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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999. Commission file number: 000-08918
CARNEGIE INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
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Colorado 13-3692114
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(State or other jurisdiction) (I.R.S. Employer of incorporation or organization)
Identification No.)
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11350 McCormick Rd., Executive Plaza 3, Suite 1001, Hunt Valley, Maryland 21031
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 785-7400
Securities registered pursuant to Section 12(b) of the Act)
Title of Class Name of Each Exchange on Which Registered
Common Stock NONE
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(Securities registered pursuant to Section 12(g) of the Act)
None
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(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State the issuer's revenues for the most recent fiscal year: 20,329,354.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 29, 2000 was approximately $354,600,000 computed by
reference to the last publicly quoted trading price of $6.875 on April 29, 1999
when trading of the Company's securities was halted on the American Stock
Exchange.
The number of shares of the registrant's common stock outstanding as of February
29, 2000 was 60,364,015.
Transactional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE. No documents are incorporated by reference
into this Report except those Exhibits so incorporated as set forth in the
Exhibit Index.
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Description of Business. 3
ITEM 2. Description of Property. 22
ITEM 3. Legal Proceedings. 23
ITEM 4. Submission of Matters to a Vote of Security Holders. 26
ITEM 5. Market For Common Equity and Related Stockholder Matters. 26
ITEM 6. Management's Discussion and Analysis or Plan of Operation. 28
ITEM 7. Financial Statements. 37
ITEM 8. Changes In and Disagreements with Accountants On Accounting
and Financial Disclosure. 37
ITEM 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act. 38
ITEM 10. Executive Compensation. 43
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management. 45
ITEM 12. Certain Relationships and Related Transactions. 46
ITEM 13. Exhibits, List and Reports on Form 8-K. 47
SIGNATURES 48
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PART I
ITEM 1. Description of Business.
CORPORATE HISTORY
General Summary
Carnegie International Corporation (referred to herein as "Carnegie", the
"Company" and the "Corporation") was formed under the laws of the State of
Colorado in 1974 to engage in the development, manufacture and sale of solar
energy systems. The Corporation ceased operations twice thereafter and was last
revived in August 1994. The current history of the Corporation began in
September 1996, when it entered into an Exchange Agreement with Grandname
Limited, a British Virgin Islands corporation ("Grandname") pursuant to which
the Corporation exchanged its common stock, no par value ("Common Stock") for
all of the stock of Electronic Card Acceptance Corporation, a Virginia
corporation ("ECAC"), and DAR Products Corporation, a Maryland corporation
("DAR"). As a result of the Exchange Agreement, ECAC and DAR became wholly-
owned subsidiaries of the Corporation. ECAC engages in the transaction,
processing and servicing of credit cards for merchants. DAR owns and licenses a
patented Non-grip Technology(R) for application to a variety of handheld items.
Non-Grip minimizes or eliminates the need for the user to exert a gripping
force. During the spring of 1997, the Board of Directors of the Corporation
made a decision to focus the future operations of the Corporation primarily in
the telecommunications industry rather than financial services. The Board cited
declining profit margins and increased competition in the financial services
industry and greater perceived opportunity for rapid growth in the
telecommunications industry.
On April 29th, 1999 trading in the common stock of the Company by the
American Stock Exchange was suspended, one day after the effective listing. As
of the date of this filing, trading has not resumed. A detailed description of
the events surrounding the cessation and the subsequent effect on the Company is
contained herein.
Summary of Transactions Through 1999
In furtherance of the implementation of a business strategy concentrating
in the telecommunications business, the Corporation effected the following
transactions involving ECAC and DAR:
(i) In April 1997 the Company sold a substantial portion of the portfolio
of Merchant accounts serviced by ECAC to First USA Bank for
approximately three million six hundred thousand dollars in a cash
transaction.
(ii) In September 1997, in keeping with the new corporate strategy
redirecting the Company's business efforts to telecommunications the
Company spun-off DAR through the formation of TimeCast Corporation, a
Nevada Corporation. All stock held in DAR by Carnegie was distributed
to Carnegie's stockholders of record and Carnegie has had no interest
in TimeCast since the transaction date.
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(iii) In January 1998, the Company sold ECAC, retaining only an interest
in the accounts of one bank, completing the divestiture to Ewing
Partners d/b/a Value Partners for the assumption of all ECAC debt and
one hundred thousand dollars in cash. This transaction is discussed
in further detail below.
(iv) ECAC (Europe) was sold to the existing management of that company for
a promissory note in the amount of two hundred fifty thousand
dollars. This note has not been paid and the Company has agreed to
extend the payment due date to a month-to-month call.
In addition, between September 1997 and December 31, 1999 the Corporation
acquired the following companies which are described in greater detail herein:
On September 29th, 1997 the Company acquired for stock all the shares
of Profit Thru Telecommunications (Europe) Ltd. ("PTT"), a
telecommunications software company providing business solutions utilizing
proprietary speech recognition, touch-tone and bar code responses to send
and/or receive information. Subsequently the company has funded the
development of a multi-language automated voice response system (automated
attendant and voice mail) referred to as MAVIS(TM).
Talidan Limited, a telecommunications company that creates call
traffic for telecommunication carriers by promoting, through print media
and television, for adult entertainment services using the telephone lines
of such telecommunications carriers. Talidan was acquired on September
29th, 1997 for stock, options and warrants. The Company reported
impairment of Talidan in the first quarter of 1998. A detailed
description of the events surrounding the impairment of Talidan is
contained herein. In June 1998, the Corporation sold all of the print
media business of Talidan, but retained its television media business.
Talidan print media was sold to Westshire Trading for a two million three
hundred and forty thousand dollar note. One million three hundred thirty
thousand dollars have been collected to date and the note is past due. A
full description of the events relating to this transaction is contained
herein.
Harbor City Corporation doing business and trading under the name of
ACC Telecom ("ACC"), a leading reseller of equipment and business telephone
systems for Comdial, SONY and Sprint, was acquired on May 18, 1998 for cash
and stock.
Voice Quest, Inc. ("Voice Quest"), a developer and provider of speech
recognition and voice mail technology products, including an automated
attendant system known as "Personal Operator," was acquired on November 20,
1998 for cash and stock. The Company reported impairment of this entity in
the 2nd quarter of 1999. A detailed description of the events surrounding
the impairment of Voice Quest is contained herein.
The assets of a corporation formerly known as RomNet, Inc., an
Internet, e-business and technical support services (help desk) company
were acquired on December 1, 1998 for cash and stock. These assets were
acquired by a newly formed wholly-owned
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subsidiary of the Corporation, RomNet Support Services, Inc. ("RomNet").
In February 1999, the Corporation acquired the stock of Paramount
International Telecommunications, Inc., a Nevada corporation ("Paramount"), an
outside service provider to the hospitality, health care and pay-telephone
industries in the United States, Mexico and Canada. In exchange for all of the
issued and outstanding stock of Paramount, the Corporation issued to the former
Paramount stockholders 6,950,000 shares of Carnegie restricted Common Stock.
Pursuant to the Acquisition Agreement, Paramount entered into employment
agreements with each of the four former stockholders of Paramount. Each
agreement provides for a $130,000 base salary with a signing bonus of $375,000
and 12,500 shares of restricted Common Stock of the Corporation. Additionally,
each will be entitled to receive additional shares of Common Stock of the
Corporation based on Paramount's sales revenues and income levels for the two
year period commencing April 1, 1999 and ending March 31, 2001. In March 1999,
Paramount signed a three-year contract with First Choice Communications of Texas
to provide services that generate automated operated-assisted calling data in
the hospitality industry. In addition, in April 1999, Paramount entered into a
Memorandum of Understanding with a subsidiary of BCT.TELUS, a major Canadian
telephone company, to provide and receive certain services for its hospitality
industry clients in Canada. As of November 30, 1999, the Memorandum of
Understanding has not been reduced to a contract. The Company expects to
complete and execute this contract in the year 2000, however there can be no
assurance in this regard. (See "Acquisition-Paramount") The Company has also
agreed with Bristol Asset Management to assume a $350,000 cash obligation of
Paramount Corporation. This obligation has not been paid by the Company and is
past due.
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.
During 1997 the Company formed a Maryland corporation, Carnegie
Communications, Inc. ("CCI"), for the express purpose of marketing MAVIS(TM) and
other interactive voice response ("IVR") products.
In addition to all of the above transactions the Company also acquired a
non-telecommunications business called Victoria Station ("Victoria") Restaurants
in Virginia Garden, Florida to generate needed cash flow. Victoria Station was
acquired in August of 1997.
Purchase Agreement Issues
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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 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
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the Company have a buy back/sell back agreement that could be invoked based on
the marketability of MAVIS(TM) or cash flows. The buy back/sell back agreement
has been extended to May 2001 by agreement.
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 recission
of this transaction. This would result in litigation. The Company does not
believe that this will occur, but can give no assurance of this.
Letters of Intent. In January 1999, the Corporation executed a non-binding
letter of intent to acquire all of the assets of (i) The Phone Stop, Inc., ("The
Phone Stop") located in Illinois, (which is engaged in sales of Ameritech
cellular phones and services, as well as answering machines, cordless phones,
pagers and related residential phone products); and (ii) an affiliated entity of
The Phone Stop engaged in the sales and servicing of Comdial phone equipment,
primarily to governmental agencies. The transactions which are the subject of
letters of intent are not expected to be completed until the shares of the
Company resume trading and still require some negotiation.
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. A new Letter of Intent was signed between
the parties on Feburary 17, 2000. The Company and Federation are in the final
stages of due diligence, although the Company expects this transaction to be
completed, there can be no assurances.
The Company also entered into letters of intent during the first quarter of
1999 with Internet Notification Solutions, Inc., a Delaware corporation, and PC
Net, Inc., a Connecticut corporation. The Company does not anticipate the
completion of these acquisitions, however, the Company expects to resume
negotiations as soon as reasonably possible. The Company cites the cessation of
the Company's public stock trading as the principal reason for the termination
of these expected transactions.
The Company and IQ Systems, a private company in Laurel, Maryland, have had
extensive discussions on acquiring the assets of IQ Systems. IQ Systems is a
VAR (value added reseller) of computer hardware and software systems and is an
operating ISP (Internet Service Provider). Currently, ACC Telecom and IQ
Systems have a "partnership agreement" where the services of each company
benefit the other. Adnan Khan, a director of the Company is a principle of IQ
Systems. The Company believes it will be able to acquire all the assets of IQ
Systems when trading resumes. There can be no assurances that this agreement
can be completed.
Suspension of Trading of Common Stock. On March 29, 1999 the SEC advised
the Corporation of certain accounting comments to its previously filed Form 10-
KSB/A. On April 27,
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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
Form 10-KSB/A filed for 1998 on January 25, 2000. In further discussions with
the staff, the staff advised the Company "Instruct Grant Thornton (the Company's
former auditor) to provide us a letter indicating permission for the Registrant
to include their audit report." This request would be with reference to the 1997
audit. The Company and its current auditors Merdinger, Fruchter, Rosen & Corso
requested delivery of this letter. To date Grant Thornton has refused to provide
such letter without explanation. Grant Thornton officials were informed that
this letter with respect to permission for inclusion of the 1997 Audit Report in
the Company's form 10-KSBA filed for 1998 was an obstacle to opening of the
Company's securities to again trade on an exchange. As a result of Grant
Thornton's refusal to give permission, trading could not resume until the
Company's 1999 Audit Report could be prepared and included with Form 10-KSB
filing for review and comment.
There can be no assurance that the Company's shares will resume trading on
the AMEX or any other exchange or quotation system. The AMEX formally notified
the Company in October 1999 of a de-listing recommendation by the AMEX Listing
Qualifications staff. The Company appealed the de-listing recommendation at a
hearing before the Executive Committee of the AMEX on December 2, 1999. At that
time, the Company and its professionals, requested the AMEX to await the result
of the then in process filings. The Company acknowledged that it is not in
compliance with the AMEX rules regarding filings but cited extenuating
circumstances beyond the Company's reasonable control. The Company also
addressed the allegations made by Grant Thornton, the Company's prior auditor.
The Company stated its basis for the firing of Grant Thornton citing loss of
their independence among the most compelling reasons. The Company received
written notice on Tuesday, January 18, 2000 of the AMEX decision to proceed with
its delisting 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. Such
action was pursuant to Rule 12d2-2 under Section 12 of the Securities and
Exchange Act of 1934 and was effective at the opening of the trading session on
January 31, 2000. The Company will seek to reapply to the AMEX, or NASDAQ or
return to the OTC bulletin board quotation system. There is no assurance that
the shares will trade on any of these Exchanges.
Shareholder Suits. The Corporation and various of its current officers and
directors are parties to several lawsuits initially filed in June, 1999 which
purport to be class actions filed on behalf of non affiliates who purchased or
acquired the Corporation's Common Stock in the period from September 15, 1998 to
April 30, 1999. On March 21, 2000 a Consolidated Complaint was filed in United
States District Court for the District of Maryland. See "Item 3. Legal
Proceedings." The Company has engaged the law firm of Blank, Rome, Comisky &
McCauley LLP of Philadelphia to defend this action.
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Extraordinary Expenses. The Corporation estimates that to date it has
incurred expenses in connection with responses to the SEC comments, suspension
of trading of its Common Stock and shareholder suits of approximately
$1,700,000, consisting mainly of professional fees. The Corporation is not
generating sufficient cash flow from current operations to pay and satisfy these
extraordinary expenses and will need to raise additional cash through borrowings
and/or issuances of additional stock. The Corporation believes that once
trading of the Corporation's Common Stock is resumed, it will be able to
generate such additional capital from either or both of such sources. (See
"Item 6. Management's Discussion and Analyses - Working Capital and Liquidity."
Talidan. The Company suspended the operations of Talidan in June 1999. See
"Business - Call Traffic Marketing - Talidan" and "Item 6. Management's
Discussion and Analysis - Overview: Talidan."
Voice Quest. In 1999 irreconcilable differences developed between the
Corporation and Mark Ortner, the founder of Voice Quest and the inventor of its
automated voice attendant system, Personal Operator(TM), as to their respective
duties and responsibilities. As a result, Mr. Ortner resigned on the basis of
alleged failures of the Corporation to perform its obligations under his
employment agreement. The Corporation simultaneously discharged Mr. Ortner
citing cause for failure to perform duties assigned to him. The Company has
endeavored to reacquire Company securities issued to Mr. Ortner and other former
Voice Quest shareholders. Such resolution may include the exchange of the Voice
Quest intellectual property for such securities, however, no definitive
agreement has been reached to date between the parties and there can be no
assurance of the execution of any such agreement during the foreseeable future.
Summary of Subsequent Events
Letters of Intent. The Company enter into a new Letter of Intent with
Federation Health Services On February 17, 2000. The Company and Federation are
in the final stages of due diligence. There is no certainty that a definitive
purchase agreement will be executed.
Shareholder Lawsuit. On March 21, 2000 a Consolidated Complaint was filed
in the United States District Court for the District of Maryland. See "Item 3.
Legal Proceedings." The Company has engaged the law firm of Blank, Rome, Comisky
& McCauley LLP of Philadelphia to defend this action.
Suspension of Trading of Common Stock. The Company received written notice
on Tuesday, January 18, 2000 of the AMEX decision to proceed with its delisting
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. Pursuant
to Rule 12d2-2 under Section 12 of the Securities and Exchange Act of 1934 the
delisting was effective at the opening of the trading session on January 31,
2000. The Company will seek to reapply to the AMEX, or NASDAQ or return to the
OTC bulletin board quotation system. The Company is also reviewing the
possibility of a merger providing a listed Company as a possible future
scenario. There is no assurance that the shares will trade on any of these
Exchanges.
Other Lawsuits. On February 29, 2000 the Company filed suit against
individuals who
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have used the Internet chat rooms to publish and propagate "false and misleading
statements about the Company, its executives and its employees." See "Item 3.
Legal Proceedings."
BUSINESS
The Corporation is a holding company that conducts business primarily through
its wholly-owned subsidiaries specializing primarily in telephony,
telecommunications and Internet products and services. The Corporation, through
wholly-owned subsidiaries, owns and operates a restaurant in Miami, Florida, and
also has a subsidiary in the financial services industry although such
subsidiary currently has no reportable revenues. 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 and voice recognition
software. The provision of technical support beta testing and Internet support
for telephone related computer services. The sale, installation and servicing of
telephone equipment. The marketing of international long distance call traffic
through the promotion of information and entertainment services. Since the
acquisition of Paramount, the Company also provides long distance call routing
services to the hospitality, health care, and pay telephone industries. The
Corporation retained an interest in the credit card accounts of one bank through
its subsidiary Electronic Card Processing, Inc. ("ECPI").
Speech Recognition and Interactive Voice Response --PTT
General. Speech recognition technology converts spoken inputs into digital
electronic signals, and are then decoded by a computer processor into specific
computer instructions or data. Historically, speech recognition technology and
related products have been deficient and costly, thereby limiting widespread
acceptance. Early speech recognition applications typically required
programming of equipment to recognize a limited number of discreet words spoken
by a specific user. These speaker-dependent systems also tended to be sensitive
to background noise and to changes in speech patterns of the user.
Additionally, these initial speech recognition applications had limited
vocabularies and required the user to speak distinctly, pausing between each
word, rather than allowing natural continuous speech.
The development of more reliable and efficient technology, including an
increase in processor speed, as well as a reduction of chip costs increased
public familiarity with computer automated devices. The integration of human
speech as an interface to telephone and computer applications has become a more
accepted feature of many telecommunications applications. PTT designs,
develops, commercializes and markets proprietary products that exploit recent
advances in speech recognition technologies, including MAVIS(TM), which is a
voice activated telephone auto attendant and voice mail product for business
applications.
In addition, PTT has developed interactive voice response ("IVR") software
products and services responding to the caller's voice commands. PTT is and
intends to continue to seek new applications as the telephony and Internet
industry develops. There can be no assurance of PTT's success in this regard.
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MAVIS(TM)
General. PTT is engaged in the development and marketing of MAVIS(TM), a
multi-language automated voice independent recognition system. MAVIS(TM)
creates an auto attendant/voice mail for businesses that connects callers to an
individual or department using only a normal speaking voice. There is no need to
keypunch numbers or letters. The system will answer all incoming calls
automatically while simply and naturally asking the caller for the name of the
person or department that the caller requires. The caller is then asked to
identify himself, before being transferred to the requested extension. The
recipient has the choice to accept or reject the announced call. Rejected
callers hear a message and are invited to leave a voice mail message. If the
caller chooses he can ask for the operator, whereby MAVIS(TM) will transfer the
call to a live person. On the occasions when MAVIS(TM) is unsure of the
caller's request, it will ask the caller to repeat himself, exactly as a live
operator does before processing the call.
MAVIS(TM) interfaces with Microsoft's Windows NT and Lernout & Hauspie's
ASR Run-Time and TTS Run-Time software programs which are all industry standard
applications. Lernout & Hauspie, a Belgium company, is a world leader in the
burgeoning market for multi-language enhanced speech recognition, and MAVIS(TM)
can be operated in any language that Lernout and Hauspie's speech recognition
platform supports. Currently MAVIS(TM) can be programmed for "American" English,
"British" English, French, Spanish, Italian and German. MAVIS(TM) currently
provides voice mail capabilities and on its next version, expected in the 2nd
quarter of 2000, is also expected to provide e-mail access. The voice mail and
e-mail are expected to be accessible remotely through MAVIS(TM) using text to
speech technology to read the e-mail to the caller. The caller can then request
that the voice mail or e-mail be repeated, deleted or saved by stating the
appropriate voice command instead of pressing keys on the telephone keypad.
MAVIS(TM) can be retrofitted to perform with a wide range of existing private
branch exchange ("PBX") equipment. A MAVIS(TM) software kit is also available
for incorporation in new high speed computer telephony PBX switchboards through
original equipment manufacture licensing.
Marketing. During 1998, the Company beta tested MAVIS(TM) and prepared it
for distribution, including without limitation, source of supply of components,
drafting of technical manuals and operator manuals, designs of advertising and
marketing programs, public relations initiatives, shipping preparations and
development of support service operators. The Company's marketing program for
MAVIS(TM) is discussed in greater detail below. The Corporation in March, 1999
entered into a one year Distributor Agreement with ALLTEL Supply, Inc., ("ALLTEL
Supply") a business unit of ALLTEL Corp. ("ALLTEL Corp."), an information
technology company that provides line and wireless communications and
information services. To date, ALLTEL has not been a material source of sales
for MAVIS(TM). The Company and ALLTEL SUPPLY will not renew this agreement at
this time. The Company has an obligation to ALLTEL SUPPLY of $126,245 for units
return from their inventory.
Initial marketing of MAVIS(TM) BY ALLTEL Supply demonstrated that
significant enhancements to MAVIS(TM), particularly to its voice mail
capabilities, would be necessary to its successful commercialization.
Enhancements to make the voice mail aspects of MAVIS(TM) competitive with other
touch-tone voice mail products in the market have been made. In addition,
MAVIS(TM) will have an option to add "unified messaging," This feature provides
for e-mail messages to be read to the subscriber. The new enhanced model of
MAVIS(TM) is currently being tested prior to planned distribution during 2nd
Quarter 2000. The Company established a directed
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supply network thru CCI for the future distribution of MAVIS(TM) and will seek
"box" distributors such as ALLTEL SUPPLY for additional points of distribution.
The enhanced MAVIS(TM) system is now fully competitive with other voice
mail products in the marketplace, and has the additional voice activated auto
attendant feature. The new features on the improved MAVIS (TM) system include a
"follow-me" feature whereby a call can be forwarded to another telephone either
hard line or cellular. MAVIS(TM) will also feature, erasing or speeding up voice
mail messages when they are retrieved, diverting calls internally by voice and
retaining a party on hold to be connected when the current telephone call is
completed. Accessing messages remotely; and remote changing of greetings and
passwords will also be featured.
To date PTT has entered into distribution agreements with ChannelVox Ltd.
and Brigantia Marketing, a U.K. enterprise. ChannelVox, (who is marketing
MAVIS(TM). MAVIS(TM) under their own brand name of FireVox(TM)) is acknowledged
as the market leader in the UK for the distribution of voice mail and auto
attendant systems. ChannelVox supply's to over a thousand computer and
telephony dealers and launched FireVox(TM) at the October, 1999 TMA show in the
UK. Brigantia Marketing will be direct marketing MAVIS(TM) to SME (Small to
Medium Enterprises) in the UK and will offer leasing facilities to include
hardware, software, PBX, installation and training. PTT has also entered into a
distribution agreement with Interlink (a Swiss company) who will assist with the
marketing of MAVIS(TM) in Switzerland, France, Germany, Belgium and Spain.
ACC, through its existing relationship with Comdial dealers, expects to
market MAVIS(TM) as an integrated addition to existing PBX systems. The
Corporation also intends to negotiate with major manufacturers of multiple line
business phone systems and switchboards such as Comdial and Sprint for MAVIS(TM)
software to be incorporated directly into their hardware product line. The
Corporation also expects to market MAVIS(TM) to the hospitality and the health
care industries through Paramount, its recent acquisition, and to the clients of
RomNet. PTT and CCI are currently seeking marketing partners throughout the
United Kingdom and Europe, and CCI and ACC are doing the same throughout the
United States.
MAVIS(TM) is marketed through Tiller International Corporation ("Tiller
International"), a registered company of Monte Carlo, Monaco, in the former
Soviet Union, Poland, Hungary, Czech Republic and other countries of the Eastern
Block (the "Eastern Block"). To date Tiller International has not reordered
additional MAVIS(TM) units for the original 1,000 as part of a Distributor
Agreement entered into in December 1998. There is no assurance that additional
units will be sold during 2000.
In addition, Tiller International acquired for nominal consideration non-
exclusive rights to sell MAVIS(TM) in Italy, subject to minimum sales
requirements. There have been no sales to date of MAVIS(TM) resulting from the
agreement with respect to Italy. The Company expects MAVIS(TM) to be marketed
successfully by Tiller International, but can give no assurance that such
efforts will result in a material source of revenue.
Carnegie Communications, Inc. ("CCI"), a wholly-owned subsidiary of the
Company was formed in 1997 to market PTT's products including MAVIS(TM) and
other IVR products and services. This company is staffed with 2 sales
professionals who have a combined 27 years
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experience with 16 years in the telephony industry. This subsidiary is located
at the Company's corporate offices in Hunt Valley, Maryland.
Personal Operator(TM)
During the latter part of 1998, the Corporation acquired Voice Quest, also
a developer of speech recognition and voice mail technologies and products
including Personal Operator(TM), an automated attendant system, with a view
toward developing a marketing strategy with MAVIS(TM). However, subsequent
evaluation revealed that Personal Operator(TM)'s intellectual property did not
compliment that of MAVIS(TM) and management accordingly terminated this project.
