-----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, LI4HcSxtD2ae4yYUzUxxlTEmWzAWyfwCHLCTVRG7i5g7IkPGY8c0p7NWnLI9IjXv sgtA3QGtxi/9Yt+F13OoCA== 0000950128-98-000691.txt : 19980401 0000950128-98-000691.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950128-98-000691 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARNEGIE GROUP INC CENTRAL INDEX KEY: 0001001188 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 251435252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26964 FILM NUMBER: 98581160 BUSINESS ADDRESS: STREET 1: FIVE PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4126426900 MAIL ADDRESS: STREET 1: FIVE PPG PLACE CITY: PITTSBURGH STATE: PA ZIP: 15222 10-K 1 CARNEGIE GROUP, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ---------------------- to ----------------------- COMMISSION FILE NUMBER 0-26964 CARNEGIE GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 25-1435252 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) FIVE PPG PLACE, PITTSBURGH, PENNSYLVANIA 15222 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 642-6900 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 20, 1998, the aggregate market value of voting common stock held by non-affiliates of the registrant, based upon the last reported sale price for the registrant's Common Stock on the Nasdaq National Market on such date, as reported in The Wall Street Journal, was $15,189,210 (calculated by excluding shares owned beneficially by directors and executive officers as a group from total outstanding shares solely for the purpose of this response). The number of shares of the registrant's Common Stock outstanding as of the close of business on March 20, 1998 was 6,499,635. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the definitive Proxy Statement of Carnegie Group, Inc. to be used in connection with the 1998 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent provided herein. Except as specifically incorporated by reference herein, the Proxy Statement is not to be deemed filed as part of this Annual Report on Form 10-K. ================================================================================ 2 PART I ITEM 1. BUSINESS. Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides business and technical consulting, client/server and Internet-based custom software development, third-party package implementation and systems integration services. The Company focuses on two business areas in the information technology professional services marketplace: customer interaction; and logistics, planning and scheduling. Within these areas, the Company helps clients in the financial services, government, manufacturing and telecommunications industries improve business processes, customer relations, productivity and market position. The Company's expertise encompasses a wide range of advanced software technologies, including knowledge management systems, object-oriented technology, advanced graphical user interfaces, constraint-directed search and distributed computing. The Company captures certain aspects of its business area experience and advanced technology expertise in a portfolio of reusable software templates that can be used as building blocks to create software solutions quickly and effectively. In addition, Carnegie Group employs its three-phased RAPID methodology to help provide speed and repeatable reliability in creating software solutions across different client engagements. RAPID begins with an Analysis and Planning phase, is followed by an Implementation phase, and ends with a Deployment phase. Since inception, Carnegie Group has emphasized relationships with leading corporations in its targeted industries. These relationships have provided the Company with opportunities for growth through the provision of additional services to existing clients and through references to other companies within the Company's targeted industries. Carnegie Group's clients include U S WEST Communications, Inc., the United States Transportation Command, U.S. Army, Diebold, BellSouth Telecommunications, Inc., First USA Bank, Highmark Blue Cross Blue Shield and Philips Medical Systems. INDUSTRY BACKGROUND Corporations increasingly seek to gain competitive advantages by reengineering business processes in order to increase productivity, improve responsiveness to market demands and facilitate comprehensive planning. The knowledge and experience of workers involved in complex business processes can be captured and disseminated through business process reengineering in order to support and improve enterprise-wide decision-making. As computer speed and capacity have increased and computer hardware and software costs have declined, corporations have decentralized their computing infrastructures by distributing computing power to end-users. While centralized computing infrastructures have historically collected, stored and manipulated large volumes of information, the widespread installation of client/server architectures has enabled multiple personal computers and workstations to be linked together in various locations within an enterprise and has permitted information to be disseminated to end-users. In addition, the Internet has provided a global network through which information can be disseminated without regard to specific computing platforms. The use of advanced software technologies within client/server and Internet-based architectures has facilitated the creation of sophisticated software solutions that capture, analyze and disseminate enterprise-wide knowledge. These solutions allow end-users to access business rules and accumulate corporate knowledge, and to use that information to make decisions more quickly and exploit business opportunities more effectively. Successful implementation of sophisticated software solutions within client/server and Internet-based architectures requires specialized expertise in advanced software technologies. Generally, such expertise is not found in corporations' internal information systems departments, because maintaining specialized expertise in advanced software technologies is not believed to be cost-effective. As a result, corporations are increasingly retaining information technology service providers to develop the sophisticated software solutions they require. The demand for sophisticated software solutions that automate and enhance business processes has created significant opportunities for information technology service providers. However, not all information technology service providers have the expertise to provide sophisticated solutions within client/server and Internet-based architectures. Some of these providers focus on general business consulting or on the 3 methodologies through which business processes can be reengineered, while others focus on consulting for specific industries or on specific systems integration services. CARNEGIE GROUP'S STRATEGY Carnegie Group has recognized the demand for information technology services from providers who combine expertise in a wide range of advanced software technologies with experience in developing sophisticated software solutions for specific industries. Carnegie Group's goal is to be a leading provider of knowledge-based, user-centered client/server and Internet-based software development services that integrate advanced technologies with clients' existing computing infrastructures to automate and enhance business processes in two business areas: customer interaction; and logistics, planning and scheduling. To attain that goal, the Company employs the following strategies: Apply Advanced Software Technologies to Develop High-Value Solutions. Carnegie Group focuses on performing software development, systems integration and technical consulting services that apply advanced software technologies to develop high-value software solutions that improve its clients' productivity and competitive market position. The Company's expertise encompasses a wide range of advanced software technologies, including: knowledge management systems; object-oriented technology; advanced graphical user interfaces; constraint-directed search; and distributed computing. Carnegie Group intends to continue to focus on applying advanced software technologies as new technologies are developed that can be used to build high-value solutions for its clients. Employ Reusable Software Templates to Leverage Business Area Experience. Carnegie Group captures certain aspects of its business area experience and advanced technology expertise, developed principally in the course of engagements for clients, in a portfolio of reusable software templates. The Company selects templates for use in new engagements where appropriate, and then modifies and enhances these templates to serve as the building blocks of complete knowledge-intensive software solutions. Carnegie Group believes that its portfolio of reusable software templates reduces development time and project costs and enhances project quality, allowing it to quickly provide sophisticated software solutions to its clients. The Company plans to continue to employ reusable software templates within appropriate application niches and to develop new templates as it performs engagements for its clients. Continue to Grow Significant Client Relationships. Carnegie Group has emphasized relationships with leading organizations in its targeted industries. These organizations are characterized by business areas (such as customer interaction, and logistics, planning and scheduling) to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations necessary to support the engagement of service providers such as the Company. In each relationship, the Company seeks to capitalize on its success in completing an initial engagement by offering additional services that automate and enhance other business processes for that client. Carnegie Group expects that its focus on providing additional software solutions for existing clients will continue to be an important component of its marketing efforts. Expand Client Base in Targeted Industries. Carnegie Group is focused upon expanding its client base in the financial services, government, manufacturing and telecommunications industries. The Company believes that successful engagements for existing clients create opportunities for client references that enhance the Company's reputation and enable it to attract additional clients in its targeted industries. Carnegie Group also intends to target additional industries in which its business area experience and advanced software technology expertise can be applied. Apply RAPID Methodology to Facilitate Rapid Custom Software Development. In the course of performing its engagements, Carnegie Group employs its three-phased RAPID methodology to help provide speed and repeatable reliability in creating software solutions across different client engagements. RAPID begins with an Analysis and Planning phase, is followed by an Implementation phase, and ends with a Deployment phase. This methodology encourages client feedback and leads to greater congruence with client needs and expectations. The Company believes that this approach enables the rapid deployment of knowledge-intensive software solutions for its clients. 2 4 Strategic Acquisition. Carnegie Group acquired Advantage kbs, Inc. in March 1998. Advantage provides problem solving resolution software and professional services for automating customer support. The Company believes that the acquisition of Advantage will enhance its customer interaction and call center strategy by enabling the Company to offer Advantage's IQSupport Application Suite in the call center and help desk market. See "Recent Development." The Company will continue evaluating acquisitions of businesses, products and technologies that complement the Company's business. SERVICES AND SOLUTIONS Carnegie Group's project teams provide software development, systems integration and technical consulting services to create knowledge-intensive software solutions that improve business processes, customer relations, productivity, and market position. Services Carnegie Group provides its services through project teams comprised of engineers, project managers and sales and marketing personnel that are assigned to client engagements. These professionals apply industry, advanced technology and business area expertise to create a solution that is intended to meet the client's needs. The Company's project teams generally perform services in three phases (which are usually the subjects of separate contracts but which may be governed by one contract covering all phases): Phase I typically consists of a "proof of concept" or feasibility assessment for the client which identifies the specific problem and proposes the solution to be created by Carnegie Group, including the technology likely to be employed during the engagement and the engagement milestones for each phase. The first phase is generally completed in one to three months and is usually performed on a fixed-price basis. Successful completion of phase one may lead to the continuation of the project into phase two, although there is no obligation for the client to engage Carnegie Group to continue the project following the completion of the first phase. Phase II generally lasts three to nine months and involves completing a solution for the client. The solution may include a licensed software component such as a reusable software template. In designing software solutions, the Company applies an iterative or "spiral" approach that starts with the client's identification of its requirements during Phase I, from which Carnegie Group proceeds to construct a prototype that is then tested with the client against, and used to refine, the original requirements. Carnegie Group then produces successive new versions of the software, each of which is again tested with the client against project requirements. Phase III generally consists of deploying the solution at additional client sites or throughout the client's business enterprise. The project specification may be further customized during this phase to incorporate changing client needs. The third phase may take from six months to more than a year. The majority of the Company's engagement contracts in the second and third phases are performed on a time-and-materials basis. Solutions Carnegie Group creates software solutions for two business areas: customer interaction; and logistics, planning and scheduling. Customer Interaction. Carnegie Group develops knowledge-based agent software that enables business managers to consistently deliver corporate knowledge and business strategy to all points of customer contact across an enterprise. Knowledge-based agents deliver corporate knowledge and strategy to human decision makers in the form of recommendations that can help solve problems and sell products and services. This technology enables organizations to affect the quality of customer encounters and optimize all interactions to generate greater revenue, improve customer satisfaction and achieve other critical business goals. A solution designed for Philips Medical Systems helps customer support engineers make a repair at the customer's site, where time and performance are critical. Using Carnegie Group's TestBench(TM) diagnostic software, engineers are able to service the customer immediately. TestBench automates the process of accessing information and gives customer support engineers the instantaneous access to knowledge bases, 3 5 consisting of technical expertise and legacy data, that they need to perform their job more efficiently and effectively. At Philips, TestBench enables engineers to repair the company's medical equipment efficiently and on the first call whenever possible. The engineer determines a machine's symptoms, queries the knowledge base, and plays out scenarios to reach a solution. Repair cycles are shortened, unnecessary service calls are eliminated, spare parts inventory is reduced, and solutions are shared among engineers' peers. A solution designed for U S WEST Communications, Inc. ("U S WEST"), a subsidiary of a regional Bell operating company, helps make U S WEST's call center more responsive and efficient and improves customer service and satisfaction. To help U S WEST maximize its share of their Mass Market environment, Carnegie Group developed a Front End Screen & Route (FES&R) system as the central component of U S WEST's Call Handling program. The FES&R system shortens call routing time to call centers and improves the match between the caller (customer) and the call handler (customer service/collection teams) so that each call gets to the call handler best equipped to help with the customer's particular needs. The FES&R system handles any call, any time, anywhere and supports a seven-day/24-hour call center operation covering multiple voice response units (VRU's) and automatic call distributors in the 14-state U S WEST Mass Market territory. The system provides a front end for VRU's to enable customer self-help. Flexible business rules, combined with customer, network, and market intelligence information, are used to provide advanced call control capabilities and load balancing for intelligent call routing and screening. A solution designed for First USA Bank, a subsidiary of Banc One, helps utilize First USA's call center in a variety of critical customer service functions. To help First USA develop a call center-based collections strategy to assist card members in controlling their accounts, Carnegie Group developed a Collections Support System. The Collections Support System enables customer support representatives to focus on helping customers, rather than navigating a computer system, by delivering the correct information as it is needed. This capability speeds the customer service representative's ability to answer questions and anticipate customer needs. A solution designed for BellSouth Telecommunications, helps make its web site provide more than company information to its customers. Carnegie Group provided the knowledge engineering and teamed with BellSouth on the software development for Solution Advisor, an interactive web site that enables small business customers to obtain the information and services they need, when they need them. When accessed via the Worldwide Web, an animated on-line "agent" greets the customer and presents a series of questions about specific business requirements. Based on the customer's response, Solution Advisor provides instant recommendations for telecommunications solutions customized to the customer's business, as well as pricing tailored to each business location. Opening this new channel gives BellSouth's web-based customers a chance to use a smart solution for self-help while reducing the number of calls to BellSouth's call center. Logistics, Planning and Scheduling. Carnegie Group's knowledge-based logistics, planning and scheduling solutions are intended to optimize the allocation of available resources, thereby increasing efficiency and reducing costs. These solutions provide advanced decision-support to planners by modeling and manipulating complex information, and by simulating and analyzing multiple scenarios. The Company's logistics, planning and scheduling solutions help to reduce lead times and to match resources with requirements. A solution designed for the U.S. Transportation Command (TRANSCOM) is helping U.S. military patient movement planners synchronize operations with evacuation processes. The TRANSCOM Regulatory And Command & Control Evacuation System (TRAC(2)ES) is the result of a Department of Defense directive that tasked TRANSCOM with establishing a global system for patient movement, integrating medical regulating and evacuation. Prior to TRAC(2)ES, medical regulation and evacuation were two separate processes. With little or no correlation between a patient's needs and the capabilities at hand to transport patients to proper care, TRAC(2)ES consolidates medical regulation and evacuation through an advanced decision-support system. This system determines the appropriate time-and-resource-sensitive information and how it should be presented to support planners in getting patients where they need to go for the best treatment. Another solution, developed for a steel producer, provides mill operators with advanced decision-support for planning and scheduling continuous slab caster and melt shop facilities. This solution arranges slab requirements into possible production sequences and helps the operator evaluate alternative sequences before 4 6 scheduling actual production. This solution assists the client in reducing costs by improving yield and cutting inventory, while simultaneously improving customer service by creating more reliable production schedules. The solution is based on the Company's Caster Planning and Scheduling System (CaPSS) software template. TECHNOLOGY Advanced Software Technologies Carnegie Group's engineering staff is experienced in applying advanced software technologies to create solutions within enterprise-wide client/server and Internet-based architectures. The architecture of the Company's software solutions typically contains three tiers or layers: a "presentation layer" which contains the user interface; a "functionality layer" which embodies the business logic, knowledge base and application logic of the system; and a "data layer" which is comprised of both data created with existing systems and new data created with the solution. To create its solutions within three-tiered client/server and Internet-based environments, Carnegie Group's engineers are skilled at employing advanced software technologies, including: knowledge-based systems; object-oriented technology; advanced graphical user interfaces; constraint-directed search; and distributed computing. Knowledge management systems are software systems that can make reasoned decisions about complicated processes and that enable those processes to be completed with little or no human intervention. Knowledge-based systems access detailed information about the process, apply underlying reasoning and recommend decisions. Object-oriented technology is a methodology for designing a software system using an object-oriented programming language, which represents concepts, things and actions by describing their attributes. Once a concept, thing, or action has been described, that description and its accompanying software code can be reused broadly. Advanced graphical user interfaces combine screen icons, text and pointing devices to allow computer users to direct a computer's activities by manipulating images. Well-designed interfaces distill powerful and complex functions into simple and intuitive graphic representations. Constraint-directed search is a software system that searches for desired data or decisions across a large range of alternatives, with limiting factors attached to the search. Such a search may, for example, be constrained by dates or by certain characteristics of available resources. In a knowledge-based system, the sets of constraints imposed on the search may be many, complex and interdependent. Distributed computing refers to computer transactions, such as information transfer, that may take place between different types of computers, which may or may not be at the same location. Distributed computing and transaction processing software automates and enables enterprise-wide information exchanges that might not otherwise be available. Other advanced software technologies employed by the Company include case-based reasoning and relational and object-oriented database management systems. Reusable Software Templates Carnegie Group captures certain aspects of its business area experience and advanced technology expertise in a portfolio of reusable software templates. Generally, these templates are developed and refined in the course of performing services for clients. The Company selects templates for use as building blocks in new engagements where appropriate, and then modifies and enhances these templates to form complete, customized, knowledge-intensive solutions. The Company believes that its reusable software templates reduce development time and project costs and enhance project quality, allowing it to quickly provide sophisticated software solutions to its clients. The Company's reusable software templates include the following: Recommender is a customer contact software template that consolidates valuable knowledge from sales and marketing personnel, and disseminates it to sales consultants and customer service representatives. 5 7 Customer Xpress helps the user navigate through the process of defining customer needs and exploring options among available products. It is intended to enable the end-user to increase revenue from each customer contact, improve the quality of service and reduce service representative training time and costs. TestBench is a customer service software template that is designed to increase the accuracy and efficiency of help desk, technical assistance center and stand-alone field support. TestBench enables organizations to capture human troubleshooting expertise and deploy that expertise rapidly and inexpensively to end-users. This template can be integrated with or embedded in other conventional computing environments. TestBench is also available from the Company as a stand-alone software product. WorkBench is a reusable customer service software template developed from a user-centric perspective. It provides a consistent, graphical interface into service applications while allowing data to be shared between these applications. Service representatives can access the information they need quickly and easily, and share information through the system. RECENT DEVELOPMENT On March 19, 1998, the Company acquired all the outstanding stock of Advantage kbs, Inc. (Advantage) for a purchase price of $5m, plus an additional contingent payment of up to $2.5m which is dependent upon revenue and earnings of Advantage for the year ending December 31, 1998. Based in Edison, New Jersey, Advantage provides problem resolution software and professional services for automating customer support. The Company believes that the acquisition of Advantage will enhance its customer interaction and call center strategy by enabling the Company to offer Advantage's IQSupport Application Suite in the call center and help desk markets. In addition, the Company believes that the acquisition will broaden its capacity to offer business consulting services to its customers. The integration of Advantage is subject to certain risks. The possible business and financial advantages of the acquisition may not be achieved unless the operations of Advantage are successfully integrated with the Company in a timely manner. See "Risk Factors--Risks Associated with Integration of Advantage." A Current Report on Form 8-K is being filed with respect to the acquisition of Advantage. MARKETING, SALES AND CLIENTS Carnegie Group markets its services directly to clients in its targeted industries of financial services, government, manufacturing and telecommunications. These industries are characterized by business areas (such as customer interaction, and logistics, planning and scheduling) to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations necessary to support the engagement of service providers such as the Company. The Company identifies leading organizations in each industry and seeks to provide an initial solution that builds on one of the Company's reusable software templates. Once an initial project has been successfully completed, Carnegie Group seeks to offer additional services that automate and enhance other business processes for the client. Carnegie Group intends to target additional industries in which its business area experience and advanced software technology expertise can be applied. The Company markets its services to clients throughout the United States from its headquarters in Pittsburgh, Pennsylvania. In addition, the Company maintains offices in Denver, Colorado, Atlanta, Georgia, and Oakland, California focusing upon clients in the telecommunications industry. The offices in Fairview Heights, Illinois and Arlington, Virginia service government industry clients. Of the 257 people employed or engaged by the Company as of December 31, 1997, 25 were involved directly in sales and marketing and were supported by 36 project managers and 162 project engineers focused upon the industries that the Company serves. The Company employs a variety of business development and marketing techniques to communicate directly with current and prospective clients. These techniques include exhibiting at trade shows, authoring articles and presenting papers regarding the Company's solutions and technology, holding seminars for clients and prospective clients on technology and industry issues and marketing through direct mail initiatives. In accordance with government contracting requirements, the Company's marketing and sales efforts toward 6 8 government industry clients that are governmental agencies or instrumentalities are limited to responding to requests for proposals and participating in competitive bidding. Periodically, the Company responds to requests by these clients for bids on projects in which the technology to be employed or services to be rendered are available from only one or a limited number of sources. 1997 saw the addition of a channels marketing program called the Carnegie Alliance Team. The Carnegie Alliance Team participates in the third-party package implementation business by securing partnerships with leading product and tool set vendors in the customer interaction business area. These product and tool set providers rely on services firms like Carnegie Group to successfully implement their products and integrate them with clients' existing information systems. In 1997, the Carnegie Alliance Team concentrated its efforts on a relationship with Genesys Telecommunications Laboratories, Inc. Genesys develops, markets and sells computer telephony integration (CTI) software products and tool sets. CTI products enable information to flow more easily between telecommunications switching equipment and the desktop computers in customer interaction or call center environments. This improved information flow leverages information contained at the switch and in existing data structures and creates a richer information environment for customer interaction business personnel to improve management and customer support and service. In 1997, total revenue from billings to each of the United States Transportation Command, U S WEST Communications, Inc. and BellSouth Telecommunications accounted for more than 10% of the Company's total revenue. In 1996, total revenue from billings to the United States Transportation Command, the U S Army, Caterpillar, Inc. and BellSouth Telecommunications accounted for more than 10% of the Company's total revenue. The Company expects to continue to derive a significant portion of its revenue from a relatively limited number of major clients. BACKLOG The Company only includes in backlog signed contracts that either have milestones yet to be attained or for which the Company can make a reasonable estimate of work yet to be performed. The Company's backlog totaled $8.7 million at December 31, 1997, compared to $9.6 million at December 31, 1996. Contracts included in backlog are generally performed within 12 months. In accordance with industry practice, most of the Company's contracts are terminable by the Company or the client upon short or no notice. There can be no assurance that contracts reflected in backlog will not be canceled or delayed. Accordingly, the Company believes that backlog is not a reliable measure of future revenue. COMPETITION The information technology services market, which includes the market for the Company's services and solutions, is comprised of a large number of participants, is subject to rapid change and is highly competitive. Primary competitors include: the consulting practices of the "Big Six" accounting firms; systems consulting and integration firms such as American Management Systems, Inc. and Cambridge Technology Partners Inc.; and the professional services groups of large companies, such as International Business Machines Corporation, Digital Equipment Corporation and AT&T Corporation. Many participants in the information technology services market have significantly greater financial, technical and marketing resources and greater name recognition than does Carnegie Group. Moreover, clients may elect to use their internal information systems resources to satisfy their needs for the software development, systems integration and technical consulting services that the Company offers. The Company also faces competition from organizations providing outsourcing services to the information systems departments of existing and potential clients. In addition, the information technology services market is highly fragmented and is served by numerous firms; some of these firms compete nationally and internationally, while others serve only their respective local markets. While the Company has not experienced competition from foreign providers of information technology services, there can be no assurance that the Company will not experience such competition in the future. Carnegie Group has targeted, and expects to continue to target, industries that are characterized by business areas (such as customer interaction, and logistics, planning and scheduling) to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations 7 9 necessary to support the engagement of service providers such as the Company. A growing number of professional services firms are seeking engagements from that same client group. The Company believes that the principal competitive factors in the information technology services market include the nature of the service offering, quality of service, timeliness, responsiveness to client needs, experience with the client's industry and competitive environment, technical expertise, access to replicable technology such as software templates and price. The Company believes that it competes favorably with respect to these factors. The Company believes that its ability to compete also depends in part upon a number of competitive factors outside its control, including: the ability of its competitors to hire, retain and motivate project managers, engineers and sales and marketing personnel; competitors' ownership of or access to software and technology used by potential clients; the development by others of software that is competitive with the Company's solutions and services; the price at which others offer comparable services; and the extent of competitors' responsiveness to customer needs. EMPLOYEES As of December 31, 1997, the Company had a total staff of 257 employees and independent contractors, comprised of 198 technical personnel (of whom 36 were project managers and 162 were project engineers), 25 sales and marketing personnel and 34 corporate services personnel. The Company's professional personnel have a variety of educational backgrounds, including degrees in software engineering, electrical engineering, computer science, mechanical engineering, linguistics and business administration; there were 106 employees at December 31, 1997 with advanced degrees. The Company has historically filled a portion of its engineering staffing needs through the retention of independent contractors at a cost not materially greater than the cost of retaining its own employees. The Company believes that its practice of retaining independent contractors on a per engagement basis provides it with access to specialized knowledge when needed, as well as greater flexibility in adjusting staffing levels in response to changes in the demand for its services. The Company believes that its future success will depend in large part upon its ability to attract, retain and motivate highly skilled managerial, technical, marketing and support personnel. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are excellent. After giving effect to the acquisition of Advantage, the total number of employees of the Company and Advantage is 294. INTELLECTUAL PROPERTY The Company relies upon a combination of patent, trade secret, non-disclosure and other contractual arrangements, and patent, copyright and trademark laws, to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company's business includes the development of custom software solutions in connection with specific client engagements. Ownership of certain custom components of such software is generally assigned to the client. The Company has licensed through December 1998 certain custom software components developed in the course of an engagement for a client. In addition, the Company also develops core software technology and reusable software templates, often in the course of engagements for clients, as well as object-oriented software components and certain software "tools," which can be reused in software application development and which generally remain the property of the Company. Although the Company believes that its services and solutions, including its reusable software templates, do not infringe on the intellectual property rights of others and that it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of litigation alleging infringement of third party intellectual property rights. There can be no assurance that third parties, including 8 10 the parties for whom the Company has been engaged to develop solutions, from which its reusable software templates have been derived, will not assert infringement claims against the Company in the future with respect to intellectual property utilized by the Company now or in the future. Any such claims could require the Company to expend significant sums in litigation, pay damages, develop noninfringing intellectual property or acquire licenses to the intellectual property which is the subject of asserted infringement. ITEM 2. PROPERTIES. The Company's headquarters and principal administrative, sales and marketing and software solutions development operations are located in approximately 88,000 square feet of leased space in Pittsburgh, Pennsylvania. The Company occupies these premises under a lease expiring in December 2004. The Company also leases an additional 7,000 square feet of space under this lease; this additional space is currently subleased to another tenant with a term ending in March 1998. In addition, the Company leases office space in Denver, Colorado, Atlanta, Georgia, Fairview Heights, Illinois, Arlington, Virginia, and Oakland, California. Advantage, leases 8,700 square feet of office space in Edison, New Jersey and additional office space in San Francisco, California. The Company anticipates that additional space will be required as business expands and believes that it will be able to obtain suitable space as needed. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company.
