In connection with space in the Building).
(c)Tenant shall fail to comply with or observe any other provision of
this Lease (or any other lease now or hereafter executed by Tenant In connection
with space in the Building), and same is not cured within fifteen (15) days
after Landlord's written notice thereof to Tenant. Notwithstanding the
foregoing, if (I) the default is of such a nature that fifteen (15) days is an
unreasonably short period of time in which to cure the default; (ii) Tenant has
commenced curing the default within the fifteen (15) day period; and (III)
Tenant is continuing to diligently pursue a cure of such default, then Tenant
shall have an additional fifteen (15) days in which to complete the cure of said
default.
(d)Tenant abandons or vacates the Premises, or removes or attempts to
remove Tenant's goods or property therefrom other than In the ordinary course of
business or does not operate or hold the Premises open for business for more
than 10 consecutive days or for more than 30 non-consecutive days during any
three-month period, without regard to whether Tenant has paid to Landlord In
full all rent and charges that may have become due.
(e)Tenant or any partner or guarantor of Tenant, as the case may be,
shall apply
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for or consent to the appointment of a receiver, trustee or liquidator of itself
or himself or any of its or his property, admit in writing its or his inability
to pay its or his debts as they mature, make a general assignment for the
benefit of creditors, be adjudicated a bankrupt, insolvent or file a voluntary
petition in bankruptcy or a petition or an answer seeking reorganization for an
arrangement with creditors to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against it or
him in any proceeding under any such law, or if action shall be taken by Tenant
or any partner or guarantor of Tenant for the purposes of effecting any of the
foregoing.
(f)Any court of competent jurisdiction shall enter an order, judgment
or decree approving a petition seeking reorganization of Tenant or all or a
substantial part of the assets of Tenant or any partner or guarantor of Tenant,
or appointing a receiver, sequestrator, trustee or liquidator of Tenant or any
partner or guarantor of Tenant or any of its or his property, and such order,
judgment or decree shall continue unstayed and in effect for any period of at
least thirty (30) days.
21. REMEDIES.
Upon the occurrence of any Event of Default specified in this Lease,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:
(a)Distrain, collect or bring an action for such rent an may be in
arrears, and request entry of judgment therefor as provided for in case of rent
in arrears, or file a proof of claim in any bankruptcy or insolvency proceeding
for such rent, or institute any other proceedings, whether similar or dissimilar
to the foregoing, to enforce payment thereof.
(b)Declare due and payable and sue for and recover, all unpaid rent for
the unexpired period of the Lease Term (and also all additional rent as the
amounts thereof can be determined or reasonably estimated) as if by the terms of
this Lease the same were payable in advance, together with all legal fees and
other expenses incurred by Landlord in connection with the enforcement of any of
Landlord's rights and remedies hereunder.
(c)Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord; and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for trespass or any claim for damages therefor,
and Tenant agrees to pay to Landlord on demand the amount of all loss and damage
which Landlord may suffer by reason of such termination, whether through
inability to relet the Premises on satisfactory terms or otherwise, including
the loss of rental for the remainder of the Lease Term.
(d)Without termination of the Lease, enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be
occupying the Premises or any part thereof, without being liable for trespass or
any claim or damages therefor; and if Landlord so elects, relet the Premises on
behalf of the Tenant on such terms as Landlord shall deem advisable and receive
the rent therefor, and Tenant agrees to pay to Landlord on demand any deficiency
that may arise by reason of such reletting for the remainder of the Lease Term.
(e)Without termination of the Lease, enter upon the Premises, by force
if necessary, without being liable for trespass or any claim for damages
therefor, and do whatever Tenant is obligated to do under the terms of this
Lease; and Tenant agrees to reimburse Landlord on demand for any expenses which
Landlord may incur in thus effecting compliance with Tenant's obligations under
this Lease, and Tenant further agrees that Landlord shall not be liable for any
<PAGE>
damages resulting to the Tenant from such action.
(f)If Tenant fails to perform any covenant or observe any condition to
be performed or observed by Tenant hereunder or acts in violation of any
covenant or condition hereof, Landlord may, but shall not be required to on
behalf of Tenant, perform such covenant and/or take such steps, Including
entering upon the Premises, as may be necessary or appropriate, if Landlord
shall have given Tenant at least three (3) days prior written notice of
Landlord's intention to do so, unless an emergency situation exists in which
case Landlord shall have the right to proceed immediately and all costs and
expenses incurred by Landlord in so doing, including reasonable legal fees,
shall be paid by Tenant to Landlord upon demand, plus interest at the overdue
interest rate set forth herein from the date of expenditure(s) by Landlord, as
additional rent. Landlord's proceeding under the rights reserved to Landlord
under this Section shall not in any way prejudice or waive any rights Landlord
might otherwise have against Tenant by reason of Tenant's default.