IVR Products
PTT has also developed a variety of IVR software products which are
expected to be marketed in Europe and the United States. These products include
the following:
OrderMaster(TM): This product allows businesses to place orders from
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various suppliers in a general voice box owned by PTT. The orders are then
forwarded to the supplier seamlessly. Conventional phone ordering requires
calls to each supplier individually by a certain time or, if placed after
business hours, require a voice mail to be provided and a response on the
next business day. OrderMaster(TM) allows the customer to place the order
at any time, seven days a week, that is transmitted to the supplier
instantly. PTT charges a fee for handling each order to the supplier. The
Company believes this product will facilitate customer reductions of
internal costs by eliminating cumbersome overhead and providing timely
updating of inventory records.
WageMaster(TM) This product is an automated payroll system designed for
----------
use by small businesses over the telephone. Callers enter time and pay.
The software then calculates and records the deductions and sends a
facsimile report to the client. PTT charges an annual fee and a
calculation fee.
Database Management: This software product can be used to collect (over
-------------------
the telephone) a variety of information from individuals. Data such as
name, address, telephone number, identity and date of purchase of products
can be included. The initial commercial application will register
purchases. PTT charges a database management fee to the manufacturer of
the product.
Profiling: This IVR software is used to statistically analyze employees
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work performance for companies.
Travel Information:
------------------
This product is used by travelers. A special telephone number is
advertised to the public. The caller states his destination country and is
informed of various information relative to that country, such as visa
requirements and necessary inoculations. The caller pays a premium
telephone rate for this service and PTT receives a portion of such fee from
the telephone company.
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Hotels:
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PTT has an agreement with British Travel Agents Accommodation Register (the
"Register") whereby the Register advertises hotel rooms on behalf of the
English and Scottish tourist boards in national newspapers. The customer
calls a toll free telephone number which allows the customer to reserve a
hotel room. The customer information is then passed on to the relevant
hotel instantly. PTT charges a fee to the participating hotels for the
maintenance of the hotel database.
Security Micro Dot:
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This security software program will assist in the recovery of stolen
automobiles. The vehicle and its principal parts are embedded with a
serial number that is not visible to the naked eye. PTT maintains a
database of these serial numbers for the market of the Micro DOT system.
PTT is paid a maintenance fee and a per-call support fee for access to the
database.
Call-a-Card(TM):
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This interactive software program allows customers to call a special
telephone number and dictate a greeting or message. A card is sent to the
intended recipient giving him or her a telephone number to call. When that
number is called the special recorded message is broadcast.
Employee Supervision:
--------------------
This program is designed for companies with a large number of employees
nationally or internationally that perform off-site services (e.g. a
cleaning service). The employee is required to call a special telephone
number when arriving on-site and again when leaving the customer's
business. The data is recorded and sent to the client. If an employee
does not call at the specified time a supervisor is alerted.
The above list of IVR software products have, to date, not been a source of
material revenue for PTT or the Company. There is no guarantee that future
marketing of these products will result in material revenue for the Company.
Telephone Business Systems--ACC
ACC engages in the sale, installation and servicing of telephone
instruments and systems, including without limitation, state-of-the-art telecom
technologies such as computer telephone integration, data cabling, networking,
auto attendant and voice-mail systems, and integrated voice response systems.
ACC is one of the leading telecommunications hardware and software inter-connect
dealers in the Baltimore-Washington metropolitan area. ACC targets mostly small
to mid-sized businesses, providing flexible and cost effective phone systems,
voice messaging and call center facilities.
ACC's major revenues are derived from the sale, installation and servicing
of Comdial telecommunications equipment, which accounted for approximately ____%
revenues in 1999. Comdial is a major manufacturer of business telecom systems
in the United States and in 1998
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ACC Telecom was its second largest commercial dealer. ACC also purchases
equipment from Sprint's North Supply and ALLTEL SUPPLY. ACC during 1999 became
an accredited Lucent Technologies dealer, which is expected to open a broader
market to ACC.
Sales are made by ACC directly to business end-users by its sales
department, currently consisting of ten employees. The sales department
includes highly trained and experienced personnel with on-going training
designed to facilitate expertise in fast-changing telecommunications technology.
Marketing is achieved principally by heavy Yellow Page advertising throughout
the Baltimore-Washington regions, in Northern Virginia and in the Wilmington,
Delaware area. Telemarketing and customer referrals are also relied upon. ACC
currently has approximately 3,200 customer installations.
The market for ACC's products and equipment is subject to rapid
technological development, changes in customer requirements and frequent new
product introductions. However, the small-to-mid-size business targeted by ACC
is less likely to rapidly change their phone system with every new technological
change. Generally, customer needs and expectations will require ACC to
continuously identify, test and market new equipment with features that keep
pace with the new technology, evolving industry standards and competitive
offerings. These activities are expected to require ACC to make expenditures on
testing equipment and on the training of sales and service personnel. ACC has
been approved as a bidder of contracts for the federal General Services Agency,
the Department of Defense and Maryland's State Department of Procurement, for
all of whom ACC has installed various systems.
ACC has long maintained a favorable relationship with its suppliers such as
Comdial's Key Voice, Sprint's North Supply, and ALLTEL Corp. for its main
systems and products. Incidentals, such as computers, monitors, keyboards,
jacks, and cords are usually purchased through a variety of vendors. If ACC
were to experience significant delays, interruptions or reductions in its supply
of Comdial key telephone systems, or unfavorable changes to prices and delivery
terms, ACC could be adversely affected.
Support Services--RomNet
RomNet is engaged in the business of providing technical support services (help
desk) for CD-ROM products, software and hardware, providing beta testing
services, and providing internet support related products and services for Web
development and e-commerce. RomNet's early development focused on providing
telephone technical support for CD-ROM products. While this service continues
to be the core of the business, the increasing popularity of the Internet in
recent years has given rise to the development of a variety of support service
options that are specially designed for a wide range of Internet products and
services.
RomNet provides support services for some licensees of its client's products via
telephone, e-mail, on-line chat and fax. RomNet also develops and hosts
numerous customer support Web sites and through the posting of Frequently Asked
Question (FAQ) on the customer's site, and offers clients cost efficient
alternative methods of providing technical and customer support. RomNet's major
clients include Yahoo! Store, Macmillan Publishers Ltd. (UK), Arthur Andersen
LLP, Pitney Bowes, Scientific American Magazine, the American College of
Cardiology, McGraw Hill, Analog Devices, DATA BECKER Corporation and Jones
Interactive Media.
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The products supported by RomNet are as varied as its clients and range from
software, including games and entertainment products, to business and financial
applications. Many products operate on a variety of platforms and operating
systems, such as Linux or Microsoft. Additionally, RomNet supports peripherals
such as electronic white boards and video capture devices to Internet computer
based training (CBT) products. RomNet enables on-line access to the archives of
major publications and on-line journals provided by clients, which may include
troubleshooting user problems related to connectivity and browsers.
RomNet customizes all elements of technical support for its clients. For each
client supported product, RomNet develops the strategies and tactics necessary
to maximize support efficiencies and economics for both client and customer
alike. Data is collected and amassed into a knowledge base that defines
technical and demographic information for each caller. RomNet not only
customizes its databases for each client but also provides routine service which
includes internal backup for all data and off premises disaster recovery via
encrypted file transfer. RomNet does not have redundant operations facilities
at this time but expects to develop such redundancy in the future.
Each RomNet client is assigned a product manager and a core group of
technicians, who will be the "front line" of support for all product(s) of the
client. Employees of RomNet include students and recent graduates from
institutions within a three mile radius of RomNet's Boston office such as MIT,
Harvard and Boston University who have major areas of concentration in fields
including engineering and computer science. As a result of the high technology
sophisticated personnel available to RomNet, the Company believes that
operations at RomNet will continue to develop on a state-of-the-art basis as
well as provide a talent pool for the Company's other businesses, however, there
can be no assurance in this regard.
Sales are generated by referrals, attendance at trade shows, direct mail and
cold calling of prospects. Prospects are selected using certain criteria that
include (a) the technical intricacies and uniqueness of the product (b) the
impact that the product will have on technical support due to large
distribution (c) the potential lack of company infrastructure needed to support
in-house staff and the limited time of day for which support is offered.
Changes in technology are expected to impact RomNet's core business by shifting
focus more to the Internet. Technical support for software and hardware
comprises about 55% of RomNet's services. However, Internet activity for 2000
and beyond is projected to comprise almost 50% of the support operation. In
1999, the Company estimates global technical support represents 60%-65% of the
core business. Internet support and Internet services comprise another 20%-25%
of the operation while the remaining 10%-20% is devoted to beta testing and e-
commerce related activities. The Company expects that within the next three to
five years Internet technical support will be the dominant source of revenue for
RomNet.
Providing technical support for companies seeking to do business on the Internet
provides RomNet the opportunity to sell products available from such companies
or to offer discounts and promotions on behalf of such companies. RomNet also
fulfills product orders for its clients, serving as a telephone distribution
channel to supplement primary and traditional retail sales.
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Overview of the Business of Talidan
Talidan's advertising operations are divided into three segments: "Talidan
Print," which was sold in June of 1998, advertises in adult magazines; "Talidan
TV," which advertises on late-night Brazilian television; and "Talidan Local,"
which advertises in the form of a "tag," i.e., an advertisement included in a
recorded message heard by a customer calling the telephone numbers advertised by
Talidan Print or Talidan TV. Both Talidan Print and Talidan TV advertise the
use of long distance telephone service, while Talidan Local advertises the use
of local premium telephone service.
Long Distance Telephone Service. Talidan's contract with WWT, a Jersey
Corporation ("WWT"), provides for the use of the telephone numbers advertised by
Talidan Print and Talidan TV for service into various "target countries." When
customers call those numbers, they are making a long distance call. WWT
negotiates with foreign telephone companies in certain jurisdictions (e.g., Sao
Tome, Moldova) to provide telephone traffic to the "target" country in exchange
for payments based on the number of calls. WWT obtains phone numbers from the
target country, certain of which phone numbers are allocated for use by Talidan
Print and Talidan TV. When a customer calls one of such provisioned numbers,
WWT pays Talidan an agreed-upon amount per call minute. WWT provides and
maintains the system to "terminate" (i.e., complete) the call either by
including the recording on the system or by switching the call to a location
where a live person is available. WWT also maintains the records used to
determine payment. Talidan is responsible for providing the content for the
recording, or the person to take the customer's call (referred to as "chat"
services), and the advertising content which includes the Talidan numbers.
Talidan acts solely in an intermediary context and fulfills its obligations
through third parties; none of the parties is an affiliate or related party to
the Company.
The long distance numbers provisioned to Talidan TV are advertised on
Brazilian late night television (e.g., after 11:00 p.m.), and the numbers
provisioned to Talidan Print are advertised in adult magazines. A customer
watches an ad on television or sees it in a magazine, typically depicting an
adult-oriented situation, and then is invited to call the number displayed in
the magazine ad or on the television screen to hear more. The customer then
makes a long distance call to a target country's exchange where either a
recording or a live person provides adult-oriented content for the customer to
hear. At some point, usually at the end of the recording, the caller is
prompted to call a premium rate 0900 number, which is a local premium call,
either to hear a more explicit recording or speak with a live person. About 10%
of long distance calls result in local premium calls.
Talidan TV has an oral agreement with WWT, pursuant to which half of the
costs of advertising time purchased by Talidan TV are reimbursed by WWT. In
addition, the Company has an oral agreement with Telecom Brazil, a Brazilian
company, whereby it pays Telecom Brazil U.S. $7,000 per month in exchange for
services related to advertising placement and other management services. Telecom
Brazil is managed by Tom Raffel, who personally owns four percent of the common
stock of the Company.
Local Premium Telephone Service. Talidan Local is allocated local premium
0900 numbers (analogous to the "900" number in the U.S.) from Telecom Brazil,
which are advertised
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as a tag included at the end of the recording the customer hears on the long
distance call advertised by Talidan Print or Talidan TV. When the customer calls
the 0900 number, they are making a local call for which they are charged a
premium rate per minute to engage in "chat" with a live person or hear
additional, typically more explicit, recordings. When a customer calls one of
the numbers provisioned to Talidan Local, Telecom Brazil, pursuant to an oral
agreement with Talidan, pays Talidan an agreed-to amount per call minute. As
consideration for the tag, part of the money received by Talidan Local is
remitted to WWT, or is credited against the amounts due Talidan TV from WWT for
shared advertising costs.
There are approximately 30 regional phone companies operating in Brazil.
The national telecom service provider is Embratel, which was state owned prior
to its being acquired by MCI/Worldcom on July 2, 1998. When a customer makes a
0900 call on one of the numbers provisioned to Talidan Local, the customer is
charged and money is collected by the regional phone company who remits a
portion of such funds to Embratel. Embratel then remits a portion of the funds
it receives to Telecom Brazil as owner of the number, who remits a portion to
Talidan. Talidan then remits (or credits for advertising costs) a portion to
WWT.
Adverse Circumstances. Several adverse circumstances negatively impacted
Talidan's business in 1998 and 1999: Long distance rates increased in Brazil in
February 1998 from 0.0028 SDR ( Standard Drawing Rate). SDR is an International
Money used by the telephones. It is equal to about 1.44 US dollars or $.40 to
U.S. $.59; Social, religious and political pressures to curtail the adult
telephone business increased significantly during 1998; and the content of both
television advertising and messages heard by a caller were restricted in the
fall of 1998. The rate increase and restricted content pressures resulted in a
decrease in call volume.
Moreover, Embratel was having difficulty in collecting funds from regional
phone companies, and estimated a $40 million payment imbalance at the time of
its privatization resulting in Embratel "temporarily suspending" its payments to
Telecom Brazil, and others under existing contracts, after its last payment in
August of 1998. In October 1998, a judge in Sao Paolo blocked access to 0900
numbers, so callers could not connect to 0900 services. At that point, it was
uncertain whether other Brazilian jurisdictions would follow suit. Although the
judge's October 1998 decision was ultimately appealed in the state and federal
courts of Brazil, the outcome and timing of such ongoing appeals were and still
are difficult to determine. By November 1998, Embratel cancelled its existing
contracts and planned to enter into new contracts with the regional phone
companies. But in August 1999 some 0900 service providers that accused Embratel
of withholding payment sought legal action to force Embratel into bankruptcy.
Shortly thereafter, Embratel cancelled contracts it had with approximately 30
such providers, including its contract with Telecom Brazil.
In addition, while Talidan TV continued to advertise throughout 1998 and
the first four months of 1999, amounts spent on ads varied in each month of 1999
and were significantly lower in January and March as the Company attempted to
manage the uncertainties facing Talidan's business. Advertising was cancelled
in late April 1999 due to lack of response. Although advertising ceased,
payments continued to be received through December 1999, albeit at a decreasing
rate. Some payments are expected to continue short-term since it is likely that
some customers have retained telephone numbers, which are still active, from
earlier TV advertisements. In December 1999, WWT notified Talidan that it was
withdrawing the use of Talidan's premium long distance telephone numbers as of
January 1, 2000, later moved to March 15, 2000. The
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business of Talidan has been suspended since June of 1999 and any residual
income ceased in December 1999. The business had no employees or office space
since it contracted through third parties. A shut down was affected without
additional costs to the Company.
In July of 1999, the Corporation received an unsolicited offer to purchase
the stock of Talidan from three shareholders of the Company in exchange for
5,676,750 shares of the Corporations common stock. The ability to complete this
transaction is predicated on the Company's shares returning to a trading status.
At that time, the Company expects to resume its negotiation and complete the
transaction. There is no assurance, at this time, that the Company and the
buyer will be able to execute this transaction.
Victoria Station Restaurant
Victoria Station Restaurant ("Victoria Station") is located in Virginia
Gardens, Florida near Miami International Airport and was opened in 1973. The
Corporation acquired the restaurant in August 1997 to provide cash flow to the
Corporation until its telecommunications companies could support the operations
of the Corporation. Victoria Station is operated under two subsidiaries of the
Company, Victoria Station Miami, Inc., a Florida corporation, and Talidan USA,
Inc., a Maryland corporation. The restaurant is a full service steak house
featuring quality steaks, barbecue ribs, chicken, fish, a salad bar and a full
liquor service. Victoria Station emphasizes consistent high quality ingredients
and generous portions at moderate prices in a casual dining atmosphere. The
restaurant attracts a diverse mix of customers, including professionals and
families. Although no decision has been made, the Company is investigating the
wisdom of divesting itself of Victoria Station.
Financial Services
In May 1996, the Corporation acquired ECAC which was engaged in the
business of processing credit card accounts. In 1997, ECAC experienced
declining profit margins and increased competition in credit card processing.
With greater perceived opportunity for rapid growth in telecommunications, the
Corporation decided to sell ECAC and to utilize the funds derived thereby to
finance acquisitions and operations of telecommunications businesses. As a
result, the Corporation sold approximately 75% of ECAC's accounts in April 1997
and all of the stock of ECAC and its start-up operation in Europe in January
1998. In connection with the sale of ECAC stock, the Corporation retained a 40%
interest in the future profit derived by the credit card merchant accounts of
Franklin Bank, which operates in Southfield, Michigan, a suburb of Detroit. The
Corporation and the purchaser of ECAC are in dispute as to the Corporation's
share of revenues derived from its retained interest in the accounts of the
Franklin Bank. As a result, the Corporation has not received any funds derived
from its retained interest and if the dispute is not resolved within a
reasonable period of time, the Corporation expects to file suit for an
accounting and full payment. There is a third party lawsuit pending against the
Company and other parties in connection with the retained interests in the
merchant accounts of Franklin Bank. There can be no assurance that currently
due funds on future revenues will be obtained at any time from the Company's
interest in the credit card merchant accounts of Franklin Bank. (See "Legal
Proceedings.")
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COMPETITION
PTT. The Corporation's competitors in the development of voice recognition
systems are independent companies such as Vocalis, Phillips and VCS, as well as
PBX and key telephone manufacturers such as Lucent Technologies, Northern
Telecom, Siemens, Executone, Panasonic and Toshiba. Carnegie believes some of
these companies are seeking a partner to integrate and further develop such
systems into their equipment. Most of these companies have greater financial,
technical, personnel and other resources than Carnegie and have established
reputations for success in the development, licensing and sale of their products
and technology. The Corporation believes that MAVIS(TM) can compete favorably
with any similar system being currently marketed. Unlike many such systems,
MAVIS(TM) can be integrated with most existing and all new PBX equipment.
MAVIS(TM) can be produced in a number of different languages. Ongoing research
and product development for voice recognition products is widespread and highly
proprietary, and as a result, the Company cannot know the full extent of its
competition or the stage of its competitors' product development. The
Corporation believes that other companies including Voice Control Systems,
Registry Magic, Locus and General Magic are attempting to develop voice
recognition software systems functionally similar to MAVIS(TM). The
Corporation's relationship with ALLTEL Supply, Inc., one of the nation's
leading providers of telecommunications and data communications products, is
expected to greatly increase the Corporation's ability to compete with other
large telecommunication dealers that enter the market in the future.
There are many companies developing IVR software products that have
substantially greater technical, financial and marketing resources as well as
larger customer bases and greater name recognition than PTT or Carnegie. The
Company's competitors in the telephony market for messaging systems are
independent suppliers, including Octel Communications, Centigram Communications,
Active Voice, Voysys, and Cellware Technologies. PTT and Voice Quest's IVR
products represent a rapidly evolving market with competition from many
companies. However, the Company believes it can compete due to the innovation
of the Corporation's products, early marketing, price, relationship with end-
users, and the universality of many of its software products.
ACC. The telephone business systems market is highly competitive and the
Corporation believes competition will intensify as manufacturers such as Lucent
Technologies and Northern Telecom continue to acquire smaller telecom companies.
ACC's principal competitors are a few local businesses which represent
manufacturers such as Siemens, Panasonic, Northern Telecom, North Star, and
Toshiba. Lucent Technologies, Bell Atlantic, and Executone who sell directly to
customers and through local businesses. The larger companies have tremendous
national advertising resources. Many have greater name recognition,
substantially greater technical, financial and marketing resources, as well as
larger customer bases. The Corporation believes that by targeting the small and
mid-size businesses ACC has an edge in both pricing flexibility and customer
relations. The approval of ACC's Lucent "Business Partner" Dealership will
enable ACC to take advantage of the advertising and name recognition associated
with Lucent Technologies. Competition for skilled and trained technicians and
sales personnel is intense. ACC's continued success depends on its ability to
attract and retain key personnel involved in its sales, technical, and
administrative departments. ACC's success also depends on the ability of its
officers and key employees to manage growth successfully. ACC must smoothly and
promptly replace requisite staff positions and oversee the training of new
personnel. Barry Hunt, the founder of ACC in 1979, and its president and chief
executive officer, has more than 20 years of
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experience in the industry.
RomNet. There are many companies in the marketplace that offer technical
support services similar to RomNet. Many of the larger outsourcing companies
such as Sykes Enterprises, Keane Inc., Stream International, and 800 Support are
large enough to have offices across the United States and overseas and are able
to provide their services to major companies of the size of Microsoft, Lotus and
Oracle. RomNet targets privately held software/hardware developers as well as
those Fortune 500 companies that may be relatively new to this arena. RomNet
believes it offers a more customized approach to technical support and customer
service than the competition. RomNet further believes that a more flexible
approach to the business relationship has attracted clients such as Arthur
Andersen, Macmillan Publishers, as well as others.
Victoria Station. There are many well known "brand" restaurants in the
Miami Airport area. These locations have larger marketing budgets and newer
units. They include, Out Back, Graddy's, Tony Roma's and Lone Star Grill, among
others. Such competition may adversely affect the Company's revenues.
Talidan. There are many operations such as Talidan in Brazil. To the
knowledge of the Company there are no companies which individually possess
significant market share in Talidan's industry segment. The barriers to entry
into that market are relatively low. The Company believes that notwithstanding
widespread competition and the possibility of new competitors entering the
market, the most significant competitive problems have arisen from social and
judicial changes in Brazil. At the current time, the Company does not
reasonably foresee an ability to continue Talidan's operations in the current
business environment.
INTELLECTUAL PROPERTY
The Corporation's success depends in part on its ability to protect its
proprietary technology. PTT believes that its success will depend on its
ability to design, develop and market new products and new or enhanced
applications, rather than patent protection. However, the likelihood of
obtaining patents is evaluated with respect to each product and patent
applications are filed where appropriate. The Corporation has filed a patent
application for the OrderMaster(TM) in England and under the Patent Cooperation
Treaty which permits filing in 95 countries worldwide upon designation within
one year and the payment of appropriate fees. The Corporation is in the process
of filing new patent applications for MAVIS(TM) and filed in May 1999 a second
patent application for other IVR software products in England and under the
Patent Cooperation Treaty. The Corporation believes that it is likely it will
obtain the patents for MAVIS(TM) and other IVR software products, however, there
can be no assurance that patents will in fact ever issue. The Corporation
otherwise relies on a combination of copyright, trademark and trade secret laws,
nondisclosure and other agreements and technical measures to protect its
proprietary technology. The Company has two applications for trademark
registration currently pending in the United States Patent and Trademark Office
for the mark "MAVIS" in ordinary block letters and in a stylized form. There
can be no assurance that the Corporation will be able to obtain any meaningful
patent protection for its technology in the future or that measures taken by the
Corporation will be adequate to prevent or deter misappropriation of its
technologies or the development of technologies having similar performance
characteristics. The Corporation
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licenses certain portions of its technology from third parties under written
agreement such as the multi-language programs from Lernout & Hauspie that
require the Corporation to pay ongoing royalties. The Corporation is not aware
of any violation of proprietary rights claimed by any third party relating to
PTT or its products. Because the computer technology market is characterized by
frequent and substantial intellectual property litigation, there can be no
assurance that the Corporation will not become involved in such litigation in
the future to either enforce or defend its intellectual property rights.
EMPLOYEES
In 1999 the Corporation together with its subsidiaries had 148 employees,
106 of which were full-time and 42 part-time as follows:
Carnegie: Eleven (11) full-time employees.
PTT: Seven (7) employees of which 6 are full-time and 1 was
part-time. The personnel included 3 programmers, 1 salesperson, and 4
administrators. PTT expects to increase its technical and sales personnel as
additional products come online and the distribution of MAVIS(TM) becomes
widespread. Michael R. Faulks, a Vice President of the Corporation, is the
creator of MAVIS(TM) and serves as the Technical Director of PTT.
Voice Quest: Currently has no employees.
ACC: Thirty-seven (37) full-time employees and 3 part-time,
they included 12 in sales and 21 in service.
RomNet: Twenty-nine (29) employees, they include 22 full-time
employees and 7 part-time; 3 in administration, 1 in sales and 25 in service.
