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NOTE 7 - LEGAL SETTLEMENTS
In June 2001, ITC/INFO Tech ("Claimant") obtained a default award of
$79,000 against the Company. The award was based on non-payment for computer
goods shipped by ITC to two subsidiaries of the Company. The Company has offered
to settle the award for shares of restricted stock, but the Claimant has refused
to accept such an offer to date. The Claimant has made no effort to enforce its
award since June 2001. As of June 30, 2006 and December 31, 2005, the award
amount has been included in the accrued expenses of the Company.
NOTE 8 - CONTINGENCIES
Celeste Trust Reg., Esquire Trade, et al. v. CBQ, Inc. (Case# 03 Civ.
9650 RMB; US District Court, SDNY, 12/4/2003). A lawsuit filed against company
by three plaintiffs on or about December 4, 2003, but which the company did not
receive notice of until the week of February 18, 2004 or thereabouts. The
Plaintiffs purchased debentures issued by Socrates Technologies Corporation
(STC), a public Delaware corporation in 2000. When the Company purchased the
assets of two STC subsidiaries in March 2001, the plaintiffs allege that the
Company promised to issue to the Plaintiffs and others the consideration that
was to be paid to STC for the acquired assets and to so do in order to
compensate the plaintiffs for their investment in the STC debentures, which were
apparently in default at that time. The total consideration paid for the STC
subsidiaries' assets were 7.65 million shares of company Common Stock and a
Promissory Note made by the Company for $700,000 principal amount. The Company
has defended against the
page 15...
NOTE 8 - CONTINGENCIES (continued)
Plaintiffs' claims to date. If the Plaintiffs win a judgment on their claims,
the judgment, if collected, would prove potentially ruinous the Company, unless
a settlement involving no cash was arranged between the parties to the lawsuit.
The Plaintiff's claims include a claim for receipt of the money due under the
Promissory Note with a principal amount of $700,000. The Company lacks the cash
flow or cash reserves or funding resources to pay such a claim, either in a lump
sum or over time. If the Plaintiffs are awarded the claimed damages against the
Company in this lawsuit, the Company would be unable to pay such damages, either
in a lump-sum or under a schedule, and would be insolvent.
The Plaintiff's complaint in Celeste was dismissed by the U.S. District
Court for the Southern District of New York in early 2005 for failure to have
all essential parties to the dispute as parties to the lawsuit. The Plaintiffs
filed an amended complaint prior to the March 1, 2005 deadline for doing so. The
Company currently intends to vigorously defend against the Plaintiff's amended
complaint, which adds two former, now defunct, subsidiaries involved in the STC
transaction as defendants. The assets of Networkland, Inc. and Technet Computer
Services Corporation were acquired by the Company on March 15, 2001 and that
transaction is at the heart of the dispute in the Celeste case. Currently, the
Company's second motion to dismiss is scheduled to be heard by the Court on or
about September 15, 2005. The Court has also heard Plaintiff's motion for
default judgment against the subsidiaries involved in the STC transaction. The
Court's decision may take several months to be issued. The Company is uncertain
at this time of the final outcome of this litigation.
Sun Trust Bank Dispute. Sun Trust Bank line of credit and term note:
Prior to being acquired by the company, Quantum Technology Group had a $4
million line of credit with Crestar Bank, which was subsequently acquired by Sun
Trust. This line of credit was guaranteed by Quantum and five individual
guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony
Saunders. This line of credit was opened during April, 2000. On August 8, 2000,
the Company acquired all of the shares of Quantum. Sun Trust asserted that $1.3
million of the line of credit had been used, and was owing to Sun Trust, as well
as line of credit, a $200,000 term loan from Sun Trust to Quantum, approximately
$200,000 in accrued interest and $100,000 in attorney fees -- all of which
Suntrust had sought to collect from the individual guarantors. Sun Trust had not
sued the Company and has not raised its prior threat to sue in 2005.
RAS Investment, Inc., a company affiliated with Anne Sigman, a former
employee of the Company, has advised the Company that RAS has acquired the Sun
Trust note and has demanded payment in cash or stock. As of the date of this
Report, the Company's position remains as before, that is, that the Company is
not obligated to pay the Sun Trust debts and any claims made to collect that
debt could be defeated by several potential defenses and counterclaims.
The Company is a defendant to another lawsuit concerning a trade show
contract for approximately $25,000, but the Company does not believe that this
lawsuit is material in respect of potential liability of the Company. The
Company has been and intends to vigorously defend itself in this lawsuit. In
August 2006, the Company settled this lawsuit for $25,000.
page 16...
NOTE 8 - CONTINGENCIES (continued)
As reported previously, the Company has received two claims from
certain former shareholders of Cyberquest, Inc. that they hold or own
approximately 70,000 shares of a class of the Company's redeemable preferred
stock that was issued in the Company's 1998 acquisition of Cyberquest.
Cyberquest ceased operations in 2000-2001 period. The Company has investigated
these claims and has not been able to date to substantiate any of the claims to
date and the claimants have not pursued their claims beyond an initial
communication asserting ownership of these shares of serial preferred stock.
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