(g)Exercise any other rights and remedies available to Landlord at law
or in equity. No reentry or taking possession of the Premises by Landlord shall
be construed as an election on its part to terminate this Lease, unless a
written notice of such intention be given to Tenant. Neither pursuit of any of
the foregoing remedies provided nor any other remedies provided herein or by law
shall constitute a forfeiture or waiver of any rent due to Landlord hereunder or
of any damages accruing to Landlord by reason of the violation or breach of any
of the terms, provisions, and covenants herein contained. Landlord's acceptance
of rent following an Event of Default hereunder shall not be construed as
Landlord's waiver of such Event of Default. No waiver by Landlord of any
violation or breach of any of the terms, provisions, and covenants herein
contained shall be construed to constitute a waiver of any other violation or
Event of Default. The loss or damage that Landlord may suffer by reason of
termination of this Lease or the deficiency from any reletting as provided for
shall include the expense of repossession and any repairs or remodeling
undertaken by Landlord following repossession. Should Landlord at any time
terminate this Lease for any default, Tenant shall not be relieved of its
liabilities and obligations hereunder and, in addition to any other remedy
Landlord may have, Landlord may recover from Tenant all damages Landlord may
incur by reason of such default, including the cost of recovering the Premises
and the lose of rental for the remainder of the Lease Term. Tenant's obligations
and liabilities under this Lease shall also survive repossession and reletting
of the Premises by Landlord pursuant to the foregoing provisions of this Section
21. Notwithstanding anything to the contrary contained in this Section, in
computing the amount due Landlord as a result of any Event of Default by Tenant,
Tenant shall not be entitled to receive any credit, upon reletting by Landlord
after Tenant's default, for any rent or other sums received by Landlord in
excess of those for which Tenant in otherwise obligated herein.
(h) The abatement of Basic Rental, if any, and other concessions of the Landlord
(which may include among other items: (14 brokerage fees; (ii) moving
allowances; (iii) Tenant improvements; (iv) Lease assumptions; (v) unamortized
portions of the buildout; and (vi) any other cash allowances or payments) are
subject to the condition that, throughout the Lease Term, Tenant will perform
and comply with all of the terms, covenants and conditions of this Lease t6 be
performed or complied with by Tenant. If, after the occurrence of an Event of
Default, Landlord terminates this Lease or reenters and takes possession of the
Premises without such a termination, the abatement of Basic Rental and other
Landlord concessions shall cease to apply and Tenant shall be obligated, within
10 days after demand, to pay to Landlord the Basic Rental abated and the value
of all Landlord's concessions. Landlord's right to recover the Basic Rental
abated and the value of all Landlord's concessions shall be in addition to any
other remedies available to Landlord as a result of such termination or reentry.
(i)All rights and remedies of Landlord and Tenant herein enumerated
shall be cumulative, and none shall exclude any other right or remedy allowed-by
law.
(j)In addition to any other rights and remedies provided in this Lease,
and with
<PAGE>
or without terminating this Lease, Landlord may with force of law, re-enter,
terminate Tenant's right of possession and take possession of the Premises, the
provision of this Section 21 operating as a notice to quit, any other notice to
quit or of Landlord's intention to re-enter the Premises being hereby expressly
waived.
22. SURENDER OF PREMISES.
No act done and no failure to act by Landlord or its agents during the
term hereby granted shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless the same be made in writing and signed by Landlord.
23. ATTORNEYS' FEES.
In case it should be necessary or proper for Landlord to bring any
action under this Lease or to consult or place this Lease, or any amount payable
by Tenant hereunder, with an attorney concerning a default of Tenant hereunder,
whether such default is later cured, then Tenant shall pay any and all
reasonable attorney's fees, court costs and expenses of Landlord incurred in
connection with such enforcement.
24. LANDLORD'S LIEN.
In addition to any statutory Landlord's lien, Landlord shall have, at
all times, and Tenant hereby grants to Landlord, a valid security interest to
secure payment of all rentals and other sums of money becoming due hereunder
from Tenant, and to secure payment of any damages or loss which Landlord may
suffer by reason of the breach by Tenant of any covenant, agreement or condition
contained herein upon all goods, wares, equipment, fixtures, furniture,
improvements and property of Tenant presently or which may hereafter be situated
on the Premises, and all proceeds therefrom; and such property shall not be
removed therefrom without the consent of Landlord until all arrearages in rent
as well as any and all other sums of money then due to Landlord hereunder shall
first have ...discharged and all the covenants, agreements and conditions hereof
...complied with and performed by Tenant. Upon the occurrence of any Event of
Default, Landlord may, in addition to any other remedies provided herein, enter
upon the Premises and take possession of any and all goods, wares, equipment,
fixtures, furniture, improvements and other personal property of Tenant situated
on the Premises, without liability for trespass or conversion, and sell the same
at public or private sale. Any surplus shall be paid to Tenant or as otherwise
required by law; and Tenant shall pay any deficiencies therein to Landlord
forthwith. Upon request by Landlord, Tenant agrees to execute and deliver to
Landlord a financing statement in form sufficient to perfect the security
interest of Landlord in the aforementioned property and proceeds thereof under
the provisions of the Uniform Commercial Code in force in the jurisdiction in
which the Building is located.
25. MECHANICS' LIENS.
Tenant shall not permit any mechanics' lien or other liens to be placed
upon the Premises or the Building or improvements thereon during the Lease Term,
caused by or resulting from any work performed, materials furnished or
obligation incurred by or at the request of Tenant. In the case of the filing of
any such lien Tenant will promptly, and in any event within thirty (30) days
after the filing thereof, satisfy or release any such lien by means of payment
thereof, bonding Landlord against any loss occasioned thereby (in which came
Tenant shall have the right in due diligence to contest and dispute such lien so
long an such bond remains in place), or take such other action as may be
otherwise acceptable to Landlord.
26. WAIVER OF SUBROGATION: INSURANCE.
(a)Landlord and Tenant hereby release the other from any and all
liability or
<PAGE>
responsibility to the other or anyone claiming through or under them by way of
subrogation or otherwise for any loss or damage to property, but only to the
extent that such lose or damage is covered by any insurance then in force, even
if such fire or other casualty shall have been caused by the fault or negligence
of the other party, or anyone for whom such party may be responsible;
provided,-however, that such release shall be applicable and in force and effect
only with respect to any loss or damage occurring during such time as the policy
or policies of Insurance covering said lose shall contain a clause or
endorsement to the effect that this release shall not adversely affect or impair
said insurance or prejudice the right of the insured to recover thereunder.
