-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBH/MuS/iq0Uu3+ctAbkFRIzTlS+PlPm9ZcskAjbxZprBXzxAvcvXToc8q6s5RL+ C7S4EEZGuFf/1ybE2vPA0w== 0001014100-99-000027.txt : 19990215 0001014100-99-000027.hdr.sgml : 19990215 ACCESSION NUMBER: 0001014100-99-000027 CONFORMED SUBMISSION TYPE: 10SB12G/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARNEGIE INTERNATIONAL CORP CENTRAL INDEX KEY: 0000311172 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133692114 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G/A SEC ACT: SEC FILE NUMBER: 000-08918 FILM NUMBER: 99536267 BUSINESS ADDRESS: STREET 1: 11350 MCCORMICK RD EXE PLAZA #3 STREET 2: STE 1001 CITY: HUNT VALLEY STATE: MD ZIP: 21031 BUSINESS PHONE: 4107857400 MAIL ADDRESS: STREET 1: CARNEGIE INTERN CORP STREET 2: 11350 MCCORMICK RD EXE PLAZA #3 STE 1001 CITY: HUNT VALLEY STATE: MD ZIP: 21031 10SB12G/A 1 CARNEGIE INTERNATIONAL CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-SB/A GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 CARNEGIE INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) Colorado 13-3692114 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 11350 McCormick Road, Executive Plaza #3, Suite 1001 Hunt Valley, Maryland 21031 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code 410-785-7400 Securities to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which to be so Registered Each Class is to be Registered None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Introductory Statements Carnegie International Corporation (the "Corporation") has prepared and filed this Form 10-SB/A on a voluntary basis to make available reportable information about the Corporation to existing shareholders and others interested in the activities of the Corporation. The Corporation will continue to voluntarily file periodic reports in the event its obligation to file such reports is suspended under the Securities Exchange Act of 1934, as amended. This registration statement on Form 10-SB/A (the "Registration Statement") may be deemed to contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Registration Statement or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Corporation's stockholders and other publicly available statements issued or released by the Corporation involve known and unknown risks, uncertainties and other factors which could cause the Corporation's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. PART I ITEM 1. BUSINESS Corporate History The Corporation was formed under the laws of the State of Colorado on March 26, 1974, under the name "Entropy Limited," to engage in the development, manufacture and sale of solar energy systems. In 1982, the Corporation ceased operations when its inventory and working capital were depleted. In September 1984, the Corporation was revived by reason of a merger with Solenergy Corporation, which was also engaged in the solar energy business, and at that time, changed its name to "Solenergy Corporation." The operations of the combined companies were not successful and, as a result, the Corporation again ceased its operations in June 1985. In September 1985, the Corporation sold all of its assets and distributed the proceeds to its secured creditors. In January 1992, the charter of the Corporation was suspended by the State of Colorado for the failure to file its Corporate Report, to appoint and maintain a registered agent in Colorado and to pay certain fees. The Corporation allowed its charter to be suspended because it was not business at the time. In August 1994, the Corporation's former president caused the Corporation's charter to be reinstated by filing a Certificate of Renewal, obtaining a registered agent, The CT Corporation, and paying the requisite fees to the State of Colorado in the hope of arranging a transaction pursuant to which the stockholders might receive some value. At that - 2 - time, the name of the Corporation was changed to "A&W Corporation, Inc." because the Solenergy Corporation name was not available and to reflect that the Corporation was not active in the solar energy business. A&W Corporation, Inc. did not conduct any business until February, 1996. In February 1996, the officers of the Corporation began discussions with representatives of Grandname Limited, a British Virgin Islands corporation ("Grandname"). In March 1996, the Corporation entered into an Exchange Agreement with Grandname pursuant to which the Corporation agreed to exchange up to 16,136,666 shares of its common stock for all of the issued and outstanding stock of Electronic Card Acceptance Corporation, a Virginia corporation ("ECAC"), and DAR Products Corporation, a Maryland corporation ("DAR"). The exact number of shares of common stock of the Corporation to be issued pursuant to the Exchange Agreement was later determined to be 12,650,000. Grandname had entered into agreements to acquire ECAC and DAR in exchange for stock of the Corporation. The transaction closed on May 3, 1996 at which time (i) a 1 for 10 reverse stock split previously approved by the Board of Directors of the Corporation became effective, so that its 10,000,000 shares of outstanding common stock were reduced to 1,000,000, (ii) the 9,000,000 shares of the then authorized but unissued common stock were issued to Grandname, and (iii) the Corporation agreed to issue the additional 3,650,000 shares of common stock to which Grandname was entitled pursuant to the Exchange Agreement, as soon as the Corporation amended its charter to increase the authorized number of shares of common stock. As a result of the Exchange Agreement, ECAC and DAR became wholly-owned subsidiaries of the Corporation. ECAC engages in the transaction processing and servicing of credit card transactions for merchants. DAR owns and licenses a patented Non-grip Technology(R) for application to a variety of handheld items which minimizes or eliminates the need for the user to exert a gripping force. On May 22, 1996, the Corporation changed its name to "Carnegie International Corporation." On June 28, 1996, the stockholders of the Corporation approved an amendment to its charter increasing its authorized capital stock to 150,000,000 shares which consisted of 110,000,000 shares of common stock, no par value ("Common Stock"), and 40,000,000 shares of preferred stock, $1.00 par value ("Preferred Stock"). Immediately thereafter, the Corporation issued the additional 3,650,000 shares pursuant to the Exchange Agreement. On July 15, 1997, the Corporation repurchased 1,585,000 shares of the Corporation's common stock for $800,000 from the Estate of John Saah, which received its shares as a stockholder of ECAC pursuant to the Exchange Agreement with Grandname. Recent Transactions 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 due to declining profit margins and increased competition in that industry. - 3 - In implementation of that business strategy, the Corporation effected in the period from April 1997 to January 1999, the following transactions. Sale of ECAC On April 16, 1997, ECAC sold a portion of its merchant accounts to First USA Merchant Services, Inc. for cash in the amount of $3,700,000. On January 6, 1998, ECAC (Europe), Ltd., a subsidiary formed by the Corporation to engage in credit card processing in Europe, was sold to Alpina Tours, Ltd. for $250,000, evidenced by a promissory note due June 29, 1999, with interest at 6% per annum. The note is secured by 125,000 shares of common stock of the Corporation owned by the buyer. On January 31, 1998, the Corporation sold all of the outstanding stock of ECAC to Value Partners Limited, a Texas Limited Partnership for $100,000 in cash and the retention by the Corporation of 40% of the gross profit derived from the accounts of Franklin Bank which operates in suburban Detroit, Michigan. Spinoff of DAR On September 15, 1997, the Corporation's Board of Directors approved a plan to spin off DAR to the Corporation's stockholders since the ownership of DAR's non-grip technology was not consistent with its telecommunications strategy. TimeCast Corporation (TimeCast"), a Nevada corporation, was formed by the Corporation to act as a holding company for DAR and to be utilized to acquire other businesses. The Corporation transferred the stock of DAR to TimeCast; and then, on October 29, 1997, distributed all of the stock of TimeCast to the Corporation's stockholders pro-rata, on the basis of one share of TimeCast for every three shares of the Corporation. Acquisition of PTT and Talidan On September 29, 1997, the Corporation acquired pursuant to Exchange Agreements all of the stock of both Profit Thru Telecommunications (Europe) Limited, a United Kingdom corporation ("PTT"), and Talidan Limited, a British Virgin Islands corporation ("Talidan"), from Tiller Holding Limited, an Anguilla company ("Tiller"). In consideration for the stock of PTT and Talidan, the Corporation issued to Tiller and its stockholders (the "Tiller Group") and to the PTT-Talidan Shareholders an aggregate of 19,340,000 shares of the Corporation's common stock, two-year warrants to purchase 5,000,000 additional common shares at an exercise price of 50% of the average market price of the Corporation's common stock for the 30 trading days prior to exercise, and four-year options (the "Exchange Options") to purchase additional common shares at an exercise price of $.001 per share for that number of shares determined by dividing 2,500,000 by the average market price for the 30 trading days prior to exercise. (See Item 8. "Description of Capital Stock" for a description of the terms of the warrants and options.) - 4 - PTT is a telecommunications software company with its principal place of business located in Sheffield, England and has developed a series of interactive voice response software products and a multi-language automated voice recognition system ("MAVIS(TM)") for commercial use. (See Business - PTT"). Talidan is a telecommunications company with its principal place of business on the Isle of Man. Talidan creates call traffic for telecommunication carriers by promoting information and entertainment services using their circuits. In June 1998, Talidan sold-off a portion of its business. (See "Business - Talidan"). Contemporaneously with the PTT/Talidan closing, the Corporation entered into a Preemption Agreement with Tiller granting the Corporation a right of first refusal for a period of three years to purchase any telecommunications businesses which Tiller desires to sell. In consideration thereof, the Corporation issued four-year options (the "Preemption Options") to Tiller to purchase shares of common stock at an exercise price of $.001 per share for that number of shares determined by dividing 2,500,000 by the average market price for the 30 days prior to exercise. (See Item 8. "Description of Capital Stock - Preemption Options.") To the extent that the Exchange Options and Preemption Options were not fully exercised by the third anniversary of the date of issue, the holders could, for a period of 30 days thereafter, exercise the remaining options in whole or in part, and require the Corporation to purchase the resultant shares at the price at which the number of shares was computed (the "Put Options"). The Corporation had recorded in its financial statements a liability representing these put options of $3,756,574 which was the discounted value of the stock options utilizing a 10% discount rate over three years. In December 1998, the Tiller Group (i) sold all of its Common Stock of the Corporation, warrants and options (retaining only 2,500,000 shares of the Corporation's Common Stock) to private primarily offshore investors, and (ii) surrendered the Put Options in exchange for rights to sell MAVIS(TM) exclusively in the former Soviet Union, Poland, Hungary, Czech Republic and other countries of the Eastern Block. In addition, Tiller acquired for nominal consideration non-exclusive rights to sell MAVIS(TM) in Italy, subject to minimum sales requirements and to Eudora (an Internet service provider) subscribers. Acquisition of ACC The Corporation acquired as of February 1, 1998 all of the stock of Harbor City Corporation, a Maryland corporation trading as ACC Telecom ("ACC"), with its principal place of business in Columbia, Maryland, for 200,000 shares of Series A Preferred Stock convertible into not less than 2,000,000 shares of Common Stock, and $1,000,000 payable in 20 equal quarterly installments over a five year period. ACC is a telephony dealer engaged in the sale, installation and servicing of telephone equipment and, in addition, will market MAVIS(TM) and the software products developed by PTT. (See "Business - ACC" and Item 8. "Description of Capital Stock"). - 5 - Contemporaneously with the ACC acquisition, the Corporation entered into a Buy-Back/Sell-Back Agreement (the "BBSB Agreement") with Barry N. Hunt and Susan B. Hunt (the "Hunts"), who owned 100% of the common stock of ACC. The BBSB Agreement provides that for a period of twenty-four (24) months from the date of the BBSB Agreement, (i) the Hunts will have the option to buy back the ACC stock if MAVIS(TM) (as described herein) is not reasonably marketable and (ii) the Corporation will have the option to sell back the ACC stock if ACC is unable to pay for its expenses for more than two consecutive months. In the event either party exercises its option, the Series A Preferred Stock issued to the Hunts and the unpaid portion of the $1,000,000 purchase price payable to the Hunts will both be cancelled. The Corporation does not believe that the Buy-Back option will be exercised by the Hunts because the Corporation is in the process of establishing a national dealer network for MAVIS(TM) and does not believe that it will exercise the Sell-Back option because of ACC's profitability. Acquisition of Voice Quest, Inc. On November 20, 1998, the Corporation acquired all of the stock of Voice Quest, Inc., a Florida corporation ("Voice Quest"), with its principal place of business in Sarasota, Florida, for 21,600 shares of Series E Preferred Stock (convertible into 216,000 shares of Common Stock), 230,000 shares of Common Stock and $102,084 payable in 12 equal quarterly installments over a three year period. Voice Quest engages in the development and marketing of interactive voice response software products and a voice recognition software product similar to MAVIS(TM). (See "Business - Voice Quest" and Item 8. "Description of Capital Stock "). Acquisition of RomNet, Inc. On December 1, 1998, RomNet Support Services, Inc., a Massachusetts corporation and wholly owned subsidiary of the Corporation ("RomNet"), acquired all of the assets of RomNet, Inc., a Massachusetts corporation with its principal place of business in Boston. The consideration paid for these assets was 52,500 shares of Series F Preferred Stock (convertible into 525,000 shares of Common Stock), 330,786 shares of Common Stock and the assumption of certain debt in the amount of $423,186. RomNet provides technical support and services for software and hardware products, beta testing and Internet support, as well as product sales and fulfillment. (See "Business - RomNet" and Item 8. "Description of Capital Stock"). Letter of Intent with Paramount International Telecommunications, Inc. On December 15, 1998, the Corporation executed a letter of intent to acquire Paramount International Telecommunications, Inc. ("PITI"), a Nevada corporation, which provides telecommunications services to the hospitality, health care and pay-telephone industries, primarily in O+/- call auditing and international one-plus sectors, in the United States, Mexico and Canada. The purchase price of the business, if consummated, will be $1,500,000 in cash and 1,000,000 shares of Series G Preferred Stock, convertible into 10,,000,000 shares of Common Stock, subject to certain adjustments. The Corporation will also assume a debt of PITI to a trust in the amount of $1,244,683, which debt will be convertible into Common Stock at the discretion of the trust - 6 - based on the market value of the Corporation's Common Stock for the 20 days prior to conversion, less a discount of 25%. At the closing of the transaction, the PITI stockholders will be entitled to convert shares of Series G Preferred Stock into up to 2,000,000 shares of Common Stock, and any shares received upon such conversion will have demand registration rights. PITI markets private branch exchange ("PBX") systems, which operate as the primary systems used by hotels to provide telephone-related services to their guests, as well as to produce the information necessary to bill guests for telephone calls and to properly manage telecommunications services in the hotel. PITI is also an Operator Service Provider, providing domestic and international clients with operator services (both live and automated) and billing services for long-distance collect calls for the pay-telephone industry. Letter of Intent with The Phone Stop, Inc. On January 27, 1999, the Corporation executed a letter of intent to acquire all of the assets of The Phone Stop, Inc. ("The Phone Stop"), a Chicago telephony company engaged in sales of Ameritech cellular phones and service, as well as answering machines, cordless phones, pagers and related residential phone products. The Phone Stop receives commissions for activations and residual payments for ongoing cellular service. The purchase price for the business, if consummated, will be 500,000 shares of the Corporation's Common Stock. The letter of intent includes a sell back provision which permits the Corporation, at its option, to reverse the transaction in the event that the current and future business of TeleResources, Inc., an Illinois corporation and an affiliate of The Phone Stop, is not acquired in the transaction. TeleResources, Inc., is primarily engaged in (i) the sales and service of Comdial phone equipment, with its major accounts including the City of Chicago, the United States Navy and Mil-Tel Communications; and (ii) sales of Ameritech network products and usage contracts. Acquisition of Victoria Restaurant In addition to all of the above transactions related to the Corporation's telecommunications strategy, the Corporation made one additional acquisition. In order to provide cash flow to the Corporation in the period prior to the time that the Corporation's telecommunications business becomes self-sustaining, the Corporation acquired the Victoria Station Restaurant in Virginia Gardens, Florida, effective in August, 1997. The purchase price for the restaurant was cash in the amount of $325,000 and 25,000 shares of the Corporation's common stock. Scoggin, Alexander & Associates, Inc. On July 15, 1998, the Corporation entered into a Consulting Agreement with Scoggin, Alexander & Associates, Inc. ("SAAI"), formerly known as The Vadiari Group International. The Corporation engaged SAAI to consult with the Corporation regarding investor relations matters and represent the Corporation in investors' communications and public relations with existing shareholders and investment professionals. In exchange for its services under the consulting agreement, SAAI received 200,847.5 shares of Series B Preferred Stock, convertible into 2,000,475 shares of common stock of the Corporation with piggyback registration rights. - 7 - Pursuant to the Consulting Agreement, the Series B Preferred Stock became convertible upon the share price of the Common Stock maintaining an average (bid) trading price of $2.00 per share for a period of at least 30 days. This condition has been satisfied. Business General. The Corporation is a holding company that owns several wholly owned subsidiaries in the telecommunications, financial services and restaurant industries. The Corporation has no direct operating assets or business activity, but does provide management and other services to its subsidiaries. The Corporation's telecommunication's business includes the development of interactive voice response ("IVR") and voice recognition system software, the marketing of international long distance call traffic through the promotion of information and entertainment services, the provision of technical support, beta testing and Internet support for telephone related computer services, and the sale, installation and servicing of telephone equipment. The Corporation's restaurant business consists of the ownership and operation of one restaurant located in the Miami, Florida area. The Corporation continues to be active in financial services in the processing of credit card accounts through its subsidiary Electronic Card Processing, Inc. ("ECPI"). The Corporation has thirteen full-time employees. Stockholders. As of December 31, 1998, the Corporation had 49,508,053 shares of Common Stock issued and outstanding and held by 1079 stockholders and 200,000 shares of Series A Preferred Stock held by the former owners of ACC; 200,847.5 shares of Series B Preferred Stock held by SAAI; 21,600 shares of Series E Preferred Stock held by the former owners of Voice Quest; and 52,500 shares of Series F Preferred Stock held by the former owners of RomNet. PTT General. PTT is engaged in the development and marketing of IVR software products and MAVIS(TM), into a computer telephone integrated ("CTI") system. PTT was in the process of developing software through December 31, 1997 with only minor amounts of sales of its IVR software products. IVR allows a user to access, store and carry out a variety of processing and messaging services by using the caller's voice commands. The telephony industry is developing a variety of new applications each year and expects to benefit from the efficiencies and cost savings of this relatively new technology. MAVIS(TM) creates an auto attendant for businesses that connects callers to an individual or department using voice only without the need to key punch numbers. MAVIS(TM) interfaces with Microsoft's Windows NT and Lernout & Hauspie's ASR Run-Time and TTS Run-Time software programs. Lernout & Hauspie, a Belgium company, is a world leader in the burgeoning market for multi-language enhanced speech recognition, and MAVIS(TM) can operate in any language that Lernout and Hauspie's speech recognition platform - 8 - supports, which currently includes "American" English, "British" English, French, Spanish, Portuguese, Italian, Russian and German. The Corporation will add additional languages to MAVIS(TM) capability in the future. MAVIS(TM) can also provide voice mail and e-mail capabilities. A caller has the option to access both voice mail and e-mail remotely through MAVIS(TM) without the need for a computer by using text to speech technology to read the voice mail or e-mail to the caller. The caller can then request that the voice mail or e-mail be repeated, deleted or saved by stating the appropriate voice command instead of pressing buttons on the telephone keypad. MAVIS(TM) can be both retrofited to perform with most existing PBX equipment or can be incorporated into new PBX switchboards. ACC and other telephony dealers engaged by the Corporation will market MAVIS(TM) as an integrated addition to existing PBX systems. In addition, the Corporation 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 into their hardware products. MAVIS(TM) is currently being marketed for field trials in Great Britain by PTT and in the United States by ACC and is currently operating in several locations in Great Britain and the United States. PTT is currently seeking marketing partners throughout the United Kingdom and Europe and the Corporation and ACC are doing the same throughout the United States. The Corporation has entered into a Distributor Agreement with ALLTEL Supply, Inc., a business unit of ALLTEL Corp, an information technology company that provides wireline and wireless communications and information services, and is also a leading distributor of communications and data networking equipment for data network service providers and end users. ALLTEL Corp. is a major distributor of Panasonic, Comdial and Lucent telecommunications equipment and had total revenues of $5.2 billion for 1998. ALLTEL Supply, Inc. is one of the nations leading providers of telecommunications and data communications products. Pursuant to the Distributor Agreement, ALLTEL Supply, Inc. will market MAVIS(TM) throughout the United States, including to its affiliates. The Corporation has already received a $100,000 initial order from ALLTEL Supply, Inc. for MAVIS(TM) software. The Corporation will also market MAVIS(TM) through ACC's existing relationship with Comdial dealers, as well as through other telephony companies if acquired in the future.. PTT has developed a variety of IVR software products which are currently being marketed in Europe and will be marketed in the United States in the future. Currently, the Corporation is concentrating on marketing MAVIS(TM) in the United States and does not have an expected date for the Corporation to commence the marketing of the IVR software in the United States. These products include the following: OrderMaster(TM): This product allows businesses to place orders from various suppliers in a general voice box owned by PTT. The orders are then forwarded to the supplier 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 - 9 - week which is transmitted to the supplier instantly. PTT charges a fee for handling each order to the supplier. This will allow the customer to reduce its internal costs by eliminating answering services and providing timely updating of inventory records. WageMaster(TM): This product is an automated payroll designed for use by small businesses over the telephone. Callers enter time and pay. The software then calculates and records the deductions and sends a facsimile similar to a pay stub to the client. PTT charges an annual fee and a calculation fee. Database Management: This is a software product which is used to collect over the telephone a variety of information from individuals, such as name, address, telephone number, identity and date of purchase of products. Its first commercial application is planned to register purchases. PTT charges a database management fee to the manufacturer of the product. Profiling: This is an IVR program used to analyze prospective employees for companies. PTT has a contract for profiling applicants for executive positions with a bank in the United Kingdom. Travel Information: This product is used by travelers. A special telephone number is advertised to the public. The caller states his destination country and is informed of various information relative to that country such as necessary inoculations. The caller pays a premium telephone rate for this service and PTT receives a portion of such fee from the telephone company. Hotels: PTT has an agreement with British Travel Agents Accommodation Register (the "Register") whereby the Register advertises hotel rooms on behalf of the English and Scottish tourist boards in national newspapers. The customer calls a free telephone number which allows the customer to reserve a hotel room. The customer information is then passed on to the relevant hotel instantly. PTT charges a fee to the participating hotels for the maintenance of the hotel database. Security Micro Dot: This is a security program to assist in the recovery of stolen automobiles. The vehicle and its principal parts are embedded with a serial number that is not visible to the naked eye. PTT maintains a database of these serial numbers which may be accessed by telephone. PTT is paid a maintenance fee and for calls made to the database. Call-a-Card(TM): This is an interactive software program pursuant to which a customer calls a special telephone number and dictates a greeting message. A card is sent to the intended recipient giving him or her a telephone number to call. When that number is called the special recorded message is broadcast. - 10 - Employee Supervision: This program is designed for companies with a large number of employees nationally or internationally that perform services at a customer's business such as a cleaning service. The employee is required to call a special telephone number when arriving at and leaving the customer's business, which information is recorded and sent to the client. If an employee doesn't call at the specified time, a supervisor is called and informed. Competition. There are many companies developing IVR and CTI software products that have substantially greater technical, financial and marketing resources as well as larger customer bases and greater name recognition than the Corporation. The Corporation's competitors in the telephony oriented market for messaging systems are independent suppliers, including Octel Communications, Centigram Communications, Active Voice, Voysys, and Cellware Technologies. The Corporation's competitors in the development of voice recognition systems are independent companies such as Vocalis, Phillips and VCS, as well as PBX and key telephone manufacturers such as Lucent Technologies, Northern Telecom, Siemens, Executone, Panasonic and Toshiba which are seeking a voice recognition system partner to integrate such systems into their equipment. With respect to voice recognition systems the Corporation believes that its MAVIS(TM) system can compete favorably with any other similar system being currently marketed because MAVIS(TM) is the only such system that can be integrated with most existing and all new PBX equipment and can be produced in seven different languages. The current competition with MAVIS(TM) is a similar voice recognition system developed by Voice Quest, which the Corporation has acquired. However, the Corporation believes that other larger companies including Voice Control Systems, Registry Magic and General Magic are attempting to develop voice recognition software systems. The Corporation's new relationship with ALLTEL Supply, Inc., one of the nation's leading providers of telecommunications and data communications products, will greatly increase the Corporation's ability to compete with other large telecommunication dealers that enter the market in the future. With respect to IVR products, the Corporation believes that it can compete based on innovation of the Corporation's products, early marketing, price, relationship with end-users, and the universality of many of its software products. 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 on patent protection. However, the likelihood of obtaining patents is evaluated with respect to each product and patent applications are filed where appropriate. The Corporation has filed a patent application for the OrderMaster(TM) in England and under the Patent Cooperation Treaty which permits filing in 95 countries worldwide upon designation within one year and the payment of appropriate fees. The Corporation is in the process of filing new patent applications for MAVIS(TM) and for a number of the other IVR software products in England and under the Patent Cooperation Treaty. The patent applications will probably be filed in the first quarter of 1999 and the Corporation believes that it is likely that it will obtain the patents for MAVIS(TM), the other IVR software products and the CTI products. The Corporation otherwise relies on a combination of copyright, - 11 - trademark and trade secret laws, nondisclosure and other agreements and technical measures to protect its proprietary technology. Two applications for trademark registration are currently pending in the United States Patent and Trademark Office covering the mark "MAVIS" in ordinary block letters and in a stylized form. There can be no assurance that the Corporation will be able to obtain any meaningful patent protection for its technology in the future or that measures taken by the Corporation will be adequate to prevent or deter misappropriation of its technologies or the development of technologies having similar performance characteristics. The Corporation licenses certain portions of its technology from third parties under written agreement such as the multi-language programs from Lernout & Hauspie which require the Corporation to pay ongoing royalty payments. Employees. PTT currently has eight employees of which five are full-time and three are part-time, consisting of four programmers, two salesmen, one receptionist and one administrator. 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. Talidan General. Talidan is engaged in the business of creating call traffic for small international telephone carriers by public promotion of information and entertainment services using the telephone circuits of such carriers. Telecommunication companies have agreements which determine how an imbalance of telephone traffic to and from a country is handled. Generally, a payment is made by the carrier from which the higher level of traffic originated. Talidan's promotions create or increase an imbalance of call traffic in favor of its associated telephone carriers. Talidan receives commissions from these carriers as a percentage of the imbalance payments which these carriers receive from their correspondent carriers. Talidan currently has contracts with international carriers in Sao Tome and a contract with a domestic carrier in Brazil utilizing circuits inside of that country. The services promoted by Talidan use dedicated ranges of telephone numbers allocated for that purpose. The most successful of the services are those appealing to a late night adult audience. Advertisements for these services are placed on television in Brazil. The domestic carrier in Brazil has agreements with advertising merchants to provide the television advertisements on behalf of the local carrier and Talidan. Callers respond to such ads and are charged by their local telephone company for calls to the international destination. The originating local carriers pay Talidan's international carrier who then pays Talidan. The Corporation determined that because the print media was available to the general population, including children, unlike the television advertisements which target adults only and are displayed only late at night, the print media was not consistent with the business image Carnegie wanted to convey. As a result, on June 22, 1998, Talidan sold all of its business derived from print media to Westshire Trading Company, Inc., a Bahamian corporation (the "Buyer") and retained its business derived from the television media. The Buyer intends to hire - 12 - certain of Talidan's consultants including Antony Redfern, Vice President of the Corporation. As part of the transaction, Talidan released its consultants from their covenants not to compete with respect to print media only. The purchase price was $2,340,000, with $640,000 allocated to the assets and $1,700,000 allocated to the release of the covenants not to compete. The purchase price, together with interest at the rate of 7% per annum, is payable in four equal quarterly installments of $585,000 each. The first installment has been paid. The Corporation's due diligence reflected that the Buyer had sufficient assets to pay the purchase price. Revenues generated by the print media were approximately $200,000 for the nine months ended September 30, 1998 and $400,000 for the year ended December 31, 1997. Talidan is currently generating call traffic only in Brazil. Talidan is currently terminating its call traffic in Sao Tome and Brazil. Competition. Although Talidan is always alert to competitive threats, it believes its ability to retain its business is dependent on its relationships with its carriers and the success of its promotions. Talidan believes that its relationships with its carriers are strong and does not anticipate the loss of any of them in the near future. Talidan also endeavors to secure exclusive advertising rights wherever possible to protect against competition. Certain international carriers are now promoting a new concept which allows each originating carrier to retain all of the monies that it collects in respect of outbound call traffic. If this becomes universally accepted, Talidan's business would be materially adversely affected. 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. Antony Redfern, a Vice President of the Corporation, serves as a consultant to Talidan pursuant to an oral agreement and is paid a consulting fee of $105,000 per year. Mr. Redfern has approximately ten years experience in the marketing of telephone time and has maintained contacts in this industry in many parts of the world. ACC General. ACC engages in the sale, installation and servicing of key business telephones and systems including the new telecom technology such as computer telephone integration, data cabling, networking, auto attendant and voice-mail systems, video conferencing equipment and integrated voice response systems. In addition, ACC has recently begun to market PTT's IVR products and the MAVIS(TM) system to its customers. ACC is one of the leading telecommunications hardware and software inter-connect dealers in the Baltimore-Washington metropolitan area. ACC targets mostly small to mid-sized businesses, providing flexible and cost effective phone systems, voice messaging and call center facilities, including Johns Hopkins Hospital, the American Red Cross and the National Security Agency. - 13 - 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. In 1998 ACC had 32 customers with sales of more than $15,000 including the American Red Cross, the Maryland Procurement Office, Search Consultants, and the Twigg Corporation. Sales are made by ACC directly to business end-users by its sales department which currently consists of ten employees. The sales department is made up of highly trained and experienced personnel with on-going training to cope with the ever-changing telecommunications technology. Marketing is achieved principally by heavy Yellow Page advertising throughout the Baltimore-Washington regions and in Northern Virginia, telemarketing and customer referrals. ACC currently has approximately 2,700 customers. The market for ACC's products and equipment is subject to rapid technological change, changes in customer requirements and frequent new product introductions. However, the small-to-mid-sized business targeted by ACC is less likely to rapidly change their phone system with every new technological change. Generally, customers needs and expectations will require ACC to continuously identify, test and market new equipment and features that keep pace with the new technology, evolving industry standards and competitive offerings. These activities will require ACC to make expenditures on testing equipment and on the training of both sales and service personnel. ACC has been approved as a bidder on contracts for the federal General Services Agency and Department of Defense and Maryland's State Department of Procurement. In the past few years, ACC has significantly increased its business in Northern Virginia. As a result, ACC has opened a branch in Fairfax, Virginia to be able to more expeditiously serve its growing customer base in that area and is planning to open a branch in Delaware in February. Suppliers. ACC has long maintained a favorable relationship with its suppliers such as Comdial's Key Voice, Sprint's North Supply, and ALLTEL Corp. for its main systems and products. Incidentals, such as computers, monitors, keyboards, jacks, and cords are usually purchased through a variety of vendors that are easily accessible. If ACC were to experience significant delays, interruptions or reductions in its supply of Comdial key telephone systems, or unfavorable changes to prices and delivery terms, ACC could be adversely affected. Competition. The telephone business systems market is highly competitive and the Corporation believes competition may intensify as manufacturers such as Lucent Technologies and Northern Telecom continue to acquire smaller telecom companies. ACC's principal competitors are a few local businesses which represent manufacturers such as Siemens, Panasonic, Northern Telecom, Vodavi-North Star, and Toshiba. Lucent Technologies, Bell Atlantic, and Executone sell directly to customers and through local businesses. The larger companies have tremendous national advertising resources with greater name recognition, substantially greater technical, financial and marketing resources, as well as larger customer bases. The Corporation - 14 - believes that by targeting the small and mid-size businesses ACC has an edge in both pricing flexibility and customer relations. Competition for skilled and trained technicians and sales personnel is intense. ACC's continued success depends on its ability to attract and retain key personnel involved in its sales, technical, and administrative departments. ACC's success also depends on the ability of its officers and key employees to manage growth successfully and to smoothly and promptly replace needed positions and oversee the training of new personnel. Barry Hunt, the founder of ACC in 1979, and its president and chief executive officer, has 19 years experience in the industry. Employees. ACC employs 35 full-time personnel, including nine in administration, nine in sales and seventeen in service. ACC has never had a work stoppage and none of its employees are represented by a labor organization. Concurrent with the ACC acquisition by the Corporation, ACC entered into a five year employment agreement with Barry Hunt to serve as President of ACC. That agreement provides for an annual salary of $125,000, plus a commission of 17.5% on the gross profits generated from MAVIS(TM) sales through ACC, up to a maximum of $200,000 in commissions in any one year. In the event the rights to MAVIS(TM) are sold to an entity for which Mr. Hunt provided the lead, he shall receive a sales commission of nine percent (9%) of the sales price. If the rights to MAVIS(TM) are sold in North America and Mr. Hunt did not directly provide the lead, he shall receive a commission of three percent (3%) of the sales price. The Corporation is not a party to the employment agreement and is not responsible for compliance with the terms entered into by ACC. Voice Quest, Inc. General. Voice Quest is a developer and provider of speech recognition and voice mail technologies and products. Voice Quest's main product is the Personal Operator(TM) which is an automated attendant system similar to MAVIS(TM), except that it is not a multi-lingual product and has fewer capabilities. However, the Personal Operator(TM) has voice mail capabilities not available with MAVIS(TM). Personal Operator(TM) enables the routing of inbound calls and faxes using speech recognition technology. It enables voice interaction between the caller and the system. It offers call routing by person or department name, automatic directory routing by first then last name, and automatic fax routing by stating the intended recipient's name and then pressing the fax start button. The Personal Operator(TM) has a new QuickMessage interface, which is a special call screening application that lets a person communicate to callers with a short message without having to take the call. The Personal Operator(TM) also features follow me calling, message delivery, message center, internal and external paging, multiple phones per user or multiple users per phone. Personal Operator(TM) is used on PBX equipment and functions similar to MAVIS(TM). In addition to the Personal Operator(TM), Voice Quest's other products include a database query product and a prescription refill system. The database query product is an IVR software which provides instantaneous automated speech recognized databases similar to the OrderMaster(TM). - 15 - Voice Quest's activities over the past few years have been primarily in the development stage and the company has only recently begun in the marketing of its products. As a result, the revenues through 1998 have been minimal. Competition. Currently, the only real competition with Personal Operator(TM) is MAVIS(TM). However, the Corporation believes that Voice Control Systems, Registry Magic and General Magic, which are larger corporations, are attempting to develop speech recognition software. Intellectual Property. The Corporation relies on a combination of copyright, trademark and trade secret laws, nondisclosure and other agreements and technical measures to protect its proprietary technology. 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. Employees. Voice Quest has no employees other than its president, Mark Ortner, who is the founder of Voice Quest and the developer of all of Voice Quest's speech recognition and voice mail technology, including the Personal Operator(TM). Mr. Ortner has a five (5) year employment agreement with Voice Quest at a salary for the first year of $75,000, $87,500 for the second and $100,000 for the balance of the term. Mr. Ortner will receive a bonus of three percent of the gross profit generated by Voice Quest from the sale of the Personal Operator(TM) or MAVIS(TM), to be paid 50% in cash and 50% in stock of the Corporation. The agreement also includes a $50,000 signing bonus, $25,000 at signing and $25,000 in three months. The Corporation will fund Mr. Ortner's salary on a loan basis until the revenues of Voice Quest are sufficient to support such obligation. RomNet, Inc. General. RomNet is engaged in the business of providing technical support services for software and hardware, beta testing services, and Internet support and services. RomNet's major clients include: Macmillan Publishers, which is based in the United Kingdom; Arthur Andersen LLP; Yahoo! Inc. and the Yahoo! Store; Pitney Bowes; Scientific American Magazine; the American College of Cardiology; Aztech New Media; and Nature Science Magazine. Global technical support for software and hardware comprises about 60-65% of RomNet's services. This technical support is provided globally--RomNet provides technical support in western Europe via e-mail and in the United States and Canada via the telephone. In addition, 5-10% of its services are for beta testing, which tests new products prior to distribution. The Internet support and services comprise 20-25% of RomNet's business. These include web design, web hosting, technical support for Internet related services including e-commerce transactions via the Internet, TCP/IP or connectivity and various browsers. RomNet intends to support more Internet related activities and e-commerce related activities in the future. - 16 - An additional 5% of RomNet's business is made up of product sales and product fulfillment. Providing technical support affords the opportunity to sell products available from its clients or to offer discounts and promotions. RomNet also fulfills product orders for its clients, serving as a telephone distribution channel to supplement primary retail channels of its clients. In this capacity, RomNet employs the latest technology in order fulfillment, credit card authorization and secure electronic commerce. RomNet has a total of 28 customers and supports over 200 products from various software, hardware and Internet companies. Products range from business and financial applications from Pitney Bowes and Arthur Andersen to "edutainment" titles for children from Houghton Mifflin Publishing and Hasbro Interactive. RomNet assigns a project manager for every client, who becomes an expert on that client's particular product. Along with a core group of technicians, RomNet provides professional quality, support and courteous customer care. RomNet's revenues for 1997 were $1,776,580 and for 1998 were $1,072,471. The decline in revenues was attributable primarily to excessive services required to be delivered, which were not provided for in RomNet's original contract with a client, which resulted in the premature termination of a support agreement with that client. Employees. Currently, there are 32 employees, 29 of which work full-time, including several college students. Nick Gentile, the President of RomNet, has a one year employment agreement providing an annual salary of $85,000 and a performance-based bonus. The agreement also provides stock options to purchase 85,000 shares of Common Stock of the Corporation at the exercise price of $1.07 per share. The agreement is automatically renewable for continuous one-year terms unless RomNet gives 90 days notice that the agreement will not be renewed. Competition. There are many companies in the marketplace that offer technical support services similar to RomNet. Many of the larger outsourcing companies like Sykes Enterprises, Keane Inc., Stream International, and 800 Support are large enough to have offices across the United States and overseas and are able to provide their services to major companies of the size of Microsoft, Lotus and Oracle. RomNet targets privately held software/hardware developers as well as those Fortune 500 companies which are relatively new in the technological area. RomNet believes it offers a more customized approach to technical support and customer service than the competition. RomNet further believes that it is this flexible approach to the business relationship that has attracted its clients like Arthur Andersen, Macmillan Publishers, and others, to RomNet. Victoria Station Restaurant General. Victoria Station Restaurant is located at 6301 Northwest 36th Street, Virginia Gardens, Florida and was opened in 1973. The Corporation acquired the restaurant in August 1997. The restaurant is a full service steak house which features quality steaks, barbecue ribs, chicken, fish, a salad bar and a full liquor service. Victoria emphasizes consistent high quality ingredients and generous portions at moderate prices in a casual dining atmosphere. The - 17 - restaurant attracts a diverse mix of customers, including professionals and families, near Miami International Airport. Lowell Farkas, the President and Chief Executive Officer of the Corporation, has extensive experience in the restaurant business. Prior to joining the Corporation, Mr. Farkas served as President and Chief Executive Officer of Mad Martha's Ice Cream, Inc. from 1995 to 1996. From 1993 to 1995, Mr. Farkas was a management consultant on a full-time basis to A.S. Management Corporation which operated restaurants on the east coast. He also served as the Executive Vice President of Horn & Hardart Company and Chief Operating Officer of its food service division from 1973 to 1982. Competition. The restaurant industry is intensely competitive with respect to price, service, location, and food quality, and there are many well-established competitors, such as Outback Steakhouse, Inc., Tony Romas and Graddy's, with substantially greater financial and other resources than Victoria, that operate in Victoria's market area. Employees. Currently, Victoria has 24 full-time and 26 part-time employees. None of the employees are covered by a collective bargaining agreement. The Corporation believes its employee relations to be good. Regulatory Matters. 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 restaurant has all appropriate food service and alcoholic beverage licenses. The failure to retain or any delay in obtaining any such license could have a material adverse effect on the restaurant's operations. Victoria's operations are also subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of Victoria's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, further increases in the minimum wage could increase Victoria's labor costs. The Americans With Disabilities Act prohibits discrimination in employment and public accommodations on the basis of disability. Under the Act, Victoria could be required to expend funds to modify its restaurant to provide service to disabled persons or make reasonable accommodations for the employment of disabled persons. Financial Services In May 1996, the Corporation acquired ECAC which was engaged in the business of processing credit card accounts. In 1997, due to declining profit margins and increased competition in credit card processing, the Corporation decided to sell ECAC and to utilize the funds derived thereby to obtain and finance operations in the telecommunications industry. As a result, the Corporation sold approximately 75% of ECAC's accounts in April 1997, all of the stock of ECAC in January 1998, and its start-up operation in Europe in January 1998. The - 18 - Corporation retained a 40% interest in the future gross profit derived by ECAC from the credit card accounts of Franklin Bank, which operates in Southfield, Michigan, a suburb of Detroit. Currently one and one-half full time equivalent employees of the Corporation, including a vice president of the Corporation, are involved in expanding the customer base. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION Overview The current history of the Corporation began on May 3, 1996 with the acquisition of ECAC and DAR. In early 1997, the Corporation decided to concentrate its operations primarily in telecommunications rather than financial services due to declining profit margins and increased competition in that industry. From that time to the present, the Corporation has implemented the following acquisitions and dispositions which have transformed the Corporation's primary focus from financial services to telecommunications. In April 1997, the Corporation sold a substantial portion of ECAC's merchant accounts; in August 1997, the Corporation acquired Victoria; in September 1997, the Corporation (i) spun-off DAR and (ii) acquired PTT and Talidan; in January 1998, the Corporation sold all of the stock of ECAC and a European affiliate; in February 1998, the Corporation acquired ACC; in November 1998, the Corporation acquired Voice Quest; and in December 1998, the Corporation acquired RomNet. During fiscal 1996, all of the Corporation's revenues were produced by ECAC from its credit card processing business. During fiscal 1997, revenues were contributed principally by ECAC, Talidan and Victoria. For the first nine months of 1998, revenues were contributed principally by Talidan, ACC and Victoria. As part of the sale of ECAC in January 1998, the Corporation retained 40% of the future gross profit derived from the merchants utilizing the credit card of Franklin Bank of Southfield, Michigan. The revenues are generated from customers who have small to mid-size retail and professional businesses in Michigan. As a result of the transactions described herein the Corporation became primarily a telecommunications company whose business segments are (i) the development and marketing of interactive voice recognition and response software, including two automated voice independent systems known as "MAVIS(TM)" and "Personal Operator(TM)", (ii) the promotion of international telephone traffic through the marketing of information and entertainment services, (iii) the provision of Internet support services, beta testing services and technical support for telephone related computer services, including software and hardware products and (iv) the sale, installation and servicing of business telephones and system solutions. Income is also currently derived from two other sources consisting of (i) the ownership and operation of the Victoria Station Restaurant near Miami, Florida, and (ii) 40% of the gross profit collected by ECAC from the accounts of the Franklin Bank. The cash flow from these two sources will continue to - 19 - provide funding to the Corporation until the telecommunications businesses become self- sustaining. The Corporation expects that its marketing of voice recognition systems, IVR software and CTI products developed by PTT and Voice Quest have the greatest immediate potential for growth of any of the Corporation's business segments. The Corporation also believes that its MAVIS(TM) system is currently unique in that it can integrate with any PBX being currently marketed as well as a significant number currently in operation, and can function in a number of languages. The Corporation intends to initially market MAVIS(TM) in the United States and Europe through marketing relationships with ALLTEL Supply Inc. and international distributors and through the clients of telephony companies that it owns or acquires. The Corporation's acquisition of Voice Quest, together with PTT, can provide the Corporation with the benefits to be derived from having two of the outstanding pioneers in the field of voice recognition systems running these two entities and collaborating on future product development and enhancement. The acquisition of PTT and Voice Quest affords the Corporation the opportunity to market voice recognition systems to large companies requiring highly sophisticated systems as well as small and medium size businesses seeking affordable systems. PTT has also developed a number of IVR telephone software products including systems to place orders from suppliers, automate payrolls, register purchases by customers, profile prospective employees, protect merchandise from theft, make hotel reservations, and obtain travel information. Voice Quest has developed a database query product and a prescription refill system, both IVR telephone software products. In addition, PTT has developed a greeting card program in which a mailed card requests the recipient to dial a certain telephone number in order to hear a greeting message. PTT's contributions to revenues were $14,400 in 1997 and $155,400 for the nine months ended September 30, 1998. The Corporation expects PTT's IVR programs and MAVIS(TM) and Voice Quest's Personal Operator(TM) to be the major contributors to its revenues and earnings in the future. Results of Operations Due to the Corporation's acquisitions and dispositions that occurred in 1997 and the nine months ended on September 30, 1998, the Corporation does not believe that any comparison of results of 1997 to 1996 or the nine months ended on September 30, 1998 to the nine months ended on September 30, 1997 would be meaningful. Fiscal Year Ended December 31, 1996 The Corporation had revenues of $3,256,291, all of which were attributable to ECAC. Cost of fees and sales for 1996 were $2,522,030, operating expenses were $1,224,689 and interest expense (net of interest income) was $218,919, resulting in the Corporation incurring a net loss for the year of $709,347. - 20 - ECAC's operations in 1996 consisted of the servicing of merchant accounts and the building of service contract portfolios. The Corporation's operations consisted of developing the organizational infrastructure for future acquisitions. Fiscal Year Ended December 31, 1997 The Corporation realized operating revenues in 1997 of $3,245,810 and income from the sale of a portion of ECAC's accounts of $3,700,000, or aggregate revenues of $6,945,810. Cost of fees and sales for 1997 were $1,589,925, operating expenses were $3,592,270, interest expense (net of interest income) was $32,583 and the provision for income taxes was $50,867, resulting in the Corporation realizing net income from continuing operations of $1,680,165. After a loss from discontinued operations of $100,330, arising as a result of the spin-off of DAR, net income for the year was $1,579,835. Revenues attributable to ECAC in the amount of $5,056,223 consisted of service revenue of $1,356,223 and revenue from the sale of the service contract portfolio of $3,700,000. The sale of the portfolio was based on management's belief that the future operations of the Company should be directed toward the acquisition of businesses involved in the telecommunications industry. The profit realized on the sale of the portfolio provided the funds necessary for the Corporation to pursue acquisitions in this area. In September, the Corporation acquired Talidan and PTT. The acquisition of Talidan provided the Corporation with access to financial resources to continue the development of MAVISTM and other software owned by PTT. Victoria was acquired in 1997 in order to provide working capital to the Corporation during the transition of principal operations to the telecommunications industry. The contribution (loss) of the Corporation and each operating subsidiary to revenues and net income before income taxes for 1997 were as follows: Income Revenues Before Taxes -------- ------------ Carnegie $ -- $ (1,463,835)1 ECAC 5,056,223 3,123,989 PTT 14,400 (75,318) Talidan 1,202,512 140,885 Victoria 672,675 5,310 --------------- --------------- $ 6,945,810 $ 1,731,032 =============== =============== - ---------------------------------- 1 Expenses of the Corporation, including management services provided by the Corporation to its subsidiaries. - 21 - Nine Months Ended September 30, 1997 The Corporation had revenues of $5,242,300, of which $5,002,675 were attributable to ECAC and $3,700,000 of which was attributable to ECAC's sale of a substantial portion of its accounts. Cost of fees and sales for the nine months ended September 30, 1997 were $784,517, operating expenses were $1,728,139 interest expense was $44,531 and provision for income taxes was $184,516 resulting in the Corporation generating net income for the nine months ended September 30, 1997 of $2,400,267. ECAC's contribution to income before income taxes for the period was $3,388,990. The profits realized from the operations of ECAC were used by the Corporation in pursuing the acquisition of businesses in the telecommunications industry. Nine Months Ended September 30, 1998 The Corporation realized operating revenues for the nine months ended September 30, 1998 of $7,321,429 including $2,340,000 from the sale of a portion of the business of Talidan. Cost of fees and sales for the nine months ended September 30, 1998 were $3,776,758, operating expenses were $3,976,880, interest expense (net of interest income) was $81,141 and the provision of income taxes was $1,022,581, resulting in the Corporation realizing net income of $2,507,820. Income taxes increased over the preceding period due to changes made in the estimated effective income tax rate of the Corporation for the year ended December 31, 1998. During this period the Corporation acquired ACC, which is a distributor of telephone systems to small and medium-size businesses. Additionally, ACC will provide the sales and marketing support for the sale of the MAVIS(TM) system to customers who have existing telephone systems. The revenues of ACC for the nine months ending September 30, 1998 of $3,019,666 did not include sales of the MAVIS(TM) system. During the year management concluded that certain aspects of Talidan's operations were not consistent with the image that the Corporation wanted to convey. As a result, the rights to certain telephone lines and promotional materials were sold along with releases of certain consultants to Talidan from their covenants not to compete for $2,340,000 evidenced by a note. The proceeds of this note will be used by the Corporation to bring the MAVIS(TM) system to market. The loss of PTT consists of the operating costs of that company that are not subject to deferral to later periods. - 22 - The contribution (loss) of the Corporation and of each operating subsidiary to revenues and income before income taxes for the nine months ended September 30, 1998 were as follows: Income Revenues Before Taxes -------- ------------ Carnegie $ 10,878 $ 732,292 1 PTT 155,400 (300,183) 2 Talidan 2,620,374 2,407,494 Victoria 1,535,111 (28,202) ACC 3,019,666 719,010 --------------- ------------- $ 7,341,429 $ 3,530,401 =============== ============= - ---------------------------------- 1 Represents gains from the sale of ECAC (Europe), from the disposition of ECAC and from the sale of a portion of the business of Talidan offset by expenses of the Corporation, including management services provided by the Corporation to its subsidiaries. 2 Includes gain on sale of Talidan phone lines and proceeds of covenant not to compete. Plan of Operations In 1999 the Corporation intends to operate each of its business segments as follows: PTT Prior to July 1998, PTT had been a development stage company with minimal income engaged in the development of a variety of IVR software and MAVIS(TM), its multi-language automated voice recognition system. PTT has completed development of a variety of IVR products and MAVIS(TM) is ready for installation in field trials. As a result, PTT and the Corporation can now turn their attention to marketing PTT's software products particularly in Europe. PTT is currently marketing its products directly in the United Kingdom and negotiating for marketing partners throughout Europe. In the United States, ACC has begun field trials of MAVIS(TM) and the Corporation has begun to establish a national dealer network for MAVIS(TM) through its agreement with ALLTEL Supply, Inc. The Corporation's initial focus is to market MAVIS(TM) in the United States and then market PTT's IVR software products throughout the United States. At that time, these products may be marketed directly to the merchant accounts of Franklin Bank. PTT also continues to develop additional IVR products, and to improve MAVIS(TM) as well as to add additional languages in which MAVIS(TM) operates. Talidan Talidan expects that revenues on its retained business in 1998 will be comparable to 1997. In addition, Talidan anticipates the receipt of $2,551,776 in 1999 from the sale of a portion of its business in June 1998. Talidan will attempt to generate additional business with other international telephone carriers or to replicate its Brazilian domestic business in other countries. Talidan has no such additional business and no assurance can be given that it will obtain such business. - 23 - ACC ACC will (i) continue to serve its existing commercial accounts and solicit new accounts, (ii) expand its services to governmental agencies, (iii) increase its hardware and software product lines, (iv) market in its area of operations software products of PTT, including the MAVIS(TM) system and (v) develop arrangements with other telephony dealers for the marketing of MAVIS(TM) and PTT's IVR products throughout North America. ACC also opened its first branch office in Fairfax, Virginia on January 7, 1999 in order to better serve its increasing business in Northern Virginia and plans to open a branch in Delaware in February 1999. Through September 30, 1998, ACC's revenues were substantially ahead of 1997 being $1,535,111 compared to $1,530,634 for all of 1997. Voice Quest Voice Quest will continue to develop it existing product line and market it through the Corporation's domestic and international distribution systems. Additionally, the technological advancements created by Voice Quest, particularly in adding valuable features to voice mail, will be used to complement and strengthen MAVIS(TM). RomNet RomNet will continue to provide a broad range of high-end technical services to its current base of clients and will attempt to generate additional business, particularly through its Internet support and services, including e-commerce related activities. Financial Services The Corporation will receive forty percent (40%) of the gross profit derived by ECAC from credit card accounts of the Franklin Bank beginning in March 1998. The Corporation estimates that it will obtain in 1998 approximately $340,000 in revenues from servicing such accounts or from selling its interests in them, but there can be no assurance that this figure will be attained. The Corporation has presently delayed seeking to enlarge this customer base because it is focusing on its telecommunications strategy. In the future the Corporation may consider taking advantage of its expertise in credit card processing and becoming more active in that market if it is satisfied with its then prevailing conditions. Victoria Station Restaurant The Corporation intends to continue to operate Victoria under its ownership in essentially the same manner as it operated in the past except that it may add an entertainment activity in the restaurant. The Corporation estimates that revenues for the year will be ten percent (10%) higher than last year. - 24 - Acquisitions In 1998, the Corporation acquired ACC, RomNet and Voice Quest. In 1999, the Corporation will seek to acquire companies in the United States engaged in the sale, installation and servicing of telephone equipment and systems; the provision of technical and Internet support services; the provision of operator service and related products; or marketing relationships with such companies. It is the intention of the Corporation to ultimately own or have marketing relationships with a complex of such companies operating across the United States. The Corporation has currently signed two letters of intent to acquire such companies, however, the Corporation is uncertain as to the possibility of acquiring either of the companies. The Corporation believes that the acquisition of PITI would be material to the operation and financial condition of the Corporation. 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 to the national distribution by ALLTEL Supply, Inc. The Corporation expects that it will take a combination of stock and cash to acquire any of such companies and that the cash requirements will be met by a combination of cash generated by the Corporation's operations, by the private and public sales of stock and by lines of credit. There can be no assurances that this strategy will be successful. Working Capital and Liquidity Cash needs of the Company have been met to date by a combination of funds generated from operations, from borrowings, from the sale of assets and from sales of the Corporation's stock for cash and for services. During the year ended December 31, 1996, cash flow from operations was $688,227. For 1997, cash flow from operations was $2,356,734, and proceeds from the sales of stock were $229,541. In the nine months ended September 30, 1998, the Corporation had a cash flow from operations of $1,356,827, and generated $960,810 in proceeds from the sale of stock as well as $100,000 from the sale of ECAC's stock. Debt from borrowings amounted to $1,324,997 and $657,506 at December 31, 1997 and September 30, 1998, respectively. In addition, in 1997, the Corporation issued 2,290,145 shares of Common Stock for services rendered valued at $448,177. For the nine months ended September 30, 1998, the Corporation issued 2,252,844 shares of Common Stock for services rendered valued at $712,869. The Corporation has made up for the loss of income from ECAC by the acquisition of other income producing assets for stock, deferred cash payments and/or relatively small amounts of upfront cash. PTT and Talidan were acquired for stock; ACC was acquired for $1,000,000 payable over five years and stock; Voice Quest was acquired for $102,084 payable over three years and stock; RomNet was acquired for stock and the assumption of debt obligations of $423,186; and the Victoria Station Restaurant for cash in the amount of $325,000 and stock. Since the acquisition of PTT at the end of September 1997, the Corporation has utilized its available cash flow primarily in the development of PTT's MAVIS(TM) system and to a lesser - 25 - extent in the development of its various IVR software products. As of September 30, 1998, the cash requirements of PTT for product development have been substantially reduced due to the start of commercial sales of several completed IVR products and to the completion of the development of the initial MAVIS(TM) system. As a result, the Corporation believes that its funds from current operations will be sufficient to meet operating expenses and debt service without any significant additional sales of stock or any significant increase in debt. If unforeseen events cause increases from time to time in the need for additional working capital, the Corporation believes it will be able to satisfy substantially all of such temporary operating funding requirements from lines of credit on commercially reasonable terms. The Corporation's plans for 1999 call for it to make additional acquisitions of companies engaged in the sale, installation and servicing of telephone systems and equipment, the provision of technical and Internet support services or the provision of operator service and related products in other areas of the United States in addition to the Mid-Atlantic region where the Corporation currently owns an operating subsidiary. If such acquisitions require substantial amounts of cash the Corporation will have to issue additional stock or incur additional debt. The Corporation believes that it will be able to generate such capital from either or a combination of both of such sources on terms satisfactory to the Corporation. If acquisitions are funded utilizing bank debt it is likely that such debt would have to be secured at least with the assets of the company to be acquired and possibly with additional assets of the Corporation. Year 2000 Computer Systems Compliance The term "Year 2000 Issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the Year 2000 is approached and reached. These problems generally arise from the fact that most of the world's computer hardware and software have historically used only two digits to identify the year and a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's." The Corporation believes that its software is certified and fully Year 2000 compliant due to its recent modification of existing software and conversion to new software or computer systems. The Corporation has also conducted an internal review of all its computer systems and has contacted all its software suppliers to determine whether there are any major areas of exposure to the Year 2000 Issues. The Corporation believes that any Year 2000 Issues which may arise will not be significant and should be able to be funded through the Corporation's normal operating revenue and income. The Corporation has contacted most of its other vendors, suppliers and significant customers to determine that their operation, products and services are Year 2000 compliant or to monitor their progress toward Year 2000 compliance. Most of the these parties state that they intend to be Year 2000 compliant. Although some of the vendors and the suppliers may not be Year 2000 compliant, the Corporation believes that such failure would not have a major impact on the Corporation due to the reliance on the Corporation's own proprietary software. The - 26 - Corporation believes that some of its customers may not be Year 2000 compliant and may therefore have cash flow problems and become a potential credit risk for the Corporation. The Corporation believes that this should not be a significant problem to the Corporation and may be a marketing opportunity since its software is Year 2000 compliant. ITEM 3. PROPERTIES The Corporation owns no real estate. The principal executive offices of the Corporation are located at Executive Plaza 3, Suite 1001, Hunt Valley, Maryland 21031. The Corporation's lease, which covers approximately 7,700 square feet, expires April 30, 2003. The annual rent is $132,000, subject to increases of 3.5% per year. The Corporation has subleased its prior offices in Owings Mills, Maryland for its remaining term expiring in March 2003. Monthly payments are required under the lease which escalate over the term of the lease starting with $1,925 and ending with $2,100. The rent under the sublease covers the rent under the lease to the Corporation. The Corporation believes that its leased premises are suitable for its corporate headquarters and offices. The Corporation also believes that its insurance coverage for its leased and subleased premises is adequate. PTT currently leases 1,900 square feet of office space in Sheffield, England under a three year lease which expires January 2001 at an annual rent of $33,000. ACC's offices are located in 5,000 square feet of leased space in Columbia, Maryland. The lease term is for five years expiring in August 2000 and at an annual rent of $59,000. The new ACC branch currently leases 3,010 square feet in Fairfax, Virginia. The lease term is for two and a half years and expires on July 11, 2001 at an annual rent of $70,908. Voice Quest currently leases 680 square feet in Sarasota, Florida. The lease is a month to month, with a monthly rent of $783. RomNet currently subleases 3,800 square feet in Boston, Massachusetts. The sublease expires in October 2001 at an annual rent of $51,600. The Victoria Station restaurant is located at 6301 Northwest 36th Street, Virginia Gardens, Florida. The annual rent under the lease, which expires in 2001, is $121,000. - 27 - ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table reflects the beneficial ownership of the Corporation's Common Stock as of December 31, 1998, held by directors, executive officers, each person known to Management of the Corporation to own beneficially, directly or indirectly, more than 5% of the Corporation's Common Stock, and all directors and executive officers as a group. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to all Common Stock shown as beneficially owned by them. Unless otherwise indicated, the address of all executive officers and directors is the principal office of the Corporation. 5% Beneficial Owners Number of Shares Percent of Class - -------------------- ---------------- ---------------- The Greater Metropolitan Corporation1 3,133,874 6.33% 333 7th Avenue New York, New York 10001 - ---------------------------------- 1 Leonard Mezi is the sole stockholder of The Greater Metropolitan Corporation and controls the corporation. - 28 - Executive Officers and Directors Class Number Percent of Shares of Class E. David Gable 1.......................... 1,748,000 2 3.53 Lowell Farkas 1........................... 725,000 1.46 Stuart L. Agranoff 1...................... 50,000 .10 Richard Cohen1 ........................... 80,000 .16 Lawrence E. Gable......................... 50,000 .10 Antony Redfern............................ 0 0 Richard J. Greene......................... 204,673 .41 Michael R. Faulks......................... 370,370 .75 Barry N. Hunt............................. 9,400 3 .02 All directors and executive officers as a group (9 persons).................. 3,237,443 6.54 --------- ---- - ---------------------------------- 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 These shares were issued to Mr. Gable in exchange for shares of stock in DAR Products Corporation and for services rendered in connection with the Exchange Agreement with Grandname Limited. 3 Does not include 200,000 shares of Series A Preferred Stock convertible into 2,000,000 shares of Common Stock on May 18, 2000. - 29 - ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Directors and Executive Officers The directors and executive officers of the Corporation are as follows: Name Age1 Position2 - ---- --- -------- E. David Gable3 49 Chairman of the Board of Directors and Chief Operating Officer Lowell Farkas4 58 Director, President and Chief Executive Officer Stuart L. Agranoff 49 Director Richard M. Cohen 47 Director Barry Hunt 51 Director Michael R. Faulks 45 Vice President Lawrence Gable3 52 Vice President and Acting Secretary Antony Redfern 40 Vice President Richard J. Greene 60 Chief Financial Officer and Treasurer - ---------------------------------- 1 As of December 31, 1998 2 Each Director holds office until his successor has been duly elected and qualified. All terms for positions of Director of the Corporation are for one year. All officers of the Corporation serve at the will of the Directors. 3 E. David Gable and Lawrence Gable are brothers. 4 Pursuant to Lowell Farkas' employment agreement with the Corporation, he is entitled to be a Director of the Corporation so long as he is the President of the Corporation. E. David Gable serves as the Chairman of the Board of the Directors and Chief Operating Officer of the Corporation. He was elected Chairman in September 1996 and Chief Operating Officer in May 1997. From September 1996 thru May 1997, Mr. Gable served as the Acting President and Chief Executive Officer of the Corporation. From 1988 to 1993, Mr. Gable served as a Principal and President of the All Star Automotive Group which consisted of fourteen automobile dealerships located throughout Maryland, Virginia, West Virginia and Pennsylvania. Lowell Farkas serves as the President and Chief Executive Officer of the Corporation and as a Director. Mr. Farkas first became involved with the Corporation in October 1996 when he began working as a part-time consultant. He was appointed a Director and President and CEO in May 1997 and continues to serve in these positions. Prior to joining the Corporation, Mr. Farkas served as President and CEO of Mad Martha's Ice Cream, Inc. from 1995 to 1996. From 1992 to 1995, Mr. Farkas was a management consultant on a full-time basis to A.S. Management Corporation which operated restaurants on the east coast. Stuart L. Agranoff has served as a Director of the Corporation since August 1998. Mr. Agranoff is a general partner of Murphy & Partners, an equity investment fund, in New York - 30 - City. From 1988 to 1997, he was employed by Citicorp Venture Capital, Ltd., an investment group, as its Chief Financial Officer and Vice President. Mr. Agranoff has also served as a Director of Farm Fresh, Inc., a privately-held supermarket chain based in Norfolk, Virginia. Richard M. Cohen has served as a Director of the Corporation since September 1998. Mr. Cohen owns Richard M. Cohen Consultants, Inc., a financial consulting firm, in New York City. From 1992 to 1996, he was employed by General Media, Inc., a publishing and entertainment company engaged in the production and sale of men's magazines, automotive publications and various entertainment products, as its President. Barry N. Hunt has served as Director of the Corporation since October, 1998. Mr. Hunt also serves as the President of ACC. He is the co-founder of ACC and has served as its President since 1979. Over the past 19 years with ACC, he has compiled a database of 2,800 direct customers of ACC and 140 Interconnect Telecommunications Companies in the United States and Canada. Michael R. Faulks has served as a Vice President of the Corporation since October 1998. Mr. Faulks is the creator of the MAVIS(TM) system and serves as Technical Director of PTT, as well as a Director on the Board of PTT. As Technical Director, Mr. Faulks is involved in the design and creation of the Voice Response Services and manages a software development team. From 1990 to 1993, he served as the Managing Director of 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. Prior to 1990, Mr. Faulks served as the Technical Director for Applied Knowledge Limited (AKL). Mr. Faulks is also a member of the MENSA Society. Antony Redfern has served as a Vice President of the Corporation since October 1997. Mr. Redfern is a consultant to Talidan. Mr. Redfern has been working in telecommunications and voice computer technology since 1990 when he joined Legion, Ltd. as its international business development director until June 1996. While at Legion, Ltd, he was responsible for establishing successful telecommunication businesses in Portugal, Brazil, Sao Tome, and South Africa. From June 1996 to September 1997, Mr. Redfern was a consultant to various companies. Mr. Redfern has a mechanical engineering background and has worked on design projects in Europe and the Middle East. Richard J. Greene was elected as Chief Financial Officer and Treasurer of the Corporation in September, 1998. He has been a certified public accountant since 1960 and has operated his own accounting and business consulting firm since 1986. Lawrence E. Gable has served as a Vice President of the Corporation since May 1997 and as Acting Secretary since January 22, 1999. He is responsible for managing the Corporation's credit card operations. From February 1996 thru 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. - 31 - ITEM 6. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth certain information concerning compensation of certain of the Company's executive officers, including the Company'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:
Restricted Securities Other Annual Stock Underlying All Other Name Year Salary Bonus Compensation Awards Options/SARs Compensation - ------------------------------------------------------------------------------------------------------------ E. David Gable 1998 $200,000 $ -- $ -- $ -- 1,000,000 $ -- 1997 225,000 1996 100,000 Lowell Farkas 1998 150,000 -- -- -- -- -- 1997 125,000 400,000
Option/SAR Grants in Last Fiscal Year The following table contains information concerning the grant of stock options to the Company's executive officers in 1998.
Percent Of Number of Total Securities Options/SARs Underlying Granted To Exercise Or Options/SARs Employees In Base Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date - ---------------------------------------------------------------------------------------------------------- E. David Gable 1,000,000 80% $0.45 12/31/99
Stock Option Plan General. On July 15, 1998, the Board of Directors of the Corporation approved the Carnegie International Corporation 1998 Stock Option Plan (the "Plan"). The purpose of the Plan is to provide incentives for directors, officers and employees of the Corporation who may be designated for participation and to provide additional means of attracting and retaining competent personnel. The Plan provides for the reservation of 2,000,000 shares of the Corporation's Common Stock for issuance upon the exercise of options granted under the Plan. The number of shares of Common Stock reserved for the grant of options and the number of shares of Common Stock - 32 - which are subject to outstanding options granted under the Plan are subject to adjustment to give effect to any stock splits, stock dividends, or other relevant changes in the capitalization of the Corporation. The options granted under the Plan may be Incentive Stock Options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or Non-Qualified Stock Options which are not intended to be Incentive Stock Options. Administration and Grant of Options. The Plan is administered by a committee of at least two directors appointed by the Board of Directors of the Corporation (the "Committee"). The Committee designates from time to time those directors, officers and employees of the Corporation or a subsidiary of the Corporation to whom options are to be granted and who thereby become participants in the Plan. No member of the Committee may vote upon or decide any matter relating to him or herself or a member of his or her immediate family. The Committee may grant to participants in the Plan options to purchase shares of Common Stock in such amounts as the Committee shall from time to time determine. Terms of Options. In the case of Incentive Stock Options, the option exercise price per share is the Fair Market Value, as that term is defined in the Plan, of the Common Stock of the Corporation on the date preceding the date of grant, except that if the grantee then owns more than 10% of the combined voting power of all classes of stock of the Corporation (a "Ten Percent Shareholder"), the option exercise price will be 110% of Fair Market Value. In the case of NonQualified Stock Options, the option exercise price per share is determined in the discretion of the Committee. Each option granted under the Plan will expire on the 10th anniversary of the date the option was granted except (i) as otherwise stated by the Committee in the Option Agreement, or (ii) on the 5th anniversary of the date the option was granted in the case of a Ten Percent Shareholder. No option may be transferred by an optionee other than by will or the laws of descent and distribution. Options are exercisable only by the optionee during his or her lifetime and only as described in the Plan. Options may not be assigned, pledged or hypothecated, and shall not be subject to execution, attachment or similar process. Upon any attempt to transfer an option, or to assign, pledge, hypothecate or otherwise dispose of an option in violation of the Plan, or upon the levy of any attachment or similar process upon such option or such rights, the option immediately becomes null and void. In the event of the termination of employment or other relationship of an optionee for any reason other than death, all unexercised options of the optionee will terminate unless such options are exercised within 90 days after the termination of employment. In the event of the death of an optionee, the options may be exercised by the personal representative, administrator or a person who acquired the right to exercise any such option, provided that such option is exercised within one year after the death of the optionee. - 33 - Employment Agreements Lowell Farkas entered into an employment agreement with the Corporation effective May 15, 1997 (the "Farkas Agreement") pursuant to which he was appointed President and Chief Executive Officer at an annual salary of $100,000 until September 1, 1997 increasing to $125,000 in the second year, $150,000 in the third year, and $200,000 in the fourth year. The Farkas Agreement will terminate on August 30, 2003 and is automatically renewable for one year terms unless notified otherwise by the Board of Directors of the Corporation at least 90 days prior to the expiration of the then current term. As additional compensation, Mr. Farkas will be paid a performance bonus annually, which will be based upon the net profits of the Corporation for each year. Mr. Farkas also received non-qualified stock options to purchase 400,000 shares of Common Stock of the Corporation at $0.50 per share, the bid price on the date of the Farkas Agreement. If the Corporation successfully completes a public offering of 5,000,000 shares of the Corporation's stock which raises at least $5,000,000 or achieves a net profit of $1,000,000 in any fiscal year, Mr. Farkas will receive options to purchase an additional 500,000 shares of Common Stock at $0.10 per share. Mr. Farkas is to be reimbursed for the cost of leasing and operating an automobile. Upon termination of his employment with the Corporation, Mr. Farkas has an option to acquire the rights and title to Corporation's Victoria Station restaurant at a purchase price paid by the Corporation for the business plus the depreciated value of improvements made after the acquisition. E. David Gable entered into an employment agreement with the Corporation effective April 8, 1998 (the "Gable Agreement") pursuant to which he was employed as Chief Operating Officer at an annual salary of $200,000. The Gable Agreement is for five years, automatically renewable on the same terms unless notification of termination from the Board of Directors of the Corporation at least 90 days prior to the expiration of the then current term. As additional compensation, Mr. Gable will be paid a performance bonus annually, which will be based upon the net profits of the Corporation each year. Mr. Gable received stock options to purchase 1,000,000 shares of Common Stock of the Corporation at $0.45 per share which shall become vested when the Corporation has a consolidated pre-tax net income of at least $1,000,000 in two consecutive quarters. These options must be exercised no later than December 31, 1999 or the options will become void. In addition, if the Corporation successfully completes a public offering of 5,000,000 shares of the Corporation's stock or raises at least $5,000,000 in the Offering, Mr. Gable will receive options to purchase an additional 500,000 shares of Common Stock at $0.10 per share. In the event the Corporation terminates the Gable Agreement for its convenience prior to the expiration thereof, the Corporation will provide Mr. Gable with written notice of 90 days prior to the termination date, along with compensation in an amount equal to five years of salary in the Gable Agreement. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Corporation has a number of common officers, directors, and relationships with TimeCast and DAR. E. David Gable, Director of DAR, serves as the Corporation's Chairman - 34 - and Chief Operating Officer. Gary Dahne, Vice President of TimeCast and DAR, manages investor relations issues for the Corporation. Donna Ruff, Secretary of DAR, is an employee of the Corporation. With respect to Talidan, Antony Redfern, a consultant to Talidan, serves as a Vice President of the Corporation. The Corporation expects to continue its business relations with TimeCast. The Corporation made loans to DAR to fund its operations since the Corporation acquired all of DAR's issued and outstanding shares in May 1996, and has agreed to continue to loan funds to DAR to finance its operations until March 1999. The Corporation also has committed to assist TimeCast with financial, administrative, and human resources support, until March 1999. The Corporation anticipates that all future transactions with TimeCast will be conducted on an arm's-length basis, on terms that the Corporation and TimeCast believe, without an independent third party evaluation, will be no less favorable to TimeCast than could have been obtained from unrelated third parties. The Corporation made advances to certain of its officers and directors from time to time which were non-interest bearing and which do not have a specified repayment date. The Corporation determines whether it will make an advance, attach any conditions or obligations to the advance, or what the repayment obligations will be on a case by case basis. Typically, the advances are made at the discretion of the executive officers. In the event a large advance is to be made, then the board of directors must approve such advance. The advances are made to help the Corporation's officers, directors and employees in the time of personal need because the Corporation is unable to pay at this time wages at industry standard. The highest advances made during the last three years were $116,500 to E. David Gable, $175,000 to Scott Caruthers, a former Director of the Corporation, and $46,664 to David Pearl, former Secretary to the Corporation. To date, all advances have been paid back to the Corporation. In the event of termination of employment, either voluntary or involuntary, any advances made to such officers must be repaid at the time of such termination. The table below sets forth for each of the officers and directors receiving advances the amount of advances at the end of each of the periods. ITEM 8. DESCRIPTION OF CAPITAL STOCK General. The Corporation's authorized capital stock consists of 110,000,000 shares of Common Stock, no par value per share, and 40,000,000 shares of Preferred Stock, par value $1.00 per share. As of December 31, 1998, the Corporation had 49,508,053 shares of Common Stock issued and outstanding and had 1,079 shareholders of record; 200,000 shares of Series A Preferred Stock issued to two shareholders of record; 200,847.5 shares of Series B Preferred Stock, issued to one shareholder of record; 21,600 shares of Series E Preferred Stock issued to two shareholders of record; and 52,500 shares of Series F Preferred Stock issued to one shareholder of record. In addition, there are outstanding warrants and options which were issued in connection with the acquisition by the Corporation of PTT and Talidan. - 35 - Pursuant to the Exchange Agreements with Tiller for the acquisition by the Corporation of PTT and Talidan, at any time that Tiller receives a notice from a PTT-Talidan shareholder of an intended sale of the Corporation's shares Tiller is to notify the Corporation and the members of the Board of Directors of the Corporation will have a right of first refusal with respect to such shares for an eight day period. The Directors of the Corporation have agreed that any exercise of such rights will be for the account and benefit of the Corporation only and not for the individual benefit of any director. Common Stock. Each outstanding share of Common Stock is entitled to one vote on any matter on which stockholders are entitled to vote, including election of directors, and except as otherwise required by law with respect to class voting rights, or provided in any resolution adopted by the Board of Directors with respect to any series of Preferred Stock establishing the rights of such series, the holders of Common Stock possess all voting powers. The holders of shares of Common Stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefor after payment of any preferential dividends that may then be issued and outstanding. Upon any dissolution, liquidation or winding-up of the Corporation, holders of Common Stock are entitled to share ratably in the net assets available for distribution to stockholders after the payment of debts and other liabilities subject to the prior rights of any issued Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights or the right to accumulate their shares in the election of directors or in any other matter. Preferred Stock. The Corporation's Articles of Incorporation authorizes the Board of Directors to (without further action by the stockholders) issue shares of Preferred Stock from time to time in one or more series, and to fix the designations, preferences, conversion rights, voting powers, restrictions, redemption provisions, limitations as to dividends, and other terms, provisions and rights, as may be determined by the Board of Directors. Each outstanding share of Series A Preferred Stock, which was issued in connection with the acquisition of ACC, is entitled to ten votes per share, not as a class, but along with the Common Stock. The Series A Preferred Stock is convertible on May 18, 2000 into 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, whichever is greater. The Series A Preferred Stock becomes convertible prior to May 18, 2000 if the closing market price of the Corporation's Common Stock is above $2.00 per share on any day or the Corporation declares a dividend on its Common Stock. The Series A Preferred Stock has a preference over Common Stock and over subsequently issued Preferred Stock, ranking in alphabetical order, in the event of a corporate liquidation. The Series A Preferred Stock is not entitled to dividends. Each outstanding share of Series B Preferred Stock, which was issued in connection with the execution of the consulting agreement with SAAI, is entitled to ten votes per share, not as a class, but along with the Common Stock. The Series B Preferred Stock is currently convertible into 2,008,475 shares of Common Stock. The Series B Preferred Stock is not entitled to dividends. - 36 - Each outstanding share of Series E Preferred Stock, which was issued in connection with the acquisition of Voice Quest, is entitled to ten votes per share, not as a class, but along with the Common Stock. The Series E Preferred Stock is convertible on May 18, 2000 into 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, whichever is greater. The Series E Preferred Stock is not entitled to dividends. Each outstanding share of Series F Preferred Stock, which was issued in connection with the acquisition of RomNet, is entitled to ten votes per share, not as a class, but along with the Common Stock. The Series F Preferred Stock is convertible on December 1, 2000 into 525,000 shares of Common Stock or $7,000,000 worth of Common Stock based on the fair market value per share of Common Stock on December 1, 2000, whichever is greater. The Series F Preferred Stock has a preference over Common Shares at $1.33 per share and over subsequently issued Preferred Stock, ranking in alphabetical order, in the event of a corporate liquidation. The Series F Preferred Stock is not entitled to dividends. Warrants. In connection with its acquisition of PTT and Talidan, the Corporation issued two-year warrants to the PTT-Talidan Shareholders to purchase 5,000,000 shares of Common Stock of the Corporation at an exercise price of 50% of the average market price of the Corporation's Common Stock as quoted by the NASD Over the Counter Bulletin Board Service ("OTCBB") for the 30 consecutive trading days before the exercise date. The warrants may be exercised in whole or in part at any time prior to 5:00 p.m. on September 29, 1999. Prior to the exercise of the Warrants, the holders will not be entitled to vote, receive dividends or be deemed the holder of common stock for any purpose. However, the warrants will be subject to an adjustment in the event a common stock dividend is paid or if the common stock is subdivided or reclassified. The Corporation is not required to issue any fractional shares upon the exercise of the warrants. If a fractional interest in a share is deliverable to the holder of the warrant, the Corporation will pay the cash value thereof. Exchange Options. The Corporation also issued to Tiller and the PTT-Talidan Shareholders four-year options to purchase shares of Common Stock at an exercise price of $.001 per share. The options may be exercised in whole or in part at any time prior to September 28, 2001. The total number of shares issuable pursuant to the Exchange Options is to be determined by dividing 2,500,000 by the average market price of the Corporation's shares as quoted by the OTCBB for the 30 consecutive trading days before the exercise date ("Average Market Price"). In the event of the occurrence of a capital transaction, including but not limited to, a share dividend, share exchange, merger, reverse merger or other capital transaction of an extraordinary nature, the number of shares and/or the market price, will be appropriately adjusted. Some of the Exchange Options were exercised on November 11, 1998 and 1,250,000 shares of Common Stock were purchased for $1,250, based on an Average Market Price of $1.00 per share. The remaining Exchange Options were exercised on December 23, 1998 and 795,167 shares of - 37 - Common Stock were purchased for $795.18, based on an Average Market Price of $1.572 per share. Preemption Options. The Corporation issued to the Tiller Group options to purchase Common Stock at an exercise price of $.001 pursuant to the Preemption Agreement which granted to the Corporation rights of first refusal on any telecommunication business which Tiller wished to sell. The total number of shares issuable pursuant to the Preemption Options is to be determined by dividing 2,500,000 by the Average Market Price. In the event of the occurrence of a capital transaction, including but not limited to, a share dividend, share exchange, merger, reverse merger or other capital transaction of an extraordinary nature, the number of shares and/or the market price, will be appropriately adjusted. The Preemption Options were exercised on December 23, 1998 and 1,590,331 shares of Common Stock were purchased for $1,590.33, based on an Average Market Price of $1.572 per share. Registration Rights. The shares of common stock issued to Tiller and the PTT-Talidan Shareholders pursuant to the Exchange Agreements as well as the shares of common stock underlying the warrants and options issued in connection therewith have identical "piggyback" registration rights. If the Corporation proposes to register any of its shares, it has to so notify the holders of those securities. The holders have 20 days to notify the Corporation of the number of shares the holders want registered. The Corporation is then required to use reasonable efforts to register the shares for the holder's benefit. The Corporation will bear all expenses of registration and the holders will bear the underwriting commissions and the expenses of their counsel. The Corporation also agreed that when it met all of the requirements necessary to effect a shelf registration it would use its best efforts to effectuate and maintain such a shelf registration. The security holders agreed not to sell the Corporation's shares for such period requested by the managing underwriter not in excess of 120 days following the effective date of a registration statement filed by the Corporation under the Securities Act of 1933. The 300,000 shares of Common Stock issued to RomNet also have "piggyback" registration rights. If the Corporation proposes to register any of its shares, it has to so notify the holders of those securities not less than 20 days prior to the anticipated date of filing. The holders have 10 days to notify the Corporation of the number of shares the holders want registered. The Corporation will bear all expenses of registration other than the underwriting commissions and the expenses of such holders' counsel. - 38 - PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS Market Information. The Common Stock of the Corporation is traded on the National Association of Securities Dealers ("NASD") Bulletin Board market. During the period of the Corporation's inactivity from June 1985 through September 1996, there was no public trading of the Corporation's shares. Trading of the Corporation's Common Stock on the over-the-counter market commenced in September 1996. The following table reflects the high and low bid prices for the Corporation's Common Stock for each quarterly period ended since trading commenced in September 1996. These quotations are based on information supplied by market makers of the Corporation's Common Stock. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. 1998 1997 ---- ---- Price Range Price Range ----------- ----------- Low High Low High --- ---- --- ---- 1st Quarter $.22 $1.44 $.65 $1.20 2nd Quarter .42 .8125 .375 .9375 3rd Quarter .48 1.90 .375 1.375 4th Quarter .73 2.45 .375 1.000 Holders. As of December 31, 1998, there were 1079 holders of record of the Corporation's Common Stock. At such date, 49,508,053 shares of Common Stock were issued and outstanding. Dividends. As of January 1, 1999, the Corporation has declared no dividends and is not likely to do so in the near future. ITEM 2. LEGAL PROCEEDINGS On July 22, 1998, the Corporation obtained an option to acquire Advanced Networking, Inc. ("ANI"), a Delaware company engaged in the sale, installation and servicing of telephone equipment in Delaware and adjoining states, subject to due diligence satisfactory to the Corporation. The Corporation was to issue 5,000 shares of the Corporation's common stock for the option. The purchase price for the business, if consummated, would be $2,800,000 in cash or cash equivalents. - 39 - The option's initial expiration date was October 31, 1998. However, the Corporation believed that the option was mutually extended by the parties to November 30, 1998. The parties were unable to reach agreement on the term of the option or on the terms of acquisition. The Corporation believes that ANI is in breach of the option. On December 22, 1998, the Corporation filed a complaint (the "Complaint") in the Circuit Court of Baltimore County against ANI and the stockholders of ANI (collectively, the "Defendants"). The Complaint asserts claims based on breach of contract, promissory estoppel and misrepresentation. The Complaint seeks specific performance of the option and/or compensatory damages in the amount of $3,000,000 for each claim and $3,000,000 in punitive damages for the misrepresentation claim. ITEM 3. CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS Not Applicable. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES The following information relates to sales of securities of the Corporation issued or sold each year since May 3, 1996 which were not registered under the Securities Act. A. 1996 In May and June 1996, the Corporation issued to Grandname, Ltd., a British Virgin Islands corporation, and the shareholders of Electronic Card Acceptance Corporation, a Virginia corporation ("ECAC") and DAR Products Corporation, a Maryland corporation ("DAR"), an aggregate of 12,650,000 shares of common stock. 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. Grandname, Ltd. is an off-shore entity and all of its shareholders were off-shore residents. DAR had five shareholders, all of whom were officers and directors of DAR. ECAC had two shareholders, one the chief executive officer and a director and the other, an estate with representation on the board of directors. All of the shareholders of DAR and ECAC were accredited or sophisticated investors and each received a proxy statement containing audited financial information. Each of the recipients of such shares represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. B. 1997 (1) In August 1997, the Corporation issued 25,000 shares of its common stock to a shareholder for the acquisition of the Victoria Station Restaurant. 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 shareholder was an accredited - 40 - investor. Each of the recipients of such shares represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. (2) In September 1997, the Corporation issued to Tiller Holdings Limited and the shareholders of that Corporation, none of whom is a U.S. person, in exchange for all of the outstanding stock of PTT and Talidan, 19,340,000 shares of the Corporations common stock, warrants to purchase an additional 5,000,000 shares at an exercise price of 50% of the average market price of the Corporation's common stock for the 30 trading days prior to exercise and options to purchase that number of additional shares, at an exercise price of $.001 per share, determined by dividing 2,500,000 by the average market price for the 30 trading days prior to exercise. The transactions were effected without registration pursuant to Regulation S under the Securities Act of 1933 in reliance on the fact that the recipients of the securities were not U.S. persons and on Section 4(2) of the Securities Act since the recipients represented that the securities were acquired for investment and without a view to distribution. The certificates representing the shares contained appropriate restrictive legends and none of such shares to date have been sold in the United States or to U.S. persons. Prior to the completion of the transactions, the recipients of the shares received current financial information and performed a thorough due diligence review of the Corporation. (3) In addition to the above shares, during 1997, the Corporation sold 2,846,119 shares for an aggregate consideration of $768,340 in cash or services to 20 purchasers. Of these purchasers, four were not U.S. persons, four were accredited investors, five were friends of the officers or the employees of the Corporation, four were affiliated with ECAC, and three were others. These transactions were effected without registration under the Securities Act in reliance upon the exemption provided by SEC Rule 504 of Regulation D. (4) During 1997, the Corporation sold 410,155 shares for an aggregate consideration of $218,028 in cash or services to six purchasers. Of these purchasers, one was not a U.S. person, one was an officer of the Corporation as well as a sophisticated investor, two were executive officers or directors of the Corporation, and therefore accredited investors, and the two other purchasers were accredited investors. The sophisticated investor is the brother of the CEO of the Corporation and had access to all corporate information. 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. Each of the recipients of such shares represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. - 41 - C. 1998 (1) On February 1, 1998, the Corporation issued to two shareholders of Harbor City Corporation, trading as ACC Telecom, ("ACC"), 5,000 shares of Common Stock and 200,000 shares of its Series A Preferred Stock, in partial consideration for all of the outstanding stock of ACC. These transactions were effected without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. The recipients of the shares were accredited investors. Each of the recipients of such shares, represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. (2) Through July 31, 1998, the Corporation sold 2,763,688 shares for an aggregate consideration of $968,878 in cash or services to 42 purchasers. Of these purchasers, six were not U.S. persons, one was an accredited investor, one was an employee of the Corporation, four were counsel to the Corporation or their relatives thereof, two were accountants to the Corporation, sixteen were relatives or friends of the officers or the employees of the Corporation, four were related purchasers and eight were others. These transactions were effected without registration under the Securities Act in reliance upon the exemption provided by SEC Rule 504 of Regulation D. (3) (a) Through July 31, 1998, the Corporation sold 3,757,534 shares for an aggregate consideration of $708,671 in cash or services to 23 purchasers. Of these purchasers, three were not U.S. persons, six were employees, officers or directors of the Corporation, two were counsel to the Corporation, one was an accountant to the Corporation, who is now an employee of the Corporation, four were relatives or friends of officers or the employees of the Corporation who is now an employee of the Corporation, four were related purchasers and three were others. These transactions were effected without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. Of the 20 purchasers who were U.S. persons, thirteen were accredited investors and six were sophisticated investors who received corporate information that was provided by Standard and Poor's as well as financial statements and information available on the Corporation's web site. Each of the recipients of such shares represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. (b) Between August 1, 1998 and December 31, 1998, the Corporation sold 1,531,855 shares for an aggregate consideration of $706,378 in cash or services to nine purchasers. Of these purchasers, two were executive officers or directors of the Corporation, one was counsel to the Corporation, and six were others. 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 nine purchasers, seven were accredited investors - 42 - and two were sophisticated investors who received the Corporation's financial statements and corporate information that was provided by Standard and Poor's. Each of the recipients of such shares represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. (4) On December 1, 1998, the Corporation issued to the owner of the assets of RomNet, Inc. 300,000 shares of Common Stock and 52,500 shares of its Series F Preferred Stock, in partial consideration for all of the assets of RomNet, Inc. These transactions were effected without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. The recipient of the shares was an accredited investor. The recipient of such shares, represented that the shares were acquired for investment without a view to distribution, the certificates representing such shares contained appropriate restrictive legends and to date none of such shares have been transferred in transactions in public markets of the United States. Prior to the completion of the transactions, the recipient of the shares performed a thorough due diligence review of the Corporation received a copy of the Corporation's 10-SB filed on October 28, 1998. (5) Through December 31, 1998, the Corporation sold 580,200 shares for an aggregate consideration of $1,145,400 in cash to 44 purchasers. All of these purchasers were accredited investors. These transactions were effected without registration under the Securities Act in reliance upon the exemption provided by SEC Rule 506 of Regulation D. D. 1999 Through January 19, 1999, the Corporation sold 4,310,345 shares for an aggregate consideration of $2,000,000 in cash to 2 purchasers. Both 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 pursuant to Rule 504 of Regulation D of the Securities Act may not have been in full compliance with the rules and regulations under the Securities Act and applicable state securities laws. On July 31, 1998, the Corporation offered to all of such purchasers (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 July 31, 1998 the average of the closing bid and asked prices in the over-the-counter bulletin board market was $1.30. As a result, the Corporation does not believe that it has any material liability to the purchasers in respect of these sales. - 43 - ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS Pursuant to the By-laws of the Corporation, each of the officers and directors of the Corporation is entitled to indemnification for actions taken by them or in the name of the Corporation to the fullest extent permitted by the laws of the State of Colorado. Under the Colorado Business Corporation Act ("CBCA"), a corporation must indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director or officer, against reasonable expenses incurred by him or her in connection with the proceeding. Also, under the CBCA, a corporation may indemnify a director or officer made a party to a proceeding because the person is or was a director or officer against liability, including reasonable expenses, incurred in a proceeding if (i) the person conducted himself in good faith; (ii) the person reasonably believed, in the case of conduct in an official capacity with the corporation, that his conduct was in the corporation's best interests, and, in all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, the person had no reasonable cause to believe that his conduct was unlawful. The corporation may not indemnify an officer or director in connection with (i) a proceeding in which the person was adjudged liable to the corporation; or (ii) in connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director or officer was adjudged liable on the basis that he or she derived an improper personal benefit. The Corporation may pay for or reimburse the reasonable expenses incurred by an officer or director who is a party to a proceeding in advance of final disposition of the proceeding if: (i) the officer or director furnishes to the corporation a written affirmation of the person's good faith belief that he or she has met the standard of conduct necessary for indemnification by the Corporation; and (ii) the officer or director furnishes to the corporation a written undertaking to repay the advance if its is ultimately determined that he or she did not meet the standard of conduct; and (iii) a determination is made that the facts then known to those making the determination would not preclude indemnification under the Colorado indemnification provisions. - 44 - PART F/S - FINANCIAL STATEMENTS The following financial statements are provided: The consolidated financial statements and related notes of the Corporation and its subsidiaries for the nine months ended September 30, 1998 (unaudited) and 1997 and the years ended December 31, 1997 and 1996, including the consolidated balance sheets at September 30, 1998 (unaudited) and December 31, 1997, and the related consolidated income statements and statement of changes in shareholders' equity and cash flows for the nine months ended September 30, 1998 and 1997 (unaudited) and the years ended December 31, 1997 and 1996. Financial Statements Corporation Report of Independent Certified Public Accountants Balance Sheet December 31, 1997 Statements of Operations for the years ended December 31, 1997 and 1996 Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996 Statements of Cash Flow for the years ended December 31, 1997 and 1996 Schedules of Valuation and Qualifying Accounts for the years ended December 31, 1997 and 1996 Pro Forma Unaudited Condensed Statements of Earnings for the years ended December 31, 1997 and 1996 - 45 - Carnegie International Corporation and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) C O N T E N T S - -------------------------------------------------------------------------------- Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEETS 5 STATEMENTS OF OPERATIONS 6 STATEMENTS OF STOCKHOLDERS' EQUITY 7 STATEMENTS OF CASH FLOWS 8 NOTES TO FINANCIAL STATEMENTS 9 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS PRO FORMA UNAUDITED CONDENSED FINANCIAL STATEMENTS PRO FORMA UNAUDITED STATEMENTS OF EARNINGS NOTES TO UNAUDITED PRO FORMA STATEMENTS OF EARNINGS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors Carnegie International Corporation and Subsidiaries We have audited the accompanying consolidated balance sheet of Carnegie International Corporation (a Colorado corporation) and Subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carnegie International Corporation and Subsidiaries as of December 31, 1997, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. We have also audited Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997 and 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON, LLP Baltimore, Maryland July 29, 1998 CONSOLIDATED FINANCIAL STATEMENTS Carnegie International Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- (Unaudited) December 31, September 30, ASSETS 1997 1998 ------------------ ------------------ CURRENT ASSETS Cash $ 226,422 $ 164,047 Certificate of deposit-restricted 400,000 -- Accounts receivable 761,464 1,291,662 Note receivable and accrued interest - affiliate -- 2,551,776 Loans receivable 10,200 9,557 Inventory 32,575 240,345 Prepaid expenses 24,620 207,031 ----------------- ---------------- Total current assets 1,455,281 4,464,418 PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation and amortization 484,217 1,883,735 OTHER ASSETS Security deposits and other assets 109,047 427,971 Accounts receivable - former subsidiary -- 1,475,012 Loans receivable - officers and employees 301,201 192,695 Intangibles, less accumulated amortization of $117,619 in 1997 and $521,058 in 1998 (unaudited) 6,487,587 6,777,441 ----------------- ---------------- 6,897,835 8,873,119 ----------------- ---------------- $ 8,837,333 $ 15,221,272 ================ ===============
The accompanying notes are an integral part of these financial statements. - 5 -
- ------------------------------------------------------------------------------------------------------------------- (Unaudited) December 31, September 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998 ------------------ ------------------ CURRENT LIABILITIES Notes payable $ 803,752 $ 1,656,719 Current maturities of long-term debt 789,230 36,996 Current maturities of notes payable to stockholder and affiliates 185,000 200,000 Accounts payable and accrued expenses 1,274,064 1,025,988 Income taxes payable 50,867 1,073,448 ----------------- ---------------- Total current liabilities 3,102,913 3,993,151 LONG-TERM OBLIGATIONS Long-term debt, less current maturities 169,612 261,671 Notes payable to stockholder and affiliates, less current maturities -- 533,298 Put option obligation 3,756,574 4,143,419 ----------------- ---------------- 3,926,186 4,938,388 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Convertible preferred stock, par value $1 per share, 40,000,000 authorized shares; none issued at December 31, 1997, 200,000 issued at September 30, 1998 (unaudited) -- 200,000 Common stock, non par with a stated value of $0.01; 110,000,000 shares authorized; 38,835,486 issued and 36,057,467 outstanding at December 31, 1997 and 44,212,708 issued and 41,436,689 outstanding at September 30, 1998 (unaudited) 388,355 442,127 Additional paid-in capital 3,535,795 5,255,702 Accumulated (deficit) earnings (834,916) 1,672,904 ----------------- ---------------- 3,089,234 7,570,733 Less treasury stock at cost (2,778,019 shares) (1,281,000) (1,281,000) ----------------- ---------------- 1,808,234 6,289,733 ----------------- ---------------- $ 8,837,333 $ 15,221,272 ================ ===============
Carnegie International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------- (Unaudited) Years ended Nine months ended December 31, September 30, ------------ ------------- 1997 1996 1996 1997 ---- ---- ---- ---- Revenue Operating $ 3,245,810 $ 3,256,291 $ 7,341,429 $ 1,542,300 Sale of Service Contracts 3,700,000 -- -- 3,700,000 --------- --------- --------- --------- 6,945,810 3,256,291 7,341,429 5,242,300 Cost of fees and sales Processing fees 183,117 1,051,421 -- 167,660 Commissions 1,103,889 1,298,851 1,652,219 502,957 Supplies 268,656 55,676 674,770 92,701 Equipment related expenses 28,919 99,421 1,449,769 19,020 Royalties 5,344 16,662 -- 2,179 --------------- ------------- ----------- ------------- Total cost of fees and sales 1,589,925 2,522,030 3,776,758 784,517 --------------- ------------- ----------- ------------- Gross profit 5,355,885 734,261 3,564,671 4,457,783 Operating expenses Compensation 1,533,264 291,092 762,163 791,604 Professional fees 429,194 564,153 755,960 220,282 Provision for bad debts -- -- 114,022 -- Advertising 359,966 -- 359,139 8,930 Travel 183,050 73,482 195,784 43,822 Utilities 141,896 3,787 79,494 73,772 Facilities 145,951 -- 228,257 60,170 Depreciation and amortization 175,264 21,084 652,970 112,826 Insurance 70,754 -- 102,116 53,941 Other 552,931 271,091 726,975 362,732 -------------- -------------- ------------ -------------- 3,592,270 (1,224,689) 3,976,880 1,728,139 -------------- --------------- ------------ -------------- Operating income (loss) 1,763,615 (490,428) (412,209) (2,729,644) Other income (expense) Interest expense (49,417) (226,063) (219,992) (44,531) Interest income 16,834 7,144 138,851 -- Sale of assets and release of covenants -- -- 2,340,000 -- Gain on sale of subsidiaries -- -- 1,683,751 -- -------------- -------------- ------------ -------------- (32,583) (218,919) 3,942,610 (44,531) -------------- -------------- ------------ -------------- Income (loss) from continuing operations before provision for income taxes 1,731,032 (709,347) 3,530,401 2,685,113 Provision for income taxes 50,867 -- 1,022,581 184,516 -------------- -------------- ------------ -------------- Net income (loss) from continuing operations 1,680,165 (709,347) 2,507,820 2,500,597 Discontinued operations Loss from operation of TimeCast (100,330) -- -- (100,330) -------------- -------------- ------------ -------------- NET INCOME (LOSS) $ 1,579,835 $ (709,347) $ 2,507,820 $ 2,400,267 ============== ========== === ============ ==============
- 6 -
Earnings (loss) per share Basic: Continuing operations $ 0.08 $ (0.08) $ 0.06 $ 0.15 Discontinued operations (0.01) -- -- (0.01) ------------ ----------- ----------- ------------- Net income $ 0.07 $ (0.08) $ 0.06 $ 0.14 =========== ========== ========== ============ Diluted: Continuing operations $ 0.07 $ (0.08) $ 0.06 $ 0.15 Discontinued operations 0.01 -- -- (0.01) ------------ ----------- ----------- ------------- Net income $ 0.06 $ (0.08) $ 0.06 $ 0.14 =========== ========== ========== ============
The accompanying notes are an integral part of these financial statements. Carnegie International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------- Preferred Stock --------------- Shares Amount ------ ------ Balance at January 1, 1996 - $ - Net loss for the year ended December 31, 1996 - - Reverse acquisition - - Shares issued in connection with acquisitions - - Share issued in lieu of compensation - - -------------- -------------- Balance at December 31, 1996 - - Net income for the year ended December 31, 1997 - - Disposition of DAR - - Issuance of common stock - - Shares issued in lieu of compensation - - Shares issued in connection with acquisitions - - Note payable converted to common stock - - Affiliates' forgiveness of note payable - - Purchase of treasury shares - - -------------- -------------- Balance at December 31, 1997 - - Net income for the nine months ended September 30, 1998 - - Issuance of common stock - - Shares issued in lieu of compensation - - Note payable converted to common stock - - Shares issued in connection with acquisitions 200,000 200,000 -------------- -------------- Balance at September 30, 1998 (unaudited) 200,000 $ 200,000 ============== ==============
The accompanying notes are an integral part of these financial statements. - 7 -
- ------------------------------------------------------------------------------------------------------------------- Additional Accumulated Common Stock paid-in (deficit) Treasury Stockholders' --------------------------- Shares Amount capital earnings stock (deficit) equity ------ ------ ------- -------- ----- ---------------- 1,000 $ 1,000 $ 78,255 $ (1,714,864) $ (59,795) $ (1,695,404) -- -- -- (709,347) -- (709,347) 999,000 9,000 (78,255) 9,460 59,795 -- 8,350,000 83,500 -- -- 83,500 7,224,786 72,248 593,413 665,661 - -------------- ------------- ------------- ------------- -------------- -------------- 16,574,786 165,748 593,413 (2,414,751) -- (1,655,590) -- -- -- 1,579,835 -- 1,579,835 -- -- 99,330 -- -- 99,330 420,400 4,204 225,337 -- -- 229,541 2,290,145 22,901 425,276 -- -- 448,177 19,340,000 193,400 1,880,815 -- -- 2,074,215 210,155 2,102 159,124 -- -- 161,226 -- -- 152,500 -- -- 152,500 -- -- -- -- (1,281,000) (1,281,000) - -------------- ------------- ------------- ------------- -------------- -------------- 38,835,486 388,355 3,535,795 (834,916) (1,281,000) 1,808,234 -- -- -- 2,507,820 -- 2,507,820 1,918,128 19,181 700,379 -- -- 719,560 2,252,844 22,528 690,341 -- -- 712,869 1,206,250 12,063 229,187 -- -- 241,250 -- -- 100,000 -- -- 300,000 - -------------- ------------- ------------- ------------- -------------- -------------- 44,212,708 $ 442,127 $ 5,255,702 $ 1,672,904 $ (1,281,000) $ 6,289,733 ============== ============ ============ ============= ============== ==============
Carnegie International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------- (Unaudited) Six months ended Years ended December 31, June 30, ------------------------ -------- 1997 1996 1998 1997 ---- ---- ---- ---- Cash flows from operating activities Net income (loss) $ 1,579,835 $ (709,347) $2,507,820 $2,581,255 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 175,264 21,084 652,970 92,819 Issuance of common stock as compensation 448,177 665,661 712,869 351,453 Net book value of subsidiary sold - - (1,624,028) - Goodwill adjustment associated with contracts sold - - 100,017 - Accrued interest put option - - 386,845 193,735 Changes in assets and liabilities Accounts receivable (40,544) 98,914 (310,685) 67,777 Due from affiliates (513,194) (589,963) (1,642,346) (940,013) Inventory (20,582) (7,993) (47,022) - Prepaid expenses (24,248) 3,726 (182,783) (36,219) Other assets 61,112 (91,818) (197,052) - Accounts payable and accrued expenses 640,047 118,037 (82,601) (97,820) Income taxes payable 50,867 - 1,022,581 (9,421) ----------- ---------- ---------- ---------- Net cash provided by operating activities 2,356,734 688,227 1,296,585 2,009,831 Cash flows from investing activities (Purchase) Proceeds of restricted certificate of deposit (400,000) - 400,000 - Purchase of furniture and equipment (170,008) (19,559) (1,573,421) (32,888) Deposits - - (355,808) 75,687 Acquisition costs (530,628) (247,850) (125,920) (267,266) ----------- --------- --------- ---------- Net cash used in investing activities (1,100,636) (267,409) (1,655,149) (224,467) Cash flows from financing activities Payments on notes payable (1,454,033) (839,504) (956,326) (403,642) Proceeds from issuance of notes payable 990,568 433,134 532,955 - Purchase of treasury shares (800,000) - - (800,000) Sale of common stock 229,541 - 719,560 - Notes receivable (10,200) - - (71,100) ----------- -------- ---------- ---------- Net cash (used in) provided by financing activities (1,044,124) (406,370) 296,189 (1,274,742) ----------- -------- ---------- ---------- NET INCREASE (DECREASE) IN CASH 211,974 14,448 (62,375) 443,728 Cash at beginning of period 14,448 - 226,422 14,448 ----------- ---------- ---------- ---------- Cash at end of period $ 226,422 $ 14,448 $ 164,047 $ 458,176 ========== ========= ========= =========
The accompanying notes are an integral part of these financial statements. - 8 - - -------------------------------------------------------------------------------- Supplemental schedule of non-cash activities: During 1996, the Company purchased all of the stock of ECAC and DAR in a reverse acquisition for 8,350,000 shares of common stock (94% of the Company's outstanding shares). During the year ended December 31, 1997, the Company purchased all of the stock of Talidan, PTT, and Victoria for 19,365,000 shares of common stock, warrants for 5,000,000 shares, options and put option for shares valued at $5 million, representing an aggregate price of $6,174,539, including cash and notes of $325,000. During 1997 and 1996, respectively, 2,290,145 and 7,224,786 shares of the Company's common stock were issued at a value of $448,177 and $665,661 as compensation for services rendered by various consultants, attorneys, and others. During 1997, the Company acquired 1,078,019 shares of its common stock in settlement of notes receivable from affiliates of $481,000 and cash of $800,000. During 1997, the Company spun-off a subsidiary with a deficit, which increased stockholders' equity by $99,330. During, 1997, 210,155 shares of common stock were issued in exchange for a note payable of $161,226. During 1997, a stockholder relieved the Company of an obligation to make payment on a note payable in the amount of $152,500. Unaudited During the nine months ended September 30, 1998 the Company purchased all of the outstanding stock of ACC Telecom for 200,000 shares of preferred stock and a note for $814,962. During the nine months ended September 30, 1998 the Company disposed of all of the common stock of ECAC, Inc and ECAC Europe, Inc. for combined receipts of $350,000 in cash. These companies had liabilities in excess of assets of $1,683,751 at the date of sale. During the nine months ended September 30, 1998 the company sold the rights to certain telephone lines and the release of certain covenants not to compete for a note in the amount of $2,340,000. During the nine months ended September 30, 1998, the Company issued 1,206,250 shares of common stock for conversion of a note payable of $241,500. During the nine months ended September 30, 1998, the Company issued 1,918,128 shares of common stock for compensation valued at $719,560. Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES A summary of significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Organization Carnegie International Corporation (the Company or Carnegie) (formerly A&W Corporation, Inc.) was incorporated in Colorado and discontinued operations in September, 1985. In 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 a stock purchase agreement with Grandname, Ltd. For accounting purposes, this transaction has been reflected as a reverse acquisition with DAR and ECAC as the acquirers. Principles of Consolidation The consolidated financial statements of the Company include the accounts of Carnegie and its wholly-owned subsidiaries: TimeCast Corporation ("TimeCast"), a Nevada corporation; Electronic Card Acceptance Corporation ("ECAC"), a Virginia corporation; Talidan Limited ("Talidan"), a British Virgin Islands corporation; Profit Through Telecommunications (Europe) Limited ("PTT"), a United Kingdom corporation; Talidan USA t/a Victoria Station - Miami, Inc. ("Victoria"), a Florida corporation; ECAC Europe ("ECAC Europe"), a United Kingdom corporation; and in 1998, Harbor City Corporation t/a ACC Telecom ("ACC Telecom"), a Maryland corporation. In 1996, Grandname, Ltd., prior to combination with Carnegie, acquired DAR and ECAC. The subsequent business combination with Carnegie has been reflected as a reverse acquisition with DAR and ECAC as the acquirers, for accounting purposes. Equity balances on January 1, 1996 represent DAR and ECAC balances. Revenue and results of operations for DAR and ECAC are included for the entire fiscal year 1996. The Company sold the stock of ECAC on January 30, 1998. - 9 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Principles of Consolidation - continued TimeCast was formed in September, 1997 as a wholly owned subsidiary of Carnegie. TimeCast became the holding company of DAR by exchanging TimeCast shares for all of DAR's outstanding shares. TimeCast was spun-off on September 15, 1997 in a distribution to the Company's stockholders. Talidan and PTT were acquired on September 29, 1997 and Victoria was acquired effectively on August 18, 1997. These acquisitions were accounted for as purchases. Results of operations of these subsidiaries from their dates of acquisition have been consolidated. ACC Telecom was acquired in 1998 and was accounted for as a purchase. Unaudited results of operations since February 1, 1998 have been consolidated. Significant intercompany transactions have been eliminated in consolidation. Business Operations The Company operates primarily in the United States, United Kingdom, and South America. 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 for discounted telephone time primarily in South America and Europe; 10% in restaurant operations in Miami, Florida. During 1996, all of the Company's business operations were in credit card processing. A description of the business operations of each company follows: o Carnegie provides management services to its wholly owned subsidiaries. Carnegie has no direct domestic operating assets or business activity. o TimeCast, prior to its spin-off in September, 1997, was engaged in the business of designing, manufacturing and marketing physical fitness exercise devices and equipment, and muscular development products, including Non-Grip Technology (R) related to exercise and fitness equipment. - 10 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Business Operations - continued o ECAC is an independent sales organization providing bankcard services to U.S. merchants. Its primary business objective is to build a portfolio of customer service contracts between itself and individual merchants. When the portfolio of contracts approximates 1,000 or more contracts the Company will offer the portfolio for sale to financial institutions, or other companies, involved in the credit card processing business. The service contracts provide for the payment of fees by the individual merchants to the company who in turn pays a financial institution for service. On January 31, 1998, the stock of ECAC was sold. o ECAC Europe is an independent sales organization providing bankcard services to merchants in the United Kingdom. On January 6, 1998, the stock of ECAC Europe was sold. o Talidan markets telephone service through international contracts for discounted telephone time. o PTT is a telecommunications software company. Its software can be utilized by voice recognition, touch-tone keypad, or bar code readers for a broad range of applications. One of PTT's products is MAVIS(TM) (Multi-language Automated Voice Independent System), an automated attendant system allowing telephone callers to reach or leave messages for a person or a department of a company, by verbally responding to prompts, without pressing buttons on the telephone. o Victoria operates a restaurant in Miami, Florida. o ACC Telecom sells, installs and services telephone systems, voicemail integration, computer technology, LAN operating systems and cable media for businesses in the Washington, DC, Maryland and Northern Virginia areas. - 11 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenue and expenses during the reporting period. Actual results may differ from those estimates. Accounts Receivable For financial reporting purposes, the Company utilizes the allowance method of accounting for doubtful accounts. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. The allowance is based on an experience factor and review of current accounts receivable. Uncollectible accounts are written off against the allowance accounts when deemed uncollectible. At December 31, 1997 and September 30, 1998 (unaudited), management estimates that all of the accounts receivable are collectible. Inventory Inventory consists of credit authorization equipment and restaurant supplies, which are carried at the lower of cost or market on a first-in, first-out basis. Property, Plant and Equipment Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, primarily on a straight-line basis. Accelerated depreciation methods are used for tax purposes on certain assets. The estimated service lives used in determining depreciation are five to seven years for computers, software, furniture and equipment. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term. - 12 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Property, Plant 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. Software Development Costs The Company's voice recognition system MAVIS reached a stage of commercial viability in 1997. The company continues to make enhancements to this product for the interface this software with existing telephone systems. The costs incurred to enhance the software are capitalized as incurred. The cost of these enhancements will be amortized over the estimated useful life of 3 years when distribution of the software commences. Intangibles Intangibles represent costs in excess of net assets acquired in connection with businesses acquired, acquisition costs, and noncompete agreements. The costs in excess of net assets acquired in connection with businesses acquired are being amortized to operations on a straight-line basis over 15 years, the acquisition costs are being amortized over 15 years and noncompete agreements are being amortized over the term of the contracts. The recoverability of carrying values of intangible assets is evaluated on a recurring basis. The primary indicators are current or forecasted profitability of the related business. Income Taxes The Company records its income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the liability method for financial reporting purposes. Deferred and prepaid taxes are provided for on temporary differences in the basis of assets and liabilities that are recognized in different periods for financial and tax reporting purposes. - 13 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Earnings Per Share Basic earnings per share amounts have been computed based on the weighted average number of common shares outstanding. Diluted earnings per share amounts reflect the increase in weighted average number of common shares outstanding that would result from the assumed exercise of outstanding options, calculated using the treasury stock method. Revenue Recognition ECAC recognizes income resulting from the sale of service contract portfolios when title to these contracts is assigned to the purchaser. The Company recognizes revenue from bank services pursuant to the terms of service agreements that are based upon a percentage of sales volume transacted by the merchant. Talidan recognizes revenue from telephone sales on a monthly basis in accordance with the service contracts it is party to. The monthly revenue is based on the number of minutes of calls that are processed. Victoria recognizes revenue monthly 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. TimeCast, ECAC Europe, and PTT revenues were not material for the year ended December 31, 1997. DAR revenues were not material for the year ended December 31, 1996. Stock-Based Compensation Compensation costs for stock options are measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation for stock awards is recorded based on the quoted market value of the Company's stock at the time of grant. - 14 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Translation of Foreign Currencies Assets and liabilities recorded in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenue and expenses are translated at the weighted-average exchange rates for the year. The resulting translation adjustments are charged or credited directly to a separate component of stockholders' equity. As of December 31, 1997 and 1996, there was no material adjustment required for foreign currency translation. Statement of Cash Flows For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Newly Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income (SFAS 130), which is effective for fiscal years beginning after December 15, 1997. The Statement establishes standards for reporting and display of comprehensive income and its components. The Company adopted SFAS 130 in the fiscal year beginning January 1, 1998, which did not impact the financial statements. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), which is effective for fiscal years beginning after December 15, 1997. The statement establishes revised standards under which an entity must report business segment information in its financial statements. The Company has adopted SFAS 131. - 15 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE B - ACQUISITIONS ACC Telecom On May 18, 1998, with an effective date of February 1, 1998, the Company acquired all of the outstanding stock of ACC Telecom for consideration of $1,314,962 consisting of a $1,000,000 note payable in quarterly installments over five years, plus 200,000 shares of the Company's Series A preferred stock. After a two year holding period, this preferred stock is convertible into the greater of $2,000,000 worth or 2,000,000 shares of the Company's common stock. In the event the Company declares a common stock dividend, or the market price of the Company's common stock exceeds $2.00 per share, the preferred stock may be converted prior to the end of the two year holding period. PTT and Talidan On September 29, 1997, the Company acquired all of the outstanding stock of PTT and Talidan from Tiller Holding Limited ("Tiller") for an aggregate price of $5,830,789 comprised of 19,340,000 shares of the Company's common stock, warrants for five million shares, and options for shares valued at $5 million, exercisable at $0.001 per share, with a related put option valued at $3,756,574. Management has reserved 100% of its treasury shares to fulfill its obligation under the options. The Agreement with Tiller also provides that the Company shall have a three year right of first refusal for future dispositions by Tiller of companies in the telecommunications industry. Victoria On September 29, 1997, the Company acquired 100% of the stock of Victoria and the assets of Jane Management Corporation (Collectively "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). - 16 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE B - ACQUISITIONS - Continued Victoria - continued The above transactions have been recorded under the purchase method of accounting and, accordingly, the results of operations of PTT and Talidan from September 29, 1997 are included in the accompanying consolidated financial statements. The operations of Victoria commenced August 18, 1997. The fair value of assets acquired and liabilities assumed are summarized as follows:
PTT Talidan Victoria --- ------- -------- Current assets $ 16,000 $ 575,379 $ -- Property, plant and equipment 32,000 -- 225,000 Other assets -- 3,341 75,000 Goodwill 1,699,315 4,471,513 43,750 Liabilities (745,600 (221,159) -- ------------- --------------- ------------ Purchase price $ 1,001,715 $ 4,829,074 $ 343,750 ============= =============== ============
ECAC and DAR On May 3, 1996, the stockholders of the Company authorized a reverse stock split of the Company's common stock so that each ten shares issued and outstanding became one share of common stock. On the same day, the stockholders approved the exchange of 8,350,000 of the Company's common stock in a transaction that has been recorded as a reverse acquisition with ECAC and DAR as the acquirers. Upon such exchange, the stockholders of ECAC and DAR owned approximately 94% of the issued and outstanding common stock of the Company and the Company's current stockholders retained approximately 6%. Because of the nature of the transaction, no goodwill has been recorded. - 17 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE B - ACQUISITIONS - Continued ECAC and DAR - continued The following table reflects unaudited pro forma combined results of operations of the Company and Talidan assuming the acquisition of Talidan had taken place at the beginning of the year for each of the years presented:
Proforma Proforma 1997 1996 -------------- -------------- Revenues $11,180,677 $9,872,538 ============== ============== Income from continuing operations $ 2,468,857 $ 462,049 Loss from discontinued operations (100,330) - -------------- -------------- Net income $ 2,368,527 $ 462,049 ============== ============== Earnings per common share: Basic Continuing operations $ 0.08 $ 0.02 Discontinued operations - - -------------- -------------- Net income $ 0.08 $ 0.02 ============== ============== Diluted: Continuing operations $ 0.08 $ 0.02 Discontinued operations - - -------------- -------------- Net income $ 0.08 $ 0.02 ============== ==============