NAME AGE POSITION ---- --- -------- Dennis Yablonsky 45 President, Chief Executive Officer and Director John W. Manzetti 50 Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director Bruce D. Russell 52 Senior Vice President
Mr. Yablonsky has served as President and Chief Executive Officer and as a director of the Company since August 1987. Before joining the Company, Mr. Yablonsky was President and Chief Operating Officer of Cincom Systems of Cincinnati, Ohio, a privately-held company that markets software products to the manufacturing, government and academic markets. Mr. Manzetti has served as Executive Vice President, Chief Financial Officer and Treasurer and as a director of the Company since February 1995. Prior to becoming an Executive Vice President, Mr. Manzetti served as Vice President, Finance and Administrative Services and Chief Financial Officer from October 1988 to February 1993, and as Vice President and Division Manager and Chief Financial Officer from February 1993 to February 1995. Mr. Manzetti has been Secretary since February 1989. Dr. Russell has served as Senior Vice President, Software Delivery since December 1997. Prior to that, he served as Executive Vice President, Chief Operating Officer and as a director of the Company since February 1995. Prior to becoming an Executive Vice President, Dr. Russell served as Vice President and Division Manager from January 1989 through January 1995. 9 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the Nasdaq National Market under the symbol "CGIX." The following table sets forth the range of high and low sale prices of the Common Stock as reported on the Nasdaq National Market for the periods indicated.
HIGH LOW ---- --- 1996: First Quarter (ended 3/31/96)............................... $10.250 $6.625 Second Quarter (ended 6/30/96).............................. $10.750 $8.250 Third Quarter (ended 9/30/96)............................... $ 8.750 $5.000 Fourth Quarter (ended 12/31/96)............................. $ 8.500 $5.250 1997: First Quarter (ended 3/31/97)............................... $ 7.750 $5.375 Second Quarter (ended 6/30/97).............................. $ 7.750 $5.000 Third Quarter (ended 9/30/97)............................... $ 8.000 $6.500 Fourth Quarter (ended 12/31/97)............................. $ 8.000 $2.813
On March 20, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $3.63 per share. As of such date there were approximately 4,100 holders of record of the Company's Common Stock. The Company has never declared or paid cash dividends on its capital stock. The Company currently anticipates that it will retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Total revenue............................ $12,817 $17,875 $25,650 $28,409 $29,406 Income (loss) from operations............ (2,065) 1,159 2,847 2,301 (548) Income (loss) before income taxes........ (2,021) 1,162 2,849 2,928 182 Income tax benefit (provision)........... -- 277 1,827 432 (72) Net income (loss)........................ (2,021) 1,439 4,676 3,360 110 Basic earnings (loss) per share of common stock.................................. ($ 0.42) $ 0.31 $ 0.99 $ 0.54 $ 0.02 Diluted earnings (loss) per share of common stock........................... ($ 0.42) $ 0.25 $ 0.82 $ 0.47 $ 0.02
DECEMBER 31 --------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Balance Sheet Data: Working Capital.......................... $ 1,196 $ 2,055 $16,139 $19,793 $18,795 Total assets............................. 6,025 8,943 24,989 28,489 29,591 Obligations under capital leases-noncurrent portion.............. -- 90 40 -- -- Total stockholders' equity............... 2,761 4,200 19,729 23,638 24,070
10 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Carnegie Group, Inc. founded in 1983, derives its revenue primarily from the performance of software services, and to a lesser extent from the sale of software licenses. Carnegie Group provides business and technical consulting, client/server and Internet-based custom software development, third-party package implementation and systems integration services. The Company focuses on two business areas in the information technology professional services marketplace: customer interaction; and logistics, planning and scheduling. Within these areas, the Company helps clients in the financial services, government, manufacturing and telecommunications industries improve business processes, customer relations, productivity and market position. The market for the Company's services and solutions is highly fragmented and is served by numerous firms. In providing services to clients in its targeted industries, the Company competes with, among others, the consulting practices of the "Big Six" accounting firms, systems consulting and integration firms and the professional services groups of large companies. In addition, clients may elect to use their internal information systems resources to satisfy their needs for the software development, systems integration and technical consulting services that the Company offers. Revenue from software services represented 95.1% of the Company's total revenue in 1997. Fees for software services provided by the Company typically are based on Carnegie Group staffing requirements and the overall scope and timing of the project as agreed upon with the client. The Company has historically filled a portion of its engineering staffing needs through the retention of independent contractors. The Company believes that its practice of retaining independent contractors on a per engagement basis provides it with access to specialized knowledge when needed, as well as greater flexibility in adjusting staffing levels in response to changes in the demand for its services. The Company's software services are generally performed on a time-and-materials basis, although the Company also provides certain software services on a fixed-price or cost-plus-fixed-fee basis, depending on the overall project scope, risks and client requirements. The Company records software services revenue at estimated realizable rates as labor hours are recorded, or as project milestones or deliverables are met, whichever most accurately reflects project completion status. Adjustments are made to software services revenue as required using the percentage-of-completion method of accounting. Revenue from software licenses, which represented 4.9% of the Company's total revenue in 1997, includes fees for licenses, education and training, maintenance revenue and miscellaneous revenue. Revenue from software licenses includes fees for reusable software templates as well as fees for templates sold on a stand-alone basis. The Company records revenue on licenses of reusable software templates when the license agreement is executed, the client purchase order is received and the software has been shipped to the client. Because development costs of these templates have been fully amortized in previous periods (as described below), current costs of software licenses revenue are insignificant. The Company does not believe that the effects of costs of software licenses revenue on the Company's aggregate gross margins or software licenses gross margins are material. Maintenance revenue with respect to software licenses is recorded ratably over the term of the maintenance agreement. Miscellaneous revenue includes fees received from various joint marketing arrangements with other companies. Historically, a significant portion of the Company's total revenue has been attributable to sales to a limited number of clients. In 1997, total revenue from billings to each of the United States Transportation Command, U S WEST Communications, Inc. and BellSouth Telecommunications, Inc. accounted for more than 10% of the Company's total revenue. In 1996, total revenue from billings to the United States Transportation Command, US Army, Caterpillar, Inc. and BellSouth Telecommunications accounted for more than 10% of the Company's total revenue. The Company expects to continue to derive a significant portion of its revenue from a relatively limited number of major clients. In accordance with applicable accounting principles, the Company presents revenue from related parties and cost of revenue from related parties as separate line items in its statements of operations. Software license revenue from related parties is not presented because it is not significant. Related parties for these purposes 11 13 include: U S West Communications, Inc., the ultimate parent corporation of which has a representative on the Company's Board of Directors, and Ford Motor Company, which holds approximately 8.6% of the Company's Common Stock outstanding as of March 20, 1998. Because the Company's business is characterized by significant customer concentration and relatively large projects, the timing of performance for each client engagement can result in significant variability in the Company's total revenue and total cost of revenue from period to period; both revenue and cost of revenue from software services from related parties have varied accordingly. Research and development expenses consist primarily of expenses for the development of licensable software for sale as stand-alone products, rather than development work performed in the course of client project engagements. Development efforts with respect to TestBench represent investments in new or updated functions or features. Research and development expenses have increased as a percentage of total revenue and have remained a significant percentage of software license revenue. Over the past six years, the Company has also benefitted from the development of reusable software templates in the course of performing engagements for clients. No software development costs were capitalized in 1995, 1996 or 1997. Based on the Company's product development process, technological feasibility is not established until completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant in recent years. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to total revenue of certain items in the Company's consolidated statement of operations.
YEAR ENDED DECEMBER 31 --------------------------------- 1995 1996 1997 ---- ---- ---- Revenue: Software services-Unrelated parties................... 81.8% 84.6% 68.4% Software services-Related parties..................... 12.6 10.3 26.7 ----- ----- ----- Total Software services............................ 94.4 94.9 95.1 Software licenses..................................... 5.6 5.1 4.9 ----- ----- ----- Total revenue...................................... 100.0 100.0 100.0 Costs and expenses: Cost of revenue-Unrelated parties..................... 53.1 56.1 46.5 Cost of revenue-Related parties....................... 6.9 6.4 18.4 ----- ----- ----- Total cost of revenue.............................. 60.0 62.5 64.9 Research and development.............................. 2.2 3.2 5.4 Selling, general and administrative................... 26.7 26.2 28.9 Restructuring charge.................................. .0 .0 2.7 ----- ----- ----- Total costs and expense............................ 88.9 91.9 101.9 Income (loss) from operations........................... 11.1 8.1 (1.9) Other income, net....................................... -- 2.2 2.5 ----- ----- ----- Income before income taxes.............................. 11.1 10.3 .6 Income tax benefit (provision).......................... 7.1 1.5 (.2) Net income.............................................. 18.2% 11.8% .4% ----- ----- -----
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996. Revenue. Total revenue was $29.4 million in 1997 compared to $28.4 million in 1996, an increase of $1.0 million or 3.5%. This growth resulted principally from volume increases in sales of software services. Total software services revenue was $28.0 million in 1997 compared to $27.0 million in 1996, an increase of $1.0 million or 3.7%. This increase was primarily attributable to customer contact engagements for clients in the telecommunications industry. Revenue from software services-unrelated parties was $20.1 million in 1997 12 14 compared to $24.0 million in 1996, a decrease of $3.9 million or 16.2%. This decrease was due primarily to a funding gap for a logistics, planning and scheduling engagement for a government industry client. Revenue from software services-related parties was $7.8 million in 1997 compared to $2.9 million in 1996, an increase of $4.9 million or 167.3%. This increase was primarily attributable to multiple customer interaction engagements for a telecommunications industry client. Revenue from software licenses was unchanged at $1.4 million in 1997 compared to $1.4 million in 1996. Cost of Revenue. Cost of revenue consists primarily of salaries and related benefits for personnel, and also includes an allocated portion of rent, building services and computer equipment services and expenses. Total cost of revenue was $19.1 million in 1997 compared to $17.8 million in 1996, an increase of $1.3 million or 7.5%. This increase was primarily attributable to additional professional staff hired to perform the increased volume of software services. Total cost of revenue was 64.9% of total revenue in 1997, compared to 62.5% of total revenue in 1996. This percentage increase was primarily attributable to increased costs associated with the use of contract labor on some customer interaction engagements and an increase in project related travel. Cost of revenue-unrelated parties was $13.7 million in 1997 compared to $15.9 million in 1996, a decrease of $2.2 million or 14.3%. This decrease, as mentioned earlier in relation to a decrease in revenue, was affected due to a funding gap on a logistics, planning and scheduling engagement for a government industry client. Cost of revenue from software services-related parties was $5.4 million in 1997 compared to $1.8 million in 1996 an increase of $3.6 million or 199.1%. This increase was directly related to the increase in software services-related parties revenue mentioned earlier. Research and Development. Research and development expenses were $1.6 million in 1997 compared to $.9 million in 1996, an increase of $.7 million or 76.4%. This increase was primarily attributable to continued investment in template and methodology development. Selling, General and Administrative. Selling, general and administrative expenses include costs of proposal development and proposal writing, marketing communications and advertising, sales and management staff and corporate services functions, including accounting, human resources and legal services, along with corporate executive staff. Selling, general and administrative expenses were $8.5 million in 1997 compared to $7.4 million in 1996, an increase of $1.1 million or 14.1%. This increase resulted primarily from increases in sales and marketing expenses needed to support the Company's channels marketing program. Also, contributing to the increase were additions to the human resource staff and their related expenses and the cost to recruit technical staff. Restructuring. Restructuring costs of $.8 million were incurred in 1997 in response to the significant funding gap in a government engagement mentioned previously. These one-time charges were for a reduction in force and the write-down of certain assets related to underutilized capacity. Other Income. Total other income for 1997 was $731,000 compared to total other income of $627,000 in 1996, an increase of $104,000 or 16.4%. This increase was due primarily to compounded interest income earned on the net proceeds received in December 1995 from the Company's initial public offering, which were invested in an interest-bearing account. Income Tax Provision. An income tax provision of $72,000 was recorded in 1997. The effective income tax rate in 1997 was higher than the effective income tax rate in 1996 due to benefit recognized in 1996 as a result of the Company's estimate of the deferred tax asset believed more likely than not to be realized. See "Income Tax Considerations." COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 Revenue. Total revenue was $28.4 million in 1996 compared to $25.7 million in 1995, an increase of $2.7 million or 10.8%. This growth resulted principally from volume increases in sales of software services. Total software services revenue was $27.0 million in 1996 compared to $24.2 million in 1995, an increase of $2.8 million or 11.4%. This increase was primarily attributable to an extension of a logistics, planning and scheduling engagement for a government industry client and the continuation of a customer contact engagement for a client in the telecommunications industry. Revenue from software services-unrelated parties 13 15 was $24.0 million in 1996 compared to $21.0 million in 1995, an increase of $3.0 million or 14.6%. This increase was primarily attributable to the extension of a logistics, planning and scheduling engagement and of a customer interaction engagement, both of which are described above. Revenue from software services- related parties was $2.9 million in 1996 compared to $3.2 million in 1995, a decrease of $.3 million or 9.7%. This decrease was primarily attributable to the completion of customer interaction engagements for a telecommunications industry client. Also, results for 1996 were affected by the renegotiation of a fixed-price contract, which resulted in engineers related to that contract being underutilized for a portion of the year. Revenue from software licenses was unchanged at $1.4 million in 1996 compared to $1.4 million in 1995. Cost of Revenue. Cost of revenue consists primarily of salaries and related benefits for personnel, and also includes an allocated portion of rent, building services and computer equipment services and expenses. Total cost of revenue was $17.8 million in 1996 compared to $15.4 million in 1995, an increase of $2.4 million or 15.5%. This increase was primarily attributable to additional professional staff hired to perform the increased volume of software services. Total cost of revenue was 62.5% of total revenue in 1996, compared to 60.0% of total revenue in 1995. This percentage increase was primarily attributable to increased costs associated with the renegotiation of a fixed-price contract for a telecommunications industry client. Cost of revenue-unrelated parties was $15.9 million in 1996 compared to $13.6 million in 1995, an increase of $2.3 million or 17.1%. This increase was primarily attributable to additional professional staff hired or reassigned to perform the increased volume of software services following the completion of customer contact engagements for a telecommunications client. Also, as mentioned earlier, the increased revenue from software services-unrelated parties for the extension of a logistics, planning and scheduling engagement for a government industry client required an increase in associated costs. Cost of revenue from software services-related parties was $1.8 million in 1996 compared to $1.8 million in 1995. Research and Development. Research and development expenses were $908,000 in 1996 compared to $568,000 in 1995, an increase of $340,000 or 59.9%. This increase was primarily due to product development of various templates for the services areas of the business. Selling, General and Administrative. Selling, general and administrative expenses include costs of proposal development and proposal writing, marketing communications and advertising, sales and management staff and corporate services functions, including accounting, human resources and legal services, along with corporate executive staff. Selling, general and administrative expenses were $7.4 million in 1996 compared to $6.9 million in 1995, an increase of $.5 million or 8.5%. This dollar increase resulted primarily from increases in sales and marketing expenses needed to support the Company's total revenue growth along with increased insurance and professional services expenses related to being a newly public company. These expenses decreased as a percentage of total revenue from 26.7% in 1995 to 26.2% in 1996 as a result of lower Company fixed costs as a percentage of total revenue. Other Income. Total other income for 1996 was $627,000 compared to total other income of $2,000 in 1995, an increase of $625,000. This increase was due primarily to interest income earned on the net proceeds received in December 1995 from the Company's initial public offering, which were invested in an interest-bearing account. Income Tax Benefit. An income tax benefit of $432,000 was recorded in 1996. The effective income tax rate in 1996 was higher than the effective income tax rate in 1995 due to changes in the amount of benefit recognized as a result of the Company's current estimate of the deferred tax asset believed more likely than not to be realized. See "Income Tax Considerations." LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations in recent years primarily through cash generated from operations and the use of cash reserves. In 1995 the Company also funded its operations in part through borrowing under available lines of credit and through the net proceeds of the initial public offering of its Common Stock. There were no borrowings in 1996 or 1997. 14 16 During 1997, the Company had net income of $110,000 and had a net use of cash of $1.2 million. The net use of cash was primarily attributable to various changes in elements of working capital and to capital expenditures. The Company experienced a drop in revenue earned but not yet billed when comparing the year ended December 31, 1997 to the year ended December 31, 1996. Invoicing of amounts to clients generally occurs within 45 days of time and materials cost occurrence, unless a specific schedule is agreed upon, and payment follows invoicing in accordance with customary terms. The Company has not experienced any significant write-downs of receivables, nor does the Company expect that the payments are doubtful; accordingly, the Company has not made an allowance for doubtful accounts. Advanced billings and deferred revenue increased at December 31, 1997 when compared to the year ended December 31, 1996. Advanced billings and deferred revenue balances normally will change from period to period. Any increase would reflect billings in advance of revenue earned, but which were billed in accordance with established or agreed billings schedules. These amounts are recorded as deferred revenue until earned. The timing and magnitude of such advance billings vary from contract to contract and from client to client. The Company has a committed line of credit agreement in the amount of $3.5 million in place with PNC Bank, N.A. (the "Bank"). No borrowings were outstanding against the committed line of credit at December 31, 1997 and December 31, 1996. Borrowings under this agreement are collateralized by accounts receivable. This line of credit bears interest at the Bank's prime interest rate and the Bank charges a 0.15% fee per annum on the unused portion of that line of credit. The Bank's prime interest rate at December 31, 1997 was 8-1/2% compared to 8-1/4% at December 31, 1996. The Company believes that current cash balances, together with cash generated from operations and borrowing available under its lines of credit, will satisfy the Company's working capital and capital expenditure requirements during fiscal year 1998 and the foreseeable period thereafter. In the longer term, the Company may require additional sources of liquidity to fund future growth. Such sources of liquidity may include additional equity offerings or debt financings. Capital expenditures are typically made for computing equipment, software, physical plant and furniture and fixtures in order to seek enhancements in the productivity of the Company's employees and to support growth. On March 19, 1998, the Company acquired all the outstanding stock of Advantage kbs, Inc. for a purchase price of $5.0 million, plus an additional contingent payment of up to $2.5 million, depending on revenue and earnings of Advantage for the year ending December 31, 1998. A Current Report on Form 8-K is being filed with respect to the acquisition of Advantage. INCOME TAX CONSIDERATIONS At December 31, 1997, the Company had net operating loss carryforwards of approximately $8.6 million available to reduce federal taxable income through 2012. If an "ownership change" were to occur, within the meaning of the Internal Revenue Code of 1986, as amended, the utilization of net operating loss carryforwards would be subject to an annual limitation. Generally, an "ownership change" occurs with respect to a corporation if shareholders who own, directly or indirectly, 5% or more of the capital stock of the corporation increase their aggregate percentage ownership of such stock by more than 50 percentage points over the lowest percentage of such stock owned by such shareholders at any time during a prescribed testing period. If the annual limitation were to apply, the amount of the limitation would equal the product of (i) the fair market value of the Company's equity on the date of the ownership change, with certain adjustments, including an adjustment to exclude capital contributions made in the two years preceding the date of the ownership change and (ii) a long-term tax exempt bond rate of return published monthly by the Internal Revenue Service. Should the annual limitation apply, the Company believes that it would affect the timing of the use of, but not the ultimate ability of the Company to use, the net operating loss carryforwards to reduce future income tax liabilities. The applicability of the limitation is not expected to affect the income tax provision (benefit) reported for financial accounting purposes. 15 17 SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." The ultimate realization of its deferred income tax asset depends on the Company's ability to generate sufficient taxable income in the future. The Company has weighed the positive evidence of profitability over the last four years and future income expectations against the negative evidence of dependence upon a limited number of customers and other uncertainties and concluded that retaining a valuation allowance related to net operating losses was not necessary at December 31, 1996 and continues to be unnecessary at December 31, 1997. In estimating the amount of its realizable deferred tax asset, the Company gives substantial weight to recent historical results. Significant changes in circumstances or in enacted tax laws which affect the valuation allowance are recorded when they occur. The Company's annual strategic business planning process takes place in the fourth quarter of the year, and the valuation allowance is adjusted for future years' income expectations resulting from that process. When preparing subsequent interim and annual financial statements, the Company reevaluates whether there has been any significant change in the assumptions underlying its plan and adjusts the valuation allowance as necessary. For example, in the fourth quarter of 1996 and 1995, as a result of its annual strategic business planning process, the Company reevaluated its future years' income expectations and recorded a discrete income tax benefit as an adjustment to the valuation allowance in each of those quarters. OTHER SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," did not affect the Company's financial position or results of operations because the Company has not offered such benefits. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of," became effective in 1996. The adoption of this standard did not have a material effect on the results of operations or the financial position of the Company. SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for an employee stock option but allows companies to continue recording compensation cost using currently accepted measurement principles. Beginning in 1996, companies electing to continue using currently accepted recognition principles are required to make pro forma disclosures of net income as if the fair value based method of accounting had been applied. Carnegie Group continues accounting for its stock-based employee compensation plans under currently accepted recognition principles and has presented the pro forma disclosures required under this statement in the notes to the financial statements. Accordingly, the adoption of this statement had no affect on the results of operations or financial position of Carnegie Group. SFAS No. 128, "Earnings per Share," the objective of which is to simplify the computation of earnings per share and to make the U.S. standard for computing earnings per share more compatible with the earnings per share standards of other countries and with that of the International Accounting Standards Committee, was issued in 1997. The Company adopted the provisions of SFAS No. 128 for the year ended December 31, 1997, and has restated earnings per share amounts for all periods presented in conformity with the new standard. Also in 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. The Company is required to adopt the provisions of SFAS No. 130 beginning with its consolidated financial statements for the three months ended March 31, 1998. SFAS No. 131 requires certain disclosures about segment information in interim and annual financial statements and related information about products and services, geographic areas and major customers. The Company must adopt the provisions of SFAS No. 131 for its consolidated financial statements for the year ending December 31, 1998. The adoptions of SFAS Nos. 130 and 131 are not expected to have a material effect on the Company's financial position, results of operations or cash flows. 16 18 Impact of Year 2000 Issue: The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations of operations, including, among other things, a temporary inability to process transactions, or engage in similar normal business activities. During 1997, the Company began a strategic project to replace and enhance its existing financial systems technology. While the decision to embark on this project was solely business related, the new software that the Company implemented is year 2000 compliant. Therefore, the Year 2000 issue will not pose significant operational problems for the Company's computer systems. The Company has designed a systems environment that is Year 2000 compliant and all systems are verified for Year 2000 compliance prior to purchase from suppliers. However, there can be no guarantee that the systems of other companies on which the Company's system rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company. The Company believes that it has no material exposure to contingencies related to the Year 2000 Issue for systems it has developed for its clients. The Company is and will continue to utilize both internal and external resources to implement and test the software for Year 2000 modifications. The Company plans to complete the Year 2000 project within one year or not later than December 31, 1998. The total cost of the Year 2000 project is estimated at $550,000 and is being funded through operating cash flows. Of the total project cost, approximately $150,000 is attributed to the purchase of new software which was purchased and capitalized in 1997. The remaining $80,000, some of which will be capitalized or expensed as incurred over the next year, is not expected to have a material effect on the results of operations. To date, the Company has capitalized or expensed approximately $470,000 related to the assessment of, and preliminary efforts in connection with, its Year 2000 project. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Inflation is not expected to have a significant effect upon the Company's business in the near future. ------------------------ This report contains forward-looking statements with respect to, among other things, the market for the Company's services, certain plans and objectives of the Company's management and prospects. These statements are indicated by phrases such as "the Company will" or use of verbs such as "believes," "plans," "intends," "anticipates," or words of similar impact. The following are certain factors that may cause the company's actual results to differ materially from those which are the subject of any such forward looking statements. Dependence Upon Limited Number of Clients. The Company has derived in the past, and expects to derive in the future, a significant portion of its revenue from a relatively limited number of major clients. For example, approximately 79%, 83% and 87% of total software services revenue in the years ended December 31, 1997, 1996 and 1995, respectively, was derived from the Company's five largest clients in each such period. In 1997, revenue from billings to each of the United States Transportation Command, U S WEST Communications, Inc. and BellSouth Telecommunications accounted for more than 10% of the Company's total revenue. In 1996, revenue from billings to the United States Transportation Command, the U S Army, Caterpillar, Inc. and BellSouth Telecommunications accounted for more than 10% of the Company's total revenue. The Company's business depends in large part upon its ability to establish and maintain relationships with a limited number of large clients. The loss of, or any significant reduction in the services provided to, any existing major clients, or the failure of the Company to establish and maintain relationships with new major clients, would have a material adverse effect on the Company's business, financial position and results of operations. 17 19 Project Risks. Many of the Company's engagements involve projects which are critical to the operations of its clients' businesses and which provide benefits that may be difficult to quantify. Moreover, many of these engagements are significant to the Company, in that each may represent a significant portion of the Company's total revenue. For example, the Company's ten largest engagements accounted for approximately 68%, 76%, and 68% of total software services revenue in the years ended December 31, 1997, 1996 and 1995, respectively. The Company's failure or inability to meet a client's expectations in the performance of an engagement could have a material adverse effect on the Company's business, financial position and results of operations, including damage to the Company's reputation that could adversely affect its ability to attract new business. In addition, the Company's engagements generally are terminable by clients on short or no notice. An unanticipated termination of a major engagement could require the Company either to maintain under-utilized employees, resulting in a higher than expected number of unassigned persons and concomitant lower utilization rate, or to terminate such employees, resulting in higher severance expenses. The Company must maintain a sufficient number of senior professionals to oversee existing client engagements and to participate with the Company's sales force in securing new client engagements; thus, professional staff expenses are relatively fixed. Although the majority of the Company's contracts are performed on a time-and-materials basis, some contracts are performed on a fixed-price basis, exposing the Company to the risks of cost overruns and inflation. Risks Associated with the Integration of Advantage. On March 19, 1998, the Company acquired all the outstanding capital stock of Advantage which became a wholly owned subsidiary of the Company. The integration of companies in the information technology services industry may be more difficult to achieve than in other industries. There can be no assurance that the acquisition of Advantage will result in any business and financial benefits to the Company. The realization of any such benefit requires, among other things, that the operations of Advantage be successfully integrated with those of the Company in a timely manner. The successful integration of the Company and Advantage will require the coordination of research and development and sales and marketing efforts. The difficulties of such integration may be increased by the need to coordinate geographically separated organizations and integrating personnel with disparate business backgrounds. In addition, the Company's senior management has not had previous experience in integrating acquisitions. There can be no assurance that the Company will be able successfully to manage the integration of Advantage. Variability of Quarterly Operating Results; Future Operating Results Uncertain. The Company has experienced significant quarterly and other variations in revenue and operating results. Because the Company's business is characterized by significant client concentration and relatively large projects, the timing of performance for each client engagement can result in significant variability in the Company's revenue and cost of revenue from quarter to quarter. In addition, variations in the Company's revenue and operating results occur as a result of a number of other factors, such as employee hiring and utilization rates and the number of working days in a quarter. The timing of revenue is difficult to forecast because the Company's sales cycle is relatively long and may depend on factors such as the size and scope of assignments and general economic conditions. Because a high percentage of the Company's expenses, particularly employee compensation, are relatively fixed, a variation in the timing of the initiation or completion of client engagements, especially at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in quarterly losses. Future revenue and operating results may vary as a result of these and other factors, including the demand for the Company's services and solutions and the competitive conditions in the industry. Moreover, much of the Company's revenue from software licenses is realized upon the licensing of individual copies of software, rather than in the course of a specific services engagement. Accordingly, the timing of software license revenue can be difficult to predict and may vary significantly from quarter to quarter. Many of the factors that could result in quarterly variations are not within the Company's control. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, quarterly variations, together with the Company's dependence upon a limited number of clients and the Company's experience of adverse operating results in years prior to 1994, make it difficult for management to engage in strategic planning that contemplates a horizon of more than three years. Thus, income expectations beyond three years are viewed by management as more uncertain, and management's 18 20 assessment of its ability to realize its deferred tax asset through future taxable income reflects this. The Company's interim and annual financial statements include a valuation allowance that is intended to reflect management's estimation, in light of these and other risk factors, of the realizability of its deferred tax asset. In determining the amount of the valuation allowance and the possible need to adjust that amount, the Company weighs the negative evidence of its dependence upon a limited number of clients and the other risks described herein, on the one hand, against the positive evidence of recent results and future expectations, on the other hand. The Company then adjusts the valuation allowance to reflect the portion of the deferred tax asset that the Company believes it will, more likely than not, be unable to realize. The valuation allowance reflects the Company's belief that it is more likely than not to realize most but not all of its deferred tax assets. Dependence on Key Management Personnel. The Company's success depends in significant part upon the retention of key senior management and technical personnel. The Company does not have employment agreements with any of its personnel other than Dennis Yablonsky, its President and Chief Executive Officer, nor does it maintain key man life insurance on any of its personnel. The loss of one or more of its key management employees or the inability to attract and retain other qualified management employees could have a material adverse effect on the Company's business, financial position and results of operations. Attraction and Retention of Employees. Carnegie Group's business involves the delivery of software development services and is labor-intensive. The Company's success depends in large part upon its ability to attract, retain and motivate highly skilled employees, particularly project managers, sales and marketing personnel, engineers and other senior personnel. Qualified project managers and engineers are in particularly great demand and are likely to remain a limited resource in the foreseeable future. Although the Company expects to continue to attract sufficient numbers of highly skilled employees and to retain existing project managers, sales and marketing personnel, engineers and other senior personnel for the foreseeable future, there can be no assurance that the Company will be able to do so. The Company, like others in the information technology services industry, is subject to a relatively high annual rate of turnover in personnel. The loss of project managers, sales and marketing personnel, engineers and other senior personnel could have a material adverse effect on the Company's business, financial position and results of operations, including its ability to secure and complete engagements. No project managers, sales and marketing personnel, engineers or other senior personnel have entered into employment agreements, other than Dennis Yablonsky, the Company's President and Chief Executive Officer. Management of Growth. The Company was founded in 1983 by computer scientists at Carnegie Mellon University in Pittsburgh, Pennsylvania. The Company was initially funded through equity investments and technology alliances with Digital Equipment Corporation, Generale de Service Informatique, The Boeing Company, Texas Instruments Incorporated, Ford Motor Company and U S WEST, Inc. From January 1, 1997 through December 31, 1997, the size of the Company's staff increased from 238 to 257 employees and independent contractors. In addition, the Company has opened offices in Atlanta, Georgia, Fairview Heights, Illinois, Oakland, California and Arlington, Virginia since January 1, 1995. In order to manage any further growth in its staff and facilities, the Company must continue to improve its operational, financial and other internal systems, and to attract, train, motivate and manage its personnel. If the Company is unable to manage growth effectively and new personnel are unable to achieve anticipated performance levels, the Company's business, financial position and results of operations would be adversely affected. Competition. The information technology services market includes a large number of participants, is subject to rapid change and is highly competitive. The Company competes with and faces potential competition for client assignments and experienced personnel from a number of companies that have significantly greater financial, technical and marketing resources and greater name recognition. Primary competitors include: the consulting practices of the "Big Six" accounting firms; systems consulting and integration firms such as American Management Systems, Inc. and Cambridge Technology Partners, Inc.; and the professional services groups of large companies, such as International Business Machines Corporation, Digital Equipment Corporation and AT&T Corporation. In addition, clients may elect to use their internal information systems resources to satisfy their needs for software development, systems integration and technical consulting services, rather than using those services offered by the Company. The Company also faces competition from organizations providing outsourcing services to the information systems departments of existing and potential clients. In addition, the information technology services market is highly fragmented and 19 21 is served by numerous firms; some of these firms compete nationally and internationally, while others serve only their respective local markets. While the Company has not experienced competition from foreign providers of information technology services, there can be no assurance that the Company will not experience such competition in the future. Carnegie Group has targeted, and expects to continue to target, industries that are characterized by business areas (such as customer interaction, and logistics, planning and scheduling) to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations necessary to support the engagement of service providers such as the Company. A growing number of professional services firms are seeking engagements from that same client group. The Company believes that the principal competitive factors in the information technology services industry include the nature of the service offering, quality of service, timeliness, responsiveness to client needs, experience with the client's industry and competitive environment, technical expertise, access to replicable technology, such as software templates, and price. The Company believes that its ability to compete also depends in part upon a number of competitive factors outside its control, including: the ability of its competitors to hire, retain and motivate project managers, sales and marketing personnel and engineers; competitors' ownership of or access to software and technology used by potential clients; the development by others of software that is competitive with the Company's solutions and services; the price at which others offer comparable services; and the extent of competitors' responsiveness to customer needs. While the information technology services market remains highly fragmented and continues to be served by numerous firms, the Company notes that this market has been subject to recent consolidation. Accordingly, the Company from time to time considers possible acquisitions, consolidations and other strategic alternatives. In addition, business combinations among the Company's competitors may result in the creation of additional large information technology service providers with greater financial, marketing and other resources, than those provided by the company. Developing Market; Technological Advances. The market for client/server software development services is continuing to develop. The Company's success is dependent in part upon the acceptance of information processing systems utilizing client/server architectures. While the Company believes that corporations and government agencies will continue to accept the use of client/server architectures, a decline in this trend could have a material adverse effect on the Company's business, financial position and results of operations. The Company's success will also depend in part on its ability to develop software solutions that incorporate and keep pace with continuing changes in advanced software technologies, evolving industry standards and changing client preferences. There can be no assurance that the Company will be successful in adequately addressing these developments on a timely basis or that, if these developments are addressed, the Company will be successful in the marketplace. The Company's failure to address these developments could have a material adverse effect on the Company's business, financial position and results of operations. In addition, there can be no assurance that products or technologies developed by others will not render the Company's services uncompetitive or obsolete. Intellectual Property Rights. The Company's success is dependent in part upon reusable software templates and other intellectual property. The Company's business includes the development of custom software solutions in connection with specific client engagements. Ownership of certain custom components of such software is generally assigned to the client. The Company has licensed through December 1998 certain custom software components developed in the course of an engagement for a client. In addition, the Company also develops core software technology and reusable software templates, often in the course of engagements for clients, as well as object-oriented software components and certain software "tools," which can be reused in software application development and which generally remain the property of the Company. The Company relies upon a combination of patent, trade secret, non-disclosure and other contractual arrangements, and patent, copyright and trademark laws, to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. 20 22 Although the Company believes that its services and solutions (including its reusable software templates) do not infringe on the intellectual property rights of others and that it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of litigation alleging infringement of third party intellectual property rights. There can be no assurance that third parties (including the parties for whom the Company has been engaged to develop solutions, from which its reusable software templates have been derived) will not assert infringement claims against the Company in the future with respect to intellectual property utilized by the Company now or in the future. Any such claims could require the Company to expend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of asserted infringement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 21 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Carnegie Group, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Carnegie Group, Inc. and its subsidiaries (the Company) at December 31, 1995, 1996 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Pittsburgh, Pennsylvania February 3, 1998, except for Note 14 which is as of March 19, 1998 22 24 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995, 1996 AND 1997
DECEMBER 31, ----------------------------------------- 1995 1996 1997 ---- ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................... $12,394,588 $14,691,765 $13,483,284 Accounts receivable (Note 3)....................... 5,131,922 2,751,316 2,955,241 Accounts receivable from related parties (Notes 3 and 12).......................................... 76,296..... 769,223 3,396,859 Accounts receivable--unbilled (Note 3)............. 2,048,609 3,660,765 1,390,650 Accounts receivable related parties--unbilled (Notes 3 and 12)................................. 87,690 188,302 211,885 Deferred income taxes (Note 13).................... 1,222,061 2,179,426 2,005,855 Other current assets............................... 397,883 403,508 871,931 ----------- ----------- ----------- Total current assets.......................... 21,359,049 24,644,305 24,315,705 ----------- ----------- ----------- Property and equipment, net of accumulated depreciation and amortization (Note 4)........... 1,812,894 2,046,415 2,568,758 Deferred income taxes (Note 13).................... 1,779,792 1,775,480 1,910,760 Long term notes receivable from officers........... -- -- 584,984 Other assets....................................... 36,900 23,055 210,597 ----------- ----------- ----------- Total assets.................................. $24,988,635 $28,489,255 $29,590,804 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable............................. $ 1,107,592 $ 614,458 $ 663,667 Payables to related parties (Note 12).............. 967,673 1,034,608 182,145 Accrued compensation............................... 1,130,479 706,965 933,004 Advance billings and deferred revenue.............. 537,541 1,101,221 2,388,660 Accrued rent (Note 5).............................. 626,253 538,641 330,981 Accrued restructuring (Note 6)..................... -- -- 598,723 Other accrued liabilities.......................... 801,544 821,752 423,544 Obligations under capital leases--current portion (Note 5)......................................... 48,691 33,242 -- ----------- ----------- ----------- Total current liabilities..................... 5,219,773 4,850,887 5,520,724 ----------- ----------- ----------- Obligations under capital leases--noncurrent portion (Note 5)................................. 39,671 -- -- ----------- ----------- ----------- Total liabilities............................. 5,259,444 4,850,887 5,520,724 ----------- ----------- ----------- STOCKHOLDERS' EQUITY (NOTES 7 AND 8): Common stock, $.01 par value; 20,000,000 shares authorized, 6,386,200, 6,512,038 and 6,707,934 shares issued at December 31, 1995, 1996, and 1997, respectively............................... 63,862 65,120 67,079 Capital in excess of par value..................... 30,836,317 31,384,080 31,704,241 Accumulated deficit................................ (10,695,988) (7,335,832) (7,226,240) Treasury stock, 190,000 shares at December 31, 1995, 1996, and 1997 (at cost)................... (475,000) (475,000) (475,000) ----------- ----------- ----------- Total stockholders' equity.................... 19,729,191 23,638,368 24,070,080 ----------- ----------- ----------- Commitments (Note 5)............................... ----------- ----------- ----------- Total liabilities and stockholders' equity.... $24,988,635 $28,489,255 $29,590,804 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 23 25 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ---- ---- ---- Revenue (Notes 11 and 12): Software services--Unrelated parties............. $20,972,461 $24,039,258 $20,138,562 Software services--Related parties............... 3,245,219 2,931,565 7,837,364 ----------- ----------- ----------- Total software services....................... 24,217,680 26,970,823 27,975,926 Software licenses................................ 1,432,628 1,438,225 1,430,335 ----------- ----------- ----------- Total revenue................................. 25,650,308 28,409,048 29,406,261 ----------- ----------- ----------- Costs and expenses: Cost of revenue--Unrelated parties............... 13,618,798 15,948,615 13,669,530 Cost of revenue--Related parties................. 1,757,072 1,810,554 5,416,175 ----------- ----------- ----------- Total cost of revenue......................... 15,375,870 17,759,169 19,085,705 Research and development......................... 567,710 907,976 1,601,525 Selling, general and administrative.............. 6,859,608 7,441,487 8,493,030 Restructuring charges (Note 6)................... -- -- 774,608 ----------- ----------- ----------- Total costs and expenses...................... 22,803,188 26,108,632 29,954,868 ----------- ----------- ----------- Income (loss)from operations....................... 2,847,120 2,300,416 (548,607) Other income (expense): Interest income.................................. 58,660 617,764 718,412 Other income..................................... 24,447 27,428 25,447 Interest expense................................. (81,124) (17,665) (13,293) ----------- ----------- ----------- Total other income............................ 1,983 627,527 730,566 ----------- ----------- ----------- Income before income taxes......................... 2,849,103 2,927,943 181,959 Income tax benefit (provision) (Note 13)........... 1,826,926 432,213 (72,367) ----------- ----------- ----------- Net income.................................... $ 4,676,029 $ 3,360,156 $ 109,592 =========== =========== =========== Basic earnings per share........................... $ .99 $ .54 $ .02 =========== =========== =========== Diluted earnings per share......................... $ .82 $ .47 $ .02 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 24 26 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CAPITAL COMMON IN EXCESS TREASURY ACCUMULATED STOCK OF PAR VALUE STOCK DEFICIT TOTAL ----- ------------ ----- ------- ----- Balance at December 31, 1994... 47,559 19,999,834 (475,000) (15,372,017) 4,200,376 ------- ----------- ---------- ------------ ----------- 1995: Exercise of stock options-- 130,330 shares at $1.25-$5.625 per share.... 1,303 463,974 -- -- 465,277 Initial Public Offering--1,500,000 shares at $8.00 per share (less issuance costs)........... 15,000 10,372,509 -- -- 10,387,509 Net income................... -- -- -- 4,676,029 4,676,029 ------- ----------- ---------- ------------ ----------- Balance at December 31, 1995... 63,862 30,836,317 (475,000) (10,695,988) 19,729,191 ------- ----------- ---------- ------------ ----------- 1996: Exercise of stock options-- 123,847 shares at $1.15-$5.00 per share..... 1,238 359,593 -- -- 360,831 Issuance of common stock under employee stock purchase plan............. 20 15,887 -- -- 15,907 Income tax benefit from stock option plan activity...... -- 196,863 -- -- 196,863 Initial Public Offering costs..................... -- (24,580) -- -- (24,580) Net Income................... -- -- -- 3,360,156 3,360,156 ------- ----------- ---------- ------------ ----------- Balance at December 31, 1996... 65,120 31,384,080 (475,000) (7,335,832) 23,638,368 ------- ----------- ---------- ------------ ----------- Exercise of stock options-- 184,393 shares at $0.03-$6.38 per share..... 1,844 161,676 -- -- 163,520 Issuance of common stock under employee stock purchase plan............. 115 53,860 -- -- 53,975 Income tax benefit from stock option plan activity...... -- 104,625 -- -- 104,625 Net Income................... -- -- -- 109,592 109,592 ------- ----------- ---------- ------------ ----------- Balance at December 31, 1997... $67,079 $31,704,241 $ (475,000) $ (7,226,240) $24,070,080 ======= =========== ========== ============ ===========
