<PAGE>
CARNEGIE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2000
CARNEGIE INTERNATIONAL CORPORATION.
(Name of Small Business Issuer in Its Charter)
Colorado 13-3692114
(State of Incorporation) (IRS Employer Identification No.)
11350 McCormick Road Suite 1001 Hunt Valley, Maryland 21031
(Address of Principal Executive Offices)
(410) 785-7400
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days . Yes X
-----
No _____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 70,013,708 shares of Common
Stock ($.001 par value) as of September 30, 2000.
Transitional small business disclosure format: Yes _____ No X
-----
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
Quarterly Report on Form 10QSB for the
Quarterly Period Ending September 30, 2000
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Losses: Three Months Ended September 30, 2000 and
1999 nine months ended September 30, 2000 and 1999
Consolidated Balance Sheets:
September 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows:
CARNEGIE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/14/2000
--------------------------------------------------------------------------------
Nine months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements:
Nine months ended September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Independent Accountant's Report
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The accompanying notes are an integral part of these statements.
Income Statement:
Carnegie International Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Operating $ 3,480,789 $ 6,627,452 $12,377,119 $15,546,565
Sale of Service Contracts 332,606 351,173 1,114,596 1,028,042
----------- ----------- ----------- -----------
3,813,395 6,978,625 13,491,715 16,574,607
COST OF SALES
Operating 944,126 2,573,078 5,809,655 7,062,824
Sale of Service Contracts 199,988 230,896 609,688 678,177
----------- ----------- ----------- -----------
1,144,114 2,803,974 6,419,343 7,741,001
GROSS PROFIT 2,669,281 4,174,651 7,072,372 8,833,606
OPERATING EXPENSES
Selling, General & Administrative 2,876,671 4,905,131 7,674,639 10,315,570
Professional Fees 31,214 208,235 270,879 1,600,000
Consulting Agreement - - 316,044 -
Third Party Equity Based Compensation - - 150,469 -
Management Bonus - - - 1,500,000
Impairment Expense 20,000 - 20,000 -
Depreciation and amortization 1,376,720 1,224,654 4,145,850 3,620,588
----------- ----------- ----------- -----------
Total operating expenses 4,304,605 6,338,020 12,577,881 17,036,158
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,635,324) (2,163,369) (5,505,509) (8,202,552)
OTHER INCOME (EXPENSE)
Interest income 5,894 11,229 20,030 119,139
Interest expense (152,348) (53,862) (472,941) (176,930)
Other income (144,712) 26,651 41,552 58,496
----------- ----------- ----------- -----------
Total other income (expense) (291,166) (15,982) (411,359) 705
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE (1,926,490) (2,179,351) (5,916,868) (8,201,847)
INCOME TAXES
INCOME TAXES (BENEFIT) - - - -
LOSS FROM CONTINUING OPERATIONS (1,926,490) (2,179,351) (5,916,868) (8,201,847)
Net Loss per common share (basic and $ (0.03) $ (0.03) $ (0.09) $ (0.13)
assuming dilution)
Weighted average common shares 69,401,539 62,792,034 64,429,927 61,351,268
outstanding - basic and diluted
COMPREHENSIVE LOSS:
Net Loss (1,926,490) (2,179,351) (5,916,868) (8,201,847)
Foreign currency translation - (181) - 226
----------- ----------- ----------- -----------
COMPREHENSIVE LOSS (1,926,490) $(2,179,532) $(5,916,868) $(8,201,621)
=========== =========== =========== ===========
</TABLE>
Note: 1999 three and nine month periods were restated to conform to current
period reporting.
