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, 1999
Commission file number 000-3692114
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 No _X_
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 60,014,015 shares of Common
Stock ($.001 par value) as of January 25, 2000.
Transitional small business disclosure format: Yes No x
---- ----
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 1999
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Losses:
Three Months Ended September 30, 1999 and 1998;
Nine Months Ended September 30, 1999 and 1998
Consolidated Balance Sheets:
September 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows:
Nine months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements:
September 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
ii
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSSSES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Operating $6,627,452 $1,862,234 $15,546,565 $5,387,883
Sale of service contracts 351,173 - 1,028,042 -
--------- --------- ---------- ---------
6,978,625 1,862,234 16,574,607 5,387,883
COST OF SALES 4,262,618 429,472 9,911,062 967,139
--------- --------- ---------- ---------
GROSS PROFIT 2,716,007 1,432,762 6,663,545 4,420,744
OPERATING EXPENSES:
Selling, General & Administrative 3,446,487 2,749,236 8,145,509 8,617,533
Professional Fees 208,235 - 1,600,000 77,000
Management Bonus - - 1,500,000 -
Impairment expense - - - 7,660,480
Depreciation and amortization 1,224,654 144,042 3,620,588 325,675
--------- --------- ---------- ---------
Total operating expenses 4,879,376 2,893,278 14,866,097 16,680,688
--------- --------- ---------- ---------
LOSS FROM OPERATIONS (2,163,369) (1,460,516) (8,202,552) (12,259,944)
OTHER INCOME(EXPENSE)
Interest income 11,229 35,782 119,139 107,347
Interest expense (53,862) (49,013) (176,930) (160,848)
Other income 26,651 11,832 58,496 669,286
Gain(loss) on sale of subsidiaries - - - 1,612,195
--------- --------- ---------- ---------
Total other income (expense) 15,982 (1,399) 705 2,227,980
------ -------
LOSS BEFORE INCOME TAXES (2,179,351) (1,461,915) (8,201,847) (10,031,964)
INCOME TAXES (BENEFIT) - - - -
NET LOSS (2,179,351) (1,461,915) (8,201,847) (10,031,964)
Net loss per common share (basic and assuming dilution) $ (0.03) $ (0.02) $ (0.13) $ (0.24)
Weighted average common shares outstanding
Basic and diluted 62,792,034 61,899,802 61,351,268 41,450,235
---------- ---------- ---------- ----------
COMPREHENSIVE LOSS:
Net loss (2,179,351) (1,461,915) (8,201,847) (10,031,964)
Foreign currency translation (181) (31) 226 98
--------- --------- ---------- ---------
COMPREHENSIVE LOSS $ (2,179.532) (1,461,946) (8,201,621) (10,031,866)
============= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 597,129 $164,047
Accounts receivable, net of allowance for doubtful accounts 1,891,810 829,812
Accounts receivable affiliates - 4,022,318
Due from former subsidiaries 173,638 14,157
Loans receivable 586,581 240,345
Inventory, at cost 183,558 207,031
Prepaid expenses and other assets ---------- ----------
3,432,716 5,477,710
Total current assets 1,446,163 1,133,789
Property and equipment, less accumulated depreciation 4,821,204 6,741,029
Software development costs, less accumulated amortization 45,072,409 - 0 -
Intangible assets, less accumulated amortization 790,516 611,686
Other assets ---------- ----------
$ 55,563,008 $ 13,964,214
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 643,056 $827,184
Current maturities of long-term debt 1,370,435 430,247
Current maturities of notes payable to related parties 581,325 743,969
Accounts payable and accrued liabilities 4,266,456 1,169,047
Deferred revenue 103,236 -
---------- ----------