In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1996 or at the beginning of 1997 or of future operations of the combined companies under the ownership and management of the Company. - 18 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE C - DISPOSITIONS On January 30, 1998, the Company entered into an agreement to sell the outstanding shares of ECAC, its credit card processing subsidiary. Consideration for the sale was $100,000 that was paid at closing. The Company realized a gain on sale of the stock of approximately $1.7 million. The Company has entered into a joint venture 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 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. Currently there is one and one half full time equivalent employees of the Company devoted to the expansion of the customer base. Revenues realized by the Company approximate the direct cost of the Company's employees. On January 6, 1998, the Company entered into an agreement to sell the outstanding shares of ECAC Europe. The Company realized a gain on the sale of stock of approximately $250,000. The Company has received a $250,000 note bearing interest at 6% as consideration, that matures in June 1999. 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. - 19 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE C - DISPOSITIONS - Continued 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 in discontinued operations is as follows: Royalty income $ 5,400 Operating loss (100,330) Net loss (100,330) Sale of Certain Talidan Assets On June 22, 1998 the Company sold to a company affiliated with one of its directors for $2,340,000 the rights to certain telephone numbers, line access, and advertising materials used in operations in South America for a note. The lines sold consisted of those used for the late night adult entertainment component of Talidan's operations. In addition to the sale of the telephone lines, the Company agreed to release of certain consultants to the Company from their covenant not to compete with the Company. Sales related to this aspect of Talidan's operations were approximately $200,000 at September 30, 1998 (unaudited) and $400,000 for the year ended December 31, 1997. The Company has allocated $600,000 of the note received to sale of the telephone lines and the balance of $1,740,000 has been allocated to the buy out of the covenant not to compete. The Company charged $117,930 of purchased goodwill attributable to these lines to operations. - 20 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE C - DISPOSITIONS - Continued Sale of Certain Talidan Assets - continued The note receivable arising from the sale of these assets in the amount of $2,340,000 bears interest at the rate of 7%. Payments are due quarterly commencing December 22, 1998 in the amount of $585,000 plus accrued interest. [The Company received a portion of the first payment on October 28, 1998 and the balance of the payment on January 27, 1999. This extension on the balance of the payment received on January 27, 1999 was agreed to based on the early receipt of initial partial payment. The Company has obtained an agreement from the purchasers that in the event of non payment, the non compete agreements will become in force again and the Company will have the right to all revenue generated through the telephone numbers that were sold. The Company has received financial information regarding the purchaser that indicates that there are sufficient assets to satisfy the payment of this note exclusive of the revenue related to the telephone numbers. At September 30, 1998, the note and accrued interet totaled $2,551,776. Unaudited] NOTE D - CERTIFICATE OF DEPOSIT - RESTRICTED At December 31, 1997, the Company maintained a $400,000 certificate of deposit, which was redeemed in 1998, that was assigned as collateral for a note payable to First Mariner Bank. The carrying value of the certificate of deposit approximates market value at December 31, 1997. NOTE E - LOANS RECEIVABLE - OFFICERS AND EMPLOYEES The Company made advances to and has receivables from officers and employees that amount to $301,201 as of December 31, 1997 and $192,695 at September 30, 1998 (unaudited). The advances are non-interest bearing and do not have a specified repayment date. These obligations have been reflected as non-current assets. - 21 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE F - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1997 and September 30, 1998: (Unaudited) December 31, September 30, 1997 1998 ---- ---- Vehicles $ 4,170 $ 297,818 Computer equipment and software 189,129 1,776,243 Furniture and office equipment 231,160 270,122 Leasehold improvements 40,000 40,000 Equipment held for lease 121,800 - -------------- -------------- Total property and equipment 586,259 2,384,183 Less accumulated depreciation and amortization 102,042 500,448 -------------- -------------- Property and equipment, net $ 484,217 $ 1,883,735 ============= ============= NOTE G - LEASE AGREEMENTS The Company has entered into operating leases for office space in Maryland, Florida and the United Kingdom. The lease terms range from 5 to 6 years and expire at various dates through March 2003. Total rent expense charged to operations for the years ended December 31, 1997 and 1996 was $45,623 and $40,048, respectively. Rent for the nine months ended September 30, 1998 and 1997 (unaudited) was $134,628 and $34,786, respectively. - 22 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE G - LEASE AGREEMENTS - Continued The following is a schedule by year of base rentals due on operating leases that have initial or remaining lease terms in excess of one year as of December 31, 1997 and September 30, 1998: (Unaudited) Year December 31, 1997 September 30, 1998 ----------- ----------------- ----------------------- 1998 $ 165,988 $ 184,260 1999 169,382 368,835 2000 172,405 349,588 2001 175,779 280,425 2002 144,574 157,095 NOTE H - NOTES PAYABLE Notes payable consisted of the following at December 31, 1997 and September 30, 1998: (Unaudited) December 31, September 30, 1997 1998 ---- ---- Former shareholders of PTT $ - $ 262,400 Various unaffiliated individuals 366,155 96,439 Strongput International, LLC 180,484 276,983 Various affiliated individuals 257,113 297,679 CNI - 592,016 Preferred Investments - 131,202 ---------- ---------- $ 803,752 $1,656,719 ========= ========== The Company is obligation under several notes payable due to former shareholders of the Company's PTT subsidiary. One of these formers shareholders, Applied Knowledge Limited, is currently controlled by shareholders of Carnegie. The total amount outstanding on these notes at the end of the year was (pound)131,000 OR $209,600 at the September 30, 1998 exchange rate. These are non-interest bearing notes and are payable on demand. The Company is obligated under notes payable to several other individuals on behalf of PTT. The total value of these notes at September 30, 1998 was (pound)33,000 or $52,800 at the September 30, 1998 exchange rate. These are non-interest bearing notes and are payable on demand. The Company has notes payable to several individuals that have outstanding balances aggregating $366,155 at December 31, 1997 and $96,439 at September 30, 1998 (unaudited). The notes are due on demand and accrue interest at rates that vary from 10% to 20% - 23 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE H - NOTES PAYABLE - Continued The Company is obligated on a note due 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 $276,983 at September 30, 1998 (unaudited). The note is due on demand and accrues interest at 12% per annum. The Company has other notes payable to several affiliated individuals and entities with aggregate outstanding balances of $257,113 at December 31, 1997 and $297,679 at September 30, 1998 (unaudited). These notes are due on demand and accrue interest at rates that vary from 10% to 12%. The Company is obligated on notes due CNI, a management company partially owned by a shareholder. The notes have an unpaid principal balance of $590,016 at September 30, 1998 (unaudited). The note is due on demand and accrues interest at 12% per annum. The Company is obligated on a note due Preferred Investments, an affiliate. The note has an unpaid principal balance of $131,202 at September 30, 1998 (unaudited). The note is due on demand and accrues interest at 12% per annum. NOTE I - LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1997 and September 30, 1998: (Unaudited) December 31, September 30, 1997 1998 ---- ---- Convertible note $ 250,000 $ - Envoy Medical Corporation 109,786 Treasury stock purchase 151,000 126,000 First Mariner Bank 398,665 - Security Financial and Investment Corporation 49,391 - Union Planter's Bank - 172,667 ---------- --------- 958,842 298,667 Less current maturities 789,230 36,996 ---------- --------- $ 169,612 $ 261,671 ========= ======== - 24 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE I - LONG-TERM DEBT - Continued On November 19, 1997, the Company issued a convertible note payable for cash in the amount of $250,000. The note bears interest at 10% and matures on November 18, 1998. Interest is payable in semi-annual installments beginning July 1, 1998. The note is convertible into shares of common stock of the Company. The number of shares of common stock issuable upon conversion of the note equals the lesser of (a) the closing price of the shares of common stock on November 19, 1997 or (b) the amount of the outstanding principal at the time a conversion notice is given, divided by the conversion price, which is defined as seventy percent of the average closing bid prices of the Company's common stock as reported by the NASD over-the-counter bulletin board for the five consecutive trading days immediately preceding the date of conversion. In May, 1998, the note was converted into 1,206,250 shares of common stock at $.20 per share. The Company is obligated on a note payable to Envoy Medical Corporation with an outstanding principal balance at December 31, 1997 of $109,786. This note bears interest at prime plus 3% and is due in June 1998. Monthly payments on the note are the greater of $7,000 or twenty percent of revenue earned from a certain customer. Payment on the note was overdue as of December 31, 1997 and therefore the entire balance is due on demand. The loan was paid in full as of September 30, 1998. The Company is obligated on a note to the former shareholders of ECAC in connection with the original acquisition. The unpaid balance of the note is $151,000 and $126,000 at December 31, 1997 and September 30, 1998, respectively. On June 11, 1997, the Company entered into a loan agreement with First Mariner Bank. The loan has 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 has a note payable to Security Financial and Investment Corporation. The outstanding principal balance at December 31, 1997 was $49,391, which bears interest at 12% per annum. The loan was paid in full as of September 30, 1998. - 25 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE I - LONG-TERM DEBT - Continued In connection with the acquisition of Victoria Station restaurant, the Company was obligated on a $185,000 note to a former shareholder of Victoria Station, which was refinanced in 1998 with Union Planter's Bank. The bank note bears interest at prime + 2% (10.5% as of September 30, 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 $172,667 was outstanding at September 30, 1998 (unaudited). - 26 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE I - LONG-TERM DEBT - Continued Scheduled annual maturities of long-term debt are as follows: (Unaudited) Year December 31, 1997 September 30, 1998 ----------- ----------------------- --------------------- 1998 $ 789,230 $ 36,996 1999 35,457 39,996 2000 10,469 39,996 2001 11,796 39,996 2002 13,293 15,683 Thereafter 98,597 126,000 The aggregate carrying value of the long-term debt at December 31, 1997 and June 30, 1998 approximates market value. NOTE J - NOTES PAYABLE TO STOCKHOLDER AND AFFILIATES Note payable to stockholder and affiliate are as follows: (Unaudited) December 31, September 30, 1997 1998 ---- ---- Note payable to stockholder $ 185,000 $ - Note payable to Barry and Susan Hunt - 733,298 -------------- ---------- 185,000 733,298 Less current maturities 185,000 200,000 -------------- ----------- $ - $ 533,298 ============== =========== - 27 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE J - NOTES PAYABLE TO STOCKHOLDER AND AFFILIATES - Continued At December 31, 1997 the Company was obligated on a 10% note payable to a stockholder in the amount of $185,000, issued in connection with the acquisition of Victoria. This note was paid in January 1998. In connection with the acquisition of ACC Telecom in February, 1998, the Company signed a $1,000,000 million non-interest bearing note, payable in quarterly payments over five years. At the time of the acquisition, the note was valued at $814,962, based on a discount at the average incremental borrowing rate of Carnegie International (8.37%) for the period of the note. As of September 30, 1998, the outstanding balance on the note is $733,298 (unaudited). - 28 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE J - NOTES PAYABLE TO STOCKHOLDER AND AFFILIATES - Continued Scheduled annual maturities of these obligations are as follows: (Unaudited) Year December 31, 1997 September 30, 1998 -------------- ----------------- ------------------ 1998 $185,000 $ 200,000 1999 - 200,000 2000 - 200,000 2001 - 133,298 NOTE K - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: (Unaudited) December 31, 1998 September 30, 1998 ----------------- ------------------ Accounts payable $1,090,660 $907,260 Other accrued liabilities 161,308 79,090 Accrued interest 22,096 39,267 ------------- ------------ $1,274,064 $1,025,617 ============= ============ - 29 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK Convertible Preferred Stock In 1998, the Company issued 200,000 shares of non-cumulative preferred stock in conjunction with the acquisition of ACC Telecom. This stock was valued at $1.50 per share at the time of issuance. The preferred stock is convertible after a two year holding period into the greater of $2,000,000 worth or 2,000,000 shares of the Company's common stock. The preferred stock is not entitled to share in dividends; however, if a dividend is declared on the common stock, or the market price of the Company's common stock exceeds $2.00 per share, the preferred stock may be converted prior to the end of the two year holding period. In the event of conversion the common stock is subject to restrictions under Section 144 of the Securities Act of 1934. Common Stock During 1997, the Company entered into various transactions that included issuance of its common stock. The number of shares issued in each transaction was determined through negotiations among the parties. The per share value of stock exchanged varied among transactions that were similar in nature, based on the time the terms were agreed upon by the parties. Exclusive of the shares exchanged in the purchase of PTT and Talidan, per share values ranged from $0.20 to $0.80, during 1997. The shares exchanged in the acquisitions of PTT and Talidan were subject to restriction and blockage discounts resulting in a value of $0.11. Of the 44,212,708 common shares issued as of September 30, 1998 (unaudited), 33,003,803 shares are restricted pursuant to the Securities Act of 1933 as amended, and 5,831,683 shares were issued pursuant to Rule 504 of the Securities Act of 1933 and exempt from registration. Treasury Stock During 1997, the Company acquired 1,700,000 shares of common stock for $800,000 ($.47 per share) in cash and 1,078,019 shares of its common stock in settlement of notes receivable for $481,000 ($.45 per share) from affiliates. All treasury shares have been reserved to cover the options issued in connection with the acquisition of Talidan. - 30 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - Continued Stock Options The Company has entered into an option agreement with Tiller in conjunction with the purchase of Talidan and PTT. This option, which expires in 2001, provides that Tiller may purchase additional shares of the Company's common stock at a price of one tenth of a cent ($.001) per share. The number of shares that may be purchased will be determined by dividing $2.5 million by the average market price of the common stock of the Company as traded in the thirty days prior to exercise of the option. The Company has also issued an option to Tiller to purchase shares in exchange for the right of first refusal (The Preemptive Agreement) for any telecommunication company that Tiller owns and offers for sale. This option, which expires in 2000, provides that Tiller may purchase additional shares of Company's common stock at a price of one tenth of a cent ($.001) per share. The number of shares that may be purchased will be determined by dividing $2.5 million by the average market price of the common stock of the Company as traded in the thirty days prior to exercise of the option. The foregoing 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. The Company has recorded its liability under the Put Option of $3,756,574 which represents the discounted value of the stock options utilizing a 10% discount rate at December 31, 1997 and $3,944,403 at September 30, 1998. - 31 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - Continued Stock Options Granted to Officers As part of the Company's employment agreement with its Chief Executive Officer, options for a total of 400,000 shares were issued on May 15, 1997. These options have an exercise price equal to the fair market value at the date of grant. These options vest 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 covered 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, 1997 and September 30, 1998 (unaudited) none of the options had been exercised. On April 8, 1998 the Chief Operating Officer of the Company was granted options to purchase 1,000,000 shares of common stock of the corporation at an exercise price of $.45 per share. These options will vest when the company achieves an operating pretax income of at least $1,000,000 for each of two consecutive quarters. These options expire on December 31, 1999. Additional options for 500,000 shares covered 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, 1997 and September 30, 1998 (unaudited) none of the options had been exercised. On April 8, 1998 the Secretary of the Company was granted options to purchase 250,000 shares of Common stock of the corporation 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 realized at least $5,000,000 through such an offering the Secretary will have the option to purchase an additional 100,000 of common stock for $0.10 per share. As of December 31, 1997 and September 30, 1998 (unaudited) 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. - 32 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - Continued The following table summarizes option activity during 1997: Weighted average exercise Shares price ------ ----- Options outstanding at beginning of year - $ - Options exercised - - Options granted 11,108,334 0.03 Options forfeited/expired - - ------------ ------------ Options outstanding at end of year 11,108,334 $ 0.03 =========== Option price range at end of year $0.001 to $0.23 Option price range for exercised shares $ - Options available for grant at end of year $ - Weighted-average fair value of options, granted during the year $ 0.12 The following table summarizes options outstanding at December 31, 1997: Weighted average Number Weighted average remaining outstanding Exercise prices exercise prices contractual life ----------- --------------- --------------- ---------------- 11,108,334 $0.001 to $0.23 $0.03 3.31 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 1997: risk free interest rates that range from 5.90% to 6.48%; expected volatility rate of 200%, and expected lives of 2 to 4 years. - 33 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE L - CAPITAL STOCK - Continued The following table presents the pro forma 1997 earnings 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: Pro forma Net earnings $ 1,507,368 Earnings per share Basic $ 0.07 Diluted $ 0.06 During 1997 and 1996, 2,290,145 and 7,224,786 shares of the Company's common stock were issued as compensation for various consultants, attorneys, and others at $.20 and $.09 per share or $448,177 and $665,661, respectively. NOTE M - INCOME TAXES Earnings before income taxes from continuing operations is comprised as follows at December 31, 1997: (Unaudited) Year ended Nine months ended December 31, September 30, ----------------------------- --------------------------- 1997 1996 1998 1997 ------------ ----------- --------- ---------- Domestic $1,665,465 $(709,347) $3,297,712 $2,681,585 Foreign 65,567 - (232,689) - ------------ ----------- ---------- ---------- $1,731,032 $(709,347) $3,530,401 $2,681,585 ============ =========== ========== =========== - 34 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE M - INCOME TAXES - continued The Company's provision for income taxes is comprised as follows: (Unaudited) Year ended Nine months ended December 31, September 30, ------------------------- --------------------------------- 1997 1996 1998 1997 --------- ----------- ------------ ------------ Domestic $ 50,867 $ - $ 1,022,581 $ 394,075 Foreign - - - - --------- ----------- ------------ ------------ $ 50,687 $ - $ 1,022,581 $ 394,075 ========= ========== ============ ============ The Company's provision for income taxes differs from the anticipated United States statutory rate. Differences between the statutory rate and the Company's provision are as follows at December 31, 1997: December June Taxes at statutory rate 34% 34% Benefit of net operating loss carryforward (28) (13) Foreign tax rate differential (3) 2 Other - 6 ------ ----- 3% 29% Deferred tax liabilities have not been recognized for basis differences related to investments in the Company's United Kingdom subsidiaries. These differences, which consist primarily of unremitted earnings intended to be indefinitely reinvested, aggregated approximately $125,000 at December 31, 1997 and $1,111,000 at September 30, 1998. The Company has not determined the amount of unrecognized deferred tax liabilities. Income taxes at September 30, 1998 include $364,531 (unaudited) attributable to foreign operations. This provision is attributable to management's intent to transfer a portion of the funds earned through foreign operations to the United States. - 35 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE M - INCOME TAXES - Continued Talidan is chartered in the British Virgin Islands, and is not subject to tax in this jurisdiction. Additionally, the point of service is located in countries in Africa that do not impose income taxes. Deferred taxes are comprised as follows at December 31, 1997 and September 30, 1998 (Unaudited) 1997 1998 ---- ---- Noncurrent tax asset Domestic net operating loss Carryforwards $ 639,378 $ 512,935 Basis difference in fixed assets (43,641) (43,641) ---------- ------------ Noncurrent deferred tax asset 595,737 469,294 Valuation allowance (595,73) (469,294) ---------- ------------ Net deferred tax asset $ - $ - ========= =========== - 36 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE N - EARNINGS PER SHARE The following table reconciles the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
Years ended December 31, ------------------------ 1997 1996 ---- ---- Income from continuing Discontinued operations operations Net Income Net income ---------- ---------- ---------- ---------- Basic EPS Income (loss) available to common stockholder $ 1,680,165 $ (100,330) $ 1,579,835 $ (709,347) ============ =========== ============= =========== Weighted average number of common shares outstanding 22,164,134 22,164,134 22,164,134 9,207,264 Basic EPS $ 0.08 $ (0.01) $ 0.07 $ (0.08) ============ =========== ============= =========== Diluted EPS Income (loss) available to common stockholder $ 1,680,165 $ (100,330) $ 1,579,835 $ (709,347) Income impact of assumed conversions - - - - ------------ ---------- ------------- ----------- Income (loss) available to common stockholders on a diluted basis $ 1,680,165 $ (100,330) $ 1,579,835 $ (709,347) ============ ========== ============= =========== Weighted average number of common shares outstanding 22,164,134 22,164,134 22,164,134 9,207,264 Effect of dilutive securities - stock options 2,254,680 2,254,680 2,254,680 - ------------ ---------- ------------- ----------- Adjusted weighted average number of common shares outstanding 23,076,623 22,164,134 23,076,623 9,207,264 ============ ========== ============= =========== Diluted EPS $ 0.07 $ (0.01) $ 0.07 $ (0.08) ============ ========== ============= ===========
- 37 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE N - EARNINGS PER SHARE - Continued During 1997, options to purchase 7,159,720 shares at prices ranging from $0.10 to $0.48 per share were outstanding, which were not included in the computation of diluted EPS from discontinued operations since inclusion of such shares would be antidilutive. NOTE O - COMMITMENTS AND CONTINGENCIES Financial Services Agreement ECAC had a financial services agreement with Old Kent Bank for the processing of credit card transactions which expired on December 31, 1994; however, the parties continued to operate under the terms provided by the expired agreement until October 1, 1996. On October 1, 1996, ECAC entered into a settlement agreement under which ECAC's 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. - 38 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE O - COMMITMENTS AND CONTINGENCIES - Continued Litigation As of December 31, 1997 and September 30,1998 the Company and its subsidiaries were involved in two lawsuits involving the 1996 acquisitions and stock transactions related to those acquisitions. In the opinion of management and its counsel, these matters should be resolved favorably and will not materially affect the financial position, results of operations or liquidity of the Company. Both of these suits were settled subsequent to September 30, 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 (unaudited). Employment Agreements The Company has entered into an employment agreement with a key employee. The agreement is for a two-year period commencing on May 15, 1997 and will be extended on the same terms unless sooner terminated. In the event the Company terminates without cause the employment of this employee, the employee shall receive an amount equal to one year's salary in addition to the balance of the salary due under the terms of the agreement. The agreements contain a provision which cause all options granted through this agreement to immediately vest if certain defined changes to the Company's ownership occur. The minimum amounts due under the agreement during the succeeding two-year period, exclusive of contingent incentive compensation and salary adjustments, are as follows: Year Amount ---- --------------- 1999 $ 125,000 2000 46,900 - 39 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE P - YEAR 2000 COMPUTER SYSTEMS COMPLIANCE AND CONTINGENCY The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. The Company does business with customers that rely on computers and computer based telephone equipment. The Company does not have any basis to draw a conclusion regarding the level of compliance achieved by these businesses. In the event that either suppliers of services or customers experience significant problems as a result of the Y2K problem, it will most likely have a significant effect on the Company's sales and ability to purchase necessary services. The Company cannot quantify what the potential loss of revenue and disruption to supply will be. NOTE Q - RELATED PARTY TRANSACTIONS The Company was involved in various transactions with related parties. Legal fees of approximately $187,000 and $3,000 were paid to a firm of which a stockholder is the managing partner for the years ended December 31, 1997 and 1996, respectively. The Company acquired 1,078,019 shares of its common stock in settlement of notes receivable from stockholders. ECAC realized $152,500 of additional paid-in-capital from the forgiveness of a note payable to a stockholder in 1997. The Company in 1998 sold the rights to certain telephone lines and intangibles to a company affiliated with one of its Directors (see Note C). The Company holds a note receivable related to this sale in the amount of $2,340,000 (unaudited). The Company made advances to and has receivables from officers and employees that amount to $301,201 as of December 31, 1997 and $192,695 at September 30, 1998 (unaudited). The advances are non-interest bearing and do not have a specified repayment date. Therefore, these obligations have been shown as non-current assets. - 40 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE Q - RELATED PARTY TRANSACTIONS - Continued As of December 31, 1997, the Company is 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 $172,667 at September 30, 1998 (unaudited). The Company is obligated on a 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 $276,679 at September 30, 1998 (unaudited). The note is due on demand and accrues interest at 12% per annum. The Company has other notes payable to several affiliated individuals and entities with aggregate outstanding balances of $257,113 at December 31, 1997 and $297,679 at September 30, 1998 (unaudited). These notes are due on demand and accrue interest at rates that vary from 10% to 12%. On January 30, 1998, the Company entered into an agreement to sell the outstanding shares of ECAC. At September 30, 1998, the Company has a receivable from ECAC of $1,475,012 (unaudited). NOTE R - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS In 1997, the Company operated in three industry segments: telecommunications, financial services and restaurant. In 1996, the Company operated in only the financial services industry. Operating profit (loss) is income from operations before general corporate expense. General corporate expense consists primarily of management services incurred by Carnegie as the holding company for its wholly owned subsidiaries. Identifiable assets by industry segment are those assets that are used in the Company's operations in each industry segment. Corporate assets are principally cash and cash equivalents, capitalized acquisition costs, notes receivable and certain fixed assets in Carnegie's office. - 41 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE R - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued A summary of the Company's operations by industry segment follows:
1997 ---- Financial Tele- Services communications Restaurant Corporate Consolidated -------- -------------- ---------- --------- ------------ Operating revenues $ 5,056,223 $ 1,216,912 $ 672,657 $ - $ 6,945,810 ============= ============= ============ ============= ============== Operating profit (loss) $ 3,150,423 $ 63,207 $ 8,402 $ (1,448,417) $ 1,763,615 Other income (expense) (16,434) 2,360 (3,092) (15,417) (32,583) -------------- -------------- ------------- -------------- --------------- Income (loss) before income taxes $ 3,123,989 $ 65,567 $ 5,310 $ (1,463,835) $ 1,731,032 ============= ============= ============ ============= ============== Identifiable assets $ 420,786 $ 6,981,506 $ 486,099 $ 948,942 $ 8,837,333 ============= ============= ============ ============= ============== Depreciation of property, plant and equipment $ 31,929 $ 6,400 $ 12,377 $ 6,939 $ 57,645 ============= ============= ============ ============= ============== Amortization of goodwill $ - $ 102,847 $ 4,250 $ 10,522 $ 117,619 ============= ============= ============ ============= ============== Capital expenditures $ 11,012 $ 100,000 $ 18,032 $ 40,964 $ 170,008 ============= ============= ============ ============= ============== 1996 ---- Financial Services Corporate Consolidated -------- --------- ------------ Operating revenues $ 3,256,291 $ - $ 3,256,291 ================ ============== ============== Operating profit (loss) $ 682,011 $ (1,172,439) $ (490,428) Other income (expense) 7,144 (226,063) (218,919) --------------- -------------- -------------- Income (loss) before income taxes $ 689,155 $ (1,398,502) $ (709,347) ================ ============== ============== Identifiable assets $ 44,604 $ 53,781 $ 498,385 ================ ============== ============== Depreciation of property, plan and equipment $ 20,066 $ 1,018 $ 21,084 ================ ============== ============== Amortization of goodwill $ - $ - $ - ================ ============== ============== Capital expenditures $ 14,473 $ 5,086 $ 19,559 ================ ============== ==============
- 42 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE R - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued In 1997, the Company operated in three geographic regions. In 1996, all of the Company's operations were domestic. A summary of the Company's operations by geographic region follows:
1997 ---- South United America Kingdom Domestic Consolidated ------- ------- -------- ------------ Operating revenues $ 1,202,512 $ 14,400 $ 5,728,898 $ 6,945,810 ============== ============== ============= ============== Operating profit (loss) $ 138,525 $ (75,318) $ 1,700,408 $ 1,763,615 Other income (expense) 2,360 - (34,943) (32,583) --------------- --------------- -------------- --------------- Income (loss) before income taxes $ 140,885 $ (75,318) $ 1,665,465 $ 1,731,032 ============== ============== ============= ============== Depreciation of property, plan and equipment $ - $ 6,400 $ 51,245 $ 57,645 ============== ============== ============= ============== Amortization of goodwill $ 74,525 $ 28,322 $ 14,772 $ 117,619 ============== ============== ============= ============== Capital expenditures $ - $ 100,000 $ 70,008 $ 170,008 ============== ============== ============= ==============
NOTE S - SUBSEQUENT EVENTS In March of 1998, the Company entered into a lease for a new corporate headquarters in Hunt Valley, Maryland. The lease expires in 2003, requires monthly payments of $11,007 and has stipulated rent increases of 3.5% per year. The lease has an automatic renewal term of 5 years, unless the landlord or Company gives other written notice. - 43 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position, and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto for the years ended December 31, 1997 and 1996 included elsewhere herein. Acquisition On February 1, 1998, the Company acquired all of the outstanding stock of ACC Telecom for consideration of $1,314,962 consisting of a $1,000,000 million note payable in quarterly payments over five years, plus 200,000 shares of the Company's Series A preferred stock which are convertible into the greater of $2,000,000 worth or 2,000,000 shares of the Company's common stock after a two year waiting period (see Note B). The preferred shares have been valued using the assumed conversion to 2,000,000 common shares valued at $300,000 ($1.50 per share). - 44 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBR 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Acquisition - continued The above transaction has been recorded using the purchase method of accounting and, accordingly, the results of operation of ACC Telecom from February 1, 1998 are included in the accompanying consolidated financial statements. The fair value of assets acquired and liabilities assumed are summarized as follows: Current assets $ 462,877 Property, plant and equipment 178,692 Other assets 4,360 Goodwill 1,005,491 Liabilities (336,458) ------------- Purchase price $ 1,314,962 ============ Disposition On January 31, 1998, the Company entered into an agreement to sell the outstanding shares of ECAC, its credit card processing subsidiary. Consideration for the sale was $100,000 that was paid at closing. The Company realized a gain on sale of the stock of approximately $1.7 million. The accounts receivable from ECAC of $1,475,012 at September 30, 1998 (unaudited), were originally due on or before December 31, 1998. Management has agreed to extend the payment of this amount through December 31, 1999. Certain members of management of ECAC have placed in an escrow account under the control of the Company's management 585,000 shares of the Company's common stock. Management has the right under this agreement to direct the sale of this stock and have the proceeds remitted directly to the Company. As a result of the modifications made to the obligation's due date the receivable has been classified as a non-current asset. On January 6, 1998, the Company entered into an agreement to sell the outstanding shares of ECAC Europe. The Company realized a gain on the sale of stock of approximately $250,000. - 45 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Earnings Per Share The following table reconciles the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
Nine months ended September 30 ------------------------------ 1998 1997 ---- ---- Income from continued Discontinued Net Income operations operations Net income ---------- ---------- ------------ ---------- Basic EPS Income (loss) available to common stockholder $ 2,507,820 $ 2,500,597 $ (100,330) $ 2,400,267 =========== =========== ========== =========== Weighted average number of common shares outstanding 42,157,333 17,414,291 17,414,291 17,414,291 Basic EPS $ 0.06 $ 0.15 $ (0.01) $ 0.14 =========== =========== ========== =========== Diluted EPS Income available to common stockholder $ 2,507,820 $ 2,500,597 $ (100,330) $ 2,400,267 Income impact of assumed conversions - - - - ------------ ------------ ----------- ------------ Income available to common stockholders on a diluted basis $ 2,507,820 $ 2,500,597 $ (100,330) $ 2,400,267 =========== =========== ========== =========== Weighted average number of common shares outstanding 42,157,333 17,414,291 17,414,291 17,414,291 Effect of dilutive securities - stock options 566,666 297,116 - 297,116 Preferred stock 3,732,549 - - - ------------ ------------ ----------- ------------ Adjusted weighted average number of common shares outstanding 45,889,882 17,711,291 17,414,291 17,711,291 ============ ============ =========== ============ Diluted EPS $ 0.06 $ 0.15 $ (0.01) $ 0.14 =========== =========== ========== ===========
- 46 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Financial Information for Business Segments In the first nine months of 1998, the Company operated in three industry segments: telecommunications, financial services, and restaurant. In the first nine months of 1997, the Company operated only the financial services industry. Operating Profit (Loss) is income from operations before general corporate expense. General corporate expense consists primarily of management services incurred by Carnegie as the holding company for its wholly owned subsidiaries. Identifiable assets by industry segment are those assets that are used in the Company's operations in each industry segment. Corporate assets are principally cash and cash equivalents, capitalized acquisition costs, notes receivable and certain fixed assets in Carnegie's office. A summary of the Company's operations by industry segment follows:
Nine months ended September 30, 1998 ------------------------------------ Tele- communications Restaurant Corporate Consolidated -------------- ---------- --------- ------------ Operating revenues $ 5,795,440 $ 1,535,111 $ 10,878 $ 7,341,429 ================ ============== ============= ============== Operating profit (loss) $ 477,419 $ (24,615) $ (865,013) $ (412,209) Other income (expense) 2,348,902 (3,587) 1,597,295 3,942,610 ----------------- --------------- -------------- --------------- Income before income taxes $ 2,826,321 $ (28,202) $ 732,282 $ 3,530,401 ================ ============== ============= ============== Identifiable assets $ 9,013,375 $ 729,427 $ 5,546,937 $ 15,221,272 ================ ============== ============= ============== Depreciation of property, plant and equipment $ 142,939 $ 30,000 $ 90,810 $ 263,749 ================ ============== ============= ============== Amortization of intangibles $ 316,019 $ 40,130 $ 33,072 $ 389,221 ================ ============== ============= ============== Capital expenditures $ 598,855 $ - $ 974,566 $ 1,573,421 ================ ============== ============= ==============
- 47 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Financial Information for Business Segments - continued The results of the operations of the credit card segment of the Company's business have been included in the corporate segment on a net basis.
Nine months ended September 30, 1997 ------------------------------------ Financial Tele- Services communications Restaurant Corporate Consolidated -------- -------------- ---------- --------- ------------ Operating revenues $ 5,002,675 $ - $ 239,625 $ - $5,242,300 ========== ========== ========== ============ ========= Operating profit (loss) $ 3,375,450 $ - $ 10,123 $ (659,457) $2,729,644 Other income (expense) (44,531) - - - (44,531) ---------- ----------- ----------- ------------- ----------- Income (loss) before income taxes $ 3,330,919 $ - $ 10,123 $ (659,457) $2,685,113 ========== ========== ========== ============ ========= Identifiable assets $ 272,640 $ 626,720 $ 228,406 $ 2,760,989 $3,888,755 ========== ========== ========== ============ ========= Depreciation of property, plant and equipment $ 23,947 $ - $ 4,126 $ 63,369 $ 91,402 ========== ========== ========== ============ ========= Amortization of intangibles $ - $ - $ 1,417 $ - $ 1,417 ========== ========== ========== ============ ========= Capital expenditures $ - $ - $ - $ 32,888 $ 32,888 ========== ========== ========== ============ =========
- 48 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Financial Information for Business Segments - continued A summary of the Company's operations by geographic region follows:
Nine months ended September 30, 1998 ------------------------------------ South United America Kingdom Domestic Consolidated ------- ------- -------- ------------ Operating revenues $ 2,620,374 $ 155,400 $ 4,565,655 $ 7,341,429 ================ ============== ============= ============== Operating profit (loss) $ 65,598 $ (288,983) $ (188,824) $ (412,209) Other income (expense) 2,341,896 (11,200) 1,611,914 3,942,610 ----------------- -------------- -------------- --------------- Income (loss) before income taxes $ 2,407,494 $ (300,183) $ 1,423,090 $ 3,530,401 ================ ============== ============ ============ Identifiable assets $ 4,708,838 $ 1,946,610 $ 8,565,824 $ 15,221,272 ================ ============== ============ ============ Depreciation of property, plant and equipment $ - $ 110,939 $ 152,810 $ 263,749 ================ ============== ============ ============ Amortization of intangibles $ 223,575 $ 56,644 $ 109,002 $ 389,221 ================ ============== ============ ============ Capital expenditures $ - $ 394,400 $ 1,179,021 $ 1,573,421 ================ ============== ============ ============
- 49 - Carnegie International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Financial Information for Business Segments - continued
Nine months ended September 30, 1997 ------------------------------------ South United America Kingdom Domestic Consolidated ------- ------- -------- ------------ Operating revenues $ - $ - $ 5,242,300 $ 5,242,300 ================ ============== ============= ============== Operating profit (loss) $ - $ - $ 2,729,644 $ 2,729,644 Other expense - - (44,531) (44,531) ----------------- --------------- -------------- -------------- Income before income taxes $ - $ - $ 2,685,113 $ 2,685,113 ================ ============== ============= ============== Identifiable assets $ 578,720 $ 48,000 $ 3,262,035 $ 3,888,755 ================ ============== ============= ============== Depreciation of property, plant and equipment $ - $ - $ 91,402 $ 91,402 ================ ============== ============= ============== Amortization of intangibles $ - $ - $ 1,417 $ 1,417 ================ ============== ============= ============== Capital expenditures $ - $ - $ - $ ================ ============== ============= ==============
- 50 - NOTE T - NOTES TO UNAUDITED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 CONSOLI- DATED FINANCIAL STATEMENTS - Continued Subsequent Acquisitions On November 20, 1998, the Company acquired all of the outstanding stock of Voice Quest, Inc. a Florida corporation. Voice Quest, Inc. is involved in the development of voice activated software applications that are compatible with the Company's MAVIS product. The consideration paid consisted of 21,600 shares of Series E Preferred Stock that is convertible to the Company common stock, 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 in 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 the time of closing. The Company also assumed the liabilities of Voice Quest, Inc. that included amounts due the sellers of $102,084. This amount is payable in quarterly installments of $8,507 over a three-year period beginning on January 1, 1999. The value of this obligation discounted at 10% is $96,700. The Company has recorded this acquisition as a purchase. On December 1, 1998, the Company acquired all of the assets, and assumed all of the liabilities of The J-Net Group, Inc. a Delaware corporation trading as Pomnet. the consideration paid was 52,500 shares of Series F preferred stock which will automatically convert into common stock of the Company on December 1, 2000. The Series F preferred stock will convert into the greater $700,000 of common stock or 525,000 shares of stock if the average closing price of the Company's common stock is $1.33 or greater for the five business days preceding conversion. In addition, the Company assumed liabilities, including equipment leases, totaling $453,972. This acquisition will be accounted for as a purchase. - 51 - SCHEDULES - 51 - Carnegie International Corporation and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS December 31, 1997 and 1996 - --------------------------------------------------------------------------------
Charged Balance to costs Charged Balance beginning and to other end of period expenses accounts Deductions of period --------- -------- -------- ---------- --------- For the year ended December 31, 1997 Accumulated depreciation $ 54,273 $ 57,645 $ - $ 9,876 $ 102,042 Accumulated amortization of intangibles - 117,619 - - 117,619 Valuation allowance on deferred tax assets 273,808 321,929 - - 595,737 For the year ended December 31, 1996 Accumulated depreciation 44,397 9,876 - - 54,273 Accumulated amortization of intangibles - - - - - Valuation allowance on deferred tax assets - 273,808 - - 273,808
- 52 - Carnegie International Corporation and Subsidiaries PRO FORMA UNAUDITED CONDENSED FINANCIAL STATEMENTS December 31, 1997 and 1996 - -------------------------------------------------------------------------------- The following pro forma unaudited condensed statements of earnings have been prepared by taking December 31, 1997 and 1996 and September 30, 1997 statements of earnings of Carnegie International Corporation (the Company) and giving effect to the acquisition of all of the outstanding stock of Talidan Limited (Talidan) by the Company as if it occurred as of January 1, 1996. The revenues and results of operations included in the following pro forma unaudited condensed statements of earnings are not considered necessarily to be indicative of anticipated results of operations for periods subsequent to the transaction, nor are they considered necessarily to be indicative of the results of operations for the periods specified had the transaction actually been completed as of January 1, 1996. These financial statements should be read in conjunction with the notes to the pro forma unaudited condensed statements of earnings, which follow and the financial statements of Talidan and related notes thereto included herewith. - 53 - Carnegie International Corporation and Subsidiaries PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED) - --------------------------------------------------------------------------------
Year ended December 31, 1997 ---------------------------- Historical Pro forma ---------- Company Talidan adjustments Pro forma ------- ------- ----------- --------- Revenue Operating $ 3,245,810 $ 4,234,867 $ - $ 7,480,677 Sale of service contracts 3,700,000 - - 3,700,000 ------------- ----------- ----------- ----------- Total revenue 6,945,810 4,234,867 - 11,180,677 Cost of fees and sales Processing fees 183,117 - - 183,117 Commissions 1,103,889 2,892,857 - 3,996,746 Supplies and merchant expenses 268,656 - - 268,656 Equipment related costs 28,919 - - 28,919 Royalties and commissions 5,344 - - 5,344 ------------- ----------- ------------ ----------- Total costs of fees and sales 1,589,925 2,892,857 - 4,482,782 ------------- ------------ ------------ ----------- Gross profit 5,355,885 1,342,010 - 6,697,895 Operating expenses (3,592,270) (57,377) (223,576) (a) (4,154,966) ------------- ------------ ----------- (281,743) (b) Operating income (loss) 1,763,615 1,284,633 (505,319) 2,542,929 Other income (expenses) Interest expense (49,417) - - (49,417) Interest income 16,834 9,378 - 26,212 ------------- ------------ ------------ ----------- Total other (expense) income (32,584) 9,378 - (23,205) ------------ ------------ ------------ ----------- Income (loss) from continuing operations before provision for income taxes 1,731,032 1,294,011 (505,319) 2,519,724 Provision for income taxes 50,867 - - 50,867 ------------ ------------ ------------ ----------- Net income (loss) from continuing operations 1,680,165 1,294,011 (505,319) 2,468,857 Discontinued operations (100,330) - - (100,330) ------------ ------------ ------------ ----------- Net income (loss) $ 1,579,835 $ 1,294,011 $ (505,319) $ 2,368,527 ============= ============ ============ ===========
- 54 - Carnegie International Corporation and Subsidiaries PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED) - -------------------------------------------------------------------------------- Earnings (loss) per share: Basic: Continuing operations $ 0.08 $ 0.08 Discontinued operations (0.01) - ------- -------- Net income $ 0.07 $ 0.08 ======= ======== Diluted: Continuing operations $ 0.07 $ 0.08 Discontinued operations - - ------- -------- Net income $ 0.07 $ 0.08 ======= ======== Carnegie International Corporation and Subsidiaries PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED) - --------------------------------------------------------------------------------
Nine months ended September 30, 1997 ------------------------------------ Historical Pro forma ---------- Company Talidan adjustments Pro forma ------- ------- ----------- --------- Revenue Operating $ 1,542,300 $ 4,234,867 $ - $ 5,777,167 Sale of service contracts 3,700,000 - - 3,700,000 -------------- ------------ --------- ----------- Total revenue 5,242,300 4,234,867 - 9,477,167 Cost of fees and sales Processing fees 257,367 - - 257,367 Commissions 1,058,140 2,892,857 - 3,950,997 Supplies and merchant expenses 92,701 - - 92,701 Equipment related costs 19,020 - - 19,020 Royalties and commissions 2,179 - - 2,179 -------------- ------------ --------- ----------- Total costs of fees and sales 1,429,407 2,892,857 - 4,322,264 -------------- ------------ --------- ----------- Gross profit 3,812,893 1,342,010 - 5,154,903 Operating expenses (1,086,777) (57,377) (223,576) (a) (1,649,473) -------------- ------------ ----------- (281,743) (b) Operating income (loss) 3,726,116 1,284,633 (505,319) 3,505,430 Other income (expenses) Interest expense (44,531) - - (44,531) Interest income - 9,378 - 9,378 -------------- ------------ --------- ----------- Total other (expense) income (44,531) 9,378 - (35,153) -------------- ------------ --------- ----------- Income (loss) from continuing operations before provision for income taxes 2,681,585 1,294,011 (505,319) 3,470,277 Provision for income taxes 184,516 - - 184,516 -------------- ------------ --------- ----------- Net income (loss) from continuing operations 2,497,069 1,294,011 (505,319) 3,285,761 Discontinued operations (100,330) - - (100,330) -------------- ------------ --------- ----------- Net income (loss) $ 2,396,739 $ 1,294,011 $(505,319) $ 3,185,431 ============= =========== ======== ========== Earnings (loss) per share: Basic: Continuing operations $ 0.09 $ 0.12 Discontinued operations - - -------------- ----------- Net income $ 0.09 $ 0.12 ============= ========== Diluted: Continuing operations $ 0.08 $ 0.12 Discontinued operations - - -------------- ----------- Net income $ 0.08 $ 0.12 ============= ==========
Carnegie International Corporation and Subsidiaries PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED) - --------------------------------------------------------------------------------
Year ended December 31, 1996 ---------------------------- Historical Pro forma ---------- Company Talidan adjustments Pro forma ------- ------- ----------- --------- Revenue Operating $ 3,256,291 $ 6,616,247 $ - $ 9,872,538 Sale of service contracts - - - - -------------- ------------ --------- ----------- Total revenue 3.256,291 6,616,247 - 9,872,538 Cost of fees and sales Processing fees 1,051,421 - - 1,051,421 Commissions 1,298,851 4,487,724 - 5,786,575 Supplies and merchant expenses 55,675 - - 55,675 Equipment related costs 99,421 - - 99,421 Royalties and commissions 16,662 - - 16,662 -------------- ------------ --------- ----------- Total costs of fees and sales 2,522,030 4,487,724 - 7,009,754 -------------- ------------ --------- ----------- Gross profit 734,261 2,128,523 - 2,862,784 Operating expenses (1,224,689) (296,863) (298,101) (a) (2,195,310) -------------- ------------ ----------- (375,657) (b) -------- Operating income (loss) (490,428) 1,831,660 (673,758) 667,474 Other income (expenses) Interest expense (226,063) - - (226,063) Interest income 7,144 13,494 - 20,638 -------------- ------------ --------- ----------- Total other (expense) income (218,919) 13,494 - (205,425) -------------- ------------ --------- ----------- Income (loss) from continuing operations before provision for income taxes (709,347) 1,845,154 (673,758) 462,049 Provision for income taxes - - - - -------------- ------------ --------- ----------- Net income (loss) from continuing operations (709,347) 1,845,154 (673,758) 462,049 Discontinued operations - - - - -------------- ------------ --------- ----------- Net income (loss) $ (709,347) $ 1,845,154 $(673,758) $ 462,049 ============= =========== ======== ========== Earnings (loss) per share: Basic: Continuing operations $ (0.08) $ 0.02 Discontinued operations - - -------------- ----------- Net income $ (0.08) $ 0.02 ============= ========== Diluted: Continuing operations $ (0.08) $ 0.02 Discontinued operations - - -------------- ----------- Net income $ (0.08) $ 0.02 ============= ==========