Paramount: Ten (10) full-time employees, of which 4 are in
administration, 2 are in sales and 4 are in service.
American Telecommunications & Computers (d/b/a RGG): Two (2) employees.
CCI: Two (2) employees.
Talidan does not have any employees as such. Talidan's managing director,
a resident of the Isle of Man, and individuals providing administration services
in Brazil and the United Kingdom are all paid pursuant to consulting agreements.
Talidan relies on outside sources for its sales, marketing and advertising.
Victoria Station: 47 employees of which 16 are full-time and 31 part-time.
None of the Corporation's employees are covered by a collective bargaining
agreement and the Corporation believes its relations are good.
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REGULATORY MATTERS
Except with respect to Victoria Station and Paramount International
Corporation, the Corporation is not subject to direct regulation by any
government agency. Restaurants are subject to numerous federal, state and
local laws affecting health, sanitation and safety, as well as state and local
licensing of the sale of alcoholic beverages. The Americans With Disabilities
Act prohibits discrimination in employment and public accommodations on the
basis of disability. Under such Act, Victoria could be required to expend funds
to modify its restaurant to provide service to disabled persons or make
reasonable accommodations for the employment of disabled persons. Paramount has
a Federal Communications Commission license that controls tariffs charged on
telephone calls.
ITEM 2. Description of Property.
The Corporation owns no real estate. The principal executive offices of
the Corporation are located at 11350 McCormick Rd. Executive Plaza 3, Suite
1001, Hunt Valley, Maryland, 21031. The Corporation's lease, of approximately
7,700 square feet of space expires April 30, 2003. The annual rent of $132,000
is subject to increases of 3.5% per year.
The Corporation believes that its leased premises are suitable for its
corporate headquarters and offices. The Corporation also believes that its
insurance coverage for its leased and subleased premises is adequate.
The Corporation has subleased its prior offices in Owings Mills, Maryland
for its remaining term expiring in March 2003. Monthly payments are required
under the lease which escalate over the term of the lease starting with $1,925
and ending with $2,100. The rent by the sublease covers the cost of the lease
to the Corporation. The Company and the Landlord of the above have entered into
a Termination Agreement dated, November 1, 1999, ending any corporate obligation
on the part of Carnegie.
PTT currently leases 1,900 square feet of office space in Sheffield,
England through a three year lease which expires January 2001 The annual rent is
approximately $33,000.
The office of ACC is located in 5,000 square feet of leased space in
Columbia, Maryland. The lease term is for five years expiring in August 2000, at
an annual rent of $59,000. During 1999 the Virginia ACC branch sublet 3,010
square feet in Fairfax, Virginia, however, the space was vacated upon the
Company being informed that the subleasor was insolvent; the Company believes it
has no further obligation with respect to this lease.
RomNet currently subleases 3,800 square feet in Boston, Massachusetts. The
sublease expires in October 2001. The annual rent is $51,600.
Paramount currently leases 4,000 square feet in Vista, California through a
seven-year lease that expires in October 2005. The annual rent of $46,624, will
increase 5% per year. This lease is with a Corporation owned by the Eberle
Family Trust. The rent terms are below market rate for the space.
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The Victoria Station restaurant is located at 6301 Northwest 36th Street,
Virginia Gardens, Florida. The annual rent per a lease, expiring in 2001 is
$121,000.
American Telephone & Computer Inc. leases 5054 square feet located at 650
West Grand Avenue Elmhurst, Illinois. The lease is 5 years, expiring in June
2004 with an annual rent of $68,228,88 and 2% per year increase. The location is
sublet on a month to month basis to The Phone Stop for the full monthly rent
obligation.
ITEM 3. 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 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 believes that it has no material 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.
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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 attached hereto in its entirety as Exhibit
99.4. The Company has dropped its action against Higbee but intends to pursue
the other defendants vigorously.
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.
Federal Court granted the Defendants' Motion to Dismiss Due to Lack of
Jurisdiction in the State of Maryland. Carnegie initiated this litigation to
obtain the benefit of its contract. The Company is reviewing its legal recourse
against the defendants in a venue of proper jurisdiction.
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
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<PAGE>
intends to vigorously pursue an appropriate cross-action to seek return of these
overpayments.
Carnegie previously reported, that arbitration with the J-Net group was
about to commence. J-Net were the former owners of Carnegie's subsidiary,
RomNet, and there is a dispute 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 thereby alleviating any
present claim and reducing any future claim that The J-Net Group may have.
Arbitration was to begin in New York in March 2000. Carnegie believes that its
position is valid. On March 2, 2000 the Company and J-Net agreed to the
withdrawal of the Request for Arbitration, without Prejudice to the rights of
each party.
On February 29, 2000 the Company filed an action for damanges against
individuals who have used the Internet chat rooms to publish and propagate
"false and misleading statements about the Company, its executives and its
employees." The action was filed in the United States District Court for the
District of Maryland. It is filed against individuals, whose legal identities
are unknown and used screen names.
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 in the period from September 15, 1998 to 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 were filed by other plaintiffs in the same court.
These Maryland 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. Each of the
five original complaints filed in Maryland alleged 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 agreed to extend until March 21, 2000 the time
within which such a consolidated complaint must be filed.
25
<PAGE>
On March 21, 2000, the Plaintiffs in the Maryland actions filed a
consolidated complaint, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act, 15 U.S.C. (S)(S) 78j(b) and 78t(a), as well as SEC Rule
10-b-5, 17 C.F.R. 240.10b-5. The consolidated complaint purports to be a class
action filed on behalf of non affiliates who purchased or acquired the
Corporations Common Stock in the period from September 15, 1998 to April 30,
1999. Under the schedule established by the United States District Court, the
Company's response to the consolidated complaint is due to be filed on or before
May 5, 2000. Certain other pre-trial proceedings have occurred, since the filing
of the complaints
Carnegie intends to vigorously defend the consolidated complaint which has
been filed against the Company and its officers and directors. The complaint
filed seeks monetary damages and other relief; however, none specifically allege
a defined amount of damages. The Company intends to file a motion to dismiss the
consolidated complaint for failure to state a cause of action on which relief
may be granted. The filing of such a motion will impose a stay of discovery,
under the provisions of the PSLRA, at least until the Federal Court rules on any
such 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 lawsuit.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
ITEM 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Common Stock of the Corporation was traded on the National Association
of Securities Dealers Bulletin Board market ("OTC") from September 1996 until
April 29, 1999, when it became listed on the American Stock Exchange ("AMEX").
During the period of the Corporation's inactivity from June 1985 through
September 1996, there was no public trading of the Corporation's shares.
The following table reflects the high and low bid prices for the
Corporation's Common Stock for each quarterly period from the first quarter of
1997 to the first quarter of 1999. These quotations are based on information
supplied by OTC market makers of the Corporation's Common Stock, except for the
high price range quoted for the second quarter of 1999 which was provided by
AMEX. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
26
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------
Price Range Price Range Price Range
---------------------- ------------------ -------------------
Low High Low High Low High
----- -------------- ---- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $2.13 $ 7.31 $.22 $ 1.44 $ .65 $ 1.20
2nd Quarter 4.00 6.875/(1)/ .42 .8125 .375 .9375
3rd Quarter - - .48 1.90 .375 1.375
4th Quarter - - .73 2.45 .375 1.00
</TABLE>
/(1)/ Trading of the Corporation's Common Stock was suspended on April 30, 1999
and has not resumed. At the time of the trading halt, the price of the
Corporation's Common Stock was $6.875.
Holders
As of February 29, 2000, there were 1,340 holders of record of the
Corporation's Common Stock. At such date, 60,364,015 shares of Common Stock
were outstanding including 21,892,066 shares held of record by CEDE Corporation
on behalf of investors in the Company.
The Corporation has issued preferred stock in series in connection with its
business acquisitions, including: (i) 200,000 shares of Series A Preferred Stock
issued to two shareholders of record, convertible on May 18, 2000 into the
greater of 2,000,000 shares of Common Stock or $2,000,000 worth of Common Stock
based on the fair market value price per share of Common Stock on May 18, 2000;
(ii) 200,848 shares of non-cumulative Series B preferred stock in consideration
for a consulting agreement with the Vadiari Group International, valued at $1.60
per share at the time of the issuance in July 1998 at a discounted valuation of
$321,356 and currently convertible into 2,008,457 shares of Common Stock; (iii)
21,600 shares of Series E Preferred Stock issued to two shareholders of record,
convertible on November 20, 2000 into the greater of 216,000 shares of Common
Stock or $270,000 worth of Common Stock based on the fair market value per
share of Common Stock on November 20, 2000; (iv) and 52,500 shares of Series F
Preferred Stock issued to one shareholder of record, which will automatically
convert on December 1, 2000 into the greater of 525,000 shares of Common Stock
or $700,000 worth of Common Stock based on the fair market value per share of
Common Stock on December 1, 2000.
Dividends
The Corporation has declared no dividends and is not likely to do so in the
foreseeable future.
Recent Sales of Unregistered Securities
The following information relates to sales of securities of the Corporation
issued or sold in the period from January 1, 1999 to December 31, 1999 that were
not registered under the Securities Act of 1933, as amended ("Securities Act").
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<PAGE>
(1) On April 16, 1999, the Company issued to sixteen (16) people and one (1)
company, 6,950,000 shares of restricted Common Stock of the Company in
consideration for all of the outstanding shares of Paramount International
Telecommunications, Inc. This transactions was effected without registration
under the Securities Act in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act. The recipients of the shares
were accredited investors. Each of the recipients of such shares, represented
that the shares were acquired for investment without a view to distribution, the
certificates representing such shares contained restrictive transfer legends and
to the knowledge of the Company none of such shares have been transferred. Prior
to the completion of the transactions, the recipient of the shares performed a
thorough due diligence review of the Corporation and received a copy of the
Corporation's Form 10-SB filed on October 28, 1998 and its amendment dated
February 12 ,1999.
(2) Through December 31, 1999, the Corporation sold 643,558 shares of Common
Stock to 83 purchasers for an aggregate consideration of $1,002,929 in cash and
the value of services. Of these thirty six (36) were employee of the Company and
its subsidiaries, one (1) preformed consulting services to the Company, one (1)
was a member of the Company's Board of Directors at the time the shares were
issued to him. These transactions were effected without registration under the
Securities Act in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act. Of the Seven (7) were sophisticated
investors who received corporate information provided by Standard and Poor's as
well as financial statements and information available on the Corporation's web
site. Each of the recipients of such shares represented that the shares were
acquired for investment without a view to distribution. The certificates
representing such shares contained appropriate restrictive legends. To date none
of such shares have been transferred in transactions in public markets of the
United States.
(3) The following information relates to sales of securities of the Corporation
issued or sold for the period beginning January 1, 2000 through the filing date
herein and were not registered under the Securities Act of 1933, as amended.
Two accredited investors purchased 2,083,334 shares of the Company's common
stock for a total consideration of $875,000. These transfers were affected
without registration under the Securities Act of 1933 in reliance upon the
exemption provided by section 4(2) of the Securities Act. Each of the recipients
of such shares has represented that such shares were acquired for investment,
without view for distribution. The certificates representing such shares
contained an appropriate restrictive legend. To date, none of the shares have
been transferred into the public market of the United States.
ITEM 6. Management's Discussion and Analysis.
Overview
The current history of the Corporation began on May 3, 1996 with the
acquisition of ECAC and DAR. In early 1997, the Board of Directors determined
that it was in the Corporation's best
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<PAGE>
interests to concentrate its operations primarily on telecommunications rather
than financial services. From such date through December 31, 1998, the
Corporation has implemented the following acquisitions and dispositions which
have transformed the Corporation's primary operations from financial services to
telecommunications. In April 1997, the Corporation sold a substantial portion of
ECAC's merchant accounts. In August of 1997, the Corporation acquired Victoria
Station to provide for interim cash flow and revenues. In the month of September
1997, the Corporation (i) spun-off DAR through the formation of TimeCast
Corporation. On September 28th 1997 Carnegie acquired PTT and Talidan. In
January 1998, the Corporation sold all of the stock of ECAC to Ewing Partners
Corporation d/b/a Value Partners, Ltd. The Corporation sold ECAC (Europe) to
that company's management. The Corporation acquired ACC in the month of February
1998. In November 1998, the Corporation acquired Voice Quest and in December
1998, the Corporation acquired RomNet.
In 1999 the Corporation acquired Paramount. Paramount provides
telecommunications services and systems to the hospitality, health care and pay-
telephone industries as an outside service provider in the United States, Canada
and Mexico. A full description of Paramount set forth under the caption
"Business - Paramount." The Company also acquired the assets of RGG, an
interconnect company similar to ACC, although with a far smaller scale of
operations. RGG has not had material operations to date.
During fiscal 1998, revenues were contributed principally by Talidan, ACC
and Victoria Station. For 1999, revenues were contributed principally by
Paramount, RomNet and ACC.
As a result of the transactions described above, the Corporation became
primarily a telecommunications company whose business units are (i) the
development and marketing of IVR software, including an automated voice
independent systems known as "MAVIS(TM)" and "Personal Operator(TM)"; (ii) the
promotion of international telephone traffic through the marketing of
information and entertainment services; (iii) The provision of Internet support
services, beta testing services and technical support for telephone related
computer services (including software and hardware products); (iv) The sale,
installation and servicing of business telephones and system solutions; and (v)
providing telecommunications services to the hospitality, health care and pay-
telephone industries.
Income is also to be derived from one other source, the ownership and
operation of the Victoria Station Restaurant near Miami, Florida.
The Corporation believes that MAVIS(TM) with its new release and its IVR
software products have significant potential for growth. MAVIS(TM) can
integrate with virtually any PBX whether currently marketed or already in use.
MAVIS(TM) can function in a number of languages. The Corporation intends to
market MAVIS(TM) in the United States through marketing relationships thru
distributors as well as direct marketing by ACC and CCI. In December 1998, the
Corporation entered into a Distributor Agreement designating Tiller
International Corporation as the exclusive authorized distributor of MAVIS(TM)
in the Eastern Block. The recent acquisition of Paramount is expected to
provide the Corporation with capability to market MAVIS(TM) to the hospitality
and health care industries, however, there can be no assurance in this regard.
PTT has also developed a number of IVR software products. These software
products include systems to place orders from
29
<PAGE>
suppliers, automate payrolls, register purchases by customers, profile current
employees, protect merchandise from theft, make hotel reservations, send
greeting card messages and obtain travel information. MAVIS(TM) its IVR software
has to date not been a source of material revenue for PTT or the Company. There
is no guarantee that future marketing of these products will be a source of
material revenue for the Company.
Talidan. The operations (advertising) of Talidan were suspended in
June of 1999. Although advertising ceased, payments continued to be received
through December 1999, albeit at a decreasing rate. In December 1999, WWT (long
distant service provider) notified Talidan that it was withdrawing the use of
Talidan's premium long distance telephone as of January 1, 2000. This date was
extended to March 15, 2000 by WWT. The operation of the business has been
suspended. The business had no employees or office space since it contract thru
third parties. A suspention was affected without additional costs to the
Company.
In July of 1999, the Corporation received an unsolicited offer to purchase
the stock of Talidan from three shareholders of the Company in exchange for
5,676,750 shares of the Corporations common stock. The ability to complete this
transaction is predicated on the Company's shares returning to a trading status.
At that time, the Company expects to finish its negotiation and complete the
transaction. There is no assurance, at this time, that the Company and the
buyer will be able to execute this transaction.
Results of Operations
The results of operations for the fiscal years ended December 31, 1998 and
1999 described herein are based upon the Corporation's Consolidated Financial
Statements for such years.
Fiscal Year Ended December 31, 1998. The Corporation realized operating
revenues in 1998 of $7,302,017. Cost of sales for 1998 were $2,950,232,
operating expenses were $20,201,475, interest income (net of interest expense)
was $2,031, and there was an income tax expense of $12,279 resulting in the
Corporation realizing a net loss from continuing operations of $15,178,571. or
($0.30) per share, diluted.
The Company during 1998 acquired the following businesses:
Harbor City Corporation doing business and trading under the name of
ACC Telecom ("ACC"), a leading reseller of equipment and business telephone
systems for Comdial, SONY and Sprint, was acquired on May 18, 1998 for cash
and stock.
Voice Quest, Inc. ("Voice Quest"), a developer and provider of speech
recognition and voice mail technology products, including an automated
attendant system known as "Personal Operator," was acquired on November 20,
1998 for cash and stock.
The assets of a corporation formerly known as RomNet, Inc., an
Internet, e-business and technical support services (help desk) company
were acquired on December 1, 1998 for cash and stock. These assets were
acquired by a newly formed wholly-owned subsidiary of the Corporation,
RomNet Support Services, Inc. ("RomNet").
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<PAGE>
See Note 2 to the Consolidated Financial Statements under the captions
"ACC Telecom, Voice Quest and RomNet."
In January 1998, the Company sold ECAC, retaining only an interest in
the accounts of one bank, completing the divestiture to Ewing Partners
d/b/a Value Partners for the assumption of all ECAC debt and one
hundred thousand dollars in cash. This transaction is discussed in
further detail below.
ECAC (Europe) was sold to the existing management of that company for a
promissory note in the amount of two hundred fifty thousand dollars. This
note has not been paid and the Company has agreed to extend the payment due
date to a month-to-month call.
In January 1998, the Company sold ECAC, retaining only an interest in
the accounts of one bank, completing the divestiture to Ewing Partners
d/b/a Value Partners for the assumption of all ECAC debt and one
hundred thousand dollars in cash. This transaction is discussed in
further detail below.
(v) ECAC (Europe) was sold to the existing management of that company for
a promissory note in the amount of two hundred fifty thousand dollars.
See Note 3 to the Consolidated Financial Statements under the captions "ECAC."
During 1998 management concluded that a segment of Talidan's operations
were not consistent with the image that the Corporation wanted to convey. As a
result, the rights to certain telephone numbers and promotional materials with
respect to Talidan's print media business ("Talidan Print") were sold in
exchange for a Note in the amount of $2,340,000 from Westshire Trading Company,
Inc. ("Westshire"). The proceeds received to date from this Note have been used
by the Corporation to develop the MAVIS(TM) system for commercialization. In
connection with the sale of the business, the Company agreed to release certain
consultants of the Company from their covenant not-to-compete with the Company.
The Company allocated $640,000 of the selling price to sale of the business and
the balance of $1,700,000 was allocated to the release of the covenant not-to-
compete. The Company charged $662,049 of purchased goodwill attributable to the
original acquisition of this business to operations at the time of sale. In the
event of non-payment, the non-compete agreements will become in force again and
the Company will have the right to recover the assets sold.
All payments have not been received on the $2,340,000 Note received from
Westshire in consideration for Talidan Print (the "Note"). The terms of the
Note require quarterly payments in the amount of $585,000 plus accrued interest
(at the rate of 7% per annum) commencing December 22, 1998, with payments
applied first to interest and then to principal. Of the amount received to date
as set forth below, $110,072 has been applied to accrued interest due. At
December 1, 1999, the Note had a remaining principal balance of approximately
$1,115,072 plus interest.
31
<PAGE>
Payment Date of Payment Amount
------- --------------- ------
1st Quarterly: October 26, 1998 $ 225,000
October 30, 1998 25,000
January 27, 1999 335,000
2nd Quarterly: March 12, 1999 750,000
----------
Total Received $1,335,000
In October 1998 the Company requested a partial early payment on the Note
which was received prior to the December 22, 1998 due date as set forth above.
In consideration for such early payment, the Company (a) granted Westshire
warrants to acquire 2,000,000 shares of the Company's common stock at a purchase
price per share of $1.425, well above the then-market value of $.78 and (b)
agreed to extend the due date of the balance of the first payment until January
27, 1999. The balance of the first quarterly payment was made in accordance
with the revised terms of the Note. The second quarterly payment, which was due
March 22, 1999, was made ten days early and in excess of the required amount.
The balance of the third quarterly payment, which was due June 22, 1999, to date
has not been made. The Company is in discussion with representatives of
Westshire to secure payment but those discussions may have been adversely
effected by a discussion between Westshire's attorney and a representative of
our former auditor. Although the Company believes that there exists no material
uncertainty as to Westshire's ability to pay, Westshire has not kept up payments
during the trading halt. Therefore, the Company has established a reserve of
$1,115,487 at December 31, 1998.
In addition, neither the Company nor Westshire contemplated that
payment on the Note would be contingent on successful operations of Talidan
Print. In the agreement of sale, Westshire represented the following:
"Buyer acknowledges that the income derived from the assets will be far
below the quarterly payments due to be made by Buyer. Buyer represents
that it has sufficient ability to make the payments due pursuant to the
Promissory Note on time and is not dependent upon the income it anticipates
being generated from these assets."
Moreover, management, always of the belief that Westshire possessed the ability
to pay the full amount of the Note through funds independent of the operations
of Talidan Print, obtained a letter, from Westshire's bank dated October 6, 1998
stating that Westshire, as a member of a group of companies, had balances with
the bank in excess of $6,000,000. The Company's Current Report on Form 8-K
filed with the SEC on September 28, 1999 also discusses Westshire. See also
1998 financial statements in Note 4 - Dispositions - Sale of Certain Talidan
Assets.
For the fiscal years ended December 31 1999 and 1998:
(1) Revenues from external customers for (a) telecommunications was $18,486,206
and $5,358,377, respectively; (b) the restaurant was $1,843,148 and $1,943,640
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(2) Interest expense for (a) telecommunications was $447,480 and $12,847,
respectively; (b) the restaurant was $27,727 and $760. respectively; and (c)
corporate was $153,072 and $213,474 respectively;
(3) Income tax expense (benefit) for telecommunications was $140, and the
restaurant was none and for corporate was $19,050 and $12,279, respectively;
(4) Depreciation and amortization for (a) telecommunications was $4,903,083 and
$926,686, respectively; (b) the restaurant was $55,148 and $36,884,
respectively; and (c) corporate was $147,886 and $31,651, respectively.
(5) Segment profit (loss) before taxes for (a) telecommunications was
(6,783,733) and ($9,698,466), respectively; (b) the restaurant was $97,693
and ($133,950), respectively; and (c) corporate was ($5,334,813) and
($3,733,960), respectively
(6) Segment assets for (a) telecommunications was $47,778,086 and $11,905,303,
respectively; (b) the restaurant was $180,807 and $267,169, respectively; and
(c) corporate was $2,106,422 and $2,244,074, respectively; and
(7) Expenditure for segment assets for (a) telecommunications was $355,319 and
$217,974, respectively; (b) the restaurant was 8,657 and none, respectively; and
(c) corporate was $48,936 and $212,335, respectively;
With respect to the fiscal years ended December 31, 1999 and 1998 the following
geographic area data for trade revenues is based on product or service delivery
location, and property, plant and equipment is based on principal location;
(1) Revenues from external customers for (a) the United States was $13,160,614
and $4,057,563, respectively; (b) Brazil was $384,653 and $3,204,379,
respectively; (c) United Kingdom was $72,101 and $40,075 respectively; and
(d) Canada was $1,962,904 and none, respectively; (e) Mexico was $4,749,082 and
none, respectively.
(2) Segment assets for the United Kingdom was $3,793,003 and $5,790,592,
respectively; and for the United States, net of inter-segment receivables was
$44,738,740 and $7,332,661, respectively, and for Brazil was $26,483 and
$1,293,293 respectively. Canada was $24,683 and none, respectively; Mexico was
$59,675 and none, respectively.
Fiscal Year Ended December 31, 1999. The Corporation realized revenues for
the year ended December 31, 1999 of $20,329,354. Cost of sales for the year were
$11,111,552. Operating expenses were $20,036,017 after impairment expenses,
depreciation and amortization, interest expense (net of interest income) was
(152,079). Net of income taxes of $19,190 resulting in the Corporation realizing
a net loss of $10,989,484 or ($0.17) per share, diluted.
33
<PAGE>
Acquisitions
In February 1999, the Corporation acquired Paramount, which is expected to
continue to provide telecommunications billing and clearing services to the
hospitality, health care and pay-telephone industries as an outside service
provider in the United States, Mexico and Canada through the sale and service of
interfacing equipment for Hotel & Hospital PBX systems. Generally these are the
primary systems used by hotels to provide 0+ & 0- telephone-related services.
Hotels provide access to credit card calls and third party collect calls to
their guests. Paramount collects and provides the data necessary to bill guests
for telephone calls and to properly manage 0+ & 0- telecommunications services
in the hotel. Paramount also purchases direct collect calls and or provides
billing and clearing services for third parties using Paramount's infrastructure
and established vender relationships. Paramount's revenues for 1998 were
$11,314,649 and its net income for the same period was $646,937. Of 1998
revenues about 1/3 came from purchase of direct collect calls and/or billing and
clearing from third parties. Third party business is subject to more attrition
than Paramount's other services. The company has an active sales force charged
with acquiring new customers for this service, but there can be no assurance
that revenues will continue at current levels. In addition, Paramount expects
to market MAVIS to the hospitality and the health care industries.