Total current liabilities 6,964,509 3,170,447
Long-term debt to related parties, less current maturities 1,793,718 4,936,261
Stockholders' Equity:
Convertible preferred stock par value, Series A, B, E, and
F,$1.00 par value per share; 40,000,000 shares authorized;
274,100 issued at September 30, 1999 and 200,000 issued at
September 30, 1998 274,100 200,000
Common stock, no par with a stated value of $.01 per share; 110,000,000
shares authorized; 63,432,212 issued and 59,379,193 outstanding at
September 30, 1999; 48,115,024 issued and 45,337,005 outstanding at
September 30, 1998 593,792 453,370
Additional paid-in capital 69,983,618 5,244,459
Retained Earnings (Deficit) (22,761,410) 1,245,028
Foreign currency translation adjustment (4,319) (4,351)
---------- ----------
48,085,781 7,138,506
Less treasury stock, at cost (1,281,000) (1,281,000)
---------- ----------
Stockholders' equity 46,804,781 5,857,506
----------- ---------
$55,563,008 $13,964,214
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Increase (Decrease) in cash and equivalents:
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (8,201,847) (10,031,964)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 3,620,588 325,675
Asset impairment expense -- 7,660,480
Gain on sale of subsidiaries -- (1,612,195)
Sale of software and distribution rights -- (3,756,574)
Issuance of stock as compensation -- 826,843
Other non-cash expenses -- 1,036,991
Accounts receivable (1,192,122) (68,341)
Due from affiliates 1,395,299 (913,943)
Inventory (441,453) (207,770)
Prepaid expenses and other assets (126,969) (182,411)
Refundable income taxes -- 12,279
Loan receivable -- (3,957)
Accounts payable and accrued expenses 1,670,009 105,017
Deferred revenue 28,193 --
Other, net (835,501) (209,309)
------------ ------------
Cash used in operations (4,083,803) (7,019,179)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash proceeds -- 400,000
Purchase of property and equipment (789,154) (662,675)
Capitalized software 849,970
Loans receivable
Notes receivable 1,058,224
Acquisition costs (220,759)
------------ ------------
Net cash utilized in investing activities 1,119,040 (483,434)
CASH FLOWS FROM FINANCING ACTIVITIES
Shares issued in connection with acquisition -- 2,719,728
Notes payable converted to common stock -- 284,200
Repayment of notes payable - 0 - (709,079)
Proceeds form issuance of notes payable 1,837,093 762,885
Sale of common stock 840,400 4,282,504
Proceeds form sale of subsidiaries -- 100,000
Proceeds from sale of option to purchase common stock 46,750 --
--------- ---------
Net cash provided by financing activities 2,724,243 7,440,238
<PAGE>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (240,520) (62,375)
CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 837,649 226,422
------------ ------------
CASH AND CASH EQUIVALENTS- END OF PERIOD $ 597,129 $ 164,047
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest 56,049 170,310
Income taxes paid -- --
Common stock issued in exchange for services and compensation 132,529 826,843
Common stock issued in exchange for debts -- 284,200
Common stock issued in exchange for acquisitions 43,137,500 --
</TABLE>
During the first three month period of 1999 the Company issued 6,950,000 shares
of stock for the acquistion of Paramount. This stock was valued at $43,137,500.
During May 1998, the company purchased all of the stock of ACC Telecom for
200,000 shares of series A convertible preferred stock and a note for $904,962
representing an aggregate price of $2,467,855.
The accompanying notes are an integral part of these statements.
3
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998 annual report
included in SEC Form 10-KSB.