Carnegie International Corporation and Subsidiaries NOTES TO PRO FORMA STATEMENTS OF EARNINGS (UNAUDITED) December 31, 1997 and 1996 and September 30, 1997 - -------------------------------------------------------------------------------- (a) To amortize the goodwill associated with the transaction based upon a fifteen year life. (b) To recognize interest expense on the Put Obligation associated with the acquisition. - 54 - PART III Item 1. Index to Exhibits Exhibit Number 3.1 Articles of Amendment to restated Articles of Incorporation, filed on February 10, 1999. 10.16 Employment Agreement between Barry N. Hunt and Harbor City Corporation, t/a ACC Telecom. 10.17 Distributor Agreement between the Corporation and ALLTEL Supply, Inc. 10.18 Stock Purchase Agreement between the Corporation and Voice Quest. Inc. 10.19 Employment Agreement between Voice Quest, Inc. and Mark S. Ortner. 10.20 Asset Purchase Agreement between the Corporation and the J-Net Group, Inc. 10.21 Employment Agreement between RomNet Support Services, Inc. and Nicholas R. Gentile 10.22 Consulting Agreement between the Corporation and the Vadiari Group International. 10.23 Distributor Agreement between the Corporation and Tiller International 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule SIGNATURES In accordance with Section 12 of the Securities Exchange Act, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. CARNEGIE INTERNATIONAL CORPORATION Dated: February 12, 1999 By: /s/ Lowell Farkas -------------------------------------- Name: Lowell Farkas ------------------------------------ Title: President ----------------------------------- C73743kk.636 R 4:2/11/99 EX-3.1 2 ARTICLES OF AMENDMENT EXHIBIT 3.1 ARTICLES OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION OF CARNEGIE INTERNATIONAL CORPORATION Carnegie International Corporation, a Colorado corporation (hereinafter called the "Corporation"), having its principal office in Hunt Valley, Maryland, hereby certifies to Secretary of State of Colorado that: FIRST: The name of the corporation is: CARNEGIE INTERNATIONAL CORPORATION. SECOND: The Articles of Incorporation of the Corporation are hereby amended by deleting in its entirety in the existing Article FOUR and by substituting in lieu thereof the Article FOUR set forth in Exhibit A attached hereto. THIRD: The amendment of the Restated Articles of Incorporation with respect to Section 2 of Article FOUR was adopted on October 30, 1998, by the Board of Directors and shareholder action was not required, as prescribed by the Colorado Business Corporation Act. The amendment of the Restated Articles of Incorporation with respect to Section 3 of Article FOUR was adopted on November 20, 1998, by the Board of Directors and shareholder action was not required, as prescribed by the Colorado Business Corporation Act. Carnegie International Corporation has caused these presents to be signed and acknowledged in its name and on its behalf by its President and witnessed and attested by its Secretary on this 9th day of February, 1999, and its President acknowledges that these Articles of Amendment are the act and deed of said Corporation, and under the penalties of perjury, that the matters and facts set forth herein with respect to authorization and approval are true in all material respects to the best of his knowledge, information and belief. ATTEST: CARNEGIE INTERNATIONAL CORPORATION /s/ Lawrence Gable By: /s/ Lowell Farkas (SEAL) - -------------------------------- ---------------------------------- Lawrence Gable, Acting Secretary Lowell Farkas, President Exhibit A ARTICLE FOUR The total amount of authorized capital stock of the Corporation shall consist of One Hundred Ten Million (110,000,000) shares of Common Stock, no par value per share and Forty Million (40,000,000) shares of Preferred Stock, par value $1.00 per share. The Board of Directors is hereby expressly authorized issue, in one or more series, any shares of unissued Preferred Stock and to determine the designation, preferences, conversion rights, voting powers, restrictions, redemption provisions, limitations as to dividends and other terms, provisions and rights. The Board of Directors shall cause the execution and filing with the Secretary of State of Colorado of appropriate Articles of Amendment to the Restated Articles of Incorporation of the Corporation with respect to any such issuance of Preferred Stock in accordance with the Colorado Business Corporation Act. 1. Series A Preferred Stock. A series of authorized Preferred Stock, $1.00 par value is hereby created and shall have the designation, authorized number of shares thereof and the rights, terms and provisions as set forth below: (a) Designation and Amount. The shares of this series shall be designated as "Series A Preferred Stock" (the "Series A") and the authorized number of shares constituting the Series A Preferred Stock shall be Two Hundred Thousand (200,000). (b) Trading. Series A will not be allowed to trade on the open market. (c) Administration. Administration of the Series A will be conducted within the corporate office and not through the Corporation's transfer agent. (d) Voting Rights. Series A will have the right to vote along with Common Stock shareholders as follows: Each share of Series A will be counted as ten (10) votes of Common Stock. For purposes of voting, the totality of voting shares on any issue shall be all Common Stock shares issued and outstanding plus Series A shares issued and outstanding, Series A to be weighted ten (10) votes for each one (1) Series A share. For example, if there are 200,000 Series A shares issued and outstanding and there are 40,000,000 shares of Common Stock issued and outstanding, the total shares eligible to vote is 42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series A) = 42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares need to be cast from either Series A (weighted 10 votes for 1 Series A share) or Common Stock issued and outstanding shares to have the motion pass. (e) Conversion Rights. Series A will have a "right of conversion" as follows: On May 18, 2000, the 200,000 shares of Series A shall be convertible to the greater of $2,000,000 worth of Common Stock or 2,000,000 shares of Common Stock, to be issued and legended in accordance with Rule 144 (hereinafter Rule 144 stock). Series A shareholder shall have the right to convert the shares prior to May 18, 2000 in the event the Common Stock price of Carnegie closes above $2.00 per share (hereinafter "early conversion"). In the event of an early conversion, Series A shareholder shall receive $2,000,000 worth of Rule 144 stock. The value of the Rule 144 stock, for conversion purposes shall be based on the average Market closing price of the Common Stock for the five business days immediately preceding the conversion date. Market is defined as the price quoted for the Company's Common Stock by the NASD Over the Counter Bulletin Board Service (OTCBB), or any other US public market that trades the Common Stock on a daily basis. The shares issued in the event of an early conversion will be Rule 144 stock. (f) Liquidation. Series A will have a preference over shares of Common Stock in the event of a corporate liquidation. (g) Dividends. Series A will not be entitled to dividends. If however the Corporation deems that a dividend be declared, the Series A shareholder shall be given at least five (5) days written notice and at that time can opt to convert Series A shares into shares of Common Stock, in accordance with the conversion formula described in Section 1(e) of this Article 4. (h) Stock Split. In the event of a stock split, either reverse or otherwise, the Series A and/or the shares of Common Stock that will be obtained upon conversion are to be proportionately split. 2. Series B Preferred Stock. A series of authorized Preferred Stock, $1.00 par value is hereby created and shall have the designation, authorized number of shares thereof and the rights, terms and provisions as set forth below: (a) Designation and Amount. The shares of this series shall be designated as "Series B Preferred Stock" (the "Series B") and the authorized number of shares constituting the Series B Preferred Stock shall be Two Hundred Thousand Eight Hundred Forty-Seven and One-Half (200,847.5). (b) Voting Rights. Series B will have the right to vote along with Common Stock shareholders as follows: Each share of Series B will be counted as ten (10) votes of Common Stock. For purposes of voting, the totality of voting shares on any issue shall be all Common Stock shares issued and outstanding plus Series B shares issued and outstanding, Series B to be weighted ten (10) votes for each one (1) Series B share. For example, if there are 200,000 Series B shares issued and outstanding and there are 40,000,000 shares of Common Stock issued and outstanding, the total shares eligible to vote is 42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series B) = 42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares need to be cast from either Series B (weighted 10 votes for 1 Series B share) or Common Stock issued and outstanding shares to have the motion pass. (c) Conversion Rights. Series B will have a "right of conversion" as follows: (i) The 21,600 shares of Series B shall be convertible to Common Stock of the Corporation upon the common share price of the Corporation maintaining an average bid trading price of Two Dollars ($2.00) per share for a period of at least thirty (30) days, provided that said trading price reaches Two Dollars ($2.00) per share by December 31, 1998 and the thirty (30) day common share price holds at Two Dollars ($2.00) per share for more than 30 days on or before February 15, 1999. Said Common Stock shall constitute 2 restricted securities as defined in 17 C.F.R. ss. 230.144(a)(3) (hereinafter "Rule 144 Stock") and shares of Rule 144 Stock received in the conversion shall be Two Million Eight Thousand Four Hundred Seventy-Five (2,008,475) shares of Rule 144 Stock. (d) Dividends. Series B will not be entitled to dividends. (e) Stock Split. In the event of a stock split, either reverse or otherwise, the Series B and/or the shares of Common Stock that will be obtained upon conversion are to be proportionately split. 3. Series E Preferred Stock. A series of authorized Preferred Stock, $1.00 par value is hereby created and shall have the designation, authorized number of shares thereof and the rights, terms and provisions as set forth below: (a) Designation and Amount. The shares of this series shall be designated as "Series E Preferred Stock" (the "Series E") and the authorized number of shares constituting the Series E Preferred Stock shall be Twenty-One Thousand Six Hundred (21,600). (b) Voting Rights. Series E will have the right to vote along with Common Stock shareholders as follows: Each share of Series E will be counted as ten (10) votes of Common Stock. For purposes of voting, the totality of voting shares on any issue shall be all Common Stock shares issued and outstanding plus Series E shares issued and outstanding, Series E to be weighted ten (10) votes for each one (1) Series E share. For example, if there are 200,000 Series E shares issued and outstanding and there are 40,000,000 shares of Common Stock issued and outstanding, the total shares eligible to vote is 42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series E) = 42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares need to be cast from either Series E (weighted 10 votes for 1 Series E share) or Common Stock issued and outstanding shares to have the motion pass. (c) Conversion Rights. Series E will have a "right of conversion" as follows: (i) On November 20, 2000, the 21,600 shares of Series E shall be convertible to Rule 144 Restricted Legend Common Stock of the Corporation (hereinafter "Rule 144 Stock") and shares of Rule 144 Stock received in the conversion shall be the greater of: a) Rule 144 Stock with a value of $270,000 based upon the conversion Value set forth in forth in paragraph (ii) below; or b) 216,000 shares of Rule 144 Stock, which shall be considered higher in Value than the Value under a) above if the Value of the Common Stock of the Corporation is above an average closing price of $1.25 per share as computed on the business day immediately preceding November 20, 2000. (ii) The Value of each share of Rule 144 Stock, for conversion calculation purposes shall be based on the average Market closing price of the Common Stock for the five (5) business days immediately preceding the conversion date. "Market" is defined as the price quoted for the Corporation's Common Stock by the NASD Over the Counter Bulletin Board 3 Service (OTCBB), or the closing trading price on the exchange on which the Corporation's Common Stock is traded if said stock is no longer quoted on the OTCBB. (d) Dividends. Series E will not be entitled to dividends. (e) Stock Split. In the event of a stock split, either reverse or otherwise, the Series E and/or the shares of Common Stock that will be obtained upon conversion are to be proportionately split. 4. Series F Preferred Stock. A series of authorized Preferred Stock, $1.00 par value is hereby created and shall have the designation, authorized number of shares thereof and the rights, terms and provisions as set forth below: (a) Designation and Amount. The shares of this series shall be designated as "Series F Preferred Stock" (the "Series F") and the authorized number of shares constituting the Series F Preferred Stock shall be Fifty Two Thousand Five Hundred (52,500). (b) Trading. Series F will not be allowed to trade on the open market. (c) Administration. Administration of the Series F will be conducted within the corporate office and not through the Corporation's transfer agent. (d) Voting Rights. Series F will have the right to vote along with Common Stock shareholders as follows: Each share of Series F will be counted as ten (10) votes of Common Stock. For purposes of voting, the totality of voting shares on any issue shall be all Common Stock shares issued and outstanding plus Series F shares issued and outstanding, Series F to be weighted ten (10) votes for each one (1) Series F share. For example, if there are 200,000 Series F shares issued and outstanding and there are 40,000,000 shares of Common Stock issued and outstanding, the total shares eligible to vote is 42,000,000 shares (40,000,000 Common Stock + (10 x 200,000 Series F) = 42,000,000). If a two thirds (2/3) majority is required, then 28,000,000 shares need to be cast from either Series F (weighted 10 votes for 1 Series F share) or Common Stock issued and outstanding shares to have the motion pass. (e) Liquidation. Series F will have a preference over shares of Common Stock in the event of a corporate liquidation, at up to $1.33 per share. Preferred shares shall have preference over other Preferred shares in the event of a corporate liquidation in order of alphabetical issuance, such that Series A shall have preference over Series B, Series B shall have preference over Series C. etc. The cumulative preferences of Series A through E Preferred over Series F shall not exceed Twenty Million Dollars ($20,000,000). (f) Dividends. Series F will not be entitled to dividends. (g) Conversion Rights. Series F will have a "right of conversion" as follows: (i) On December 1, 2000, the 52,500 shares of Series F shall be converted automatically to Common Stock of the Company, which Common Stock shall constitute 4 restricted securities as defined in 17 C.F.R. ss. 230.144(a)(3) (hereinafter "Rule 144 Stock"). The Common Stock shall be converted to the greater of: a) Rule 144 Stock with a Value of $7,000,000, based upon the conversion Value set forth in paragraph (ii) below; or b) 525,000 shares of Rule 144 Stock, which shall be considered higher in Value than the Value under a) above if the Value of the Common Stock of the Company is above an average closing price of $1.33 per share as computed for five (5) business days immediately preceding December 1, 2000. (ii) The Value of each share of Rule 144 Stock, for conversion calculation purposes shall be based on the average Market closing price of the Common Stock for the five business days immediately preceding the conversion date. Market is defined as the price quoted for the Company's Common Stock by the NASD Over the Counter Bulletin Board Service (OTCBB), or the closing trading price on the exchange on which the Company Common Stock is traded if said stock is no longer quoted on the OTCBB. (h) Stock Split. In the event of a stock split, either reverse or otherwise, the Series F and/or the shares of Common Stock that will be obtained upon conversion are to be proportionately split. 5 EX-10.16 3 EMPLOYMENT AGREEMENT EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is dated this 18th day of May, 1998, by and between Harbor City Corporation, t/a ACC Telecom, the "Employer" and Barry N. Hunt, the "Employee". 1. EMPLOYMENT: The Employer employs the Employee and the Employee accepts employment upon the terms and conditions of this Agreement. 2. TERMS: The term of this Agreement shall begin on the Closing Date of the purchase of Employer's Stock by Carnegie International Corporation and shall continue for a period of five (5) years, unless terminated prior thereto. 3. COMPENSATION: For all services rendered by the employee, the employer shall pay the employee an annual salary of One Hundred Twenty-Five Thousand Dollars ($125,000) to be paid through Five Thousand Two Hundred and Eight Dollar and Thirty-three Cent ($5,208.33) semi-monthly payments, payable at the end of each of twenty-four (24) semi-monthly periods. The annual salary shall be increased to Two Hundred Thousand Dollars ($200,000) and payable semi-monthly in the event that Susan Hunt and Barry Hunt become divorced or on the death or termination of employment of Susan Hunt or if Susan Hunt does not become employed pursuant to the Agreement set forth in Attachment A. Salary payments shall be subject to withholding and other applicable taxes. 4. DUTIES: The employee is engaged to serve as the President of Employer. Employee's duties include but are not limited to managing the operations of the Company. The precise services of the Employee may be extended or curtailed by the employer from time to time. 5. EXTENT OF SERVICES: The Employee shall devote substantially his entire working time, attention and energies to the Employees business and shall not during the term of this Agreement be engaged in any employment activities, undertake to work for compensation or accept employment with another entity for gain, profit, or other pecuniary advantage. However, the Employee may invest his assets in such form or manner as will not require his services in the operation of the affairs of the companies in which such investments are made. 6. DISCLOSURE OF CONFIDENTIAL INFORMATION: The employee acknowledges that he will have access to significant amounts of confidential information of employer and its Parent Company, Carnegie International Corporation, including such information as lists of customers, sources of supply, production information, product information, service information, formulas, computer programs and development ideas related thereto, work in progress, trade secrets, technical information acquired by Employee from Employer or Carnegie or from the inspection of Employer's or Carnegie's property, confidential information disclosed to Employee by third parties, and all documents, things and record bearing media disclosing or containing the aforegoing information, - 2 - including any confidential materials prepared by the parties hereto which contain or otherwise relate to such information concerning the Employer's and or Carnegie's financial, intellectual, technical and commercial information (collectively hereinafter referred to as "Confidential Information") shall be and remain confidential. The Employee will not during or after the term of this employment, disclose the Confidential Information or any part thereof to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever. In the event of a breach or threatened breach by the Employee of the provisions of this paragraph, the Employer shall be entitled to an injunction restraining the Employee from disclosing, in whole or in part, the Confidential Information, or from rendering any services in connection with the telecommunications industry to any person, corporation, association, or other entity to whom such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein shall be construed as prohibiting the Employer or Carnegie from pursuing any of the remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee. If Employee buys back the Shares of Employer, the provisions hereof relating only to Employer shall no longer apply. 7. EXPENSES: The Employee may incur reasonable expenses for promoting the Employees business. The employer shall - 3 - reimburse the Employee for all such expenses upon the Employee's periodic presentation of an itemized account of such expenditures. 8. VACATIONS: The Employee shall be entitled to twenty (20) vacation days each year, during which time his salary and benefits shall be paid in full. Each vacation shall be taken so as not to unreasonably interfere with the operation of Employer's business. No such vacations shall be taken before May 31, 1998. 9. SURVIVAL AFTER TERMINATION OR EXPIRATION OF EMPLOYMENT RELATIONSHIP: The Provisions contained within paragraphs 6, 11 and 14 of this Agreement shall survive the expiration or other termination of this Agreement. 10. TERMINATION: The following termination provisions shall apply hereto: a. Termination by Employer for cause. The Employer may terminate this Agreement immediately by written notice if Employee is convicted of any crime involving fraud, dishonesty, or willful misconduct directly or indirectly connected to Employee's duties and responsibilities to Employer or the management and or operation of Employer's business. If Employer chooses not to pursue criminal action against Employee in connection with fraud, dishonesty, or willful misconduct that has a material impact on the Employer, the Employee may terminate this Agreement for such cause, after written notice to the Employee of the reason for termination and failure by the Employee within - 4 - thirty (30) days thereafter to cure or eliminate such reason for termination and compensate Employer for any losses sustained as a result of Employee actions in connection with such fraud, dishonesty or willful misconduct. All terminations made pursuant to this paragraph shall be considered for cause and the Employer shall not be liable for any amounts pursuant to this Agreement, following such termination. b. Termination by Employer for other than cause. If the Employer terminates this Agreement for any reason other than cause during the first two years of this Agreement, then the Employee may exercise his option to Buy-Back the Shares of the Employer. If the Employer terminates this Agreement for any reason other than cause during the final three years of the term of this Agreement, the Employer shall pay to the Employee all salary owed pursuant to paragraph 3 of this Agreement, for the remainder of the term of this Agreement. c. Termination by Employee for Good Reason. The Employee may terminate his employment with Employer pursuant to this Agreement for "good reason", provided that the Employee has given written notice to the Employer of the reason of the resignation and Employer fails to cure or eliminate such reason within thirty (30) days from the receipt of such written notice by Employer. For the purposes of this Agreement, good reason shall mean: (i) removal form the position of President, other than as a - 5 - result of promotion; (ii) material diminution of the Employee's title, position, or responsibilities; (iii) material reduction in the Employee's salary or benefits; (iv) relocation of the Employee to a location more than thirty (30) miles from the Employee's principal work place at the time this Agreement takes effect; or (v) the Employees willful failure to comply with and satisfy material requirements of this Agreement. If the Employee terminates his employment for good reason during the first two years of the term of this Agreement, the Employee may exercise his option to Buy-Back the Shares of the Employer. If the Employee terminates his employment for good reason during the final three years of he term of this Agreement, the Employer shall pay to the Employee one year of salary as delineated in paragraph 3 of this Agreement, consistent with similar benefits being provided to other executives of Carnegie International Corporation. d. Termination by Employee for other than good reason. Employee may terminate this Agreement for any reason or no reason at any time, upon thirty (30) days written notice to the Employer. In such event, the Employee if requested by the Employer, shall continue to render his services and receive full salary and benefits up to the date of termination. The Employer may elect to terminate Employee by written notice thereof before the expiration of the thirty (30) day period and discontinue all salary and benefits as of said termination date. If Employee - 6 - terminates this Agreement for any reason other than good reason, the Employer shall not be liable for any amounts due to Employee pursuant to the terms of this Agreement. e. Termination by Employee or Employer by Exercise of Buy-Back/Sell-Back Agreement Options. In the event that the Shares of the Employer are transferred to Employee pursuant to options exercised under the terms the Buy-Back/Sell-Back Agreement between Employer, Carnegie, Barry Hunt and Susan Hunt, this Agreement shall terminate effective on the closing date for said Buy-Back or Sell-Back, except for the provisions hereof contained in paragraph 6 related to non-disclosure of confidential information related to Carnegie or any of its subsidiaries and any other provisions related to the enforcement thereof which all shall remain in full force and effect. f. Other Termination. This Agreement shall terminate upon the occurrence of any of the following events: 1. Expiration of the term of employment, as provided in Section 2 hereof; or 2. Death of Employee, except for those benefits as provided to the contrary herein; or 3. In the event Employee shall become permanently disabled as defined in the following paragraph and such permanent disability prevents the Employee from substantially performing the duties of his employment, Employer shall pay to - 7 - Employee the amounts provided in the following paragraph. Disability Compensation. In the event of illness, injury or other condition which causes disability of the Employee, which in the reasonable objective opinion of two Physicians (one of said physicians to be chosen by the Company and one to be chosen by Hunt) is of such a nature that it prevents the Employee from substantially fulfilling his obligations under this Agreement (hereinafter referred to as the "Permanent Disability"), and it is agreed between the parties that it is likely that such condition will continue to exist for more than six (6) months, it shall be considered by the parties to be a Permanent Disability. In addition to all other amounts due pursuant to this Section, Employee's basic salary shall be continued for a period of six (6) weeks following the onset of such Permanent Disability. The weekly amount paid to Employee shall be the average weekly compensation earned by the Employee based on the collection of the six (6) months immediately prior to the onset of Permanent Disability. For purposes of this Agreement, the "onset of Permanent Disability" shall be defined as that point in time when, pursuant to the provisions of this Agreement, it is deemed that Employee is no longer able to substantially fulfill his obligations under this Agreement. It is understood that Employee's occasional sickness or other incapacity of short duration shall not result in a determination of Permanent Disability. Upon the death or - 8 - disability of Employee, any salary of Employee hereunder that has been allocated to Susan Hunt shall immediately cease unless and until Employer consents thereto in writing. 11. EMPLOYEE'S REPRESENTATIONS: Employee represents and. warrants to Employer that no legal, administrative or other proceedings against the Employee have been threatened or filed in any federal, state or local court of law or before any administrative body. 12. OTHER BENEFITS AND COMPENSATION: a. Health insurance coverage shall be provided to Employee comparable to the coverage being provided to Employee by Employer immediately prior to the acquisition of Employer's stock by Carnegie International Corporation ("Carnegie"). b. Employee shall have the benefit of having the cost of his current vehicle, a BMW, paid for by Employer with a comparable vehicle replacement two (2) years from the date hereof, with a new vehicle provided every two (2) years thereafter during the term of Employee's employment. c. Employee shall be reimbursed for all reasonable and necessary company expenses attributable to the business of ACC or Carnegie. d. Employee shall receive disability and life insurance coverage consistent with the current coverage being provided to Employee by Employer immediately prior to the - 9 - acquisition of Employer's stock by Carnegie International Corporation ("Carnegie"). e. Employee or his estate shall receive a Seventeen and one-half percent (17.5 %) commission on the gross profits generated from MAVIS sales through ACC during the duration of this employment agreement. However, no such commissions shall be paid until after January 1, 1999 and no amount shall be paid based on the gross profits generated from MAVIS sales unless adequate funds are available to satisfy the cash flow needs of ACC or its successor for the upcoming six (6) month period after each evaluation date. After January 1, 1999, the first evaluation date, Employee shall receive compensation over and above his base salary, based on seventeen and a half percent (17.5%) of the gross profit generated from MAVIS sales (hereinafter referred to as the "Commissions") up to a maximum of Two Hundred Thousand Dollars ($200,000.00) in Commissions in any one year. Said Commissions shall be paid if financial projections prepared by ACC or its successor and agreed to by Carnegie as of the first day of each calendar quarter beginning on January 1, 1999 indicate that funds will be available to meet the cash flow needs of ACC or its successor for the next six months and funds are still available over and above said cash flow needs. Disbursements to Employee for accrued commissions earned shall be made within thirty (30) days of the first day of each calendar quarter, beginning with the calendar - 10 - quarter starting on January 1, 1999. The amount of any such commissions earned in excess of the Two Hundred Thousand Dollar ($200,000.00) limit for any one calendar year shall be paid at the beginning of the next calendar quarter if funds are available to satisfy the projected cash flow needs of ACC or its successor for the next six (6) months following the beginning of said calendar quarter. All reasonably available funds after payment of said commissions shall be made available for upstream distribution to the parent company of Employer. Any commission that would have been due to Employee on gross profit from MAVIS sales during the five (5) years covered by his employment agreement shall upon Employee's death or permanent disability be paid to Employee's heirs or his designees consistent with the manner in which Employee would have been paid for said commissions, as provided above. f. MAVIS sales through ACC for the purposes of calculating the Commissions owed to Employee shall consist of any and all software and/or hardware product sales by ACC that encompass the Multi-language Automated Voice Intelligence System (MAVIS). Gross profit on said sales shall be determined by subtracting from the selling price of said products any and all costs of software, hardware, sales commissions, labor, materials, parts, equipment or other identifiable items which are attributable to the MAVIS product and any related hardware and or software sold as a part thereof. - 11 - g. Employee shall be a voting member or have the right to appoint a voting member to the Carnegie Board of Directors upon execution of the Stock Purchase Agreement between Carnegie, Barry Hunt and Susan Hunt. 13. SALE OF MAVIS: If through the direct efforts of Employee, the rights to MAVIS are sold for a lump sum amount to an entity for which the lead for such sale was developed by Employee, Employee shall receive as a sales commission nine percent (9%) of selling price of MAVIS paid by entities with whom Employee developed the lead for said sale. If said sale of MAVIS is paid on an installment basis, Employee shall receive the sales commission on the purchase price as payments thereof are received by Employer. In the event that the rights to MAVIS are sold for a lump sum or on an installment basis in North America during the term of this Agreement, Employee shall receive a three Percent (3%) sales commission on the selling price if the lead for said sale was not developed directly by Employee. Notwithstanding anything to the contrary contained herein, no sales commission whatsoever shall be paid on a sale of the rights to MAVIS to either Nortel or Nokia during the six (6) month period beginning on the date of this Agreement. 14. RESTRICTIVE COVENANTS: For a period of two (2) years, after the termination or expiration of this Agreement, the Employee will not, within the current geographical customer market - 12 - of ACC, directly or indirectly, own, manage, operate, control, be employed by or participate in any business that competes with and or sell similar products and or services as the business conducted by the Employer at the time of the termination of this Agreement. In the event of the Employee's actual or threatened breach of the provisions of this paragraph, the Employer shall be entitled to an injunction restraining the Employee therefrom. Nothing shall be construed as prohibiting the Employer from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages from the Employee. If Employee buys back the Shares of Employer the provisions hereof shall no longer apply. 15. OWNERSHIP OF OTHER PUBLIC COMPANIES: Employee may own up to five percent (5%) of public companies other than Carnegie, provided such ownership is not inconsistent with the terms and conditions of this Agreement and or otherwise prohibited by Law. 16. NOTICES: Any Notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of the Employee, or to its principal office in the case of the Employer. 17. WAVIER OF BREACH: The waiver of the Employer of a breach of any provision of this Agreement by the Employee shall not operate or be construed as a waiver of a subsequent breach by the Employee. - 13 - 18. ASSIGNMENT: The Employee acknowledges that the services to be rendered by him are unique and personal. Accordingly, the Employee may not assign any of his rights, or delegate any of his duties or obligations under this Agreement. The rights and obligations of the Employer under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Employer. 19. ENTIRE AGREEMENT: This Agreement contains the entire understanding of the parties. No representations were made or relied upon by either party, other then those expressly set forth. No agent, employee, or other representatives of either party are empowered to alter any of the terms hereof, unless they are in writing and signed by the Employee and an executive officer of the Employer. 20. CONTROLLING LAW: The validity, interpretation and performance of this Agreement shall be controlled by and construed under the Laws of the State of Maryland. 21. FIRST RIGHT OF REFUSAL FOR FINANCING OR LEASING ARRANGEMENTS: Employer or its designee shall have the first right of refusal for any leasing and/or financing of software and/or equipment sales through ACC. - 14 - IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. ATTEST: EMPLOYER: HARBOR CITY CORPORATION /s/ Susan B. Hunt, Sec. BY: /s/ Barry N. Hunt, Pres. - ----------------------- --------------------------------- BARRY N. HUNT, President WITNESS: Employee: /s/ Barry N. Hunt - ----------------------- ----------------------------------- BARRY N. HUNT - 15 - Attachment A This 18th day of May, 1998, Harbor City Corporation, t/a ACC Telecom, (the "Employer") hereby agrees that, for valuable consideration received in the form of Barry Hunt's Employment Agreement, on or before June 1, 1998, it will hire Susan Hunt as an employee of the Employer and will enter into an employment agreement with Ms. Hunt containing, without limitation, the following terms: 1) an employment term of five (5) years; 2) an annual salary of $75,000; 3) part-time duties, to be defined later; 4) twenty (20) paid vacation days per year; 5) termination provisions identical to those in Barry Hunt's Employment Agreement, where applicable. 6) reimbursement of reasonable business expenses; and 7) provision of health, disability, and life insurance coverage equivalent to such coverage provided to Barry Hunt. Notwithstanding any representations contained in the Employment Agreement between Harbor City Corporation, t/a ACC Telecom, and Barry Hunt, the Employer hereby understands and agrees that Barry Hunt reserves the right to exercise his option to Buy-Back the Shares of Harbor City Corporation, t/a ACC Telecom, immediately if an employment agreement is not reached encompassing the above provisions between the Employer and Susan Hunt by June 18, 1998. The Employer hereby acknowledges that, to the extent applicable, the provisions of this attachment are in addition to the employee benefit disclosure contained in exhibits S and T to the Stock Purchase Agreement. /s/ Barry N. Hunt, Pres. - ---------------------------- Harbor City Corporation, t/a ACC Telecom /s/Barry N. Hunt /s/ Susuan Hunt - ------------------ ---------------- Barry Hunt Susan Hunt - 16 - Attachment B This 18th day of May, 1998, the Employer hereby agrees that it will in good faith inform the Employee six months prior to the end of the term of this agreement, in December 2002, of its intentions regarding renewal or extension of this Agreement. If at that time the Employer intends to extend Employee's employment, both parties hereby agree to engage in good faith negotiations regarding the terms of such employment, commencing no later than ninety (90) days prior to the termination of this Agreement. /s/Barry N. Hunt. Pres. - -------------------------- Harbor City Corporation, t/a ACC Telecom /s/ Barry Hunt - -------------------------- Barry Hunt - 17 - EX-10.17 4 ALLTEL SUPPLY DISTRIBUTOR AGREEMENT EXHIBIT 10.17 ALLTEL SUPPLY ALLTEL 6625 The Corners Parkway Norcross, GA 30092 770-448-5210 ALLTEL Supply DISTRIBUTOR AGREEMENT This Agreement is made as of this 20 day of January 1 1999, by and between ALLTEL Supply, Inc., located at 6625 The Corners Parkway, Suite 400, Norcross, Georgia 30092 hereinafter referred to as "Distributor", and Carnegie International Corp./Assignees, having its principal office at 11350 McCormick Road, Suite 100 1, E.P. III, Hunt Valley, MD 21031 hereinafter referred to as "Manufacturer/Supplier". This agreement shall be automatically renewed for successive one year terms unless either party terminates as provided for herein. In consideration of the mutual agreements and promises contained in this Agreement, Distributor and Manufacturer/Supplier agree as follows: 1. APPOINTMENT OF DISTRIBUTOR: Manufacturer/Supplier hereby appoints and designates the Distributor as an authorized distributor of the Equipment described in the attached Exhibit I "Equipment" and authorizes Distributor to market and sell the Equipment, according to the terms and conditions of this Agreement. Manufacturer/Supplier agrees to sell to Distributor, Equipment for resale in the Territory. The Territory, in which Distributor may act as authorized distributor of the Equipment, shall be the United States of America. 2. THE DISTRIBUTOR AGREES: A. To use its best efforts to promote, market and distribute the Equipment of Manufacturer/Supplier in a manner reflecting credit on the parties to this Agreement. B. To provide customers with currently available catalogs and promotional literature in reasonable quantities as deemed appropriate by Distributor. C. To provide and/or coordinate technical support for and training in the proper use of the Equipment, for those customers requesting same, through seminars and other programs as deemed appropriate by Distributor. D. To adhere to the payment and price terms prescribed in this Agreement. (See Attachment "A") 3. MANUFACTURER/SUPPLIER AGREES: A. To support the Distributor in its effort to promote the sale of the Equipment. B. To provide reasonable technical and/or sales training assistance for the ALLTEL Supply, Inc. Distribution Agreement Page 2 of 8 Distributor's customers at the Distributor's request. C. To support the Distributor by providing it, upon request, with all reasonable quantities of literature, catalogs, advertisements, circulars, etc. at no charge. D. To insure that the prices, terms and conditions of sale to Distributor are no less favorable than those allowed other Distributors of Manufacturer/Supplier's Equipment. E. To support sales through Distributor and any requests for Direct Sales shall be quoted at Manufacturer's suggested list price. (See Attachment "B") F. To extend to Distributor, at Distributor's discretion the following options. Relevant only to the product purchased on the agreed upon initial stocking orders, for any product remaining in inventory six (6) months after delivery to Distributor, the Distributor may elect to either return any product in exchange for an equal value purchase of alternate product, OR return the remaining product for a full cash refund based upon the original purchase price. G. To recognize that Distributor is the Purchasing entity for all ALLTEL Corporation Affiliated companies and will make no attempt to sell directly to them. Further any pricing inquiries shall be referred back to the Distributor. H. That their products will be produced, manufactured and delivered in accordance with all applicable Federal, State, and Local statutes. To hold ALLTEL Supply harmless from all claims or judgments for bodily injury, personal injury, advertising injury or property damage against ALLTEL Supply by third parties, which injury or damage results from the distribution of that product by ALLTEL Supply. To maintain Commercial General Liability Insurance, including Products- Completed Operations, in the minimum amount of $ 1,000,000 per occurrence / aggregate, endorsed to name ALLTEL Supply, Inc. as additional insured. Upon request, Manufacturer/ Supplier agrees to provide a certificate evidencing such coverage. 4. ADDITIONAL TERMS AND CONDITIONS: A. Order Entry. All orders shall be placed using the standard Purchase Order forms of ALLTEL Supply, Inc. B. Pricing/Discounts. Distributor's cost for each item of the Equipment shall be Manufacturer/Supplier's current list price as published from time to time, less a discount, as shown in Exhibit 2. Manufacturer/Supplier shall have the right to change its prices upon sixty (60) days written notice to Distributor, Prices are exclusive of federal, state, and local taxes. In the event of a decrease in price, ALLTEL Supply, Inc. Distribution Agreement Page 3 of 8 ALLTEL Supply, Inc. Distribution Agreement Page 3 of 8 Manufacturer/Supplier will issue a credit to Distributor for the difference between the original and new lower price on products currently in Distributor's stock. In the event of a price increase, orders placed prior to effective date will be invoiced at the old prices. Ten (10) sets of pricing are to be included with notification. Volume discount and/or rebate programs may be included herein or accepted under separate agreement or schedule. C. Advertising/Marketing Allowances. In the event Vendor Advertising/Co-op programs are available, it/they are included herein as Exhibit 3. D. Payment Terms. Payment shall be due, in full, thirty (30) days from date of invoice. If paid within fifteen (15) days, a two percent (2%) early payment discount will apply. Invoice date shall be the date the Equipment is shipped or later. In no event shall the invoice date precede the shipping date. E Stock Balancing. Distributor may request one (1) return authorization in each calendar quarter without a restocking charge, for slow moving inventory. Distributor may return one (1) consolidated shipment from each distribution location, freight prepaid, for stock adjustment. F. Obsolescence. If the Manufacturer/Supplier introduces new equipment, which substantially obsoletes equipment previously purchased by the Distributor, the Manufacturer/Supplier, shall after written request from the Distributor, repurchase such equipment which was so rendered obsolete at the purchase price, provided the Distributor will issue an order to offset at equal value. Manufacturer/Supplier will give sixty day (60) notification. G. Freight. FOB Laurel, Maryland. Equipment will be shipped to Distributor's specified delivery point FOB origin for dropship orders, freight prepaid and added to the invoice provided a copy of the actual freight invoice is included for all shipments other than U.P.S. FOB destination freight prepaid and allowed for stock shipments. Title and risk of loss for Equipment shall pass to Distributor, upon delivery. Manufacturer/Supplier will pack equipment purchased hereunder for transport in accordance with commercial standards and deliver Equipment to a carrier of the mode of transportation selected by Distributor unless otherwise agreed upon by the parties. If any unauthorized freight carrier routing occurs which results in an increase to the net cost of freight to the Distributor, the difference is subject to bill back and will be deducted from the next available invoice. All Bills of Lading shall indicate total piece count. All shipments marked "SAID TO CONTAIN" are subject to refusal and all charges applicable are Manufacturer/Supplier's responsibility. Manufacturer/Supplier will assist in asserting any claim against the invoiced carrier for loss, damage, or destruction of Equipment. Freight classifications must be provided for all products upon acceptance of this Agreement. ALLTEL Supply, Inc. Distribution Agreement Page 4 of 8 H. Packaging/Weights. Standard unit, master carton, pallet and reel quantities are to be identified and provided with corresponding weights prior to the acceptance of this agreement. Unless instructed otherwise by Distributor, Manufacturer/Supplier shall, for orders placed hereunder: (1) ship to the destination designated in the order in accordance with specific shipping instructions; (2) see that all subordinate documents bear Distributor's order number; (3) enclose a packing memorandum with each shipment and when more than one package is shipped, identify the one containing the memorandum and sequentially number all cartons i.e. I of 4, 2 of 4, etc.; (4) mark Distributor's order number on all packages and shipping papers; and (5) render separate invoices for each shipment or order. I. Manufacturing Origin. City, state, and country of origin are to be identified for each product/product group. Certificates of origin (where applicable) are to be included with this agreement and provided as further development occurs. All products are to be identified where CSA/DOC approval has been granted. J. Non-Assignability. The rights and obligations created hereunder cannot be assigned by either party either voluntarily or by operation of the law without the prior written consent of the other party. Any unauthorized transfer or attempt to transfer or assign automatically terminate this Agreement. K. Relationship of Parties. This Agreement does not in any way create the relationship of joint venture, partnership, or principal and agent between Manufacturer/Supplier and ALLTEL Supply, Inc. and neither shall have the power or ability to pledge the credit of the other, nor to bind the other, nor to contract in the name of or create a liability against the other in any way for any purpose. L. Infringement. The Manufacturer will indemnify, defend, and otherwise hold harmless the Distributor, its affiliates, and its customers from all cost, loss, damage, or liability arising from any proceeding or claim brought or asserted against Distributor, its affiliates, or its customers for any claim that the use of any Products in accordance with this agreement infringes a third party's U.S. patent, copyright, trade secret and/or other proprietary right in the United States. The Manufacturer will pay any costs, damages and attorney's fees finally awarded against Distributor, for any such infringement, provided that: o Distributor notifies the Manufacturer immediately upon Distributor's receipt of such claim; o Manufacturer has sole control of the defense of, and all related settlement negotiations for, any such claim, and; o Distributor cooperates fully in the defense-of, and furnishes all related evidence in its control relating to, any such claim. ALLTEL Supply, Inc. Distribution Agreement Page 5 of 8 If claim for infringement occurs and Distributor's use of a product or any part thereof in accordance with this agreement is enjoined as a result thereof, or in the manufacturer's opinion is likely to occur, the Manufacturer shall have the right, at its option and expense, to (1) procure the right for Distributor to continue using such product(s) in accordance with this agreement, (2) replace or modify such product(s) so that it becomes non-infringing, or (3) require the return to the Manufacturer all products to which such claim(s) for infringement relate. In the event of any such return of products, the Manufacturer agrees to grant Distributor credit for such returned products, based on the price paid. Manufacturer shall have no obligation or liability to Distributor for any claim and/or injunction for infringement based upon (1) the combination, operation or use of any product(s) with equipment, data, or software not supplied by Manufacturer, (2) alteration or modification of any product(s) not authorized or performed by Manufacturer, or which are made or authorized by Manufacturer in compliance with Distributor's or end user's designs, specifications or instructions. M. Warranty. Standard policy to be included with current price schedule provided initially and periodically hereafter. Optional policies or programs as available. Multi-Century Clause: Multi-Century Compliance Not withstanding any provision of this agreement to the contrary, the manufacturer/supplier represents and warrants that its own internal systems and each item of hardware, software, and firmware created, modified, upgraded, revised, developed, or delivered hereunder shall accurately process date data (including without limitation calculating, comparing, and sequencing), within, from, into, and between centuries, (including without limitation the twentieth and twenty-first centuries), including leap year calculations. The design of said hardware, software, and firmware to insure compliance with the foregoing warranty shall include, without limitation, date data century recognition, calculations that accommodate same century and multi-century formulae and dated values, date data interface values reflect the century. In the event of breach of this warranty, ALLTEL shall be entitled to repair or replacement of any non-compliant item, at no cost to ALLTEL, within sixty (60) days after notice of breach from ALLTEL to manufacturer/supplier, in addition to the warranties expressed, implied , or arising by operation of law. It is understood that the warranties created by this agreement, whether express, implied, or arising by operation of law that affect ALLTEL's rights under this agreement are cumulative and should be considered in a manner consistent with one another. N. Hazardous Material Compliance. In accordance with "Right to Know" legislation, MSDS documentation is to be provided for all products initially and hereafter with each shipment. ALLTEL Supply, Inc. Distribution Agreement Page 6 of 8 0. Trademarks. Products and licensed materials purchased under this Agreement may bear trade names, trademarks, logos or to symbols of Manufacturer/Supplier. Manufacturer/Supplier hereby grants to Distributor permission to use such symbols in Distributor's marketing and advertising of Manufacturer/Supplier products, provided such use conforms to standards and guidelines relating thereto which Manufacturer/Supplier may furnish from time to time. Use of trademarks and symbols by Distributor may be subject to pre- publication or pre-use review and approval by Manufacturer/Supplier. If, in Manufacturer/Supplier judgment, any use by Distributor is deemed detrimental to Manufacturer/Supplier or is deemed undesirable, Manufacturer/Supplier may withdraw permission without liability as result thereof. P. Force Majeure. Neither party shall be responsible for delays or failures in performance resulting from acts of God, labor strikes, acts of war or civil disruption, government regulations imposed after the fact, public utility failures, or natural disasters. Q Termination. The Distributorship hereby created may be terminated only; (a) by an agreement in writing duly signed by the parties hereto; (b) by either party at will, with or without cause, upon not less than ninety (90) days notice in writing given by certified mail, return receipt requested, to the other party; (c) by either party if the other party either ceases to function as a going concern or to conduct its operations in the normal course of business, a receiver is appointed or applied for by the party, a petition under the Federal Bankruptcy Reform Act if filed by or against either party, or either party make an assignment for the benefits of creditors. Upon termination, Manufacturer/Supplier shall purchase from Distributor and Distributor shall sell to Manufacturer/Supplier any and all products remaining in Distributor's inventory at the price paid originally by Distributor. Material to be returned to Manufacturer/Supplier for full cash refund, freight paid by the Distributor. R. Governing Law. This Agreement shall be governed by the laws of the State of Georgia. ALLTEL Supply, Inc. Distribution Agreement Page 7 of 8 S. Notices. All notices required or contemplated under this Agreement shall be by first class mail, except as stated in Paragraph 4 (1) hereof, addressed to the parties as follows: TO MANUFACTURER/SUPPLIER Carnegie International Corp. / Assignees 11350 McCormick Rd.,Suite 1001 EP III Hunt Valley, MD, 21031 TO DISTRIBUTOR ALLTEL Supply, Inc. 6625 The Comers Parkway Suite 400 Norcross, Georgia 30092 ALLTEL Supply, Inc. Distribution Agreement Page 8 of 8 5. This Agreement shall be binding upon and ensure to the benefit of the parties hereof, and their successors and assigns. MANUFACTURER/SUPPLIER /s/ Carnegie International Corp. -------------------------------- (Manufacturer/Supplier) By: /s/ Lowell Farkas -------------------------- (Authorized Signature) Name: Lowell Farkas Title: President Date: 12/23/98 Attest: /s/ David Pearl - -------------------- (Signature) Name: David Pearl Title: Secretary ALLTEL Supply, Inc. By: /s/ H.S. Fisher, Jr. -------------------------- (Authorized Signature) Name: H.S. Fisher Jr. Title: Senior Vice President, Operations Date: January 20, 1999 Attest: /s/ C.F. Addlesberger - ---------------------- (Signature) Name: C.F. Addlesberger Title:Executive Secretary c76365.634 EX-10.18 5 STOCK PURCHASE AGREEMENT EXHIBIT 10.18 VOICE QUEST, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (hereinafter referred to as the "Agreement") is made and entered into this 20th day of November, 1998 by and between Carnegie International Corporation, a Corporation of the State of Colorado (hereinafter referred to as "Carnegie"or "Purchaser") Mark S. Ortner, Individually (hereinafter referred to as "Ortner"), Jennifer Meckes, Individually (hereinafter referred to as "Meckes"), Trevor Kitson, Individually (hereinafter referred to as "Kitson"), Simon Oliver (hereinafter referred to as "Oliver") and Voice Quest, Inc. (hereinafter referred to as the "Company"), a Corporation of the State of Florida. Ortner, Meckes, Kitson and Oliver shall hereinafter collectively be referred to as "Seller". EXPLANATORY STATEMENT Seller owns One Hundred (100) shares of Common Stock of the Company, which represents One Hundred Percent (100%) of the issued and outstanding Company Stock, (hereinafter referred to as the "Shares"). The Company owns One Hundred percent (100%) of the assets used in the operation of the Company including but not limited to equipment, furniture, fixtures, inventory, contract rights, leasehold, improvements, software rights, software development rights, lease rights for the Premises of the Company located at 6360 Tamiami Trail, Sarasota, Florida 34231-3935 (hereinafter referred to as the "Premises"), and any and all other assets related to the business of the Company (hereinafter referred to as the "Assets"). Carnegie shall purchase the Shares from Seller, together with such relative rights, preferences and limitations as appertain to said Shares, as are hereinafter provided by this Agreement. Seller shall issue, sell, transfer and deliver said Shares to Carnegie upon the terms and conditions provided by this Agreement. NOW, THEREFORE, in consideration of the Explanatory Statement, which shall constitute a substantive and binding part of this Agreement, and the mutual covenants, promises, agreements, representations and warranties hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged by the Parties hereto, Purchaser, Seller and the Company do hereby covenant, promise, agree, represent and warrant as follows: 1. Closing: Purchase of Shares: 1.1. The closing (hereinafter referred to as the "Closing") of the purchase of the Shares provided by this Agreement shall take place simultaneously with the execution of this Agreement, or on such other day as Purchaser and Seller shall agree in writing, at the law offices of Gershberg and Pearl, LLC through an escrow arrangement agreeable to the parties unless the place and means of closing is changed pursuant to a writing signed by all parties hereto (hereinafter, such day shall be referred to as the "Closing Date", and such law offices shall be referred to as the "Closing Place.") 