U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1999
Commission file number 000-08918
CARNEGIE INTERNATIONAL CORPORATION.
(Name of Small Business Issuer in Its Charter)
Colorado 13-3692114
(State of Incorporation) (IRS Employer Identification No.)
11350 McCormick Road Suite 1001 Hunt Valley, Maryland 21031
(Address of Principal Executive Offices)
(410) 785-7400
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 60,014,015 shares of Common
Stock ($.001 par value) as of January 25, 2000.
Transitional small business disclosure format: Yes No x
--- ---
CARNEGIE INTERNATIONAL CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 1999
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Losses:
Three Months Ended March 31, 1999 and 1998;
Consolidated Balance Sheets:
March 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows:
Three months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements:
March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
Three Months Ended
March 31,
1999 1998
---- ----
REVENUES:
Operating 3,168,958 1,498,618
Service contracts 364,417 --
------------ ------------
Total revenue 3,533,375 1,498,618
COST OF SALES 1,666,730 186,412
------------ ------------
GROSS PROFIT 1,866,645 1,312,206
OPERATING EXPENSES:
Selling, general and administrative 2,436,261 2,806,212
Management bonus 1,500,000 --
Asset impairment -- 7,660,480
Depreciation and amortization 794,277 67,834
------------ ------------
Total operating expenses 4,730,538 10,534,526
LOSS FROM OPERATIONS (2,863,893) (9,222,320)
OTHER INCOME(EXPENSE):
Interest income 3,824 35,782
Interest expense (99,459) (55,118)
Other income 19,251 2,008
Gain on sale of subsidiary -- 1,612,195
------------ ------------
Total other income (expense) (76,384) 1,594,867
LOSS BEFORE INCOME TAXES (2,940,277) (7,627,453)
Income taxes( benefit) -- --
------------ ------------
NET LOSS $ (2,940,277) $ (7,627,453)
============ ============
Loss per common share (basic and assuming dilution) (0.05) (0.19)
Weighted average common shares outstanding 58,421,710 39,176,918
COMPREHENSIVE LOSS: (2,940,277) (7,627,453)
Foreign currency translation adjustment 128 --
------------ ------------
(2,940,149) (7,627,453)
COMPREHENSIVE LOSS ============ ============
The accompanying notes are an integral part of these statements
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, March 31,
1999 1998
---- ----
ASSETS
Current Assets:
Cash and equivalents $ 633,355 $ 530,838
Accounts receivable, net of allowance for doubtful accounts 2,239,768 994,004
Loans receivable 572,195 1,591,641
Inventory, at cost 331,908 199,469
Prepaid expenses 108,460 185,428
------------ ------------
Total current assets 3,885,686 3,501,380
Property and equipment, less accumulated depreciation 1,244,430 556,803
Software development costs, less accumulated amortization 5,235,973 7,071,450
Intangible assets, less accumulated amortization 46,103,480 --
Other assets 195,285 231,182
$ 56,664,854 $ 11,360,815
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 326,563 $ --
Current maturities of long-term debt 1,146,253 266,375
Current maturities of notes payable to related parties -- 352,071
Deferred revenue 125,230 --
Accounts payable and accrued liabilities 2,571,929 1,014,250
------------ ------------
Total current liabilities 4,169.975 1,632,696
Long-term debt to related parties, less current maturities 1,723,590 5,597,345
Stockholders' Equity:
Convertible preferred stock, Series A, B, E, and F, $1 par value;
40,000,000 shares authorized; 274,100 issued at March 31, 1999;
200,000 issued at March 31, 1998 274,100 200,000
Common stock, no par with a stated value of $.01 per share; 110,000,000 shares
authorized; 63,341,354 issued and 60,563,335 outstanding at March 31, 1999;
42,511,057 issued and 39,733,038 outstanding at March 31, 1998 605,633 397,331
Additional paid-in capital 68,680,951 3,703,550
Retained earnings (Deficit) (17,504,159) 1,115,293
Foreign currency translation adjustment (4,236) (4,400)
------------ ------------
52,052,289 5,411,774
Less treasury stock, at cost (1,281,000) (1,281,000)
------------ ------------
Stockholders' equity 50,771,289 4,130,775
$ 56,664,854 $ 11,360,815
============ ============
The accompanying notes are an integral part of these statements.