Amounts for the nine months ended September 30, 1998 have been reclassified to
conform with the September 30, 1999 presentation.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the 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 Maryland corporation; Carnegie Communications,
Inc., a Maryland corporation ECAC Europe , a United Kingdom corporation;
Electronic Card Processing, Inc. ("ECPI"), a Maryland corporation; Electronic
Card Acceptance Corporation, a Virginia corporation; TimeCast Corporation, a
Nevada corporation, and Paramount International Telecommunications,
Inc.("Paramount").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Segment Information
- -------------------
During 1999 and 1998, the Company operated in three principal
industries: telecommunications , financial services and 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
REVENUES FROM EXTERNAL CUSTOMERS: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Telecommunications $ 6,548,248 $ 1,413,324 $ 15,147,589 $ 3,959,815
Restaurant 430,377 428,965 1,427,018 1,368,233
Corporate -- 19,945 -- 59,835
------------ ------------ ------------ ------------
Total $ 6.978,625 $ 1,862,234 $ 16,574,607 $ 5,387,883
============ ============ ============ ============
INTEREST EXPENSE:
Telecommunications $ 17,822 $ 4,166 $ 37,294 $ 8,887
Restaurant 4,402 200 17,662 576
Corporate 31,638 121,974 44,647 151,385
------------ ------------ ------------ ------------
Total $ 53,862 $ 49,013 $ 176,930 $ 160,848
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION:
Telecommunications $ 467,885 $ 124,802 $ 1,383,671 $ 275,371
Restaurant 37,810 8,327 38,539 26,565
Corporate 718,959 7,913 2,198,378 23,739
------------ ------------ ------------ ------------
Total $ 1,224,654 $ 141,042 $ 3,620,588 $ 325,675
============ ============ ============ ============
SEGMENT PROFIT (LOSS) BEFORE TAXES:
Telecommunications $ (749,835) $ (155,532) $ (1,389,279) $ (7,706,929)
Restaurant (46,055) (43,041) (8,965) (156,205)
Corporate (1,383,461) (1,260,342) (6,803,603) (2,168,831)
------------ ------------ ------------ ------------
Total $ (2,179,351) $ (1,458,915) $ (8,201,847) $(10,031,965)
============ ============ ============ ============
SEGMENT ASSETS:
Telecommunications $ (89,847) $ (896,165) $ 12,742,988 $ 12,358,329
Restaurant (12,186) 170,807 364,757 384,016
Corporate (641,746) 475,638 42,455,263 1,221,869
------------ ------------ ------------ ------------
Total $ (464,085) $ (249,720) $ 55,563,008 $ 13,964,214
============ ============ ============ ============
EXPENDITURE FOR SEGMENT ASSETS:
Telecommunications $ 353,987 $ 127,811 $ 636,899 $ 487,212
Restaurant -- -- -- --
Corporate -- -- 12,163 --
------------ ------------ ------------ ------------
Total $ 353,987 $ 127,811 $ 649,062 $ 487,212
============ ============ ============ ============
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
Three Months Ended Sept 30, Nine Months Ended Sept 30,
REVENUES FROM EXTERNAL CUSTOMERS: 1999 1998 1999 1998
United States $ 6,913,221 $ 1,154,876 $ 16,179,823 $ 2,551,491
Brazil 26,259 697,339 327,414 2,806,335
United Kingdom 39,145 10,019 67,370 30,057
------------ ------------ ------------ ------------
Total $ 6,978,625 $ 1,862,234 $ 16,574,607 $ 5,387,883
============ ============ ============ ============
SEGMENT ASSETS:
U.S., net of intersegment $ (457,307) $ (676,922) $ 50,094,006 $ 7,002,112
receivables
Brazil (8,513) 145,102 89,565 1,187,901
United Kingdom 1,735 282,100 5,379,437 5,774,201
------------ ------------ ------------ ------------
<PAGE>
Total $ (464,085) $ (249,720) $ 55,563,008 $ 13,964,214
============ ============ ============ ============
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended September 30, 1999 and 1998
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 telecommunication's business includes the development of
interactive voice response ("IVR") and voice recognition system software,
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 information and entertainment services, and the sale, installation and
servicing 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 Companies
subsidiaries are in the 1998 10-KSB/A filed on January 25, 2000
Forward Looking Statements
- --------------------------
This Form 10-KSB 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
<PAGE>
Results of Operations
- ---------------------
The Company's revenues increased by $ 11,186,724 to $16,574,607 for the nine
months ended September 30, 1999, from $5,387,883 during the same period in 1998.
The increase in revenues is a result of the Company's acquisition of Paramount
International Telecommunications, Inc. in February, 1999. Service contract
revenue increased to $1,028,042 during the nine months ended September 30, 1999
from no revenues during the first nine months of 1998. The increase is due to
service revenues attributed the Company's Romnet and ACC Telecom subsidiaries
during the period ended September 30, 1999.
Cost of sales for the nine months ended September 30, 1999 were $9,911,062, an
increase of $8,943,923 from $967,139 during the same period in 1998. The
increase is a result of including the results of operations of the Company's
Paramount subsidiary.
