SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20594
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
September 21, 1999
(Date of earliest event reported)
CARNEGIE INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
Colorado 0-8918 13-3692114
(State of other jurisdiction of (Commission File No.) (IRS Employer
incorporation or organization) Identification No.)
11350 McCormick Road, Executive Plaza 3, Suite 1001, Hunt Valley, Maryland 21031
(Address of principal executive offices)
(410) 785-7400
(Registrant's telephone number)
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Item 4. Changes in Registrant's Certifying Accountant.
On September 21, 1999, Carnegie International Corporation (the
"Company") replaced its certifying accountant, Grant Thornton, LLP ("Grant
Thornton"). The decision to replace Grant Thornton was approved by the Company's
Board of Directors. Grant Thornton was notified of the Company's decision on
September 23, 1999.
The Company has engaged Merdinger, Fruchter, Rosen & Corso, P.C. as its
certifying accountant as of September 22, 1999 for the Company's fiscal year
ending December 31, 1999. Merdinger, Fruchter, Rosen & Corso, P.C. previously
audited the December 31, 1998 and 1997 financial statements of Paramount
International Telecommunications, Inc., a wholly-owned subsidiary of the
Company. The Company has not consulted Merdinger, Fruchter, Rosen & Corso, P.C.
previously.
Grant Thornton was engaged by the Company in January 1998, as the
Company's certifying accountant, and previously issued reports concerning the
Company's financial statements for 1997 and 1998. Grant Thornton's report on the
Company's financial statements for each of those years did not contain an
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles. During the two most recent
fiscal years and subsequent interim periods, the Company has not had any
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
On Thursday, September 23, 1999, the Company informed Grant Thornton,
in writing, of the Board's decision to terminate the Company's relationship with
Grant Thornton, effective immediately. The Company's decision to terminate its
relationship with Grant Thornton was based upon the Company's conclusion that
Grant Thornton is not independent with respect to the Company's financial
statements. The Company believes that Grant Thornton cannot be considered to be
objective in the performance of its audit work and therefore is not independent.
The decision to terminate the Company's relationship with Grant Thornton was
also based upon the Company's conclusion that Grant Thornton would not complete
the work that it was engaged to perform, including completion of work necessary
to assist the Company in connection with the filing of an amended Form 10-KSB
for the years ended December 31, 1997 and December 31, 1998, and in connection
with the Company's Form amended 10SB.
On Friday, September 24, 1999, Grant Thornton confirmed, in writing,
that the client-auditor relationship between the Company and Grant Thornton had
ceased. In a separate letter to the Company's Board of Directors, also dated
September 24, 1999, Grant Thornton stated as follows:
"Since the filing of Carnegie's 1998 Form 10-KSB, Carnegie,
Grant Thornton and the SEC's staff have had detailed and intensive
discussions respecting Carnegie's financial reporting. The discussions
were held primarily in response to questions raised by the SEC staff in
a series of comment letters addressed to Carnegie. The staff's comments
focused in significant part on Carnegie's accounting for various events
and transactions. We anticipated that Carnegie would be issuing
restated 1998 audited financial statements in response to certain
comments by the staff and
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to reflect the impact of information discovered subsequent to the
issuance of the 1998 Auditor's Report. Until recently, we believed that
the filing of these restated financial statements was imminent. We now
believe that there is considerable uncertainty as to when, if ever, the
restated financial statements will be issued.
In light of this development, we cannot continue to be
associated with the 1998 Carnegie Financial Statements. Accordingly, we
hereby advise you that we are withdrawing our 1998 Auditor's Report and
that it should no longer be relied upon."
Grant Thornton did not withdraw its 1997 Audit Report.
In separate correspondence from Grant Thornton to the Company, also
dated September 24, 1999, Grant Thornton advised the Company of the following
reportable events, under Item 304(a)(1)(v) of Regulation S-B:
- Information has come to Grant Thornton's attention which has
purportedly lead Grant Thornton to conclude "that we cannot rely
upon the representations of Carnegie's current management."