2
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CARNEGIE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
--------------------------------------------------------------------------------
Carnegie International Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31,
2000 1999
(Unaudited)
-----------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 188,162 $ 463,374
Accounts receivable, net of allowance for doubtful accounts 2,429,103 2,634,755
Loan receivable - 104,119
Note receivable 427,768 -
Inventory, at cost 509,797 353,993
Prepaid expenses 106,995 123,309
-----------------------------------
Total current assets 3,661,825 3,679,550
Property and equipment, less accumulated depreciation 1,299,847 1,258,026
Software development costs, less acculuated amortization 2,275,239 3,728,695
Other Assets:
Intangible assets, less accumulated amortization 38,086,886 39,720,405
Due from related parties 79,197 21,244
Due from former Subsidiaries - 206,112
Security deposits and other assets 148,359 28,552
-----------------------------------
Total Other Assets 38,314,442 39,976,313
Total Assets $ 45,551,353 $ 48,642,584
==================================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $ - $ 159,000
Advance on Stock Purchases 250,000 641,000
Current Maturities of long term debt 234,154 891,562
Current Maturities of notes payable to stockholders & affiliates 1,420,413 1,546,382
Deferred revenue 67,458 20,519
Accounts payable and accrued liabilities 7,593,379 7,596,753
-----------------------------------
Total current liabilities 9,565,404 10,855,216
Long Term Liabilities
LT debt to stockholders & affiliates, less current maturities 1,052,865 696,899
Notes Payable 276,592 305,075
Advance on Stock purchases
----------------------------------
Total Long Term Liabilities 1,329,457 1,001,974
Total Liabilities 10,894,861 11,857,190
Stockholders' Equity:
Stockholders' Equity:
Convertible Preferred stock par value,
Series A, B, E, F and G, $1.00 par value per share;
40,000.000 shares authorized; 624,100 issued at December 30, 1999 624,100 274,100
Common stock, no par with a stated value at $.01 per share;
110,000,000 outstanding at September 30, 2000; 62,959,524 issued
and 61,678,574 outstanding at December 30, 1999 727,917 629,595
Additional paid-in capital 66,050,994 62,721,886
Retained earnings (31,471,692) (25,564,823)
Foreign currency translation adjustment 6,173 (4,364)
----------------------------------
Less treasury stock, at cost 35,937,492 38,068,354
(1,281,000) (1,281,000)
----------------------------------
Stockholders' euqity 34,656,492 36,785,394
Total Liabilities & stockholders Equity $45,551,353 48,642,584
=================================
</TABLE>
3
<PAGE>
Consolidated Statements of Cash Flow:
Carnegie International Corporation
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---- ----
<S> <C> <C>
Increase (decrease) in cash and equivalents:
Cash flows from operating activities
Net loss (5,916,868) (8,201,847)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,145,850 3,620,588
Issuance of warrants as compensation 154,619 -
Accounts receivable 231,862 (1,192,122)
Due from affiliates 148,159 1,395,299
Inventory (155,804) (441,453)
Prepaid expenses & other assets (103,493) (126,969)
Refundable income taxes (12,046) -
Accounts payable and accrued expenses (3,374) 1,670,009
Deferred revenue 46,939 28,193
Other, net 831,789 (835,501)
---------- -----------
Net cash (used in) operations (632,367) (4,083,803)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (482,999) (789,154)
Capitalized software, net - 849,970
Collection of Loans receivable 104,119 -
Increase of Notes receivable (221,656) 1,058,224
---------- -----------
Net cash provided by (used in) investing activities (600,536) 1,119,040
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable (433,882) 1,837,093
Proceeds from Capital Leases 344,511 -
Proceeds of advance on Stock Purchases (391,000) -
Sale of common stock 465,062 840,400
Proceeds from sale of option to purchase common
stock 973,000 46,750
---------- -----------
Net cash provided by financing activities 957,691 2,724,243
NET (DECREASE) IN CASH AND CASH EQUIV (275,212) (240,520)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 463,374 837,649
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD 188,162 597,129
========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest 306,532 56,049
Common stock issued in exchange for services &
compensation 1,933,629 132,529
Common stock issued in exchange for acquisition 350,000 43,137,500
Convertible Preferred shares issued in exchange for
acquisition 350,000 -
</TABLE>
4
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(UNAUDITED)
CARNEGIE INTERNATIONAL CORP - 10QSB - QUARTERLY REPORT Date Filed 11/10/2000
--------------------------------------------------------------------------------
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
-------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30,2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's December 31, 1999 annual report
included in SEC Form 10-KSB/A.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Carnegie
International Corporation ("Company") and its wholly-owned subsidiaries, Talidan
Limited, a British Virgin Islands corporation,; Profit Through
Telecommunications (Europe) Limited, a United Kingdom corporation; Talidan USA
t/a Victoria Station, a Florida corporation; Harbor City Corporation t/a ACC
Telecom, a Maryland corporation; Voice Quest, Inc., a Florida corporation;
RomNet Support Services, Inc., a Massachusetts corporation; Carnegie
Communications, Inc., a Maryland corporation, Paramount International
Telecommunications, Inc. ("Paramount"), a Nevada Corporation, American Telephone
& Computers, Inc., a Maryland Corporation and Federation of Associated Health
Systems, Inc., a Texas Corporation.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
5
<PAGE>
SEGMENT INFORMATION
During 2000 and 1999, the Company operated in the following principal
industries;
a. Telecommunications
b. Restaurant
Telecommunications include the development and distribution of software and
telephone operations.