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1999 1998
---- ----
Increase (Decrease) in cash and equivalents:
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS (2,737,693) (7,627,183)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 794,277 67,834
Asset impairment loss -- 7,660,480
Gain on sale of subsidiaries -- (1,612,195)
Sale of software and distribution rights -- (3,756,574)
Non- cash compensation charge -- 212,997
Issuance of stock options 1,036,991
Accounts receivable (1,540,080) (232,540)
Due from Affiliates 1,568,937 --
Loans receivable -- (1,581,441)
Inventory (186,780) (166,894)
Prepaid expenses (51,871) (160,808)
Refundable income taxes -- 12,279
Accounts payable and accrued expenses (24,519) (259,814)
Deferred revenue 50,187
Other, net (81,483) 179,066
----------- -----------
NET CASH USED IN OPERATIONS (2,209,025) (6,227,802)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash proceeds -- 400,000
Purchase of property and equipment (448,614) (85,689)
Capitalized software, net 435,201 (406,497)
Loans receivable
Notes receivable 486,029 --
----------- -----------
NET CASH FROM INVESTING ACTIVITIES 472,616 (92,186)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 644,965 284,200
Proceeds from the sale of options to purchase common stock 46,750 (1,326,607)
Proceeds from the sale of common stock 840,400 5,597,345
Proceeds form sale of subsidiaries -- 2,069,446
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,532,115 6,624,384
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (204,294) 304,396
CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 837,649 226,442
CASH AND CASH EQUIVALENTS- END OF PERIOD 633,355 530,838
SUPPLEMENTAL INFORMATION:
Interest paid 19,514 55,118
Income taxes paid -- --
Common stock issued in exchange for debts -- 284,200
Common stock issued in exchange for services 87,100 406,743
Common stock issued in exchange for acquisitions 43,137,600 --
During the first three-month period of 1999, the
Company issued 6,950,000 shares of stock for the
acquisition of Paramount. This stock was valued at
$43,137,500.
CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
- -------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's December 31, 1998 annual report
included in SEC Form 10-KSB/A.
Amounts for the three months ended March 31, 1998 have been reclassified to
conform with the March 31, 1999 presentation.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Carnegie
International Corporation ("Company") and its wholly-owned subsidiaries, Talidan
Limited , a British Virgin Islands corporation,; Profit Through
Telecommunications (Europe) Limited, a United Kingdom corporation; Talidan USA
t/a Victoria Station, a Florida corporation; Harbor City Corporation t/a ACC
Telecom, a Maryland corporation; Voice Quest, Inc., a Florida corporation;
RomNet Support Services, Inc., a Maryland corporation; Carnegie Communications,
Inc., a Maryland corporation ECAC Europe , a United Kingdom corporation;
Electronic Card Processing, Inc. ("ECPI"), a Maryland corporation; Electronic
Card Acceptance Corporation, a Virginia corporation; TimeCast Corporation, a
Nevada corporation, and Paramount International Telecommunications,
Inc.("Paramount").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE B - SEGMENT INFORMATION
During 1999 and 1998, the Company operated in three principal
industries: telecommunications , financial services and restaurant.
Telecommunications include the development and distribution of
software, and telephone operations. Corporate and other includes
unallocated corporate costs. The Company's foreign operations are
conducted by Talidan and PTT.
Three Months Ended March 31,
REVENUES FROM EXTERNAL CUSTOMERS: 1999 1998
Telecommunications $ 3,023,848 $ 995,074
Restaurant 509,527 483,599
Corporate -- 19,945
------------ ------------
Total $ 3,533,375 $ 1,498,618
INTEREST EXPENSE:
Telecommunications $ 16,059 $ 1,555
Restaurant -- 194
Corporate 83,400 53,369
------------ ------------
Total $ 99,459 $ 55,118
============ ============
DEPRECIATION AND AMORTIZATION:
Telecommunications $ 512,394 $ 50,526
Restaurant 729 9,395
Corporate 281,154 7,913
------------ ------------
Total $ 794,277 $ 67,834
============ ============
SEGMENT PROFIT
(LOSS) BEFORE TAXES:
Telecommunications $ (311,343) $ (7,920,473)
Restaurant 32,731 (58,563)
Corporate (2,661,665) 351,853
------------ ------------
Total $ (2,940,277) $ (7,627,183)
============ ============
SEGMENT ASSETS:
Telecommunications $ 12,329,589 $ 9,940,713
Restaurant 330,958 227,216
Corporate 44,004,307 1,192,886
------------ ------------
Total $ 56,664,854 $ 11,360,815
============ ============
EXPENDITURE FOR
SEGMENT ASSETS:
Telecommunications $ 235,319 $ 269,880
Restaurant -- --
Corporate 6,878 --
------------ ------------
Total $ 242,197 $ 269,880
============ ============
The following
geographic area
data for trade
revenues is based
on product or
service delivery
location and
property, plant
and equipment is
based on physical
location.
