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 June 30, 1999
Commission file number 000-08918
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 June 30, 1999
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Losses:
Three Months Ended June 30, 1999 and 1998;
Six Months Ended June 30, 1999 and 1998
Consolidated Balance Sheets:
June 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements:
June 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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Operating $ 5,750,155 $ 2,027,031 $ 8,919,113 $ 3,525,649
Sale of service contracts 312,452 0 676,869 0
------------ ------------ ------------ ------------
6,062,607 2,027,031 9,595,982 3,525,649
COST OF SALES 3,981,714 349,525 5,648,444 537,667
------------ ------------ ------------ ------------
GROSS PROFIT 2,080,893 1,677,506 3,947,538 2,987,982
OPERATING EXPENSES:
Selling, General & Administrative 3,003,526 3,139,085 5,305,487 5,945,297
Professional fees 651,000 -- 785,300 --
Management bonus -- -- 1,500,000 --
Impairment expense -- -- -- 7,660,480
Depreciation and amortization 1,601,657 116,799 2,395,934 184,633
------------ ------------ ------------ ---------
Total operating expenses 5,256,183 3,255,884 9,986,721 13,790,410
LOSS FROM OPERATIONS (3,175,290) (1,578,378) (6,039,183) (10,802,428)
OTHER INCOME(EXPENSE)
Interest income 104,086 35,783 107,910 71,565
Interest expense (23,609) (56,717) (123,068) (111,835)
Other income 12,594 655,446 31,845 657,454
Gain(loss) on sale of subsidiaries -- -- -- 1,612,195
------------ ------------ ------------ ------------
Total other income (expense) 93,071 634,512 16,687 2,229,379
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (3,082,219) (943,866) (6,022,496) (8,573,049)
INCOME TAXES (BENEFIT) -- -- -- --
------------ ------------ ------------ ---------
NET LOSS (3,082,219) (943,866) (6,022,496) (8,573,049)
============ ============ ============ ============
Loss per common share (basic and assuming dilution) $ (.05) $ (0.02) $ (0.10) $ (0.21)
Weighted average common shares outstanding
Basic and diluted 62,791,530 41,676,475 60,618,944 40,385,675
COMPREHENSIVE LOSS:
Net loss $ (3,082,219) (943,866) (6,022,496) (8,573,049)
Foreign currency translation 98 -- 226 98
------------ ------------ --------- ---------
COMPREHENSIVE LOSS $ (3,082,121) (943,866) (6,022,270) (8,572,951)
============ ============ ============ =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 886,233 $ 52,042
Accounts receivable, net of allowance for doubtful
accounts 1,845,753 1,156,138
Due from former subsidiaries -- 1,670,542
Note receivable and accrued interest -- 1,739,690
Loans receivable 190,141 5,000
Inventory, at cost 516,387 218,551
Prepaid expenses 127,788 182,640
------------ ------------
Total current assets 3,566,302 5,024,603
Property and equipment, less accumulated depreciation 1,201,495 1,095,851
Software development costs, less accumulated amortization 5,104,804 7,016,379
Intangible assets, less accumulated amortization 45,528,835 600,310
Due from related parties -- 123,773
Other assets 625,657 353,018
------------ ------------
$ 56,027,093 $ 14,213,934
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 426,563 $ 685,914
Current maturities of long-term debt 992,024 408,447
Current maturities of notes payable to related parties 299,850 482,778
Deferred revenue 73,975 --
Accounts payable and accrued liabilities 3,471,361 1,173,410
------------ ------------
Total current liabilities 5,263,773 2,750,549
Long-term debt, less current maturities -- 1,000,481
Long-term debt to related parties, less current maturities 1,802,607 3,944,403
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 June 30, 1999; 200,000
issued at June 30, 1998
274,100 200,000
Common stock, no par with a stated value of $.01 per share; 110,000,000 shares
authorized ;63,341,354 issued and 59,288,335 outstanding at June 30, 1999;
47,548,189 issued and 44,770,170 outstanding at June 30, 1998 592,883 447,702
Additional paid-in capital 69,965,246 5,135,804