Corporate and other includes unallocated corporate costs.
The Company's foreign operations are conducted by Talidan and PTT.
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
----------------------------------- -----------------------------------
Revenues from external customers: 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Telecommunications $ 3,455,570 $ 6,548,248 $12,202,144 $15,147,589
Restaurant 357,825 430,377 1,289,571 1,427,018
Corporate - - - -
----------- ----------- ----------- -----------
Total $ 3,813,395 $ 6,978,625 $13,491,715 $16,574,607
=========== =========== =========== ===========
Interest expense:
Telecommunications $ 75,736 $ 17,822 $ 277,438 $ 37,294
Restaurant 3,720 4,402 10,678 17,662
Corporate 72,892 31,638 184,825 121,974
----------- ----------- ----------- -----------
Total $ 152,348 $ 53,862 $ 472,941 $ 176,930
=========== =========== =========== ===========
Depreciation and amortization:
Telecommunications $ 1,336,104 $ 467,885 $ 4,038,348 $ 1,383,671
Restaurant (5,155) 37,810 22,416 38,539
Corporate 45,771 718,959 85,086 2,198,378
----------- ----------- ----------- -----------
Total $ 1,376,720 $ 1,224,654 $ 4,145,850 $ 3,620,588
=========== =========== =========== ===========
Segment profit (loss) before taxes:
Telecommunications $(1,069,952) $ (749,835) $(3,153,408) $(1,389,279)
Restaurant (156,212) (46,055) (199,876) (8,965)
Corporate (700,326) (1,383,461) (2,563,584) (6,803,603)
----------- ----------- ----------- -----------
Total $(1,926,490) $(2,179,351) $(5,916,868) $(8,201,847)
=========== =========== =========== ===========
Segment assets:
Telecommunications $44,504,751 $12,742,988 $44,504,751 $12,742,988
Restaurant 156,382 364,757 156,382 364,757
Corporate 890,220 42,455,263 890,220 42,455,263
----------- ----------- ----------- ------------
Total $45,551,353 $55,563,008 $45,551,353 $55,563,008
=========== =========== =========== ===========
Expenditure for segment assets:
Telecommunications $ 258,920 $ 494,079 $ 344,900 $ 776,991
Restaurant 8,103 - 18,604 -
Corporate 119,495 - 119,495 12,163
----------- ----------- ----------- -----------
Total $ 386,518 $ 494,079 $ 482,999 $ 789,154
=========== =========== =========== ===========
</TABLE>
The following geographic area data for trade revenues is based on product or
service delivery location and property, plant and equipment is based on physical
location.
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
----------------------------- ------------------------------
Revenues from external customers: 2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
United States $ 3,417,702 $ 6,913,221 $11,917,964 $16,179,823
Canada 393,003 - 1,562,765 -
Mexico - - - -
Brazil - 26,259 - 327,414
United Kingdom 2,690 39,145 10,986 67,370
----------- ----------- ----------- -----------
Total $ 3,813,395 $ 6,978,625 $13,491,715 $16,574,607
=========== =========== =========== ===========
Segment assets:
U.S., net of intersegment receivables $43,150,431 $50,094,006 $43,150,431 $50,094,006
Canada 24,683 - 24,683 -
Mexico - - - -
Brazil - 89,565 - 89,565
United Kingdom 2,376,239 5,379,437 2,376,239 5,379,437
----------- ----------- ----------- -----------
Total $45,551,353 $55,563,008 $45,551,353 $55,563,008
=========== =========== =========== ============
</TABLE>
6
<PAGE>
NOTE B - SUBSEQUENT EVENTS
On November 1, 2000, the Company announced that ARC Telecom and Teleservices
have agreed to finalize the documentation for the proposed acquisition by the
Company. These transactions are not expected to close until after the first of
the year. The Company can give no assurances that ether will close at that time.