- Information has come to Grant Thornton's attention which, according
to Grant Thornton, requires "an expansion of the scope of our
audit." Grant Thornton commented that "given management's failure
to provide required evidential detail for certain transactions
effected by Carnegie's stockholders, it is our professional
judgment that the scope of our audit has been limited."
- Grant Thornton had previously discussed the above referenced
reportable events with the Company's audit committee. The Company
has authorized Grant Thornton to respond fully to any inquiries of
Merdinger, Fruchter, Rosen & Corso, P.C. concerning the subject
matter of each reportable event.
The Company strongly disagrees with each of these assertions by Grant
Thornton and believes that these assertions reflect Grant Thornton's lack of
independence in connection with Grant Thornton's 1998 Audit Report.
To the best of the Company's knowledge, the statements made by Grant
Thornton in its September 24, 1999 letters arise from Grant Thornton's request
for records of a March 1999 third-party transaction, involving the purchase and
sale of restricted Company shares by Westshire Trading Company, Inc.
("Westshire"), a Bahamian company, and certain natural and juridical persons,
who are presumed to be former shareholders or creditors of Talidan Limited
("Talidan"), all of whom are presumed to be citizens of countries other than the
United States, and in the aggregate, are principal holders of equity securities
of the Company.
None of Carnegie's officers and directors, and none of their relatives,
and none of any other businesses in which any of them have any interest
whatsoever, have any interest in Westshire. Similarly, none of the Company's
officers and directors, and none of their relatives, and none of any other
businesses in which any of them have any interest whatsoever, had or has any
interest in any entities that owned Talidan; or any shareholders or entities
issued Company shares pursuant to the Purchase Agreement dated September 29,
1997 between Tiller Holdings, Ltd. and the Company for the purchase of Talidan
and Profit Through Telecommunications (Europe) Limited; or the entities involved
in the March 1999 transaction with Westshire.
On August 5, 1999, the Commission wrote the Company, and commented
about facts relating to a 1998 transaction, previously reviewed by Grant
Thornton, and as to which Grant Thornton had expressed no disagreement, relating
to the Company's recognition of revenue in the sale of a print media business to
Westshire. The Company had previously acquired that print media business as part
of a 1997 transaction with Talidan. As part of the transaction between the
Company and Westshire, the Company
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accepted a Note in payment of a portion of the price paid by Westshire for it's
acquisition of the print media portion of the Talidan business. Following the
consummation of that transaction, in July 1998, certain payments were received
from Westshire. By mid-1999, one of the payments due from Westshire had not been
made in full. The Commission inquired about the probability that the Note would
be collected in full. Subsequent to the initial transaction between the Company
and Westshire, Westshire acquired certain warrants for the purchase of Company
shares.
As part of Grant Thornton's work, purportedly to assist the Company in
responding to the August 5, 1999 comments by the Commission about this 1998
transaction, Grant Thornton questioned the nature of relationships between
Westshire and the Company and, in particular, whether Westshire is a Company
shareholder. A review of the transfer agent's statements was undertaken. Grant
Thornton was promptly informed that, in March 1999, Westshire acquired 1,800,000
restricted shares from Westover, Amphora, and Raffel in a private transaction
between Westshire and those natural and juridical persons.
Grant Thornton has requested that the Company provide Grant Thornton
with "evidential detail" of the nature of the transaction between Westshire, on
the one hand, and Westover, Amphora, and Raffel, on the other. Grant Thornton
has now informed the Company, as reflected in its September 24, 1999
communications to the Company, that "information has come to our attention
requiring an expansion of the scope of our audit." The Company believes that the
"information" to which Grant Thornton referred, in this comment, was the
information, described above, that, in March 1999, Westshire acquired 1,800,000
restricted shares from Westover, Amphora, and Raffel in a private transaction
between Westshire and those natural and juridical persons.