Paramount's client base consists of domestic and international hotels,
motels, inns, resorts, hospitals, and publicly accessible telephone equipment
providers. In March 1999, Paramount signed a three-year contract with First
Choice Communications of Texas to provide billing, technical and support
services to its hotel clients for 0+ and 0- telephone services. In addition, in
April 1999, Paramount entered into a Memorandum of Understanding ("Memorandum")
with a subsidiary of BCT.TELUS, a major Canadian telephone company, to provide
and receive certain services for its hospitality industry clients in Canada.
The Memorandum is subject to the execution of a definitive agreement that is
being negotiated. Paramount expects this agreement to be completed in year 2000,
however, there can be no assurance in this regard.
Paramount has 11 full-time employees, of which seven are administration and
four are service. Michael Eberle, President, David M. Moody and David Paton,
Executive Vice Presidents and Kay Eberle, Secretary (wife of Michael Eberle),
each have five year employment agreements with Paramount, that expire on January
1, 2004. Each agreement provides for a $130,000 base salary and a signing bonus
of $375,000 plus 12,500 shares of restricted Common Stock of the Corporation.
Additionally, each may be entitled to receive additional shares of Common Stock
of the Corporation based on Paramount's sales revenues for the two-year period
commencing April 1, 1999 and ending March 31, 2001.
Paramount's competition includes AT&T, MCI Worldcom, and Sprint
Corporation, as well as other smaller companies. These larger companies have
tremendous national advertising resources with greater name recognition,
substantially greater technical, financial and marketing resources, as well as
larger customer bases. As technological and regulatory changes occur, Paramount
anticipates that new and different competitors will enter marketplace.
Paramount believes that by focusing primarily on the hospitality industry, it
has created its own market niche. Other companies offering similar services to
hotels must divert the phone traffic to an OSP, and the hotel is paid a
commission by the OSP. Paramount's systems are located inside the hotel. This
allows each hotel to operate as an OSP. This feature provides a greater profit
margin to the hotel since the Hotel may establish its own rates with respect to
O+ calls. An increase in use of cellular telephones by hotel guests, reducing
the number of calls made on the hotel telephones, could have an adverse impact
on Paramount's profitability.
34
<PAGE>
In April 1999 the Company acquired all of the assets of RGG of Rockford,
Illinois for the nominal price of $25,000 in cash. RGG installs, supplies and
services phone systems in Illinois and southern Wisconsin. Roy Gustafson, a
former owner, has agreed to stay on in a consulting capacity for a period of one
year. RGG is a distributor of COMDIAL products similar to ACC and is expected
to operate as an adjunct to the Company's proposed acquisition of The Phone Stop
described herein. 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 is expected to
be conducted by this corporation. RGG has not had material operations to date.
The Corporation expects to acquire companies in the United States engaged
in the sale, installation and servicing of telephone equipment and systems; the
provision of technical and Internet support services; the provision of operator
service and related products; or marketing relationships with such companies.
It is the intention of the Corporation to ultimately own or have marketing
relationships with a complex of such companies operating across the United
States. The Corporation has currently signed two letters of intent to acquire
such companies, however, there is no certainty that the Corporation with respect
to either such letter of intent will consummate a purchase. The Corporation
believes that such coverage by its own telephony companies will be ideal for the
marketing to their customers of PTT's IVR products and the MAVIS(TM) system. In
addition the Company expects to market MAVIS(TM) nationally through ALLTEL
Supply, Inc. The Corporation expects that it will take a combination of stock
and cash to acquire any such companies. The cash requirements are expected to be
met by a combination of cash generated by the Corporation's operations, by the
private and public sales of stock and by lines of credit. There can be no
assurances that the Corporation will obtain such funding or that this strategy
will be successful.
Working Capital and Liquidity
Cash needs of the Company have been met to date by a combination of funds
generated from operations, from borrowings, from the sale of assets and from
issuances of the Corporation's stock for cash and for services. For 1998, cash
flow used in operations was ($4,132,378), and proceeds from the sales of stock
were 4,282,504. In 1999 the Corporation had cash flow used in operations
of 1,490,572 and generated $1,052,150 in proceeds from the sale of stock as
well as approximately $100,000 from the sale of ECAC's stock. Cash from
borrowings amounted to 2,211,625 and $1,258,827 for the years ended
December 31, 1998 and December 31, 1999, respectively.
In addition, during 1999 and 1998, the Corporation issued 843,180 and
2,179,268 shares of the Company's Common Stock at a value of $132,529 and
$922,732, respectively as compensation for services rendered by various
consultants, attorneys, and others.
35
<PAGE>
The Corporation has made up for the loss of income from ECAC by the
acquisition of other income producing assets for stock, deferred cash payments
and/or relatively small amounts of upfront cash when making corporate
acquisitions. PTT and Talidan were acquired for stock with no cash used in the
purchases. ACC was acquired for a $1,000,000 note payable over five years and
stock convertible to common stock. Voice Quest was acquired for a $102,084 note
payable over three years and stock. RomNet was acquired for stock and the
assumption of debt obligations up to $577,890. Victoria Station was acquired
for cash in the amount of $140,000, a note payable of $185,000, and stock.
Paramount was acquired for stock. However, the stockholder-employees of
Paramount were paid $1,500,000 in the aggregate as bonuses for entering into
employment agreements in connection with the acquisition of Paramount.
Commencing in the second quarter of 1999 the Corporation incurred
unanticipated expenses in connection with the resolution of the SEC's accounting
comments, the cessation of trading, and shareholders' suits which in the
aggregate are estimated to be $1,700,000. Although the Company believes that
the basis for the shareholder suits are without merit and intends to vigorously
defend itself against them, the outcome of such suits are uncertain at this
time. In addition, the Company is involved in certain other legal proceedings
none of which the Company believes will have a material adverse effect on the
Company, however there can be no assurance in this regard.
The Corporation has not yet achieved any significant level of sales of the
MAVIS(TM) system. The Corporation has not reached the level of revenues that
were expected subsequent to December 31, 1998. The Corporation has expended
resources for the further enhancement of MAVIS(TM). PTT has significantly
increased the capabilities of the voice mail component of the system. With
these enhancements the Corporation expects to realize increased interest in and
sales of the MAVIS(TM) system in the first quarter of year 2000 and thereafter,
however there can be no assurance in this regard.
During 1999, the Company has expended available cash resources on (1) the
operating requirements of the Corporation and its subsidiaries, (2) the payment
of signing bonuses related to the Paramount Employment Agreements, and (3) the
repayment of short term borrowings, (4) cost for legal and re-audit of 1998.
The Corporation's plans for 2000 include additional acquisitions of
companies engaged in the sale, installation and servicing of telephone systems
and equipment. The provision of technical and Internet support services or the
provision of operator service and related products in other areas of the United
States. If such acquisitions require substantial amounts of cash the Corporation
intends to issue additional stock or incur additional debt. The ongoing
activities of the Corporation, including those extraordinary in nature, may
require funding in excess of the resources that will be available through
operations. The Corporation believes, that if the Common Stock resumes trading
on AMEX, or another stock exchange or quotation system, the Company expects that
it may be able to generate such additional capital, however, there can be no
assurance in this regard. If acquisitions are funded utilizing bank debt it is
likely that such debt would be secured with the assets of the company to be
acquired but may require additional security through other assets of the
Corporation. There can be no assurance that any such financing will be
available on terms favorable to the Company, or at all.
36
<PAGE>
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.
ITEM 7. Financial Statements.
The financial statements are included herein following Item 13 of this
Annual Report on Form 10-KSB commencing on page F-1.
ITEM 8. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure.
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.
The Company has engaged Merdinger, Fruchter, Rosen & Corso, P.C. as its
certifying accountant as of September 22, 1999 for the Company's fiscal year
ending December 31, 1999. Merdinger, Fruchter, Rosen & Corso, P.C. previously
audited the December 31, 1998 and 1997 financial statements of Paramount
International Telecommunications, Inc., a wholly-owned subsidiary of the
Company. The Company has not consulted Merdinger, Fruchter, Rosen & Corso, P.C.
previously.
Grant Thornton was engaged by the Company in January 1998, as the Company's
certifying accountant, and previously issued reports concerning the Company's
financial statements for 1997 and 1998. Grant Thornton's report on the Company's
financial statements for each of those years did not contain an adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During the two most recent fiscal years
and subsequent interim periods until after the effective date of dismissal, the
Company did not have any disagreements with Grant Thornton on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
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<PAGE>
The Company's report on Form 8-K dated September 21, 1999 and filed with
the SEC on September 28, 1999, discusses in detail the Company's views with
regard to Grant Thornton's termination, which is incorporated herein by
reference thereto. Grant Thornton's responses to such discussion are set forth
on Forms 8-K/A filed with the SEC on October 13, 1999 and on October 25, 1999,
respectively, which are incorporated herein by reference thereto. The Company's
rebuttals to Grant Thornton's statements are set forth in Exhibit 99.1,
referenced hereto.
On March 7, 2000 the Board of Director's approved a motion to begin an
action against Grant Thornton for damages and other legal remedies, and empower
management to select one or more law firms to file the motions.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following is a listing of the directors and executive officers of the
Corporation as of December 31, 1999, their ages and positions with the
Corporation.
38
<PAGE>
<TABLE>
<CAPTION>
Name Age/(1)/ Position/(2)/
- - ---- -------- -------------
<S> <C> <C>
E. David Gable/(3)/ 50 Chairman of the Board of Directors
Lowell Farkas/(4)/ 59 Director, President and Chief
Executive Officer
Barry N. Hunt 51 Director
Michael Eberle/(5)/ 53 Executive Vice President
Michael R. Faulks 45 Vice President
Lawrence Gable/(3)/ 54 Vice President
Richard J. Greene, CPA/(6)/ 61 Vice President, Corporate Secretary and
Acting Chief Financial Officer
Anthony Redfern 41 Vice President
Adnan Khan/(7)/ 30 Director
Allan Jay Kovitz/(8)/ 57 Director
Walt Nawrocki/(9)/ 54 Director
</TABLE>
- - -----------------------------
/(1)/ As of December 31, 1999.
/(2)/ Each Director holds office for one year and until his successor has been
duly elected and qualified.
/(3)/ E. David Gable and Lawrence Gable are brothers. E. David Gable also serves
as a member of the Company's Office of the Chief Operating Officer.
/(4)/ Pursuant to Lowell Farkas' employment agreement with the Corporation, he
is entitled to be a Director so long as he is the President. Mr. Farkas
also serves as a member of the Company's Office of the Chief Operating
Officer.
/(5)/ Pursuant to terms of the Paramount Acquisition Agreement, Mr. Eberle is
entitled to a seat on the Board of Directors but has not yet exercised
such right. Mr. Eberle also serves as a member of the Company's Office of
the Chief Operating Officer.
/(6)/ Effective February 15, 1999, Richard J. Greene became the Secretary of the
Corporation.
/(7)/ As of October 21, 1999.
/(8)/ As of November 16, 1999.
/(9)/ As of November 16, 1999.
Biographical Data of Directors and Executive Officers
E. David Gable. Mr. Gable serves as Chairman of the Board of Directors and
as a member of the Company's Office of the Chief Operating Officer. He served
as Chief Operating Officer from May 1997 to March 16, 1999. He was elected
Chairman in September 1996. From September 1996 through May 1997, Mr. Gable also
served as the Acting President and Chief Executive Officer of the Corporation.
From 1988 to 1993, he served in various capacities including Dealer Principal of
All Star Dodge and All Star Chevrolet Buick and President of the All Star
Automotive Group consisting of fourteen automobile dealerships located
throughout Maryland, Virginia, West Virginia and Pennsylvania.
Lowell Farkas. Mr. Farkas serves as the President and Chief Executive
Officer of the Corporation and as a Director. Mr. Farkas served as a part-time
consultant to the Corporation from October 1996 until May 1997. He was
appointed a Director and President and CEO in May 1997 and continues to serve in
these positions as well as serving as a member of the Company's Office of the
Chief Operating Officer. Prior to joining the Corporation, Mr. Farkas served as
President
39
<PAGE>
and CEO of Mad Martha's Ice Cream, Inc. from 1995 to 1996. From 1992 to 1995,
Mr. Farkas was a management consultant on a full-time basis to A.S. Management
Corporation which operate restaurants on the east coast. Mr. Farkas has also
served as the President, Chief Executive Officer and a member of the Board of
Directors of Victoria Station Acquisition Corporation and the Executive Vice
President and Chief Operating Officer of The Horn & Hardart Company.
Antony D. Redfern. Mr. Redfern has served as a Vice President of the
Corporation since October 1977. Mr. Redfern is a consultant to Talidan. Mr.
Redfern has been working in telecommunications and voice computer technology
since 1990 when he joined Legion, Ltd. as its international business development
director until June 1996. While at Legion, Ltd., he was responsible for
establishing successful telecommunication businesses in Portugal, Brazil, Sao
Tome, and South Africa. From June 1996 to September 1997, Mr. Redfern was a
consultant to various companies. Mr. Redfern has a mechanical engineering
background and has worked on design projects in Europe and the Middle East.
Barry N. Hunt. Mr. Hunt has served as a Director of the Corporation since
October 1998. Mr. Hunt also serves as the President of ACC. He is the co-
founder of ACC and has served as its President since 1979.
Adnan Khan. Mr. Khan has served as a Director of the Corporation and as a
member of its audit Committee since October 1999. He is the owner of IQ Systems
of Laurel, Maryland, which provides corporate technology and information
solutions in the Baltimore/Washington area, and is one of the top beta sites for
new Microsoft business solutions software. IQ Systems, supplies Carnegie with
hardware for its MAVIS(TM) system, along with software support. Mr. Khan has a
dual MBA in finance and computer science from Georgetown University and is a
Microsoft(R) Certified Systems Engineer.
Walt Nawrocki. Mr. Nawrocki has served as a Director of the Corporation
and a member of its audit committee since November 1999. In November, 1999 he
was named CEO of Intraco Systems, Inc. (OTCBB: INSY), of Boca Raton, Florida,
----
which specializes in convergence of voice and data technologies for business.
Prior to that time he was President, CEO and Director of Registry Magic for 3
years prior after leaving IBM for many years holding various positions including
manager for Worldwide Product Development and Business Management. Mr. Nawrocki
has received numerous Computer Telephony industry awards.
Allan Jay Kovitz. Mr. Kovitz has served as a Director of the Corporation
and a member of its audit committee since November 1999. He is the owner and
principal of Allan Jay Kovitz, Certified Public Accountant, with offices in
Islandia, New York, and Hartford, Connecticut, specializing in taxation, tax
audit representation, and business consulting.
Michael Eberle. Mr. Eberle has served as the President and Chief Executive
Officer of Paramount since 1994 and is a co-founder of Paramount. Mr. Eberle
also is President of Carlsbad Framing, Inc., a California corporation engaged in
the residential framing business. Since 1996, Mr. Eberle has served as the
Managing Director of Cherry Mountain Spring Water Company, LLC, which sells bulk
spring water to bottlers in the Phoenix metropolitan area.
40
<PAGE>
Michael R. Faulks. Mr. Faulks has served as a Vice President of the
Corporation since October 1998. Mr. Faulks is the creator of the MAVIS(TM)
system and serves as Technical Director of PTT. Mr. Faulks is a member of the
Board of Directors of PTT. As Technical Director, Mr. Faulks is involved in the
design and creation of Voice Response Services and manages a software
development team. From 1990 to 1993, he served as the Managing Director of
Software Marketing Corporation Limited, a software development company in the
United Kingdom. In 1992, Mr. Faulks also became the Technical Director of CFS
(Distribution) Limited, the distributor for Software Marketing Corporation
Limited.
Lawrence E. Gable. Mr. Gable has served as a Vice President of the
Corporation since May 1997. He is currently responsible for the integration of
the Corporation's acquisitions in the telephone interconnect operations. From
February 1996 through February 1997, Mr. Gable served as a consultant to ECAC.
Prior thereto, Mr. Gable worked as a Sales Representative for Shaw Industries, a
Corporation engaged in the carpet and floor covering industries.
Richard J. Greene. Mr. Greene has served as Vice President and Corporate
Secretary of the Corporation since February 15, 1999 and has served as Acting
Chief Financial Officer since September 11, 1999. He served as Chief Financial
Officer and Treasurer of the Corporation from September 1998 until February
1999. He has been a certified public accountant since 1960 and has operated his
own accounting and business consulting firm since 1986.
Changes in Directors and Management During 1999
Directors
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.
Adnan Kahn became a member of the Board on October 21, 1999 and Allan Jay
Kovitz and Walt Nawrocki became members of the Board on November 16, 1999.
Messrs. Khan, Kovitz and Nawrocki are the members of the audit committee.
Officers
The following changes occurred between January 1, 1999 and December 31,
1999:
David Pearl resigned as Corporate Secretary as of January 22, 1999 to
pursue other opportunities.
41
<PAGE>
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. To date, approximately $48,788.47 have
been paid and $38,711.53 is still due to be paid under this agreement. The
Company fully expects to resolve the outstanding amounts.
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.
Subsequent Events. Arthur Abraham, the Corporate Comptroller since April
1999, was appointed Vice President, Corporate Comptroller in January, 2000 by
the Board of Directors.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and executive officers, and persons who own more than
ten percent of the Corporations outstanding Common Stock to file reports with
the Securities and Exchange Commission (the "SEC"). These reports include
initial ownership and changes in ownership of Common Stock. Such persons are
required by SEC regulation to furnish the Corporation with copies of all such
reports when filed.
To the Corporation's knowledge, based solely on review of such reports,
furnished to the Corporation (with written representations that no other reports
were required), all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been
complied with for the period relating to this form 10-KSB except that the
following directors and executive officers have not filed a Form 3: E. David
Gable, Lowell Farkas, Barry Hunt, Adnan Khan, Allan Jay Kovitz, Walt Nawrocki,
Michael Eberle, Michael Faulks, and Richard Greene. The following directors and
executive officers have inadvertently not filed a Form 5: E. David Gable, Lowell
Farkas, Barry Hunt and Michael Faulks. The Company has informed the foregoing
persons of their legal obligations to file such forms and believes that all such
forms will be filed with the commission very shortly.
42
<PAGE>
ITEM 10. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information concerning compensation
of the Corporation's Chief Executive Officer and all executive officers whose
total annual salary and bonus exceeded $100,000, for the years ended December
1999 and 1998
<TABLE>
<CAPTION>
Annual Compensation Long term Compensation
--------------------------------- --------------------------------------------------------------
Restricted Securtities
Other Annual Stock Underlying All Other
Name Year Salary Bonus Compensation Awards Options/SARs Compensation
---- ---- ------ ----- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. David Gable 1999 200,000 -- -- -- -- --
1998 200,000 -- -- 500,000/(1)/ 1,000,000 --
Lowell Farkas 1999 200,000 -- -- -- -- --
1998 150,000 -- -- 300,000/(1)/ -- --
Michael R. Faulks 1999 200,000/(2)/ -- -- -- -- --
1998 200,000/(2)/ -- -- -- -- --
Mike Eberle 1999 108,333 375,000/(3)/ -- -- -- --
Antony Redfern 1998 115,000 -- -- -- -- --
Barry Hunt 1999 125,000 -- -- -- -- --
</TABLE>
/(1)/ All of such shares were issued pursuant to grant of discretionary bonuses
by the Company's Board of Directors, with respect to performance of the
Company during fiscal 1997. The SEC, in reviewing the Company's Form
10-SB, questioned in writing to the Company's attorney on March 29, 1999
the discounted value on 1997 Company acquisitions. As a result, until such
issues were resolved, Company management voluntarily elected to return all
of such shares to the Company without further consideration. Upon review
of the re-stated 1997 financial statements on which the bonuses were based
and review of each employment agreement, the bonuses in question were in
fact earned. These shares will be returned to the employees.
/(2)/ This amount reflects conversion of (Pounds)75,000 received by Mr. Faulks
at an estimated exchange rate of $1.60.
/(3)/ Mike Eberle received sign bonus when Paramount was acquired.
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<PAGE>
The Chairman and President of the Company have agreed to defer a substantial
portion of their respective salaries and expense reimbursements during 1999 and
1998. The Company has undertaken to pay these deferred salaries and expenses in
the form of cash and/or stock to be negotiated in amounts as yet to be
determined.
Option/SAR Grants in Last Fiscal Year
None
Employment Agreements
Lowell Farkas. Mr. Farkas entered into an employment agreement with the
Company (the "Farkas Agreement") effective May 15, 1997 at an annual salary of
$100,000. His salary increases to $125,000 in the second year, $150,000 in the
third year, and $200,000 for the remainder of the term. The agreement
terminates on August 30, 2003 and is renewable for additional one year terms
except upon notice of termination 90 days prior to the end of the then-current
term. As additional compensation, Mr. Farkas will be paid a discretionary
performance bonus annually, based upon the net profits of the Corporation for
each year. Mr. Farkas also received non-qualified stock options to purchase
400,000 shares of Common Stock at $0.50 per share, the bid price on the date of
the Farkas Agreement. If the Corporation successfully completes a public
offering of 5,000,000 shares of the Corporation's stock that raises at least
$5,000,000 or achieves a net profit of $1,000,000 in any fiscal year, Mr. Farkas
will receive options to purchase an additional 500,000 shares of Common Stock at
$0.10 per share. Mr. Farkas is to be reimbursed for the cost of leasing and
operating an automobile for business purposes. Upon termination of his
employment with the Corporation, Mr. Farkas has an option to acquire the rights
and title to Victoria Station restaurant at the same purchase price paid by the
Corporation. The depreciated value of improvements made after the acquisition
will be added.
E. David Gable. Mr. Gable entered into an employment agreement with the
Corporation effective April 8, 1998 at an annual salary of $200,000. The
agreement will terminate on April 7, 2003 and is renewable on the same terms
unless the Corporation gives notice of termination 90 days prior to the end of
the then-current term. As additional compensation, Mr. Gable will be paid a
discretionary performance bonus annually, based upon the net profits of the
Corporation each year. Mr. Gable received stock options to purchase 1,000,000
shares of Common Stock of the Corporation at $0.45 per share that vest when the
Corporation has a consolidated pre-tax net income of at least $1,000,000 in two
consecutive quarters. These options were originally to be exercised no later
than December 31, 1999 however, the Board of Directors has determined to extend
such exercise period for an additional two years. In addition, if the
Corporation successfully completes a public offering of 5,000,000 shares of the
Corporation's stock or raises at least $5,000,000 in the Offering, Mr. Gable
will receive options to purchase an additional 500,000 shares of Common Stock at
$0.10 per share. In the event the Corporation terminates the Gable Agreement
for its convenience prior to the expiration thereof, the Corporation will
provide Mr. Gable with written notice of 90 days prior to the termination date
and compensation in an amount equal to five years of salary per the Gable
Agreement.
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
44
<PAGE>
current positions under the terms of their prior agreements. The Company expects
to sign new agreements with them shortly.
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 Company's shares as well as the term of all other
provisions of the employment agreements of E. David Gable, Chairman and Lowell
Farkas, President & CEO. Mr. Gable's term was extended until April 7, 2005 and
1,000,000 options that were due to expire on December 31, 1999 were extent to
December 31, 2001. Mr. Farkas agreement term was extended to August 30, 2005.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table reflects the beneficial ownership of the Corporation's
Common Stock as of December 31, 1999. The table includes directors, executive
officers, each person known to Management of the Corporation to own
beneficially, directly or indirectly, more than 5% of the Corporation's Common
Stock. All directors and executive officers as a group are included. Except as
otherwise indicated, the persons or entities listed below have sole voting and
investment power with respect to all Common Stock shown as beneficially owned by
them. Unless otherwise indicated, the address of all executive officers and
directors is the principal office of the Corporation.
<TABLE>
<CAPTION>
5% Beneficial Owners Number of Shares Percent of Class
- - -------------------- ---------------- ----------------
<S> <C> <C>
The Greater Metropolitan Corporation/(1)/ 3,133,874 5.22%
333 7th Avenue
New York, NY 10001
</TABLE>
/(1)/ Leonard Mezi is the sole stockholder of The Greater Metropolitan
Corporation and controls the corporation.
<TABLE>
<CAPTION>
Executive Officers and Directors Number of Shares Percent of Class
<S> <C> <C>
E. David Gable/(1)(2)(3)/ 1,253,100 2.05%
Lowell Farkas/(3)/ 925,000 1.52
Michael Eberle 2,807,300 4.68
Richard J. Greene/(3)/ 38,058 .06
Michael R. Faulks 370,370 .62
Barry N. Hunt/(4)/ 7,385 .01
Adnan Khan 0 0%
Walt Nawrocki 0 0%
Allan Kovitz 1,000 0%
All directors and executive officers 5,402,213 9.0%
as a group (9 persons)
</TABLE>
45
<PAGE>
/(1)/ Includes shares of Common Stock that the above individuals have a right to
acquire within 60 days pursuant to the exercise of options. Such shares are
deemed outstanding for the purpose of computing the percentage ownership of such
individuals, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the table.