The Company also announced on November 1, 2000, that its agreement with
Williams, Rosen and Wall, LLC. will not be completed. The Company has reason to
now believe, as a result of a lack of any recent communications from Michael J.
Edison, Manager of Williams, Rosen and Wall, LLC, and the person who represented
to the Company that he was to be the source of funds, that Williams, Rosen and
Wall, LLC. may not have had the ability to provide the funding as agreed. The
Company notes that before the Company entered into the financing agreement, it
undertook all reasonable steps, and performed significant due diligence and
review of Mr. Edison's background, including receiving confirmation from
references such as investment bankers, former and current business associates
and attorneys of Mr. Edison, as well as public information. Williams, Rosen and
Wall, LLC and Mr. Edison were represented by a major Washington /Baltimore law
firm, in the preparation and completion of financing and related documents,
which provided the Company with additional comfort concerning the viability of
the contemplated transaction. Under the current circumstances, the Company
doubts the contemplated or similar transaction will ever be completed between
these parties.
NOTE C - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As September 30, 2000, the Company
had a working capital deficit of $5,903,580 and an accumulated deficit of
$31,471,692. Based upon the Company's plan of operation the Company estimates
that existing resources, together with funds generated from operations, will not
be sufficient to fund the Company's working capital. The Company is actively
seeking additional equity and debt financing. The Company believes that since
the resumption of trading, additional equity and debt financing will be more
readily available. There can be no assurances that sufficient financing will be
available on terms acceptable to the Company or at all. If the Company is unable
to obtain such financing, the Company will be forced to scale back operations,
which would have an adverse effect on the Company's financial conditions and
result of operation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations nine Months Ended September 30, 2000 and 1999
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of Company
----------------------
The Corporation is a holding company that operates a group of owned subsidiaries
in the telecommunications, Internet support & computer service, and restaurant
industries. The Corporation has no direct operating assets or business activity,
but does provide management and other services to its subsidiaries. The
Corporation's telecommunications business includes the development of
interactive voice response ("IVR") and voice recognition system s7oftware,
telecommunication billing clearing services to hospitality, health care and pay-
telephone industries for 0+ (credit card) & 0- (operator assisted) calls, the
marketing of international long distance call traffic through the promotion of
7
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CARNEGIE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
--------------------------------------------------------------------------------
of telephone equipment. The Internet and computer services include technical
support services (help desk) for software and hardware, Internet support
services including Web development and e-commerce. The Corporation's restaurant
business consists of the ownership and operation of one restaurant located in
the Miami, Florida area. A full description of the Company's subsidiaries are in
the 1999 10-KSB/A filed on March 30, 2000.
Forward Looking Statements
--------------------------
This Form 10-QSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements
included herein that address activities, events or developments that the
Corporation expects, believes, estimates, plans, intends, projects or
anticipates will or may occur in the future, are forward-looking statements.
Actual events may differ materially from those anticipated in the forward-
looking statements. Important risks that may cause such a difference include:
general domestic and international economic business conditions, increased
competition in the Corporation's markets and products. Other factors may
include, availability and terms of capital, and/or increases in operating and
supply costs, market acceptance of existing and new products, rapid
technological changes, availability of qualified personnel also could be
factors. Changes in the Corporation's business strategies and development plans
and changes in government regulation could adversely affect the Company.
Although the Corporation believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions could
be inaccurate. There can be no assurance that the forward-looking statements
included in this filing will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Corporation that the objectives and expectations of the Corporation would be
achieved.