The Company has no information concerning the nature of the transaction
between Westshire, on the one hand, and Westover, Amphora, and Raffel, on the
other. Information concerning the nature of the transaction is not available to
the Company, since Westshire is a Bahamian Company. The Company also believes
that none of the three sellers, Westover, Amphora, and Raffel, are residents or
citizens of the United States, although the Company is not in possession of
information about the owners of Westover or Amphora. Westover's address,
previously provided to Grant Thornton, is in Bermuda. Amphora's address, also
provided previously to Grant Thornton, is in the British Virgin Islands.
The Company provided Grant Thornton with the name, address and
telephone number of Westshire's attorney. Grant Thornton was previously in
possession of this information, as well as information concerning the
identities, addresses and other contact information relating to Westover,
Amphora, and Raffel, relating to other Talidan shareholders, and relating to
Talidan's counsel.
Grant Thornton communicated directly with Westshire's counsel, and was
provided with a letter by that attorney, informing Grant Thornton that Westshire
had paid fair consideration for the shares which Westshire acquired from
Westover, Amphora, and Raffel. Westshire's counsel informed Grant Thornton that
he is bound by the attorney-client privilege, and, in addition, that the
transaction between Westshire and the sellers is subject to a non-disclosure
agreement between those parties. The Company's
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management has cooperated fully in Grant Thornton's request for information
about this transaction, and has independently made efforts to persuade
Westshire, through its counsel, to provide Grant Thornton with additional
"evidential detail" concerning this private stock transaction.
No benefit to the Company occurred by reason of the transaction between
Westshire, on the one hand, and Westover, Amphora, and Raffel, on the other. No
such benefit will be realized by the Company by reason of this private stock
transaction at any time in the future.
Grant Thornton has refused to accept these representations by
Westshire's counsel, and has, stated, as set forth above, that "given
management's failure to provide required evidential detail for certain
transactions effected by Carnegie's stockholders, it is our professional
judgment that the scope of our audit has been limited." The Company believes
that the "evidential detail" to which Grant Thornton's comment referred, was
documentation of the private stock transaction between Westshire, on the one
hand, and Westover, Amphora, and Raffel, on the other.
As noted above, the Company's management has not failed to provide
Grant Thornton with any information in the Company's possession. Instead, the
Company's management has, at all times, provided Grant Thornton with complete
access to all of the Company's books and records, it has provided Grant Thornton
with any and all specific information that Grant Thornton has requested that was
available to the Company, and it has at all times assisted Grant Thornton in
acquiring any information which Grant Thornton has requested, if such
information was not in the Company's possession.
As further noted above, the Company's management has not limited the
scope of Grant Thornton's work, particularly its audit work, in any respect.
The Company believes that the "information discovered subsequent to the
issuance of the 1998 Auditor's Report" to which Grant Thornton referred, in its
September 24, 1999 communications to the Company, quoted above, was the fact
that a private stock transaction had occurred in March 1999 between Westshire,
on the one hand, and Westover, Amphora, and Raffel, on the other.
The Company anticipates that the Company will be issuing restated 1997
and 1998 audited financial statements in response to certain comments by the
staff. Any such restated 1998 audited financial statements will reflect the
impact, if any, of information concerning the private stock transaction that has
or having occurred in March 1999 between Westshire, on the one hand, and
Westover, Amphora, and Raffel, on the other.
The Company believes that Grant Thornton has no material basis for its
stated conclusion that it "cannot rely upon the representations of Carnegie's
current management." Grant Thornton has never provided the Company, or the Audit
Committee appointed by the Company's Board, with any written report stating the
evidential detail and basis for Grant Thornton's recent conclusion. The Company
believes that Grant Thornton's recent conclusion is reflective of Grant
Thornton's current adversarial relationship with the Company's management, and
reflective of Grant Thornton's lack of independence.
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Item 7. Financial Statements and Exhibits.
Exhibit No.