Operating expenses decreased $ 1,814,591 for the first nine months of 1999
compared to the same period in 1998. Operating expenses as a percentage of
revenues were 89.6% in the first nine months of 1999 as compared to 309.5 % in
1998. Selling, general and administrative increased $2,550,976 for the first
nine months of 1999 to $11,245,509 form $8,694,533 during the nine months ended
September 30, 1998. The increase was a result of the Company incurring increased
outside professional fees of $1.6 million and a $1.5 million bonus paid to the
shareholders of Paramount at the time of acquisition. In accordance with
Financial Accounting Standards Number 121, Impairment of Long-lived Assets, the
Company recognized an impairment expense during the nine months ended September
30, 1998 in the amount of $7,660,480 as compared to no impairment expense during
the nine months ended September 30, 1999. The expense in 1998 related to the
impairment of the telecommunications assets held by the Company's subsidiary in
Brazil. Depreciation and amortization expense increased $3,294,913 to $3,620,588
during the nine months ended September 30, 1999 from $325,625 during the period
ended September 30, 1998.. The increase is a result of including the
amortization of the goodwill associated with the acquisition of the Company's
Paramount subsidiary in February, 1999.
Other income and expenses for the nine months ended September 30, 1999 was $ 705
of net expenses as compared to net other income of $2,227,980 during the
previous nine month period ended September 30, 1998. The principal component of
other expenses during the nine months ended September 30, 1999 was interest
expense of $176,930, an increase of $16,082, or 10% from $160,848 during the
nine months ended September 30, 1998. The increase was due to the debt issued
and assumed in connection with the acquisition of Paramount in February, 1999.
During the nine months ended September 30, 1998, the Company recognized a
$1,612,195 gain from the sale of certain subsidiaries. This compared to no gain
on sale of subsidiaries in 1999.
The Company's revenues increased by $ 5,116,391 to $6,978,625 for the three
months ended September 30, 1999, from $1,862,234 during the same period in 1998.
Income from operations increased $4,765,218 , or 255.9%, to $ 6,627,452 for the
third quarter of 1999, from $1,862,234 during the third quarter of 1998. The
increase in revenues is a result of the Company's acquisition of Paramount
International Telecommunications, Inc. in February, 1999. Service contract
revenue increased to $351,173 during the three months ended September 30, 1999
from no revenues during the third quarter of 1998. The increase is due to
increased service revenues attributed the Company's Romnet and ACC Telecom
subsidiaries during the quarter ended September 30, 1999.
<PAGE>
Cost of sales for the quarter ended September 30, 1999 were $4,262,618, an
increase of $3,833,146 from $429,472 during the quarter ended September 30 ,
1998. The increase is a result of including the results of operations of the
Company's Paramount subsidiary.
Operating expenses increased $ 1,989,098 to $ 4,879,376 for the three months
ended September 30, 1999 compared to $ 2,890,278 during the same period in 1998.
Expenses as a percentage of revenues were 69.9% in the third quarter of 1999 as
compared to 155.4 % in 1998. Selling, general and administrative expenses
increased $ 905,486 for the third quarter of 1999 to $3,654,722 from $ 2,749,236
during the quarter ended September 30, 1998. The increase was a result of the
Company incurring additional overhead costs and an increase in outside
professional fees related to the change in certifying accountants. Depreciation
and amortization expense increased $ 1,080,611 to $ 1,224,653 during the third
quarter of 1999 from $144,042 during the quarter ended September 30, 1998.. The
increase is a result of including the amortization of the goodwill associated
with the acquisition of the Company's Paramount subsidiary in February, 1999.
Other income and expenses for the quarter ended September 30, 1999 was $16,086
of net income as compared to net other expenses of $1,399 during the previous
year's quarter..
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Company had a working capital deficit of $
3,531,793 compared to a working capital of $ 24,200 at December 31, 1998, a
decrease in working capital of $ 3,555,993. The decrease in working capital was
substantially due to the Company issuance of $ 2,114,580 of short term debt in
order to meet its current working capital requirements and the collection of
previously recognized receivables from related parties during the first nine
months of 1999 . As a result of the Company's operating losses during the nine
months ended September 30, 1999 and 1998, the Company generated cash flow
deficits from operating activities of $4,083,803 in 1999 as compared to
$7,019,179 in 1998. The Company met its cash requirements during the first nine
months of 1999 through net additional borrowings of $1,837,093 and the sale of
$840,400 of its common stock. 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 raising the funds required.