Three
Months
Ended
March 31,
----------
REVENUES FROM EXTERNAL 1999 1998
CUSTOMERS:
United States $ 3,330,959 $ 463,654
Brazil 187,979 1,024,945
United Kingdom 14,437 10,019
----------- -----------
Total $ 3,533,375 $ 1,498,618
=========== ===========
SEGMENT ASSETS:
U.S., net of intersegment $51,121,771 $ 4,986,140
receivables
Brazil 74,975 1,022,473
United Kingdom 5,468,108 5,352,202
----------- -----------
Total $56,664,854 $11,360,815
=========== ===========
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended March 31, 1999 and 1998
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of Company
- ----------------------
The Corporation is a holding company that operates a group of owned subsidiaries
in the telecommunications, Internet support & computer service, and restaurant
industries. The Corporation has no direct operating assets or business activity,
but does provide management and other services to its subsidiaries. The
Corporation's telecommunication's business includes the development of
interactive voice response ("IVR") and voice recognition system software,
telecommunication billing clearing services to hospitality, health care and
pay-telephone industries for 0+ (credit card) & 0- (operator assisted) calls,
the marketing of international long distance call traffic through the promotion
of information and entertainment services, and the sale, installation and
servicing of telephone equipment. The Internet and computer services include
technical support services (help desk) for software and hardware, Internet
support services including Web development and e-commerce. The Corporation's
restaurant business consists of the ownership and operation of one restaurant
located in the Miami, Florida area. A full description of the Companies
subsidiaries are in the 1998 10-KSB/A filed on January 25, 2000
Forward Looking Statements
- --------------------------
This Form 10-QSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements included
herein that address activities, events or developments that the Corporation
expects, believes, estimates, plans, intends, projects or anticipates will or
may occur in the future, are forward-looking statements. Actual events may
differ materially from those anticipated in the forward-looking statements.
Important risks that may cause such a difference include: general domestic and
international economic business conditions, increased competition in the
Corporation's markets and products. Other factors may include, availability and
terms of capital, and/or increases in operating and supply costs. Market
acceptance of existing and new products, rapid technological changes,
availability of qualified personnel also could be factors. Changes in the
Corporation's business strategies and development plans and changes in
government regulation could adversely affect the Company. Although the
Corporation believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. There can be no assurance that the forward-looking statements
included in this filing will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Corporation that the objectives and expectations of the Corporation would be
achieved
Results of Operations
- ---------------------
The Company's revenues increased by $ 2,034,757 to $3,533,375 for the three
months ended March 31, 1999, from $1,498,618 during the same period in 1998. The
increase in revenues is a result of the Company's acquisition of Paramount
International Telecommunications, Inc. in February, 1999. Service contract
revenue increased to $364,417 during the three months ended March 31, 1999 from
no revenues during the first quarter of 1998. The increase is due to increased
service revenues attributed the Company's RomNet and ACC Telecom subsidiaries
during the quarter ended March 31, 1999.
Cost of sales for the quarter ended March 31, 1999 were $1,666,730, an increase
of $1,480,588 from $186,142 during the quarter ended March 31, 1998. The
increase is a result of including the results of operations of the Company's
Paramount subsidiary.