Results of Operations
---------------------
The Company's revenues for the nine months ended September 30, 2000, decreased
$3,082,892 to $13,491,715 as compared to $16,574,607 for the same period in
1999. Loss from operations decreased $(2,697,043) to $(5,505,509) for the first
nine months of 2000, from $(8,202,552) during the nine months ended September
30, 1999.
Cost of sales for the nine months ended September, 2000 were $6,419,343, a
decrease of $1,321,658 from $7,741,001 during the same period in 1999.
Operating expenses decreased $4,458,277 for the first nine months of 2000
compared to the same period in 1999. Operating expenses as a percentage of
revenues were 93.2% in the first nine months of 2000 as compared to 102.8% in
1999. Selling, general and administrative decreased $2,640,931 to $7,674,639
from $10,315,570 during the nine months ended September 30, 1999.
Other income and expenses for the nine months ended September 30, 2000 resulted
in net expenses of $(411,359) as compared to net income of $705 during the nine
month period ended September 30,1999. The principal component of other expenses
during the nine months ended September 30, 2000 was interest expense of
$472,941, an increase of $296,011, or 167.3% from $176,930 during the nine
months ended September 30, 1999
--------------------------------------------------------------------------------
8
<PAGE>
CARNEIGE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
--------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
As of September 30, 2000, the Company had a working capital deficit of
$5,903,580 compared to a working capital deficit of $7,175,666 at December 31,
1999 an increase in working capital of $1,272,086. The increase in working
capital was substantially due to the Company's conversion of debt to equity.
During the nine months ended September 30, 2000 and 1999, The Company incurred a
cash flow deficit from operating activities of $632,367 in 2000 as compared to a
cash flow deficit of $4,083,803 for the same period in 1999. The Company
invested $482,999 in equipment during the first nine months of 2000 compared to
$789,154 during the same period of 1999. The Company met its cash requirements
during the first nine months of 2000 through the borrowings of short term debt,
the issuance of common stock and options to purchase common stock and internal
cash flow. While the Company has raised capital to meet its working capital and
financing needs in the past, additional financing is required in order to meet
the Company's current and projected cash flow deficits from operations. The
Company is seeking financing in the form of equity in order to provide the
necessary working capital. The Company currently has no commitments for
financing. There are no assurances the Company will be successful in raising the
funds required.
The Company has issued shares of its Common Stock from time to time in the past
to satisfy certain obligations, and expects in the future to also acquire
certain services, satisfy indebtedness and/or make acquisitions utilizing
authorized shares of the capital stock of the Company. There are no assurances
the Company will be successful in this regard.
The Company is subject to several lawsuits that have been discussed in detail in
prior filings as well those filed since Carnegie's last filing. Below under Part
II, Item 1. are material updates to prior Carnegie disclosed actions against the
Company as well as several new or changes to actions against the Company and in
one case actions by the Company. The Company intends to vigorously defend the
complaints, which have been filed against the Company and in at least one case
against its officers and directors. Each of the complaints filed to date seeks
monetary damages and other relief; however, none specifically allege a defined
amount of damages. The Company believes it will be successful in the defense of
these actions. There can be no assurance in this regard.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
--------------------------
As Carnegie has previously disclosed, a purported shareholder action
entitled In re Carnegie International Corporation Securities Litigation, Civ.
--------------------------------------------------------------
No. L-99-1688, was instituted in the United States District Court for the
District of Maryland in June 1999. Carnegie filed a motion to dismiss the
complaint for failure to state a cause of action on which relief may be granted
on May 5, 2000. A hearing on Carnegie's motion to dismiss was scheduled for
September 22, 2000. This motion was not heard since prior to a hearing the
parties reach a settlement agreement and the hearing was indefinitely postponed.
The parties entered into a Memorandum of Understanding dated September 29,2000
setting forth an agreement to settle this matter under certain terms. The
parties are now in the process of exchanging drafts of the documents necessary
to effectuate and formally document the settlement.
On or about April 28, 2000, in a separate action entitled Lipsitz, et al. v.
------------------
Grant Thornton, LLP, Civil Action No. L00CV1233, also in the United States
-------------------
District Court for the District of Maryland, Carnegie shareholders brought
similar securities claims against Grant Thornton, Carnegie's former auditor.