/(2)/ Includes 248,000 shares issued to Mr. Gable in exchange for shares of
stock in DAR Products Corporation and for services rendered in connection with
the Exchange Agreement with Grandname Limited.
/(3)/ Messrs. Gable, Farkas and Greene were issued 500,000, 300,000 and 175,000
bonus shares of Common Stock, respectively, in 1998 based on 1997 net income.
All of such shares were issued pursuant to grant of discretionary bonuses by the
Company's Board of Directors, with respect to performance of the Company during
fiscal 1997. The shares were returned to the status of authorized but unissued
shares. Upon review of the re-stated 1997 financial statements on which the
bonuses were based and review of each employment agreement, the bonuses in
question were in fact earned. These shares will be returned to the employees.
/(4)/ Includes shares owned with his wife as tenants by the entirety. Does not
include 200,000 shares of Series A Preferred Stock convertible into 2,000,000
shares of Common Stock on May 18, 2000 or earlier, at any time into Common Stock
valued at $2,000,000 based on its then market value. Since market value of the
Company's Common Stock has been in excess of $1.00, the conversion right is not
likely to be exercised within 60 days.
ITEM 12. Certain Relationships and Related Transactions.
On June 25, 1999, American Champion Entertainment, Inc. a Delaware
corporation ("American Champion") loaned the Company $250,000, with an
origination fee of $25,000, fixed interest of $25,000 and warrants to purchase
the Company's Common Stock at an exercise price of $3.50 per share. E. David
Gable, the Corporation's Chairman, serves as a director of American Champion.
The American Champion loan is due December 31, 1999 and is secured by an option
to purchase 100% of the stock of RomNet, exercisable in the event of default of
such loan, at a price equal to two times gross sales for the 12 months prior to
the date such option is exercised, less any unpaid principal and/or loan fees or
interest on the loan. The Company entered into such loan agreement at arms-
length and the Board of Directors of the Company approved the transaction as
being in the best interest of the Corporation with particular reference to the
Company's financial condition and the lack of reasonable alternative sources of
financing. The Company has requested an extension of the payment terms of such
loan with conversion of the interest and origination fee to Common Stock of the
Company. The Company does not believe default on this loan would cause any
material adverse effect on the Company's financial condition. On February 17,
2000, American Champion Entertainment, converted its debt to equity with shares
to issued based on the trading value of the shares average for a period after
trading resumes plus 75,000 warrant at an exercise price of $3.50 per share that
expire on June 25, 2002.
TimeCast spun off DAR in December 1998. The Corporation had made loans to
DAR in the amount of approximately $57,000 to fund its operations since the
Corporation acquired all of DAR's assets and outstanding shares in May 1996.
The Corporation has agreed on
46
<PAGE>
March 16, 1999 to extend the service agreement to TimeCast until March 15, 2001.
The Corporation made loans to certain of its officers and directors from
time to time which were non-interest bearing and did not have a specified
repayment date. The Corporation determines whether it will make a loan, attach
any conditions or obligations to the loan, or what the repayment obligations
will be on a case by case basis. Typically, the loans are made at the
discretion of the executive officers. In the event of a large loan prior
approval will be sought from the Board of Directors. The loans are made to help
the Corporation's officers, directors and employees in time of personal need
and the Company believes that all wages may not be to industry standards. The
highest loans made during the last three years were $116,500 to E. David Gable,
$175,000 to Scott Caruthers, a former Director of the Corporation, and $46,664
to David Pearl, former Secretary to the Corporation. To date, all loans have
been paid back to the Corporation. In the event of termination of employment,
either voluntary or involuntary, any loans made to such officers must be repaid
at the time of such termination.
ITEM 13. Exhibits, List and Reports on Form 8-K.
Exhibits
The exhibits filed as a part of the Annual Report on Form 10-KSB/A for 1998
filed on January 25, 2000 are incorporated by referenced are listed in the
"Index of Exhibits" on the page following the signature page hereof.
Reports on Form 8-K.
No Reports on Form 8-K were filed during the fiscal year ended December 31,
1998. The following Reports on Form 8-K have been filed through December 1,
1999.
Report on Form 8-K as filed with the SEC on May 24, 1999 in connection with the
acquisition of Paramount.
Report on Form 8-K as filed with the SEC on September 28, 1999 in connection
with the acquisition of certain assets of Talidan by Westshire.
Report on Form 8-K/A as filed with the SEC on October 13, 1999 in connection
with the change in the Company's certifying accountant.
Report on Form 8-K/A as filed with the SEC on October 22, 1999 in connection
with a letter from Grant Thornton LLP to the SEC dated October 15, 1999.
Report on Form 8-K/A as filed with the SEC on October 25, 1999 in connection
with a letter from Grant Thornton LLP to the SEC dated October 15, 1999.
47
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
C O N T E N T S
---------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2 - F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4 - F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS F-6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
CARNEGIE INTERNATIONAL CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Carnegie
International Corporation and Subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, comprehensive loss,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carnegie
International Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 23 to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 23. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
March 18, 2000
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1999 1998
----------- -----------
CURRENT ASSETS (Restated)
Cash and cash equivalents $ 463,374 $ 837,649
Accounts receivable, net of allowance for
doubtful accounts of $931,417 and $48,000 2,634,755 699,688
Due from former subsidiaries - 1,568,937
Loans receivable 104,119 1,058,224
Inventory 353,993 145,128
Prepaid expenses and other current assets 97,263 56,589
Prepaid income taxes 26,046 -
---------- ----------
Total current assets 3,679,550 4,366,215
PROPERTY AND EQUIPMENT, less
accumulated depreciation and amortization of
$570,980 and $162,506 1,258,026 901,423
SOFTWARE DEVELOPMENT COSTS, less accumulated
amortization of $2,098,741 and $156,263 3,728,695 5,671,174
OTHER ASSETS
Intangibles, less accumulated amortization of
$2,966,502 and $195,539 39,720,405 3,374,992
Due from related parties 21,244 51,986
Due from former subsidiaries 206,112 -
Security deposits and other assets 28,552 50,756
----------- -----------
TOTAL ASSETS $48,642,584 $14,416,546
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Restated)
CURRENT LIABILIT ------------
<S> <C> <C>
Notes payable-Banks $ 159,000 $ 206,951
Advance on stock purchases 641,000 -
Current maturities of long-term debt 818,740 1,203,675
Current maturities of notes payable to stockholders and affiliates 1,546,382 259,898
Current maturities of capital lease obligations 72,822 -
Accounts payable and accrued expenses 7,596,753 2,596,448
Deferred revenue, current portion 20,519 75,043
------------ ------------
Total current liabilities 10,855,216 4,342,015
LONG-TERM LIABILITIES
Long-term debt, less current maturities 239,685 277,487
Long-term debt to stockholders and affiliates,
less current maturities 441,233 603,430
Long-term capital lease obligations, less current maturities 65,390 -
Deferred revenue less current portion 255,666 -
------------ ------------
TOTAL LIABILITIES $ 11,857,190 $ 5,222,932
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, B, E and F,
$1 par value; 40,000,000 authorized shares;
274,100 issued 274,100 274,100
Common stock, no par with a stated value of $0.01;
110,000,000 shares authorized; 62,959,534 issued
and 61,678,534 outstanding at December 31, 1999
and 55,796,154 issued and 53,018,135 outstanding at
December 31, 1998 629,595 557,961
Additional paid-in capital 62,721,886 24,212,256
Accumulated deficit (25,554,823) (14,565,339)
Foreign currency translation adjustment (4,364) (4,364)
------------ ------------
38,066,394 10,474,614
Less treasury stock at cost (1,281,000) (1,281,000)
------------ ------------
Total Stockholders' Equity 36,785,394 9,193,614
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,642,584 $ 14,416,546
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-------------------------------
1999 1998
------------ ------------
REVENUE (Restated)
Operating $ 20,329,354 $ 7,179,900
Sale of service contracts - 122,117
------------ ------------
Total revenue 20,329,354 7,302,017
COST OF SALES 11,111,552 2,950,232
------------ ------------
GROSS PROFIT 9,217,802 4,351,785
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 14,908,788 11,029,785
Impairment Expense 21,112 8,176,469
Depreciation and amortization 5,106,117 995,221
------------ ------------
Total operating expenses 20,036,017 20,201,475
------------ ------------
LOSS FROM OPERATIONS (10,818,215) (15,849,690)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (628,279) (227,081)
Interest income 135,905 229,112
Other income 340,295 681,367
------------ ------------
Total other income (expense) (152,079) 683,398
------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (10,970,294) (15,166,292)
INCOME TAXES 19,190 12,279
------------ ------------
LOSS FROM CONTINUING OPERATIONS (10,989,484) (15,178,571)
DISCONTINUED OPERATIONS:
Gain on sale of ECAC - 1,612,195
------------ ------------
NET LOSS $(10,989,484) $(13,566,376)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-----------------------------
1999 1998
----------- -----------
LOSS PER SHARE (Restated)
- - --------------
BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.17) $ (0.34)
DISCONTINUED OPERATIONS - .04
----------- -----------
NET LOSS $ (0.17) $ (.30)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
BASIC 62,851,192 44,579,804
DILUTED 62,851,192 44,579,804
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended
December 31,
-------------------------------
1999 1998
------------ ------------
COMPREHENSIVE LOSS (Restated)
Net loss $(10,989,484) $(13,566,376)
Foreign currency translation adjustment - (4,364)
------------ ------------
COMPREHENSIVE LOSS $(10,989,484) $(13,570,740)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- 6 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Additional Currency
-------------------- ------------------------- Paid-in Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustment
------- ---------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 -
as restated - - 38,835,486 388,355 14,732,345 (998,963) -
Net loss for the year - - - - - (13,566,376) -
Foreign currency
translation adjustment - - - - - - (4,364)
Issuance of common stock - - 9,227,100 92,270 4,190,234 - -
Shares issued in lieu of
compensation and other cases - - 2,179,268 21,793 900,939 - -
Issuance of warrants - - - - 415,132 - -
Notes payable converted to
common stock - - 1,358,000 13,580 270,620 - -
Exercise of stock options - - 3,635,500 36,355 1,000,636 - -
Shares issued in connection
with acquisitions 274,100 274,100 560,800 5,608 2,702,350 - -
------- ---------- ---------- -------- ----------- ------------ -----------
Balance at December 31, 1998
- as restated 274,100 $274,100 55,796,154 $557,961 $24,212,256 $(14,565,339) $ (4,364)
Net loss for the year - - - - - (10,989,484) -
Issuance of common stock - - 495,200 4,952 1,000,448 - -
Shares issued in lieu of
compensation and other cases - - 843,180 8,432 124,097 - -
Exercise of stock options - - 50,000 500 46,250 - -
Shares cancelled - - (1,175,000) (11,750) 11,750 - -
Shares issued in connection
with acquisitions 6,950,000 69,500 37,327,085 - -
------- ---------- ---------- -------- ----------- ------------ -----------
Balance at December 31, 1999 274,100 $274,100 62,959,534 $629,595 $62,721,886 $(25,554,823) $ (4,364)
======= ========== ========== ======== =========== ============ ===========
</TABLE>
Treasury Stockholders'
Stock Equity
------------ ---------------
Balance at January 1, 1998 -
as restated (1,281,000) 12,840,737
Net loss for the year - (13,566,376)
Foreign currency
translation adjustment - (4,364)
Issuance of common stock - 4,282,504
Shares issued in lieu of
compensation and other cases - 922,732
Issuance of warrants - 415,132
Notes payable converted to
common stock - 284,200
Exercise of stock options - 1,036,991
Shares issued in connection
with acquisitions - 2,982,058
----------- ------------
Balance at December 31, 1998
- as restated $(1,281,000) $ 9,193,614
Net loss for the year - (10,989,484)
Issuance of common stock - 1,005,400
Shares issued in lieu of
compensation and other cases - 132,529
Exercise of stock options - 46,750
Shares cancelled - -
Shares issued in connection
with acquisitions - 37,396,585
----------- ------------
Balance at December 31, 1999 $(1,281,000) $ 36,785,394
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
- 7 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES (Restated)
<S> <C> <C>
Net income (loss) $(10,989,484) $(13,566,376)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 5,106,117 995,221
Asset impairment loss 21,112 8,176,469
Gain on sale of subsidiaries - (1,612,195)
Gain on sale of print media - (646,928)
Issuance of stock as compensation 132,529 922,732
Issuance of stock options - 1,036,991
Changes in assets and liabilities
Accounts receivable - trade (1,935,067) 61,776
Accounts receivable - former subsidiary 1,362,825 (1,568,937)
Due from affiliates (131,428) 249,215
Inventory (192,371) (112,553)
Prepaid expenses (40,674) 31,969
Refundable income taxes (26,046) 12,279
Other assets 22,204 58,291
Accounts payable and accrued expenses 5,000,278 1,322,384
Deferred revenue 201,142 75,043
Others - net 21,709 432,241
------------ ------------
Net cash provided by (used in) operating activities (1,490,572) (4,132,378)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash (purchase) proceeds (769,076) 400,000
Purchase of property and equipment (412,912) (430,309)
Capitalized software - (446,733)
Loans receivable (95,113) (25,500)
Collection of notes receivable 1,032,724 201,989
Acquisition costs - (220,759)
------------ ------------
Net cash used in investing activities (244,377) (521,312)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 1,258,827 2,211,625
Payments on notes payable ( 1,729,515) (1,323,577)
Payments on capital leases 138,212 (1,271)
Advances on stock purchases 641,000 -
Purchase of treasury shares - -
Sale of common stock 1,052,150 4,282,504
Proceeds from sale of subsidiaries - 100,000
------------ ------------
Net cash provided by (used in) financing activities 1,360,674 5,269,281
------------ ------------
Effects of exchange rates on cash - (4,364)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (374,275) 611,227
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 837,649 226,422
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 463,374 $ 837,649
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid 189,933 227,081
============ ============
Income taxes paid 45,096 -
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 8 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
During 1999, the Company:
. purchased all of the stock of Paramount International
Telecommunications, Inc. for 6,950,000 shares of common stock
representing an aggregate price of $37,396,585.
During 1999 and 1998, the Company:
. issued 843,180 and 2,179,268 shares of the Company's common stock at a
value of $132,529 and $922,732, respectively, as compensation for
services rendered by various consultants, attorneys, and others;
During 1998, the Company:
. purchased all of the stock of ACC Telecom, Voice Quest and RomNet for
274,100 shares of preferred stock and 530,000 shares of common stock
and notes totaling $904,962, representing an aggregate price of
$3,937,171;
. received a $2,340,000 note receivable from the sale of the print media
business. $1,032,724 was collected on the note in 1999;
. extinguished its put obligation of $3,756,574 in exchange for
distribution rights covering eastern Europe.
. issued 1,358,000 shares of common stock in exchange for notes payable
of $284,200.
The accompanying notes are an integral part of these consolidated financial
statements.
- 9 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Organization and Basis of Presentation
--------------------------------------
CARNEGIE INTERNATIONAL CORPORATION (formerly A&W Corporation, Inc.,
which discontinued operations in September, 1985 (the "Company" or
"Carnegie") was incorporated under the laws of Colorado in June 1974.
The accompanying financial statements include the accounts of Carnegie
and its wholly owned subsidiaries:
1) Talidan Limited ("Talidan"), a British Virgin Islands
corporation;
2) Profit Through Telecommunications (Europe) Limited ("PTT"), a
United Kingdom corporation;
3) Talidan USA t/a Victoria Station ("Victoria"), a Florida
corporation;
4) Harbor City Corporation t/a ACC Telecom ("ACC Telecom"), a
Maryland corporation;
5) Voice Quest, Inc. ("Voice Quest"), a Florida corporation;
6) RomNet Support Services, Inc. ("RomNet"), a Massachusettes
corporation;
7) Carnegie Communications, Inc. ("CCI"), a Maryland corporation;
8) Paramount International Telecommunications, Inc. ("PIT"), a
Nevada corporation;
9) American Telephone & Computer, Inc. ("ATC") formerly Carnegie
Majesty Gold, Inc., a Maryland corporation;
10) ECAC Europe ("ECAC Europe"), a United Kingdom corporation;
11) Electronic Card Acceptance Corporation ("ECAC"), a Virginia
corporation.
Carnegie Communications was formed in 1998 but remained inactive until
January 1999. Paramount was acquired in February 1999 and was
accounted for as a purchase. The Company purchased certain assets
from a third party and assigned them to AT&C in April 1999. This
investment is recorded as a purchase. Results of operations since
January 1, 1999 for CCI, February 26, 1999 for PIT and April 6, 1999
for AT&C have been included in the consolidated financial statements
(see Note 2).
- 10 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a) Organization and Basis of Presentation
--------------------------------------
ACC Telecom, Voice Quest and RomNet were acquired in 1998 and were
accounted for as purchases. Results of operations since May 18, 1998
for ACC Telecom, November 20, 1998 for Voice Quest, and December 1,
1998 for RomNet have been included in the consolidated financial
statements. (See note 2).
ECAC, ECAC Europe and certain assets of Talidan were disposed of as of
December 31, 1998. (See note 3).
All significant inter-company accounts and transactions have been
eliminated in consolidation.
b) Business Operations
-------------------
The Company operates primarily in the United States, Canada, Mexico
the United Kingdom and South America. On the basis of revenue, the
Company's business operations were in:
1999 1998
----- -----
Sales, installation and servicing of telephone systems 89% 28%
Software and distribution rights - 28%
Marketing of telephone time through
international contracts, in South America 2% 26%
Restaurant operations in Miami, Florida. 9% 18%
The primary business segments and a description of the business
operations of each company are as follows:
Corporate
---------
Carnegie provides management services to its wholly owned
subsidiaries. Carnegie has no direct domestic operating assets or
business activities.
Telecommunications
------------------
Talidan markets telephone service through international and local
premium (0900) contracts for entertainment services.
- 11 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Business Operations (Continued)
--------------------
PTT is a telecommunications software company. Its software can be
utilized by voice recognition, touch-tone keypad, or bar code readers
for a broad range of applications. One of PTT's products is MAVIS(TM)
(Multi-language Automated Voice Independent System), an automated
attendant system, allowing telephone callers to reach or leave
messages for a person or a department of a company, by verbally
responding to prompts, without pressing buttons on the telephone.
ACC Telecom sells, installs and services telephone systems, voice mail
integration, computer technology, Local Area Network ("LAN") operating
systems and cable media in the Washington, DC, Maryland and Northern
Virginia areas.
Voice Quest, located in Sarasota, Florida, is involved in the
development of voice activated software applications that are
compatible with the Company's MAVIS(TM) product.
RomNet is engaged in the business of providing technical support
services for software and hardware, beta testing services, and
Internet support and services.
Carnegie Communications distributes the Company's MAVIS(TM) system and
other interactive voice response ("IVR") products.
Paramount provides telecommunication services to the lodging and pay-
telephone industries in the United States, Canada, and South American
and markets third-party manufactured PBX systems.
American Telephone and Computer, Inc. supplies, installs and services
telecommunications system in Illinois and Southern Wisconsin.
Restaurant
----------
Victoria operates a restaurant in Miami, Florida.
Financial Services
------------------
ECAC is an independent sales organization providing bankcard services
to U.S. merchants. Its primary business objective was to build a
portfolio of customer service contracts between itself and individual
merchants. On January 30, 1998, the stock of ECAC was sold.
- 12 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Business Operations (Continued)
-------------------
ECAC Europe is an independent sales organization providing bankcard
services to merchants in the United Kingdom. On January 6, 1998, the
stock of ECAC Europe was sold.
c) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the periods presented. Actual results could
differ from those estimates.
d) Revenue Recognition
-------------------
ECAC recognized income resulting from the sale of service contract
portfolios when title to these contracts is assigned to the purchaser.
The Company recognized revenue from bank services pursuant to the
terms of service agreements that are based upon a percentage of sales
volume transacted by the merchant.
Talidan recognizes revenue based on the number of call minutes of
calls that are processed after adjustment for estimated uncollectible
calls, based upon historical information. A provision for bad debts
is recorded when adverse factors with respect to collection are
evident, including chargebacks. Chargebacks represent credits for
service charges that the network provided and has been unable to
collect from the customer. Due to the fact that the Company
had no written agreements and no legal recourse for uncollected fees,
the company deferred recognition of revenue in 1999 until cash was
received.
PTT recognizes product revenues upon shipment to the customer.
Victoria recognizes revenue based on food and beverage sales at its
Miami, Florida restaurant.
ACC Telecom recognizes revenue from telephone sales and service when
the equipment is installed or service is provided.
Voice Quest recognizes revenue upon delivery and installation of
software products.
RomNet recognizes revenue on a monthly basis under the service
contracts to which it is a party. Amounts received in advance of the
services being provided are deferred.
- 13 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Revenue Recognition (Continued)
-------------------
Carnegie Communications recognizes revenue upon delivery of software
products.
Paramount recognizes revenue each month based on the gross proceeds to
be collected which are net of contractual allowances for uncollectible
fees charged by a third party billing agency. Product sales are
recognized upon delivery of products to the customer.
American Telephone and Computer recognizes revenue for telephone sales
and service when the equipment is installed or service is provided.
e) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
f) Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
g) Accounts Receivable
-------------------
For financial reporting purposes, the Company utilizes the allowance
method of accounting for doubtful accounts. The Company performs
ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses. The allowance is based on an experience
factor and review of current accounts receivable. Uncollectible
accounts are written off against the allowance accounts when deemed
uncollectible.
h) Inventory
---------
Inventory consists of telephone equipment, supplies, credit
authorization equipment and restaurant supplies, which are valued at
the lower of cost or market on a first-in, first-out basis.
i) Sales-Type Lease
----------------
A portion of the Company's revenue for the year ended December 1999
has been generated using a sales-type lease. The Company sold
equipment to a customer under a sales-type lease to be collected over
a three year period. Because the present value (computed at the rate
implicit in the lease) of the minimum payments under this sales-type
lease equals or exceeds 90 percent of the fair market value of the
equipment and/or the length of the lease exceeds 75 percent of the
estimated economic life of the equipment, the Company recognized the
net effect of this transaction as a sale.
- 14 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Property and Equipment
-----------------------
Property and equipment is stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, primarily on a
straight-line basis. The estimated service lives used in determining
depreciation are five to seven years for computers, software,
furniture and equipment. Leasehold improvements are amortized over the
shorter of the useful life of the asset or the lease term.
Maintenance and repairs are charged to expense as incurred; additions
and betterments are capitalized. Upon retirement or sale, the cost and
related accumulated depreciation of the disposed assets are removed
and any resulting gain or loss is credited or charged to operations.
k) Software Development Costs
--------------------------
Software development costs are charged to expense as incurred until
technological feasibility has been established for the product.
Software acquired and development costs incurred after technological
feasibility has been established are capitalized and amortized on a
straight line basis over a period of three years, commencing with
product release. The Company began amortizing software development
costs on December 1, 1998, the date that the software was released.
l) Research and Development
------------------------
Cost incurred in research and development activities are charged to
expense as incurred. In 1999 expenditures for research and development
were $254,987.
m) Intangibles
-----------
Intangibles consist of goodwill, covenants not to compete, assembled
workforce, customer lists, patent and license costs. Goodwill
represents costs in excess of net assets acquired in connection with
businesses acquired. Goodwill is being amortized to operations over 15
years. Non-compete agreements are being amortized over the term of the
contracts, on a straight-line basis. Assembled workforce is being
amortized over a period of three years on a straight-line basis.
Customer lists are being amortized over a period of 2-7 years. Patent
costs consist of application costs in connection with patent
registrations and applications. Patent costs are amortized over 5
years. License costs consist of certifications for billings in the
intra-state telecommunications business. License costs are amortized
over 10 years.