Expenses decreased $ 5,803,988 for the first three months of 1999 compared to
the same period in 1998. Expenses as a percentage of revenues were 133.8% in the
first three months of 1999 as compared to 702.9% in 1998. Selling, general and
administrative increased $1,130,049 for the first three months of 1999 to
$3,936,261 from $2,806,212 during the quarter ended March 31, 1998. The increase
was a result of the Company incurring costs associated with the implementation
of the Paramount operations during the quarter and increased use of outside
professional services in connection with compliance with regulatory filing
requirements. In accordance with Financial Accounting Standards Number 121,
Impairment of Long-lived Assets, the Company recognized an impairment expense
during the quarter ended March 31, 1998 in the amount of $7,660,480 as compared
to no impairment expense during the quarter ended March 31, 1999. The expense in
1998 related to the impairment of the telecommunications assets held by the
Company's subsidiary in Brazil. Depreciation and amortization expense increased
$726,443 to $ 794,277 during the three months ended March 31, 1999 from $67,834
during the quarter ended March 31, 1998. The increase was is a result of
including the amortization of the goodwill associated with the acquisition of
the Company's Paramount subsidiary.
Other income and expenses for the quarter ended March 31, 1999 was $ 76,384 of
net expenses as compared to net other income of $1,594,867 during the same
period. The principal component of other expenses during the three months ended
March 31, 1999 was interest expense of $99,459, an increase of $44,341, or 80.4%
from $55,118 during the three months ended March 31, 1998. The increase was due
to the debt issued and assumed in connection with the acquisition of Paramount
in February, 1999. During the three months ended March 31, 1998, the Company
recognized a $1,612,195 gain from the sale of certain subsidiaries. This
compared to no gain on sale of subsidiaries in 1999.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1999, the Company had a working capital deficit of $ 284,289
compared to $ 24,200 of working capital at December 31, 1998, a decrease in
working capital of $ 308,614. The decrease in working capital was substantially
due to the decrease its accounts receivable from affiliates and related parties
during the first three months of 1999 As a result of the Company's operating
losses during the three months ended March 31, 1999 and 1998, the Company
generated cash flow deficits of $ 2,209,025 in 1999 as compared to a deficit of
$ 6,227,802 in 1998 from operating activities. The Company met its cash
requirements during the first three months of 1999 through the private placement
of $ 840,400 of the Company's common stock and the sale of options to purchase
stock in the amount of $ 46,750. In addition, during the first three months of
1999, the Company borrowed a net of $644,965 from private sources.
The Company has issued shares of its Common Stock from time to time in the past
to satisfy certain obligations, and expects in the future to also acquire
certain services, satisfy indebtedness and/or make acquisitions utilizing
authorized shares of the capital stock of the Company.
While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Company's current and projected cash flow deficits from operations. The Company
is seeking financing in the form of equity in order to provide the necessary
working capital. There are no assurances the Company will be successful in
raising the funds required.
The Company is subject to several lawsuits that is discussed in detail below
under Part ll, Item 1. Carnegie intends to vigorously defend the complaints,
which have been filed against the Company and its officers and directors, as
well as the consolidated complaint that may be filed later this year. Each of
the complaints filed to date seeks monetary damages and other relief; however,
none specifically allege a defined amount of damages. The Company believes it
will be successful in the defense of these actions. There can be no assurance in
this regard.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On December 21,1998 Gloria Lucas, personal Representative of the Estate
of John Charles Saah, brought suit against Carnegie, E. David Gable, Carnegie's
Chairman, and David Pearl, a former officer of Carnegie, which was originally
filed in the United States District Court for the Eastern District of Virginia,
Alexandria Division, and has since been removed to the U.S. District Court for
the Northern District of Maryland. This case stems from a series of contracts
and negotiations resulting from the acquisition of ECAC by Grandname, the
assignment to Carnegie and Carnegie's subsequent sale of ECAC. A Settlement
Agreement was entered into and, a Dismissal with Prejudice only with respect to
Carnegie has been filed with the Court. Payments have been made to the Plaintiff
through the sale of Carnegie stock belonging to the Estate of John Charles Saah,
which has been placed in escrow. Currently, there remains a balance due of
approximately $126,000.00 plus a disputed amount of $130,654.
Lisa Kamil, a former broker of ECAC, brought an action against ECAC,
n/a Carnegie International Corporation, and Ewing Partners Corporation, d/b/a
Value Partners, Limited, which is pending in the Circuit Court for Oakland
County, Michigan. This case originates from a number of transactions involving
Carnegie's former subsidiary, ECAC, which was sold to Value Partners Limited in
January of 1998, and a special arrangement between Ms. Kamil, Carnegie and
Franklin Bank. The Complaint in this action seeks damages in the amount of
$150,000.00. The incidents and matters which are the subject of the Complaint
are based on activities caused by First Charter Bank, a subsidiary or affiliate
of Ewing Partners Corporation, d/b/a Value Partners. Although the Plaintiff may
have a valid claim for a smaller sum, Carnegie believes that it is not at fault
in this matter and that Plaintiff is not likely to prevail against Carnegie.