The Company is subject to several lawsuits that is discussed in detail below
under Part ll, Item 1. Carnegie intends to vigorously defend the complaints,
which have been filed against the Company and its officers and directors, as
well as the consolidated complaint that may be filed later this year. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
On December 21,1998 Gloria Lucas, personal Representative of the Estate
of John Charles Saah, brought suit against Carnegie, E. David Gable, Carnegie's
Chairman, and David Pearl, a former officer of Carnegie, which was originally
filed in the United States District Court for the Eastern District of Virginia,
Alexandria Division, and has since been removed to the U.S. District Court for
the Northern District of Maryland. This case stems from a series of contracts
and negotiations resulting from the acquisition of ECAC by Grandname, the
assignment to Carnegie and Carnegie's subsequent sale of ECAC. A Settlement
Agreement was entered into and, a Dismissal with Prejudice only with respect to
Carnegie has been filed with the Court. Payments have been made to the Plaintiff
through the sale of Carnegie stock belonging to the Estate of John Charles Saah,
which has been placed in escrow. Currently, there remains a balance due of
approximately $126,000.00 plus a disputed amount of $130,654.
Lisa Kamil, a former broker of ECAC, brought an action against ECAC,
n/a Carnegie International Corporation, and Ewing Partners Corporation, d/b/a
Value Partners, Limited, which is pending in the Circuit Court for Oakland
County, Michigan. This case originates from a number of transactions involving
Carnegie's former subsidiary, ECAC, which was sold to Value Partners Limited in
January of 1998, and a special arrangement between Ms. Kamil, Carnegie and
Franklin Bank. The Complaint in this action seeks damages in the amount of
$150,000.00. The incidents and matters which are the subject of the Complaint
are based on activities caused by First Charter Bank, a subsidiary or affiliate
of Ewing Partners Corporation, d/b/a Value Partners. Although the Plaintiff may
have a valid claim for a smaller sum, Carnegie believes that it is not at fault
in this matter and that Plaintiff is not likely to prevail against Carnegie.
Carnegie has minimal liability and may have a strong cross-claim against Value
Partners and also a strong third party claim against First Charter Bank, which
have not yet been filed. Carnegie intends to vigorously defend itself in this
matter and believes it will be successful in defending this litigation to it
conclusion or otherwise resolving the same in Carnegie's favor.
In July 1998, the Corporation entered into a contract with Jan Bonner
("Bonner"), doing business as Source Financial of Houston, Texas, providing
public relations services to the Corporation. In April 1999, Bonner filed suit
in the state court in Harris County, Texas, seeking 180,000 shares of the
Corporation's Common Stock as damages. On the Corporation's request, the case
was removed to the United States District Court for the Southern District of
Texas, Houston Division and the discovery process has commenced. The Corporation
believes it has a valid defense as Bonner failed to perform pursuant to the
contract. The Corporation intends to vigorously defend this suit and believes
that it will be successful in this litigation, however, there can be no
assurance in this regard.
On May 28, 1999, the Corporation filed a complaint in the United States
District Court for the District of Maryland against Kelly Allen, Ark Capital,
Inc., G. William Higbee, and an individual using an Internet chat room whose
legal name is unknown. The complaint asserts a claim based on defamatory
statements made over the Internet by the defendants. The defendants stated that
certain officers sold shares of the Common Stock of the Corporation two days
before trading of the Common Stock on AMEX was halted. These statements were
false. In fact the corporate officers did not sell the shares in the market. All
shares referred to in these statements were voluntarily returned to the
Corporation without consideration. Contemporaneously proper forms were filed by
each officer with the Securities and Exchange Commission to such effect. The
Complaint seeks compensatory and punitive damages. Defendant Higbee has entered
into an agreement with the Company retracting these statements as false pursuant
to a Stipulation filed with the Court. Additional information can be found on
the 10-KSB/A. The Company has dropped its action against Higbee but will pursue
the other defendants vigorously.