1 1.2. On the Closing Date and at the Closing Place, Seller shall issue, sell, transfer and deliver to Carnegie the Shares, which Shares shall in each instance be represented by one or more stock certificates of the Company duly endorsed to Carnegie or accompanied by stock powers duly executed in blank for transfer on the books of the Company, which shall convey ownership rights, title and interest to the shares and the Assets of the Company effective as of the Closing Date, November 20, 1998, including all Assets on the List of Assets (a copy of which is attached hereto as Exhibit A2). 1.2.1. Purchase Price Adjustment: The Parties hereby agree that for purposes of calculating purchase price adjustments, if any, said adjustments (See Exhibit A3) shall be made if the Company is not debt free as of the Closing Date except for the obligations assumed by Purchaser under Section 1.3.2. of this Agreement. 1.3. Purchase Price: The Purchase Price of the Shares shall be as follows: 1.3.1. Purchaser shall issue to Ortner and Meckes collectively Twenty-one Thousand Six Hundred (21,600) shares of Preferred Series E restricted stock of Carnegie International Corporation which shall be convertible to Rule 144 Restricted Legend Common Stock of Carnegie (hereinafter "Rule 144 Stock") twenty-four (24) months (the "Period") from the Closing Date, as follows: 1.3.1.1. Ortner and Meckes shall receive collectively in the conversion the greater of: (i) Rule 144 Stock with a value of Two Hundred Seventy Thousand Dollars ($270,000.00) based upon the conversion value set forth in Section 1.3.1.2. below; or (ii) Two Hundred Sixteen Thousand (216,000) shares of Rule 144 Stock, (which shall be considered higher in Values than the respective values to each individual under 1.3.1.1.(i) above if the Value of the Common Stock of Carnegie is above $1.25 per share as computed on the business day immediately preceding the expiration of the Period. 1.3.1.2. The Value of each share of Rule 144 Stock for conversion calculation purposes shall be based on the average Market closing price of Carnegie's Common Stock on the five (5) business days immediately preceding the conversion date. For the purposes of this section " Market" shall include the price quoted for Carnegie's Common Stock by the NASD Over the Counter Bulletin Board Service (OTCBB) or the closing trading price on the exchange on which Carnegie Common Stock is traded if said Stock is no longer quoted on OTCBB. 1.3.2. One Hundred Two Thousand Eighty-four Dollars and Twenty-five Cents ($102,084.25) to be paid in quarterly installments over a period of three (3) years in the amount of Eight Thousand Five Hundred Seven Dollars and Two Cents ($8,507.02) per quarter, with the first payment to be paid on January 1, 1999. The amount of this portion of monetary consideration is based on any funds infused into the Company in the form of loans and/or equity 2 contributions in excess of equity contributions of Fifty Thousand Dollars ($50,000.00) for a total of One Hundred Two Thousand Eighty-four Dollars and Twenty-five Cents ($102,084.25) and is subject to audit by Carnegie or its representatives within six (6) months from the Closing Date. Carnegie shall assume the liabilities of the Company as set forth in Exhibit B as of the closing date less any amounts due and payable as reflected in this paragraph. The liabilities assumed shall be substantially the same as those reflected on the tax return of the Company provided to Carnegie less amounts due and payable as reflected in this paragraph. This monetary consideration shall be allocated between Kitson and Oliver. 1.3.3. On or before the Closing Date Kitson and Oliver shall each be issued One Hundred Fifteen Thousand (115,000) Rule 144 Legend Common Stock of Carnegie. 1.3.4. The purchase of the Shares shall vest in Carnegie on the Closing Date, November 20, 1998, subject to the provisions of this Agreement, complete possession, ownership and control of the Shares and the management and operations of the Company and ownership of the Assets, including but not limited to the leases, equipment, fixtures, inventory, cash, accounts receivable, contract rights with equipment suppliers and others, goodwill, trade secrets, software rights, software development rights, leasehold improvements and assets relating thereto; provided, however, that Ortner shall continue to manage the daily operations of the Company, including decisions on hiring and terminating personnel. Seller and the Company shall cooperate in and facilitate the immediate transfer of possession, ownership and control of the Shares and Assets including all assets and operations relating to the Premises of the Company. 1.3.5. There shall be no debt of the Company as of and including the Closing Date, except for any amount assumed by Purchaser under Section 1.3.2. above. Purchaser shall not be liable for any tax liability or other liabilities of any kind whatsoever relating to or incurred by the Company or its owners up to and including the Closing Date, and Seller shall indemnify Purchaser and hold Purchaser harmless from any of said tax or other liabilities. 2. Representations and Warranties of the Seller and the Company: Seller and the Company represent and warrant to Purchaser as follows: 2.1. Sellers are, and as of the Closing Time will be the valid and legal owners of the Shares and related Assets being transferred hereby and own the Shares free and clear of any and all liens and encumbrances (See Certificate of No Debts - Exhibit B). The Seller through the ownership of the Shares owns all of the Assets of and relating to the Company located at the Premises, including but not limited to the leases, equipment, inventory, furniture, fixtures and the like and assets relating thereto. Sellers represent and warrant that they own the Shares that represent one hundred 3 percent (100%) of the stock of the Company and have fairly and accurately in all material respects reflected and allocated all assets, liabilities, income and expenses related to both the management and results of operations of the Company on the books, records and tax returns of the Company, which have been presented to Carnegie for the periods ended December 31, 1997, December 31, 1996 and December 31, 1995, respectively. 2.2. Sellers have the requisite and proper authority to enter into the within agreement and to transfer, assign and sell the Shares in accordance with the terms hereof. 2.3. The Company is, and at the Closing Time will be, a corporation duly organized, validly existing and in good standing under the laws of Florida. The Company has and at the Closing Date will have, the power and authority to own, lease and operate its properties and to conduct its business as such business is now being conducted by the Company. A complete and correct copy of the articles of incorporation, as amended, and the by-laws, as amended, of the Company, are attached to this Agreement collectively as Exhibit C and are incorporated by reference herein, and no changes therein will be made subsequent to the date hereof and prior to the Closing Time. 2.4. The Company has validly authorized, issued, and has outstanding, and on the Closing Date will have authorized, issued and outstanding, fully paid and non-assessable, One Hundred (100) shares of its common stock. Upon issuance, sale, transfer and delivery of the Shares to Purchaser, the shares of the Company Common Stock issued and outstanding will constitute One Hundred Percent (100%) of the issued and outstanding capital stock of the Company. Except as hereinafter set forth in this Section 2.4, the Company does not have outstanding, and on the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or to sell assets or shares of common stock or any such options, rights, warrants, convertible securities or obligations of the Company. The Company has not issued, and hereby warrants and represents that it shall not issue any Stock Options (hereinafter referred to as the "Options"), which grant to the holders thereof the right to purchase in the aggregate any shares of the Company Common Stock. 2.5. The Shares are fully paid and non-assessable, free and clear of all mortgages, pledges, liens, security interests, conditional sale agreements, charges, encumbrances and restrictions of every nature, except for those created pursuant to the terms of this Agreement. 2.6. Except as set forth on Exhibit D, Company has properly and accurately filed all tax returns, as appropriate, country wide, state and local, and all related information required to be filed prior to the date hereof, and at the Closing Time shall have filed all tax returns, as appropriate, and all related information required to be filed prior to the Closing Time. To the best knowledge of Seller and the Company, the amounts reflected in the Balance Sheet for taxes are sufficient for the payment of all accrued and unpaid federal, state and local taxes of all types, including interest and penalties thereon, of the Company for or on account of which Company is 4 or may become liable in any manner whatsoever for periods prior to the Closing Date. 2.7. Since June 9, 1995 2.7.1. The business of the Company has been operated, and up to the Closing Date will be operated, only in the ordinary course. 2.7.2. Except as set forth in Exhibit D1, there has been, and prior to the Closing Date there will be, no material adverse change, individually or in the aggregate, in Company's condition (financial or otherwise) or in Company's assets, liabilities or business. There also has been no material adverse change, individually or in the aggregate, in the Company's condition (financial or otherwise) or in the Company or its Assets, liabilities or business from the status that was represented to Purchaser as existing at December 31, 1997 compared to the status at the Closing Date. 2.7.3. There has been, and prior to the Closing Date there will be, no damage, destruction or loss to the Company or any of its contracts, assets, inventory, accounts, or other properties, or other events or conditions of any character, or any pending or threatened developments, individually or in the aggregate, which would materially and adversely affect the Company's condition (financial or otherwise) or Company's assets, liabilities or business. 2.8. Except as set forth in Exhibit D1 attached hereto and incorporated by reference herein, there is, and on the Closing Date there will be, no material action, suit, proceeding or investigation pending or, to the knowledge of the Company and/or the Sellers, threatened, against or affecting the Company or any of its assets. Company is not, and on the Closing Date will not be, in default under or with respect to any judgment, order, writ, injunction or decree of any court or of any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality. To Seller's and Company's knowledge, Company has, and on the Closing Date will have, complied in all material respects with all laws, rules, regulations and orders applicable to it and to its business; has, and on the Closing Date will have, performed in all material respects all of its material obligations and duties to be performed by it to the extent required in accordance with their respective terms; and is not, and on the Closing Date will not be, in default under or in material breach of any material contract, agreement, commitment or other instrument to which it is subject or a party or under which it is bound. 2.9. Seller and the Company have not, and on the Closing Date will not have, incurred any liability, obligation or duty for any finder's, agent's or broker's fee or commission in connection with this Agreement or the transactions contemplated hereby. 2.10. The Board of Directors of the Company, pursuant to the power and authority legally vested in it, has duly authorized the execution, sealing and delivery of this Agreement by the Seller and the Company, Common Stock of the Company, and the transactions 5 hereby contemplated, and no action, confirmation or ratification by any stockholder of the Company, Seller, or by any other person, entity or governmental authority is required in connection therewith. The Seller and the Company have the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by them pursuant to the provisions hereof. The Seller and the Company have taken all actions required by law, the Company's certificate of creation or incorporation, as amended, its bylaws, as amended, or otherwise to authorize the execution, sealing and delivery of this Agreement and the issuance, sale, transfer and delivery of the Shares and related Assets pursuant to the provisions hereof. This Agreement is valid and binding upon the Seller and the Company in accordance with its terms. Neither the execution, sealing and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or breach of the Articles of Incorporation, as amended, or the by-laws, as amended, of the Company, or any agreement, stipulation, order, writ, injunction, decree, law, rule or regulation applicable to the Company or the Seller. 2.11. Attached hereto as Exhibit E and incorporated by reference herein is a list of all officers and directors of the Company and all beneficial owners of the issued and outstanding Company Common Stock, and the number of shares of the Company Common Stock owned of record and beneficially by each such officer, director and beneficial owner. To the best knowledge of Company, the information set forth on Exhibit E is true and correct. 2.12. To Seller's knowledge neither this Agreement nor any written information, statement, list or certificate furnished or to be furnished to Purchaser pursuant to this Agreement or in connection with this Agreement or any of the transactions contemplated by this Agreement contains or, on the Closing Date will contain any untrue statement of a material fact or omits or, on the Closing Date will omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances in which they are made, not misleading. 2.13. Seller's and the Company's Release: Seller and the Company hereby warrant, represent and acknowledge that they shall execute at the time of closing a release of all claims which reflects Seller and the Company's complete release and discharge of any claims it may have against the Company, both individually and as an officer or Director of the Company, except for those considerations due as set forth in this Agreement. Such release shall be attached hereto and incorporated herein by reference as Exhibit F. 2.14. [Intentionally left blank] 2.15. Seller has and will continue until the Closing Date to accurately maintain the books of account of the Company, or any other entity operating at the Premises or as successor to the Company. Seller shall indemnify and hold Purchaser harmless from any and all losses due to Seller's intentional misconduct or gross negligence during the period in which Seller is managing the financial operations of the Company. 6 2.16. No Subsidiaries: The Seller and the Company hereby acknowledge that the Company does not have any subsidiaries and does not, directly or indirectly, own any interest in or control any corporation, partnership, joint venture or other business entity. 2.17. Licenses; Permits; Related Approvals: The Company possesses all licenses, permits, consents, approvals, authorizations, qualifications and orders (hereinafter collectively referred to as the "Permits") of all governments and governmental agencies lawfully required for the Company to conduct its business in all jurisdictions where business is conducted. All of the Permits are in full force and effect and no suspension, modification, or cancellation of any business or permits is pending or threatened. A list of the business/permits is attached hereto as Exhibit G and incorporated herein by reference. 2.18. No Real Property: Except as set forth on Exhibit H attached hereto and incorporated herein by reference, the Company does not own or have any interest in any real estate. 2.19. Condition of Personal Property: Attached hereto as Exhibit I and incorporated by reference herein is a true, correct and complete list of all personal property, owned by the Company or used by the Company in the conduct of its business, including, but not limited to, all inventory, equipment, machinery and fixtures, (collectively, the "Personal Property"), indicating whether it is owned or the manner in which the Personal Property is otherwise utilized by the Company. The Company has sole and exclusive, good and merchantable title to all of the Personal Property owned by it, free and clear of all pledges, claims, liens, restrictions, security interests, charges and other encumbrances, except as provided to the contrary in Exhibit I. 2.20. Certain Contracts. Attached hereto as Exhibit J and incorporated by reference herein is a true, correct and complete list and copy of all contracts under which the Company is provided or is providing services (collectively, the "Service Contracts"). To Seller's knowledge, each of the Service Contracts is in full force and effect, is valid and binding upon each of the parties thereto and is fully enforceable by the Company against the other party thereto in accordance with its terms. Neither Seller nor the Company has any notice of, or any reason to believe that there is or has been any actual, threatened or contemplated, termination or modification of any of the Service Contracts. To Seller's knowledge, no party to any of the Service Contracts is in breach of or in default thereunder, nor has any event occurred which, with the lapse of time, notice or election, may become a breach or default by the Company or any other party to or under any of the Service Contracts. All payments required to be made by Seller pursuant to the Service Contracts have been paid in full through the Closing Date. See Exhibit J. 2.21. Contracts, Licenses, and Other Agreements. Attached hereto and incorporated by reference herein are the following: 2.21.1. Exhibit K, a true, correct and complete list and copy (or where 7 they are oral, true, correct and complete written summaries) of all leases of the Company relating to real property. 2.21.2. Exhibit L, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all leases of the Company relating to personal property. 2.21.3. Exhibit M, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all licenses, franchises, assignments or other agreements of the Company and/or Seller relating to trademarks, trade names, patents, copyrights and service marks (or applications therefor), unpatented designs or styles, know-how and technical assistance. 2.21.4. Exhibit O, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all employment, compensation and consulting agreements, contracts, understandings or arrangements of the Company with any officer, director, employee, broker, agent, consultant, salesman or other Person, including the names, starting dates of employment, term of employment, functions and aggregate compensation (including salary, bonuses, commissions and other forms of compensation). 2.21.5. Exhibit P, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements of the Company for the purchase, sale or lease of goods, materials, supplies, machinery, equipment, capital assets and services having a cost in excess of Two Thousand Five Hundred Dollars ($2,500.00) in any one instance or in excess of Ten Thousand Dollars ($10,000.00) in the aggregate. 2.21.6. Exhibit Q, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements and arrangements of the Company for the borrowing or lending of money, on a secured or unsecured basis, or guaranteeing, indemnifying or otherwise becoming liable for the obligations or liabilities of any other Person or entity. 2.21.7. Exhibit R, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements and understandings of the Company other than those listed in Exhibits O through Q which are material in nature, involve the payment or receipt, in any twelve (12) month period, of more than Five Thousand Dollars ($5,000.00) or have a term of more than the twelve (12) months. To Seller's knowledge, each of the agreements, arrangements and understandings listed in Exhibits K through R (hereinafter collectively referred to as the "Commitments") is in full force and effect, is valid and binding upon each of the parties thereto and is fully enforceable by the Company against the other party thereto in accordance with its terms. Neither Seller nor the Company has any notice of, or any reason to believe, that there is or has been any actual, 8 threatened or contemplated termination or modification of any of the Commitments. To Seller's knowledge, no party to any of the Commitments is in breach of or in default thereunder, nor has any event occurred which, with the lapse of time, notice or election, may become a breach or default by the Company or any other party to or under any of the Commitments. The Company has the right to quiet enjoyment of all real properties leased to it for the full term of the lease thereof. All payments required to be made by the Company pursuant to any of the Commitments have been paid in full through the Closing Date. See Exhibits K-R. 2.22. Insurance: Attached hereto as Exhibit S and incorporated by reference herein is a list of all insurance policies of the Company, setting forth with respect to each policy the name of the insurer, a description of the policy, the dollar amount of coverages, the amount of the premium, the date through which all premiums have been paid, and the expiration date. Each insurance policy relating to the insurance referred to in Exhibit S is in full force and effect, is valid and enforceable, and the Company is not in breach of or in default under any such policy. Neither Seller nor the Company have any notice of or any reason to believe that there is or has been any actual, threatened, or contemplated termination or cancellation of any insurance policy relating to the insurance referred to in Exhibit S. 2.23. Pension Plans: Seller and the Company hereby acknowledge that the Company does not maintain any pension, profit sharing, ESOP, stock option, incentive bonus, hospitalization, major medical, dental, optical, prescription, drug, health insurance, life insurance, or other benefit plan for the benefit of any employee as the term "Employee Benefit Plan" is defined in ERISA, Section 3, except as set forth on Exhibit T. 2.24. Employee Relations and Employment Agreements: 2.24.1. None of the Company's employees is represented by a labor organization, and no petition for representation has ever been filed with the National Labor Relations Board. Seller and the Company are not aware of any union organizational activity with respect to the Company, and have no reason to believe that any such activity is being contemplated. 2.24.2. To Seller's knowledge, the Company is not in violation in any material respect of any applicable equal employment opportunity laws, wage and hour laws, occupational safety and health laws, federal labor laws or any other laws of any government or governmental agency relating to employment. 2.24.3. The Company has not entered into written employment agreements and all employees can be terminated at will except as provided in Exhibit T1. The Company has no contractual obligation or special termination or severance arrangements with respect to any employee. The Company and Seller further represent and warrant that there have been and will be no changes in employment or corporation salary agreements between the Company and its employees, officers, directors or contractors from January 1, 1998 up till and 9 including the date of Closing. 2.24.4. The Company has paid all wages due including all required taxes, insurance and withholding thereon, and will continue to do so through the Closing Date. 2.24.5. Attached hereto as Exhibit U and incorporated herein by reference, is a list of all accrued vacation, sick leave, and accrued bonuses, if any, as of the Cut-Off Date. 2.24.6. Seller and the Company shall supply to Purchaser a list of all employees of the Company, including the date of hire of each, position, present salary, amount of bonus paid in the last year, and announced termination date, if any, as Exhibit V. 2.24.7. Patents; Trademarks; Service Marks; Related Contracts. Attached hereto as Exhibit W and incorporated by reference herein, is a true, correct and complete list of all patents, trademarks, trade names, or trademark or trade name registrations, service marks, and copyrights or copyright registrations (the "Proprietary Rights") related to the Company. To Seller's knowledge, all of the Proprietary Rights are valid, enforceable, in full force and effect and free and clear of any and all security interests, liens, pledges and encumbrances of any nature or kind. Neither Seller or the Company has licensed, leased or otherwise assigned, transferred or granted any right to use any of its Proprietary Rights to any other Person or entity, and to Seller's knowledge, no Person or entity is infringing upon the Proprietary Rights. The Company has not infringed and are not infringing upon any patent, trademark, trade name, or trademark or trade name registration, service mark, copyright, or copyright registration of any other Person or entity. Seller and the Company have filed all necessary and appropriate documents and paid all necessary fees to maintain the integrity of the Proprietary Rights until the year see Exhibit W. 2.25. Seller agrees that after Closing Seller shall execute any and all documents which may be reasonably necessary to carry out the terms, conditions and intention of this agreement and to facilitate the transfer of the property, to ratify unto Purchaser the Shares and the Assets and to facilitate the operations of the Company by Purchaser. 2.26. Seller and the Company shall transfer to Purchaser or Purchaser's designee all title, rights and interests in any deposits (as reflected on Exhibit X) owned by Seller or the Company related to the Premises and/or the Company's business. 2.27. There are no bulk transfer laws in Florida applicable to this transaction (See Opinion Letter of Counsel, Exhibit B1). 2.28. To the best knowledge of such Seller and the Company, the issuance, sale, transfer and delivery of the Shares and the Assets pursuant to the provisions of this Agreement will not constitute a violation or breach of any agreement, stipulation, order, writ, injunction or decree applicable to the Seller or the Company. 10 3. Representations, Warranties and Covenants of Purchaser. Purchaser represents, warrants and covenants to Seller as follows: 3.1. Purchaser is, and on the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado. 3.2. The Board of Directors of Purchaser, pursuant to the power and authority legally vested in it, has duly authorized the execution, sealing and delivery of this Agreement by Purchaser and the transactions hereby contemplated, and no action, confirmation or ratification by the stockholders of Purchaser or by any other person, entity or governmental authority is required in connection therewith. Purchaser has the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by it pursuant to the provision, hereof. Purchaser has taken all actions required by law, its articles of incorporation, its by-laws or otherwise to authorize the execution, sealing and delivery of this Agreement. This Agreement is valid and binding upon Purchaser in accordance with its terms. Neither the execution, sealing and delivery of this Agreement nor the consummation of said transactions will constitute any violation or breach of the articles of incorporation or the by-laws of Purchaser, or any agreement, order, writ, injunction, decree, law, rule or regulation applicable to Purchaser. 4. Further Agreements: 4.1. Seller's Agreement Not to Compete: The Parties hereby acknowledge that Seller shall not establish a business telephone sales, installation and/or services business in the same market as the Company operates at the time of acquisition of the shares, directly or indirectly, for a period of three (3) years from the date of this Agreement. 5. Conditions Precedent to Obligation and Duty of Purchaser to Acquire the Property: 5.1 The obligation and duty of Purchaser to purchase the Property from Seller as contemplated by this Agreement are subject to the fulfillment and satisfaction on the Closing Date of each of the following conditions precedent, any or all of which may be waived in writing in whole or in part at or prior to the Closing Date by Purchaser: 5.1.1. All representations and warranties of the Seller and the Company contained in this Agreement and expressly made at the Closing Date shall be true and correct at the Closing Date, in all material respects, and all of the other representations and warranties of Seller and the Company contained in this Agreement shall be true and correct at the Closing Date as though each of such representations and warranties was made at such time. 5.1.2. Seller and the Company shall have performed and complied in all material respects with all covenants and agreements on their part required by this Agreement in 11 material respects to be performed or complied with prior to or at the Closing Date. 5.1.3. Purchaser shall have received certificates of the officers and directors of Company, whose signatures, such as President, shall be attested by the Secretary of Company or an independent third party if Signatory and Secretary are the same person, dated as of the Closing Date, in form reasonably satisfactory to Purchaser, certifying to the fulfillment and satisfaction of each of the same conditions precedent specified in Sections 5.1.1. and 5.1.2. of this Agreement for Seller and the Company. 5.1.4. Purchaser shall receive the written opinions of the legal counsel (See Exhibit B1) for Seller and the Company, dated the Closing Date, stating that: (a) The Company is a corporation duly organized, validly existing and in good standing. The Company has the power and authority to own, lease and operate its properties and to conduct its business as such business is now being conducted by them. (b) Except as set forth on Exhibit D1 to this Agreement, such counsel does not know of any material action, suit, proceeding or investigation pending or threatened against the Company or affecting the Company or any of its assets. (c) The Board of Directors of Company, pursuant to the powers and authority legally vested in it, has duly authorized the execution, sealing and delivery of this Agreement by Company, the transactions hereby contemplated, and no action, confirmation or ratification by the stockholders or Personal Representatives or Executors of any deceased stockholders of Company or by any other person, entity or governmental authority is required in connection therewith which has not been obtained. Seller and the Company have the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by or pursuant to the provisions hereof. Company has taken all actions required by law, its certificate of incorporation, as amended, its by-laws, as amended, or otherwise to authorize the execution, sealing and delivery of this Agreement and the issuance, sale, transfer and delivery of the Shares pursuant to the provisions hereof. This Agreement is valid and binding upon Seller and the Company. (d) There are no Bulk Sales laws in Maryland applicable to this transaction. 5.2. The obligation and duty of Seller to sell the Shares and related Assets to Purchaser as contemplated by this Agreement are subject to fulfillment and satisfaction on the Closing Date of each of the following conditions precedent, any or all of which may be waived in whole or in part prior to the Closing Date by Seller: 5.2.1. All representations and warranties of the Purchaser contained in this Agreement shall be true and correct in all material respects at the Closing Date as though each of 12 such representations and warranties was made at such time. 5.2.2. Purchaser shall have performed and complied in all material respects with all covenants and agreements on their part required by this Agreement to be performed or complied with prior to or at the Closing Date. 5.2.3. Seller shall have received certificates of the officers and directors of Purchaser, whose signatures, such as President, shall be attested by the Secretary of Purchaser or an independent third party if Signatory and Secretary are the same person, dated as of the Closing Date, in form reasonably satisfactory to Seller, certifying to the fulfillment and satisfaction of each of the conditions precedent specified in Section 5.2.1. and 5.2.2. of this Agreement. 5.2.4. Seller shall have received the written opinion of legal counsel for Purchaser, dated the Closing Date, containing the opinions with respect to Purchaser which Seller's counsel is required to provide with respect to the Companies under Section 5.1.4(a) and (d) and that Purchaser has reserved for issuance the common stock reasonably for the transaction contemplated herein. 6. Indemnification: 6.1 Sellers individually and collectively and the Company shall each indemnify and hold harmless Purchaser from and against any and all actions, suits, proceedings, demands, causes of action, damages, liabilities, claims, losses, costs and expenses (including reasonable attorneys' and experts' fees) paid or incurred by Purchaser by reason of or arising out of or in connection with: 6.1.1 The breach by Sellers (individually and jointly) or the Company of any representation or warranty contained in this Agreement or in any certificate delivered to Purchaser pursuant to the provisions of this Agreement. 6.1.2 The failure of Sellers individually or collectively and or the Company to perform or comply with any covenant or agreement required by this Agreement to be performed or complied with by each such person or entity. 6.1.3 Debts and or liabilities incurred, accruing or arising up to and including the Cut-Off Date attributable to Seller or the Company including, but not limited to, contract liabilities, tort liability and tax liability, other than those assumed by Purchaser pursuant to the terms of this Agreement. Purchaser shall have the right to setoff against any and all amounts owed by Purchaser to Seller for any amounts owed or incurred by Purchaser in connection with any and all liability imposed by this Section 6. Notwithstanding anything to the contrary contained in this agreement, this provision 6.1.3 shall be fully enforceable with no time limitation. 6.2. Carnegie shall indemnify and hold Seller and the Company harmless from 13 and against any and all actions, suits, proceedings, demands, causes of actions, damages, liabilities, claims, losses, costs and expenses (including reasonable attorneys' and experts' fees) paid or incurred by any of them by reason of or arising out of in connection with: 6.2.1. The breach by Purchaser of any of the representations or warranties contained in this Agreement or in any certificate delivered to Seller pursuant to provisions of this Agreement; 6.2.2. The failure by Purchaser to perform or comply with any covenant or agreement required by this Agreement to be performed or complied by Purchaser. 6.2.3. Debts and liabilities incurred or arising after the Cut-Off Date attributable to Purchaser or the Company, except Seller shall be responsible for such debts and liabilities incurred or arising after the Cut-Off Date due to the negligence of Seller and or the Company up to and including the Cut-Off Date. 6.3. With respect to any claim, action, suit, liability, loss, damage or expense asserted, threatened, instituted, paid or incurred or discovered by or against an indemnified party, within the applicable Indemnification Period, if any, the obligation to indemnify shall continue through the final disposition or settlement of any such matter and the full satisfaction of the indemnification obligation. 6.4. [Intentionally Left Blank] 6.5. If a party (an "Indemnified Party"), receives notice or has knowledge of any matter which it believes the other party hereto (the "Indemnitor") is obligated to provide indemnification pursuant to this Section 6 (a "Claim"), the Indemnified Party will within a reasonable period of time (A) after receipt of such notice or otherwise first becoming knowledgeable of a Claim, give the Indemnitor written notice of the assertion of such Claim; and (B) furnish the Indemnitor with all relevant information and copies of all pertinent documents relating to the Claim in the Indemnified Party's possession or control or within a reasonable period of time after the Indemnified Party's receipt thereof, as the case may be. 6.6. The failure of the Indemnified Party to give notice of the Claim promptly will not affect the Indemnified Party's rights to indemnification hereunder, except if, and only to the extent that, the Indemnitor's defense of such Claim is actually prejudiced by reason of such failure to give timely notice. 6.7. The Indemnitor will undertake and continuously defend such Claim with counsel of reputable standing, and the Indemnified Party may participate in such defense by counsel of its own choosing at its own expense. 6.8. If the Indemnified Party is required to pay any amount with respect to said Claim, such amount shall be promptly paid by the Indemnitor to the Indemnified Party upon the Indemnified Party giving the Indemnitor a written request therefor. 14 6.9. If the Indemnitor does not timely undertake or continuously defend any such Claim, then the Indemnified Party will have the right to employ separate counsel in any such action and to participate in the defense thereof, and the reasonable fees and expenses of such counsel will be the Indemnitor's obligation and direct responsibility. Furthermore, the Indemnified Party will then have the right to defend or dispose of the Claim in such manner as it deems advisable for Indemnitor's account and risk and for the purpose hereof as if such defense or disposition had been made or undertaken by the Indemnitor. 6.10. The Indemnitor agrees, unless it timely assumes the defense of any Claim hereunder, to pay the Indemnified Party's costs of defending any Claim, including, without limitation, reasonable attorney's and paralegal fees, accountants' fees, witness fees and court costs, promptly after written demand therefor is given by the Indemnified Party to the Indemnitor. 6.11. If the Indemnitor timely undertakes the defense of any Claim, then so long as the Indemnitor, in good faith, is continuously contesting or defending the Claim: (A) the Indemnified Party shall not admit any liability with respect thereto, or settle, compromise, pay or discharge the same without the prior written consent of the Indemnitor; (B) the Indemnified Party shall cooperate with the Indemnitor in the contest or defense of the Claim; (C) the Indemnified Party shall accept any settlement of the Claim, provided such settlement is effected by monetary payment only and adequate arrangements for such payment, to the Indemnified Party's reasonable satisfaction, are made by the Indemnitor and the Indemnified Party is provided with a full release of all Claims made; and (D) the Indemnitor will provide the Indemnified Party with all information regarding the contest or defense of the Claim and allow counsel for the Indemnified Party to monitor, at the Indemnified Party's sole expense, all proceedings in connection with the Claim. 6.12. Neither the Indemnitor nor the Indemnified Party may admit any liability with respect to any Claim or settle, compromise, pay or discharge the same without the prior written consent of the other party if such settlement, compromise, payment or discharge could in any way expose such other party to the payment of funds which are not subject to a claim of reimbursement or indemnification from the settling, compromising or paying party. 6.13. The Indemnified Party shall use reasonable efforts to preserve the status quo, not incur any penalties and not prejudice the Indemnitor's defense of any Claim prior to the Indemnitor undertaking the defense of such Claim. 6.14. Anything in this Section 6 to the contrary notwithstanding, if there is a reasonable probability that an indemnifiable Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party, upon giving the Indemnitor reasonably prompt written notice thereof, shall have the right to defend, compromise or settle such indemnifiable Claim; provided, however, that no compromises or settlement which would result in the payment of money shall be made, executed or delivered without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld. 15 6.15. Any payment required by an Indemnitor pursuant to this Section 6 shall be reduced by any insurance proceeds actually recovered (excluding any deductible or self-insured retention) by the Indemnified Party as a result thereof from a policy of insurance owned by any person. Any tax benefit received by the Indemnified Party by reason of any action of the Indemnitor shall reduce any payment required to be made by the Indemnitor to the Indemnified Party arising therefrom. 7. Miscellaneous: 7.1. All of the covenants, promises, agreements, representations and warranties set forth in this Agreement shall survive all closings under this Agreement for the periods herein provided, and shall be binding and enforceable notwithstanding any knowledge (other than as specifically herein disclosed) on the part of a party hereto with respect to the matter involved. 7.2. At any reasonable time upon prior reasonable notice by Purchaser (whether at or after the Closing Date), Seller and the Company shall execute, acknowledge, seal and deliver such further instruments and documents and take such other actions as Purchaser may reasonably request more effectively to vest in Purchaser full right, title and interest in and to the Shares and related Assets as shall be issued, sold, transferred and delivered under this Agreement, and to secure for Purchaser the full benefits intended to be secured by this Agreement. 7.3. All writings, notices and other communications under this Agreement shall be in writing and addressed as follows: If to Purchaser, to: Lowell Farkas, President Carnegie International Corporation Executive Plaza 3 Suite 1001 11350 McCormick Road Hunt Valley, Maryland 21031 With a copy to: Lewis A. Dardick, Esquire Gershberg and Pearl, LLP 11419 Cronridge Drive, Suite 7 Owings, Maryland 21117 If to Seller, to: Mr. Mark Ortner c/o Voice Quest, Inc. 6360 Tamiami Trail Sarasota, Florida 34231-3935 with a copy to: Kurt F. Lewis, Esquire 6624 Gateway Avenue Sarasota, Florida 34231 16 Any such writing, notice or communication by telegram shall be deemed given when received at the address specified above. Any such writing, notice or communication other than by telegram shall be deemed given when deposited in the appropriate international or United States mails, postage prepaid, first class, registered or certified mail, return receipt requested, and addressed as herein-above provided. Any such address may be changed by notice to the other parties to this Agreement as provided in this Section 7.3. 7.4. This Agreement shall be governed by and construed and enforced in all respects in accordance with the laws of the State of Maryland, United States of America. 7.5. This Agreement contains the full, complete and exhaustive agreement between the parties hereto. This Agreement may be amended only by an instrument in writing executed, sealed and delivered by Seller, the Company and Purchaser. 7.6. Nothing expressed or implied in this Agreement is intended or shall be construed to confer or give any person or entity other than the parties hereto any rights or remedies under or by reason of this Agreement. 7.7. This Agreement may be executed simultaneously or in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. 7.8. Unless the context otherwise requires, the words such as "herein", "hereinafter", "hereby", "hereto", "hereof" and "hereunder" refer to this Agreement as a whole and not merely to a Section in which such words appear. As used herein and unless the context otherwise requires, the singular shall include the plural and vice-versa, and the masculine gender shall include the feminine and neuter, and vice-versa. 7.9. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors and permitted assigns. 7.10. The headings for this Agreement are intended for convenience of reference only and shall be given no effect in the construction or interpretation of this Agreement. 7.11. Carnegie shall have the right to assign its rights, title and interests under this Agreement and to the Property to any of its wholly owned subsidiaries, except as provided to the contrary herein. This shall not impair any of Carnegie's obligations under this Agreement. 8. Employment of Seller: Seller and Purchaser shall enter into mutually agreeable Employment Agreements simultaneously herewith that provide for a salary to Ortner of Seventy-five Thousand Dollars ($75,000.00) for one (1) year following the Closing Date, Eighty-seven Five Hundred Dollars ($87,500.00) in the second year following the Closing Date and One Hundred Thousand Dollars ($100,000.00) in the third year following closing. A cost of living adjustment of twenty-five 17 percent (25%) will be included, if Ortner is required to move to Maryland. Ortner shall receive three percent (3%) of the gross profit from the sale of the Personal operator or Hybid MAVIS(TM) software by the Company, to be paid fifty percent (50%) in cash and fifty percent (50%) in Rule 144 Legend Shares of Carnegie at the end of each calendar year. IN WITNESS WHEREOF, the parties have executed, sealed and delivered this Agreement the day and year first herein above set forth. PURCHASER: ATTEST: CARNEGIE INTERNATIONAL CORPORATION /s/ BY: /s/ Lowell Farkas - --------------------------------- -------------------------- Lowell Farkas, President THE COMPANY: ATTEST: Voice Quest, Inc. /s/ /s/ Mark Ortner - --------------------------------- ------------------------------ Mark Ortner, President WITNESS: SELLERS: /s/ /s/ Mark Ortner - --------------------------------- ------------------------------ Mark Ortner, Individually WITNESS: /s/ /s/ Trevor Kitson - --------------------------------- ------------------------------ Trevor Kitson, Individually 18 WITNESS: /s/ /s/ Simon Oliver - --------------------------------- ------------------------------ Simon Oliver, Individually WITNESS: /s/ /s/ Jennifer Meckes - --------------------------------- ------------------------------ Jennifer Meckes, Individually 19 EX-10.19 6 EMPLOYMENT AGREEMENT EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is dated this 20th day of November, 1998, by and between Voice Quest, Inc., the "Employer" and Mark Ortner, the "Employee". 1. EMPLOYMENT: The Employer employs the Employee and the Employee accepts employment upon the terms and conditions of this Agreement. 2. TERMS: The term of this Agreement shall begin on the Closing Date of the purchase of Employer's Stock by Carnegie International Corporation and shall continue for a period of five (5) years, unless terminated prior thereto. 3. COMPENSATION: For all services rendered by the Employee, the Employer shall pay the Employee an annual salary for the first year of this Agreement of Seventy-five Thousand Dollars ($75,000.00) to be paid through Three Thousand One Hundred Twenty-five Dollar ($3,125.00) semi-monthly payments. The annual salary shall cease in the event of the death or termination of employment of Employee. Salary payments shall be subject to withholding and other applicable taxes. The annual salary for the second and third years of this Agreement shall be Eighty-seven Thousand Five Hundred Dollars ($87,500.00) and One Hundred Thousand Dollars ($100,000.00), respectively. A cost of living increase of twenty-five percent (25%) shall apply to the above salaries if Employee is required to move permanently to Maryland. 