- 15 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
m) Intangibles (Continued)
------------
Should events or circumstances occur subsequent to the acquisition of
a business which bring into question the realizable value or
impairment of the related goodwill, the Company will evaluate the
remaining useful life and balance of goodwill and make adjustments, if
required. The Company's principal consideration in determining an
impairment includes the strategic benefit to the Company of the
particular assets as measured by undiscounted current and expected
future operating income of that specified groups of assets and
expected undiscounted future cash flows. Should an impairment be
identified, a loss would be reported to the extent that the carrying
value of the related goodwill exceeds the fair value of that goodwill
as determined by valuation techniques available in the circumstances.
n) Income Taxes
------------
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". The liability method
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between
the reported amount of assets and liabilities and their tax bases.
o) Offering Costs
--------------
Offering costs consist primarily of professional fees. These costs are
charged against the proceeds of the sale of common stock in the
periods in which they occur.
p) Advertising Costs
-----------------
Advertising costs are expensed as incurred and are included in
selling, general and administrative expenses. For the years ended
December 31, 1999 and 1998, advertising expense amounted to $494,540
and $1,164,698, respectively.
q) Fair Value of Financial Instruments
-----------------------------------
The carrying values of cash and cash equivalents, accounts receivable,
notes receivable, accounts payable and accrued expenses and income
taxes payable approximate fair value due to the relatively short
maturity of these instruments. The fair value of long-term borrowings
was determined based upon interest rates currently available to the
Company for borrowings with similar terms. The fair value of long-term
borrowings approximates the carrying amounts at December 31, 1999 and
1998.
r) Long-lived Assets
-----------------
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets and long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to
sell.
- 16 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
s) Translation of Foreign Currency
-------------------------------
The Company translates the foreign currency financial statements of
its United Kingdom subsidiary in accordance with the requirements of
SFAS No. 52, "Foreign Currency Translation". Assets and liabilities
are translated at current exchange rates, and related revenue and
expenses are translated at average exchange rates in effect during the
period. Resulting translation adjustments are recorded as a separate
component in stockholders' equity. Foreign currency transaction gains
and losses are included in the statement of operations.
t) Stock-Based Compensation
------------------------
The Company has adopted the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
u) Earnings Per Share
------------------
SFAS No. 128, "Earnings Per Share" requires presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS").
The computation of basic earnings per share is computed by dividing
earnings available to common stockholders by the weighted average
number of outstanding common shares during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on losses.
v) Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that it
was necessary to modify or replace portions of its software in order
to ensure that its computer systems will properly utilize dates beyond
December 31, 1999. The Company completed Year 2000 systems
modifications and conversions in 1999. Costs associated with becoming
Year 2000 compliant are not material. At this time, the Company cannot
determine the impact the Year 2000 will have on its key customers or
suppliers. If the Company's customers or suppliers don't convert their
systems to become Year 2000 compliant, the Company may be adversely
impacted. The Company is addressing these risks in order to reduce the
impact on the Company.
-17 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - ACQUISITIONS
During 1999, the Company made the following acquisitions:
Paramount
---------
On February 26, 1999, the Company acquired all of the issued and
outstanding stock of Paramount International Telecommunications, Inc.
of Vista, California for $37,396,585, consisting of 6,950,000 shares
of commons stock which are subject to Rule 144 restrictions.
American Telephone & Computers, Inc.
------------------------------------
On April 6, 1999, the Company acquired assets from RGG Communications
Svc. ("RGG") of Rockford, Illinois for $25,000 cash. The Company then
assigned these assets and the business of RGG to one of its
subsidiaries, American Telephone & Computers, Inc., which will conduct
the business of RGG.
The fair value of assets acquired and liabilities assumed during 1999
are summarized as follows:
American
Telephone &
Paramount Computers
-------------- --------------
Current assets 380,724 1,388
Property and equipment 282,309 2,500
Other assets 837,881
Goodwill 38,350,485 21,112
Licenses 15,750
Liabilities (2,470,564)
----------- ---------
Purchase Price $37,396,585 $ 25,000
=========== =======
The value of the common stock issued for Paramount was $5.38 per
share, which was discounted 15% off the market price.
During 1998, the Company made the following acquisitions:
ACC Telecom
-----------
On May 18, 1998, the Company acquired all of the outstanding stock of
ACC Telecom for $2,467,855 consisting of a $1,000,000 note payable
in quarterly installments over five years, plus 200,000 shares of
the Company's Series A preferred stock. After a two year holding
period, this preferred stock is convertible into the greater of
$2,000,000 worth of or 2,000,000 shares of the Company's common stock.
In the event the Company declares a common stock dividend, or the
market price of the Company's common stock exceeds $2.00 per share,
the preferred stock may be converted prior to the end of the two year
holding period. This acquisition was accounted for as a purchase.
-18-
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - ACQUISITIONS (Continued)
Voice Quest
-----------
On November 20, 1998, the Company acquired all of the outstanding
stock of Voice Quest, a Florida corporation, for $506,985. Voice
Quest is involved in the development of voice activated software
applications that are compatible with the Company's MAVIS(TM)
product. Consideration consisted of 21,600 shares of Series E
Preferred Stock that is convertible into the Company's common stock,
which shares are subject to Rule 144 restrictions. Conversion of the
Preferred Series E Stock to common will be based on the greater of
common stock with a value of $270,000 or 216,000 shares of common
stock if the value per share during the business day immediately
preceding expiration of the conversion period is greater than $1.25
per share. Conversion may not take place until November 20, 2000. In
addition, the sellers received 230,000 shares of common stock subject
to Rule 144 restrictions, at closing. Additional consideration
included a non-interest bearing note to the sellers of $102,084. This
note is payable in quarterly installments of $8,507 over a three-year
period commencing January 1, 1999. The value of this obligation
discounted at 10% is $90,000. The Company has recorded this
acquisition as a purchase.
RomNet
------
On December 1, 1998, the Company acquired all of the assets, and
assumed all of the liabilities of RomNet for $962,330. The
consideration paid was 52,500 shares of Series F preferred stock,
which automatically converts into common stock of the Company on
December 1, 2000. The Series F preferred stock will convert into the
greater of $700,000 of common stock or 525,000 shares of stock if the
average closing price of the Company's common stock is $1.33 or
greater for the five business days preceding conversion. In addition,
the Company assumed liabilities, including equipment leases, totaling
$577,890. This acquisition was accounted for as a purchase.
The fair value of assets acquired and liabilities assumed during 1998
are summarized as follows:
ACC Telecom Voice Quest Rom Net
------------- -------------- ------------
Current assets $ 773,303 $ 7,632 $ 42,761
Property and equipment 163,935 14,012 94,200
Other assets 727,259 379 428,552
Goodwill 1,376,591 489,228 974,707
Liabilities (573,233) (4,266) (577,890)
---------- -------- ----------
Purchase price $2,467,855 $506,985 $ 962,330
========== ======== ==========
- 19 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - DISPOSITIONS
ECAC
----
On January 30, 1998, the Company entered into an agreement to sell all
of the outstanding shares of ECAC, its credit card processing
subsidiary. Consideration for the sale was $100,000 paid at closing.
The Company realized a gain on sale of the stock of approximately $1.4
million. At the time of the sale the liabilities of ECAC exceeded its
assets by approximately $1.3 million. Accordingly the total of the
sales proceeds and the underlying net asset value of the company sold
represent the gain reported.
At the time of sale, ECAC owed the Company approximately $1.6 million
on a non-interest bearing debt which the buyer assumed. This
obligation, which was due in December 1998, was discounted to reflect
imputed interest at 10% per annum on the obligation and is classified
on the balance sheet as Accounts Receivable - former subsidiaries.
To secure this obligation, ECAC's management personally guaranteed the
debt and delivered one million free trading shares of Carnegie stock
as collateral for the amount due by ECAC.
In December 1998, the Company's management agreed to extend the due
date of the amount due from ECAC. This extension was granted to
enhance the Company's negotiating position with respect to a pending
venture between Nuefield Investments, ECAC, and the Company. A 7% note
was received from ECAC and Nuefield Investments agreed to substitute
391,000 shares of Carnegie shares valued at $770,000 as collateral on
behalf of the management of ECAC. On March 31, 1999 the collateral was
sold in satisfaction of the balance due on the note.
The Company has entered into an agreement with the purchaser of ECAC
and a bank, whereby the Company is to receive a distribution of 40% of
the gross profit arising from the services sold to new merchants that
the Company is instrumental in recruiting. The Company has the
authority to direct these customers to other financial institutions
without the joint venture partner's consent. Revenue realized by the
Company approximate the direct cost of the Company's employees.
ECAC Europe
-----------
On January 6, 1998, the Company entered into an agreement to sell the
outstanding shares of ECAC Europe, in consideration for a $250,000
note bearing interest at 6% per annum, that matures in June 1999. A
gain of $250,000 has been recorded on the sale. The note has not been
paid and a bad debt expense of $250,000 has been recorded.
- 20 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - DISPOSITIONS (Continued)
Sale of Certain Talidan Assets
------------------------------
On June 22, 1998 the Company sold its business derived from print
media, including the rights to certain telephone numbers, line access,
and advertising materials used in its operations in South America for
a $2,340,000 note bearing interest at 7%. The lines sold were not
compatible with the Company's operations. In addition to the sale of
the business, the Company agreed to release a certain consultant to
the Company from its covenant not to compete with the Company.
Operations of the Print Media Business is summarized as follows:
1998
--------
Revenue $263,257
========
Cost of sales $210,606
========
Operating expenses $ 71,684
========
The goodwill written off on the sale of the print media business was
based on an allocation of print media income compared to the total
income of Talidan. The resulting percentage of 17% was used to
allocate goodwill in the amount of $1,380,572 to the gain on the sale
of the print media portion of the business. The Company also wrote off
the net book value in the amount of $312,500 of the covenant not to
compete with one consultant with whom the contract was terminated.
Payments on the $2,340,000 note are due quarterly commencing on
December 22, 1998 in the amount of $585,000 plus accrued interest. The
Company received a portion of the first payment on October 26, 1998,
which was in advance of its due date. As a result of the early partial
payment, the Company agreed to extend the payment on the balance until
January 27, 1999. Through March 31, 1999, a total of $1,335,000 of
principal and interest had been collected on the note. Due to the fact
that no payments were received on the note after March, 1999, a
reserve against the collectibility of the note has been established in
the amount of $1,115,487 at December 31, 1998. The collectible balance
recorded on the balance sheet at December 31, 1998 is $1,032,724. In
the event of non- payment, the non-compete agreements will become in
force again and the Company will have the right to recover the assets
sold.
- 21 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - DUE FROM FORMER SUBSIDIARIES
Amounts due from former subsidiaries consist of the following at
December 31, 1999 and 1998:
1999 1998
---- ----
ECAC (See Note 4) - $1,512,195
Timecast (See Note 20) 206,112 56,742
--------- ----------
$ 206,12 $1,568,937
========= ==========
NOTE 5 - LOANS RECEIVABLE
Loans receivable consist of the following at December 31,
1999 1998
---------- ----------
Talidan asset sale - $1,032,724
Other 104,119 25,500
---------- ----------
$ 104,119 $1,058,224
========== ==========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31,
--------------------------
1999 1998
---------- ----------
Vehicles $ 382,150 $ 202,594
Computer equipment and software 678,119 431,969
Furniture and office equipment 376,574 389,366
Leasehold improvements 67,112 40,000
Telecommunication equipment 325,051 -
---------- ----------
1,829,006 1,063,929
Less: Accumulated depreciation
and amortization 570,980 162,506
---------- ----------
Property and equipment, net $1,258,026 $ 901,423
========== ==========
Depreciation expense for the years ended December 31, 1999 and 1998
was $378,663 and $60,464, respectively.
- 22 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - INTANGIBLES
Intangibles are summarized as follows as of:
December 31,
----------------------------
1999 1998
----------- -----------
Goodwill $41,404,026 $ 2,344,820
Acquisition cost 73,526 73,526
Covenants not to compete 5,000 5,000
Patents and licenses 57,170 -
Assembled workforce 466,242 466,242
Customer lists 680,943 680,943
----------- -----------
42,686,907 3,570,531
Less: accumulated amortization expense 2,966,502 195,539
----------- -----------
Total intangibles $39,720,405 $ 3,374,992
=========== ===========
The Company determined the fair value of assets and liabilities
acquired as follows:
The value of the assembled work force was determined based on the
salary cost, fringe benefits, training time, and recruiting costs that
the Company would expect to incur over the six month period,
management estimates that it would take to recruit and assemble the
necessary personnel in order to conduct operations.
The value of the customer lists is based on the projection of
discounted cash flows from sales made to customers of the Company over
the average life of the customers.
The following describes the allocations of the purchase price related
to intangibles for the companies acquired over the past three years.
Paramount
Amount Period
----------- --------
Goodwill $39,059,208 15 years
Licenses 44,115 10 years
-----------
Total $39,103,323
===========
Paramount provides telecommunication services to the lodging and pay-
telephone industries in the United States, Canada and Mexico. The
Company markets third-party manufactured PBX systems. Such products
represent the primary systems used by hotels to provide telephone-
related services to their guests, as well as their information
necessary to bill guests for telephone calls and properly manage the
telecommunications environment at the hotel. The Company bills and
collects for the hotels, through a third-party service, the cost of
all calls initiated by the hotel guest. Also, the Company provides
live-operator assistance and billing services for long-distance
collect calls for the pay-telephone industry.
-23-
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - INTANGIBLES (Continued)
American Telephone & Computer
At December 31, 1999, the Company determined that the goodwill of
$21,112 recorded upon the purchase of the RGG assets was completely
impaired; consequently, goodwill was written off to operations in
1999.
ACC Telecom
Amount Period
----------- --------
Goodwill $1,350,111 15 years
Customer List 252,391 7 years
Assembled Workforce 466,242 3 years
----------
Total $2,068,744
==========
ACC Telecom is a telephone interconnect company that sells, installs
and services telephone systems to small businesses. ACC Telecom
distributes products manufactured by others and purchases these
products directly from the manufacturers and from distributors.
ACC Telecom's customers do not replace telephone systems with any
regularity. However, additional products are sold to existing
customers and service agreements are sold at the time of the original
sale of equipment. Revenue from service agreements is recognized over
the contract term. The value of the customer list, based on discounted
cash flow derived from sales other than system sales, was determined
by management to be $252,391 and is being amortized over 7 years,
which is the average historical business life of a customer of ACC.
ACC Telecom had 27 employees at the time it was acquired. Other than
the shareholder/operator, the employees consisted of sales personnel,
service technicians, service helpers and general office personnel.
Sales and service technicians possess certain levels of technical
expertise. Similar skills are found in sales and service personnel in
the computer industry. Often these personnel will migrate from one
industry to another. Nevertheless, the Company believes there is value
to the assembled workforce. The value arrived at was based on existing
salary levels, recruiting costs, normal turnover, and training time.
The total tangible cost assigned to the assembled workforce is
$466,242. The cost is being amortized over three years. There are no
other identifiable intangibles.
ACC Telecom does not have any contracts with its suppliers. ACC
Telecom does not own any patents nor does it own any proprietary
technology.
PTT
PTT has no identifiable intangible assets or goodwill.
- 24 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - INTANGIBLES (Continued)
Voice Quest
Voice Quest has no identifiable intangible assets. The goodwill
associated with the acquisition of Voice Quest of $489,228 is being
amortized over fifteen years. Voice Quest does not have any contracts
with any of its suppliers. Voice Quest does not own any patents or any
proprietary technology that has reached the point of commercial
feasibility.
The Company determined complete impairment of goodwill of Voice Quest
at December 31, 1998 and, accordingly, wrote-off this asset to
operations.
RomNet
Amount Period
----------- --------
Goodwill $ 974,707 15 years
Customer List 428,552 2 years
----------
Total $1,403,259
==========
The value of the customer list, based on historical income derived
from continuing customers, was determined by management to be
$428,552, using a discounted cash flow approach. The customer list is
being amortized over 2 years based on the expected business life of a
customer of the Company. RomNet does not have any contracts with any
of its suppliers. RomNet does not own any patents or proprietary
technology.
Victoria Station
Victoria Station is a family style restaurant. It owns furniture,
fixtures and kitchen equipment. The company does not have any
contracts, patents, technology or other identifiable intangible
assets. Goodwill of $20,000 is being amortized over fifteen years.
- 25 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - INTANGIBLES (Continued)
Talidan
The business of Talidan has four distinct operational elements, all of
which contribute to the generation of revenue. They are (a) television
(and formerly print) advertising and promotion, (b) agreements with
reliable telephone switch operators, (c) telephone carriers that have
the ability to record, track and bill "900" and long distance
telephone calls and (d) access to financial resources to buy media and
place advertising. Elements (a) and (b) were provided by consultants
to the Company. Elements (c) and (d) were an inherent part of the
nature of the business and were totally outside of the control of any
of the consultants. The tangible net assets acquired on September 29,
1997 amounted to $357,561. The acquisition included the execution of
covenants not to compete with two consultants that were providing
service to Talidan. The consulting agreements were for a period of one
year and may be canceled by either party on one year's notice. These
consultants were:
Anthony Redfern - Contacts and service arrangements with switch
operators
Matys Media, Inc. Print media advertising and promotion
Management allocated the purchase price of Talidan as follows:
Amount Period
---------- --------
Covenant Redfern $ 500,000 2 Years
Covenant Matys Media 500,000 2 Years
Goodwill (includes net liabilities assumed) 8,649,076 15 Years
----------
Total $9,649,076
==========
The value assigned to the covenants represents additional imputed
compensation cost based on the historical compensation of the
consultants over the amounts set forth in the consultants' service
agreements. The covenants are being amortized over two years, which
considers the notice provision described above.
Talidan does not have patents, trademarks, technology contracts or
other identifiable intangibles.
Several adverse factors negatively impacted Talidan's business in
1998. Long distance rates increased by more than 100% in February
1998. The national telecom service provider was privatized in July
1998, suspended payments in August 1999 and then cancelled its
existing contracts in November 1998. Additionally, a judge in Sao
Paolo blocked access to 0900 services in October 1998. As a result of
these negative factors. the Company determined that there was a
complete impairment of the intangible assets of Talidan at December
31, 1998 and, accordingly, wrote-off these assets to operations.
- 26 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - NOTES PAYABLE - BANKS
Notes payable - banks - consist of the following at:
December 31,
---------------------
1999 1998
--------- ---------
First Union National Bank $ 99,000 $ 57,000
First National Bank 60,000
Cambridge Trust Company - 149,951
-------- --------
$159,000 $206,951
======== ========
The Company has a $100,000 demand line-of-credit with First Union
National Bank. Interest is due monthly at a rate of 2% over the prime
rate (effective rate of 10.5% at December 31, 1999). Advances drawn
under this line as of December 31, 1999 and 1998 were $99,000 and
$57,000.
The Company has a $86,200 line of credit with First National Bank.
Interest is due monthly at a rate of 9.5% per annum. Advances drawn
under this line were $60,000 at December 31, 1999. The line of credit
is secured by equipment of Paramount and guaranteed personally by two
officers of Paramount.
The Company is obligated on several notes payable to Cambridge Trust
Company that have outstanding balances, aggregating $149,951 at
December 31, 1998. These notes are due on demand and accrue interest
at rates that vary from 10.5% to 12.75% per annum. The notes were paid
off in 1999.
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following as of:
December 31,
--------------------------
1999 1998
---------- ----------
Comdial 90,000 -
Lloyds Bank 7,444 $ 18,437
Former shareholder of PTT 25,858 91,098
CNI - 320,586
Estate of former owner of ECAC 126,000 126,000
First Mariner Bank - Auto loans 98,251 85,021
Union Planter Bank 129,500 160,333
Sentinel 250,000 -
Mace Meeks 75,000 -
Quantum 100,000 -
First National Bank of North County 58,586 -
Preferred Investments - 168,612
Preferred Investments - Trident - 180,787
Sixteen Six, Inc. - 171,600
Various Capital Leases 138,212 116,811
Various Auto Loans 97,786 11,877
Miscellaneous - 30,000
---------- ----------
1,196,637 1,481,162
Less: current maturities 891,562 1,203,675
---------- ----------
$ 305,075 $ 277,487
========== ==========
- 27 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - LONG-TERM DEBT (Continued)
The Company is obligated to Sentinel United under a promissory note
dated March 2, 1999 in the principal amount of $250,000. The note
bears interest at the rate of 12% per annum and was due on September
2, 1999. The note has not been paid and is currently in default.
The Company is obligated to Mace Meeks under a promissory note dated
July 22, 1999 in the principal amount of $75,000. The note is past due
and is guaranteed by the Company's chairman.
The Company is obliged to Quantum Financial Corporation under a
promissory note dated May 12, 1999 in the principal amount of
$100,000. The note provides for interest at the rate of 10% per year
and is due on March 31, 2000.
The Company is obligated on a note payable to First National Bank of
North County. The note is dated March 30, 1998, for $122,000. Interest
at 9.25% is payable monthly along with monthly principal payments of
$3,902. The note matures on April 15, 2001, and is collateralized by
certain telecommunication equipment of Paramount and the personal
guarantee of two executive officers of Paramount. The outstanding
balance at December 31, 1999 is $58,586.
On January 1, 1999, the Company entered into a revolving line of
credit for $250,000 with Comdial, a major supplier, expiring on June
30, 2000. The terms call for interest at prime +.5% payable monthly.
The outstanding balance on the note at December 31, 1999 is $90,000.
The Company is obligated on a $43,233 note to Lloyds Bank. The note
bears interest at 9.99% and is payable in equal monthly installments
of $918. This working capital loan is guaranteed by the Department of
Trade and Industry, a branch of the United Kingdom. A balance of
$7,444 was outstanding at December 31, 1999.
- 28 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - LONG-TERM DEBT (Continued)
The Company is obligated under several notes payable due to former
shareholders of PTT. The notes are payable on demand, non-interest
bearing and had a balance due of $25,858 at December 31, 1999. One of
these former shareholders, Applied Knowledge Limited ("Applied"), is
currently controlled by shareholders of Carnegie. The balance due
Applied at December 31, 1999 was $5,555.
The Company is obligated on notes due CNI, a management company
partially owned by a shareholder. The notes had an unpaid principal
balance of $320,586 at December 31, 1998. The notes were due on
demand, accrued interest from 12% to 25% per annum and were paid off
in 1999.
The Company is obligated on a note to the estate of the former owner
of ECAC in connection with the original acquisition. The unpaid
balance of the note was $126,000 at December 31, 1999 and 1998. The
Company has accrued an additional $130,653 at December 31, 1998 for a
disputed amount on this note.
The Company entered into loan agreements with First Mariner Bank in
connection with the purchase of four automobiles. The notes bear
interest at rates ranging from 8.5% to 10.25% per annum and are
payable in monthly installments totaling $1,938 in 1998 and $2,608 in
1999, including interest through March 2004. The loans are secured by
liens on the vehicles. The total balance of these notes was $98,251
and $85,021 at December 31, 1999 and 1998, respectively.
The Company is obligated on a $185,000 note to Union Planter's Bank.
The note bears interest at prime + 2% (10.5% as of December 31, 1999)
and is payable in equal installments of $3,083 per month starting in
May, 1998, with the balance due in full on January 15, 2001. The debt
is secured by a first lien on all assets of Victoria Station. A
balance of $129,500 was outstanding at December 31, 1999.
The Company was obligated on several notes to Preferred Investments,
Limited totaling $168,612 at December 31, 1998. The notes had
maturities ranging from 60 to 180 days, accrued interest ranging from
8% to 12% per annum and were paid off in 1999.
The Company was obligated to Trident, Ltd. on a note of $180,787 at
December 31, 1998. The note accrued interest at 18% per annum and was
paid off in 1999.
- 29 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - LONG-TERM DEBT (Continued)
The Company had a note payable to Sixteen Six, Inc. with an unpaid
balance of $171,600 at December 31, 1998. The note accrued interest at
10% per annum and was paid off in 1999.
The Company is obligated on several capital leases for vehicles and
office equipment that have outstanding balances aggregating $138,212
at December 31, 1999. The lease terms range from 1 to 5 years and
accrue interest at rates that vary from 7.5% to 20% per annum.
The Company is obligated on several notes in connection with the
purchase of five vans during 1999. The notes bear interest at rates
ranging from 3.1% to 5.1% and are payable in monthly installments of
$2,873 per month, including interest. The total outstanding balance of
these notes at December 31, 1999 is $97,786. The loans are secured by
liens on the vehicles.
Scheduled annual maturities of long-term debt as of December 31, 1999
are as follows:
Debt Lease
Year Amount Obligation
------ ----------- ----------
2000 818,740 72,822
2001 159,954 28,679
2002 51,510 24,066
2003 26,262 12,645
2004 1,959 -
----------- ----------
$ 1,058,425 $ 138,212
=========== ==========
The aggregate carrying value of the long-term debt at December 31,
1999 and 1998 approximates market value.
NOTE 10 - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES
Notes payable to stockholder and affiliates are as follows:
December 31,
--------------------------
1999 1998
---------- ----------
Former shareholders of ACC Telecom $ 713,298 $ 683,298
Former shareholders of Voice Quest 68,056 107,500
Affiliate of RomNet 73,407 72,530
Affiliate of Paramount 1,090,292 -
Affiliate of PTT 42,562 -
---------- --------
1,987,615 863,328
Less: current maturities 1,546,382 259,898
---------- --------
$ 441,233 $ 603,430
========== ========
- 30 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES (Continued)
In connection with the acquisition of ACC Telecom in February 1998,
the Company signed a $1,000,000 non-interest bearing note, payable
quarterly over five years. At the time of the acquisition, the note
was valued at $814,962, based on a discount at Carnegie's average
incremental borrowing rate of 8.37%. The outstanding balance on the
note is $633,298 and $683,298 as of December 31, 1999 and 1998,
respectively. The creditors have effected a lien against all assets
and common stock of ACC Telecom as security for this debt.