The accompanying notes are an integral part of these financial statements. 25 27 CARNEGIE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ---- ---- ---- Cash flows from operating activities: Net income....................................... $ 4,676,029 $ 3,360,156 $ 109,592 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization................. 704,312 982,208 1,294,374 (Gain) loss on the disposal of fixed assets... 2,176 (1,833) 44,976 Deferred income taxes......................... (1,988,361) (953,053) 38,291 Changes in working capital component: Accounts receivable......................... (3,406,927) 768,450 2,066,190 Accounts receivable--Related parties........ 1,574,087 (793,539) (2,651,219) Other assets................................ (184,449) 8,220 (655,965) Interest receivable......................... -- -- (9,984) Trade accounts payable...................... (50,496) (493,134) 49,209 Payables to related parties................. 396,461 66,935 (852,463) Accrued compensation........................ 44,975 (423,514) 226,039 Accrued rent................................ (68,761) (87,612) (207,660) Accrued restructuring charge................ -- -- 598,723 Other accrued liabilities................... 606,817 217,071 (293,583) Advance billings and deferred revenue....... (361,444) 563,680 1,287,439 ----------- ----------- ----------- Net cash provided by operating activities............................. 1,944,419 3,214,035 1,043,959 ----------- ----------- ----------- Cash flows from investing activities: Proceeds from the sales of fixed assets, net..... 18,420 4,585 1,000 Long term notes receivable from officers......... -- -- (575,000) Capital expenditures............................. (1,285,752) (1,218,481) (1,862,693) ----------- ----------- ----------- Net cash used in investing activities.... (1,267,332) (1,213,896) (2,436,693) ----------- ----------- ----------- Cash flows from financing activities: Borrowings on line of credit..................... 5,125,000 -- -- Repayments on line of credit..................... (5,125,000) -- -- Principal payments under capital lease obligations................................... (50,522) (55,120) (33,242) Proceeds from sales of common stock, net......... 10,852,786 352,158 217,495 ----------- ----------- ----------- Net cash provided by financing activities............................. 10,802,264 297,038 184,253 ----------- ----------- ----------- Net change in cash and cash equivalents............ 11,479,351 2,297,177 (1,208,481) Cash and cash equivalents: Beginning of period.............................. 915,237 12,394,588 14,691,765 End of period.................................... $12,394,588 $14,691,765 $13,483,284 =========== =========== =========== Supplementary information: Cash paid during the period for income taxes..... $ 32,474 $ 157,250 $ 172,585 Cash paid during the period for interest......... $ 63,358 $ 5,667 $ 6,326
The accompanying notes are an integral part of these financial statements. 26 28 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 1. DESCRIPTION OF THE BUSINESS Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides business and technical consulting, client/server and Internet-based custom software development, third-party package implementation and systems integration services. The Company focuses on two business areas in the information technology professional services marketplace: customer interaction; and logistics, planning and scheduling. Within these areas, the Company helps clients in the financial services, government, manufacturing and telecommunications industries improve business processes, customer relations, productivity and market position. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include Carnegie Group, Inc., and its wholly owned subsidiaries, Carnegie Group Investments, Inc., Carnegie Investment Services, Inc., Carnegie Services, Inc., and Carnegie Federal Systems Corporation. All significant intercompany balances and transactions have been eliminated. REVENUE RECOGNITION Software services. Revenue from software services contracts is recognized as time and material costs are incurred, or as project milestones or deliverables are met, and is adjusted using the percentage-of-completion method of accounting, as required. When a loss is anticipated for a software services contract, a provision for such loss is recorded in the period in which the loss becomes evident. The difference between contractual amounts billed in advance to customers and amounts recorded as revenue is included in advance billings. Amounts earned but not billed to the customer are included in accounts receivable. Software licenses. Revenue from software licenses is recognized when a license agreement is executed, the client purchase order is received and the software is shipped to the customer. No significant vendor and post-contract support obligations remain at the time revenue is recognized. Revenue applicable to insignificant post-contract support is deferred and recognized ratably as the obligations are fulfilled. Revenue from customer support and training is recognized over the period in which the services are rendered. SOFTWARE DEVELOPMENT COSTS Certain internal development costs, primarily coding and testing of new products and enhancements to existing products, are capitalized after technological feasibility has been established. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of each product, not to exceed five years, or the ratio of current revenue to the total of current and anticipated future revenue, whichever is the greater annual charge. Based on the Company's product development process, technological feasibility is not established until completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release 27 29 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) have been insignificant in recent years. Accordingly, no software development costs were capitalized in 1995, 1996 or 1997. Research and development expenses consist primarily of expenses for the development of licensable software for sale as stand-alone products. Research and development costs, including software costs incurred prior to establishing technological feasibility, are expensed as incurred. CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term interest-bearing deposits with original maturities of less than 90 days. CREDIT RISKS Financial instruments that subject the Company to concentrations of credit risks consist primarily of billed and unbilled receivables. The Company's clients are primarily involved in the financial services, government, manufacturing and telecommunications industries (Notes 3 and 12). Concentrations of credit risk with respect to billed and unbilled accounts receivable are limited due to the Company's credit evaluation process. Historically, the Company has not incurred any significant credit-related losses. PROPERTY AND EQUIPMENT Properties are recorded at cost. Equipment under capital lease is recorded at the lower of fair market value or the present value of future minimum lease payments. For financial reporting purposes, depreciation and amortization are provided under the straight-line method over the estimated useful lives of the respective assets, which range up to 5 years but are primarily 3 years or less. The Company uses accelerated methods for income tax purposes. EMPLOYEE BENEFIT PLAN The Company has a Section 401(k) Savings Plan (the Plan). The Plan allows employees to contribute up to 20 percent of their annual compensation, subject to statutory limitations. Company contributions to the Plan are discretionary. The company contributed $113,734 to the plan in 1997, no Company contributions were made in prior years. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," which requires an asset and liability approach in accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between carrying amounts and the tax bases of all assets and liabilities. PER SHARE AMOUNTS All share and per share data have been adjusted to give effect to the 2:5 "reverse" stock split of the Company's common stock which became effective on September 18, 1995. The Company has adopted SFAS No. 128 (SFAS 128), "Earnings per Share" which establishes standards for computing and disclosing basic and diluted earnings per common share. Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding plus all dilutive potential common shares outstanding during the period. Dilutive common shares are determined using the treasury stock method. 28 30 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings per common share for 1997, 1996 and 1995 have been restated to reflect the adoption of SFAS 128. (See Note 9) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APBO 25), "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. (See Note 10) 3. ACCOUNTS RECEIVABLE Accounts receivable are as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---- ---- ---- U.S. government agencies: Billed................................... $ 277,060 $ 663,877 $ 753,242 Unbilled................................. 946,192 2,269,340 321,460 Telecommunications companies, including $64,932, $852,122 and $3,608,213 from related parties Billed................................... 1,315,904 1,066,187 3,736,103 Unbilled................................. 347,077 241,182 367,234 Other trade receivables, including $99,054, $105,402 and $531 from related parties Billed................................... 3,615,254 1,790,475 1,862,755 Unbilled................................. 843,030 1,338,545 913,841 Allowance for doubtful accounts............... -- -- -- ---------- ---------- ---------- $7,344,517 $7,369,606 $7,954,635 ========== ========== ==========
Revenue earned but not yet billed to customers is generally billed to customers within 45 days of time and material cost incurrence unless a specific billing schedule is agreed. Retainage and claims are not significant. 29 31 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1995 1996 1997 --------------------- --------------------- --------------------- OWNED LEASED OWNED LEASED OWNED LEASED ---------- -------- ---------- -------- ---------- -------- Equipment (primarily computer equipment).... $7,055,000 $ -- $8,124,460 $ -- $9,691,589 $ -- Furniture and fixtures... 1,430,806 419,494 1,541,005 419,494 1,807,426 419,494 Other.................... 210,758 -- 244,604 -- 184,574 -- ---------- -------- ---------- -------- ---------- -------- 8,696,564 419,494 9,910,069 419,494 11,683,589 419,494 Less--Accumulated depreciation and amortization........... 6,975,381 327,783 7,897,505 385,643 9,114,831 419,494 ---------- -------- ---------- -------- ---------- -------- $1,721,183 $ 91,711 $2,012,564 $ 33,851 $2,568,758 $ -- ========== ======== ========== ======== ========== ========
There were no significant operating leases other than leases for office space (see Note 5). Depreciation expense for the years ended December 31, 1995, 1996 and 1997, was $646,608, $924,347, and $1,260,524 respectively. For the years ended December 31, 1995, 1996 and 1997, amortization expense was $57,704, $57,861, and $33,850 respectively. 5. COMMITMENTS The Company leases office space in Pittsburgh, Pennsylvania, Denver, Colorado, Fairview Heights, Illinois and Atlanta, Georgia under agreements that provide for escalating rent. Rent expense is normalized over the term of the lease which expires in December 2004, December 2002, August, 1998 and March 2002 respectively. The difference between cash payments and rent expense is carried as accrued rent. Future minimum lease payments under noncancelable operating leases as of December 31, 1997, are as follows:
OPERATING --------- 1998........................................................ $ 1,645,121 1999........................................................ 1,653,389 2000........................................................ 1,668,852 2001........................................................ 1,671,665 2002........................................................ 1,604,868 Thereafter.................................................. 2,750,398 ----------- Total minimum lease payments................................ 10,994,293 ===========
Minimum payments under operating leases have not been reduced by minimum sublease rentals of $32,344 due in the future under noncancelable subleases. Rent expense under operating leases was $1,546,873, $1,592,215, and $1,794,241, and receipts under subleases were $288,821, $286,105 and $376,937 during the periods ended December 31, 1995, 1996 and 1997 respectively. 6. RESTRUCTURING CHARGES During 1997, the Company implemented a restructuring plan in response to a significant funding gap for a government contract. The restructuring involved a reduction in workforce and the write off of certain assets related to underutilized capacity. 30 32 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The statement of operations for the year ended December 31, 1997 included costs of $774,608, of which $598,723 is recorded as accrued restructuring in the December 31, 1997 balance sheet. Costs associated with the restructuring include employee severance costs of $413,932, the write off of certain assets related to underutilized capacity of $289,958 and other costs of $70,718. All costs associated with the restructuring are expected to be incurred by the end of 1998. 7. BORROWINGS At December 31, 1995, the Company had a $3,000,000 line of credit agreement. Additionally, the Company had an agreement for a $500,000 discretionary line of credit. The availability of those funds were subject to the lender's approval. Both the $3,000,000 committed line and the discretionary line expired on June 30, 1996. The agreement was amended by extending the expiration date to June 29, 1998 and increasing the committed line to $3,500,000, while eliminating the $500,000 discretionary amount. Borrowings under this agreement are collateralized by accounts receivable. The line of credit bears interest at the bank's prime interest rate and the bank charges a 0.15% fee per annum on the unused portion of the line of credit. The line of credit agreement in place at December 31, 1995 bore interest at the bank's prime interest rate plus 0.75%, and the bank charged a 0.25% fee per annum on the unused portion. The bank's prime interest rate was 8.50%, 8.25% and 8.50% at December 31, 1995, 1996 and 1997, respectively. There were no borrowings outstanding at December 31, 1995, 1996 or 1997. 8. STOCKHOLDERS' EQUITY On September 1, 1995, the Board of Directors authorized 5,000,000 shares of preferred stock, par value $.01 per share. Terms of any series of such preferred stock will be established by the Board of Directors at the time of issue. On January 7, 1998, the Board of Directors authorized the repurchase of up to 200,000 shares of Carnegie Group common stock, on the open market or in negotiated transactions. The authorization will remain in effect until June 30, 1998, and purchases may be made from time to time during that period. 9. EARNINGS PER COMMON SHARE The computation of basic and diluted earnings per common share for the years ended December 31, 1997, 1996 and 1995 is performed as follows:
1997 1996 1995 ---- ---- ---- Net income............................ $ 109,592 $3,360,156 $4,676,029 ========== ========== ========== Weighted average common shares outstanding......................... 6,358,221 6,250,964 4,709,818 Effect of dilutive options............ 583,634 850,425 972,637 ---------- ---------- ---------- Diluted shares outstanding............ 6,941,854 7,101,389 5,682,455 ========== ========== ========== Earnings per common share Basic............................... $ .02 $ .54 $ .99 ========== ========== ========== Diluted............................. $ .02 $ .47 $ .82 ========== ========== ==========
Stock options to purchase 497,000 shares of common stock at exercise prices ranging from $9.88 to $6.38 per share outstanding at December 31, 1997 were not included in the computation of diluted earnings per common share because the options' exercise prices were greater than the average market price of the common shares for the year ended December 31, 1997. Stock options to purchase 434,000 shares of common stock at exercise prices ranging from $9.88 to $8.00 per share outstanding at December 31, 1996 31 33 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) were not included in the computation of diluted earnings per common share because the options' exercise prices were greater than the average market price of the common shares for the year ended December 31, 1996. All stock options outstanding at December 31, 1995 were included in the computation of diluted earnings per common share for December 31, 1995. 10. STOCK OPTIONS 1989 STOCK OPTION PLAN Incentive stock options granted under the Carnegie Group, Inc., 1989 Stock Option Plan expire 10 years from the date of grant, generally become exercisable over a four-year period and are adjusted pro forma for stock splits or dividends. All grants of incentive stock options under the plan are exercisable at prices that were at least 100% of the fair market value of the Company's common stock at the date of grant as determined by the Board of Directors. The plan provides that the payment for the shares may be in cash or by exchange of common stock previously held. In May 1992, the Company issued 4,000 nonqualified stock options under this plan to a newly elected member of the Board of Directors at an exercise price of $1.65 per share. The options become exercisable over a four-year period and expire on May 12, 2002. In March 1995, the Company issued 2,000 nonqualified stock options under the plan to the same member of the Board of Directors at an exercise price of $4.65 per share. The options become exercisable over a four-year period and expire on March 6, 2005. The following table summarizes activity under the plan:
OPTIONS AVAILABLE GRANTED & WEIGHTED AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance, December 31, 1994........... 163,268 777,482 $3.96 Granted.............................. (43,060) 43,060 $4.65 Exercised............................ -- (56,170) $3.53 Forfeitures.......................... 12,530 (12,530) $3.53 ------- ------- Balance, December 31, 1995........... * 751,842 $4.04 Granted.............................. -- -- $ -- Exercised............................ -- (94,793) $4.19 Forfeitures.......................... -- (7,408) $2.08 ------- ------- Balance, December 31, 1996........... * 649,641 $4.15 Granted.............................. -- -- $ -- Exercised............................ -- (46,500) $2.60 Forfeitures.......................... -- (10,600) $4.77 ------- ------- Balance, December 31, 1997........... * 592,541 $4.26 =======
- --------- * See additional discussion below regarding the termination of the 1989 stock option plan. At December 31, 1997, options to purchase 577,012 shares of the Company's common stock were exercisable under this plan. On February 7, 1995, the Board of Directors determined the estimated fair market value of the stock to be $4.65 per share. During 1995, options to acquire 43,060 shares were granted at this exercise price. NONQUALIFIED STOCK OPTIONS: On September 30, 1985, in exchange for a six-month personal guarantee of a line of credit to the Company from a bank, an individual was granted an option to purchase 40,000 shares of common stock exercisable over a 10-year period at a price of $5.625 per share. The option was exercised on September 29, 1995. 32 34 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Not included in the table above are 108,000 nonqualified stock options (which do not qualify under Section 422A of the Internal Revenue Code), which were granted in August 1987, as part of the employment agreement with an officer, at an exercise price of $0.025 per share. These options became exercisable immediately upon grant. The options were exercised on August 5, 1997. LONG-TERM INCENTIVE STOCK OPTION PLAN In 1991, the Company implemented the Carnegie Group, Inc. Long-Term Incentive Stock Option Plan to provide an incentive for the Company's key management employees to achieve long-term corporate objectives. The options under the Long-Term Incentive Plan become exercisable on September 29, 2001, subject to an acceleration clause. Each year, acceleration can be awarded based on predetermined Company performance criteria and individual performance criteria set by the Compensation Committee of the Board of Directors. Within 90 days after the previous year, the Committee determines the number of shares (allotted shares) to be accelerated for exercise, if any. Options subject to acceleration will become exercisable over a two-year period, with one-third becoming exercisable immediately upon the determination date and the remaining two-thirds becoming exercisable on each anniversary of the determination date. In October 1991, under this plan, 662,000 shares were granted to 16 key management employees at an option price of $1.25, which was the Board-determined fair market value at the date of grant. The following table summarizes activity under the plan:
OPTIONS AVAILABLE GRANTED & WEIGHTED AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance, December 31, 1994........... 149,840 512,160 $1.25 ------- ------- Granted.............................. (24,000) 24,000 $4.65 Exercised............................ -- (34,160) $1.25 Forfeitures.......................... -- -- $ -- ------- ------- Balance, December 31, 1995........... * 502,000 $1.45 Granted.............................. -- -- $ -- Exercised............................ -- (29,054) $1.25 Forfeitures.......................... -- (19,706) $1.25 ------- ------- Balance, December 31, 1996........... * 453,240 $1.43 Granted.............................. -- -- $ -- Exercised............................ -- (29,393) $1.25 Forfeitures.......................... -- (9,328) $4.17 ------- ------- Balance, December 31, 1997........... * 414,519 $1.38 =======
- --------- * See additional discussion below regarding the termination of the long term incentive stock option plan. Of the total options outstanding as of December 31, 1997, the number of shares subject to accelerated exercise was 394,828 and 275,972 shares had become exercisable. 1995 STOCK OPTION PLAN In 1995, the Company implemented the 1995 Stock Option Plan (1995 Stock Option Plan) under which stock option awards may be made to eligible employees of the Company. Awards to employees under the 1995 Stock Option Plan may take the form of incentive stock options or nonqualified stock options. The 33 35 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) term of each option will be determined by the Board of Directors, but no option will be exercisable more than 10 years after the date of grant. The exercise price for incentive stock options must be at least equal to 100% of the fair market value of the common stock on the date of grant. The exercise price of nonqualified options will be determined by the Board of Directors at the time of grant. The maximum number of shares of common stock which may be issued or delivered and as to which awards may be granted under the 1995 Stock Option Plan is 800,000 shares. In 1995, the Board of Directors terminated the 1989 Stock Option and Long-Term Incentive Plans and directed that options under the plans which thereafter become available for grant (because outstanding options expire or terminate unexercised) will become available for award under the 1995 Stock Option Plan. The following table summarizes activity under the plan:
OPTIONS AVAILABLE GRANTED & WEIGHTED AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance, September 8, 1995........... 800,000 -- -- Granted.............................. (436,000) 436,000 $8.00 Forfeitures 1989 Plan................ 3,710 -- $ -- -------- ------- Balance, December 31, 1995........... 367,710 436,000 $8.00 Granted.............................. (69,500) 69,500 $9.22 Exercised............................ -- -- $ -- Forfeitures.......................... 86,114 (59,000) $8.06 -------- ------- Balance, December 31, 1996........... 384,324 446,500 $8.18 Granted.............................. (154,000) 154,000 $6.24 Exercised............................ -- (500) $6.38 Forfeitures.......................... 102,928 (83,000) $8.06 -------- ------- Balance, December 31, 1997........... 333,252 517,000 $7.62 ======== ======= =====
At December 31, 1997, options to purchase 195,875 shares of the Company's stock were exercisable under this plan. SUMMARY STOCK OPTION INFORMATION The Company applies APBO 25 and related interpretations in accounting for its three stock-based compensation plans. No compensation cost has been recognized for its stock option plans and its stock purchase plan. The pro forma data below reflects the effect had compensation cost for the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123.