Retained earnings (deficit) (20,586,378) 2,020,377
Foreign currency translation adjustment (4,138) (4,382)
------------ ------------
50,241,713 7,799,501
Less treasury stock, at cost (1,281,000) (1,281,000)
------------ ------------
Stockholders' equity 48,960,713 6,518,501
------------ ------------
$ 56,027,093 $ 14,213,934
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Increase (Decrease) in cash and equivalents:
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (6,022,496) $ (8,573,049)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 2,395,934 184,633
Asset impairment loss -- 7,660,480
Gain on sale of subsidiaries -- (1,612,195)
Sale of software and distribution rights -- (3,756,574)
Non cash expenses -- 548,141
Issuance of stock options -- 1,038,991
Accounts receivable (1,146,065) (394,674)
Due from affiliates 1,378,796 (335,113)
Inventory (371,259) (185,976)
Prepaid expenses (71,199) (158,020)
Refundable income taxes -- 12,279
Other assets (33,599) (66,543)
Accounts payable and accrued expenses 874,913 (100,654)
Deferred revenue (1,068) --
Other, net -- 25,028
------------ ------------
Cash used in operations (2,996,043) (5,713,206)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash proceeds -- 400,000
Purchase of property and equipment (436,720) (624,737)
Capitalized software, net 566,370 (351,426)
Loans receivable -- --
Notes receivable 1,058,224 --
Acquisition costs -- --
------------ ------------
Net cash from investing activities 1,187,874 (576,163)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable -- (561,287)
Proceeds from sale of option to purchase stock 46,750
Proceeds from issuance of notes payable 969,603 4,775,272
Sale of common stock 840,400 1,801,004
Proceeds form sale of subsidiaries 0 100,000
------------ ------------
Net cash provided by financing activities 1,856,753 6,114,989
NET INCREASE (DECREASE) IN CASH AND CASH 48,584 (174,380)
EQUIVALENTS
CASH AND CASH EQUIVALENTS- BEGINNING OF 837,649 226,422
PERIOD ------------ -----------
CASH AND CASH EQUIVALENTS- END OF PERIOD 886,233 52,042
SUPPLEMENTAL INFORMATION:
Interest paid 36,309 113,400
Income taxes paid -- --
Common stock issued in exchange for debts 284,200
Common stock issued in exchange for services 132,529 --
Common stock issued in exchange for capital asset 43,137,500 --
</TABLE>
During the first three month period of 1999, the Company issued 6,950,000
shares of stock for the acquisition 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
JUNE 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 six month period ended June 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/A.
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
REVENUES FROM EXTERNAL CUSTOMERS: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Telecommunications $ 5,575,493 $ 1,551,417 $ 8,599,341 $ 2,546,491
Restaurant 487,114 455,669 996,641 939,268
Corporate -- 19,945 -- 39,890
------------ ------------ ------------ ------------
Total $ 6,062,607 $ 2,027,031 $ 9,595,982 $ 3,525,649
INTEREST EXPENSE:
Telecommunications $ 3,413 $ 3,166 $ 19,472 $ 4,721
Restaurant 13,260 182 13,260 376
Corporate 6,936 53,369 90,336 106,738
------------ ------------ ------------ ------------
Total $ 23,609 $ 56,717 $ 123,068 $ 111,835
DEPRECIATION AND AMORTIZATION:
Telecommunications $ 403,392 $ 100,043 $ 915,786 $ 150,569
Restaurant -- 8,843 729 18,238
Corporate 1,198,265 7,913 1,479,419 15,826
------------ ------------ ------------ -------------
Total $ 1,601,657 $ 116,799 $ 2,395,934 $ 184,633
SEGMENT PROFIT (LOSS) BEFORE TAXES:
Telecommunications $ (328,101) $ 369,076 $ (639,444) $ (7,551,397)
Restaurant 4,359 (54,601) 37,090 (113,164)
Corporate (2,758,477) (1,260,342) (5,420,142) (908,489)
------------ ------------ ------------ ------------
Total $ (3,082,219) $ (945,867) $ (6,022,496) $ (8,573,050)
SEGMENT ASSETS:
Telecommunications $ 223,552 $ 3,313,781 $ 12,553,141 $ 13,254,494
Restaurant 45,985 (14,007) 376,943 213,209
Corporate (907,298) (446,655) 43,097,009 746,231
------------ ------------ ------------ ------------