(b)Tenant shall maintain throughout the Lease Term, at Tenant's sole
cost and expense, insurance against lose or liability in connection with bodily
injury, death, property damage and destruction, in or upon the Premises or the
remainder of the Land, and arising out of the use of all or any portion of the
same(. by Tenant or its agents, employees, officers, invitees, visitors and
guests, under policies of comprehensive general public liability insurance
having such limits as to each as may be reasonably required by Landlord from
time to time, but in any event of not less than One Million Dollars ($1,000,000)
per occurrence for death or injury and One Million Dollars ($1,000,000) per
occurrence for property damage or destruction and personal injury, such policies
shall name Landlord and Tenant, (and, at Landlord's or such mortgagee's or
paramount lessor's or installment seller's request) any mortgagee of all or any
portion of the Buildings and any landlord of, or installment seller to, Landlord
an the insured parties, shall provide that they shall not be modified or
cancelled without at least thirty (30) days' prior written notice to Landlord
and any other party designated as aforesaid and shall be issued by insurers of
recognized responsibility licensed to do business in the jurisdiction in which
the Building Is located and acceptable to Landlord. Copies of all such policies
certified by the insurers to be true and complete shall be supplied to Landlord
and such mortgagees, paramount lessors and installment sellers at all times.
27. SUBSTITUTION SPACE.
(a)Landlord shall have the right at any time during the term of this
Lease, including during any renewal or extension hereof, to substitute, instead
of the Premises, 'other space of comparable size (but not less than the area of
the Premises) and decor in the Building, hereinafter referred to as
"Substitution Space."
(b)If Landlord desires to exercise such right, it shall give Tenant at
least sixty (60) days prior written notice thereof specifying the effective date
of such substitution, whereupon, as of such effective date: (i) the description
of the Premises set forth in this Lease shall, without further act on the part
Landlord or Tenant, be deemed amended so that the Substitution Space shall, for
all intents and purposes, be deemed the Premises hereunder, and all of the
terms, covenants, conditions, provisions and agreements of this Lease shall
continue in full force and effect and shall apply to the Substitution Space; and
(ii) Tenant shall move from the Premises into the Substitution Space and shall
vacate and surrender possession to Landlord of the Premises on and after such
effective date; thereafter, during the period of such occupancy, Tenant shall
pay rent for the Substitution Space at the above-described rate, whereupon rent
shall abate entirely with respect to the Premises.
(c)If Landlord exercises its relocation right, Landlord shall reimburse
Tenant for Tenant's reasonable out-of-pocket expenses for moving Tenant's
equipment, supplies and telephones and telephone equipment from the ... Premises
to the Substitution Space and for reprinting Tenant's stationary of the same
quality and quantity of Tenant's stationary supply on hand immediately prior to
Landlord's notice to Tenant of the exercise of this relocation right.
28. BROKERAGE
Tenant warrants that it has had no dealings with any broker or agent
other than C. B. Commercial Real Estate Group, Inc. and The Fred Ezra Company in
connection with the negotiation or execution of this Lease, and Tenant agrees to
indemnify Landlord against all costs,
<PAGE>
expenses, attorneys' fees or other liability for commissions or other
compensation or charges claimed by any other broker or Agent claiming the same
by, through or under Tenant.
29. ESTOPPEL CERTIFICATES
Tenant shall from time to time, within ten (10) days after Landlord shall have
requested the same of Tenant, acknowledge and deliver to Landlord a written
instrument in recordable form and otherwise in such form as required by Landlord
(i) certifying that this Lease is in full force and effect and has not been
modified, supplemented or amended in any way (or if there have 1 121 W Lake
Street - Oak Park Illinois 60301 - Voice 708.445.8500 - Fax 708.445.8992
Exhibit 10.33
Lease Termination Agreement - Centre 1000 Limited
THIS LEASE TERMINATION AGREEMENT is made as of the 1st day of October 1999, by
and between CENTRE 1000 LIMITED PARTNERSHIP, herein called "Landlord", and
CARNEGIE INTERNATIONAL CORPORATION, herein called "Tenant".
By Agreement dated February 8, 1997, herein the "Lease", Landlord leased to
Tenant premises known as Suite 9 in the building located at 11419 Cronridge
Drive, Owings Mills, Maryland, The parties desire to terminate their
relationship and the Lease as herein set forth.
NOW, WHEREFORE, for and in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. The Lease shall be and is hereby terminated and the term thereof is brought
to an end as of the date hereof, with the same force and effect as if the term
thereof was, by its terms, fixed to expire on the date hereof, and not as
otherwise provided in the Lease,
2. Tenant has surrendered possession of the leased premises to Landlord and
warrants that it has not done or suffered to be done any act, matter or thing
whatsoever to encumber the leased premises,
3. The parties agree that each has performed all of its obligations under the
Lease and that neither has any further liability or obligation, financial or
otherwise, to the other with respect to the Lease or the leased premises.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
IN WITNESS WHEREOF, this Termination Agreement has been duly executed by the
parties under their respective seals as of the clay and year first above
written.
WITNESS: LANDLORD:
CENTRE 1000 LIMITED PARTNERSHIP
By/s/ Jean R. Feinglass ( SEAL)
-----------------------
Name: Jean R. Feinglass
General Partner
WITNESS: TENANT:
CARNEGIE INTERNATIONAL ORPORATION
By: /s/ E. David Gable (SEAL)
-----------------------
NAME: E. DAVID GABLE
TITLE: CHAIRMAN
Exhibit 10.34
AGREEMENT - Antony D. Redfern
THIS AGREEMENT is made this first day of September 1997 BETWEEN CARNEGIE
INTERNATIONAL, INC of Baltimore, Maryland, United States of America hereinafter
called "Carnegie" (which shall include its successors in title and assigns) AND
ANTONY D. REDFERN of Saffron Walden, United Kingdom, hereinafter called "the
Consultant".