1996 1997 ---- ---- Net income (loss) As reported........ $3,360,156 $ 109,592 Pro forma.......... $2,411,481 $ (542,169) Basic earnings (loss) per common share As reported........ $ .54 $ .02 Pro forma.......... $ .39 $ (.09) Diluted earnings (loss) per common share As reported........ $ .47 $ .02 Pro forma.......... $ .34 $ (.09)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1997, respectively: risk-free interest rates of 5.68-6.97 percent and 5.91-6.65 percent; dividend yields of zero in both years; expected terms of 9.7-10.0 years and 9.8-10.0 years, and volatility (based on an analysis of "peer" companies) of 69.7 percent and 68.7 percent. 34 36 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information about stock options outstanding under all of the Company's stock option plans at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE --------------- --------- ---------------- --------------- ----------- --------------- $1.15-$1.65 513,074 3.86 $1.25 379,196 $1.26 $4.50-$6.38 629,986 3.27 $5.23 487,788 $5.02 $7.13-$9.88 381,000 7.84 $8.14 181,875 $8.15 --------- --------- 1,524,060 1,048,859 ========= =========
The weighted average fair value of options granted during 1996 and 1997 under the 1995 Stock Option Plan were $7.35 and $6.24, respectively. 1995 EMPLOYEE STOCK PURCHASE PLAN In 1995, the Company implemented the 1995 Employee Stock Purchase Plan (1995 Stock Purchase Plan). Under the 1995 Stock Purchase Plan, eligible employees will have the opportunity to purchase up to an aggregate of 200,000 shares of common stock. Shares of common stock purchased under the 1995 Stock Purchase Plan will be paid for by payroll deductions. Each participant will be deemed to be granted purchase rights to acquire the whole number of shares of common stock that can be purchased with accumulated payroll deductions at an amount equal to 85% (or such higher amount as the Board of Directors may establish) of the fair market value of the common stock as of the offering commencement date (January 1, April 1, July 1 or October 1) or the offering termination date, whichever is less. Under the 1995 Stock Purchase Plan the Company sold 1,991 shares to employees during 1996 and 10,350 during 1997 at 95% of the fair market value as of the offering commencement date. The 1995 Stock Purchase Plan is intended to be an "employee stock purchase plan" under section 423 of the Internal Revenue Code and noncompensatory under SFAS 123. 11. MAJOR CUSTOMERS For the years ended December 31, 1995, 1996, and 1997, clients who individually accounted for 10% or more of the Company's revenue were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 ---- ---- ---- Client A............................ $2,769,000 $ * $ 7,808,000 Client B............................ 9,060,000 12,340,000 12,370,000 Client C............................ 3,787,000 3,340,000 * Client D............................ 3,706,000 2,937,000 3,401,000
- --------- * Less than 10% Receivables from these clients were $3,984,468, $2,368,735 and $4,489,345 at December 31, 1995, 1996 and 1997, respectively. 12. RELATED PARTIES The Company provides software services to four companies (Ford Motor Company, Digital Equipment Corporation, Texas Instruments Incorporated, and U S WEST Inc.) which have been significant stockholders of the Company; one of these companies has a representative on the Company's Board of Directors. Revenue from software services from these companies is reported as from related parties. U S WEST Inc. and Ford Motor Company are major customers (Note 10). 35 37 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company and Carnegie Mellon University, through its Center for Machine Translation, were parties to a License and Affiliate Agreement dated January 31, 1991 (as amended, the License Agreement) and a Subcontract Agreement dated February 1, 1991 (as amended, the Subcontract Agreement). Carnegie Mellon University's Center for Machine Translation is headed by a director and stockholder of the Company. Under the License Agreement, Carnegie Mellon University granted to the Company several perpetual, non-exclusive, worldwide licenses, some of which are royalty-bearing, to use and distribute certain base software and to access Center personnel, computational resources and technical information. The term of each of the License Agreement and the Subcontract Agreement expired on December 31, 1997. Pursuant to the Subcontract Agreement, the Company engaged Carnegie Mellon University, through its Center for Machine Translation, to perform certain software development services and to furnish certain deliverable items. All of the deliverables developed under the Subcontract Agreement belong exclusively to the Company. Expenses incurred under the agreement were $1,996,987, $1,904,473 and $444,385 for the years ended December 31, 1995, 1996 and 1997, respectively. Total payables at December 31, 1995, 1996 and 1997 under these agreements amounted to $967,673, $959,608,and $182,145 respectively. 13. INCOME TAXES The Company accounts for income taxes in accordance with SFAS 109, which requires an asset and liability approach in accounting for income taxes. The Company and its subsidiaries file a consolidated federal income tax return. The income tax (benefit)/provision consists of the following for the years ended December 31, 1995, 1996 and 1997:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ---- ---- ---- Current: Federal................................ $ 54,659 $ 333,897 $ (70,552) State.................................. 106,776 28,227 -- ----------- ---------- ---------- 161,435 362,124 (70,552) ----------- ---------- ---------- Deferred: Federal................................ (1,891,057) (829,309) 182,197 State.................................. (97,304) 34,972 (39,278) ----------- ---------- ---------- (1,988,361) (794,337) 142,919 ----------- ---------- ---------- Net income tax (benefit) provision....... $(1,826,926) $ (432,213) $ 72,367 =========== ========== ==========
The income tax expense differs from the amount computed by applying the statutory rate of 34 percent to income (loss) before taxes as shown in the following table:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ---- ---- ---- Federal income tax provision (benefit), at statutory rate...................... $ 968,695 $1,002,875 $ 61,866 Effect of valuation allowance adjustments............................ (2,936,159) (1,779,675) -- Prior year adjustments and other......... 26,906 302,876 36,424 State income tax, net of federal benefit................................ 113,632 41,711 (25,923) ----------- ---------- ---------- Net income tax (benefit) provision....... $(1,826,926) $ (432,213) $ 72,367 =========== ========== ==========
36 38 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred tax assets and liabilities consist of the following as of December 31, 1995, 1996 and 1997:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ---- ---- ---- Deferred tax assets: Net operating losses................... $ 3,728,724 $2,838,951 $3,036,699 Tax credit carryforwards............... 644,299 693,585 690,724 Executive compensation................. 375,575 378,773 -- Expense accruals....................... 294,548 338,725 491,695 Prior years write-off of investments in affiliates.......................... 252,833 254,991 256,707 Depreciation........................... 107,789 61,014 68,397 Deferred revenue....................... 48,751 50,106 46,675 ----------- ---------- ---------- Total deferred tax assets.............. 5,452,519 4,616,145 4,590,897 Less--Valuation allowance........... (2,351,116) (571,441) (571,441) ----------- ---------- ---------- Net deferred tax assets................ $ 3,101,403 $4,044,704 $4,019,456 =========== ========== ========== Deferred tax liabilities: Capital leases......................... $ 94,139 $ 77,953 $ 97,576 Expense accrual........................ -- -- -- Other.................................. 5,411 11,845 5,265 ----------- ---------- ---------- Total deferred tax liabilities......... $ 99,550 $ 89,798 $ 102,841 =========== ========== ==========
Income tax benefits of $196,863 and $104,625 associated with the exercise of employee stock options were credited to equity in 1996 and 1997, respectively. SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred income tax asset depends on the Company's ability to generate sufficient taxable income in the future. The Company weighed the positive evidence of profitability over the last four years and future income expectations against the negative evidence of dependence upon a limited number of customers and other uncertainties and concluded that retaining a valuation allowance related to net operating losses was not necessary at December 31, 1996 and continues to be unnecessary at December 31, 1997. The remaining valuation allowance at December 31, 1996 and 1997 relates to general business credits which expire sooner than net operating loss carryforwards and realization is limited to years not subject to the alternative minimum tax. Significant changes in circumstances or in enacted tax laws which affect the valuation allowance are recorded when they occur. The Company's annual strategic business planning process takes place in the fourth quarter of the year, and the valuation allowance is adjusted for future years' income expectations resulting from that process. When preparing subsequent interim and annual financial statements, the Company reevaluates whether there has been any significant change in the assumptions underlying its plan and adjusts the valuation allowance as necessary. In the event the estimated results are not achieved, an adjustment to the recorded deferred tax asset could result and such adjustment could be material. The changes in the valuation allowance at December 31, 1995 and 1996 resulted primarily from current year utilization of net operating loss carryforwards in excess of amounts estimated at the respective preceding year ends together with changes in the Company's estimate of the portion of the deferred tax asset more likely than not to be realized in the future in light of the factors described above. 37 39 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1997, the net operating loss carryforwards for federal tax purposes available to offset future income are as follows:
YEAR FEDERAL YEAR OF ORIGINATED AMOUNT EXPIRATION - ---------- ------ ---------- 1986................................................... 35,000 2001 1987................................................... 1,124,900 2002 1988................................................... 2,463,600 2003 1989................................................... 2,898,300 2004 1992................................................... 423,800 2007 1993................................................... 1,329,200 2008 1997................................................... 363,100 2012 ---------- $8,637,900
Additionally, at December 31, 1997, the Company has net operating loss carryforwards for Pennsylvania income tax purposes of $1,513,800 available to offset taxable income in the years 1998 through 2000. At December 31, 1997, Carnegie Group had investment, research and minimum tax credit carryforwards available totaling $96,162, $475,279 and $119,283, respectively. Investment credit carryforwards have been reduced 35 percent under the provisions of the Tax Reform Act of 1986. The investment tax credit carryforwards expire by the year 2000, the research tax credit carryforward expires by the year 2003 and the minimum tax credit has an indefinite carryforward. If certain substantial changes in the Company's ownership were to occur, there would be an annual limitation on the amount of carryforwards that could be utilized for federal income tax purposes. 14. ACQUISITION OF ADVANTAGE kbs, INC. On March 19, 1998, Carnegie Group acquired all of the outstanding stock of Advantage kbs, Inc. (Advantage) for a purchase price of $5 million cash, plus an additional contingent payment of up to $2.5 million, which is dependent on revenue and earnings of Advantage for the year ending December 31, 1998. Advantage provides problem resolution software and professional services for automating customer support. The transaction will be accounted for as a purchase. Supplemental Pro Forma Results of Operations (Unaudited)--Supplemental pro forma results of operations for the acquisition of Advantage have not been presented as the relative fair values of the net assets acquired have not yet been determined. Carnegie Group anticipates it will write off a significant portion of the purchase price as "in-process research and development" in the first quarter of 1998. 15. CURRENT ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. The Company is required to adopt the provisions of SFAS No. 130 beginning with its consolidated financial statements for the three months ended March 31, 1998. SFAS No. 131 requires certain disclosures about segment information in interim and annual financial statements and related information about products and services, geographic areas and major customers. The Company must adopt the provisions of SFAS No. 131 for its consolidated financial statements for the year ending December 31, 1998. The adoptions of SFAS Nos. 130 and 131 are not expected to have a material effect on the Company's financial position, results of operations or cash flows. 38 40 CARNEGIE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ---- ($ IN THOUSANDS EXCEPT EARNINGS PER SHARE) 1997: Revenue............................... $7,132 $7,858 $7,944 $6,472 $29,406 Revenue less cost of revenue.......... 2,713 3,147 2,966 1,494 10,320 Income (loss) from operations......... 478 693 352 (2,071) (548) Net income (loss)..................... 388 522 322 (1,122) 110 Basic earnings (loss) per common share.............................. 0.06 0.08 0.05 (0.17) 0.02 Diluted earnings (loss) per common share................................. 0.06 0.08 0.05 (0.17) 0.02 1996: Revenue............................... $8,323 $6,664 $6,509 $6,913 $28,409 Revenue less cost of revenue.......... 3,258 2,344 2,547 2,501 10,650 Income from operations................ 944 40 529 788 2,301 Net income............................ 683 121 410 2,146 3,360 Basic earnings per common share....... 0.11 0.02 0.07 0.34 0.54 Diluted earnings per common share..... 0.10 0.02 0.06 0.31 0.47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 39 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K and the information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference in response to this Item 10. In addition to Messrs. Yablonsky and Manzetti, the principal occupations and employments of whom are set forth under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K, the following persons are directors of the Company: Dr. Reddy is a co-founder of the Company and has served as a director since the Company's inception. Dr. Reddy serves as a consultant in a scientific or engineering capacity from time to time on projects for the Company. Dr. Reddy has served as Chairman of the Board since February 1988. Dr. Reddy is Dean of the School of Computer Science and the Herbert A. Simon University Professor of Computer Science and Robotics at Carnegie Mellon University. Dr. Reddy joined Carnegie Mellon's Department of Computer Science in September 1969 and served as Director of the Robotics Institute from September 1979 to September 1992. Dr. Reddy is a member of the Board of Directors of Telxon Corporation, Director and Chairman of the Board of SEEC, Inc., and a member of the Technical Advisory Board of Microsoft Corporation. Dr. Carbonell is a co-founder of the Company and has served as a director since the Company's inception. Dr. Carbonell serves as a consultant in a scientific or engineering capacity from time to time on projects for the Company. Dr. Carbonell has been affiliated with Carnegie Mellon University since January 1979. He has been a Professor of Computer Science since July 1983 and the Director, Center for Machine Translation since July 1986 at Carnegie Mellon's School of Computer Science. Dr. Carbonell is Director, Wisdom Technologies Corporation. Mr. Chatfield has served as a director of the Company since May 1992. Mr. Chatfield was President of Chatfield Enterprises from April 1990 to November 1992, and has been President of Optimum Power Technology, Inc. since December 1992, Chairman of Emprise Technologies, Inc. since December 1992, and General Partner of CEO Venture Fund since January 1986. He was a founder of Duquesne Systems, Inc., a predecessor of LEGENT Corporation. Dr. Fox is a co-founder of the Company and has served as a director since the Company's inception. Dr. Fox serves as a consultant in a scientific or engineering capacity from time to time on projects for the Company. Dr. Fox has been Professor of Industrial Engineering with cross appointments in the Department of Computer Science and Faculty of Management at the University of Toronto since August 1991. Dr. Fox is founder, President and Chief Executive Officer of Fox-Novator Systems Ltd., a provider of electronic commerce software for the Internet/World Wide Web. Prior to August 1991, Dr. Fox was an Associate Professor of Computer Science and Robotics and Director of the Center for Integrated Manufacturing Systems at Carnegie Mellon University. Ms. Muesing has served as a director of the Company since August 1995. Ms. Muesing has been Vice President of Network and Technology Services for U S WEST Communications, Inc., a wholly owned subsidiary of U S WEST, Inc., since September 1995. Prior to that time, Ms. Muesing was Vice President of Transformation Systems for U S West Communications, Inc. from August 1994 to September 1995, Vice President of Information Application Development for U S WEST Technologies from June 1992 to August 1994 and Vice President of Quality, U S WEST, Inc. from October 1990 to June 1992. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference in response to this Item 11. 40 42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the subcaption "Certain Transactions" in the Proxy Statement is incorporated herein by reference to this Item 13. 41 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. FINANCIAL STATEMENTS. The following consolidated financial statements of the Company are filed as part of this Annual Report on Form 10-K:
PAGE NO. -------- Report of Independent Accountants........................... 22 Consolidated Balance Sheets at December 31, 1995, 1996 and 1997...................................................... 23 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997.......................... 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997.............. 25 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.......................... 26 Notes to Consolidated Financial Statements.................. 27
2. FINANCIAL STATEMENT SCHEDULES. Financial statement schedules have been omitted because they are inapplicable, are not required under applicable provisions of Regulation S-X, or the information that would otherwise be included in such schedules is contained in the registrant's consolidated financial statements or accompanying notes. 3. EXHIBITS. The Exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.01 Restated Certificate of Incorporation of Carnegie Group, Inc. (1) 3.02 Amended and Restated By-Laws of Carnegie Group, Inc. (1) 10.01 Carnegie Group, Inc. 1989 Stock Option Plan. (1)(2) 10.02 Carnegie Group, Inc. Long-Term Incentive Plan. (1)(2) 10.03 Carnegie Group, Inc. 1995 Stock Option Plan. (1)(2) 10.04 Carnegie Group, Inc. 1995 Employee Stock Purchase Plan. (1)(2) 10.05 Employment Agreement, dated August 11, 1987, between Carnegie Group, Inc. and Dennis Yablonsky. (1)(2) 10.06 Signing Bonus Stock Option Agreement, dated August 11, 1987, between Carnegie Group, Inc. and Dennis Yablonsky. (1)(2) 10.07(a) Severance Agreement, dated May 28, 1993, between Carnegie Group, Inc. and Dennis Yablonsky. (1)(2) 10.07(b) Severance Agreement, dated May 28, 1993, between Carnegie Group, Inc. and Bruce D. Russell. (1)(2) 10.07(c) Severance Agreement, dated May 17, 1993, between Carnegie Group, Inc. and John W. Manzetti. (1)(2) 10.08(a) General License Agreement, dated December 17, 1992, among U S WEST Advanced Technologies, Inc., U S WEST Communications, Inc. and Carnegie Group, Inc. (1) 10.08(b) Development Agreement, dated as of January 2, 1996. (3) 10.08(c) Development Agreement, dated as of March 1, 1996. (3) 10.08(d) Development Agreement, dated as of July 1, 1996. (4) 10.08(e) Development Agreement, dated as of October 15, 1996
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.08(g) Development Agreement, dated as of January 24, 1997, by and between U S West Advanced Technologies, Inc., U S West Communications, Inc., and Carnegie Group, Inc. (5) 10.08(h) Development Agreement, dated April 28, 1997, by and between an affiliate of U S West Communications Group, Inc., and Carnegie Group, Inc. (6) 10.08(i) Letter Agreement, dated May 20, 1997, to amend Development Agreement, dated as of January 24, 1997, as previously amended by Letter Agreement, dated March 6, 1997, by and between U S West Business Resources, Inc., as agent for U S West Advanced Technologies, Inc., U S West Communications, Inc., and Carnegie Group, Inc. (6) 10.08(j) Letter Agreement, dated as of March 25, 1997, by and between U S West Business Resources, Inc., as agent for U S West Advanced Technologies, Inc., U S West Communications, Inc., and Carnegie Group, Inc. (6) 10.08(k) Letter Agreement, dated as of March 6, 1997, by and between U S West Business Resources, Inc., as agent for U S West Advanced Technologies, Inc., U S West Communications, Inc., and Carnegie Group, Inc. (6) 10.08(l) Agreement No. 9700050785, effective as of July 1, 1997, between US West Business Resources, Inc., as agent for various U S West Companies, and Carnegie Group, Inc. (7) 10.08(m) Schedule Number 230397, effective as of July 21, 1997, to Agreement No. 9700050785, effective as of July 1, 1997, between U S West Business Resources, Inc., as agent for various U S West Companies, and Carnegie Group, Inc. (7) 10.08(n) Schedule Number 230597, effective as of August 18, 1997, to Agreement No. 9700050785, effective as of July 1, 1997, between U S West Business Resources, Inc., as agent for various U S West Companies, and Carnegie Group, Inc. (7) 10.08(o) Schedule Number "35-002-97"/Agreement No. 9700050785, effective September 2, 1997, issued pursuant to the General terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(p) Schedule No. 230997 effective August 11, 1997 pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended) 10.08(q) Schedule No. "14-001-07 effective September 29, 1997, issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(r) Letter Agreement dated October 1, 1997 to Amend Development Agreement No. 35-001-97 (Amendment No. 35-001-97-B) (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(s) Letter Agreement dated October 30, 1997 to Amend Development Agreement No. 37-001-97 (Amendment No. 37-001-97-C) (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended)
43 45
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.08(t) Schedule Number "X34-001-97" effective October 10, 1997 issued pursuant to the General terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(u) Schedule No. "23-07-97" effective November 17, 1997 pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(v) Schedule No. "23-09-97" effective November 21, 1997 pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S West and Carnegie Group, Inc. (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.08(w) Letter Agreement dated December 1, 1997 with respect to Schedule No. "230397"/ Agreement No. 9700050785 (confidential treatment with respect to certain information contained in this exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended) 10.09 CCA Marketing Agreement, dated January 19, 1995, between U S WEST Communications, Inc. and Carnegie Group, Inc. (1) 10.10(a) Lease, dated December 12, 1986, between Glass Plaza Associates and Carnegie Group, Inc. (1) 10.10(b) Amendment, dated as of September 2, 1987. (1) 10.10(c) Amendment, dated as of December 15, 1987. (1) 10.10(d) Amendment, dated as of February 4, 1991. (1) 10.10(e) Amendment, dated as of October 1, 1991. (1) 10.10(f) Amendment, dated as of November 23, 1993. (1) 10.10(g) Amendment, dated as of March 14, 1995. (1) 10.10(h) Lease, dated as of October 18, 1995, between Glass Plaza Associates and Carnegie Group, Inc. (8) 10.11(a) Loan Agreement, dated as of September 11, 1997, between Dennis Yablonsky and Carnegie Group, Inc. (2)(7) 10.11(b) Loan Agreement, dated as of September 11, 1997, between John Manzetti and Carnegie Group, Inc. (2) 21.01 Subsidiaries of the Registrant 23.01 Consent of Price Waterhouse LLP 27 Financial Data Schedule
- --------- (1) Incorporated by reference from the Company's Registration Statement on Form S-1, File No. 33-97118. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 as amended. (4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996, as amended. 44 46 (5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 1997 (6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 1997. (7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended September 30, 1997. (8) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (b) Reports on Form 8-K: The Company did not file any Reports on Form 8-K during the year ended December 31, 1997. 45 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARNEGIE GROUP, INC. March 27, 1996 By: /s/ DENNIS YABLONSKY ------------------------------------ Dennis Yablonsky President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ DENNIS YABLONSKY President and Chief Executive Officer March 27, 1997 - ------------------------------------ (Principal Executive Officer) and Dennis Yablonsky Director /s/ JOHN W. MANZETTI Executive Vice President and March 27, 1997 - ------------------------------------ Chief Financial Officer John W. Manzetti (Principle Financial and Accounting Officer) and Director /s/ RAJ REDDY Chairman of the Board and Director March 27, 1997 - ------------------------------------ Raj Reddy /s/ JAIME G. CARBONELL Director March 27, 1997 - ------------------------------------ Jaime G. Carbonell /s/ GLEN F. CHATFIELD Director March 27, 1997 - ------------------------------------ Glen F. Chatfield /s/ MARK S. FOX Director March 27, 1997 - ------------------------------------ Mark S. Fox /s/ TRACIE A. MUESING Director March 27, 1997 - ------------------------------------ Tracie A. Muesing
46 EX-10.8.O 2 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(o) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 LONG DISTANCE GUI SCHEDULE NUMBER "35-002-97"/AGREEMENT NO. 9700050785 U S WEST LONG DISTANCE-GUI (USWLD-GUI) This Schedule Number "35-002-97", effective September 2, 1997, issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") and is made a part thereto. For purposes of this Schedule 35-002-97 only, the Customer is U S WEST Long Distance, Inc., an Affiliate of U S WEST Communications Group, Inc. The U S WEST Long Distance GUI Proposal from Carnegie Group, Inc. to U S WEST Long Distance dated October 8, 1997 (the "Long Distance GUI Proposal") shall be included in its entirety as part of this Schedule 35-002-97. This Schedule contains the following sections which may reference specific portions of the Proposal. 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: I. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST in support of U S WEST LONG DISTANCE GUI. The work to be provided by CGI represents a new effort between the parties.
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3 LONG DISTANCE GUI 1.2 OVERVIEW Reference the Executive Summary and Articles 1 through 2 of the Long Distance GUI Proposal in their entirety for a complete project overview description of the project. 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following exceptions and definitions apply to this Schedule: o Special Rampdown provisions: Notwithstanding subsection 21.2 of the Agreement, Customer shall be responsible for continued funding of the current CGI project resources at the time of termination for a period of two (2) weeks. o Services Warranty terms: CGI will warrant the final Purchases for a period of ninety (90) days from final Acceptance in accordance with the terms of section 5 of the Agreement. o Management of project resources: The CGI project manager assigned to this U S WEST LONG DISTANCE GUI has exclusive control of and over the CGI resources on the project, including but not limited to responsibility for staff assignment, project team makeup, and transition of CGI resources either onto or from a project. U S WEST may request the CGI project manager to make changes relating to the CGI resources. CGI will respond with consent or an objection to consent and reasons why consent will be withheld; consent will not be unreasonably withheld. The CGI project manager and the U S WEST project manager have the authority to mutually agree on the location, either at a U S WEST site or CGI site, where each CGI resource may work during the project, including an associated period of time, based on not compromising the schedule and deliverables set forth in this Schedule. o Review of the Schedule The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI project manager will meet within the first week after the date this Schedule is signed to review the details of this Schedule, including but not limited to the Exceptions to the Agreement provided above ("Review"). The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI project manager be assigned by U S WEST or CGI respectively to the U S WEST LONG DISTANCE GUI after the initial Review, unless as otherwise mutually agreed by the parties.
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4 LONG DISTANCE GUI 1.4 ROLES AND RESPONSIBILITIES Reference Article 6 in its entirety of the Long Distance GUI Proposal for CGI, U S WEST and Joint CGI and U S WEST Roles and Responsibilities for the project. 1.5 SCOPE Reference Article 3 in its entirety of the Long Distance GUI Proposal for the scope of the project. 1.6 DELIVERABLES The following USWLD-GUI deliverables will be provided by CGI to U S WEST: o SOFTWARE PROJECT MANAGEMENT PLAN (SPMP): The SPMP provides a project management guide for successful execution of the USWLD-GUI project. It documents such elements as project goals, points of contact, schedule, resources, risks, constraints, and assumptions. The SPMP ensures that all project elements are considered initially and managed to successful completion. o USER REQUIREMENTS SPECIFICATION: This document defines the set of requirements specified by the USWLD client representatives for functional purposes and channel groups for usability purposes. o SYSTEM ARCHITECTURE SPECIFICATION: This document describes the overall system architecture, which describes modular composition, high-level interfaces, hardware platform, and software platform. o FUNCTIONAL SPECIFICATION: This document describes the functions and operations that the LD GUI must perform, as determined and defined by Carnegie Group and U S WEST . It describes the characteristics of the application as end users would experience the application, and provides preliminary high-level technical information for application developers. o DESIGN SPECIFICATION: This document contains a detailed description of each USWLD- GUI application module and their respective interfaces. O SOURCE CODE: U S WEST will receive a software release at the beginning of NT testing and another at the end of NT testing, after any issues noted during NT testing have been addressed. o The BUSINESS SERVICE MODULE: contains the business rules defined by U S WEST for inclusion in the USWLD-GUI application. The business services content will be reviewed by USWLD prior to its formal acceptance, following procedures specified in
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5 LONG DISTANCE GUI the SPMP. (Note: the Business Services Module may be implemented as part of the TFS database.) o TFS DATABASE: The TFS database contains the data used by the business processing layer of the LD GUI. o STATUS REPORTS: CGI will provide monthly written status reports that describe project status, progress, issues, and plans. Carnegie Group's project manager and other personnel as appropriate will provide more frequent regular status updates via phone or face-to-face conversation. o ADMINISTRATOR'S GUIDE: A manual for System Administrators, describing the installation, set-up, and maintenance of the system. o CONSULTING ON TRAINING MATERIALS: Carnegie Group will work with U S WEST market units to determine the type and content of user training that should be provided. This proposal assumes approximately three person weeks of CGI time will be used for consulting on the content and organization of training materials. We assume that the training materials will be produced by US WEST. 1.7 SUMMARY This Schedule covers efforts to be performed from September 2, 1997 through May 31, 1998. See Section 2.1 for a more detailed schedule.