Additionally, the Company is obligated to two executive officers of
ACC Telecom on two notes for $70,000 and $10,000, respectively,
bearing interest at 8% and maturing June 2000 and March 2001,
respectively.
In connection with the acquisition of Paramount International
Communications, Inc., the Company is obligated tot he Eberle Family
Trust under a note dated September 30, 1998, in the original amount of
$1,224,749. The note bears interest payable monthly at 10% and matures
in June 2000. The outstanding balance at December 31, 1999 is
$1,090,292, plus accrued interest of $269,856. The accounts
receivable, current contracts, furniture, fixtures, equipment and
inventory of Paramount are collateral as guarantee for payment of this
debt.
The Company is obligated to two officers of PTT on notes dated June 1,
1999 and September 12, 1997 in the amounts of $11,310 and $31,252,
respectively. Both notes have unspecified due dates and interest
rates. The outstanding balances at December 31, 1999 are $11,310 and
$31,252, respectively.
In connection with the acquisition of Voice Quest in November, 1998,
the Company signed a $102,084 non-interest bearing note, payable to
two former shareholders of Voice Quest in quarterly payments over
three years. At the time of the acquisition, the note was valued at
$90,000 based on a discount at Carnegie's average incremental
borrowing rate of 8.37%. The outstanding balance on the note is
$68,056 and $90,000 as of December 31, 1999 and 1998, respectively.
In connection with the acquisition of RomNet in December 1998, the
Company assumed certain liabilities owed to a former shareholder of
RomNet. The outstanding balance was $50,861 and $72,530 at December
31, 1999 and 1998, respectively. Additionally, the Company owes a
former shareholder of RomNet $22,546 at December 31, 1999.
- 31 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - NOTES PAYABLE TO STOCKHOLDERS AND AFFILIATES (Continued)
Scheduled annual maturities of these obligations at December 31, 1999
are as follows:
Debt
Year Amount
------ ----------
2000 1,546,382
2001 239,594
2002 185,072
2003 16,567
2004 -
----------
$1,987,615
==========
The aggregate carrying value of the long-term debt at December 31,
1999 approximates market value.
NOTE 11 - ADVANCES ON STOCK PURCHASES
Advances on stock purchases consist of the following:
American Champion Entertainment $ 300,000
Fountainhead, Inc. 250,000
Jonathan Mirsky 91,000
----------
$ 641,000
==========
The Company is obligated to American Champion Entertainment under a
promissory note dated June 25, 1999, in the principal amount of
$250,000. The note provides for interest in the amount of $25,000 and
was due December 31, 1999. Additionally, the Company is to pay a fee
of $25,000 and is to issue warrants to purchase 75,000 shares of
common stock at an exercise price of $3.50, exercisable at any time
prior to June 25, 2002. The note, including interest and fee has not
been paid and is in default. The note provides that upon default, the
holder shall exercise its option to acquire all of the outstanding
stock of Romnet. On February 17, 2000, the parties entered into a
subscription agreement pursuant to which the Company agreed to issue
shares of common stock to satisfy the amount of $300,000 divided by
the 15 day average closing price of the Company's common stock
following the date on which the shares resume trading. The option to
acquire RomNet has not been exercised and has been cancelled.
The Company is obligated to Fountainhead, Inc. for advances of
$250,000 received pursuant to a stock purchase agreement for the sale
of 1,250,000 shares of Rule 144 common stock at .40 a share. The
investor has the right of recision if the common stock of the Company
doesn't trade within a specified period of time (10 weeks plus a
possible extension of 30 days from the date the full purchase price is
received). To date, not additional funds have been received and no
stock has been issued.
- 32 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - ADVANCES ON STOCK PURCHASES (Continued)
The Company is obligated to Jonathan Mirsky, an investor, for an
advance of $91,000 received pursuant to a letter agreement dated
November 22, 1999, whereby the Company agreed to grant options to
purchase 300,000 shares of common stock subject to Rule 144 at a price
of .75 per share warrants to purchase 300,000 shares at .25 per share.
An additional $48,000 was received in January 2000.
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of:
December 31,
--------------------------
1999 1998
---------- ----------
Accounts payable $2,586,230 $1,191,778
Accrued liabilities 5,010,523 1,404,670
---------- ----------
$7,596,753 $2,596,448
========== ==========
NOTE 13 - PUT OPTION/SALE OF DISTRIBUTION RIGHTS
On December 8, 1998, the Company entered into a Distributor Agreement
with Tiller International Limited, whereby, in exchange for a release
on a put option which it had acquired (see Note 3 - "PTT and
Talidan"), the Company appointed and designated Tiller International
Limited as the exclusive authorized distributor of the MAVIS(TM)
software in certain countries of Eastern Europe.
Under the terms of the agreement, Carnegie is obligated to support the
distributor in its effort to promote the sale of the software at the
distributor's expense; provide reasonable technical and/or sales
training assistance for the distributor's customers at the
distributor's request and expense; support the distributor by
providing it, upon request, with all reasonable quantities of
literature, catalogs, advertisements, circulars, and other related
materials at cost plus 10%; and to provide a master disk which would
allow the distributor the right to 1,000 copies of the MAVIS(TM)
software.
The Company was relieved of the put obligation contained in the option
agreement. However, the options were not cancelled and were
subsequently exercised. The amount attributable to the put feature,
$3,107,564, has been credited to equity.
- 33 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Operating leases
----------------
The Company's future minimum annual aggregate rental payments, for
office space, required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year are as
follows:
2000 $ 667,404
2001 613,459
2002 521,006
2003 268,299
2004 132,589
----------
$2,202,757
==========
Rent expense under operating leases for the year ended December 31,
1999 and 1998 was approximately $630,613 and $303,449, respectively.
Employment Agreements
---------------------
The Company has entered into various employment agreements as follows:
. A five-year agreement commencing May 10, 1996 providing for an
annual salary of $80,000, plus certain benefits.
. A two-year agreement commencing May 15, 1997, with an extension
through August 30, 2003, providing for an annual salary of
$100,000 - $200,000.
. A five-year agreement commencing August 18, 1997, providing for
an annual salary of $75,000, plus certain benefits.
. A five-year agreement commencing April 8, 1998, with an extension
through April 8, 2005, providing for an annual salary of
$200,000, plus bonus.
. A five-year agreement commencing May 18, 1998 providing for an
annual salary of $125,000.
. A five-year agreement commencing July 31, 1998 providing for an
annual salary of $75,000.
- 34 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
. Four five-year agreements commencing February 28, 1999, providing
for an annual salaries of $130,000 each, plus bonuses.
Common Stock Subject to Recission
---------------------------------
Certain of the stock issuances of the company during 1996, 1997, and
1998 may not have been in full compliance with the rules and
regulations under the Securities Act and applicable state securities
laws. The Corporation offered to the purchasers of such stock
issuances a right to rescind their purchases and receive a full refund
of their purchase price, plus interest. No purchaser has elected to
rescind. At December 31, 1998, the statute of limitations had not
expired on the shares issued in 1998. The Company acknowledges that it
is possible that the Company may be subject to regulatory action by
federal and state securities regulatory authorities in connection with
such sales. Management and the Company's counsel believe that the
effect of any possible regulatory action would not have a materially
adverse effect on the financial position and results of operations of
the Company.
No purchaser elected to rescind and the statute of limitations expired
in 1999. Accordingly, these shares have been classified within
permanent equity in these financial statements as of December 31,
1998.
After trading on the AMEX for one day, the SEC advised the Corporation
on April 29, 1999 that certain accounting issues remained unresolved
from the Company's prior filing of Form 10-SB/A with the SEC and
trading of the Corporation's common stock on AMEX was suspended. In
October 1999, the Company was notified by the AMEX of a de-listing
recommendation by the AMEX listing staff. The Company had filed an
appeal with the AMEX. The appeal was denied and a de-listing occurred
on January 31, 2000.
The corporation and a number of its current officers and directors are
parties to several lawsuits which purport to be class actions filed on
behalf of shareholders of the Corporation. These actions purport to
allege violations of federal securities laws in connection with the
Company's filing with the Securities and Exchange Commission of a Form
10KSB on October 28, 1998. On March 20, 2000, a consolidated complaint
was filed in the United States district court in Maryland. The
Company's insurer under its Directors, Officers and Corporate
Liability Insurance Policy has undertaken representation of all of the
defendants in the several lawsuits. The Policy contains a $150,000
retention, applicable to defense costs which the insurance company has
waived.
In February 1999, the Company received and accepted a non-binding
letter of intent to purchase all of the outstanding stock of Talidan
in a stock for stock exchange. The letter of intent is subject to due
diligence by both parties to the possible transaction. The transaction
subject to this letter of intent has not been consummated as of March
2000.
- 35 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In September 1999, the former shareholders of Paramount International
Telecommunications, Inc. filed liens against all accounts receivable,
all contracts, furniture, fixtures, equipment and inventory of
Paramount International Telecommunications, Inc. to secure a note
payable of $1,224,749 plus interest and payments of $1,200,000 plus
interest in connection with the sale of Paramount to Carnegie in
February 1999.
In November 1999, Victoria Station entered into a financing
arrangement with IGT Services, Inc., a discount credit card company,
whereby IGT advances funds and is reimbursed a portion of revenues
generated by customers who use the IGT credit card. IGT has effected a
lien on all Victoria Station assets.
In December 1999, the former shareholders of ACC Telecom filed liens
against all the assets of ACC Telecom and the corporate stock,
representing said ownership to secure a note payable of $683,298 due
them in connection with the sale of ACC Telecom in May 1998.
Rent expense under operating leases for the year ended December 31,
1999 and 1998 was approximately $630,613 and $303,449, respectively.
The Company is also a party to claims and lawsuits arising in the
normal course of operations. Management is of the opinion that
exposure from these claims and lawsuits have either been provided for
or do not have a material effect on the financial position of the
Company at December 31, 1999.
NOTE 15 - CONVERTIBLE PREFERRED STOCK
The following Convertible Preferred stock shares were issued and
outstanding:
December 31,
-------------------
1999 1998
------- -------
Series A, $1 par value; 200,000 shares authorized 200,000 200,000
Series E, $1 par value; 21,600 shares authorized 21,600 21,600
Series F, $1 par value; 52,500 shares authorized 52,500 52,500
------- -------
274,100 274,100
======= =======
In 1998, the Company issued 200,000 shares of non-cumulative Series A
preferred stock in conjunction with the acquisition of ACC Telecom.
The preferred stock is convertible after a two-year holding period
into the greater of $2,000,000 worth or 2,000,000 shares of the
Company's common stock. The preferred stock is not entitled to share
in dividends; however, if a dividend is declared on the common stock,
or the market price of the Company's common stock exceeds $2.00 per
share, the preferred stock may be converted prior to the end of the
two year holding period. In the event of the conversion, the common
stock issued will be subject to restrictions under Section 144 of the
Securities Act of 1934. The shares were valued at a discounted
valuation of $1,700,000.
- 36 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 15 - CONVERTIBLE PREFERRED STOCK (Continued)
On November 20, 1998, the Company issued 21,600 shares of non-
cumulative Series E preferred stock in conjunction with the
acquisition of Voice Quest. The preferred stock automatically converts
after a two year holding period into the greatest of $270,000 worth or
216,600 shares of common stock subject to restrictions under Section
144 of the Securities Act of 1934. The shares were valued at a
discounted valuation of $223,141.
On December 1, 1998, the Company issued 52,500 shares of non-
cumulative Series F preferred stock in conjunction with the
acquisition of RomNet. The preferred stock automatically converts
after a two year holding period into the greater of $700,000 worth or
525,000 shares of common stock subject to restrictions under Section
144 of the Securities Act of 1934. The shares were valued at a
discounted valuation of $578,512.
NOTE 16 - COMMON STOCK
During 1999 and 1998, the Company entered into various transactions
that include issuance of its common stock. The number of shares issued
in each transaction was determined through negotiations among the
parties. The per share value of stock exchanged varied among
transactions that were similar in nature, based on the time the terms
were agreed upon by the parties. Exclusive of the shares exchanged for
acquisitions, per share values ranged from $0.50 to $4.81 in 1999 and
$0.40 to $0.96, during 1998.
NOTE 17 - TREASURY STOCK
During 1997, the Company acquired 1,700,000 shares of common stock for
$800,000 ($0.47 per share) in cash and 1,078,019 shares of its common
stock in settlement of notes receivable for $481,000 ($0.45 per share)
from affiliates.
NOTE 18 - STOCK OPTIONS
1998 Stock Options Plan
-----------------------
On July 15, 1998, the Board of Directors of the Company approved the
Carnegie Internationals Corporation 1998 Stock Option Plan (the
"Plan"). The purpose of the Plan is to provide incentives for
directors, officers and employees of the company who may be designated
for participation and to provide additional means of attracting and
retaining personnel.
- 37 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 18 - STOCK OPTIONS (Continued)
The Plan provides for the reservation of 2,000,000 shares of the
Company's Common Stock for issuance upon the exercise of options
granted under the Plan. The number of shares of Common Stock reserved
for the grant of options and the number of shares of Common Stock
which are subject to outstanding options granted under the Plan are
subject to adjustment to give effect to any stock splits, stock
dividends, or other relevant changes in the capitalization of the
company.
Stock Options
-------------
In January 1999, two Directors of the Company were each granted
options to purchase 50,000 shares of common stock at an exercise price
of $2.14 per share. The options vest immediately and expire on January
4, 2001.
In October 1998, two Directors of the Company were each granted
options to purchase 50,000 shares of common stock of the Company at an
average exercise price of $0.94 per share. These options were
exercised in 1999.
On April 8, 1998 the Chairman and Chief Operating Officer of the
Company were granted options to purchase 1,000,000 shares of common
stock of the company at an exercise price of $0.45 per share. These
options will vest when the company achieves an operating pretax income
of at least $1,000,000 for each of two consecutive quarters. These
options expire on December 31, 1999. Additional options for 500,000
shares were also issued which have an exercise price of $0.10 per
share and vest upon the Company successfully completing an offering of
5 million shares of the Company stock or $5,000,000, whichever is
lower, or achieving a $1,000,000 net profit at the end of a fiscal
year. As of December 31, 1998 none of the options had been exercised.
An extension for the options was granted until December 31, 2001.
On April 8, 1998 the Secretary of the Company was granted options to
purchase 250,000 shares of common stock of the Company, which are
exercisable immediately at an exercise price of $0.45 per share. In
addition, in the event the Company completes a public offering of at
least 5 million shares of common stock or realizes at least $5,000,000
through such an offering the Secretary will have the option to
purchase additional 100,000 shares of common stock for 0.10 per share.
As of December 1999 and 1998 none of the options had been exercised.
- 38 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 18 - STOCK OPTIONS (Continued)
As part of the Company's employment agreement with its Chief Executive
Officer, options for a total of 400,000 shares were issued on May 15,
1997. These options have an exercise price equal to the fair market
value at the date of the grant. These options vested as follows:
150,000 on May 15, 1997, 150,000 on December 31, 1997, and 100,000 on
September 1, 1998. Additional options for 500,000 shares have an
exercise price of $0.10 per share and vest upon the Company
successfully completing an offering of 5 million shares of Company
stock or $5,000,000, whichever is lower, or achieving a $1,000,000 net
profit at the end of a fiscal year. As of December 31, 1999 and 1998
none of the options had been exercised.
The vesting of outstanding options is accelerated upon the sale of the
company or more than 50% of its outstanding shares to one person or
entity.
The Company entered into an option agreement in connection with the
acquisition of Talidan. This option, which expires in 2001, provides
that the option holder may purchase additional shares of the Company's
common stock at a price of one tenth of a cent ($0.001) per share. The
number of shares that may be purchased will be determined by dividing
$2.5 million by the average market price of the common stock of the
Company as traded in the thirty days prior to exercise of the option.
The Tiller and Talidan stock options have a Put Option associated with
them. To the extent that the options are not fully exercised on the
third anniversary of the issue date, the holder may, for a period of
thirty days following such anniversary, exercise the remainder of the
option, in whole or in part. The Company may be required by the holder
to purchase the resultant number of shares as determined in the
agreement. As of December 31, 1997, the Company recorded its liability
under the Put Option based on the discounted value of the stock
options utilizing a 10% discount rate. The Option's carrying value was
$3,756,574 as of December 31, 1997. The Put Option was terminated in
1998 in consideration for the award of certain distribution rights and
software licenses. All of the options were exercised during 1998.
- 39 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 18 - STOCK OPTIONS (Continued)
The following table summarizes the option activity during 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 2,850,000 0.020 6,108,334 $0.020
Options exercised (50,000) 0.935 (3,635,500) 0.001
Adjustment due to change in stock price (1) - - (1,572,834) 0.001
Options granted 100,000 0.530 1,950,000 0.350
--------- -------- --------- ---------
Options outstanding at end of year 2,900,000 2,850,000 $0.290
--------- --------- ---------
Options exercisable 1,800,000 1,950,000
--------- ---------
1999 1998
---- ----
Weighted Average Option Price
Per Share
Granted $0.530 $0.350
Exercised 0.935 0.001
Adjustments - 0.001
Outstanding at End of Period .390 0.290
Exercisable at End of Period .390 0.290
Weighted Average Remaining Life
Of Options Outstanding 24 months 36 months
</TABLE>
(1) Number of available options increases or decreases as a result of
movement in the stock price. See discussion of stock options above.
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes options-pricing model, with the following
weighted-average assumptions used for grants in 1999 and 1998:
1999 1998
-------- -------------------
Risk free interest rate 4.63% 4.12% to 5.56%
Volatility rate 38.00% 109.4% to 112.0%
Expected lives 2 years 1.75% to 3.75 years
- 40 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 18 - STOCK OPTIONS (Continued)
The following table represents the proforma earnings for each period
presented if the fair values of options granted had been recognized as
compensation expense on a straight-line basis over the vesting period
of the grant:
1999 1998
------------ ------------
Proforma
Net earnings (loss) $(11,841,285) $(13,910,852)
Earnings (loss) per share
Basic $ (0.18) $ (0.31)
Diluted $ (0.18) $ (0.31)
NOTE 19 - WARRANTS
In December 1998, the Company issued warrants to purchase 250,000
shares of common stock, with 125,000 of the warrants having an
exercise price of $0.71 per share and 125,000 of the warrants having
an exercise price of $1.25 per share, to Bristol Asset Management, LLC
("Bristol") in connection with Bristol's purchase of common stock. The
warrants may be exercised at any time through December 31, 2001. As of
December 31, 1999, none of the warrants were exercised.
In November 1998, the Company issued a warrant to purchase 2 million
shares of common stock, at an exercise price of $1.43 per share, to
Westshire Trading Company, in consideration for a prepayment on a
$2,340,000 note due the Company. The warrant may be exercised at any
time prior to November 2000. As of December 31, 1999, the warrant had
not been exercised.
In association with the acquisition of Talidan, the Company issued
warrants for 5 million shares of common stock. The warrants are
exercisable at any time through September 29, 1999 at a subscription
price equal to 50 percent of the average market price of the Company's
shares as quoted by the NASD OTC Bulletin Board Service for the 30
consecutive trading days before exercise. These options expired on
September 29, 1999, without being exercised.
NOTE 20 - RELATED PARTY TRANSACTIONS
Legal fees of approximately $184,495 and $409,000 were incurred with a
firm of which a stockholder is the managing partner for the years
ended December 31, 1999 and 1998, respectively.
- 41 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 20 - RELATED PARTY TRANSACTIONS (Continued)
The Company has made advances to American Motorcycle Leasing Corp.
("AML") in 1999 totaling $206,112. AML is a wholly owned subsidiary of
Timecast Corp., a former subsidiary of the Company. An additional
$20,000 was advanced to AML in January 2000. An officer of the Company
is also associated with Timecast Corp.
The Company has a service agreement with Timecast expiring March 15,
2001, whereby the Company agrees to provide Timecast with
administrative, financial, accounting, legal, and other services. In
addition, the Company agrees to advance funds to Timecast on a cost
plus 10% basis which monies will be repaid within six months following
termination of the agreement. Upon termination of this agreement, if
Timecast is unprofitable, then Timecast may, at its discretion, extend
the agreement six months.
The Company made advances to and has receivables from officers and
employees that amount to $29,333 and $6,560 as of December 31, 1999
and 1998, respectively. The advances are non-interest bearing and do
not have a specified repayment date. Therefore, these obligations have
been shown as non-current assets.
NOTE 21 - INCOME TAXES
The components of the provision for income taxes are as follows:
For The Years Ended
December 31,
-------------------
1999 1998
-------- --------
Current Tax Expense
U.S. Federal $ - $ -
State and Local - -
-------- --------
Total Current - -
-------- --------
Deferred Tax Expense
U.S. Federal - -
State and Local - -
-------- --------
Total Deferred - -
-------- --------
Total Tax Provision (Benefit) from
Continuing Operations $ - $ -
======== ========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows for the years ended December 31, 1999 and
1998:
Federal Income Tax Rate ( 34.0)% ( 34.0)%
Effect of Valuation Allowance 34.0% 34.0%
------- -------
Effective Income Tax Rate 0.0% 0.0%
======= =======
- 42 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 21 - INCOME TAXES (Continued)
At December 31, 1999 and 1998, the Company had net carry-forward
losses of approximately $10,731,000 and $6,211,000, respectively.
Because of the current uncertainty of realizing the benefit of the tax
carry-forwards, a valuation allowance equal to the tax benefit for
deferred taxes has been established. The full realization of the tax
benefit associated with the carry-forwards depends predominantly upon
the Company's ability to generate taxable income during the carry-
forward period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
December 31,
--------------------------
1999 1998
---------- ----------
Deferred Tax Assets
Loss Carry-forwards $3,649,000 $2,112,000
Less: Valuation Allowance 3,649,000 2,112,000
---------- ----------
Net Deferred Tax Assets $ - $ -
========== ==========
Net operating loss carry-forwards expire starting in 2007 through
2019. Per year availability is subject to change of ownership
limitations under Internal Revenue Code Section 382.
NOTE 22 - SEGMENT INFORMATION
During 1999 and 1998, the Company operated in two principal
industries:
a) Telecommunications
b) Restaurant
Telecommunications include the development and distribution of
software, and telephone operations. Corporate and other includes
unallocated corporate costs.
- 43 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 22 - SEGMENT INFORMATION (Continued)
During 1999 and 1998, 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.
Years Ended December 31,
-----------------------------
1999 1998
------------ ------------
Revenues from external customers:
Telecommunications $ 18,486,206 $ 5,358,377
Restaurant 1,843,148 1,943,640
Corporate - -
------------ ------------
Total $ 20,329,354 $ 7,302,017
============ ============
Interest expense:
Telecommunications $ 447,480 $ 12,847
Restaurant 27,727 760
Corporate 153,072 213,474
------------ ------------
Total $ 628,279 $ 227,081
============ ============
Income tax expense:
Telecommunications $ 140 $ -
Restaurant - -
Corporate 19,050 12,279
------------ ------------
Total $ 19,190 $ 12,279
============ ============
Depreciation and amortization:
Telecommunications $ 4,903,083 $ 926,686
Restaurant 55,148 36,844
Corporate 147,886 31,651
------------ ------------
Total $ 5,106,117 $ 995,181
============ ============
Segment profit (loss) before taxes:
Telecommunications $ (5,733,174) $ (9,698,466)
Restaurant 97,693 (133,950)
Corporate (5,334,813) (3,733,960)
------------ ------------
Total $(10,970,294) $(13,566,376)
============ ============
- 44 -
<PAGE>
CARNEGIE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 22 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Segment assets:
Telecommunications $47,778,086 $11,905,303
Restaurant 180,807 267,169
Corporate 683,691 2,244,074
----------- -----------
Total $48,642,584 $14,416,546
=========== ===========
Expenditure for segment assets:
Telecommunications $ 355,319 $ 217,974
Restaurant 8,657 -
Corporate 48,936 212,335
----------- ------------
Total $ 412,912 $ 430,309
=========== ===========
</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>
Years Ended December 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues from external customers:
Brazil $ 384,653 3,204,379
Canada 1,556,650 -
Mexico 3,401,568 -
United Kingdom 72,101 40,075
United States $14,914,382 $4,057,563
----------- -----------
Total $20,329,354 $7,302,017
=========== ===========
Segment assets:
Brazil $ 26,483 $1,293,293
Canada 24,683 -
Mexico 59,675 -
United Kingdom 3,793,003 5,790,592
U.S., net of intersegment receivables 44,738,740 7,332,661
----------- -----------
Total $48,642,584 $14,416,546
=========== ===========
</TABLE>
- 45 -
<PAGE>
NOTE 23 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of December
31, 1999, the Company has a working capital deficit of $7,156,666 and
an accumulated deficit of $25,554,823. 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 upon
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.