WHEREAS:
Carnegie has associated companies hereinafter called "the Associates" which
are engaged in the business of audio text services and related services in
various countries not including the United Kingdom and with clients none of whom
are resident or carrying on business in the United Kingdom, and
Carnegie has requested the Consultant to provide advice and administrative
services related to market research and development, promotional techniques,
sales, technical matters and budgetary controls to the Associates, which the
Consultant has agreed to do
NOW THEREFORE the parties agree as follows:
1. GENERAL NATURE AND EXTENT OF SERVICES
1.1 Services will be advisory and consultative in nature, and the
Associates from time to time will have the sole responsibility
for the implementation of the advice received.
1.2 The services will be rendered from the Consultant's office
through correspondence, telephone, facsimile, e - mail, the
use of computers, periodic visits of Carnegie's and the
Associates' personnel, travel by the Consultant to promote the
interests of the Associates and other means mutually agreed
from time to time.
1.3 The Consultant may engage other firms or persons to assist
in the rendition of services herein or to perform all or any
part of such services.
1.4 In all his services the Consultant will endeavor to provide
technically sound information and the advice of technically
competent personnel. However, the Consultant makes no warranty
as to the accuracy or effectiveness of such information or
advice, or as to the results which may be obtained by Carnegie
for the Associates through the use thereof.
2. TERM
The term of this agreement shall be until 31 December 1998 and
shall automatically be renewed for succeeding one year periods
thereafter, unless either party shall have given written
notice to the other party at least one year before the end of
the then current term of its intention to terminate at the end
of such term.
3. CONSIDERATION
3.1 During the continuance of the service herein Carnegie shall
pay the Consultant as net remuneration without any deduction
and taxes, a monthly fee on the last day of each calendar
month at the basic rate of US$ 200,000 (two hundred thousand
United States dollars) per annum, which shall be deemed to
accrue from day to day.
3.2 The Associates or Carnegie shall reimburse to the Consultant
all traveling, hotel, subsistence entertainment, telephone,
facsimile, e-mail, postage, and other expenses which the
Consultant may from time to time incur in the course of
providing the services herein.
3.3. The Consultant's annual basic fee shall be reviewed every
six months by Carnegie together with the Consultant. Such
reviews shall not consider any reduction to the annual rate.
3.4. In addition to his fee, the Consultant will be paid within
fourteen days of the completion of the
<PAGE>
quarterly financial statements of Carnegie's subsidiary
company Talidan Limited, hereinafter called 'Talidan" a bonus
on the net profits of Talidan before taxation and before
management charges from Carnegie or its Associates other than
fees payable to the Consultant, calculated according to the
table in Schedule A hereto. The bonus shall be paid not later
than 45 days after the end of each calendar quarter.
4. ASSIGNMENTS
This agreement may not be assigned, in whole or in part, without the
written consent of both parties.
4. RESTRICTIONS
4.1 Throughout the duration of this Agreement the Consultant shall not
participate in any business which competes with Talidan.
4.2 Except as required in the performance of his services, or as agreed in
writing by Carnegie, the Consultant will not disclose to any third
party any information pertaining to Carnegie or its Associates which
the Consultant is told and should reasonably know is confidential. The
Consultant shall not be prevented from using or disclosing information
which has become general knowledge available to the public through no
default by the Consultant.
4.3 The Consultant agrees to return upon request confidential information
relating to Carnegie or its associates.
4.4 The Consultant shall comply with Carnegie's rules in relations to
dealings in its shares and other securities.
4.5 Unless this Agreement has been terminated by Carnegie, the Consultant
shall not directly or indirectly for a period of six months after the
termination date hold any material interest or position in any business
which is in competition with Talidan.
5. APPLICABLE LAW
This agreement shall be governed and construed in all respects
including validity, interpretation and enforcement, in accordance with
the laws of England.
IN WITNESS whereof this agreement has been signed by or on behalf of the
parties hereto the day and year first before written.
SIGNED for and on behalf of CARNEGIE INTERNATIONAL, INC: in the
presence of
SIGNED By /s/ Antony D. Redfern
ANTONY D REDFERN:
in the presence of-
<PAGE>
SCHEDULE A
Formula for the calculation of bonuses payable
(in terms of Clause 3.4 hereto)
NET PROFITS BONUS
----------- -----
$ $
up to 1,000,000 Nil
1,000,001 - 1,500,000 2 % of excess over $ 1,000,000
1,500,001 - 5,000,000 $ 10,000 plus 4 % of excess over $ 1,500,000
greater than 5,000,000 $ 150,000 plus 6 % of excess over $ 5,000,000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000311172
<NAME> CARNEGIE INTERNATIONAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 837,649
<SECURITIES> 0
<RECEIVABLES> 747,688
<ALLOWANCES> (48,000)
<INVENTORY> 145,128
<CURRENT-ASSETS> 4,366,215
<PP&E> 1,063,929
<DEPRECIATION> (162,506)
<TOTAL-ASSETS> 14,155,673
<CURRENT-LIABILITIES> 4,342,015
<BONDS> 0
0
274,100
<COMMON> 557,961
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,155,673
<SALES> 7,302,017
<TOTAL-REVENUES> 7,302,017
<CGS> 2,950,232
<TOTAL-COSTS> 20,200,018
<OTHER-EXPENSES> (2,522,674)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,018
<INCOME-PRETAX> 13,552,640
<INCOME-TAX> 12,279
<INCOME-CONTINUING> (13,564,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,564,919)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
Exhibit 99.1
CARNEGIE INTERNATIONAL CORPORATION
BALTIMORE, MD, Friday, October 29, 1999 - Carnegie International Corporation
today replied to assertions made by Grant Thornton, LLP, its former auditors,
concerning the Company's financial reports for the years 1997 and 1998.