16 Letter from Grant Thornton LLP to Commission, dated October 11, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 13, 1999 /s/ E. David Gable
--------------------------
E. David Gable
Chairman of the Board
GRANT THORNTON LLP
SUITE 800
ONE PRUDENTIAL PLAZA
130 E. RANDOLPH DRIVE
CHICAGO, IL 60601-6050
TEL: 312-856-0001
FAX: 312-861-1340
October 11, 1999
U.S. Securities and Exchange Commission
450 Fifth Street
Washington, DC 20549
Re: Carnegie International Corporation (File No. 0-8918)
Dear Sir or Madam:
We were previously the principal accountants for Carnegie International
Corporation and subsidiaries ("Carnegie" or the "Registrant" or the "Company").
In two letters which Grant Thornton LLP ("Grant" or "Grant Thornton") received
by facsimile transmission on September 24, 1999, each of which was dated
September 23, 1999, Carnegie notified us of the Company's decision to terminate
our services and separately enclosed a draft Form 8-K stating that "the Company
has general business disagreements with Grant Thornton... ." We notified the
Registrant in writing on September 24, 1999 that we did not concur with the
proposed disclosure, reminding the Company that we had informed counsel for
Carnegie and the Audit Committee separately that we could not rely upon the
representations of management and that information had come to our attention
requiring an expansion of the scope of our audit. In addition, on September 24,
1999 we sent Carnegie a letter advising it that we were withdrawing our report,
dated April 22, 1999, on the Company's December 31, 1998 financial statements
included in Carnegie's 1998 Annual Report on Form 10-K filed with the Commission
on April 27, 1999.
After the Company filed its Form 8-K on September 28, 1999 we retrieved a copy
from the Edgar database and thereafter received a copy from the Company. We have
read Item 4 of that Form 8-K and believe that it should be supplemented as
follows:
Reportable Events
As detailed below, information has come to our attention suggesting that
Carnegie's upper management has been indifferent to its financial reporting
responsibilities under the federal securities laws. Thus, as we previously
informed the Company's Audit Committee, we can no longer rely upon the
representations of the management of Carnegie--including, the
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Chariman, the Chief Executive Officer/President ("CEO") and the recently
separated Chief Financial Officer (hereinafter, "Management"). We are also
unwilling to be associated with financial statements prepared by Management. The
following paragraphs are representative of the issues that form the basis for
our conclusions.
In connection with Grant's Audit Report dated April 22, 1999, on Carnegie's
December 31, 1998 financial statements, the Company's Chairman, CEO and Chief
Financial Officer provided Grant with a management representation letter, dated
April 22, 1999. That management representation letter, which was also signed by
the Company's Treasurer, including the following representation: "We have made
available to you all requested agreements and there are no side agreements,
written or oral, pertaining to such agreements." Later, in the course of further
audit inquiries triggered by comment letters from the Securities and Exchange
Commission (the "Commission"), we discovered that this representation was
incorrect.
For example, during our audit of the 1998 financial statements, Management
provided us with an acquisition agreement dated February 26, 1999. Management
did not, however, furnish us with a related side agreement dated February 27,
1999. We learned of the existence of the side agreement in August, 1999 when we
received a copy of a letter sent to Carnegie demanding payment of a finders fee
of $350,000 in accordance with the February 27, 1999 side agreement. When
initially questioned about the existence of this side agreement, the Company's
Chairman represented to us that there was no such agreement with Carnegie.
Rather, he stated that the agreement was between the other parties involved in
the transaction. Ultimately, when the side agreement was provided to us, it was
clear that the Registrant had a material undisclosed, unrecorded liability.
In addition, in February 1999 the Registrant signed a letter of intent to
acquire a company for cash. The acquisition was consummated in April 1999.
Despite the representation in a July 30, 1999 letter that: "The consolidated
financial statements fully and appropriately disclose all of the acquisitions
and dispositions, whether completed or pending, for which the Company is legally
bound," we were not given the letter of intent for this transaction. In fact, we
were not even informed that the acquisition had taken place. We first learned of
the acquisition in August 1999 while discussing another matter with the CEO.
In its December 31, 1998 financial statements field as part of the Company's
10-K report on April 27, 1999, there were outstanding preferred shares which
purportedly had been issued to consultants. When the Commission raised questions
about the valuation of these preferred shares allegedly issued to the
consultants, the Company prepared a response stating that only one of three
consultants who purportedly received the preferred shares continued to provide
services to Carnegie, that the shares were being held in escrow and that
two-thirds of the shares were going to be cancelled. When Grant sought to verify
the cancellation of these shares, we discovered that in actuality the Company
had never issued any such preferred shares.