This action, for certain limited purposes, has been consolidated with the
shareholder action against Carnegie, described above. Grant Thornton filed a
Third Party Complaint for contribution and breach of engagement agreement
against Carnegie, Lowell Farkas and David Gable. Motions to dismiss have been
filed with respect to all claims in the Lipsitz action by Carnegie and Grant
--------------------------------------------------------------------------------
9
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CARNEIGE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
--------------------------------------------------------------------------------
Thornton, and were scheduled for a hearing on September 22, 2000. This
motion was also not heard for the same reason as stated above.
On May 23, 2000, Carnegie filed a complaint against Grant Thornton and Arthur
Flach, its Managing Partner, in the Circuit Court for Baltimore City, Maryland,
Civil Action No. 24-C-00-00239, alleging that Grant Thornton was negligent in
its performance of auditing and accounting services for Carnegie. The Complaint
also alleges counts of fraud and deceit, breach of trust, interference with
business relations, fraudulent inducement, excess fees, breach of contract and
defamation. Grant Thornton has filed a motion to stay proceedings in the state
court due to the pendency of the federal shareholder action described above. A
motion by Grant Thornton to stay proceedings in the state court was denied on
August 22,2000. Grant Thornton filed a Motion to Dismiss the action on September
21,2000. Carnegie submitted its Opposition to this Motion to Dismiss on November
8,2000. No hearing date has yet been schedule for consideration of Grant's
motion.
The Company's insurer under its Directors, Officers and Corporate Liability
Insurance Policy has undertaken payment for the representation of all of the
defendants, including current and former officers and directors of the Company,
in the shareholders lawsuit. The Company's insurer has advised the Company in
writing that the insurer has reserved its rights under the policy and that the
insurer intends to commence arbitration under the policy, in which the insurer
may seek to rescind the policy. The Company has informed the insurer that it
disputes the insurer's claim, that the Company desires mediation of any dispute
that may exist and that rescission of the policy is unwarranted. No further
action has been taken by either party. It should be noted the insurer is a party
to the Memorandum of Understanding for the settlement of the Class Action
complaint.
On or about October 25, 2000, Edward Lawson, as escrow agent for certain
Carnegie shares, filed an interpleader lawsuit in the state court of Blaine
County, Idaho, naming as defendants Carnegie, Fountainhead Inc, and Lucky Dog,
Inc, all parties to an escrow agreement involving the purchase and sale of
certain Carnegie Stock, which transaction was not completed. The Company's time
to respond has not expired. The company believes it will be successful in this
action, but there can be no assurances in this regard.
The Company is subject to several lawsuits that have been disclosed in prior
filings. The Company believes it will be successful in the defense of these
actions. There can be no assurance in this regard.
Item 2. Changes in Securities.
During this nine month reporting period the Company issued 9,999,693 of
restricted common stock for a total of $3,702,535 for cash, payment of services
and conversion of debt to equity. All of such restricted securities were issued
in reliance upon the exemption from registration under section 4(2) of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
On July 27, 2000 the Company purchased the assets of the Phone Stop, Inc, an
Illinois corporation for a purchase price of $100,000. The Purchase price will
in the form of warrants to acquire shares equal to $100,000 120 days from the
closing date. Phone Stop is a retail and wholesale seller of cell telephones and
service. The retail location is in Oak Park, Illinois. Phone Stop will be
operated by American Telephone and Computer a subsidiary of the Company in
Elmhurst, Illinois.
On August 4, 2000, the Company entered into an agreement for Investec Ernst &
Company to represent the Company as a Financial Advisor and Investment Banker.
The agreement terms and engagement time of the agreement has been extended. The
companies believe that a long-term agreement will be reached with Investec
shortly, but the Company can give no assurances of this, at this time.
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<PAGE>
CARNEIGE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
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On September 11, 2000, the Company announced it was extending its Letter of
Intent agreements to acquire the business of ARC Communications, Inc. of
Piscataway, New Jersey and Teleservices, Inc., of Nashville, Tennessee. See
Subsequent Events for additional information.