Carnegie has minimal liability and may have a strong cross-claim against Value
Partners and also a strong third party claim against First Charter Bank, which
have not yet been filed. Carnegie intends to vigorously defend itself in this
matter and believes it will be successful in defending this litigation to it
conclusion or otherwise resolving the same in Carnegie's favor.
In July 1998, the Corporation entered into a contract with Jan Bonner
("Bonner"), doing business as Source Financial of Houston, Texas, providing
public relations services to the Corporation. In April 1999, Bonner filed suit
in the state court in Harris County, Texas, seeking 180,000 shares of the
Corporation's Common Stock as damages. On the Corporation's request, the case
was removed to the United States District Court for the Southern District of
Texas, Houston Division and the discovery process has commenced. The Corporation
believes it has a valid defense as Bonner failed to perform pursuant to the
contract. The Corporation intends to vigorously defend this suit and believes
that it will be successful in this litigation, however, there can be no
assurance in this regard.
On May 28, 1999, the Corporation filed a complaint in the United States
District Court for the District of Maryland against Kelly Allen, Ark Capital,
Inc., G. William Higbee, and an individual using an Internet chat room whose
legal name is unknown. The complaint asserts a claim based on defamatory
statements made over the Internet by the defendants. The defendants stated that
certain officers sold shares of the Common Stock of the Corporation two days
before trading of the Common Stock on AMEX was halted. These statements were
false. In fact the corporate officers did not sell the shares in the market. All
shares referred to in these statements were voluntarily returned to the
Corporation without consideration. Contemporaneously proper forms were filed by
each officer with the Securities and Exchange Commission to such effect. The
Complaint seeks compensatory and punitive damages. Defendant Higbee has entered
into an agreement with the Company retracting these statements as false pursuant
to a Stipulation filed with the Court. Additional information can be found on
the 10-KSB/A. The Company has dropped its action against Higbee but will pursue
the other defendants vigorously.
On December 23, 1998, Carnegie brought an action against Advanced
Networking, Inc., Richard B. Raphael, Lori A. Raphael, The Richard B. Raphael
Living Trust, The Lori A. Raphael Living Trust, which was originally filed in
the Circuit Court for Baltimore County, Maryland, and was removed by the
Defendants to the United States District Court for the District of Maryland,
Northern Division. This case emanated from an Option Agreement for the purchase
of Advanced Networking, Inc., a Delaware corporation, which was entered into
between Carnegie as purchaser, and the other Defendants as sellers on or about
July 22, 1998. The Defendants failed to complete the transaction, all the terms
of which had been agreed upon in the Option Agreement. The Complaint sought
relief under the theories of breach of contract, promissory estoppel, and
misrepresentation and seeks monetary damages as well as specific performance. At
this point in time the Federal Court granted the Defendants' Motion to Dismiss
Due to Lack of Jurisdiction in the State of Maryland. Carnegie is contemplating
filing an action in the State of Delaware where the Defendants reside and
conduct their businesses. Carnegie initiated this litigation to get the benefit
of its bargain as well as to deploy a strategic maneuver to assist in the
prevention of any claims by the Defendants against Carnegie or former employees
of the Defendants for the opening of an office by ACC in Delaware near the
territory of the Defendants. Carnegie believes that its position is strong and
there is little exposure on any possible counterclaim. Notwithstanding the same,
Carnegie has put off filing said Delaware action so as not to divert its
attentions from other more pressing matters.
On November 16, 1999, Communications Intercambio Mundial, Inc. ("CIM"),
Versatel Communications Corp. ("Versatel"), Edgardo Morelos ("Morelos"), and
Lucio Rodriguez ("Rodriguez") filed a lawsuit against Paramount, Mike Eberle
("Eberle") and ATN Communications, Inc. ("ATN") alleging various claims related
to a contract entered into between Paramount, CIM and Versatel on September 18,
1997 for the provision of international long distance telephone services.
Plaintiffs contend that they were not paid by Paramount all sums due under the
contract that were allegedly paid to Paramount for long distance services
provided, which they have asserted is a sum amounting to $2,194,920.41.