NOTE 24 - SUBSEQUENT EVENTS
In January and March 2000, the Company received a total of $400,000
pursuant to a letter agreement with an investor dated January 13,
2000, whereas the Company agreed to sell two million shares of common
stock subject to Rule 144 at a price of .40 per share for a total of
$700,000 payable $250,000 at closing and the balance in three equal
installments over six months. The investor has the option, if the
Company's common stock is not publicly trading, to acquire all the
common stock of RomNet for an additional $250,000 less the
liabilities of RomNet.
In January 2000, the Company entered into a subscription agreement
with an investor for the sale of 66,667 shares of Rule 144 common
stock and warrants to purchase 133,000 shares of common stock at an
exercise price of .01 per share, exercisable until January 31, 2002,
for the total price of $100,000 which monies were collected in
January and February 2000.
- 46 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
CARNEGIE INTERNATIONAL CORPORATION
Date: March 30, 2000 By: /s/
_______________________________
Lowell Farkas
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/
______________________________ Chairman of the Board and Director March 30, 2000
E. David Gable
/s/
______________________________ President, Chief Executive Officer March 30, 2000
Lowell Farkas and Director
/s/
______________________________ Director March 30, 2000
Barry N. Hunt
______________________________ Director March 30, 2000
Adnan Khan
/s/
______________________________ Director March 30, 2000
Walt Nawrocki
/s/
______________________________ Director March 30, 2000
Allan Jay Kovitz
/s/ Vice President, Corporate Secretary March 30, 2000
______________________________ and Acting Chief Financial Officer
Richard Greene
</TABLE>
<PAGE>
INDEX OF EXHIBITS
Exhibit
No. Exhibit Description
- - ------- -------------------
3.1 Articles of Incorporation, as amended, (filed as Exhibit 3.1 to the
Corporation's form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein).
3.2 Bylaws (filed as Exhibit 3.2 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.1 Employment Agreement between the Corporation and Lowell Farkas, as
amended (filed as Exhibit 10.1 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.2 Employment Agreement between the Corporation and E. David Gable
(filed as Exhibit 10.2 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.3 Employment Agreement between the Corporation and Bennett H. Goldstein,
(filed as Exhibit 10.3 to the Corporation's form 10-KSB, filed with
the Commission on April 27, 1999 and incorporated by reference
herein).
10.4 1998 Stock Option Plan (filed as Exhibit 10.4 to the Corporation's
Form 10-SB, filed with the Commission on October 28, 1998 and
incorporated by reference herein).
10.5 Exchange Agreement between A&W Corporation, Inc. and Grandname Limited
(filed as Exhibit 10.5 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.6 Assignment Agreement by and between First USA Merchant Services, Inc.
and Electronic Card Acceptance Corporation (filed as Exhibit 10.6 to
the Corporation's Form 10-SB, filed with the Commission on October 28,
1998 and incorporated by reference herein).
10.7 Agreement between Tiller Holdings Limited and the Corporation (filed
as Exhibit 10.7 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.8 Form of Warrant (filed as Exhibit 10.8 to the Corporation's Form 10-
SB, filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.9 Form of Stock Option Agreement (filed as Exhibit 10.9 to the
Corporation's Form 10-SB, filed with the Commission on October 28,
1998 and incorporated by reference herein).
<PAGE>
10.10 Preemption Agreement (filed as Exhibit 10.10 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated
by reference herein).
10.11 Stock and Asset Purchase Agreement for Victoria Station Restaurant
(filed as Exhibit 10.11 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference
herein).
10.12 Purchase Agreement and Promissory Note between the Corporation and the
Alpina Tours, LLC (filed as Exhibit 10.12 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated
by reference herein).
10.13 Stock Purchase Agreement between the Corporation and Value Partners,
Ltd. (filed as Exhibit 10.13 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.14 Stock Purchase Agreement for Harbor City Corporation, t/a ACC Telecom
(filed as Exhibit 10.14 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference
herein).
10.15 Buy-Back/Sell-Back Agreement for Purchase of Harbor City Corporation,
t/a ACC Telecom (filed as Exhibit 10.15 to the Corporation's Form 10-
SB, filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.16 Employment Agreement between Barry N. Hunt and Harbor City
Corporation, t/a ACC Telecom (filed as Exhibit 10.16 to Amendment
Number 1 of the Corporation's Form 10-SB/A, filed with the Commission
on February 12, 1999 and incorporated by reference herein).
10.17 Distributor Agreement between the Corporation and ALLTEL Supply, Inc.
(filed as Exhibit 10.17 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.18 Stock Purchase Agreement between the Corporation and Voice Quest. Inc.
(filed as Exhibit 10.18 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.19 Employment Agreement between Voice Quest, Inc. and Mark S. Ortner
(filed as Exhibit 10.19 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.20 Asset Purchase Agreement between the Corporation and the J-Net Group,
Inc. (filed as Exhibit 10.20 to Amendment Number 1 of the
Corporation's Form 10-SB/A,
<PAGE>
filed with the Commission on February 12, 1999 and incorporated by
reference herein).
10.21 Employment Agreement between RomNet Support Services, Inc. and
Nicholas R. Gentile (filed as Exhibit 10.21 to Amendment Number 1 of
the Corporation's Form 10-SB/A, filed with the Commission on February
12, 1999 and incorporated by reference herein).
10.22 Consulting Agreement between the Corporation and the Vadiari Group
International (filed as Exhibit 10.22 to Amendment Number 1 of the
Corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
10.23 Distributor Agreement between the Corporation and Tiller International
(filed as Exhibit 10.23 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.24 Acquisition Agreement between the Corporation and Paramount
International Telecommunications, Inc., (filed as Exhibit 10.24 to the
Corporation's form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein.)
10.25 Employment Agreement between Paramount International
Telecommunications, Inc. and Michael Eberle, (filed as Exhibit 10.25
to the Corporation's form 10-KSB, filed with the Commission on April
27, 1999 and incorporated by reference herein.)
10.26 Agreement of Sale by and between Talidan Limited and Westshire
Trading, Inc. (filed as Exhibit 10.26 to the Corporation's Form 10-
KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.27 Agreement between the Corporation and Bristol Capital, LLC dated
February 27, 1997 in connection with payment of a finders fee. (filed
as Exhibit 10.27 to the Corporation's Form 10-KSB/A Amendment 1 filed
with the Commission on January 25, 2000 and incorporated by reference
herein.)
10.28 Termination and Consulting Agreement between the Corporation and
Bennett H, Goldstein dated September 30, 1999. (filed as Exhibit 10.28
to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.29 Loan Agreement between Carnegie and American Champion Entertainment
dated June 25, 1999. (filed as Exhibit 10.29 to the Corporation's Form
10-KSB/Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.30 Letter of Intent between the Corporation and R.G.G. Communications,
Inc. dated April 1, 1999. (filed as Exhibit 10.30 to the Corporation's
Form 10-KSB/A
<PAGE>
Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.31 Sublease of The Phone Stop dated May 14, 1999 and underlying Lease as
amended, between American Telecommunications & Computer Inc. and
Korman/Lederer Management Co. dated May 13, 1999. (filed as Exhibit
10.31 to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.32 Lease Agreement between The Equitable Life Assurance Society of the
United States and the Harbour Financial Mortgage Corporation t/a New
America Financial. (filed as Exhibit 10.32 to the Corporation's Form
10-KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.33 Lease Termination Agreement between the Corporation and Centre 1000
Limited Partnership dated as of October 1, 1999. (filed as Exhibit
10.33 to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.34 Services Agreement between Anthony Redfern and Talidan dated as of
September 1, 1997. (filed as Exhibit 10.34 to the Corporation's Form
10-KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
16.1 Company Statement on change of Certifying Accountant, filed as an
Exhibit to Form 8-K on September 28, 1999 and incorporated herein by
reference thereto.
16.2 Letter on change of Certifying Accountant, filed as Exhibit 16 to Form
8-K/A filed on October 13, 1999 and incorporated herein by reference
thereto.
16.3 Letter on change of Certifying Accountant, filed as Exhibit 16 to Form
8-K/A filed on October 22, 1999 and incorporated herein by reference
thereto.
16.4 Letter on change of Certifying Accountant, filed as Exhibit 16 to Form
8-K/A filed on October 25, 1999 and incorporated herein by reference
thereto.
21.1 Subsidiaries of the Registrant, (filed as Exhibit 21.1 to the
Corporation's form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein.)
27.1 Financial Data Schedule is filed electronically herewith. via EDGAR.
(filed as Exhibit 27.1 to the Corporation's Form 10-KSB/A Amendment 1
filed with the Commission on January 25, 2000 and incorporated by
reference herein.)
99.1 Company Public Statement, dated October 23, 1999, responding to
allegations of Grant Thornton LLP. (filed as Exhibit 99.1 to the
Corporation's Form 10-KSB/A
<PAGE>
Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
99.2 Resignation Letter of Director Richard M. Cohen, dated September
24, 1999. (filed as Exhibit 99.2 to the Corporation's Form 10-
KSB/A Amendment 1 filed with the Commission on January 25, 2000
and incorporated by reference herein.)
99.3 Resignation Letter of Director Stuart Agranoff, dated September,
1999. (filed as Exhibit 99.3 to the Corporation's Form 10-KSB/A
Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by refer ence herein.)
99.4 Stipulation filed with the United District Court for the Northern
District of Maryland on September 14, 1999 with respect to G.
William Higbee in connection with Carnegie v. Kelley Allen, Ark
-----------------------------
Capital Inc., Indianhead and G. William Higbee. (filed as Exhibit
----------------------------------------------
99.4 to the Corporation's Form 10-KSB/A Amendment 1 filed with
the Commission on January 25, 2000 and incorporated by reference
herein.)
99.5 Head of Agreement dated Feburary 18, 2000 between Paramount
International Telecommunications, Inc. ("PIC"), a Nevada
Corporation and a wholly owned subsidiary of Carnegie
Interntional Corporation, a Colorado Corporation ("Carnegie"),
Federation of Associated Health Services, Inc ("FASH") a Texas
Corporation and its subsidiary, Transcontinental Communications,
Inc. ("TCI").
99.6 Elizabeth Shampoi, Case Administrator American Arbitration
Association Consistent with Mr. Horsley's letter of March 2, 2000
confirming that Carnegie International Corporation has agreed to
allow the withdrawal of the Request for Arbitration, without
Prejudice to the rights of each party.
99.7 Extension of Agreement made by and between Carnegie International
Corporation, a Colorado Corporation and Harbor City Corporation,
t/a ACC Telecom, a Maryland Corporation and Barry N. Hunt an
individual, and Susan B. Hunt, an individual, said Agreement
being dated May 18, 2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000311172
<NAME> CARNEGIE INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 463,374
<SECURITIES> 0
<RECEIVABLES> 3,566,172
<ALLOWANCES> (931,417)
<INVENTORY> 337,499
<CURRENT-ASSETS> 3,885,662
<PP&E> 1,829,006
<DEPRECIATION> 570,980
<TOTAL-ASSETS> 48,642,584
<CURRENT-LIABILITIES> (10,855,216)
<BONDS> 0
0
274,100
<COMMON> 629,595
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,642,584
<SALES> 20,329,354
<TOTAL-REVENUES> 20,329,354
<CGS> 11,111,552
<TOTAL-COSTS> 20,036,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (152,079)
<INCOME-PRETAX> (10,970,294)
<INCOME-TAX> 19,190
<INCOME-CONTINUING> (10,989,484)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,989,484)
<EPS-BASIC> 0
<EPS-DILUTED> (0.17)
</TABLE>
<PAGE>
Exhibit 99.2
Richard M. Cohen
45 Rockefeller Plaza
New York, New York 10111
September 24, 1999
VIA FACSIMILE AND REGULAR MAIL
- - ------------------------------
Mr. E. David Gable
Chairman of the Board of Directors
Carnegie International Corporation
11350 McCormick Road
Executive Plaza 3 - Suite 1001
Hunt Valley, Maryland 21031
Dear David:
I hereby resign, effective immediately, as a member of the Board of
Directors, and as a member of all Committees of the Board of Directors, of
Carnegie International Corporation.
I appreciate having had the opportunity to serve on Carnegie's Board of
Directors, and I wish the Company every success in its endeavors.
Sincerely yours,
/s/ Richard M. Cohen
--------------------
Richard M. Cohen
<PAGE>
Exhibit 99.3
Stuart L. Agranoff
45 Rockefeller Plaza
New York, New York 10111
September 24, 1999
VIA FACSIMILE AND REGULAR MAIL
- - ------------------------------
Mr. E. David Gable
Chairman of the Board of Directors
Carnegie International Corporation
11350 McCormick Road
Executive Plaza 3 - Suite 1001
Hunt Valley, Maryland 21031
Dear David:
I hereby resign, effective immediately, as a member of the Board of
Directors, and as a member of all Committees of the Board of Directors, of
Carnegie International Corporation.
I appreciate having had the opportunity to serve on Carnegie's Board of
Directors, and I wish the Company every success in its endeavors.
Sincerely yours,
/s/ Stuart L. Agranoff
----------------------
Stuart L. Agranoff
<PAGE>
Exhibit 99.4
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF MARYLAND
CARNEGIE INTERNATIONAL CORPORATION, *
Plaintiff *
v. *
KELLEY ALLEN *
and
ARK CAPITAL, INC. *
and Civil Action No. MJG-99-1517
INDIANHEAD, c/o Yahoo!, Inc. *
and
G. WILLIAM HIGBEE, *
Defendants
* * * * * * * * * * * * * *
STIPULATION
Plaintiff Carnegie International Corporation and defendant G. William
Higbee, by their undersigned respective counsel, stipulate and agree as follows:
1. Carnegie International Corporation, for itself and for all persons,
firms or corporations that might claim by and/or through it, for good and
valuable consideration in light of Mr. Higbee's retraction and statement of
regret attached, accepts Mr. Higbee's expression of regret and acknowledgment,
and agrees that all claims against G. William Higbee in this or any other
jurisdiction or forum, including any and all third party claims, shall be and
the
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same hereby are dismissed with prejudice upon approval of this stipulation by
the Court.
2. The parties agree that each side will bear its own open costs.
3. Each party person affixing a signature below warrants his/her
authority to execute this stipulation and by such stipulation bind his/her
client. End of stipulation .
SO STIPULATED
On behalf of Carnegie International On behalf of G. William Higbee
Corporation:
/s/ Richard L. Gershberg /s/ Edward F. Houff
- - ----------------------------- -------------------------
Richard L. Gershberg, Esquire Edward F. Houff, Esquire
Federal Bar #01769 Federal Bar #00100
Gershberg & Associates, LLC Church & Houff, P.A.
11419 Cronridge Drive, Suite 7 Two North Charles St., Suite 600
Owings Mills, Maryland 21117 Baltimore, Maryland 21201
(410) 654.3850 (410) 539.3900
2
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APPROVED BY THE COURT:
The foregoing stipulation is APPROVED this 16th day of September, 1999. The
Clerk of the Court is directed to enter this action DISMISSED WITH PREJUDICE as
to Defendant G. William Higbee. Each party to bear its own costs.
/s/ Marvin J. Garbis
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Marvin J. Garbis
United States District Judge
3
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G. William Higbee
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September 10, 1999
I, G. William Higbee; hereby retract any statements made or forwarded in writing
or on the Internet on or about May 25, 1999, that any individuals associated
with Carnegie International Corporation (AMEX:CGY) ("Carnegie") inappropriately
sold shares of Carnegie. After I sent the email with its attachment I became
aware that the individuals in question did not sell any Carnegie shares but
returned them to Carnegie for no consideration. I sincerely regret the
statements I made.
/s/ G. William Higbee
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G. William Higbee
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C H U R C H & H O U F F, P.A.
Law Offices
Edward F. Houff DIRECT NUMBER
Email: [email protected] 410-539-3982
800-969-2898
September 13,1999
By Fax (410-654-3880) and Hand Delivery
Richard L. Gershberg, Esquire
Gershberg & Associates, LLC
11419 Cronridge Drive, Suite 7
Owings Mills, Maryland 21117
Re: Carnegie International Corporation v. G. William Higbee, et al.,
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U.S. District Court, Maryland Docket No. MJG-99-1517
Confirmation of Settlement Agreement
Dear Mr. Gershberg:
This letter is written in confirmation of the settlement agreement we have
reached in connection with this matter.
1. Your client has agreed to accept my client's statement to the following
effect, on a separate paper that your client can publish in its entirety:
I, G. William Higbee; hereby retract any statements made or forwarded in
writing or on the Internet on or about May 25, 1999, that any individuals
associated with Carnegie International Corporation (AMEX:CGY) ("Carnegie")
inappropriately sold shares of Carnegie. After I sent the email with its
attachment I became aware that the individuals in question did not sell any
Carnegie shares but returned them to Carnegie for no consideration. I
sincerely regret the statements I made.
Action required: None by Carnegie other than acceptance, which is agreed. I am
enclosing a fax copy of that document with this letter as evidence of our good
faith compliance with the agreement. Further action is indicated below.
2. My client will make payment in the amount of two thousand five hundred
dollars ($2,500.00) in the form of a check made payable to your firm, for
attorneys' fees and costs only. This payment shall be completely confidential
and may not be the
2 North Charles Street, Suite 600, B&O Building . Baltimore, Maryland 21201
Telephone 410-539-3900 . Facsimile 410-539-3987
502 Washington Avenue, Suite 220, Nottingham Centre
Towson, Maryland 21204-4513 . Telephone 410-427-3900 . Facsimile 410-427-3914
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Law Offices
Church & Houff, P.A.
Richard L. Gershberg, Esquire
Re: Carnegie International Corp. v. Higbee, et al.
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September 13, 1999
Page 2
subject of any direct or indirect disclosure at any time in the future, by any
person, firm or entity representing Carnegie, or by Carnegie itself.
Action required: None by Carnegie. I have enclosed the check with this letter.
Further action described below.
3. In consideration of Mr. Higbee's actions recited in paragraphs 1 and 2
above, Carnegie will authorize you to execute the attached stipulation of
dismissal with prejudice on its behalf. The pertinent language of that dismissal
is as follows:
Carnegie International Corporation, for itself and for all persons,
firms or corporations that might claim by and/or through it, for good and
valuable consideration in light of Mr. Higbee's retraction and statement of
regret attached, accepts Mr. Highbee's expression of regret and
acknowledgment, and agrees that all claims against G. William Higbee in
this or any other jurisdiction or forum, including any and all third party
claims, shall be and the same hereby are dismissed with prejudice upon
approval of this stipulation by the Court.
Action required: Please execute the original stipulation attached and
return it with the messenger to my office.
Final action: I have requested that the original of the retraction
statement be sent to me overnight. As soon as it is received I will forward it
to you. When I forward the statement to you, I will submit the finalized
stipulation of dismissal to the Court and you may cash the check.
Thank you for your courtesy in this matter. If everything stated here is in
accord with our agreement, please indicate that by placing your signature on the
line below which will affirm your authority on behalf of your client to make
this settlement agreement, and will further indicate you and your client's
agreement to the terms and conditions stated in this letter. Please fax the
executed copy back to me and place the original executed copy in the mail.
Very truly yours,
/s/ Edward F. Houff
-------------------
Edward F. Houff
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Exhibit 99.5
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February 17, 2000
Mr. S. R. Alexander Benningfield
Chairman of the Board
Federation of Associated Health Services, Inc.
314 E. Commerce, Suite 400
San Antonio, TX 78205
Re: Head of Terms Agreement
Dear Mr. Benningfield
This letter is to replace the Head of Agreement dated July 21, 1999 between
Paramount International Telecommunications, Inc. ("PIC"), a Nevada Corporation
and a wholly owned subsidiary of Carnegie Interntional Corporation, a Colorado
Corporation ("Carnegie"), Federation of Associated Health Services, Inc ("FASH")
a Texas Corporation and its subsidiary, Transcontinental Communications, Inc.
("TCI").
1. Purchase price of shares or assets:
The purchase of shares or assets (to be determined) for 100% of FASH shall be
3.5 million dollars worth of Carnegie common shares based on the 30-day
average closing trading price proceeding the first anniversary of the closing
of a Purchase Agreement between the parties. There will be a 15% discount in
the event an orderly sale agreement is part of the closing documents (terms to
be agreed). The Company will issue a preferred series _____ (to be assigned
prior to final Agreement) shares at closing to represent the conversion to
common shares. (Tacking shall begin at the time the preferred shares are
issued).
2. Performance Bonus:
In the event "FAHS" maintains a free cash flow of 1.5 million in years two and
three following the closing, an additional 1 million dollars worth of the
companies common stock shall be issued , for each year , to the management in
their employment agreement based on the average closing price of the companies
common stock trading price proceeding each of the anniversary dates. These
shares shall vest on the anniversary date of the award.
3. Consulting and Employment Agreement
PIT will agree to the signing of three-year employment agreements with key
FASH personnel at salaries to be agreed to.
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Heads of Terms Agreement
Federation of Associated Health Services, Inc. -2
4. Balance Sheet
FAHS cash, receivables and payables shall be in the same proportions as in the
two accounting periods preceding this Agreement.
5. The contents of this Agreement are subject to a full definitive agreement
signed within 30 days of this Agreement as well as due diligence by all
parties to commence upon signing of the Agreement. It is understood that
FAHS current results of operations show free cash flow at a minimum of
$125,000 per month.
/s/ _________________________________________ /s/ ___________________________
S. R. Alexander Benningfield Lowell Farkas
Chairman of the Board President & CEO
Federation of Associated Health Systems, Inc. Carnegie International
Corporation & Director of
Paramount International
Telecommunications, Inc.
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Exhibit 99.6
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LEBOEUF, LAMB, GREENE & MACRAE
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L.L.P.
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
260 FRANKLIN STREET
- - -------------------
BOSTON, MA 02110-3173
(617) 439-9500
FACSIMILE: (617) 439-0341
FASCIMILE: (617) 439-0342
WRITER'S DIRECT DIAL:
(617) 748-6834
E-MAIL ADDRESS: [email protected]
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March 2, 2000
VIA TELEFAX AND
FIRST CLASS MAIL
Ms. Elizabeth J. Shampnoi
American Arbitration Association
1633 Broadway
Floor 10
New York, NY10019-6708
Re: 13-181-01117-99
The J-Net Group and Carnegie International Corporation
------------------------------------------------------
Dear Ms. Shampnoi:
Further to my telephone conversation with you of last week, this is to
confirm that the J-Net Group, having recently reviewed the 10Q filings of
Carnegie International, has determined that pursuant of their claims against
Carnegie International through arbitration would be, in fact, impracticable.
As a result, J-Net has requested that the arbitration demand be withdrawn,
without prejudice to the rights of either party, and has requested that counsel
for Carnegie International assent to this request, again without prejudice to
the rights of Carnegie International.
Very truly yours,
Allen C. B. Horsley
Cc: Rchard L. Gershberg, Esq.
Mr. John H. Hoagland, Jr.
Ms. Annetta Douglass
Mr. William Dredge
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Exhibit 99.7
EXTENSION OF AGREEMENT
Extension of Agreement made by and between Carnegie International
Corporation, a Colorado Corporation and Harbor City Corporation, t/a ACC
Telecom, a Maryland Corporation and Barry N. Hunt an individual, and Susan B.
Hunt, an individual, said Agreement being dated May 18, 2000.
Whereas said Agreement expires on May 18, 2000, and the parties desire to
extend and continue said Agreement; it is provided that said Agreement shall be
extended for an additional term commencing upon the expiration of the original
term with the new expiring on March 3, 2001.
This extension shall be on the same terms and conditions as contained in
the original Agreement and as set forth and incorporated herein.
This extension of Agreement shall be binding upon and inure to the benefit
of the parties, their successors and assigns.
Signed this 3rd day of March 2000.
/s/ Richard Greene /s/ Lowell Farkas
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Witness Corporate Secretary Lowell Farkas, President
Carnegie International Corp.
/s/ Julie Barth /s/ Barry N. Hunt
- - -------------------------------- --------------------------------
Witness Harbor City Corporation,
t/a ACC Telecom
/s/ Julie Barth /s/ Barry N. Hunt
- - -------------------------------- --------------------------------
Witness Barry N. Hunt
/s/ Julie Barth /s/ Susan B. Hunt
- - -------------------------------- --------------------------------
Witness Susan B. Hunt