<PAGE>
On December 23, 1998, Carnegie brought an action against Advanced
Networking, Inc., Richard B. Raphael, Lori A. Raphael, The Richard B. Raphael
Living Trust, The Lori A. Raphael Living Trust, which was originally filed in
the Circuit Court for Baltimore County, Maryland, and was removed by the
Defendants to the United States District Court for the District of Maryland,
Northern Division. This case emanated from an Option Agreement for the purchase
of Advanced Networking, Inc., a Delaware corporation, which was entered into
between Carnegie as purchaser, and the other Defendants as sellers on or about
July 22, 1998. The Defendants failed to complete the transaction, all the terms
of which had been agreed upon in the Option Agreement. The Complaint sought
relief under the theories of breach of contract, promissory estoppel, and
misrepresentation and seeks monetary damages as well as specific performance. At
this point in time the Federal Court granted the Defendants' Motion to Dismiss
Due to Lack of Jurisdiction in the State of Maryland. Carnegie is contemplating
filing an action in the State of Delaware where the Defendants reside and
conduct their businesses. Carnegie initiated this litigation to get the benefit
of its bargain as well as to deploy a strategic maneuver to assist in the
prevention of any claims by the Defendants against Carnegie or former employees
of the Defendants for the opening of an office by ACC in Delaware near the
territory of the Defendants. Carnegie believes that its position is strong and
there is little exposure on any possible counterclaim. Notwithstanding the same,
Carnegie has put off filing said Delaware action so as not to divert its
attentions from other more pressing matters.
On November 16, 1999, Communications Intercambio Mundial, Inc. ("CIM"),
Versatel Communications Corp. ("Versatel"), Edgardo Morelos ("Morelos"), and
Lucio Rodriguez ("Rodriguez") filed a lawsuit against Paramount, Mike Eberle
("Eberle") and ATN Communications, Inc. ("ATN") alleging various claims related
to a contract entered into between Paramount, CIM and Versatel on September 18,
1997 for the provision of international long distance telephone services.
Plaintiffs contend that they were not paid by Paramount all sums due under the
contract that were allegedly paid to Paramount for long distance services
provided, which they have asserted is a sum amounting to $2,194,920.41.
Attorneys retained to represent Paramount, ATN, and Eberle have determined that
all claims are defensible and that Plaintiffs' damage estimate is completely
unsubstantiated. Plaintiffs' claims relate to allegations of fraudulent long
distance calls made from Mexico by unknown third parties that are not
attributable to Paramount, ATN or Eberle under the terms of the parties
September 18, 1997. Pursuant to that agreement Plaintiffs were only entitled to
receive payment on calls that were ultimately paid. These fraudulent calls
concern long distance service charges that were not collected by Paramount or
ATN from its end users. Furthermore, Plaintiffs CIM and Versatel actually
received overpayments and loans from Paramount that were provided by Paramount
or to Plaintiffs in an accounting statement forwarded to the latter in early
December, 1999. The amount of the overpayments and loans received by CIM and
Versatel are in excess of $1,350,000.00. Paramount intends to vigorously pursue
an appropriate cross-action to seek return of these overpayments.
Carnegie is about to commence arbitration with The J-Net Group, former
owners of Carnegie's subsidiary, RomNet, regarding certain payment issues. The
J-Net Group contends that Carnegie is indebted to it in the amount of
$112,000.00 to be paid in four semi-annual installments of $28,000.00 and
Carnegie believes that it is entitled to a setoff in the amount of $71,734.00
thereby alleviating any present claim and reducing any future claim that The
J-Net Group may have. Arbitration is to begin in New York in March 2000.
Carnegie believes that its position is valid.
A subsidiary of Carnegie terminated one of its key employees, Mark
Ortner, and although most issues have been resolved, no final agreement has been
executed. Carnegie believes that this matter will be resolved through the
completion of ongoing negotiations amicably without the assertion of any further
claims or litigation; however there can be no assurances in this regard.
Shareholders Suits. The Corporation and various of its current
officers and directors are parties to several lawsuits which purport to be class
actions filed on behalf of non affiliates who purchased or acquired the
Corporation's Common Stock for the period from October 28, 1998 and April 30,
1999. The first of these suits, typical of the others, was filed in the U.S.
District Court for the District of Maryland on or about June 11, 1999, titled
Alan Genut, individually and on behalf of all others similarly situated v.