2
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Other instances manifesting Management's indifference to its duty to communicate
completely and candidly with its auditors involve the Company's Brazilian
subsidiary, Talidan Limited ("Talidan"). Talidan's business consisted in
significant part of providing services for an operation in which members of the
Brazilian public could place telephone calls for a specified charge per minute.
When Brazil privatized its telephone operations in 1998, Talidan's business was
put at risk. While performing additional audit procedures relating to the
impairment of assets at Talidan in response to comments from the Commission,
Carnegie's Chairman and CEO told Grant that Management had been unaware of the
severity of the problems in the Brazilian telephone market. But contrary to this
representation, in August 1999 we obtained a fax sent to Carnegie from
management of Talidan referencing a February 16, 1999 memorandum to Carnegie's
CEO that included a discussion of potential serious problems in the Brazilian
telephone market.
In June 1998, a portion of Carnegie's Brazilian subsidiary--namely, the Talidan
print media operation--was sold for a note (the "Westshire Note") from a non-US
entity, Westshire Trading Company, Inc. (Westshire). In responding to an SEC
inquiry, management provided a draft response indicating that the amount paid on
the note had increased by $350,000 over the previously audited amount, the
result of an additional payment. When we asked to see support for the Company's
receipt of this additional sum, Management represented to us that the payment
had been sent from Westshire to a third party escrow agent to provide funds for
an acquisition in March 1999. We asked for documentation supporting the flow of
funds and for the escrow agreement. Neither was provided. About a week and a
half later, we were told by the Chairman that the payment in question was not
from Westshire.
In addition to these specific misstatements applicable to historical or
contemporaneous events, Management failed to make an effort to carry out its
stated intentions respecting the Company's financial services segment. A
significant factor in determining whether discontinued operations treatment was
appropriate for this financial services segment was the representation that the
Registrant would actively continue in that line of business. Management
represented that the Registrant maintained an interest in one of the contracts
in the subsidiary sold and had started a new subsidiary that would itself begin
to package vendor groups which would be sold off to financial institutions as
the sold subsidiary had done. Carnegie failed to pursue any funds under the
contract and did not start operations under the new subsidiary.
Restrictions on Audit Scope
In its Form 8-K filed on September 28, 1999, the Company has offered a number of
comments about a March 1999 transaction involving the purchase of 1.8 million
shares of Carnegie stock by Westshire. We believe that Carnegie's disclosure
omits significant
3
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information relevant to an understanding of our conclusion that we have been
restricted in the scope of our audit procedures. Westshire purchased 1.8
million Carnegie shares from persons who had originally sold the Talidan
business to Carnegie in exchange for Carnegie securities, including in pertinent
part: Westover, Amphora and Raffel (hereinafter, "Three Carnegie Shareholders").
As a result of Carnegie's original purchase of Talidan, the Three Carnegie
Shareholders hold a significant percentage of Carnegie shares.
In August 1999, in connection with procedures to verify payments on the
Westshire Note--which, as identified above in this summary of Reportable Events,
was executed in June 1998 as part of Westshire's purchase of Talidan's print
media business--we learned that Westshire had acquired 1.8 million Carnegie
shares from the Three Carnegie Shareholders by way of a March 1999 private
transaction. But even before this March 1999 transaction, in the fall of 1998
Westshire had obtained an interest in Carnegie when the Company issued to
Westshire warrants to purchase Carnegie stock as an inducement for an early
payment on the Westshire Note. Similarly, as in the fall of 1998, in March 1999
Westshire made an early payment on the Westshire Note. Grant therefore, in part,
questioned whether Westshire's acquisition of 1.8 million shares from a
significant Carnegie stockholder group (that is, the Three Carnegie
Shareholders) at about the same time as the March 1999 note payment in effect
amounted to another inducement for early payment on the Westshire Note. We also
considered that this transaction may raise questions regarding the ultimate
source of the cash used to make the March 1999 note payment.