Total $ (637,761) $ 2,853,119 $ 56,027,093 $ 14,213,934
EXPENDITURE FOR SEGMENT ASSETS:
Telecommunications $ 47,593 $ 89,521 $ 282,912 $ 359,401
Restaurant -- -- -- --
Corporate 5,285 -- 12,163 --
------------ ------------ ------------ -----------
Total $ 52,878 $ 89,521 $ 295,075 $ 374,901
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 June 30, Six Months Ended June 30,
REVENUES FROM EXTERNAL CUSTOMERS: 1999 1998 1999 1998
United States $ 5,935,643 $ 932,961 $ 9,266,602 $ 1,396,615
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Brazil 113,176 1,084,051 301,155 2,108,996
United Kingdom 13,788 10,019 28,225 20,038
------------ ------------ ---------- ----------
Total $ 6,062,607 $ 2,027,031 $ 9,595,982 $ 3,525,649
SEGMENT ASSETS:
U.S., net of intersegment $ (570,458) $ 2,692,894 $ 50,551,313 $ 7,679,034
receivables
Brazil 23,103 20,326 98,078 1,042,799
United Kingdom (90,406) 139,899 5,377,702 5,492,101
------------ ------------ ------------ ------------
Total $ (637,761) $ 2,853,119 $ 56,027,093 $ 14,213,934
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended June 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 10SBA filed on February 1, 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
<PAGE>
Results of Operations
---------------------
The Company's revenues increased by 172.2 %, or $6,070,333 to $ 9,595,982 for
the six months ended June 30, 1999, from $ 3,525,649 during the same period in
1998. The increase in revenues is a result of a $5,575,493 increase in
telecommunications revenues and a $ 494,840 increase in service contract revenue
in 1999 as compared to 1998. The increases were a result of the Company's
acquisition of its Paramount subsidiary in February, 1999.
The Company's revenues increased by $ 4,035,396 to $ 6,062,427 for the three
months ended June 30, 1999, from $ 2,027,031 during the same period in 1998.
Income from operations increased $ 3,723,124 , or 183%, to $ 5,750,155 for the
second quarter of 1999, from $ 2,027,031 during the second 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 $312,272 during the three months ended June 30, 1999, from
no revenues during the first quarter of 1998. The increase is due to increased
service revenues attributed to the Company's Romnet and ACC Telecom subsidiaries
during the quarter ended June 30, 1999.
Costs of sales increased $5,110,777 to $ 5,648,444 during the first six months
of 1999 compared to the six months ended June 30, 1998. The increase is related
to the Company's acquisition of its wholly owned Paramount subsidiary in
February, 1999.
Cost of sales for the quarter ended June 30, 1999 were $3,981,714, an increase
of $3,632,459 from $349,255 during the second quarter of 1998. The increase is a
result of including the results of operations of the Company's Paramount
subsidiary.
Operating expenses decreased by 27.6% or $3,803,689 for the first six months of
1999 compared to the same period in 1998. Expenses as a percentage of revenues
were 104% in the first six months compared to 391.2% for the first six months of
1998. Selling, general and administrative increased $1,645,490 for the first six
months of 1999 to $7,590,787 from $ 5,945,297 during the six months ended June
30, 1998. The increase was a result of the Company incurring costs associated
with the implementation of the Paramount operations during the quarter and
increased use of outside professional services in connection with compliance
with regulatory filing requirements. In accordance with Financial Accounting
Standards Number 121, Impairment of Long-lived Assets, the Company recognized an
impairment expense during the six months ended June 30, 1998 in the amount of
$7,660,480 as compared to no impairment expense during the six months ended June
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 $2,211,301 to $ 2,395,934 during
the six months ended June 30, 1999 from $ 184,633 during the same period in
1998. The increase was is a result of including the amortization of the goodwill
associated with the acquisition of the Company's Paramount subsidiary.