Grant Thornton was engaged by the Company in January 1998, as the Company's
certifying accountant, and previously issued reports concerning the Company's
financial statements for 1997 and 1998. Grant Thornton's report on the Company's
financial statements for each of those years did not contain an adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During the two most recent fiscal years
and subsequent interim periods, and until Grant Thornton's recent termination by
the Company, the Company has not had any disagreements with Grant Thornton on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure. Grant Thornton had not been engaged to audit the
Company's financial statements for the year 1999.
The Company made available to Grant Thornton ALL of the Company's records.
Nothing was withheld. At all times during its work for the Company, Grant
Thornton had unfettered access to all of the Company's paper and computer
records, and it was given a key to the Company's offices, so that Grant
Thornton's personnel could gain access to those records during and after normal
business hours, even when no Company employees were present. To the best of the
Company's knowledge, Grant Thornton did, in fact, avail itself of this
unfettered access, working outside normal business hours. The Company has been
billed by Grant Thornton for more than $500,000 of work incurred in auditing the
Company's 1998 financial statements, alone. Grant Thornton knew or should have
known of the existence of all documents relevant to any issue that may have been
raised in the course of its audit, or thereafter.
On September 21, 1999, the Company's Board of Directors voted to terminate the
Company's relationship with Grant Thornton, and to engage Merdinger, Fruchter,
Rosen & Corso, PC, of New York, as its new independent auditors. The Company
terminated Grant Thornton as its auditor on September 24, 1999.
On September 28, 1999, the Company filed a Current Report (Form 8-K) with the
Securities and Exchange Commission to report on certain assertions made by Grant
Thornton in letters to the Company dated September 24, the day Grant Thornton
was fired. Among other things, those letters from Grant Thornton informed the
Company that Grant Thornton had withdrawn its Auditor's Report for the year
1998. Grant Thornton did not and has never withdrawn its Auditor's Report for
the year 1997.
On October 11, 1999, Grant Thornton sent the Company its response to the
Company's Current Report of September 28, 1999. Grant Thornton's response was
also filed by the Company with the SEC in an Amended Current Report (Form 8-K/A)
on October 13. Both the Company's Current Report and Grant Thornton's response
can be found at www.freeedgar.com, using "Carnegie International" as the search
term.
The Company disputes the assertions made in Grant Thornton's October 11, 1999
letter, and believes that many of the comments made in Grant Thornton's letter
are incorrect and unfounded.
In its Form 8-K, the Company addressed some of the issues raised by Grant
Thornton's September 24 letters, as follows: "The Company believes that Grant
Thornton has no material basis for its stated conclusion that it cannot rely
upon the representations of Carnegie's current management." Grant Thornton has
never provided the Company, or the Audit Committee appointed by the Company's
Board, with any written report stating the evidential detail and basis for Grant
Thornton's recent conclusion.
Grant Thornton's October 11 letter suggests that, prior to September 24, it had
informed the Company that it might have lost confidence in the representations
of Carnegie's management. On one occasion, Grant Thornton made such a
suggestion, and withdrew it the following day. On a second occasion, prior to
September 24, when Grant Thornton intimated that it might have such beliefs, the
Company requested that Grant Thornton provide the Company with specific factual
detail concerning the basis for any such beliefs. Grant Thornton has not written
the Company's Audit Committee to report any such beliefs and, when challenged to
do so by the Company's management, Grant Thornton did not set forth its factual
basis for any such conclusion. The Company notes that, notwithstanding Grant
Thornton's recent assertions about the Company's management, Grant Thornton
never believed it necessary, as a matter of that firm's professional ethics, to
resign.
The only written comments which the Company received from Grant Thornton, before
the Company filed its Form 8-K, were those set forth in Grant Thornton's
September 24 letter. The only other comments, written or oral, which were
received by the Company before October 11, were those addressed in the Form 8-K.
Virtually all of the comments made in Grant Thornton's October 11 letter were
not set forth in Grant Thornton's September 24 letters to the Company, and were
not otherwise conveyed to the Company verbally or in writing. They were,
therefore, not addressed in the Company's initial Form 8-K. While the Company
believes that each of the assertions made in Grant Thornton's October 11 letter
is without substance, the Company also believes it appropriate to respond to
some of those assertions.
ALLEGED "REPORTABLE EVENTS"
Nothing in Grant Thornton's October 11 letter disputes or sets forth any
disagreements with the Company's description of facts relating to the Westshire
stock transaction, contained in the Company's initial Form 8-K.
In its October 11 letter, Grant Thornton refers to certain written
representations made by the Company's management, in connection with Grant
Thornton's audit of the Company's 1998 financial statements. Grant Thornton
notes that, on or about April 22, 1999, the Company's Chairman, CEO and Chief
Financial Officer provided Grant with a management representation letter,
including the following representation: "We have made available to you all
requested agreements and there are no side agreements, written or oral,
pertaining to such agreements."