On September 15, 2000, the Company entered into an agreement with Edison and Co.
Inc. to act as a consultant and placement agent to raise up to $8M dollars for
operational funding of the Company. Michael J. Edison as Manager signed this
agreement.
On September 15, 2000, the Company entered a Letter of Intent with Williams,
Rosen and Wall, LLC a Delaware limited liability company. On September 25, 2000,
the Company entered into a Letter Amendment to the September 15, 2000 Letter of
Intent. Mr. Michael J. Edison, as manager of the williams, Rosen and Wall LLC
negotiated the Letter of Intent and the Letter Amendment Agreement. The Letter
of Intent provides the full basis, understanding and terms for a confidential
offering memorandum, subscription agreement, and a registration rights agreement
to be executed between the companies. The Company provided Mr. Edison, as
manager of Williams, Rosen and Wall LLC with these documents which were dated
and signed by the company on October 2, 2000. The documents were reviewed by
Williams, Rosen and Wall LLC's law firm and their comments were incorporated
into the documents prior to their execution. The Letter of Intent and subsequent
agreement calls for a total of $8M in financing under specific terms and
conditions. Please see subsequent events for additional information concerning
these proposed financing.
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The assumptions supporting the current value of goodwill are: The current
intangible value at 9/30/00 is $40,823,602. The $40,823,602 value consists of
Goodwill, Customer lists and assembled workforces. Goodwill is amortized over 15
years. Customer lists and assembled workforces are amortized over a shorter
period of time. Please refer to the 1999 10-KSB/A for applicable periods of
amortization. In order to assess the recoverability of the net Goodwill value, a
cash flow is completed annually and quarterly for each subsidiary that
recognizes Goodwill. Cash flow reports are completed for each subsidiary to
determine whether or not the cash flow obtained solely from the subsidiary is
equal to or greater than the subsidiary's net Goodwill. If it is not, the
Goodwill is considered impaired. Based on cash flow, no impairment of goodwill
existed at 9/30/00, except for American Telephone and Computers, Inc., which was
purchased for $25,000 on 4/6/99 and Talidan, USA, which was purchased for
$343,750 on 9/29/97. Goodwill totaling $21,112 was impaired and charged to
operating expense at 12/31/99 (ATC) and $20,000 at 9/30/00 (Talidan, USA).
Purchase Agreement Issues
-------------------------
The purchase agreement for ACC Telecom required quarterly payments of $50,000
per quarter over 5 years for a total of $1,000,000 of principal and interest.
The first payment was due on the closing with quarterly payments starting on
September 1, 1998. A payment was due on September 1, 1999, which was not made
resulting in a balance of $800,000 due under this agreement. The company fully
expects to make these payments in the future. The selling shareholders and the
Company have a buy back/sell back agreement that could be invoked based on the
marketability of MAVIS or insufficient cash flows neither of which the Company
believes have or will occur, but the company can give no assurances that either
or both conditions may not occur in the future. The buy back/sell back agreement
has been mutually extended to March 3, 2001.
The purchase agreement for Paramount calls for payment due the Eberle Family
Trust on May 25, 1999 in the amount of $1,244,774.48. This payment has not been
made to date. The Trust has agreed to accept monthly interest payments until a
time a payment schedule will be agreed upon.
Changes in Directors
--------------------
NONE
Item 6. Exhibits and reports on Form 8-K
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<PAGE>
CARNEIGE INTERNATIONAL CORP - 10QSB - Quarterly Report Date Filed: 11/10/2000
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Exhibits
10.35 William Rosen & Wall Letter of Intent dated September 15, 2000
10.36 Edison & Co. Inc. Consultant Agreement dated September 15, 2000
10.37 Investec, Ernst & Company agreement dated August 4, 2000.
No Reports on Form 8-K
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARNEGIE INTERNATIONAL CORPORATION
Registrant
November 14, 2000 By: /s/ Lowell Farkas
Date -----------------------
Lowell Farkas
President and Chief Executive Officer
By: /s/ Richard Greene
-----------------------
Richard Greene, CPA
Corporate Secretary and Vice President,
Acting Chief Financial Officer
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