Attorneys retained to represent Paramount, ATN, and Eberle have determined that
all claims are defensible and that Plaintiffs' damage estimate is completely
unsubstantiated. Plaintiffs' claims relate to allegations of fraudulent long
distance calls made from Mexico by unknown third parties that are not
attributable to Paramount, ATN or Eberle under the terms of the parties
September 18, 1997. Pursuant to that agreement Plaintiffs were only entitled to
receive payment on calls that were ultimately paid. These fraudulent calls
concern long distance service charges that were not collected by Paramount or
ATN from its end users. Furthermore, Plaintiffs CIM and Versatel actually
received overpayments and loans from Paramount that were provided by Paramount
or to Plaintiffs in an accounting statement forwarded to the latter in early
December, 1999. The amount of the overpayments and loans received by CIM and
Versatel are in excess of $1,350,000.00. Paramount intends to vigorously pursue
an appropriate cross-action to seek return of these overpayments.
Carnegie is about to commence arbitration with The J-Net Group, former
owners of Carnegie's subsidiary, RomNet, regarding certain payment issues. The
J-Net Group contends that Carnegie is indebted to it in the amount of
$112,000.00 to be paid in four semi-annual installments of $28,000.00 and
Carnegie believes that it is entitled to a setoff in the amount of $71,734.00
thereby alleviating any present claim and reducing any future claim that The
J-Net Group may have. Arbitration is to begin in New York in March 2000.
Carnegie believes that its position is valid.
A subsidiary of Carnegie terminated one of its key employees, Mark
Ortner, and although most issues have been resolved, no final agreement has been
executed. Carnegie believes that this matter will be resolved through the
completion of ongoing negotiations amicably without the assertion of any further
claims or litigation; however there can be no assurances in this regard.
Shareholders Suits. The Corporation and various of its current
officers and directors are parties to several lawsuits which purport to be class
actions filed on behalf of non affiliates who purchased or acquired the
Corporation's Common Stock for the period from October 28, 1998 and April 30,
1999. The first of these suits, typical of the others, was filed in the U.S.
District Court for the District of Maryland on or about June 11, 1999, titled
Alan Genut, individually and on behalf of all others similarly situated v.
Carnegie International Corporation, et al., Civil No. L-99-1688. Four other
lawsuits of like kind have been filed by other plaintiffs in the same court. A
sixth action has been filed by an individual plaintiff in the U.S. District
Court in Oklahoma. That matter has, for the moment, been stayed.
These class actions purport to allege violations of federal securities
laws in connection with the Corporation's filing with the Securities and
Exchange Commission of a Form 10-SB, on or about October 28, 1998. In
particular, each of the five complaints alleges that the Defendants improperly
recorded certain transactions in violation of generally accepted accounting
principles. The transactions in question are the sale of ECAC, and the purchase
of its subsidiaries, PTT and Talidan.
In August 1999, the Plaintiffs in the several actions which have been
filed in Federal Court moved to consolidate their complaints, in accordance with
provisions of the Private Securities Law Reform Act of 1995 (the "PSLRA"). The
Company and the other Defendants in those actions consented to the motion and,
on or about September 1, 1999, the Court entered an Order consolidating the
actions and requiring that a consolidated complaint be filed on or before
October 31, 1999. The parties have since agreed to extend until March 15, 2000
the time within which such a consolidated complaint must be filed. As a result
of the application of certain statutory provisions, the Corporation's response
to these complaints is, therefore, not yet required. Accordingly, the
Corporation has not yet formally responded.
Certain other pre-trial proceedings have occurred, since the filing of
the complaints. The Company does not expect that the litigation will become
active until a consolidated complaint is filed, in March 2000, or thereafter.
Carnegie intends to vigorously defend the complaints which have been
filed against the Company and its officers and directors, as well as the
consolidated complaint that may be filed later this year. Each of the complaints
filed to date seeks monetary damages and other relief; however, none
specifically allege a defined amount of damages. The Company believes it will be
successful in the defense of these actions. There can be no assurance in this
regard.
Item 2. Changes in Securities.
During this reporting period the Company issued 420,200 of restricted common
stock in accordance with Rule 506, Regulation D, promulgated under the
Securities Act of 1933 for a total consideration of $840,400 to a group of
accredited investors. A Director of the Company exercised options awarded to him
totaling 50,000 shares for an exercise price of $46,750. The aggregate proceeds
from the sale of these restricted common shares were used for normal Company
operating costs and expenses.