4. DUTIES: The Employee is engaged to serve as the President of Employer. Employee's duties include but are not limited to managing the operations of the Company. The precise services of the Employee may be extended or curtailed by the Employer from time to time. -1- 5. EXTENT OF SERVICES: The Employee shall devote substantially his entire working time, attention and energies to the Employer's business and shall not during the term of this Agreement be engaged in any employment activities, undertake to work for compensation or accept employment with another entity for gain, profit, or other pecuniary advantage. However, the Employee may invest his assets in such form or manner as will not require his services in the operation of the affairs of the companies in which such investments are made. 6. DISCLOSURE OF CONFIDENTIAL INFORMATION: The Employee acknowledges that he will have access to significant amounts of confidential information of Employer and its Parent Company, Carnegie International Corporation, including such information as lists of customers, sources of supply, production information, product information, service information, formulas, computer programs and development ideas related thereto, work in progress, trade secrets, technical information acquired by Employee from Employer or Carnegie or from the inspection of Employer's or Carnegie's property, confidential information disclosed to Employee by third parties, and all documents, things and record bearing media disclosing or containing the aforegoing information, including any confidential materials prepared by the parties hereto which contain or otherwise relate to such information concerning the Employer's and/or Carnegie's financial, intellectual, technical and commercial information (collectively hereinafter referred to as "Confidential Information") shall be and remain confidential. The Employee will not during or after the term of this employment, disclose the Confidential Information or any part thereof to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever. In the event of a breach or threatened breach -2- by the Employee of the provisions of this paragraph, the Employer shall be entitled to an injunction restraining the Employee from disclosing, in whole or in part, the Confidential Information, or from rendering any services in connection with the telecommunications industry to any person, corporation, association, or other entity to whom such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein shall be construed as prohibiting the Employer or Carnegie from pursuing any of the remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee. The Employee shall be responsible to Employer and Carnegie for reasonable attorneys fees and costs incurred in connection with the enforcement of this provision should a Court of competent jurisdiction rule in favor of Employer or Carnegie in connection with a cause of action brought for enforcement of said provision. If Employee buys back the Shares of Employer, the provisions hereof relating only to Employer shall no longer apply. 7. EXPENSES: The Employee may incur reasonable expenses for promoting the Employer's business. The Employer shall reimburse the Employee for all such expenses upon the Employee's periodic presentation of an itemized account of such expenditures. 8. VACATIONS: The Employee shall be entitled to ten (10) vacation days during each of the first two (2) years of employment and fifteen (15) vacation days each year thereafter, during which time his salary and benefits shall be paid in full. Each vacation shall be taken so as not to unreasonably interfere with the operation of Employer's business. 9. SURVIVAL AFTER TERMINATION OR EXPIRATION OF EMPLOYMENT RELATIONSHIP: The Provisions contained within paragraphs 6, 11 and 14 of this Agreement shall -3- survive the expiration or other termination of this Agreement 10. TERMINATION: The following termination provisions shall apply hereto: a. Termination by Employer for cause. The Employer may terminate this Agreement immediately by written notice if Employee is convicted of any crime involving fraud, dishonesty, or willful misconduct directly or indirectly connected to Employee's duties and responsibilities to Employer or the management and or operation of Employer's business. If Employer chooses not to pursue criminal action against Employee in connection with fraud, dishonesty, or willful misconduct that has a material impact on the Employer, the Employer may terminate this Agreement for such cause, after written notice to the Employee of the reason for termination and failure by the Employee within thirty (30) days thereafter to cure or eliminate such reason for termination and compensate Employer for any losses sustained as a result of Employee actions in connection with such fraud, dishonesty or willful misconduct. All terminations made pursuant to this paragraph shall be considered for cause and the Employer shall not be liable for any amounts pursuant to this Agreement following such termination. b. Termination by Employer for other than cause. If the Employer terminates this Agreement for any reason other than cause during the final three (3) years of the term of this Agreement, the Employer shall pay to the Employee one (1) year of salary as delineated in paragraph 3 of this Agreement. c. Termination by Employee for Good Reason. The Employee may terminate his employment with Employer pursuant to this Agreement for "good reason", provided that the Employee has given written notice to the Employer of the reason of the resignation and Employer fails to cure or eliminate such reason within thirty (30) days from the -4- receipt of such written notice by Employer. For the purposes of this Agreement, good reason shall mean: (i) removal from the position of President, other than as a result of promotion; (ii) material diminution of the Employee's title, position or responsibilities; (iii) material reduction in the Employee's salary; (iv) relocation of the Employee to a location more than one hundred (100) miles from the Employee's principal work place at the time this Agreement takes effect except for a move to Maryland for which the Employee receives a twenty-five percent (25%) cost of living increase in his salary; or (v) the Employer's willful failure to comply with and satisfy material requirements of this Agreement. If the Employee terminates his employment for good reason during the final three (3) years of the term of this Agreement, the Employer shall pay to the Employee one (1) year of salary as delineated in paragraph 3 of this Agreement. d. Termination by Employee for other than good reason. Employee may terminate this Agreement for any reason or no reason at any time, upon thirty (30) days written notice to the Employer. In such event, the Employee if requested by the Employer, shall continue to render his services and receive full salary and benefits up to the date of termination. The Employer may elect to terminate Employee by written notice thereof before the expiration of the thirty (30) day period and discontinue all salary and benefits as of said termination date. If Employee terminates this Agreement for any reason other than good reason, the Employer shall not be liable for any amounts due to Employee pursuant to the terms of this Agreement. e. Other Termination. This Agreement shall terminate upon the occurrence of any of the following events: 1. Expiration of the term of employment, as provided in Section 2 hereof; or -5- 2. Death of Employee, except for those benefits as provided to the contrary herein; or 3. In the event Employee shall become permanently disabled as defined in the following paragraph and such permanent disability prevents the Employee from substantially performing the duties of his employment. 11. EMPLOYEE'S REPRESENTATIONS: Employee represents and warrants to Employer that no legal, administrative or other proceedings against the Employee have been threatened or filed in any federal, state or local court of law or before any administrative body. 12. OTHER BENEFITS AND COMPENSATION: a. Health insurance coverage shall be provided to Employee comparable to the coverage being provided to Executives in comparable positions with Carnegie International Corporation ("Carnegie"). b. Employee shall be reimbursed for all reasonable and necessary company expenses attributable to the business of Voice Quest or Carnegie. c. Employee shall receive disability and life insurance coverage consistent with the current coverage provided to Employees with comparable positions at Carnegie International Corporation ("Carnegie"). As of the date of this Agreement no such benefits are being provided. d. Employee shall receive a bonus equal to three percent (3%) of the gross profit generated by Voice Quest from the sale of Personal Operator or Hybid MAVIS(TM) software. Gross profit shall be defined as sales from said products less costs of goods sold. -6- Costs of goods sold shall include, but not be limited to, sales and marketing expenses, software development costs, costs of reproducing the products, product materials, direct labor and reasonable overhead costs. This bonus shall be paid within ten (10) business days from the end of each calendar year, fifty percent (50%) of which shall be paid in cash, and fifty percent (50%) of which shall be paid through an issuance to Employee of Rule 144 shares of Carnegie, valued based on the average closing price of Carnegie Common Stock for five (5) days prior to the issuance. For a period of five (5) years after the termination of this Agreement, Employee shall receive three percent (3%) of the gross profits, as defined above, generated by Voice Quest from sales of Personal Operator or MAVIS(TM) software products that incorporate features that were developed by Employee. e. Employee shall receive a Company vehicle during the term of his employment. 13. RESTRICTIVE COVENANTS: During the period of this Agreement and for a period of two (2) years after the termination or expiration of this Agreement, the Employee will not, within the geographical customer market of Voice Quest, directly or indirectly, own, manage, operate, control, be employed by or participate in any business that competes with and or sells similar products and or services as the business conducted by the Employer at the time of the termination of this Agreement, including but not limited to voice recognition software and related products and services that are related to said products or services. In the event of the Employee's actual or threatened breach of the provisions of this paragraph, the Employer shall be entitled to an injunction restraining the Employee therefrom. Nothing shall be construed as prohibiting the Employer from pursuing any other available remedy for such breach or threatened -7- breach, including the recovery of damages from the Employee. If Employee buys back the Shares of Employer the provisions hereof shall no longer apply. 14. OWNERSHIP OF OTHER PUBLIC COMPANIES: Employee may own up to five percent (5%) of public companies other than Carnegie, provided such ownership is not inconsistent with the terms and conditions of this Agreement and or otherwise prohibited by Law. 15. NOTICES: Any Notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of the Employee, or to its principal office in the case of the Employer. 16. WAIVER OF BREACH: The waiver of the Employer of a breach of any provision of this Agreement by the Employee shall not operate or be construed as a waiver of a subsequent breach by the Employee. 17. ASSIGNMENT: The Employee acknowledges that the services to be rendered by her are unique and personal. Accordingly, the Employee may not assign any of her rights, or delegate any of his duties or obligations under this Agreement. The rights and obligations of the Employer under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Employer. 18. ENTIRE AGREEMENT: This Agreement contains the entire understanding of the parties. No representations were made or relied upon by either party, other then those expressly set forth. No agent, employee, or other representatives of either party are empowered to alter any of the terms hereof, unless they are in writing and signed by the Employee and an executive officer of the Employer. -8- 19. CONTROLLING LAW: The validity, interpretation and performance of this Agreement shall be controlled by and construed under the Laws of the State of Maryland. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ATTEST: EMPLOYER: VOICE QUEST, INC. /s/ BY:/s/Lowell Farkas - -------------------------- ----------------------------- LOWELL FARKAS, Chairman WITNESS: Employee: /s/ /s/Mark Ortner - -------------------------- -------------------------------- MARK ORTNER Carnegie.24EmployAgmtOrtner.07 -9- EX-10.20 7 ASSET PURCHASE AGREEMENT EXHIBIT 10.20 CARNEGIE INTERNATIONAL CORPORATION/ THE J-NET GROUP, INC. ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (hereinafter referred to as the "Agreement") is made and entered into the 1st day of December, 1998 by and between Carnegie International Corporation, a Corporation of the State of Colorado (hereinafter referred to as "Carnegie"or "Purchaser") or its Assignee, and The J-Net Group, Inc. (hereinafter referred to as the "Company" or "Seller"), a Corporation of the State of Delaware. EXPLANATORY STATEMENT A. Seller owns One Hundred Percent (100%) of the assets that were previously owned by a Corporation of the State of Massachusetts known as RomNet, Inc. (hereinafter referred to as "RomNet") including all trademarks, service marks, the assets used in the operation of RomNet including but not limited to equipment, software, trade names, furniture, fixtures, inventory, customer lists, customer sales files, accounting records, contract rights, leasehold improvements, lease rights for the Premises of the Company located at 1660 Soldiers Field Road, Boston, Massachusetts (hereinafter referred to as the "Premises"), and any and all other assets related to the business of RomNet including any and all assets acquired by Seller subsequent to the consolidation of RomNet into Seller to the extent attributable to RomNet's efforts or the assets previously owned by RomNet and/or the business conducted by Seller with said assets including but not limited to business generated from customers of RomNet and telephone equipment and numbers (hereinafter collectively referred to as the "Assets"). B. Purchaser desires to purchase the Assets from Seller, together with such related rights, preferences and limitations as pertain to said Assets, as are hereinafter provided by this Agreement. Seller desires to sell, assign, transfer and deliver the Assets, described in Section A hereof, to Purchaser upon the terms and conditions provided by this Agreement. NOW, THEREFORE, in consideration of the Explanatory Statement, which shall constitute a substantive and binding part of this Agreement, and the mutual covenants, promises, agreements, representations and warranties hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, Purchaser and the Company intending to be legally bound, do hereby covenant, promise, agree, represent and warrant as follows: 1. Closing: Purchase of Assets: 1.1. The closing (hereinafter referred to as the "Closing") of the purchase of the Assets provided by this Agreement shall take place as of December 1, 1998, or on such other day as Purchaser and Seller shall agree in writing, at the law offices of Gershberg and Pearl, LLC, unless the place and means of closing is changed pursuant to a writing signed by all parties hereto (hereinafter, such day shall be referred to as the "Closing Date", and such law offices shall be referred to as the "Closing Place.") 1 1.2. On the Closing Date, which shall occur as of December 1, 1998, and at the Closing Place, Seller shall sell, transfer and deliver to Purchaser the Assets, which shall convey ownership rights, title and interest to the Assets effective as of the Closing Date, December 1, 1998, including all Assets on the List of Assets (a copy of which is attached hereto as Exhibit A) and pursuant to a Bill of Sale related thereto, a copy of which is attached as Exhibit A1. 1.3. Purchase Price: The Purchase Price of the Assets shall be as follows: 1.3.1. Purchaser shall issue to Seller on the Closing Date Fifty-two Thousand Five Hundred (52,500) shares of Preferred Series F restricted stock of Carnegie International Corporation which shall be converted automatically to Common Stock of Carnegie on the second anniversary of the Closing Date, which Common Stock shall constitute restricted securities as defined in 17 C.F.R. ss.230.144(a)(3) (hereinafter "Rule 144 Stock"). 1.3.1.1. Seller shall receive in the conversion the greater of: (i) Rule 144 Stock with a value of Seven Hundred Thousand Dollars ($700,000.00) based upon the conversion value set forth in Section 1.3.1.2. below; or (ii) Five Hundred Twenty-five Thousand (525,000) shares of Rule 144 Stock, which shall be considered higher in Value than the value under 1.3.1.1.(i) above if the Value of the Common Stock of Carnegie is above an average closing price of $1.33 per share as computed for the five (5) business days immediately preceding the second anniversary of the Closing Date. 1.3.1.2. The Value of each share of Rule 144 Stock for conversion calculation purposes shall be based on the average of the Market closing price of Carnegie's Common Stock on the five (5) business days immediately preceding the conversion date. For the purposes of this section " Market" shall include the price quoted for Carnegie's Common Stock by the NASD Over the Counter Bulletin Board Service (OTCBB) or the closing trading price on the exchange on which Carnegie Common Stock is traded if said Stock is no longer quoted on OTCBB. Purchaser shall reserve at all times a sufficient number of shares of authorized but unissued Common Stock to permit the exercise of the conversion rights enumerated in this Agreement. 1.3.1.3. The Preferred Series F pursuant to Section 1.3.1. shall be subject to rights, terms and provisions set forth in the Articles of Amendment attached hereto as Exhibit A1A: 1.3.2. Three Hundred Thousand (300,000) shares of Rule 144 Stock with piggy-back registration rights, the issuance of which shall be initiated within three (3) business days of the Closing Date pursuant to irrevocable instructions to Carnegie's transfer agent, in form and substance reasonably satisfactory to the Seller and Purchaser. 1.3.2.1. Piggyback Registration Rights. If, at any time, the Company proposes to file a registration statement under the Securities and Exchange Act of 1933 2 with respect to an offering (a "Primary Offering") of common stock (other than a registration statement in connection with an employee benefit plan or corporate reorganization), the Company will: a. give written notice to all shareholders with piggyback registration rights under this Agreement (collectively the "Subscribers"), not less than twenty (20) days prior to the anticipated date of filing (the "Notice"). The Notice will offer each Subscriber an opportunity to request that a number of shares held by such Subscriber be registered; and b. include in such proposed Primary Offering that number of shares specified in a written request from such Subscriber received within ten (10) days of the Notice. If the Primary Offering is underwritten and the underwriter determines in good faith that marketing factors require a limitation on the number of shares offered, the shares included will be allocated, first, to the Company and second, pro rata among the holders of piggyback rights based on the shares requested to be sold. Each participating Subscriber will enter into an Underwriting Agreement with the underwriter containing usual and customary agreements and understandings. Each participating Subscriber will bear and pay a proportionate share of all discounts and commissions and the expenses of his counsel. All other expenses will be borne by the company. 1.3.3. Purchaser shall assume only the following debts as reflected on Exhibits A2 through A5, respectively: a. Purchaser shall assume an IRS obligation of Eighty-five Thousand Dollars ($85,000.00) pursuant to an October 23, 1998 agreement with the IRS pursuant to an instrument of assumption in form and substance reasonably satisfactory to the Seller and Purchaser. Said obligations shall be paid as per an Agreement with the IRS which requires monthly payments of Eight Thousand Five Hundred Dollars ($8,500.00). Purchaser shall also assume a state unemployment tax obligation of Eight Thousand Seven Hundred Twenty-three Dollars ($8,723.00). Purchaser shall indemnify and hold Seller harmless with respect to these obligations. b. Purchaser shall assume five (5) bank notes with Cambridge Trust Company totaling no more than One Hundred Fifty-five Thousand One Hundred Twenty-four Dollars and Thirteen Cents ($155,124.13) as of November 30, 1998 pursuant to documentation in form and substance reasonably satisfactory to the Seller and Purchaser, which documentation shall release the Seller and all guarantors from any and all liabilities in respect of such loans. Upon the same payment terms as existed as of November 1, 1998. The loans are as follows: 3 Balance at Account # November 30, 1998 Original Loan Agmt. --------- ----------------- ------------------ Loan # 1 00057432571 $24,999.94 $88,888.88 Loan #2 00057432570 $9,733.36 $29,200.00 Loan #3 77146599 $35,390.83 $35,000.00 Loan #4 00057432572 $65,000.00 $65,000.00 Loan#5 00077146570 $20,000.00 $25,00.00 ---------- $155,124.13 Within thirty (30) days of the Closing Date Purchaser shall secure a line of credit or other arrangements that facilitate the release of the current obligors under the above Notes. c. Purchaser shall assume trade accounts payable of approximately One Hundred Ten Thousand Dollars ($110,000.00) at November 30, 1998 but in no event greater than One Hundred and Ten Percent (110%) of this amount. d. Purchaser shall assume the following equipment leases: November 30, 1998 Balance 1. C.I.T. 19 payments @ $435.04 per month totaling $8,265.76 2. C.I.T. 31 payments @ $273.17 per month totaling 8,468.27 3. Wiltel 19 payments @ $1,195.54 per month totaling 22,715.26 4. AT&T 28 payments @ $177.27 per month totaling 4,963.56 5. AT&T 26 payments @ $105.80 per month totaling 2,750.80 6. AT&T 26 payments @ $531.39 per month totaling 13,816.14 7. AT&T 29 payments @ $226.50 per month totaling 6,568.50 8. Greentree 26 payments @ $212.08 per month totaling 5,514.08 -------- TOTAL: $73,062.37 e. In satisfaction of any and all obligations owed to Annetta Douglass and Cambodochine Deo, respectively, for accrued payroll related to services performed by said individuals for RomNet and or any of its Successors related in any way to the Assets, each individual shall receive shares of Common Stock of Carnegie, which shares shall constitute "restricted securities" as defined in 17 C.F.R. ss.230.144(a)(3), as follows: Annetta Douglass 20,756 Cambodochine Deo 10,030 1.3.4. The purchase of the Assets shall vest in Purchaser on the Closing Date, December 1, 1998, subject to the provisions of this Agreement, complete possession, ownership and control of the Assets and any rights attributable thereto, including but not limited 4 to the leases, equipment, fixtures, inventory, cash, accounts receivable, contract rights with equipment suppliers and others, goodwill, trade names, trademarks, service marks, trade secrets, software rights, software development rights, leasehold improvements and assets relating thereto. Seller and the Company shall cooperate in and facilitate the immediate transfer of possession, ownership and control of the Assets including all assets and operations relating to the Premises of the Company relating to the Assets. 1.3.5. Except as enumerated in 1.3.3., Purchaser shall assume no debts, there shall be no liens or encumbrances on the Assets, and Purchaser shall not be liable for any tax liability or other liabilities or claims of any kind whatsoever relating to the Assets or incurred by the Company, RomNet, and/or its owners related to the Assets. 1.3.6. Purchase Price for Assets; Allocations: The Purchase Price for the Assets shall be ________________________________ (the "Purchase Price"). The parties agree that the Purchase Price for the Assets shall be allocated among the Assets as follows: Accounts Receivable $ Equipment, Furniture and Fixtures $ Goodwill $ 1.4. Lease rights: Seller shall deliver a lease or sublease for the portion of the space that is being utilized by the entity which purchases the Assets pursuant to this transaction at the premises located at 1660 Soldiers Field Road, Boston, Massachusetts on terms no less favorable than the terms contained in the lease between the Landlord and Jack Hoagland and Annetta Douglas. 1.5. Accounts Receivable: The Assets shall include Accounts Receivable of approximately Ninety Thousand Dollars ($90,000.00) as of November 30, 1998 but in no event less than Ninety Percent (90%) of said amount unless there are collections between the date of execution of this Agreement and November 30, 1998. In the later event the amount collected shall only be used to pay current payroll and to make payments on accounts payable. 1.6. Consulting Services: The Company shall receive consulting fees for services to be rendered to Purchaser during the Period. The fees shall be in the amount of One Hundred Twelve Thousand Dollars ($112,000.00) and shall be billed and paid in four (4) equal semi-annual installments in the amount of Twenty-eight Thousand Dollars ($28,000.00) beginning six (6) months from the Closing Date and continuing with three (3) additional consecutive payments thereafter due six (6) months from each of the prior payments. 2. Representations and Warranties of the Seller: Seller represents and warrants to Purchaser as follows: 5 2.1. Seller is, and as of the Closing Date and time will be the valid and legal owner of the Assets being transferred hereby and owns the Assets free and clear of any and all liens and encumbrances except as enumerated in Exhibit B - Certificate of No Debts. The Seller through the ownership of the shares of the Company owns all of the Assets including the Assets located at the Premises, including but not limited to the leases, equipment, inventory, furniture, fixtures and the like and assets relating thereto. Seller represents and warrants that Seller owns one hundred percent (100%) of the Assets and that the books, records and tax returns of the Company and RomNet, which have been presented to Carnegie as of and for the periods ended October 31, 1998, December 31, 1997, December 31, 1996 and December 31, 1995, fairly and accurately in all material respects reflect and allocate all assets, liabilities, income and expenses related to both the management and results of operations of RomNet or its Successors related to the Assets. 2.2. Seller has the requisite and proper authority to enter into the within agreement and to transfer, assign and sell the Assets in accordance with the terms hereof. 2.3. The Company is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of Delaware. The Company has and at the Closing Date will have, the power and authority to own, lease and operate its properties and to conduct its business as such business is now being conducted by the Company. A complete and correct copy of the articles of incorporation, as amended, and the by-laws, as amended, of the Company, and the Certificate of Consolidation of Ecology Communications, Inc., J-Net Broadcasters, Inc., RomNet, Inc. to form the J-Net Group, Inc. and the related Plan and Agreement of Consolidation, as amended, are attached to this Agreement collectively as Exhibit C and are incorporated by reference herein, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date. 2.4. Upon sale, transfer and delivery of the Assets to Purchaser, the Assets will constitute One Hundred Percent (100%) of the Assets of and or related to the entity previously known as RomNet, Inc., as the term the "Assets" is defined in the Explanatory Statement hereof, excepting consumable items used in the ordinary course of business. Except as provided in this Agreement, the Company does not have outstanding, and on the Closing Date will not have outstanding any options to purchase or any contracts or commitments to sell the Assets. The Company has not issued, and hereby warrants and represents that it shall not issue up to and including the Closing Date any Options (hereinafter referred to as the "Options"), which grant to the holders thereof the right to purchase any of the Assets. 2.5. The Assets are and as of the Closing Date shall be free and clear of all mortgages, pledges, liens, security interests, claims, conditional sale agreements, charges, encumbrances and restrictions of every nature, except as provided on Exhibit C1 incorporated herein by reference and made a part hereof. 2.6. Except as set forth on Exhibit D, RomNet, Inc., the Company or its successors in interest in the Assets have properly and accurately filed all tax returns, as 6 appropriate, country wide, state and local, and all related information required to be filed prior to the date hereof, and at the Closing Date shall have filed all tax returns, as appropriate, and all related information required to be filed prior to the Closing Date including those relating to RomNet, Inc. or the Assets. To the knowledge of Seller, and except as set forth on Exhibit D, the amounts reflected in the Company's and RomNet, Inc.'s Balance Sheet for taxes are sufficient for the payment of all accrued and unpaid federal, state and local taxes of all types, including interest and penalties thereon, of the Company for or on account of which Company is or may become liable in any manner whatsoever for periods prior to the Closing Date. 2.7. Since December 31, 1997 2.7.1. The business of the Company as well as RomNet has been operated, and up to the Closing Date, or the date of Consolidation with respect to RomNet, will be operated, only in the ordinary course consistent with past practice. 2.7.2. Except as set forth in Exhibit D1, there has been, and prior to the Closing Date there will be, no material adverse change, individually or in the aggregate, in Company's condition (financial or otherwise) or in the Assets, liabilities or business. There also has been no material adverse change, individually or in the aggregate, in the Company's condition (financial or otherwise) or in the Company or the Assets, liabilities or business of the Company and RomNet, Inc. from the status that was represented to Purchaser as existing at August 30, 1998 compared to the status at the Closing Date. 2.7.3. There has been, and prior to the Closing Date there will be, no damage, destruction or loss to the Company, the Assets or any of the Company's contracts, assets, inventory, accounts, or other properties, or other events or conditions of any character, or any pending or threatened developments, individually or in the aggregate, which would materially and adversely affect the Company's condition (financial or otherwise) or the Assets or the Company's Assets, liabilities or business. 2.8. Except as set forth in Exhibit D1 attached hereto and incorporated by reference herein, there is, and on the Closing Date there will be, no material action, suit, proceeding or investigation pending or, to the knowledge of the Seller, threatened, against or affecting the Company or any of the Assets. Company is not, and on the Closing Date will not be, in default under or with respect to any judgment, order, writ, injunction or decree of any court or of any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality. To Seller's knowledge, Seller and RomNet has, and on the Closing Date will have, complied in all material respects with all laws, rules, regulations and orders applicable to it and to its business; has, and on the Closing Date will have, performed in all material respects all of its material obligations and duties to be performed by it to the extent required in accordance with their respective terms; and is not, and on the Closing Date will not be, in default under or in material breach of any material contract, agreement, commitment or other instrument to which it is subject or a party or under which it is bound. 7 2.9. The Company has not, and on the Closing Date will not have, incurred any liability, obligation or duty for any finder's, agent's or broker's fee or commission in connection with this Agreement or the transactions contemplated hereby. 2.10. The Board of Directors of the Company, pursuant to the power and authority legally vested in it, has duly authorized the execution, sealing and delivery of this Agreement by the Company, the Assets, and the transactions hereby contemplated, and no action, confirmation or ratification by any stockholder of the Company, Seller, or by any other person, entity or governmental authority is required in connection therewith. The Seller has the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by them pursuant to the provisions hereof. The Seller has taken all actions required by law, the Company's certificate of creation or incorporation, as amended, its bylaws, as amended, or otherwise to authorize the execution, sealing and delivery of this Agreement and the issuance, sale, transfer and delivery of the Assets pursuant to the provisions hereof. This Agreement is valid and binding upon the Seller in accordance with its terms. Neither the execution, sealing and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or breach of the Articles of Incorporation, as amended, or the by-laws, as amended, of the Company, or any agreement, stipulation, order, writ, injunction, decree, law, rule or regulation applicable to the Seller. 2.11. Attached hereto as Exhibit E and incorporated by reference herein is a list of all officers and directors of the Company and all beneficial owners of the issued and outstanding Company Common Stock and the Assets, and the number of shares of the Company Common Stock owned of record and beneficially by each such officer, director and beneficial owner. To the best knowledge of Company, the information set forth on Exhibit E is true and correct. 2.12. To Seller's knowledge neither this Agreement nor any written information, statement, list or certificate furnished or to be furnished to Purchaser pursuant to this Agreement or in connection with this Agreement or any of the transactions contemplated by this Agreement contains or, on the Closing Date will contain any untrue statement of a material fact or omits or, on the Closing Date will omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances in which they are made, not misleading. 2.13. Shareholder Claims: The Seller hereby warrants and represents that no Shareholder of the Seller or of RomNet has any claim against the Company related to the Assets or against the Assets, either individually or as an officer or Director of the Company or RomNet, except for those considerations due as set forth in this Agreement. 2.14. [Intentionally left blank] 2.15. Seller has and will continue until the Closing Date to accurately maintain in all material respects the books of account of the Company and relating to the Assets, or any other entity operating at the Premises or as successor to the Company. 8 2.16. No Subsidiaries: The Seller hereby acknowledges that the Company does not have any subsidiaries and does not, directly or indirectly, own any interest in or control any corporation, partnership, joint venture or other business entity, except as enumerated on Exhibit F1, which shall be attached hereto and incorporated by reference. 2.17. Licenses; Permits; Related Approvals: The Company possesses all licenses, permits, consents, approvals, authorizations, qualifications and orders (hereinafter collectively referred to as the "Permits") of all governments and governmental agencies lawfully required for the Company to conduct the business formerly conducted by RomNet in all jurisdictions where such business is conducted. All of the Permits are in full force and effect and no suspension, modification, or cancellation of any business or permits is pending or threatened. A list of the business/permits related to the Assets is attached hereto as Exhibit G and incorporated herein by reference. 2.18. No Real Property: Except as set forth on Exhibit H attached hereto and incorporated herein by reference, the Company does not own or have any interest in any real estate that relates to the Assets. 2.19. Condition of Personal Property: Attached hereto as Exhibit I and incorporated by reference herein is a true, correct and complete list of the Assets owned by the Company or used by the Company in the conduct of the business formerly conducted by RomNet, including, but not limited to, all inventory, equipment, machinery and fixtures, (collectively, the "Personal Property"), indicating whether it is owned or the manner in which the Personal Property is otherwise utilized by the Company. The Company has or on the Closing Date will have sole and exclusive, good and merchantable title to all of the Personal Property owned by it including the Assets, free and clear of all pledges, claims, liens, restrictions, security interests, charges and other encumbrances, except as provided to the contrary in Exhibit I. 2.20. Certain Contracts. Attached hereto as Exhibit J and incorporated by reference herein is a true, correct and complete list and copy of all contracts that are part of the Assets under which the Company is provided or is providing services (collectively, the "Service Contracts" or "Asset Contracts"). To Seller's knowledge, each of the Asset Contracts is in full force and effect, is valid and binding upon each of the parties thereto and is fully enforceable by the Company against the other party thereto in accordance with its terms. The Seller has no notice of, or any reason to believe that there is or has been any actual, threatened or contemplated, termination or modification of any of the Asset Contracts. To Seller's knowledge, no party to any of the Asset Contracts is in material breach of or in default thereunder, nor has any event occurred which, with the lapse of time, notice or election, may become a breach or default by the Company or any other party to or under any of the Asset Contracts. All payments required to be made by the Company pursuant to the Asset Contracts have been paid in full. See Exhibit J. 2.21. Contracts, Licenses, and Other Agreements. Attached hereto and incorporated by reference herein are the following: 9 2.21.1. Exhibit K, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all leases of the Company relating to real property that are part of the Assets. 2.21.2. Exhibit L, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all leases of the Company relating to personal property that are part of the Assets. 2.21.3. Exhibit M, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all licenses, franchises, assignments or other agreements of the Company and/or Seller relating to trademarks, trade names, patents, copyrights and service marks (or applications therefor), unpatented designs or styles, know-how and technical assistance that are part of the Assets. 2.21.4. Exhibit O, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all employment, compensation and consulting agreements, contracts, understandings or arrangements of the Company with any officer, director, employee, broker, agent, consultant, salesman or other Person, including the names, starting dates of employment, term of employment, functions and aggregate compensation (including salary, bonuses, commissions and other forms of compensation) that are part of the Assets. 2.21.5. Exhibit P, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements of the Company for the purchase, sale or lease of goods, materials, supplies, machinery, equipment, capital assets and services having a cost in excess of Two Thousand Five Hundred Dollars ($2,500.00) in any one instance or in excess of Ten Thousand Dollars ($10,000.00) in the aggregate that are part of the Assets. 2.21.6. Exhibit Q, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements and arrangements of the Company for the borrowing or lending of money, on a secured or unsecured basis, or guaranteeing, indemnifying or otherwise becoming liable for the obligations or liabilities of any other Person or entity that are attributable to the Assets. 2.21.7. Exhibit R, a true, correct and complete list and copy (or where they are oral, true, correct and complete written summaries) of all agreements and understandings of the Company other than those listed in Exhibits O through Q each of which is material in nature, involve the payment or receipt, in any twelve (12) month period, of more than Five Thousand Dollars ($5,000.00) or has a term of more than the twelve (12) months that are part of the Assets. To Seller's knowledge, each of the agreements, arrangements and understandings listed in Exhibits K through R (hereinafter collectively referred to as the "Commitments") is in full force and effect, is valid and binding upon each of the parties thereto and is fully enforceable 10 by the Company against the other party thereto in accordance with its terms. The Seller does not have any notice of, or any reason to believe, that there is or has been any actual, threatened or contemplated termination or modification of any of the Commitments. To Seller's knowledge, no party to any of the Commitments is in material breach of or in default thereunder, nor has any event occurred which, with the lapse of time, notice or election, may become a material breach or default by the Company or any other party to or under any of the Commitments. The Company has the right to quiet enjoyment of all real properties leased to it for the full term of the lease thereof. As of the Closing Date all payments required to be made by the Company pursuant to any of the Commitments have been paid as required. See Exhibits K-R. 2.22. Insurance: Attached hereto as Exhibit S and incorporated by reference herein is a list of all insurance policies of the Company relating to the Assets, setting forth with respect to each policy the name of the insurer, a description of the policy, the dollar amount of coverages, the amount of the premium, the date through which all premiums have been paid, and the expiration date. Each insurance policy relating to the insurance referred to in Exhibit S is in full force and effect, is valid and enforceable, and the Company is not in material breach of or in default under any such policy. The Company does not have any notice of or any reason to believe that there is or has been any actual, threatened, or contemplated termination or cancellation of any insurance policy relating to the insurance referred to in Exhibit S. 2.23. Pension Plans: The Company hereby acknowledges that it does not maintain in relation to the Assets any pension, profit sharing, ESOP, stock option, incentive bonus, hospitalization, major medical, dental, optical, prescription, drug, health insurance, life insurance, or other benefit plan for the benefit of any employee as the term "Employee Benefit Plan" is defined in ERISA, Section 3, except as set forth on Exhibit T. 2.24. Employee Relations and Employment Agreements: 2.24.1. None of the Company's employees is represented by a labor organization, and no petition for representation has ever been filed with the National Labor Relations Board. The Company is not aware of any union organizational activity with respect to the Company, and have no reason to believe that any such activity is being contemplated. 2.24.2. With respect to the Assets, to Seller's knowledge, the Company is not in violation in any material respect of any applicable equal employment opportunity laws, wage and hour laws, occupational safety and health laws, federal labor laws or any other laws of any government or governmental agency relating to employment. 2.24.3. With respect to the Assets, the Company has not entered into written employment agreements and all employees can be terminated at will except as provided in Exhibit T1. The Company has no contractual obligation or special termination or severance arrangements with respect to any employee employed in the business formerly conducted by RomNet. The Company further represents and warrants that there have been and will be no changes in employment or corporation salary agreements between the Company and its 11 employees, employed in the business formerly conducted by RomNet from January 1, 1998 up till and including the date of Closing, except as provided in Exhibit T2. 2.24.4. With respect to the Assets, the Company has paid all wages due including all required taxes, insurance and withholding thereon, and will continue to do so through the Closing Date. 2.24.5. With respect to the Assets, attached hereto as Exhibit U and incorporated herein by reference, is a list of all accrued vacation, sick leave, and accrued bonuses, if any, as of the Cut-Off Date. 2.24.6. With respect to the Assets, Seller shall supply to Purchaser a list of all employees of the Company, including the date of hire of each, position, present salary, amount of bonus paid in the last year, and announced termination date, if any, as Exhibit V. 2.24.7. Patents; Trademarks; Service Marks; Related Contracts. With respect to the Assets, attached hereto as Exhibit W and incorporated by reference herein, is a true, correct and complete list of all patents, trademarks, trade names, or trademark or trade name registrations, service marks, and copyrights or copyright registrations (the "Proprietary Rights") related to the Company. To Seller's knowledge, all of the Proprietary Rights are valid, enforceable, in full force and effect and free and clear of any and all security interests, liens, pledges and encumbrances of any nature or kind. The Company has not licensed, leased or otherwise assigned, transferred or granted any right to use any of its Proprietary Rights to any other person or entity, and to the Company's knowledge, no Person or entity is infringing upon the Proprietary Rights. The Company has not, in conjunction with the business formerly conducted by RomNet, infringed and are not infringing upon any patent, trademark, trade name, or trademark or trade name registration, service mark, copyright, or copyright registration of any other Person or entity. The Company has filed all necessary and appropriate documents and paid all necessary fees to maintain the integrity of the Proprietary Rights until the year . See Exhibit W. 2.25. Seller agrees that on or after Closing Seller shall execute, acknowledge, send and deliver any and all documents or instruments which may be reasonably necessary to carry out the terms, conditions and intention of this agreement and to facilitate the transfer of the Assets and Premises, to ratify the transfer unto Purchaser of the Assets and to facilitate the operations related to the Assets by Purchaser. 2.26. The Company shall transfer to Purchaser or Purchaser's designee all title, rights and interests in any deposits (as reflected on Exhibit X) owned by the Company related to the Assets and including the Premises. 2.27. There are no bulk transfer laws in Massachusetts applicable to this transaction (See Opinion Letter of Counsel, Exhibit B1) and the Company is not selling all or substantially all of the assets of the Company in this transaction. 12 2.28. To the knowledge of the Company, the issuance, sale, transfer and delivery of the Assets pursuant to the provisions of this Agreement will not constitute a violation or breach of any agreement, stipulation, order, writ, injunction or decree applicable to the Company. 3. Representations, Warranties and Covenants of Purchaser. Purchaser represents, warrants and covenants to Seller as follows: 3.1. Purchaser is, and on the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado. 3.2. The Board of Directors of Purchaser, pursuant to the power and authority legally vested in it, has duly authorized the execution, sealing and delivery of this Agreement by Purchaser and the transactions hereby contemplated, and no action, confirmation or ratification by the stockholders of Purchaser or by any other person, entity or governmental authority is required in connection therewith. Purchaser has the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by it pursuant to the provision, hereof. Purchaser has taken all actions required by law, its articles of incorporation, its by-laws or otherwise to authorize the execution, sealing and delivery of this Agreement. This Agreement is valid and binding upon Purchaser in accordance with its terms. Neither the execution, sealing and delivery of this Agreement nor the consummation of said transactions will constitute any violation or breach of the articles of incorporation or the by-laws of Purchaser, or any agreement, order, writ, injunction, decree, law, rule or regulation applicable to Purchaser. 3.3. Purchaser is and on the Closing Date will be in good standing and qualified to do business under the laws of the State of Maryland or another State in which it conducts its principal business. Assignee on its date of Assignment will be in good standing and qualified to do business under the laws of the Commonwealth of Massachusetts or another State in which it conducts its principal business. 3.4. When issued the Carnegie common stock and the Preferred Series F stock constituting a portion of the Purchase Price shall be duly and validly authorized and issued, fully paid and non-assessable. 3.5. As of September 1, 1998, One Hundred Ten Million (110,000,000) shares of common stock were authorized of which Forty-three Million Eight Hundred Ten Thousand Two Hundred Eight (43,810,208) were issued and outstanding. Forty Million (40,000,000) shares of preferred stock were authorized, of which Two Hundred Thousand (200,000) shares of Series A preferred stock of Carnegie were issued and outstanding. 3.6. To Purchaser's knowledge neither this Agreement nor any written information, statement, list or certificate furnished or to be furnished to Seller pursuant to this Agreement or in connection with this Agreement or any of the transactions contemplated by this Agreement contains or, on the Closing Date will contain any untrue statements of a material fact 13 or omits or, on the Closing Date will omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances in which they are made, not misleading. 3.7. Carnegie shall at all times while the Seller holds any capital stock of Carnegie, take all such reasonable actions as are necessary so that the adequate current public information condition specified in 17 C.F.R. ss.230.144(c) is satisfied. 4. Further Agreements: 4.1. Seller's Agreement Not to Compete: The Parties hereby acknowledge that Seller and/or its owners shall not establish a same or similar business as that contemplated with respect to the Assets, namely a software and or hardware technical support and help desk service, and fulfillment services, within a one hundred (100) mile radius of the Greater Boston, Massachusetts area, directly or indirectly, for a period of three (3) years from the Closing Date. For a period of three (3) years from the Closing Date Seller and/or its owners will not directly or indirectly solicit any present or future customers of Purchaser and within a one (100) hundred mile radius of Purchaser's business locations, will not directly or indirectly own (excluding, however, ownership of not more than five percent (5%) of the outstanding common shares of any public company), manage, operate, control, be employed by or participate in any business that competes with and/or sells similar products and/or services as the products or services offered or business conducted by the Purchaser and/or its Assignee, including but not limited to voice recognition software, hardware and/or related products and services. In the event of the actual or threatened breach of the provisions of this paragraph, the Purchaser shall be entitled to an injunction restraining the Seller and or its owners therefrom. Nothing shall be construed as prohibiting the Purchaser from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages from the Seller or its owners. 