We informed Management that we needed to obtain sufficient evidential matter to
gain a complete understanding of the transfer of 1.8 million shares from the
Three Carnegie Shareholders to Westshire. In essence, that evidential matter
relates to the consideration given by Westshire for the 1.8 million Carnegie
shares and in general the business purpose of the transaction. In our judgment,
this evidential matter is critical to an auditor's ability to concur with the
Company's accounting for the sale of the print media operation to Westshire.
In addition to our efforts to obtain the required evidential matter directly
from the parties to the March 1999 stock transfer to Westshire, as described in
part in the Company's Form 8-K filing, Grant also made inquiries of Carnegie's
Management. Management provided us with some of the evidence we requested, but
took the position that the remaining evidential matter was in control of
Westshire and the Three Carnegie Shareholders and beyond Management's power to
produce. We responded to both the Company and the Audit Committee that, without
this additional information, we would have insufficient competent evidential
matter on which to base our audit report. Subsequently and before resolution of
these audit issues, we received notice of our termination.
4
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Internal Control Deficiencies
We believe that internal controls necessary for Carnegie to develop reliable
financial statements may no longer exist. The following paragraphs are
representative of the issues that form the basis for our conclusion.
When we were investigating whether or not Carnegie's investment in Talidan was
impaired, Carnegie was unable to provide adequate records to reflect the
operations of its Talidan subsidiary during fiscal 1999. For example, in trying
to determine the methodology used to assess the collectibility of Talidan
receivables, Management had to rely on TLA, an English entity that maintains the
books of Talidan. Because of fee issues, and an apparent lack of availability
of Talidan records, TLA was unwilling or unable to provide records to the
Registrant. We discussed with Management the requirement for maintaining
adequate books and records, but did not have an opportunity to pursue the matter
further. At a minimum, it appears that the Registrant does not have adequate
books and records to determine the accounts of Talidan in fiscal 1999.
Carnegie was also unable to provide timely supporting documentation for the
disclosure related to its RomNet subsidiary. The Company's original disclosure
indicated that the corporate name for RomNet was the company from which it was
purchased. When questioned, Management took more than a week to provide
supporting documentation. That documentation indicated the existence of a
separate, previously undisclosed subsidiary doing business as RomNet.
Independence of Grant Thornton
In paragraphs 4, 7 and 17 of Item 4 of its Form 8-K Report, Carnegie has accused
Grant in conclusory language of having an adversarial relationship with
Management (Paragraph 17) and lacking independence and objectivity as auditors
(Paragraphs 4 and 7). More particularly, pointing to Grant's stated inability to
rely on current Management's Representations and conclusion that the scope of
its audit has been limited, the Company says: "[T]hese assertions reflect Grant
Thornton's lack of independence in connection with Grant Thornton's 1998 Audit
Report." (See Item 4, paragraphs 6 and 7).
The forgoing Reportable Events, Restrictions on Audit Scope and Internal Control
Deficiencies summarized in this letter reflect adherence to professional
standards, not an adversarial attitude or lack of objectivity and independence.
Grant was doing nothing more than attempting to gather sufficient competent
evidential matter to support an Audit Report on the Company's 1998 financial
statements. That competent evidential matter must include an ability to rely
upon Management's Representations. Grant's conclusion that it could no longer
rely upon Management's Representation is in reality rooted in the indifference
that Carnegie's Management repeatedly displayed toward its financial reporting
responsibilities.
5
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Additional Disclosure Items
We have been informed that the Chief Financial Officer of the Registrant has
resigned effective September 10, 1999.
We have been informed that the members of the audit committee resigned as
directors on or about September 24, 1999.
We had previously informed the Registrant that had we been able to reissue an
opinion on the 1998 financial statements, that opinion would have been modified
to reflect substantial doubt as to the Registrant's ability to continue as a
going concern.
Very truly yours,
/s/ Grant Thornton LLP