Carnegie International Corporation, et al., Civil No. L-99-1688. Four other
lawsuits of like kind have been filed by other plaintiffs in the same court. A
sixth action has been filed by an individual plaintiff in the U.S. District
Court in Oklahoma. That matter has, for the moment, been stayed.
<PAGE>
These class actions purport to allege violations of federal securities
laws in connection with the Corporation's filing with the Securities and
Exchange Commission of a Form 10-SB, on or about October 28, 1998. In
particular, each of the five complaints alleges that the Defendants improperly
recorded certain transactions in violation of generally accepted accounting
principles. The transactions in question are the sale of ECAC, and the purchase
of its subsidiaries, PTT and Talidan.
In August 1999, the Plaintiffs in the several actions which have been
filed in Federal Court moved to consolidate their complaints, in accordance with
provisions of the Private Securities Law Reform Act of 1995 (the "PSLRA"). The
Company and the other Defendants in those actions consented to the motion and,
on or about September 1, 1999, the Court entered an Order consolidating the
actions and requiring that a consolidated complaint be filed on or before
October 31, 1999. The parties have since agreed to extend until March 15, 2000
the time within which such a consolidated complaint must be filed. As a result
of the application of certain statutory provisions, the Corporation's response
to these complaints is, therefore, not yet required. Accordingly, the
Corporation has not yet formally responded.
Certain other pre-trial proceedings have occurred, since the filing of
the complaints. The Company does not expect that the litigation will become
active until a consolidated complaint is filed, in March 2000, or thereafter.
Carnegie intends to vigorously defend the complaints which have been
filed against the Company and its officers and directors, as well as the
consolidated complaint that may be filed later this year. 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.
Item 2. Changes in Securities and Use of Proceeds
During this reporting period the Company issued 34,858 restricted
shares of common stock under Section 4 (2) of the Securities Act of 1933 to nine
(9) employees of the corporation, for a total value of $17,429.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Letter of Intent
- ----------------
In July, 1999, Paramount entered into a non-binding letter of intent to
acquire all of the outstanding stock or assets of Federation of
Associated Health Systems, Inc., a Texas corporation, an outside
service provider to hospitals and other medical facilities of operated
assisted ("0+") and credit card direct dial ("0-") phone services.
There is no certainty that a definitive purchase agreement will be
executed.
<PAGE>
10-KSB/A Filing and Suspension of Trading of Common Stock on AMEX
- -----------------------------------------------------------------
On March 29, 1999 the SEC advised the Corporation of certain accounting
comments to its previously filed Form 10-KSB/A. On April 27, 1999, the
Corporation, in the belief that the accounting issues had been resolved, filed
its annual report on Form 10-KSB. On April 28, 1999, the Company's Common Stock
was listed on the American Stock Exchange ("AMEX") and the Corporation's Common
Stock began trading there. On April 29, 1999, the SEC advised the Corporation
that it had questions regarding certain accounting issues and requested
additional information. As a result of this SEC request, trading of the
Corporation's Common Stock was suspended by AMEX pending resolution of such
accounting issues. The issues have been discussed at length with the SEC and the
Company has restated 1997 and 1998 audited consolidated financial statements
reflecting such discussions, which are filed as part of this Form 10-KSB/A. (See
10-KSB/A for additional detailed information.)
Impairment
- ----------
The value of stock, options and warrants used in the purchase of
Talidan have been restated. Before discussion with the SEC and in the original
filing, the Company valued the stock at a discount to market of 85%. The first
recommendation by the staff of the SEC included a discount reflecting only 15%
to market. There was much discussion of this issue and the discount was in fact
valued at 33-1/3 % to market with the staff's agreement. The 1997 financial
results of the Company reflect this change. The warrants originally were valued
using a Black Scholls method that was restated to a Monte Carlo simulation.
Subsequent evaluation of the cash flow, however, did not support the new value.
Adverse economic conditions in the Brazilian marketplace, and changes in the
local telephone industry substantially eroded cash flows. Talidan reported an
impairment of goodwill resulting in a charge of $7,786,545 in the first quarter
of 1998. The Company suspended the operations of Talidan in June 1999. (See
10KSB/A for additional detailed information.)
Purchase Agreement Issues
- -------------------------
The purchase agreement for ACCTelecom 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 June 1, 1999, which was
not made resulting in 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(TM) or cash flows.