5. Conditions Precedent: 5.1 The obligation and duty of Purchaser to purchase the Assets from Seller as contemplated by this Agreement are subject to the fulfillment and satisfaction on the Closing Date of each of the following conditions precedent, any or all of which may be waived in writing in whole or in part at or prior to the Closing Date by Purchaser: 5.1.1. All representations and warranties of the Company contained in this Agreement and expressly made at the Closing Date shall be true and correct at the Closing Date, in all material respects, and all of the other representations and warranties of the Company contained in this Agreement shall be true and correct at the Closing Date as though each of such representations and warranties was made at such time. 5.1.2. The Company shall have performed and complied in all material respects with all covenants and agreements on their part required by this Agreement in material respects to be performed or complied with prior to or at the Closing Date. 14 5.1.3. Purchaser shall have received a certificate of the President of the company which shall be attested by the Secretary of Company or an independent third party if Signatory and Secretary are the same person, dated as of the Closing Date, in form reasonably satisfactory to Purchaser, certifying to the fulfillment and satisfaction of each of the conditions precedent specified in Sections 5.1.1. and 5.1.2. of this Agreement for the Company. 5.1.4. Purchaser shall receive the written opinions of the legal counsel (See Exhibit B1) for the Company, dated the Closing Date, substantially to the effect that: (a) The Company is a corporation duly organized, validly existing and in good standing. The Company has the power and authority to own, lease and operate its properties and to conduct its business as such business is now being conducted by them. (b) The Company is authorized to sell the Assets to Purchaser. (c) Except as set forth on Exhibit D1 to this Agreement, such counsel does not know of any material action, suit, proceeding or investigation pending or threatened against the Company or affecting the Company or any of its assets, including specifically the Assets contemplated for sale under the terms of this Agreement. (d) The execution, sealing and delivery of this Agreement by the Company, and the transactions hereby contemplated have been duly authorized by all necessary corporate action. The Company has the power and authority to execute, seal and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by or pursuant to the provisions hereof. Company has taken all actions required by law, its certificate of incorporation, as amended, its by-laws, as amended, or otherwise to authorize the execution, sealing and delivery of this Agreement and the sale, transfer and delivery of the Assets pursuant to the provisions hereof. This Agreement is valid and binding upon the Company. (e) There are no Bulk Sales laws in Massachusetts applicable to this transaction. 5.2. The obligation and duty of Seller to sell the Assets to Purchaser as contemplated by this Agreement are subject to fulfillment and satisfaction on the Closing Date of each of the following conditions precedent, any or all of which may be waived in whole or in part prior to the Closing Date by Seller: 5.2.1. All representations and warranties of the Purchaser contained in this Agreement shall be true and correct in all material respects at the Closing Date as though each of such representations and warranties was made at such time. 5.2.2. Purchaser shall have performed and complied in all material respects with all covenants and agreements on their part required by this Agreement to be performed or complied with prior to or at the Closing Date. 15 5.2.3. Seller shall have received certificates of the officers and directors of Purchaser, whose signatures, such as President, shall be attested by the Secretary of Purchaser or an independent third party if Signatory and Secretary are the same person, dated as of the Closing Date, in form reasonably satisfactory to Seller, certifying to the fulfillment and satisfaction of each of the conditions precedent specified in Section 5.2.1. and 5.2.2. of this Agreement. 5.2.4. Seller shall have received the written opinion of legal counsel for Purchaser, dated the Closing Date, containing substantially the same opinions with respect to Purchaser which Seller's counsel is required to provide with respect to the Company under Section 5.1.4(a), (c) and (d), as well as an opinion as to the matters set forth in Sections 3.4. and 3.5. 6. Indemnification: 6.1 The Company shall indemnify and hold harmless Purchaser from and against any and all actions, suits, proceedings, demands, causes of action, damages, liabilities, claims, losses, costs and expenses (including reasonable attorneys' and experts' fees) paid or incurred by Purchaser by reason of or arising out of or in connection with: 6.1.1 The breach by the Company of any representation or warranty contained in this Agreement or in any certificate delivered to Purchaser pursuant to the provisions of this Agreement. 6.1.2 The failure of the Company to perform or comply with any covenant or agreement required by this Agreement to be performed or complied with by each such person or entity. 6.1.3 Debts, claims, and/or liabilities incurred, accruing or arising up to the Closing Date attributable to Seller and/or RomNet and/or the Assets including, but not limited to, contract liabilities, tort liability and tax liability, other than those assumed by Purchaser pursuant to the terms of this Agreement. Purchaser shall have the right to setoff against any and all amounts owed by Purchaser to Seller any amounts owed or incurred by Purchaser in connection with any and all liability imposed by this Section 6. Notwithstanding anything to the contrary contained in this agreement, this provision 6.1.3 shall be fully enforceable generally for a period one (1) year from the Closing Date except for any claims brought against Purchaser by any third party for which this provision shall be fully enforceable for a period of three (3) years from the Closing Date. 6.2. Carnegie shall indemnify and hold the Company harmless from and against any and all actions, suits, proceedings, demands, causes of actions, damages, liabilities, claims, losses, costs and expenses (including reasonable attorneys' and experts' fees) paid or incurred by any of them by reason of or arising out of in connection with: 16 6.2.1. The breach by Purchaser of any of the representations or warranties contained in this Agreement or in any certificate delivered to Seller pursuant to provisions of this Agreement. 6.2.2. The failure by Purchaser to perform or comply with any covenant or agreement required by this Agreement to be performed or complied by Purchaser. 6.2.3. All debts and liabilities assumed by Carnegie pursuant to Section 1.3.3., and all debts, claims and liabilities incurred, accruing or arising on or after the December 1, 1998 attributable to business conducted with the Assets after the Closing Date, except Seller shall be responsible for such debts and liabilities incurred, accruing or arising on or after the Closing Date due to the negligence of Seller or its employees, officers or directors up to Closing Date. 6.3. With respect to any claim, action, suit, liability, loss, damage or expense asserted, threatened, instituted, paid or incurred or discovered by or against an indemnified party, within the applicable indemnification period, if any, the obligation to indemnify shall continue through the final disposition or settlement of any such matter and the full satisfaction of the indemnification obligation. 6.4. [Intentionally Left Blank] 6.5. If a party (an "Indemnified Party"), receives notice or has knowledge of any matter which it believes the other party hereto (the "Indemnitor") is obligated to provide indemnification pursuant to this Section 6 (a "Claim"), the Indemnified Party will within a reasonable period of time (A) after receipt of such notice or otherwise first becoming knowledgeable of a Claim, give the Indemnitor written notice of the assertion of such Claim; and (B) furnish the Indemnitor with all relevant information and copies of all pertinent documents relating to the Claim in the Indemnified Party's possession or control or within a reasonable period of time after the Indemnified Party's receipt thereof, as the case may be. 6.6. The failure of the Indemnified Party to give notice of the Claim promptly will not affect the Indemnified Party's rights to indemnification hereunder, except if, and only to the extent that, the Indemnitor's defense of such Claim is actually prejudiced by reason of such failure to give timely notice. 6.7. The Indemnitor will undertake and continuously defend such Claim with counsel of reputable standing, and the Indemnified Party may participate in such defense by counsel of its own choosing at its own expense. 6.8. If the Indemnified Party is required to pay any amount with respect to said Claim, such amount shall be promptly paid by the Indemnitor to the Indemnified Party upon the Indemnified Party giving the Indemnitor a written request therefor. 6.9. If the Indemnitor does not timely undertake or continuously defend any such 17 Claim, then the Indemnified Party will have the right to employ separate counsel in any such action and to participate in the defense thereof, and the reasonable fees and expenses of such counsel will be the Indemnitor's obligation and direct responsibility. Furthermore, the Indemnified Party will then have the right to defend or dispose of the Claim in such manner as it deems advisable for Indemnitor's account and risk and for the purpose hereof as if such defense or disposition had been made or undertaken by the Indemnitor. 6.10. The Indemnitor agrees, unless it timely assumes the defense of any Claim hereunder, to pay the Indemnified Party's costs of defending any Claim, including, without limitation, reasonable attorney's and paralegal fees, accountants' fees, witness fees and court costs, promptly after written demand therefor is given by the Indemnified Party to the Indemnitor. 6.11. If the Indemnitor timely undertakes the defense of any Claim, then so long as the Indemnitor, in good faith, is continuously contesting or defending the Claim: (A) the Indemnified Party shall not admit any liability with respect thereto, or settle, compromise, pay or discharge the same without the prior written consent of the Indemnitor; (B) the Indemnified Party shall cooperate with the Indemnitor in the contest or defense of the Claim; (C) the Indemnified Party shall accept any settlement of the Claim, provided such settlement is effected by monetary payment only and adequate arrangements for such payment, to the Indemnified Party's reasonable satisfaction, are made by the Indemnitor and the Indemnified Party is provided with a full release of all Claims made; and (D) the Indemnitor will provide the Indemnified Party with all information regarding the contest or defense of the Claim and allow counsel for the Indemnified Party to monitor, at the Indemnified Party's sole expense, all proceedings in connection with the Claim. 6.12. Neither the Indemnitor nor the Indemnified Party may admit any liability with respect to any Claim or settle, compromise, pay or discharge the same without the prior written consent of the other party if such settlement, compromise, payment or discharge could in any way expose such other party to the payment of funds which are not subject to a claim of reimbursement or indemnification from the settling, compromising or paying party. 6.13. The Indemnified Party shall use reasonable efforts to preserve the status quo, not incur any penalties and not prejudice the Indemnitor's defense of any Claim prior to the Indemnitor undertaking the defense of such Claim. 6.14. Anything in this Section 6 to the contrary notwithstanding, if there is a reasonable probability that an indemnifiable Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party, upon giving the Indemnitor reasonably prompt written notice thereof, shall have the right to defend, compromise or settle such indemnifiable Claim; provided, however, that no compromises or settlement which would result in the payment of money shall be made, executed or delivered without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld. 18 6.15. Any payment required by an Indemnitor pursuant to this Section 6 shall be reduced by any insurance proceeds actually recovered (excluding any deductible or self-insured retention) by the Indemnified Party as a result thereof from a policy of insurance owned by any person. Any tax benefit received by the Indemnified Party by reason of any action of the Indemnitor shall reduce any payment required to be made by the Indemnitor to the Indemnified Party arising therefrom. 7. Miscellaneous: 7.1. All of the covenants, promises, agreements, representations and warranties set forth in this Agreement shall survive all closings under this Agreement for the periods herein provided, and shall be binding and enforceable notwithstanding any knowledge (other than as specifically herein disclosed) on the part of a party hereto with respect to the matter involved. 7.2. All writings, notices and other communications under this Agreement shall be in writing and addressed as follows: If to Purchaser, to: Lowell Farkas, President Carnegie International Corporation Executive Plaza 3 Suite 1001 11350 McCormick Road Hunt Valley, Maryland 21031 With a copy to: Lewis A. Dardick, Esquire Gershberg and Pearl, LLC 11419 Cronridge Drive, Suite 7 Owings, Maryland 21117 If to Seller, to: John H. Hoagland, Chairman The J-Net Group, Inc. 1660 Soldiers Field Road Boston, Massachusetts 02135 with a copy to: Allen C. B. Horsley, Esquire LeBoeuf, Lamb, Green & MacRae, LLP 260 Franklin Street Boston, Massachusetts 02110 Any such writing, notice or communication by telegram shall be deemed given when received at the address specified above. Any such writing, notice or communication other than by telegram shall be deemed given when deposited in the appropriate international or United States mails, postage prepaid, first class, registered or certified mail, return receipt requested, and addressed as herein-above provided. Any such address may be changed by notice to the other parties to this Agreement as provided in this Section 7.3. 19 7.4. This Agreement shall be governed by and construed and enforced in all respects in accordance with the laws of the State of Maryland, United States of America. 7.5. This Agreement contains the full, complete and exhaustive agreement between the parties hereto and supercedes all prior agreements and understanding between the Parties. This Agreement may be amended only by an instrument in writing executed, sealed and delivered by the Company and Purchaser. 7.6. Nothing expressed or implied in this Agreement is intended or shall be construed to confer or give any person or entity other than the parties hereto any rights or remedies under or by reason of this Agreement. 7.7. This Agreement may be executed simultaneously or in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. 7.8. Unless the context otherwise requires, the words such as "herein", "hereinafter", "hereby", "hereto", "hereof" and "hereunder" refer to this Agreement as a whole and not merely to a Section in which such words appear. As used herein and unless the context otherwise requires, the singular shall include the plural and vice-versa, and the masculine gender shall include the feminine and neuter, and vice-versa. 7.9. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors and permitted assigns. 7.10. The headings for this Agreement are intended for convenience of reference only and shall be given no effect in the construction or interpretation of this Agreement. 7.11. Carnegie shall have the right to assign its rights, title and interests under this Agreement and to the Assets to any of its wholly owned subsidiaries, except as provided to the contrary herein. This shall not impair any of Carnegie's obligations under this Agreement. 8. Employment of Key Personnel: Seller and Nicholas R. Gentile, Robert Randall, Timothy McDonough and James Menix shall enter into one (1) year Employment Agreements simultaneously herewith in the form attached hereto as Exhibit Y that provide for salaries comparable to those currently being paid to said individuals. 9. Escrow Agreement: Notwithstanding anything to the contrary contained within this Agreement, the Purchaser and Seller do hereby agree to close on this transaction as of December 1, 1998 and transfer ownership and control of the Assets effective as of said date with the understanding that certain terms and conditions shall be completed after the Closing Date pursuant to an Escrow Agreement between said Parties (a copy of which is attached hereto as Exhibit Z). 20 IN WITNESS WHEREOF, the parties have executed, sealed and delivered this Agreement the day and year first herein above set forth. ATTEST: PURCHASER: CARNEGIE INTERNATIONAL CORPORATION /s/ /s/ Lowell Farkas - -------------------------- ----------------------------- BY: Lowell Farkas, President ATTEST: SELLERS: THE J-NET GROUP, INC. /s/ /s/ John H. Hoagland, Jr. - -------------------------- ----------------------------- By: John H. Hoagland, Jr., Chairman 21 EX-10.21 8 EMPLOYMENT AGREEMENT EXHIBIT 10.21 EMPLOYMENT AGREEMENT Agreement is by and between RomNet Support Services, Inc. with an office and place of business at 1660 Soldiers Field Road, Boston, Massachusetts 02135 (hereinafter called "Corporation"), acting herein by its Secretary, duly authorized by its Board of Directors, and Nicholas R. Gentile, (hereinafter called "Employee"). Corporation desires to employ Employee as President, or any other position required, of the Corporation under the terms and conditions set forth herein and Employee desires to be so employed. NOW, THEREFORE, the parties agree as follows: 1. Employment. Corporation agrees to employ Employee and Employee agrees to be so employed in the capacity of President, or any other position required. 2. Term. Employment shall be for a term of one (1) year commencing on 12/1/98 unless the Employee shall have received written notification from the Board of Directors of Corporation that this employment Agreement will not be renewed at least 90 days prior to its expiration, then this Agreement shall be extended, without further formalities, on the same terms and conditions. 3. Salary. Corporation shall provide to Employee as compensation for his services $85,000 Annually plus: (a) Stock Option Plan: 85,000 shares at an exercise price as of the closing bid price on the date this contract is signed - 25,000 shares will vest on signature, the balance on first anniversary. (b) Bonus Program to be established based on approved budget. Plan to be established by 1/1/99. 4. Insurance Benefits. The Corporation shall maintain medical and dental insurance programs if needed because of loss of wife's coverage. The Corporation shall pay 50% of the expense incurred for these for the Employee and his family. 5. Expenses. (a) Reimbursement. The Corporation shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Corporation an itemized account of such expenses in any form required by the Corporation on a weekly basis. (b) Auto - will provide auto and maintenance and insurance, with the value of the car not to exceed $30,000. (c) Company will provide for reasonable living expenses (apartment) in the greater Boston area. 6. Termination. This Agreement may be terminated for the following reasons: (a) For Cause: Corporation may terminate this Agreement for cause because of Employee's gross and intentional failure to perform the duties of President, or any other position required. (b) Disability: Employer shall have the right to terminate this Agreement on 30 days notice to Employee if, because of mental or physical disability Employee shall be determined by competent medical authority to be incapable for a period of 90 days from fully performing any or all of his obligations of his position within the Corporation. In this event Corporations obligations under this Agreement shall terminate 52 weeks after the determination of such disability. (c) Convenience of the Corporation: In the event Employee's employment is terminated by the Corporation for reasons of convenience to the Corporation and not due to any cause as provided above, the Corporation agrees to provide to Employee written notice 30 days prior to the effective date of termination plus the balance of salary due under the terms of this Agreement. 7. Restrictive Covenants. During the term of this Agreement and for a period of two (2) years after the termination or expiration of this Agreement, the Employee will not solicit any customers of Employer or within a one-hundred mile radius of Employer's business locations, directly or indirectly, own, manage, operate, control, be employed by or participate in any business that competes with and/or sells similar products and/or services as the products or services offered or business conducted by the Employer. In the event of the Employee's actual or threatened breach of the provisions of this paragraph, the Employer shall be entitled to an injunction restraining the Employee therefrom. Nothing shall be construed as prohibiting the Employer from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages from the Employee, including reasonable attorneys fees. 8. Disclosure of Confidential Information. The Employee acknowledges that he will have access to significant amounts of confidential information of Employer and its Parent Company, Carnegie International Corporation, including such information as lists of customers, sources of supply, production information, product information, service information, formulas, computer programs and development ideas related thereto, work in progress, trade secrets, technical information acquired by Employee from Employer or Carnegie or from the inspection of Employer's or Carnegie's property, confidential information - 2 - disclosed to Employee by third parties, and all documents, things and record bearing media disclosing or containing the aforegoing information, including any confidential materials prepared by the parties hereto which contain or otherwise relate to such information concerning the Employer's and/or Carnegie's financial, intellectual, technical and commercial information (collectively hereinafter referred to as "Confidential Information") which shall be and remain confidential. The Employee will not during or after the term of this employment, disclose the Confidential Information or any part thereof to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever. In the event of a breach or threatened breach by the Employee of the provisions of this paragraph, the Employer shall be entitled to any injunction restraining the Employee from disclosing, in whole or in part, the Confidential Information, or from rendering any services in connection with the telecommunications industry to any person, corporation, association, or other entity to whom such Confidential Information, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein shall be construed as prohibiting the Employer or Carnegie from pursuing any of the remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee. The Employee shall be responsible to Employer and Carnegie for reasonable attorneys fees and costs incurred in connection with the enforcement of this provision should a Court of competent jurisdiction rule in favor of Employer or Carnegie in connection with a cause of action brought for enforcement of said provision. 9. Indemnity. Corporation shall indemnify Employee and hold him harmless for all acts or decisions made by him in good faith while performing services for the Corporation. Corporation shall use its best efforts to obtain insurance coverage for him covering his acts or decisions during the term of his employment against lawsuits. Corporation shall pay all expenses including attorneys fees actually and necessarily incurred by Employee in connection with the defense of such act or decision in any suit or proceeding and in connection with any related appeal including the cost of settlement. 10. Notices. All notices required or permitted to be given under this Agreement shall be given by certified mail, return receipt requested, to the parties at the following addresses or to such other addresses as either may designate in writing to the other party: If to Corporation: RomNet Services, Inc. c/o Carnegie International Corporation 11350 McCormick Road, Suite 1001 Hunt Valley, MD 21031 If to Employee: - 3 - 11. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Maryland. 12. Entire Contract. This Agreement constitutes the entire understanding and Agreement between the Corporation and Employee with regard to all matters herein. There are no other Agreements, conditions, or representatives, oral or written, express or implied, with regard thereto. This Agreement may be amended only in writing, signed by both parties. 13. Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 14. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns. In Witness Whereof, Corporation has by its appropriate officers, signed and affixed its seal and Employee has signed and sealed this Agreement. ATTEST ROMNET SUPPORT SERVICES, INC. /s/ By: /s/ Lowell Farkas - ----------------------------- --------------------------- Lowell Farkas, Chairman WITNESS EMPLOYEE /s/ By: /s/ Nicholas R. Gentile - ----------------------------- --------------------------- Nicholas R. Gentile - 4 - EX-10.22 9 CONSULTING AGREEMENT EXHIBIT 10.22 CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is entered into this 15th day of July 1998 by and between Carnegie International Corporation, a Colorado corporation (herein referred to as the "Company") and The Vadiari Group International (herein referred to as the "Consultant"). RECITALS WHEREAS, the Company is a public corporation with its common stock reported on the OTC/BB; and WHEREAS, the Consultant has experience in the area of investor communications and financial and investor public relations, and WHEREAS, the Company desires to engage the services of Consultant to assist and consult to the Company in matters concerning investor relations and to represent the Company in investors' communications and public relations with existing shareholders and brokers, dealers, and other investment professionals as to the Company's current and proposed activities; NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1) Term of Consultancy. Company hereby agrees to retain the Consultant to act in a consulting capacity to the Company, and the Consultant hereby agrees to provide services to the Company, for a term of eighteen (18) months commencing July 15, 1998 and ending eighteen (18) months from said date. 2) Duties of Consultant. The Consultant agrees to provide the following specified consulting services during the term specified in Section 1: (a) Advise and assist the Company in developing and implementing appropriate plans and materials for presenting the Company and its business plans, strategy and personnel to the financial community, establishing an image for the Company in the financial community, and creating the foundations for subsequent financial public relations effort. (b) Introduce the Company to financial community; (c) Maintain an awareness during the term of this Agreement of the Company's plans, strategy and personnel, as they may evolve during such period, and advise and assist the Company in communicating appropriate information regarding such plans, strategy and personnel to the financial community; (d) Assist and advise the Company with respect to its (i) stockholder and investor relations, (ii) relations with brokers, dealers, analysts and other investment professionals, and (lit) financial public relations, generally; (e) Perform the functions generally assigned to investor/stockholder relations and public relations departments in major corporations, including responding to telephone and written inquiries; reviewing press releases, reports and other communications with or to shareholders, the investment community and the general public; advising with respect to the timing, form, distribution and other matters related to such releases, reports and communications; and consulting with respect to corporate symbols, logos, names, the presentation of such symbols, logos and names, and other matters relating to corporate image; (f) Disseminate information regarding the Company to brokers, dealers, other investment community professionals and the general investment public; (g) Conduct meetings, in person or by telephone, with brokers, dealers, analysts and other investment professionals to advise them of the Company's plans, goals and activities, and assist the Company in preparing for press conferences and other forums involving the media, investment community professionals and the general investment public; (h) At the Company's request, review business plans, strategies, mission statements, budgets, proposed transactions and other plans for the purpose of advising the company of the investments community implications thereof; (i) Otherwise perform as the company's financial relations and public relations consultant; and; - 2 - (j) Make public communications and disclosures regarding the Company only within the scope of the authorizations conferred by the company and not make any such communications or disclosures of information not provided or authorized by the company. 3) Allocations of Time and Energies. The consultant hereby promises to perform and discharge well and faithfully the responsibilities which may be assigned to the Consultant from time to time by the officers and duly authorized representative of the Company in connection with the conduct of its financial and investor public relations and communications activities, so long as such activities are in compliance with applicable securities laws and regulations. Consultant shall diligently and thoroughly provide the consulting services required hereunder. Although no specific hours-per-day requirement will be required, Consultant and the Company agree that Consultant will perform the duties set forth hereinabove in a diligent and professional manner. The parties acknowledge and agree that although a disproportionately large amount of the effort to be expended and the costs to be incurred by the consultant are expected to occur upon and shortly after, and in any event, within the first several months of this Agreement, remuneration will be viewed to be earned pro-rata over the life of the contract. 4) Remuneration. As full and complete compensation for services described in this Agreement, the Company shall transfer to Consultant shares in such amounts and at such times as shall be described on Exhibit A which is attached hereto and incorporated herein by reference. 5) Additional Obligations of IR. Consultant agrees that, in connection with its investor relations services to the Company, Consultant will not make any payment in cash or in kind to any third party as an inducement to such party to engage in activities which could be deemed to constitute market manipulation or other improper practice, such as recommending the stock without disclosure of Consultant's engagement as a Consultant for the company or Consultant's financial interest in the Company. Consultant will indemnify the Company from all claims, liability, cost or other expenses. (Including reasonable attorney's fees) incurred by the Company as a result of any inaccurate information concerning the Company released by Consultant, unless such information was provided to Consultant by the Company. 6) Additional Obligations of the Company. The Company agrees that, in connection with this Agreement, it will indemnify Consultant from all claims, liability, costs or other expenses incurred (including reasonable attorney's fees) by Consultant as a result of any inaccurate or misleading information concerning the Company provided by the Company or any of its officers or directors to Consultant, or as a result of any breach by the Company of any of the terms and conditions of this Agreement or commission of acts illegal under securities laws - 3 - by the Company or its officers or directors. The Company will not give Consultant material non-public or other confidential information that Consultant should not be disseminating. 7) Expenses. Consultant agrees to pay for all its own expenses (phone, labor, etc.), other than extraordinary items (travel required by/or specifically requested by the Company, luncheons or dinners to large groups of investment professionals, mass faxing to a sizeable percentage of the Company's constituents, investor conference calls, etc.) approved by the Company in writing prior to its incurring an obligation for reimbursement. The Company agrees to mail due diligence and investor materials at the request of Consultant at the sole expense of the Company. 8) Indemnification. The company warrants and represents that all oral communications, within documents or materials, furnished to Consultant by the Company with respect to financial affairs, operations, profitability and strategic planning of the Company are accurate and Consultant may rely upon the accuracy thereof without independent investigation. The Company will protect, indemnify and hold harmless Consultant against any claims or litigation including any damages, liability, cost and reasonable attorney's fees with respect thereto resulting from Consultant's communication or dissemination of any said information, documents or materials not designated by the Company to the Consultant as "confidential" or "company private," excluding any such claims or litigation resulting from Consultant's dissemination of information not provided or authorized by the Company. 9) Representations. Consultant represents that he is not required to maintain any licenses and registrations under federal or any state regulations necessary to performing the services set forth herein. Consultant acknowledges that, to the best of his knowledge, the performance of the services set forth under this Agreement will not violate any rule or provision of any regulatory agency having jurisdiction over Consultant. Consultant acknowledges that, it has not in the past or to the best of his knowledge, been the subject of any investigation, claim, decree or judgement involving any violation of the SEC, securities laws or NASD rules and regulations. Consultant further acknowledges that he is not a securities Broker Dealer or a registered investment advisor, and therefore is not required to communicate directly with shareholders or private investors. 10) Dissemination of Information. Consultant agrees to not disseminate information pertaining to the Company in the form of financial information, news releases, corporate reports or profiles, or other Such related information without the prior written authorization of the Company. Consultant agrees to indemnity the Company from such activities in the event Consultant fails to get prior written authorization for the release of said information. The Consultant will protect, indemnify and hold harmless the Company against any claims or litigation including any damages, liability, cost and reasonable attorney's fees with respect thereto - 4 - resulting from Consultant's communication or dissemination of any said information, documents or materials not designated by the Company to the Consultant as "confidential" or "company private," excluding any such claims or litigation resulting from Consultant's dissemination of information not provided or authorized by the Company. 11) Legal Representation. The Company acknowledges that it has been represented by independent legal counsel in preparation of this Agreement. Consultant represents that he has consulted with independent legal counsel and/or tax, financial and business advisors, to the extent the Consultant deemed necessary. 12) Status as Independent Contractor. Consultant's engagement pursuant to this Agreement shall be as independent contractor, and not as an employee, officer or other agent of the Company. Neither party to this Agreement shall represent or hold itself out to be the employer or employee of the other. Consultant further acknowledges the consideration and that the Company will not withhold from such consideration any amounts as to income taxes, social security payments or any other payroll taxes. All such income taxes and other such payment shall be made or provided for by Consultant and the Company shall have no responsibility or duties regarding such matters. Neither the Company nor the Consultant possesses the authority to bind each other in any agreements without the express written consent of the entity to be bound. 13) Attorney's Fees. If any legal action or any arbitration or other proceeding is brought for the enforcement or interpretation of this Agreement, or because of an alleged dispute, breach, default ' or misrepresentation in connection with or related to this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorney's fees and other costs in connection with that action or proceeding, in addition to any other relief to which it or they may be entitled. 14) Waiver. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by such other party. 15) Notices. All notices, requests, and other communications hereunder shall be deemed to be duly given if sent by U.S. mail, postage prepaid, addresses to the other party at the address as set forth herein below: To the Company: Mr. David Gable Carnegie International Corporation, Inc. 11350 McCormick Road Executive Plaza #3, Suite 1001 Hunt Valley, Maryland 21031 - 5 - To the Consultant: Mr. Chris Scoggin The Vadiari Group International P.O. Box 460427 Houston, Texas 77056-8427 It is understood that either party may change the address to which notices shall be addressed by providing notice of such change to the other party in the manner set forth in this paragraph. 16) Choice of Law, Jurisdiction and Venue. This Agreement shall be governed by, construed and enforced in accordance with the laws of the state of Maryland. The parties agree that Baltimore County, Maryland will be the venue of any dispute and will have jurisdiction over all parties. 17) Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the alleged breach thereof, or relating to Consultant's activities of remuneration under this Agreement, shall be settled by binding arbitration in Maryland, in accordance with the applicable rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator(s) shall be binding on the parties and may be entered in any court having jurisdiction thereof The provisions of the Maryland Rules of Procedure and successor statutes, permitting expanded discovery proceedings shall be applicable to all disputes that are arbitrated under this paragraph. 18) Arbitration and Waiver of Jury Trial. ANY DISPUTE BASED UPON OR ARISING OUT OF THIS AGREEMENT SHALL BE SUBJECT TO BINDING ARBITRATION TO BE HELD IN BALTIMORE COUNTY, MARYLAND BEFORE A RETIRED MARYLAND CIRCUIT COURT JUDGE. JUDGMENT ON THE ARBITRATOR'S AWARD SHALL BE FINAL AND BINDING, AND MAY BE ENTERED IN ANY COMPETENT COURT. AS A PRACTICAL MATTER, BY AGREEING TO ARBITRATE, ALL PARTIES ARE WAIVING JURY TRIAL. 19) Assignment. This Agreement, with the consent of the Company, may be assigned to a corporation, limited liability company, partnership, or unincorporated organization, owned or controlled by Consultant, at the sole discretion of Consultant, any time during the term of the Agreement, without the consent of the Company. Given the unique and personal nature of the services to be provided by Consultant, no other assignment shall be permitted without the prior written consent of the Company. 20) Complete Agreement. This Agreement instrument contains the entire Agreement of the parties relating to the subject matter hereof. This Agreement and its terms - 6 - may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. Agreed to and signed this 15th day of July, 1998: Carnegie International Corporation The Vadiari Group International By:/s/ E. David Gable By: /s/ Tina S. Alexander ------------------ --------------------- E. David Gable Tina S. Alexander - 7 - EXHIBIT A 200,847.5 Preferred Series B shares of Carnegie International Corporation which shall be convertible to 2,008,475 Common shares of the Corporation (which is based on 4.99% of the issued shares of the Company as of July 15, 1998) with piggyback registration rights. Said Shares shall be convertible only upon the common share price of the Company maintaining an average (bid) trading price of two dollars ($2.00) per share for a period of at least thirty (30) days. In the event said trading price of the Company does not reach $2.00 per share by December 31, 1998, or in the event the 30 day average common Share price does not hold at $2.00 per share for more than thirty (30) days on or before February 15, 1999, this Agreement may be terminated at the sole and exclusive option of the Company, in which case all of the Consultant's Preferred Shares shall automatically revert back to the Company. The Company's option to terminate shall continue and not expire. In the event of said termination, the Company shall issue to the Consultant, as Consultant's total compensation, 100,423.8 shares of CAGI common, which represents five percent (5%) of the common shares to which it would have been entitled had it performed fully in accordance with the terms hereof. INITIALS: /s/ TSA /s/ EDG ------- ------- EX-10.23 10 TILLER INTERNATIONAL DISTRIBUTOR AGREEMENT EXHIBIT 10.23 CARNEGIE INTERNATIONAL CORPORATION TILLER INTERNATIONAL DISTRIBUTOR AGREEMENT This Agreement is made as of this 8th day of December, 1998 by and between Carnegie International Corporation, hereinafter referred to as Supplier, and Tiller International Corporation, a Company registered in Monte Carlo, Monaco hereinafter referred to as Distributor. In consideration of the surrender of the put options previously owned by Tiller First Wall Investments, Ltd., Eastby, Ltd., Bothwell, Ltd., Timana, Ltd., and Tigan Capital Holdings, Ltd., which Distributor caused to be surrendered, the puts having a face value at maturity of $5,000,000, and the mutual agreements and promises contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, Distributor and Supplier agree as follows: 1. APPOINTMENT OF DISTRIBUTOR: Supplier hereby appoints and designates the Distributor as the authorized Distributor of the MAVIS(TM) Software in the Russian and English language, hereinafter referred to as "Software" and authorizes Distributor to market and sell Software, according to the terms and conditions of this Agreement. Supplier agrees to sell to Distributor, Software for resale in the former Soviet Union, Poland, Hungary, Czech Republic and other countries of the Eastern Block. 2. THE DISTRIBUTOR AGREES: A. To use its best efforts to promote, market and distribute the Software of Supplier in a manner reflecting credit on the parties to this Agreement. B. To provide customers with currently available catalogs and promotional literature in reasonable quantities as deemed appropriate by Distributor. C. To provide and/or coordinate technical support for and training in the proper use of the Software, for those customers requesting same, through seminars and other programs as deemed appropriate by Distributor. 3. SUPPLIER AGREES: A. To support the Distributor in its effort to promote the sale of the Software. B. To provide reasonable technical and/or sales training assistance for the Distributor's Customers at the Distributor's request and expense. C. To support the Distributor by providing it, upon request, with all reasonable quantities of literature, catalogs, advertisements, circulars, etc. at cost plus 10%. D. To provide 1,000 copies of the MAVIS(TM) software in the Russian and English language. 4. ADDITIONAL TERMS AND CONDITIONS: A. Order Entry. All orders shall be placed using the standard Purchase Order forms of Supplier B. Pricing/Discounts: Distributor's cost for each item of the Software shall be Supplier's current list price as published from time to time. Supplier shall have the right to change its prices upon sixty (60) days written notice to Distributor. Prices are exclusive of taxes. In the event of a decrease in price, Supplier will issue a credit to Distributor for the difference between the original and new lower price on products currently in Distributor's stock. In the event of a price increase, orders placed prior to effective date will be invoiced at the old prices. Volume discount and/or rebate programs may be included herein or accepted under separate agreement or schedule. C. Stock Balancing. Distributor may request one (1) return authorization in each calendar quarter without a restocking charge, for slow moving inventory. Distributor may return one (1) consolidated shipment from each distribution location, freight prepaid, for stock adjustment. D. Freight. FOB. Equipment will be shipped to Distributor's specified delivery point FOB Origin for drop ship orders, freight prepaid and added to the invoice provided a copy of the actual freight invoice is included for all shipments other than U.P.S. FOB destination freight prepaid and allowed for stock shipments. Title and risk of loss for Equipment shall pass to Distributor, upon delivery. Supplier will pack Software purchased hereunder for transport in accordance with commercial standards and deliver Software to a carrier of the mode of transportation selected by Distributor unless otherwise agreed upon by the parties. If any unauthorized freight carrier routing occurs which results in an increase to the net cost of freight to the Distributor, the difference is subject to bill back and will be deducted from the next available invoice. All Bills of Lading shall indicate total piece count. All shipments marked "SAID TO CONTAIN" are subject to refusal and all charges applicable are Supplier's responsibility. Supplier will assist in asserting any claim against the invoiced carrier for loss, damage or - 2 - destruction of Software. Freight classifications must be provided for all products upon acceptance of this Agreement. E. Packaging/Weights. Unless instructed otherwise by Distributor, Supplier shall, for orders placed hereunder: (1) ship to the destination designated in the order in accordance with specific shipping instructions; (2) see that all subordinate documents bear Distributor's order number; (3) enclose a packing memorandum with each shipment and when more than one package is shipped, identify the one containing the memorandum and sequentially number all cartons, i.e., 1 of 4, 2 of 4, etc.; (4) mark Distributor's order number on all packages and shipping papers; and (5) render separate invoices for each shipment or order. F. Relationship of Parties. This Agreement does not in any way create the relationship of joint venture, partner, or principal land agent between Carnegie International Corporation and Tiller International and neither shall have the power or ability to pledge the credit of the other, nor to bind the other, nor to contract in the name of or create a liability against the other in any ways for any purpose. G. Infringement. The Supplier will indemnify, defend, and otherwise hold harmless the Distributor, its affiliates, and its customers from all cost, loss, damage, or liability arising from any proceeding or claim brought or asserted against Distributor, its affiliates, or its customers for any claim that the use of any Products in accordance with this agreement infringes a third party's patent, copyright, trade secret and/or other proprietary right. If claim for infringement occurs and Distributor's use of a product or any part thereof in accordance with this agreement is enjoined as a result thereof, or in the supplier's opinion is likely to occur, the Supplier shall have the right, at its option and expense; to (1) produce the right for Distributor to continue using such product(s) so that it becomes non-infringing, or (2) require the return to the Supplier all products to which such claim(s) for infringement relate. In the event of any such return of products, the Supplier agrees to grant Distributor credit for such returned products, based on the price paid. Supplier shall have no obligation or liability to Distributor for any claim and/or injunction for infringement based upon (1) the combination, operating or use of any product(s) with equipment, data, or software not supplier by Supplier, (2) alteration or modification of any product(s) not authorized or performed by Supplier, or which are made or authorized by Supplier in compliance with Distributor's or end user's designs, specifications or instructions. - 3 - H. Warranty. Standard policy to be included with current price schedule provided initially and periodically hereafter. Optional policies or programs as available. I. Trademarks. Products and licensed materials purchased under this Agreement may bear trade names, trademarks, logos or to symbols of Supplier. Supplier hereby grants to Distributor permission to use such symbols in Distributor's marketing and advertising of Supplier's products, provided such use conforms to standards and guidelines relating thereto which Supplier may furnish from time to time. Use of trademarks and symbols by Distributor may be subject too pre-publication or pre-use review and approval by Supplier. If, in Supplier's judgment, any use by Distributor is deemed detrimental to Supplier or is deemed undesirable, Supplier may withdraw permission without liability as result thereof. J. Force Majeure. Neither party shall be responsible for delays or failures in performance resulting from acts of God, labor strikes, acts of war or civil disruption, government regulations imposed after the fact, public utility failures, or natural disasters. K. Termination. The Distributorship hereby created may be terminated only by an agreement in writing duly signed by the parties hereto. L. Governing Law. This Agreement shall be governed by the laws of the State of Maryland. SUPPLIER Carnegie International Corporation BY: /s/ Lowell Farkas ---------------------------------- (Authorized Signature) Name: Lowell Farkas -------------------------------- Title: President ------------------------------- Date: 12/8/98 -------------------------------- Attest: /s/ David Pearl - 4 - TILLER INTERNATIONAL By: /s/ Anthony N. Georgiou ---------------------------------- (Authorized Signature) Name: Anthony N. Georgiou -------------------------------- Title: Chairman ------------------------------- Date: 12/8/98 -------------------------------- Attest: _______________________________ - 5 - EX-21.1 11 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant 1. Profit Thru Telecommunications (Europe) Limited 2. Talidan Limited 3. Harbor City Corporation, t/a ACC Telecom 4. Talidan USA, Inc. 5. Victoria Station Miami, Inc. 6. Electronic Card Processing, Inc. 7. Voice Quest, Inc. 8. RomNet Support Services, Inc. EX-27.1 12 FINANCIAL DATA SCHEDULE
5 (Replace this text with the legend) 0000311172 CARNEGIE INTERNATIONAL CORPORATION 1 U.S. Dollars 12-MOS 12-MOS 9-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-30-1998 DEC-30-1997 JAN-1-1996 JAN-1-1997 JAN-1-1998 JAN-1-1997 DEC-31-1996 DEC-31-1997 JUN-30-1998 JUN-30-1997 1 1 1 1 0 226,422 164,047 0 0 400,000 0 0 0 771,664 3,552,995 0 0 0 0 0 0 32,575 240,345 0 0 1,455,281 4,464,418 0 0 586,259 2,384,183 0 0 102,042 500,488 0 0 8,837,333 15,221,222 0 0 3,102,913 3,993,151 0 0 0 0 0 0 0 0 0 0 0 200,000 0 0 388,355 442,127 0 0 1,419,879 5,647,606 0 0 8,837,333 15,221,272 0 3,256,291 6,945,810 7,341,429 5,242,300 3,256,291 6,945,810 7,341,429 5,242,300 2,522,030 1,589,925 3,776,758 784,517 0 0 0 0 1,224,689 3,592,270 3,976,880 1,728,139 0 0 0 0 226,063 49,417 219,992 44,531 (709,347) 1,731,032 3,530,401 2,685,113 0 50,867 1,022,581 184,516 (709,347) 1,680,165 2,507,820 2,500,597 0 (100,330) 0 (100,330) 0 0 0 0 0 0 0 0 (709,347) 1,579,835 2,507,820 2,400,467 (.08) .07 .06 .14 (.08) .07 .06 .14
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