Grant Thornton suggests that it has "discovered that this representation was
incorrect." It asserts that, during the audit of the 1998 financial statements,
Management provided Grant Thornton with an acquisition agreement dated February
26, 1999, relating to the Company's 1999 acquisition of Paramount International
Telecommunications, Inc. Carnegie signed a letter of intent to acquire Paramount
on December 15, 1998; Carnegie's acquisition of Paramount was not completed
until late February 1999.
Grant Thornton contends, in its October 11 letter, that "Management did not ...
furnish us with a related side agreement dated February 27, 1999," and that
Grant Thornton "learned of the existence of the side agreement in August, 1999
when we received a copy of a letter sent to Carnegie demanding payment of a
finders fee of $350,000 in accordance with the February 27, 1999 side
agreement." These were the only assertions of which the Company was aware, based
upon Grant Thornton's oral assertions, prior to filing the Company's Form 8-K.
The so-called "side agreement," to which Grant Thornton's comment refers, was an
agreement concluded between Paramount and a broker, Bristol Capital, L.L.C.,
dated December 1, 1998, pursuant to which Paramount agreed to pay Bristol cash
and shares in connection with the transaction that resulted in Paramount's
affiliation with Carnegie. As part of that transaction, Carnegie agreed to
assume Paramount's obligations to Bristol, which was negotiated to cash payment
of $350,000.
The Company and its Chairman deny the allegation made by Grant Thornton, in the
October 11 letter, that "When initially questioned about the existence of this
side agreement, the Company's Chairman represented ... that there was no such
agreement with Carnegie," and the allegation that "he stated that the agreement
was between the other parties involved in the transaction." Instead, the
Company's Chairman correctly stated that the agreement with Bristol, in its
original form, existed between Paramount and Bristol, and that it had been
agreed, as part of the purchase consideration, that the liability to Bristol
would be absorbed by Carnegie. The Company also strongly disagrees with Grant
Thornton's characterization of the Bristol agreement as a "material" liability.
The October 11 letter refers to a February 1999 letter of intent, and suggests
that certain representations were made by the Company in an alleged July 30,
1999 representation letter, supposedly furnished by the Company's management. No
such letter was ever furnished by the Company to Grant Thornton.
This assertion by Grant Thornton is simply wrong. The Company has brought this
error to Grant Thornton's attention. Grant Thornton has admitted to its error
and has sent the SEC a letter correcting this mistaken assertion. The Company
filed Grant Thornton's correction as a further Amended Form 8-K.
The Company understands that Grant Thornton's correction to its prior letter
will, instead, refer to the Company's April 22, 1999 representations to Grant
Thornton. In those representations, the Company accurately stated to Grant
Thornton that it had MADE AVAILABLE to [Grant Thornton] all REQUESTED agreements
..." In fact, as noted above, the Company made available to Grant Thornton ALL
of the Company's records. Nothing was withheld.
The Company also notes that the letter of intent, to which Grant Thornton's
comment refers, dealt with the acquisition of a company in the Chicago,
Illinois, area, for $25,000. The Company asserts that this letter of intent was
not a material transaction.
The October 11 letter also refers to certain preferred shares which were never
issued. Those shares are the subject of a dispute between the Company and
certain consultants. The Company disputes Grant Thornton's implication, in its
October 11 letter, that the Company's management incorrectly represented to
Grant Thornton any aspect of this transaction. Documents reflecting the nature
and extent of this transaction were available to Grant Thornton in the Company's
records. Nothing was withheld.
Grant Thornton's recent letter also asserts that that the Company's management
represented to Grant Thornton, at some unspecified time, that it was "unaware of
the severity of problems in the Brazilian telephone market." Grant Thornton
asserts that this alleged representation was "contrary" to a certain memorandum
and facsimile transmission between the Company's subsidiary, Talidan, received
by the Company in February 1999.
Grant Thornton implies that it was not until August 1999 that Grant Thornton
first became aware of that memorandum. In fact, that memorandum was provided to
Grant Thornton as part of the Company's production of documents to Grant
Thornton during its audit of the Company's 1998 financial statements. The
Company also disputes Grant Thornton's conclusion that this memorandum was
contrary to any representation alleged to have been made by the Company's
management.
The October 11 letter suggests that Carnegie has "failed to pursue any funds"
under a contract relating to one of the Company's subsidiaries, ECAC, and that
"[m]anagement failed to make an effort to carry out its stated intentions
respecting the Company's financial services segment." Grant Thornton has no
first hand knowledge concerning the Company's intentions. It has made no effort
to determine those intentions, or the Company's actions. Neither the persons
involved in the ECAC transaction, nor the contemplated joint venture partner,
was ever contacted by Grant Thornton, either before, during or after Grant
Thornton completed its audit of the Company's 1998 financial statement, either
by telephone, in person or otherwise, to determine the Company's efforts.
ALLEGED "RESTRICTIONS ON AUDIT SCOPE"
As noted above, nothing in Grant Thornton's October 11 letter disputes or sets
forth any disagreements with the Company's description of facts relating to the
Westshire stock transaction, contained in the Company's initial Form 8-K.
Instead, without identifying the "information" to which it refers, the letter
suggests that the Company's Form 8-K "omits significant information relevant to
an understanding of [Grant Thornton's] conclusion that [it has] been restricted
in the scope of [its] audit procedures."
Grant Thornton has raised issues concerning the Westshire transaction based upon
a comment by the Securities and Exchange Commission, in a letter dated August 5,
1999, which requested information concerning the likely collectibility of the
Westshire note. It is noteworthy that, despite Grant Thornton's admitted
knowledge of the 1998 issuance of warrants to Westshire as an inducement for an
early payment on the Westshire note, during Grant Thornton's audit of the
Company's 1998 financial statements, Grant Thornton never questioned the
validity or nature of that transaction, at any time prior to August 1999.