The Company, as reported in an 8k filing of May 24, 1999, acquired all of the
issued and outstanding shares of Paramount International Corporation of Vista,
California for 6,950,000 shares of restricted common stock of the Corporation
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Acquisitions
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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. 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. The Company agreed
pursuant to discussions with the SEC staff, to expense the $1,500,000 sign-on
bonus in the first quarter 1999. Refer to the Company's 1998 10-KSB/A filed
January 25, 2000 for additional information on Paramount.
Letter of Intent
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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. During the first quarter, the Company signed Letters of Intent with
P.C. Net and Internet Notification Systems. These Letters of Intent did not
result in a contract to purchase due to the trading halt of April 29, 1999.
10-KSB/A Filing and Suspension of Trading of Common Stock on AMEX
- -----------------------------------------------------------------
On March 29, 1999 the SEC advised the Corporation of certain accounting
comments to its previously filed Form 10-SB/A. On April 27, 1999, the
Corporation, in the belief that the accounting issues had been resolved, filed
its annual report on Form 10-KSB. On April 28, 1999, the Company's Common Stock
was listed on the American Stock Exchange ("AMEX") and the Corporation's Common
Stock began trading there. On April 29, 1999, the SEC advised the Corporation
that it had questions regarding certain accounting issues and requested
additional information. As a result of this SEC request, trading of the
Corporation's Common Stock was suspended by AMEX pending resolution of such
accounting issues. The issues have been discussed at length with the SEC and the
Company has restated 1997 and 1998 audited consolidated financial statements
reflecting such discussions, which are filed as part of Form 10-KSB/A. (See
10-KSB/A for additional detailed information.)
Impairment
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The value of stock, options and warrants used in the purchase of
Talidan have been restated. Before discussion with the SEC and in the original
filing, the Company valued the stock at a discount to market of 85%. The first
recommendation by the staff of the SEC included a discount reflecting only 15%
to market. There was much discussion of this issue and the discount was in fact
valued at 33-1/3 % to market with the staff's agreement. The 1997 financial
results of the Company reflect this change. The warrants originally were valued
using a Black Scholls method that was restated to a Monte Carlo simulation.
Subsequent evaluation of the cash flow, however, did not support the new value.
Adverse economic conditions in the Brazilian marketplace, and changes in the
local telephone industry substantially eroded cash flows. Talidan reported an
impairment of goodwill resulting in a charge of $7,660,480 in the first quarter
of 1998. The Company suspended the operations of Talidan in June 1999. (See
10-KSB/A for additional detailed information.)
Purchase Agreement Issues
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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 made in March, 1999, resulting in a balance of
$800,000 due under this agreement. The selling shareholders and the Company have
a buy back/sell back agreement that could be invoked based on the marketability
of MAVIS(TM) or cash flows.
The purchase agreement for Paramount calls for payment due the Eberle Family
Trust on May 25, 1999 in the amount of $1,244,774.48. This payment has not been
made to date due to the trading halt. The Trust has agreed to accept monthly
interest payments until trading resumes. At that time a payment schedule will be
agreed to. The agreements are referenced in the exhibits attached. The Company
notes that if the Company shares do not resume trading in a reasonable period of
time, the possibility exists for an attempted rescission of this transaction
which would result in litigation. The Company does not believe that this will
occur, but can give no assurance of this.
Resignations
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Steven Thomas resigned on January 1, 1999 as Managing Director of PTT (Europe)
Limited. Michael Faulks who was the Technical Director of PTT and is Vice
President of the Company assumed his responsibilities
David Pearl resigned as Corporate Secretary as of January 22, 1999 to pursue
other opportunities.
Item 6. Exhibits and Reports on Form 8-K.
An 8K was filed for the Purchase Agreement of Paramount International
Telecommunications the Security and Commission on May 24, 1999 and incorporated
by reference herein.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARNEGIE INTERNATIONAL CORPORATION
Registrant
February 11, 2000 By: /s/ Lowell Farkas
---------------- ------------------
Date Lowell Farkas
President and Chief Executive
Officer
By /s/ Richard Greene
------------------
Richard Greene, CPA
Secretary and Vice President,
Corporate Acting Chief Financial
Officer