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6 LONG DISTANCE GUI 2. SCHEDULE, STATEMENT OF WORK, AND DELIVERABLES 2.1 TASKS AND SCHEDULE Reference Section 4 in its entirety of the Long Distance GUI Proposal for the Statement of Work and Schedule to address this section of this Schedule No. 35-002-97. 2.2 ASSUMPTIONS AND RISKS The project description, schedules, and deliverables were developed based on the assumptions provided in Sections 6.1 and 6.2 of the Long Distance GUI Proposal. If these assumptions are not valid, changes to the schedule, deliverables, and cost of the LD GUI project may be required. Both parties agree that there are specific risks associated with this effort, as provided in Section 6.2 of the Long Distance GUI Proposal. 2.2.1 SCOPE ASSUMPTIONS The scope of LD GUI is as described in Section 2 of the Long Distance GUI Proposal. 2.2.2 PERSONNEL AND LOGISTICS ASSUMPTIONS Reference Section 6.1.2 of the Long Distance GUI Proposal. 2.2.3 HARDWARE AND SOFTWARE ASSUMPTIONS Reference Section 6.1.3 of the Long Distance GUI Proposal. 2.2.4 SCHEDULE ASSUMPTIONS Reference Section 6.1.4 of the Long Distance GUI Proposal. 2.2.5 PROCESS ASSUMPTIONS Reference Section 6.1.5 of the Long Distance GUI Proposal. 2.2.6 RISKS Reference Section 6.2 of the Long Distance GUI Proposal.
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7 LONG DISTANCE GUI 2.3 DELIVERABLES See Section 1.6 of this Schedule for a description of the LD-GUI deliverables. A copy of each deliverable will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within ten (10) business days after delivery, then the Deliverables shall be deemed accepted.
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8 LONG DISTANCE GUI 3. PROJECTED COST The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT AND [ ] [ ] PROJECT VOLUME DISCOUNT [ ] - ------------------------------------------------------ ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- ESTIMATED HOURS ARE AS FOLLOWS: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED CARNEGIE GROUP HOURS - ------------------------------------------------------ ------------------------------------------------------ MANAGER(S) [ ] PRINCIPAL ENGINEER [ ] ENGINEER(S) [ ] TECHNICAL WRITER(S) [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
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9 LONG DISTANCE GUI IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST LONG DISTANCE MARK HERNANDEZ SENIOR DIRECTOR - SYSTEMS BY: /s/ BRUCE RUSSELL BY: /s/ MARK HERNANDEZ ------------------------- ------------------------- NAME: Bruce Russell NAME: Mark Hernandez ----------------------- ----------------------- (printed) (printed) TITLE: EVP/COO DATE: 10/30/97 ---------------------- ----------------------- DATE: 11/4/97 ----------------------- U S WEST BRI LONG DISTANCE KEVIN PHELPS DIRECTOR - FINANCE BY: /s/ KEVIN PHELPS ------------------------- NAME: Kevin Phelps ----------------------- (printed) DATE: 10/30/97 -----------------------
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EX-10.8.P 3 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(p) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 PROJECT TITLE: Product Modeling FINAL VERSION SCHEDULE NUMBER "230697"/(AGREEMENT NO. 9700050785) PRODUCT MODELING This Schedule Number "230697", effective August 11, 1997 issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") is made a part thereto. This Schedule contains the following sections: 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST EAC in support of PRODUCT MODELING. The work to be provided by CGI represents a new effort between the parties. 1.2 OVERVIEW U S WEST products are an important architectural element of service delivery now and in the future. [ ] The initial focus of this effort will be on modeling product from the customer contact and consumer viewpoint. CGI will supply a single resource to this project. The CGI resource will be a team member providing a set of skills to a group effort. A result of this approach will be a jointly developed set of documents under the leadership and management of U S WEST.
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3 PROJECT TITLE: Product Modeling FINAL VERSION 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following definitions apply to this Schedule: 1. Review of the Schedule a) The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI resource will meet within the first week after the effective date of this Schedule to review the details of this Schedule. b) The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI resource be assigned by U S WEST or CGI respectfully to the PRODUCT MODELING effort after the initial Review, unless as otherwise mutually agreed by the parties. 1.4 CGI ROLES AND RESPONSIBILITIES The following activities are to be performed by CGI: 1. Research [ ] 3. Documentation The following task(s) (including details involved in the activities provided above) are to be performed by CGI: 1. The CGI resource will work within the U S WEST research team as dependent and independent member. The research will be guided by and direction provided by U S WEST. The area of research will be focused on modeling U S WEST products from a customer point of view. [ ] 3. Documentation of work and assigned tasks. Where during the project the CGI resource is assigned tasks that require a final document and/or a component/section(s) of a final document the CGI resource will produce that document or component/section(s).
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4 PROJECT TITLE: Product Modeling FINAL VERSION 1.5 U S WEST ROLES AND RESPONSIBILITIES The following activities are to be provided by U S WEST: 1. Scope definition 2. Research 3. Documentation 1.6 JOINT CGI AND U S WEST ROLES AND RESPONSIBILITIES CGI and U S WEST are jointly responsible for the following activities: 1. Research 2. Requirements Development 3. Design [ ] 1.7 SCOPE This is a U S WEST lead project supported by a single CGI resource. The scope of this phase of the project is to define requirements, publish draft models and specifications to support multiple applications use of product knowledge. The CGI resource is a contributor to the overall effort through October of 1997. 1.8 DELIVERABLES [ ] Actual deliverables will be determined during this phase of the project. In addition to the research and design the CGI resource will also be required to document their work. 1.9 SUMMARY This Schedule covers efforts to be performed from August 11, 1997 through October 31, 1997.
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5 PROJECT TITLE: Product Modeling FINAL VERSION 2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES 2.1 TASKS, SCHEDULE, AND DELIVERABLES The following table summarizes the tasks, schedule and deliverables included in this Schedule.
- ------------------------------------------------------------------------------------------------------------------ TASKS RESPONSIBILITY START DATE END DATE DELIVERABLES - ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- Research, Design U S WEST and To be and CGI 8/11/97 10/31/1997 determined Documentation during the early phases of the project. Both U S WEST and CGI resources will produce the requisite documents as determined in the early phases of the project. - ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
2.2 ASSUMPTIONS The above tasks, schedules and deliverables were developed based on the following assumptions. 1. The schedule is based on a project start date of August 11, 1997. Delays in this start date may impact the delivery date of one or more Deliverables. 2. The work estimates are based on CGI Methodology and past experience. CGI will continuously monitor the status and notify U S WEST of any issues or risk situations which may impact the delivery date. 3. CGI has timely access to U S WEST personnel (i.e. SMEs). 4. U S WEST to provide a sponsor and project manager to act as the liaison between the U S WEST project team and the CGI resource. 5. Weekly status reports and meetings to be held between the U S WEST project manager and the CGI project manager to measure progress against the workplan. Any known issues and risks are also discussed and raised to the next level if not resolved. 6. U S WEST to provide facilities, computer equipment, software, etc., as requested by CGI.
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6 PROJECT TITLE: Product Modeling FINAL VERSION 7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact the delivery date of one or more Deliverables. 8. Change requests to be submitted using the CGI change process for analysis to provide estimates, costs, and impact on current deliverables. Signed approval in compliance with RPP 1001 is required before implementation of any change requests. 2.3 DELIVERABLES Deliverables will be determined during the early phases of the project and will be completed jointly between U S WEST and CGI. [ ] A copy of the deliverables will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within five (5) business days after delivery, then the Deliverables shall be deemed accepted.
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7 PROJECT TITLE: Product Modeling FINAL VERSION 3. PROJECTED COST The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT AND ANY [ ] PROJECT VOLUME DISCOUNT - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES None - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH None EXPENSES - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- Estimated hours are as follows: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED HOURS - ------------------------------------------------------ ------------------------------------------------------ Manager(s) Business Consultant(s) Engineer(s) [ ] Technical Writer(s) - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
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8 IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST BY: /S/ BRUCE RUSSELL BY: /S/ M.G. -------------------------- ------------------------- NAME: BRUCE RUSSELL NAME: MOTTI GOLDBERG ------------------------ ----------------------- (printed) (printed) TITLE: EVP TITLE: DIRECTOR ----------------------- ---------------------- DATE: 11/20/97 DATE: 11/10/97 ------------------------ -----------------------
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EX-10.8.Q 4 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(q) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 CTAS Enhancements SCHEDULE NUMBER "14-001-97"/AGREEMENT NO. 9700050785 U S WEST CUSTOMER TERMINAL ACCESS SYSTEM (CTAS) ENHANCEMENTS (CTAS ENHANCEMENTS PROJECT) This Schedule Number "14-001-97", effective September 29, 1997, issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") and is made a part thereto. The U S WEST Customer Terminal Access System (CTAS) Enhancements Proposal from Carnegie Group, Inc. to U S WEST dated September 1997 (the "CTAS Proposal") shall be included in its entirety as a part of this Schedule 14-001-97. This Schedule contains the following sections which may reference specific portions of the Proposal. 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST in support of the CUSTOMER TERMINAL ACCESS SYSTEM (CTAS) ENHANCEMENTS PROJECT. The work to be provided by CGI represents a new effort between the parties.
Schedule Number 14-001-97 Carnegie Group, Inc. and U S West 10/13/97 Proprietary and Confidential Page 1
3 CTAS Enhancements 1.2 OVERVIEW Reference the Executive Summary and sections 1.1 through 1.3 of the CTAS Proposal in its entirety for a complete project overview description of the project. 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following exceptions and definitions apply to this Schedule: o Special Rampdown provisions: Notwithstanding subsection 21.2 of the Agreement, Customer shall be responsible for continued funding of the current CGI project resources at the time of termination for a period of two (2) weeks. o Services Warranty terms: CGI will warrant the final Purchases (CTAS ENHANCEMENTS) for a period of ninety (90) days from final Acceptance in accordance with the terms of section 5 of the Agreement. This warranty does not include correction of Errors in the CTAS software code which are traceable to any portion of such code other than the CTAS ENHANCEMENTS. o Acceptance terms: U S WEST shall test the CTAS software delivered hereunder according to the Acceptance Test(s) to be mutually agreed to by the parties and provided hereunder. The CGI project manager assigned to this CTAS ENHANCEMENTS PROJECT has exclusive control of and over the CGI resources on the project, including but not limited to responsibility for staff assignment, project team makeup, and transition of CGI resources either onto or from a project. U S WEST may request the CGI project manager to make changes relating to the CGI resources. CGI will respond with consent or an objection to consent and reasons why consent will be withheld; consent will not be unreasonably withheld. The CGI project manager and the U S WEST project manager have the authority to mutually agree on the location, either at a U S WEST site or CGI site, where each CGI resource may work during the project, including an associated period of time, based on not compromising the schedule and deliverables set forth in this Schedule. o Review of the Schedule The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI project manager will meet within the first week after the effective date of this Schedule to review the details of this Schedule, including but not limited to the Exceptions to the Agreement provided above ("Review"). The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI project manager be assigned by U S WEST or CGI respectively
Schedule Number 14-001-97 Carnegie Group, Inc. and U S West 10/13/97 Proprietary and Confidential Page 2
4 CTAS Enhancements to the CTAS ENHANCEMENT PROJECT after the initial Review, unless as otherwise mutually agreed by the parties. 1.4 ROLES AND RESPONSIBILITIES Reference section 2.2 in its entirety of the CTAS Proposal for CGI, U S WEST and Joint CGI and U S WEST Roles and Responsibilities for the project. 1.5 SCOPE Reference sections 1.3 through 1.5 of the CTAS Proposal in their entirety for the scope of the project. 1.6 DELIVERABLES The following CTAS ENHANCEMENTS deliverables will be provided by CGI to U S WEST: o Software Project Management Plan (SPMP): The SPMP provides a project management guide for successful execution of the CTAS ENHANCEMENTS project. It documents such elements as project goals, points of contact, schedule, resources, acceptance criteria, risks, constraints, and assumptions. The SPMP ensures that all project elements are considered initially and managed to successful completion. o Client and User Requirements Document: This document defines the set of requirements specified by the CTAS ENHANCEMENTS client representatives for functional purposes and channel groups for usability purposes. o Architecture Document: This document describes the overall system architecture, which describes modular composition, high-level interfaces, hardware platform, and software platform. o Design Document: This document contains a detailed description of each CTAS ENHANCEMENTS application module and their respective interfaces. o User Guide: This document contains detailed instructions of actions required by Inter- exchange carriers to effectively utilize all system functions. o Source Code: Multiple releases of the CTAS ENHANCEMENTS source code will be provided to U S WEST. Releases include the initial development release, integration- tested software, system-tested software, and final production software. o Status Reports: Weekly (or as determined appropriate) status reports will be developed by CGI which describes project status, progress, issues, and plans.
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5 CTAS Enhancements o Administrators Guide: providing instructions for System Administrators describing the installation, set-up, and maintenance of the system. o Training Materials: We will work with U S WEST market units to determine what training materials, if any, need to be provided. o Additionally, User Cases, User Requirements, Design Notes, and Test Plans will be developed. 1.7 SUMMARY This CTAS Enhancements project covers efforts to be performed over an estimated three (3) month duration.
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6 CTAS Enhancements 2. SCHEDULE, STATEMENT OF WORK, AND DELIVERABLES 2.1 TASKS AND SCHEDULE Reference Article 2 at the very beginning under "General", including the development tasks in 1 through 5, of the CTAS Proposal for a more detailed schedule with development tasks by functional area. 2.2 ASSUMPTIONS AND RISKS The project description, schedules, and deliverables were developed based on the assumptions provided in Section 2.3 of the CTAS Proposal. If these assumptions are not valid, changes to the schedule, deliverables, and cost of the CTAS Enhancement project may be required. Both parties agree that there are risks associated with this effort primarily because the original CTAS software was developed by a different U S WEST contractor (and not CGI). To minimize the risks, the parties have agreed to fully define the scope prior to the start of this CTAS Enhancements Project. 2.3 DELIVERABLES See Section 2.1 of the CTAS Proposal for a description of the deliverables. A copy of each deliverable will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within ten (10) business days after delivery, then the Deliverables shall be deemed accepted.
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7 CTAS Enhancements 3. PROJECTED COST The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT [ ] - ------------------------------------------------------ ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- ESTIMATED HOURS ARE AS FOLLOWS: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED CARNEGIE GROUP HOURS - ------------------------------------------------------ ------------------------------------------------------ PROJECT MANAGER [ ] ENGINEER(S) [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
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8 CTAS Enhancements IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST By: /s/ BRUCE RUSSELL By: /s/ LEE TANNER ------------------------ ------------------------ Name: Bruce Russell Name: Lee Tanner ---------------------- ---------------------- (printed) (printed) Title: EVP/COO Title: Program Manager --------------------- --------------------- Date: 10/20/97 Date: 10/15/97 ---------------------- ---------------------- U S WEST BRI By: /s/ SHERYL SWAYZE ------------------------ Name: Sheryl Swayze ---------------------- (printed) Title: Commodity Manager --------------------- Date: 10/15/97 ---------------------- - --------------------------------------------------------------------------------
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EX-10.8.R 5 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(r) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 LETTER AGREEMENT TO AMEND DEVELOPMENT AGREEMENT NO. 35-001-97 and AMENDMENT 35-001-97-A - Call Handling - 1997 - AMENDMENT NO. 35-001-97-B This Letter Agreement dated October 1, 1997 is in regard to Development Agreement No. 35-001-97 dated December 31, 1996 and the Amendment 35-001-97-A thereto dated March 25, 1997 (collectively the "Development Agreement"), and constitutes an amendment to portions of the Development Agreement and to one or more of the Exhibits attached thereto, in accordance with Article 11 of the Development Agreement. At the request of U S WEST's Call Handling Project Manager, CGI will complement and enhance the current Call Handling 1997 capabilities by providing additional CGI resources in support of newly recognized project needs to be incorporated into the ongoing project. The time period in which the additional CGI resources will work is currently estimated to be October 1, 1997 through December 31, 1997. Based on remaining funds and CGI resources previously estimated under the Development Agreement, this Amendment estimates additional resources to be two (2) Project Managers, six (6) Senior Engineer II's, two (2) Senior Engineer I's, two (2) Requirements Analysts, one (1) Associate Engineer who are providing or are estimated to provide Call Handling services in 1997. CGI will continue to work under U S WEST direction and, based on currently known requirements, has included within this Amendment additional capabilities to Call Handling for which U S WEST has expressed interest in incorporating into future Call Handling releases. CGI will work within the funding limitations to provide such capabilities under this Amendment in 1997. OVERALL ASSUMPTIONS: It is not foreseen that all capabilities in this Amendment, as fully or partially implemented, will be provided this year. The delivery dates and inclusion of requirements in the Call Handling releases resulting from any of the tasks below are dependent upon U S WEST defining the scope of work in the Project Plans for going forward, the client setting requirements priorities, project resources, and commitment dates of other CH applications provided by U S WEST, CGI and/or third parties. A detailed schedule for the Call Handling releases resulting from the tasks below being implemented will be prepared by CGI upon delivery of the Functional Specification and as requested by U S WEST. 35-001-97-B 1 November 10, 1997 3 Upon delivery of each Project Plan corresponding to the Modules below, CGI will continue to go forward with implementating the Project Plan within the funding and schedule limitations herein, unless otherwise directed by U S WEST. The additional resources provided in this Amendment will be applied to the tasks in accordance with the Project Plans. - -------------------------------------------------------------------------------- ADDITIONAL PROJECT TASKS/TASK CHANGES: [ ] 35-001-97-B 2 November 10, 1997 4 STAFFING FOR GLOBAL CONDITIONS (1) Project Manager (Tech Lead) (4) SE II (2) SE I NEW DELIVERABLES Requirements Document 9/30 Functional Specification 10/31 Project Plan 10/31 Due to major changes in the Activity-Based Routing requirements by U S WEST, the delivery of the final Functional Specification has been delayed and the Global Conditions Functional Specification and resulting release is intended to incorporate the Activity-Based Routing tasks and deliverables. ASSUMPTIONS/DEPENDENCIES: Due to the increased scope of Global Conditions requirements coupled with other CH requirements that the client is requesting, the Global Conditions 35-001-97-B 3 November 10, 1997 5 scope of work needs to be defined in the Project Plan for going forward. Additionally, the Global Conditions requirements will need to be prioritized, by providing a cut off in project tasks if necessary, by the clients. An initial Global Conditions release will not necessarily satisfy all the requirements identified in the requirements document. A subsequent release may be required to deploy all requirements. SUPPORT FOR ONGOING ACTIVITIES Because it is difficult and problematic to develop Call Handling capabilities in parallel, project planning and coordination efforts are needed. To that end, CGI provides overall management, architectural direction and support for ongoing FES&R development. Specifically CGI provides release management, requirements analysis and technical architecture direction for FES&R. There is an ever changing list of deliverables here. If the parties were finished with release planning we could include due dates for release plans, but this is not the case. The technical architect is always evaluating new directions for FES&R, e.g. evaluation of Long Distance requirements. Requirements work is planned for Inbound Promotions, underway for Call Tracking and completed for Global Conditions. Note: The Requirements Analysts will also work on the Functional Specifications. STAFFING (1) Managers (1) SE III as Technical Architect (2) Requirements Analysts DMS100 SCREEN POP (REFLECTS SCHEDULE CHANGE) The scope of work for DMS100 Screen Pop is unchanged from the current Development Agreement. However in accordance with U S WEST changes in project priorities and under their direction, the deliverable schedule has changed significantly, as below. DELIVERABLES The deliverable schedule in Exhibits 3 and 5 relating to Screen Pop - DMS is no longer valid. Deliverables relating to Design, Construction, Integration Test, System Test, User Acceptance, Product Integration, ORL, and Deployment Support will be prepared by CGI after the Function Specification Update is delivered and as requested by U S WEST. 35-001-97-B 4 November 10, 1997 6 The new commitments for deliverables in Exhibit 3 under "SCREEN POP - DMS" should be:
- --------------------------------------------------------------------------------------------------------------- Feasibility Start 9/3/97 Finish 11/97 - ---------------------------------------------- ------------------------------- ------------------------------- Functional Specification Update Start 11/97 Finish 11/97 - ---------------------------------------------- ------------------------------- ------------------------------- Project Plan Finish 11/97 - ---------------------------------------------------------------------------------------------------------------
STAFFING FOR DMS100 SCREEN POP (1) Project Manager (2) SE II (1) SE I (full time Oct. and 25% in Nov.-Dec. ) (1) Associate Engineer INBOUND PROMOTIONS [ ] NEW DELIVERABLES
- --------------------------------------------------------------------------------------------------------------- Functional Specification Start 5/97 Finish 10/97 - ------------------------------------ ------------------------------------ ----------------------------------- Project Plan Finish 10/97 - ---------------------------------------------------------------------------------------------------------------
STAFFING (1) Project Manager (1) SE I (1) SE II CALL TRACKING [ ] 35-001-97-B 5 November 10, 1997 7 NEW DELIVERABLES Requirements definition for Call Tracking is underway. Once requirements are completed the next step in Call Tracking development will be scheduled.
- --------------------------------------------------------------------------------------------------------------- Requirements Specification Start 9/22/97 Finish 10/97 - ---------------------------------------------------------------------------------------------------------------
STAFFING This is very difficult to estimate since requirements are not defined and the scope of work is extremely variable. CGI expects the staffing for this to change based on two factors: schedule interaction with people rolling off of DMS100 Screen and final scope of work. Note: the scope of work has increased dramatically during requirements. Best estimate: (.75) Project Manager (2) SE II (2) SE I - -------------------------------------------------------------------------------- [ ] Exhibit 2 - Estimated Cost is amended as attached. This Amendment describes the expanded scope, in accordance with the current intent of the parties, for which the Call Handling - 1997 Development Agreement is being modified hereunder. It is intent of the parties that the new services to be provided by CGI under this Amendment will be incorporated into the ongoing effort under the 35-001-97 Development Agreement as amended without interruption. Such services will continue to be provided by CGI under this Development Agreement and Amendment as subject to change in accordance with U S WEST direction and additional amendments or change orders. Except as expressly set forth in this Letter Agreement, the terms of the Development Agreement and all signed amendments shall remain in full force and effect. 35-001-97-B 6 November 10, 1997 8 IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. LICENSEE By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN --------------------------- ------------------------------ Title: President/CEO Title: Sr. Director ------------------------ --------------------------- Date: 12-2-97 Date: 12/1/97 ------------------------- ---------------------------- U S WEST BUSINESS RESOURCES, INC. ACTING AS AGENT FOR: LICENSEE By: /s/ SHERYL SWAYZE ------------------------------ Title: Commodity Manager --------------------------- Date: 11/26/97 ---------------------------- 35-001-97-B 7 November 10, 1997 9 EXHIBIT 2 - ESTIMATED COST COST OVERVIEW The total cost of the work net of discounts is estimated at [ ] based on expected time and material expenses, which represents an increase of [ ] above the original funding approved for Call Handling - 1997 of [ ]. No travel is anticipated for this project. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. Work will be provided on a time and materials basis. The cost estimate and applicable discount breakouts being extended are as shown below. The [ ]Alliance Discount has been extended pursuant to the GLA extension executed between U S WEST and CGI in March, 1997. The [ ]Facilities Discount (includes [ ] computer and [ ] building discount) is extended under the assumption that all work will be performed at U S WEST facilities for this project. Work requiring platforms and software outside of this environment will be requested by U S WEST. It is planned that U S WEST will provide availability to the nonstandard items to CGI for the duration of the project should any be required. CGI has also extended the applicable Volume Discount of [ ]. U S WEST may, at its discretion, close the project or the involvement of CGI resources by providing a written notice to the CGI Program Manager. If such an eventuality occurs, the respective resources will be given a ramp down period of [ ] weeks to find other work. Upon completion of the [ ] week ramp down period, U S WEST will be obligated to CGI for the time and materials expended up to and including the [ ] week ramp down.