Grant Thornton's letter sets forth its speculations about transactions between
Westshire, on the one hand, and Westover, Amphora and Raffel, on the other. The
preponderance of evidence has been ignored by Grant Thornton, and no factual
basis is set forth in Grant Thornton's letter for its speculations.
Grant Thornton has refused to act upon the facts available to it. The Company
was informed by Grant Thornton that, if additional facts were not available,
proper auditing procedures would require Grant Thornton to construe this 1999
transaction as one that is, in effect, a financing charge.
As noted in the Company's Form 8-K, the Company has no information concerning
the nature of the transaction between Westshire, on the one hand, and Westover,
Amphora, and Raffel, on the other.
The Company has no special relationship with Westshire, Westover, Amphora or
Raffel. The Company cannot compel any of these persons or entities to produce
the information that Grant Thornton demanded.
The Company provided Grant Thornton with the name, address and telephone number
of Westshire's attorney. Grant Thornton communicated directly with Westshire's
counsel, and was provided with a letter by that attorney, informing Grant
Thornton that Westshire had paid fair consideration for the shares which
Westshire acquired from Westover, Amphora, and Raffel. Westshire's counsel
declined to provide additional information to Grant Thornton citing the
attorney-client privilege, and, in addition, the fact that the transaction
between Westshire and the sellers is subject to a non-disclosure agreement
between those parties.
The Company's management has cooperated fully in Grant Thornton's request for
information about this transaction, and has independently made efforts to
persuade Westshire, through its counsel, to provide Grant Thornton with
additional "evidential detail" concerning this private stock transaction.
The Company informed Grant Thornton that, if, as a result of the unavailability
of any further "evidential detail," it would be necessary for Grant Thornton to
regard the Westshire acquisition of shares in March 1999 as a transaction
involving as "inducement for early payment on the Westshire note," that is, in
effect, a financing charge, then Grant Thornton should do so. Grant Thornton
refused to accept this accounting presumption. Grant Thornton refused to do
anything about this matter, other than continue to assert that it was necessary
for the Company to acquire information which was unavailable to either Grant
Thornton or the Company.
ALLEGED "INTERNAL CONTROL DEFICIENCIES"
Grant Thornton has stated a belief that "internal controls necessary for
Carnegie to develop reliable financial statements may no longer exist". These
comments by Grant Thornton, as well as a number of others in its October 11
letter, are beyond the scope of the Company's Form 8-K and do not respond to,
explain, dispute or disagree with any assertion contained therein. None of these
comments by Grant Thornton was asserted before Grant Thornton was fired. None of
these comments was required by any rule or regulation, or by any professional
standard.
The Company has provided Grant Thornton with all information requested by Grant
Thornton relating to the Company's subsidiary, Talidan. Although Grant Thornton
has asserted that "it appears that [Carnegie] does not have adequate books and
records to determine the accounts of Talidan in fiscal 1999," it has failed to
identify a single record which Carnegie is alleged not to possess. The Company's
books and records were deemed sufficient to enable Grant Thornton to determine
the accounts of Talidan for 1997 and 1998. The same kinds of records are
available for 1999.
Grant Thornton also complains, in its October 11 letter, that "Carnegie was also
unable to provide timely supporting documentation for the disclosure related to
its RomNet subsidiary," criticizing management for taking "more than a week" to
provide supporting documentation.
The Company's management provided Grant Thornton with all records related to its
RomNet subsidiary. The time taken to respond fully, completely and accurately to
Grant Thornton's inquiries was completely reasonable and cannot be construed as
support for Grant Thornton's gratuitous comments about the Company's internal
controls.
LACK OF INDEPENDENCE
The manner in which Grant Thornton has characterized and mischaracterized events
and its dealings with the Company provides evidence of Grant Thornton's lack of
independence. The Company believes that numerous other factors amply support the
Company's conclusion that Grant Thornton is not independent with respect to the
Company's financial statements.
EXHIBIT 99.2
RESIGNATION LETTER - RICHARD M. COHEN
September 24, 1999
Mr. E. David Gable
Chairman of the Board of Directors
Carnegie International Corporation
11350 McCormick Road
Executive Plaza 3 - Suite 1001
Hunt Valley, Maryland 21031
Dear David:
I hereby resign, effective immediately, as a member of the Board of
Directors and as a member of all Committees of the Board of Directors, of
Carnegie International Corporation.
I appreciate having had the opportunity to serve on Carnegie's Board of
Directors, and I wish the Company every success in its endeavors.
Sincerely yours,
/s/ Richard M. Cohen
Richard M. Cohen
Exhibit 99.3
RESIGNATION LETTER - STUART L. AGRANOFF
September 24, 1999
Mr. E. David Gable
Chairman of the Board of Directors
Carnegie International Corporation
11350 McCormick Road
Executive Plaza 3 - Suite 1001
Hunt Valley, Maryland 21031
Dear David:
I hereby resign, effective immediately, as a member of the Board of
Directors and as a member of all Committees of the Board of Directors, of
Carnegie International Corporation.
I appreciate having had the opportunity to serve on Carnegie's Board of
Directors and I wish the Company every success in its endeavors.
Sincerely yours,
/S/ STUART L. AGRANOFF
STUART L. AGRANOFF
EXHIBIT 99.4
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF MARYLAND
CARNEGIE INTERNATIONAL *
CORPORATION,
*
Plaintiff
*
v.
*
KELLEY ALLEN
And *
ARK CAPITAL, INC.
and * Civil Action No. MJG-99-1517
INDIANHEAD, c/o Yahoo!, Inc.