Operating expenses increased $ 2,000,299, from $ 3,255,884 to $ 5,256,183 for
the three months ended June 30, 1999 compared to the same period in 1998.
Operating expenses as a percentage of revenues were 86.7% in the quarter ended
June 30, 1999 as compared to 160.6 % in 1998. Selling, general and
administrative increased $ 515,441 for the three months ended June 30, 1999 to $
3,654,526 from $3,139,085 during the quarter ended June 30, 1998. The increase
was a result of the Company incurring costs associated with the implementation
of the Paramount operations during the quarter and increased use of outside
professional services in connection with compliance with regulatory filing
requirements. Depreciation and amortization expense increased $ 1,484,858 to $
1,601,657 during the three months ended June 30, 1999 from $ 116,799 during the
quarter ended June 30, 1998. The increase was as a result
<PAGE>
of including the amortization of the goodwill associated with the acquisition of
the Company's Paramount subsidiary.
Other income and expenses for the six months ended June 30, 1999 was $ 16,687 of
net expenses as compared to net other income of $2,229,379 during the six months
ended June 30, 1998 . The principal component of other expenses during the six
months ended June 30, 1999 was interest expense of $123,068, an increase of
$11,233, or 10.0% from $111,835 during the six months ended June 30, 1998. The
increase was due to the debt issued and assumed in connection with the
acquisition of Paramount in February, 1999. During the six months ended June 30,
1998, the Company recognized a $1,812,195 gain from the sale of certain
subsidiaries. This compared to no gain on sale of subsidiaries in 1999.
Other income and expenses for the quarter ended June 30, 1999 was $ 4,220 of net
income as compared to net other income of $634,446 during the previous year's
quarter. The principal component of other income during the three months ended
June 30, 1999 was interest and miscellaneous income of $ 28,515 a decrease of $
662,714 from $691,229 during the three months ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1999, the Company had a working capital deficit of $ 1,697,471
compared to $ 24,200 of working capital at December 31, 1998, an decrease in
working capital of $1,721,671. The decrease in working capital was substantially
due to the Company increasing its short term borrowings to meet current
obligations during the first six months of 1999 as compared to the same period
in 1998 and the significant increase in selling, general and administrative
expenses in 1999 as compared to 1998. As a result of the Company's operating
losses during the six months ended June 30, 1999 and 1998, the Company generated
cash flow deficits of $ 2,996,043 in 1999 as compared to a deficit of $
8,757,596 in 1998 from operating activities. The Company met its cash
requirements during the first six months of 1999 through the private placement
of $ 840,400 of the Company's common stock and the sale of options to purchase
stock in the amount of $ 46,750 . In addition, during the first six months of
1999, the Company borrowed a net of $969,603 from private sources.
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.
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
<PAGE>
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.
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, 1,275,000 shares of restricted common
stock that had been issued to some of the Companies Executives and an Outside
Professional were returned to the treasury. These shares were returned to the
treasury for no consideration, as reported on Forms 4 filed May 10, 1999 with
the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Acquisitions
- ------------
In April 1999 the Company acquired all of the assets of R.G.G.
Communications, Inc. (RGG) of Rockford, Illinois for the nominal price of
$25,000 in cash. In connection with the acquisition, the Company assigned to one
of its subsidiaries, American Telecommunications & Computers, Inc., a Maryland
corporation, all of such assets and the business of RGG will be conducted by
this corporation. ( additional information is contained in the Companies
10-KSB/A )
10KSBA 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-SB/A. On April 27, 1999, the
Corporation, in the belief that the accounting issues
<PAGE>
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
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
10-KSB/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 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(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 to. The Company notes that if the Company shares do not resume trading in
a reasonable period of time, the possibility exists for a rescission attempt of
this transaction that would result in litigation. The Company does not believe
that this will occur, but can give no assurance of this.
Item 6. Exhibits and Reports on Form 8-K.
None
<PAGE>
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
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