- ----------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNTS - ----------------------------------------------------------------- ----------------------------------------- CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS: [ ] ALLIANCE DISCOUNT [ ] LESS: [ ] VOLUME DISCOUNT [ ] LESS: [ ] FACILITIES DISCOUNT [ ] - ----------------------------------------------------------------- ----------------------------------------- TOTAL CONTRACT ENGINEERING [ ] - ----------------------------------------------------------------- ---------------------------------------- TRAVEL EXPENSES 0 - ----------------------------------------------------------------- ---------------------------------------- TOTAL AMENDED DA ESTIMATE: [ ] - ----------------------------------------------------------------------------------------------------------
35-001-97-B 8 November 10, 1997 10 Additionally, we are providing the estimated hours for the labor categories associated with the 24-person CGI team as shown below:
- ------------------------------------------------------------------------------------------------------------ CATEGORY CONTRIBUTION BY TOTAL ESTIMATED HOURS CATEGORY - --------------------------------------------- -------------------------- ---------------------------------- Manager/Project Manager (4) [ ] [ ] Sr. Engineer III (1) [ ] [ ] Sr. Engineer II (9) [ ] [ ] Sr. Engineer I/Reqs. Analyst (8) [ ] [ ] Engineer (1) [ ] [ ] Associate Engineer (1) [ ] [ ] - ------------------------------------------------------------------------------------------------------------ TOTAL CONTRIBUTION / HOURS: 100% [ ] - --------------------------------------------- -------------------------- ----------------------------------
35-001-97-B 9 November 10, 1997 EX-10.8.S 6 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(s) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 LETTER AGREEMENT TO AMEND DEVELOPMENT AGREEMENT NO. 37-001-97 - - AMENDMENT NO. 37-001-97-C This Letter Agreement dated October 30, 1997, is in regard to Development Agreement No. 37-001-97 dated January 24, 1997, as amended under Amendment No. 37-001-97-A dated March 6, 1997, and as amended under Amendment No. 37-001-97-B dated May 20, 1997 (together the "Development Agreement"), and constitutes an amendment to portions of the Development Agreement and to one or more of the Exhibits attached thereto, in accordance with Article 11 of the Development Agreement. Under this Amendment, CGI will complement the current Fetch & Stuff Phase 2 consulting services by providing additional CGI resources in support of on-going project tasks as mutually determined by the parties. The tasks covered under this amendment include: o Requirements Gathering o Requirements Analysis o Requirements Specification o Requirements Traceability o Coordination of Requirements Testability with U S West System Testers o The Design, Development, Unit Testing, and Integration Testing related to CR2598; [ ]. o Additional Management in Support of Requirements Analysis and such tasks will be incorporated into the existing schedule, statement of work and deliverables, under U S WEST's direction. One (1) additional CGI team member will be included over four (4) project months, currently estimated from September 1, 1997, through December 31, 1997 and there will be an increase in the involvement of the Manager. Such resource related modifications will maintain the current level of effort on the Fetch & Stuff project development effort, including the level of effort originally scoped by U S WEST for [ ], and will provide the additional services described herein. Accordingly, this Amendment includes additional estimated funding in the amount of [ ] to the work previously scoped in Development Agreement. The Projected Cost and Payment for the Project in Article 5 of the Development Agreement have been increased by [ ]. 37-001-97-B 1 MAY 22, 1997 3 Exhibit 2 - Estimated Cost is amended as attached. This Amendment describes the expanded scope, in accordance with the current intent of the parties, for which the Fetch & Stuff Phase 2 Development Agreement (as amended) is being modified hereunder. It is understood by the parties that the consulting services will continue to be provided by CGI under the Development Agreement and this Amendment as subject to change in accordance with U S WEST direction. Except as expressly set forth in this Letter Agreement, the terms of the Development Agreement and all signed amendments shall remain in full force and effect. IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. LICENSEE By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN ------------------------ --------------------------- Title: President/CEO Title: Sr. Director --------------------- ------------------------ Date: 12-1-97 Date: 12-1-97 ---------------------- ------------------------- 37-001-97-B 2 MAY 22, 1997 4 EXHIBIT 2 - ESTIMATED COST COST OVERVIEW The total cost of the work net of discounts is estimated at [ ] based on estimated time and material expenses, which represents an increase of [ ] above the previous funding approved for Fetch & Stuff Phase 2, Release 3 of [ ]. No travel is anticipated for this project. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. Work will be provided on a time and materials basis. The cost estimate and applicable discount breakouts being extended are as shown below.[ ].
- ----------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNTS - ----------------------------------------------------------------- ----------------------------------------- Contract Engineering Costs (time and materials) [ ] Less: [ ] Alliance Discount [ ] Less: [ ] Volume Discount [ ] Less: [ ] Facilities Discount [ ] - ----------------------------------------------------------------- ----------------------------------------- Total Contract Engineering [ ] - ----------------------------------------------------------------- ----------------------------------------- Travel Expenses 0 - ----------------------------------------------------------------- ----------------------------------------- Total Amended DA Expenses [ ] - -----------------------------------------------------------------------------------------------------------
37-001-97-B 3 MAY 22, 1997 5 Estimated hours by skill category are as follows:
- ------------------------------------------------------------------------------------------------------------ CATEGORY CONTRIBUTION BY TOTAL ESTIMATED HOURS CATEGORY - --------------------------------------------- -------------------------- ---------------------------------- Manager .71 [ ] Principal Engineer .79 [ ] Sr. Engineer III .16 [ ] Sr. Engineer II 2.89 [ ] Sr. Engineer I 3.06 [ ] Engineer 1.66 [ ] Associate Engineer .73 [ ] - ------------------------------------------------------------------------------------------------------------ TOTAL CONTRIBUTION/HOURS: 10.00 [ ] - --------------------------------------------- -------------------------- ----------------------------------
U S WEST may, at its discretion, close the project or the involvement of CGI resources by providing a written notice to the CGI Program Manager. If such an eventuality occurs, the respective resources will be given a ramp down period of [ ] weeks to find other work. Upon completion of the [ ] week ramp down period, U S WEST will be obligated to CGI for the time and materials expended up to and including the [ ] week ramp down. 37-001-97-B 4 MAY 22, 1997 EX-10.8.T 7 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(t) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 PROJECT TITLE: List Administration/Distribution SCHEDULE NUMBER "X34-001-97"/AGREEMENT NO - 9700050785 U S WEST LIST ADMINISTRATION/DISTRIBUTION PROJECT (CLIMATE ENHANCEMENT PROJECT) This Schedule Number "34-001-97", effective October 10, 1997 issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") and is made a part thereto. This Schedule contains the following sections: 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST in support of the LIST ADMINISTRATION/DISTRIBUTION project. The work to be provided by CGI represents a new effort between the parties. 1.2 OVERVIEW This section provides a high level system overview for the List Administration/Distribution project. It defines the overall system components of the proposed system. Carnegie Group will be working with U S WEST by providing development services in support of U S WEST's CLIMATE software and related systems solution under U S WEST direction.
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3 PROJECT TITLE: List Administration/Distribution As defined by the users, three major functions of the List Administration/Distribution project include: o List Management and Administration o List Distribution o Reports LIST MANAGEMENT & ADMINISTRATION This will be the point and click based system. This will be used for management of the generated list. This module will provide: o Current user list associated by sales code in each offices o Flexibility to list data by various factors o Call lists could include any of the following: o Telephone number o Credit Class o Originating Sales Code o Product o Product information o Contract USOC charges o Expiration Date o Average Toll o Accumulative Toll o Customer quality checks LIST DISTRIBUTION The List Distribution system will be used for manually distributing the calls to various clients. After the list has been generated, this module will provide capability to: o distribute call list o run multiple lists simultaneously o distribute calls between all of the listed locations and selected agents o status the system, at any time, to check list(s) point of completion
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4 PROJECT TITLE: List Administration/Distribution REPORTS Various types of reports will be required for the List Administration/ Distribution project. The reports can be generated daily, monthly or both. Reports can be pulled from a remote location for all offices. Ability to customize report requests are also needed. These reports include: o Post Installation Verification Performance Report. o This report provides various call counts by each office. These call counts include Scheduled, Completed, Rescheduled, Follow-up, Missed Commitment etc. o This report also provides call counts by various product types o Basic and Summary Reports at all levels, depicting product sold by individual sales code or office o Summary Report on agents and/or offices performance o Call Outcome Report listing order placed, order number, TN, due-date. o Due Date Missed Report tracking due dates missed and refer to appropriate department o Agent Sales Code Changes Report. SYSTEM OVERVIEW Figure 1 provides an overview of the List Administration/Distribution System. It contains 2 major subsystems, namely: o Marketing System - for list generation, management and administration o Host/PACT System - for providing customer/sale related information. Host system, such as CRIS/CDW can provide the customer and order related information to marketing system. PACT or SCATS system can provide sales code related information to marketing system. Marketing system can use the information to generate various lists. The list can be generated using various factors, such as Customer Credit Class, Originating Sales Code, Product related information, Expiration Date, Customer quality checks etc. Marketing system can be used for providing all required reports.
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5 PROJECT TITLE: List Administration/Distribution [GRAPHIC OMITTED] FIGURE 1: LIST ADMINISTRATION/DISTRIBUTION - SYSTEM OVERVIEW 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following exceptions and definitions apply to this Schedule: I. Special Rampdown provisions: Notwithstanding subsection 21.2 of the Agreement, Customer shall be responsible for continued funding of the current CGI project resources at the time of termination for a period of two (2) weeks. II. Services Warranty terms: CGI will warrant the final Purchases (LIST ADMINISTRATION/DISTRIBUTION PROJECT SOFTWARE DELIVERABLES) for a period of ninety (90) days from final Acceptance in accordance with the terms of section 5 of the Agreement. This warranty does not include correction of Errors in the CLIMATE sfotware code which are traceable to any portion of such code other than the LIST ADMINISTRATION/ DISTRIBUTION PROJECT SOFTWARE DELIVERABLES. III. Acceptance terms: U S WEST shall test the List Administration/ Distribution project software delivered hereunder according to the Acceptance Test(s) agreed upon by both U S WEST and CGI. A. The CGI project manager assigned to this LIST ADMINISTRATION/ DISTRIBUTION PROJECT has exclusive control of and over the CGI resources on the project, including but not limited
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6 PROJECT TITLE: List Administration/Distribution to responsibility for staff assignment, project team makeup, and transition of CGI resources either onto or from a project. U S WEST may request the CGI project manager to make changes relating to the CGI resources. CGI will respond with consent or an objection to consent and reasons why consent will be withheld; consent will not be unreasonably withheld. B. The CGI project manager and the U S WEST project manager have the authority to mutually agree on the location, either at a U S WEST site or CGI site, where each CGI resource may work during the project, including an associated period of time, based on not compromising the schedule and deliverables set forth in this Schedule. IV. Review of the Schedule A. The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI project manager will meet within the first week after the effective date of this Schedule to review the details of this Schedule, including but not limited to the Exceptions to the Agreement provided above ("Review"). The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI project manager be assigned by U S WEST or CGI respectively to the LIST ADMINISTRATION/DISTRIBUTION PROJECT after the initial Review, unless as otherwise mutually agreed by the parties. 1.4 CGI ROLES AND RESPONSIBILITIES The following activities are to be performed by CGI: o Develop an overall project schedule for this effort based on joint CGI/U S WEST input. o Provide project management for the CGI software development team. o Create weekly status reports documenting project progress. o Conduct all software development processes, listed in the deliverable section, required to achieve project deliverables and schedule. o Provide all document and software deliverables listed in the deliverable section. o Provide knowledge transfer to U S WEST for maintenance, training, and ongoing support as requested. o Support U S WEST in all phases of installation and testing. U S WEST Roles and Responsibilities The following activities are to be performed by U S WEST:
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7 PROJECT TITLE: List Administration/Distribution o Provide subject matter expertise on this LIST ADMINISTRATION/ DISTRIBUTION PROJECT relative to the CLIMATE system and the client needs stated in the project requirements. o Acquire and install all test and production software and hardware to be used for testing and deployment. o Acquire and install all development software and hardware to be used for project development. o Provide system administration and database administration required for project testing and deployment. o Specify any required documentation standards and formats that CGI is required to follow for project deliverables. o Provide project management and appropriate project sponsorship support to aid CGI in gaining access to either IT or end user organizations, containing appropriate expertise. o Review and either sign-off or provide comments on all CGI deliverables. o Manage scope and expectations with end user clients. o Conduct system and acceptance testing on U S WEST's production platform after the software is delivered to U S WEST. o Conduct all required end user training for using the LIST ADMINISTRATION/DISTRIBUTION PROJECT system. Joint CGI/U S WEST Roles and Responsibilities CGI and U S WEST are jointly responsible for the following activities: o Hold periodic status meetings where schedule, progress, plans, and issues are presented and action items are assigned for resolution. o Meet with U S WEST subject matter experts for such meetings as requirements gathering and knowledge acquisition. o Follow all project change management procedures as directed by either party. o Define and document the success criteria for the project in a timely manner. o Participate in U S WEST project review meetings including architecture reviews and operational readiness reviews.
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8 PROJECT TITLE: List Administration/Distribution 1.7 SCOPE Please refer to section 1.2 for project scope. This is joint U S WEST and CGI project. CGI is supplementing the team with two Engineer developers and one half time Project Manager. The scope of the project is to provide the three major functions of the List Administration/Distribution project which are: o List Management and Administration o List Distribution o Reports 1.8 DELIVERABLES Deliverables are provided in Section 2.3 below. Due to the joint responsibilities between U S WEST and CGI, successful delivery of the software solution will be shared by both U S WEST and CGI. 1.9 SUMMARY The services and deliverables provided hereunder covers efforts to be performed from October 13, 1997 through January 13, 1998. 2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES 2.1 TASKS, SCHEDULE, AND DELIVERABLES. This section lists proposed changes which will be needed in the CLIMATE system in order to run the List Administration application.
- --------------------------------------------------------------------------------------------------------------- EXISTING CLIMATE CAPABILITY CLIMATE ENHANCEMENTS (H&PS) (SBG) - ------------------------------------ ------------------------------------ ------------------------------------ DATABASE (STRUCTURES) Everything Add Customer Quality Checkpoints - ------------------------------------ ------------------------------------ ------------------------------------ DATABASE (DATA) Everything exists for H&PS Reuse same extract programs to populate following H&PS data: o Contract USOC Charges o Average Toll o Accumulative Toll o Customer Quality Checks o Agent Sales Code History - ------------------------------------ ------------------------------------ ------------------------------------ PROCESSING LAYER o List Creation o Sub List Creation o List Distribution o Sub List Assignment o Query List o Adjust for Response flow o Multiple Lists - ---------------------------------------------------------------------------------------------------------------
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9 PROJECT TITLE: List Administration/Distribution
- --------------------------------------------------------------------------------------------------------------- PRESENTATION o View List o View Master List o Assign Sub list o Form Sub list o Sort List by Search Criteria o Assign Sub list to o Ability to load SubList Office/Sales Agent o Update List Status - ----------------------------------- ------------------------------------- ------------------------------------ REPORTS o Post Installation Verification o Summary Office Performance o Due Date Report o Agent Sales Code Changes - ------------------------------------ ------------------------------------ ------------------------------------ ADMINISTRATION o Database Security o Install Software on PC o Application Security o Access to Server o Training o Capacity - ---------------------------------------------------------------------------------------------------------------
2.2 ASSUMPTIONS The above tasks, schedules and deliverables were developed based on the following assumptions. 1. The schedule is based on a project start date of October 13, 1997. Delays in this start date may impact the delivery date of one or more Deliverables. 2. The work estimates are based on CGI Methodology and past experience. CGI will continuously monitor the status and notify U S WEST of any issues or risk situations which may impact the delivery date. 3. CGI has timely access to U S WEST personnel (i.e. SMEs). 4. U S WEST to provide a sponsor and project manager to act as the liaison between the U S WEST project team and the CGI project team. 5. Weekly status reports and meetings to be held between the U S WEST project manager and the CGI project manager to measure progress against the workplan. Any known issues and risks are also discussed and raised to the next level if not resolved. 6. U S WEST to provide facilities, computer equipment, software, etc., as requested by CGI. 7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact the delivery date of one or more Deliverables. 8. Change requests to be submitted using the CGI change process for analysis to provide estimates, costs, and impact on current deliverables. Signed approval in compliance with RPP 1001 is required before implementation of any change requests.
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10 PROJECT TITLE: List Administration/Distribution 2.3 DELIVERABLES Project deliverables are included in the table below. U S WEST will provide a systems solution for the LIST ADMINISTRATION/DISTRIBUTION project. CGI as members of a U S WEST/CGI team, will provide systems solution consulting to U S WEST, software development services and project management of the CGI team. As such, no identifiable segment of the List Administration/Distribution solution can be detailed as purely a CGI responsibility, but a shared responsibility with U S WEST. A copy of the deliverables will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within ten (10) business days after delivery, then the Deliverables shall be deemed accepted.
- ------------------------------------------------------------------------------------------------------------- MILESTONE DURATION (FROM START OF PROJECT) DELIVERABLES - --------------------------- -------------------------------------------- ------------------------------------ Milestone 1 Week 0 Obtain Funding - --------------------------- -------------------------------------------- ------------------------------------ Milestone 2 Week 2 Mock up screens & design document - --------------------------- -------------------------------------------- ------------------------------------ Milestone 3 Week 7 Alpha Software - --------------------------- -------------------------------------------- ------------------------------------ Milestone 4 Week 9 Beta Software - --------------------------- -------------------------------------------- ------------------------------------ Milestone 5 Week 10 User Acceptance & Training - -------------------------------------------------------------------------------------------------------------
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11 PROJECT TITLE: List Administration/Distribution 3. PROJECTED COST The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort.. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS MINIMUM DISCOUNT AND ANY PROJECT [ ] VOLUME DISCOUNT - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES 0 - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES TBD - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- Estimated hours are as follows: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED HOURS - -------------------------------------------------------------------------------------------------------------- Manager(s) [ ] Business Consultant(s) Engineer(s) [ ] Technical Writer(s) - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - ------------------------------------------------------ ------------------------------------------------------
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12 IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST BY: /S/ BRUCE RUSSELL BY: /S/ BARBARA IRWIN ----------------------- ------------------------ NAME: BRUCE RUSSELL NAME: BARBARA IRWIN --------------------- ---------------------- (printed) (printed) TITLE: EVP/COO TITLE: SR. DIRECTOR -------------------- --------------------- DATE: 10/23/97 DATE: 10/13/97 --------------------- ---------------------- U S WEST BRI BY: /S/ SHERYL SWAYZE ------------------------ NAME: SHERYL SWAYZE ---------------------- (printed) TITLE: COMMODITY MANAGER --------------------- DATE: 10/20/97 ----------------------
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EX-10.8.U 8 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(u) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 CSRM SCHEDULE NUMBER "23-07-97"/(9700050785) CSR [ ] CSRM This Schedule Number "23-07-97", effective November 17, 1997 issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") and is made a part thereto. The CSR [ ] Proposal from Carnegie Group, Inc. to U S WEST Communications, Information Technologies dated November 17, 1997 (the "CSR [ ] Proposal") shall be included in its entirety as part of this Schedule 23. This Schedule contains the following sections which may reference specific portions of the Proposal. This Schedule contains the following sections: 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST in support of CSR [ ]. The work to be provided by CGI represents a new effort between the parties.
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3 CSRM 1.2 OVERVIEW Reference the Executive Summary and Articles 1, 2 and 3 of the CSR [ ] Proposal in their entirety for a complete overview and description of the project. 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following exceptions and definitions apply to this Schedule: o Work Authorization: It is agreed by the parties that any work provided by CGI under the Letter of Intent dated November 17, 1997 will be included under this Schedule as billable to U S WEST and in accordance with the terms and conditions hereunder. o Special Rampdown provisions: Notwithstanding subsection 21.2 of the Agreement, Customer shall be responsible for continued funding of the current CGI project resources at the time of termination for a period of two (2) weeks. o Services Warranty terms: CGI will warrant the final Purchases for a period of ninety (90) days from final Acceptance in accordance with the terms of section 5 of the Agreement. o Management of project resources: o The CGI project manager assigned to this CSR [ ] has exclusive control of and over the CGI resources on the project, including but not limited to responsibility for staff assignment, project team makeup, and transition of CGI resources either onto or from a project. U S WEST may request the CGI project manager to make changes relating to the CGI resources. CGI will respond with consent or an objection to consent and reasons why consent will be withheld; consent will not be unreasonably withheld. o The CGI project manager and the U S WEST project manager have the authority to mutually agree on the location, either at a U S WEST site or CGI site, where each CGI resource may work during the project, including an associated period of time, based on not compromising the schedule and deliverables set forth in this Schedule. o Review of the Schedule o The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI project manager will meet within the first week after the effective date of this Schedule to review the details of this Schedule, including but not limited to the Exceptions to the Agreement provided above ("Review") o The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI project manager be assigned by U S WEST or CGI respectfully to the CSR [ ] after the initial Review, unless as otherwise mutually agreed by the parties.
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4 CSRM 1.4 CGI ROLES AND RESPONSIBILITIES Reference Article 9 in its entirety of the CSR [ ] Proposal for CGI, U S WEST and Joint CGI and U S WEST Roles and Responsibilities for the project. 1.5 SCOPE Reference Article 3 and 4 in its entirety of the CSR [ ] Proposal for the scope of the project. 1.6 DELIVERABLES The following CSR [ ] deliverables will be provided by Carnegie Group to U S WEST and are considered Work Products pursuant to subsection 7.1 of the Agreement. For the purposes of this Schedule No. 23-07-97 such deliverables will be the sole and exclusive property of U S WEST: o SOFTWARE PROJECT MANAGEMENT PLAN (SPMP): The SPMP provides a project management guide for successful execution of the CSR [ ] project. It documents such elements as project goals, points of contact, schedule, resources, risks, constraints, and assumptions. The SPMP ensures that all project elements are considered initially and managed to successful completion. o CLIENT AND USER REQUIREMENTS DOCUMENT: This document defines the set of requirements specified by the U S WEST client representatives for functional purposes and Interconnect Engineering for usability purposes. o ARCHITECTURE DOCUMENT: This document describes the overall system architecture and design notes. o DESIGN DOCUMENT: This document contains a detailed description of each CSR [ ] application and related interfaces. o USER GUIDE: This document contains detailed API specifications to support interfacing developers, and also actions required by users to effectively utilize any GUI screens provided. o SOURCE CODE: Multiple releases of the CSR [ ] source code will be provided to U S WEST. Releases include the initial development release, integration-tested software, system-tested software, and final production software. o STATUS REPORTS: Status reports will be developed by Carnegie Group which describes project status, progress, issues, and plans. o ADMINISTRATORS GUIDE: providing instructions for System Administrators describing the installation, set-up, and maintenance of the system. 1.7 SUMMARY This Schedule covers efforts to be performed from November 17, 1997 through February 27, 1998.