And *
G. WILLIAM HIGBEE,
*
Defendants,
* * * * * * * * * * * *
*
STIPULATION
Plaintiff Carnegie International Corporation and defendant G. William
Higbee, by their undersigned respective counsel, stipulate and agree as
follows:
1. Carnegie International Corporation, for itself and for all persons, firms or
corporations that might claim by and/or through it, for good and valuable
consideration in light of Mr. Higbee's retraction and statement of regret
attached, accepts Mr. Higbee's expression of regret and acknowledgment, and
agrees that all claims against G. William Higbee in this or any other
jurisdiction or forum, including any and all third party claims, shall be and
the same hereby are dismissed with prejudice upon approval of this stipulation
by the Court.
2. The parties agree that each side will bear its own open costs.
3. Each party person affixing a signature below warrants his/her authority to
execute this stipulation and by such stipulation bind his/her client.
End of stipulation.
SO STIPULATED:
<PAGE>
On behalf of Carnegie International: On behalf of G. William Higbee
By: /s/ Richard Gershberg By: /s/ Edward F. Houff
--------------------- -------------------
Richard L. Gershberg, Esquire Edward F. Houff, Esquire
Federal Bar # 01769 Federal Bar # 00100
Gershberg & Associates, LLC Church & Houff, P.A.
11419 Cronridge Drive, Suite 7 Two North Charles St., Suite 600
Owings Mills, Maryland 21117 Baltimore, Maryland 21201
(410) 654.3850 (410) 539.3900
APPROVAL BY THE COURT:
The foregoing stipulation is APPROVED this 16th day of September 1999.
The Clerk of the Court is directed to enter this action DISMISSED WITH PREJUDICE
as to Defendant G. William Higbee. Each party to bear its own costs.
By: /s/ Marvin J. Garbis
------------------------
Marvin J. Garbis
United States District Judge
<PAGE>
G. William Higbee
September 10, 1999
I, G. William Higbee, hereby retract any statements made or forwarded in writing
or on the Internet on or about May 25, 1999, that any individuals associated
with Carnegie International Corporation (AMEX:CGY) ("Carnegie") inappropriately
sold shares of Carnegie. After I sent the email with its attachment I became
aware that the individuals in question did not sell any Carnegie shares but
returned them to Carnegie for no consideration. I sincerely regret the
statements I made.
By: /s/ G. William Higbee
---------------------
G. William Higbee
<PAGE>
Richard L. Gershberg, Esquire
Gershberg & Associates, LLC
11419 Cronridge Drive, Suite 7
Owings Mills, Maryland 21117
Re: Carnegie International Corporation v. G. William Higbee, et al ,U. S.
District Court, Maryland Docket No. MJG-99-1517
CONFIRMATION OF SETTLEMENT AGREEMENT
Dear Mr. Gershberg:
This letter is written in confirmation of the settlement agreement we have
reached in connection with this matter.
1. Your client has agreed to accept my client's statement to the following
effect, on a separate paper that your client can publish in its entirety:
I, G. William Higbee, hereby retract any statements made or forwarded in writing
or on the Internet on or about May 25, 1999, that any individuals associated
with Carnegie International Corporation (AMEXCGY) ("Carnegie") inappropriately
sold shares of Carnegie. After I sent the email with its attachment I became
aware that the individuals in question did not sell any Carnegie shares but
returned them to Carnegie for no consideration. I sincerely regret the
statements I made.
Action required: None by Carnegie other than acceptance, which is agreed. I am
enclosing a fax copy of that document with this letter as evidence of our good
faith compliance with the agreement. Further action is indicated below.
2. Subject to Confidential Agreement.
ACTION REQUIRED: None by Carnegie. I have enclosed the check with this letter.
Further action described below.
3. In consideration of Mr. Higbee's actions recited in paragraphs 1 and 2 above,
Carnegie will authorize you to execute the attached stipulation of dismissal
with prejudice on its behalf. The pertinent language of that dismissal is as
follows:
Carnegie International Corporation, for itself and for all persons, firms or
corporations that might claim by and/or through it, for good and valuable
consideration in light of Mr. Higbee's retraction and statement of regret
attached, accepts Mr. Higbee's expression of regret and acknowledgment, and
agrees that all claims against G. William Higbee in this or any other
jurisdiction or forum, including any and all third party claims, shall be and
the same hereby are dismissed with prejudice upon approval of this stipulation
by the Court.
ACTION REQUIRED: Please execute the original stipulation attached and return it
with the messenger to my office.
Final action: I have requested that the original of the retraction statement be
sent to me overnight. As soon as it is received I will forward it to you. When I
forward the statement to you, I will submit the finalized stipulation of
dismissal to the Court and you may cash the check.
Thank you for your courtesy in this matter. If everything stated here is in
accord with our agreement, please indicate that by placing your signature on the
line below which will affirm your authority on behalf of your
<PAGE>
client to make this settlement agreement, and will further indicate you and your
client's agreement to the terms and conditions stated in this letter. Please fax
the executed copy back to me and place the original executed copy in the mail.
Very truly yours,
/s/ Edward F. Houff
---------------
Edward F. Houff
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT:
I acknowledge receipt of the foregoing letter and all of its attachments setting
out the settlement agreement by and between Carnegie International Corporation
and G. William Higbee. I am the attorney for Carnegie International Corporation,
and am authorized by the client to enter into this settlement agreement on
Carnegie's behalf, and to affix my signature below indicating Carnegie's
agreement to the terms and conditions stated in this letter and to execute the
Stipulation of Dismissal with prejudice to be filed with the Court.
This day of September, 1999
Richard L. Gershberg
cc: G. William Higbee, Esquire