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 due to the trading halt. The Trust has agreed to accept monthly
interest payments until trading resumes. At that time a payment schedule will be
agreed too. The agreements are referenced in the Exhibits attached. The Company
notes that if the Company shares do not resume trading in a reasonable period of
time, the possibility exists for an attempted rescission of this transaction.
This would result in litigation. The Company does not believe that this will
occur, but can give no assurance of this.
<PAGE>
Discharge of Grant Thornton:
- ----------------------------
On September 21, 1999, the Company replaced its certifying accountant,
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. A detailed description can be found in the
Company's 8K & 8K/A filings dated 9/28, 10/13/,10/22 & 10/25.
New Certifying Accountants Retained
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.
Changes in Directors and Management
On September 24, 1999 the Company received letters of resignation from
Directors Stuart L. Agranoff and from Richard Cohen. These letters cited
personal reasons for leaving and to the knowledge of the Company these Directors
had no controversy with the Company. Each of Messrs. Agranoff and Cohen stated
to the Company that commitments to the Company during the trading halt had
required far more time than originally anticipated at the date they assumed
their positions with the Company. The Company maintains good relationships with
both Richard Cohen and Stuart Agranoff.
Bennett Goldstein joined the Company on February 16, 1999 as executive
Vice President and Chief Financial Officer. Prior to joining the Company Mr.
Goldstein was a partner at Grant Thornton LLP and the Audit Partner responsible
for the 1997 restated 1996 audit of the Company. On September 10, 1999 Mr.
Goldstein left full-time employment with the Company under mutually agreed
terms. Pursuant to such agreement, which was signed on September 30, 1999, Mr.
Goldstein is required to provide consulting services to the Company for six
months ending March 10, 2000. Mr. Goldstein has pursued another employment
opportunity since leaving the Company.
B. Chris Schwartz joined the Company as Chief Operating Officer on
March 16, 1999. Mr. Schwartz resigned on September 24, 1999 because the Company
and Mr. Schwartz could not come to terms on an employment agreement.
Michael Eberle became Executive Vice President in September 1999 and
was appointed as a member of the Company's newly constituted Office of the Chief
Operating Officer. He will serve in that role until the Company fills the
position of COO. Mr. Eberle is President of Paramount.
Employment Agreements
In September 1999 Michael Faulks Managing Director of PTT and a Vice President
of the Company and Mark Davies of PTT contracts expired. Both have agreed to
continue in their current under the terms of their agreements. The Company
expects to sign new agreements with them shortly.
In August there was a payment due the four executives of Paramount under their
employment agreements for a bonus if Paramount signed an agreement with First
call Data. The four executives agreed to an extension of the $1.2 million until
June 15, 2000.
<PAGE>
Subsequent Events
- -----------------
On October 21, 1999 Adnan Khan was elected to the Companies Board of Directors
as an outside board member.
On November 16, 1999 Walt Nawrocki and Allan Jay Kovitz were elected as outside
members of The Board of Directors of the Company. Both will serve on the
Companies Audit Committee.
In December the Board of Directors voted to extend the terms for the right of
exercising stock options for two years from the current expiration dates due the
trading status of the Companies shares, as well as the term of all other
provisions of the employment agreements of E. David Gable, Chairman and Lowell
Farkas, President & CEO.
In January, 2000, Arthur Abraham, Corporate Controller was appointed a Vice
President of the Company.
The AMEX noticed the Company on January 19, 2000 that the Exchange was filing
its application to strike the Company's listing and registration with the
Securities and Exchange Commission on that date. This is pursuant to Rule 12d2-2
under Section 12 of the Securities Exchange Act of 1934 effective at the opening
of the trading session on January 31, 2000.
Item 6. Exhibits and Reports on Form 8-K.
The Company filed an 8K & 8K/A's on the discharge of the Company's
Auditor dated 9/28, 10/13/,10/22 & 10/25 and incorporated by reference herein.
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
February 11, 2000 By: /s/ Lowell Farkas
---------------- --------------------------
Date Lowell Farkas
President and Chief Executive
Officer
By /s/Richard Greene
---------------------------
Richard Greene, CPA
Secretary and Vice President,
Corporate Acting Chief Financial
Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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