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5 CSRM 2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES 2.1 TASKS AND SCHEDULE Reference Section 4 and 5 in its entirety of the CSR [ ] Proposal for the Work Breakdown Structure and Schedule to address this section of this Schedule No. 23-07-97. 2.2 ASSUMPTIONS The project description, schedules, and deliverables were developed based on the assumptions provided in Sections 8 of the CSR [ ] Proposal. If these assumptions are not valid, changes to the schedule, deliverables, and cost of the CSR [ ] project may be required. 1. BOSS access for new APIs can be provided through existing IMS capability with no updates to the BMP process. If IMS capability for these transactions does not exist, U S WEST will add the necessary IMS transactions. 2. Based on past Fetch 'N Stuff experience, we assume that CARS access through screen scraping will be necessary (worst case assumption). Capabilities are not supported by COBOL through the BMP. 3. The schedule is based on a project start date of 12/1/97. Delays in this start date will impact the project completion date. 4. The work estimates are based on Carnegie Group Methodology and past experience. Carnegie Group will continuously monitor the project status and notify U S WEST of any issues or risk situations which may impact the delivery date. 5. Carnegie Group has timely access to required U S WEST personnel (e.g. subject matter experts). 6. U S WEST provides a project sponsor to act as the liaison between the U S WEST and Carnegie Group. This does not require that U S WEST handle all Interconnect Engineering interactions but that appropriate personnel be provided to support these activities. 7. All development will be done on Carnegie Group premises and facilities. Intermediate and final software products will be moved to U S WEST facilities as required. 8. Any delays outlined in the Dependencies may impact the delivery dates. 9. Change requests to the requirements outlined in this proposal must be defined by U S WEST for analysis by Carnegie Group to provide estimates, costs, and impact on current deliverables. Signed approval by both parties is required prior to implementation of any change request. 10. The primary point of contact will be Patti Jansen who will designate a back-up contact when unavailable.
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6 CSRM 2.3 DELIVERABLES See Section 6 of this Schedule for a description of the CSR [ ] deliverables. A copy of each deliverable will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within ten (10) business days after delivery, then the Deliverables shall be deemed accepted.
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7 CSRM 3. PROJECTED COST The total cost of the work (less options) net of discounts shall not exceed [ ] based on estimated time and material expenses. Travel be required. U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS MINIMUM DISCOUNT AND ANY PROJECT [ ] VOLUME DISCOUNT - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- Estimated hours are as follows: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED HOURS - ------------------------------------------------------ ------------------------------------------------------ Manager(s) [ ] Business Consultant(s) Engineer(s) [ ] Technical Writer(s) [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
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8 CSRM IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST BY: /s/ DENNIS YABLONSKY BY: /s/ BARBARA IRWIN --------------------------- ----------------------- NAME: DENNIS YABLONSKY NAME: BARBARA IRWIN ------------------------- ---------------------- (printed) (printed) TITLE: PRESIDENT/CEO TITLE: SR. DIRECTOR ------------------------ --------------------- DATE: 12-8-97 DATE: 12/05/97 ------------------------- --------------------- U S WEST BRI BY: /s/ SHERYL SWAYZE ------------------------ NAME: SHERYL SWAYZE --------------------- (printed) TITLE: COMMODITY MANAGER --------------------- DATE: 12/3/97 --------------------- - --------------------------------------------------------------------------------
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EX-10.8.V 9 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(v) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 PROJECT TITLE: Quick Hit Team SCHEDULE NUMBER "23-09-97"/(AGREEMENT NO. 9700050785) QUICK HIT TEAM This Schedule Number "23-09-97", effective November 21, 1997 issued pursuant to the General Terms and Conditions of Agreement No. 9700050785 dated June 30, 1997 between U S WEST and Carnegie Group, Inc. ("CGI") including the Special Provisions Module - Software License and Services dated June 30, 1997 (collectively, the "Agreement") is made a part thereto. This Schedule contains the following sections: 1. Project Description 2. Schedule, Statement of Work and Deliverables 3. Projected Cost This Schedule specifically overrides the terms and conditions of the Agreement pursuant to "Exceptions/Definitions to the Agreement" in section 1.3 below. In the event that such section 1.3 conflicts with the provisions of the Agreement, the terms of section 1.3 shall control for purposes of this Schedule only. In consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PROJECT DESCRIPTION 1.1 INTRODUCTION This Schedule covers the services and deliverables to be provided by Carnegie Group, Inc. for U S WEST Information Technologies Service Delivery in support of the QUICK HIT TEAM. The work to be provided by CGI represents a new effort between the parties. 1.2 OVERVIEW U S WEST Information Technologies (IT) Service Delivery has created a team to provide short timeframe turnaround on solutions delivery to their respective clients (the "Quick Hit Team"). The U S WEST Immediate Solution Discovery Team recommends solutions for the clients. The solutions recommended are small from a time and resources perspective, but the end results are of value to the success of the channels. The Quick Hit Team, which includes three (3) Carnegie Group resources, will provide hourly consulting services to U S WEST Information Technologies and will be working within the complete development process of individual quick hit projects. It is intended that this will include solutions review to coding and testing. A result of this approach will
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3 PROJECT TITLE: Quick Hit Team be jointly developed documents and solutions under the leadership and management of U S WEST IT. 1.3 EXCEPTIONS/DEFINITIONS TO THE AGREEMENT The following definitions apply to this Schedule: 1. Review of the Schedule a) The parties agree that the U S WEST team leader, the U S WEST project manager and the CGI resource will meet within the first week after the effective date of this Schedule to review the details of this Schedule. b) The Review will occur more than once should a new U S WEST team leader, U S WEST project manager or CGI resource be assigned by U S WEST or CGI respectfully to the QUICK HIT TEAM effort after the initial Review, unless as otherwise mutually agreed by the parties. c) Special Rampdown provisions: Carnegie Group is aware that U S WEST intends to replace CGI resources with U S WEST resources when such person(s) can be identified and made available to this project. Notwithstanding subsection 21.2 of the Agreement, Customer shall be responsible for continued funding of the current CGI project resources at the time of termination for a period of two (2) weeks or at the expiration of this Schedule whichever comes first. 1.4 ROLES AND RESPONSIBILITIES The Roles and Responsibilities of the QUICK HIT TEAM are separated and defined in this document by individual company and collectively between U S WEST and Carnegie Group. The project team has been assembled such that CGI is playing a role on the team. Each team member within this collective group may be asked to perform any one of the responsibilities listed below. Therefore, the listing of Roles and Responsibilities has been duplicated and listed separately and jointly between U S WEST and Carnegie Group. 1.4.1 CGI ROLES AND RESPONSIBILITIES The following activities are to be performed by CGI: 1. Research 2. Design 3. Coding 4. Testing 5. Documentation
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4 PROJECT TITLE: Quick Hit Team The following task(s) (including details involved in the activities provided above) are to be performed by CGI under IT direction: o Investigate discovery team recommended solutions to determine actual problem(s) to be solved. o Work with clients to uncover and document functional requirements. o Convey requirements to developers and answer/investigate questions as they arise. o Develop solutions from coding through testing. o Review final solutions prior to delivery to client to insure requirements match. o Help deliver solutions to client and perform client acceptance testing. o Help review test results with functional analysts and (sometimes) client. o Create all required application documentation. o Deploy applications in production. o Hand-off solutions/applications to maintenance teams. 1.4.2 U S WEST ROLES AND RESPONSIBILITIES The following activities are to be provided by U S WEST: 1. Research 2. Design 3. Coding 4. Testing 5. Documentation 6. Project Management 7. User acceptance 1.4.3 JOINT CGI AND U S WEST ROLES AND RESPONSIBILITIES CGI and U S WEST are jointly responsible for the following activities: 1. Research 2. Design 3. Coding 4. Testing 5. Documentation
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5 PROJECT TITLE: Quick Hit Team 1.5 SCOPE This is a U S WEST IT lead effort supported by a single CGI resources. for an individual solutions delivery project for a given client. [ ]. There may be innumerable quick hit projects identified, Therefore each of the three (3) CGI resources may work on more than one quick hit project at any time. Such resources will contribute to the overall Quick Hit Team effort through February 23, 1998. 1.6 DELIVERABLES Actual deliverables will be determined during the early phases of the project. For the purpose of this Schedule No. 23-09-97, such deliverables will be the sole and exclusive property of U S WEST. 1.7 SUMMARY This Schedule covers efforts to be performed from November 24, 1997 through February 23, 1998. 2. SCHEDULE, STATEMENT OF WORK AND DELIVERABLES 2.1 TASKS, SCHEDULE, AND DELIVERABLES The following table summarizes the tasks, schedule and deliverables included in this Schedule.
- ------------------------------------------------------------------------------------------------------------------ TASKS RESPONSIBILITY START DATE END DATE DELIVERABLES - ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- Research U S WEST and 11/24/97 2/23/98 To be CGI determined Design during the early phases of the Coding project. Both US WEST and Testing CGI resources will produce the Documentation requisite documents as determined in the early phases of the project. - ------------------------------------------------------------------------------------------------------------------
2.2 ASSUMPTIONS
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6 PROJECT TITLE: Quick Hit Team The above tasks, schedules and deliverables were developed based on the following assumptions. 1. The schedule is based on a project start date of November 24, 1997. Delays in this start date may impact the delivery date of one or more Deliverables. 2. The work estimates are based on fixed dates provided by U S WEST. CGI will continuously monitor the overall effort's status and notify U S WEST of any issues or risk situations which may impact one or more delivery dates. 3. CGI has timely access to U S WEST personnel (i.e. SMEs). 4. U S WEST to provide a sponsor and project manager to act as the liaison between the U S WEST project team and the CGI resource. 5. Weekly status reports and meetings to be held between the U S WEST project manager and the CGI project manager to measure progress against the workplan as mutually agreed upon by U S WEST and CGI. Any known issues and risks are also discussed and raised to the next level if not resolved. 6. U S WEST to provide facilities, computer equipment, software, etc., as requested by CGI. 7. Any delays in dependent tasks (i.e. U S WEST tasks) may impact the delivery date of one or more Deliverables. (Such dependent tasks may likely be determined and documented during the early phases of the project and jointly agreed upon between U S WEST and CGI.) 8. Change requests to be submitted using the CGI change process for analysis to provide estimates, costs, and impact on current deliverables. Signed approval in compliance with RPP 1001 is required before implementation of any change requests. 2.3 DELIVERABLES Deliverables will be determined during the early phases of the project and will be completed jointly between U S WEST and CGI. [ ]. A copy of the deliverables will be provided to the appropriate U S WEST recipients. The master copy will contain a letter to be mutually signed by the parties acknowledging delivery, receipt and acceptance of the deliverables. Should CGI not receive the signed letter or a written list of items which are not in compliance with the project specifications within five (5) business days after delivery, then the Deliverables shall be deemed accepted.
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7 PROJECT TITLE: Quick Hit Team 3. PROJECTED COST The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Schedule does not represent a follow-on effort or a change order effort. Estimated costs with applicable discounts for the project are provided below:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT AND ANY PROJECT VOLUME DISCOUNT [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES None - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES None - ------------------------------------------------------ ------------------------------------------------------ TOTAL SCHEDULE ESTIMATED PRICE [ ] - -------------------------------------------------------------------------------------------------------------- Estimated hours are as follows: - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED HOURS - ------------------------------------------------------ ------------------------------------------------------ Manager(s) Business Consultant(s) Engineer(s) [ ] Technical Writer(s) - -------------------------------------------------------------------------------------------------------------- TOTAL HOURS [ ] - ------------------------------------------------------ ------------------------------------------------------
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97 Proprietary and Confidential Page 6
8 PROJECT TITLE: Quick Hit Team IN WITNESS WHEREOF, U S WEST and CGI agree and execute this Schedule in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. U S WEST INFORMATION TECHNOLOGIES BY: /s/ DENNIS YABLONSKY BY: /s/ BARBARA IRWIN ----------------------- ------------------------------ NAME: Dennis Yablonsky NAME: Barbara Irwin --------------------- -------------------------- (printed) (printed) TITLE: President/CEO TITLE: Sr. Director -------------------- -------------------------- DATE: 1/28/98 DATE: 01/21/98 --------------------- -------------------------- U S WEST BRI BY: /s/ SHERYL SWAYZE ------------------------------ NAME: Sheryl Swayze ---------------------------- (printed) TITLE: Commodity Manager --------------------------- DATE: 1/20/98 ----------------------------
Schedule Number 230997 Carnegie Group, Inc. and U S West 12/30/97 Proprietary and Confidential Page 7
EX-10.8.W 10 CARNEGIE GROUP, INC. 1 EXHIBIT 10.08(w) Confidential treatment with respect to certain information in this Exhibit has been requested of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The bracketed portions of this Exhibit have been omitted from material filed in accordance with Rule 24b-2 and have been filed separately with the Commission. 2 LETTER AGREEMENT TO AMEND SCHEDULE NUMBER "230397" / AGREEMENT NO. 9700050785 - - AMENDMENT NO. 230397-A This Letter Agreement dated December 1, 1997, is in regard to Schedule Number "230397"/ Agreement No. 9700050785 dated July 21, 1997. Under this Amendment, CGI will extend the services of three (3) Technical Functional Coordinators to perform like roles as described under Schedule 230397. The tasks covered under this Amendment include: The CGI support team will continue to provide hourly consulting services to U S WEST Information Technologies (IT) to collectively recommend an approach to IT by identifying the system requirements, the gaps, the risks and the solutions to the U S WEST Long Distance (LD) business objectives. Then under IT direction, the CGI support team will translate these into more detailed requirements for the project development teams; work with the project development teams; and continue to be the liaison between the project development teams, IT, and LD. The time period in which the CGI resources will provides services hereunder is December 1, 1997 to April 30, 1997. The following tasks are to be performed by CGI: (1) Translate the LD service delivery business requirements into detailed requirements. (2) Actively monitor and work to promote billing and service delivery are in synch with each other. [ ] (4) Work with each area to promote the completion of their deliverables. (5) Work with the development teams to assist them with their target to meet schedule. (6) Work with development teams on the best approach to develop their solutions. (7) Coordinate the development team's delivery of their tasks. [ ] Accordingly, this Amendment includes additional estimated funding in the amount of [ ] FOR AN ADDITIONAL ESTIMATED FIVE (5) MONTHS OF EFFORT to the work previously scoped in Schedule 230397. The project end date provided in Section 2.1 of Schedule 230397 has effectively been changed hereunder from November 30, 1997 to April 30, 1998. 230397-A 1 NOVEMBER 25, 1997 3 The Projected Cost in Article 3 of Schedule 230397 has been increased by [ ] to [ ] in accordance with Exhibit 1 as attached hereto to effectively replace the original Article 3 in its entirety. This Amendment describes the project extension and scope, in accordance with the current intent of the parties, for which the Technical/ Functional Specification Development Schedule 230397 is being modified hereunder. It is understood by the parties that the consulting services will continue to be provided by CGI under Schedule 230397 and this Amendment as subject to change in accordance with U S WEST direction and within the funding constraints of this Amendment. Except as expressly set forth in this Letter Agreement, the terms of Schedule 230397 and all signed amendments shall remain in full force and effect. IN WITNESS WHEREOF, Licensee and CGI have executed this Letter Agreement in duplicate by their respective authorized representatives. CARNEGIE GROUP, INC. LICENSEE By: /s/ DENNIS YABLONSKY By: /s/ BARBARA IRWIN ------------------------- ------------------------ Title: President/CEO Title: Director ---------------------- --------------------- Date: 12-2-97 Date: 12/1/97 ----------------------- ---------------------- U S WEST Business Resources, Inc. Acting as Agent for: LICENSEE By: /s/ SHERYL SWAYZE ------------------------ Title: Commodity Manager --------------------- Date: 11/26/97 ---------------------- 230397-A 2 NOVEMBER 25, 1997 4 EXHIBIT 1 - PROJECTED COST 3. Projected Cost The total cost of the work net of discounts shall not exceed [ ] based on estimated time and material expenses, which represents an increase of [ ] above the previous funding approved for Technical Functional Coordinator of [ ] No travel is anticipated for this project. Should travel be required, U S WEST agrees to pay CGI travel expenses for all pre-approved trips. This Amendment No. 230397-A represents direct follow-on work to the Technical Functional Specification Development Schedule No. 230397. Based on the aggregate contract engineering costs (before discounts) of Schedule No. 230397 and Amendment No. 230397-A totaling [ ], a [ ] Cumulative Project Volume Discount has been applied to incremental contract engineering costs (before discounts) of this Amendment. Estimated costs with applicable discounts and estimated hours are provided below for this Amendment No. 230397-A and for the entire project, respectively. The incremental Amendment costs and hours follow:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT [ ] LESS [ ] CUMULATIVE PROJECT VOLUME DISCOUNT [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES - ------------------------------------------------------ ------------------------------------------------------ TOTAL INCREMENTAL AMENDMENT 230397-A [ ] ESTIMATED PRICE - ------------------------------------------------------ ------------------------------------------------------
230397-A 3 NOVEMBER 25, 1997 5
CATEGORY ESTIMATED HOURS - -------------------------------------------------------------------------------------------------------------- Senior Engineer II [ ] Senior Engineer I [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
The Technical/Functional Specification Development project to date hours and costs follow:
- -------------------------------------------------------------------------------------------------------------- ITEMIZATION OF COSTS AMOUNT - ------------------------------------------------------ ------------------------------------------------------ CONTRACT ENGINEERING COSTS (TIME AND MATERIALS) [ ] LESS [ ] MINIMUM DISCOUNT LESS APPLICABLE VOLUME DISCOUNT [ ] [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL CONTRACT ENGINEERING [ ] - ------------------------------------------------------ ------------------------------------------------------ CGI/THIRD PARTY LICENSE FEES - ------------------------------------------------------ ------------------------------------------------------ TRAVEL EXPENSES AND OTHER PASS-THROUGH EXPENSES - ------------------------------------------------------ ------------------------------------------------------ TOTAL AMENDMENT NO. 230397-A AND [ ] SCHEDULE NO. 230397 ESTIMATED PRICE - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- CATEGORY ESTIMATED HOURS - ------------------------------------------------------ ------------------------------------------------------ Senior Engineer II [ ] Senior Engineer I [ ] - ------------------------------------------------------ ------------------------------------------------------ TOTAL HOURS [ ] - --------------------------------------------------------------------------------------------------------------
230397-A 4 NOVEMBER 25, 1997 EX-10.11.B 11 CARNEGIE GROUP, INC. 1 EXHIBIT 10.11(b) LOAN AGREEMENT THIS AGREEMENT is made as of this 15th day of December, 1997, by and between CARNEGIE GROUP, INC., a Delaware corporation (the "Company") located in Pittsburgh, Pennsylvania, and JOHN MANZETTI, an individual residing at 272 Seasons Drive, Wexford Pennsylvania 15090 (the "Executive"). WHEREAS, the Company and the Executive desire that the Company loan to the Executive the sum of $250,000 in accordance with the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: ARTICLE 1 LOAN 1.1 The Company hereby loans to the Executive the sum of $250,000 (the "Principal Sum"). The Principal Sum, together with interest compounded annually at the rate of 6.39% per annum on the outstanding balance of the Principal Sum (the "Interest Amount"), shall be repaid in a single installment on December 30, 1999 (the "Repayment Date"), subject to the provisions of Section 1.2. 1.2 In the event that, prior to November 30, 1999, (i) the Executive voluntarily terminates his employment with the Company or his employment is terminated by the Company for "Cause" (as hereinafter defined), and (ii) there has been no "Change in Control" (as defined in the Severance Agreement dated as of May 17, 1993, as amended, between the Company and the Executive) prior to such termination, then the Repayment Date shall be thirty days following the date of such termination. 1.3 As used herein, "Cause" shall mean the willful commission by the Executive of any of the following actions, provided that such action is demonstrably and materially injurious to the assets, operations or business prospects of the Company: (i) a felony; (ii) the unlawful or unethical conversion or commitment for the personal benefit of the Executive, a member of his family or a business owned or controlled by the Executive or a member of his family, of corporate funds or property or a material business opportunity of the Company; or (iii) the unauthorized disclosure or use of confidential information of the Company, other than disclosures which are made in the ordinary course of the Company's business or for the purpose of carrying out business objectives of the Company. No action of Executive shall be considered "willful" unless it is done by the Executive in bad faith and without reasonable belief that such action is in the best interests of the Company. 2 ARTICLE 2 PLEDGE OF SHARES 2.1 To secure the repayment of the Principal Sum and the Interest Amount, the Executive shall pledge to the Company any shares of the Common Stock of the Company, par value $.01 per share, which may be acquired after the date hereof by the Executive (the "Pledged Shares"). To perfect such security interest, the Executive shall deliver to the Company immediately upon receipt any stock certificates representing any Pledged Shares. All stock certificates delivered by the Executive to the Company hereunder shall be accompanied by stock powers duly endorsed in blank and medallion signature guaranteed. Until such time, if any, that the Company forecloses on the Pledged Shares, the Executive shall be entitled to retain cash dividends and cash distributions (if any) in respect of, and voting rights incident to, the Pledged Shares. 2.2 The Executive acknowledges and agrees that the loan made hereunder is a full-recourse loan, and if the value of the Pledged Shares is not sufficient to repay the Principal Sum and the Interest Amount, the Executive shall be liable to the Company for the repayment in full on the Repayment Date of the Principal Sum and the Interest Amount. 2.3 Each stock certificate evidencing Pledged Shares shall be held by the Company until the Principal Sum and the Interest Amount has been paid in full. ARTICLE 3 MISCELLANEOUS 3.1 This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of assets or stock, liquidation or otherwise), by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement. Regardless whether such an agreement is executed, this Agreement shall be binding upon any successor of the Company. 3.2 This Agreement contains the entire understanding between the parties hereto with respect to the subject matter set forth herein, but in no way supersedes the Severance Agreement. This Agreement may be modified only by means of a written agreement signed by both parties. 3.3 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 3.4 This Agreement may be executed in several counterparts each of which shall be deemed an original. 3 3.5 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. 3.6 All disputes and controversies arising out of or relating to this Loan Agreement, or any breach thereof, will be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules then in effect. An arbitral award will be final and binding on both parties hereto and may be enforced by any court or judicial authority having competent jurisdiction over either party or its assets against whom the arbitral award is to be enforced. IN WITNESS WHEREOF, the parties have duly executed this Agreement. CARNEGIE GROUP, INC. By: /S/ DENNIS YABLONSKY ------------------------- Title: PRESIDENT/CEO ---------------------- /S/ JOHN MANZETTI --------------------------- John Manzetti EX-23.1 12 CARNEGIE GROUP, INC. 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-01760) of Carnegie Group, Inc. of our report dated February 3, 1998 appearing on page 22 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP March 31, 1998 EX-27 13 CARNEGIE GROUP, INC.
5 0001001188 CARNEGIE GROUP, INC. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,483,284 0 7,954,635 0 0 24,315,705 2,568,758 0 29,590,804 5,520,724 0 0 0 67,079 24,003,001 29,590,804 1,430,335 29,406,261 19,085,705 29,954,868 0 0 13,293 181,959 72,367 109,592 0 0 0 109,592 .02 .02
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