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, 2000
Commission file number 000-3692114
CARNEGIE INTERNATIONAL CORPORATION.
(Name of Small Business Issuer in Its Charter)
Colorado 13-3692114
(State of Incorporation) (IRS Employer Identification No.)
11350 McCormick Road Suite 1001 Hunt valley, Maryland 21031
(Address of Principal Executive Offices)
(410)785-7400
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
___ ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 60,431,515 shares of Common
Stock ($.001 par value) as of March 31, 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, 2000
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Losses:
Three Months Ended March 31, 2000 and 1999;
Consolidated Balance Sheets:
March 31, 2000 and December 31, 1999
Consolidated Statements of Cash Flows:
Three months ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements:
March 31, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Independent Accountant's Report
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The accompanying notes are an integral part of these statements.
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF LOSSES
(Unaudited)
Three Months Ended
March 31,
2000 1999
---------- ----------
REVENUES:
Operating $ 4,660,247 $ 3,168,958
Sale of service contracts 414,176 364,417
----------- -----------
5,074,423 3,533,375
COST OF SALES 2,825,824 1,666,730
----------- -----------
GROSS PROFIT 2,248,599 1,866,645
----------- -----------
OPERATING EXPENSES:
Selling, General & Administrative 2,334,419 2,436,261
Consulting Agreement 316,044 -0-
Management Bonus -0- 1,500,000
Depreciation and amortization 1,381,946 794,277
----------- -----------
Total operating expenses 4,032,409 4,730,538
----------- -----------
LOSS FROM OPERATIONS (1,783,810) (2,863,893)
----------- -----------
OTHER INCOME(EXPENSE)
Interest income 6,223 3,824
Interest expense (140,815) (99,459)
Other income 123,012 19,251
----------- -----------
Total other income (expense) (11,580) (76,384)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,795,390) (2,940,277)
INCOME TAXES (BENEFIT) - -
LOSS FROM CONTINUING OPERATIONS (1,795,390) (2,940,277)
Net loss per common share (basic and assuming dilution) $(0.03) $(0.05)
Weighted average common shares outstanding
Basic and diluted 60,307,889 58,421,710
----------- -----------
COMPREHENSIVE LOSS:
Net loss (1,795,390) (2,940,277)
Foreign currency translation - 128
----------- -----------
COMPREHENSIVE LOSS $(1,795,390) (2,940,149)
=========== ===========
See accompanying notes and accountant's report.
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and equivalents $ 389,312 $ 463,374
Accounts receivable, net of allowance for doubtful
accounts 1,977,862 2,634,755
Loans receivable 110,293 104,119
Inventory, at cost 367,743 353,993
Prepaid expenses and other assets 86,555 123,309
------------ ------------
Total current assets 2,931,765 3,679,550
Property and equipment, less accumulated depreciation 1,194,836 1,258,026
Software development costs, less accumulated amortization 3,238,744 3,728,695
Intangible assets, less accumulated amortization 39,300,202 39,720,405
Due from former subsidiaries 206,112 206,112
Other assets 143,113 49,796
------------ ------------
47,014,772 $ 48,642,584
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 321,564 $ 159,000
Advance on stock purchases 641,000 641,000
Current maturities of long-term debt 638,200 891,562
Current maturities of notes payable to related 1,544,048 1,546,382
parties
Accounts payable and accrued liabilities 7,863,895 7,596,753
Deferred revenue 131,868 20,519
------------ ------------
Total current liabilities 11,140,575 10,855,216
Long-term debt to stockholders and affiliates, less current 530,829 1,001,974
maturities
Stockholders' Equity:
Convertible preferred stock par value, Series A, B, E, and
F, $1.00 par value per share; 40,000,000 shares authorized;
274,100 issued at March 31, 2000 and at December 31, 1999
274,100 274,100
Common stock, no par with a stated value of $.01 per share;
110,000,000 shares authorized; 63,209,534 issued and 60,431,515
outstanding at March 31, 2000; 62,959,534 issued and
60,181,515 outstanding at December 31,1999 683,296 629,595
Additional paid-in capital 63,015,807 62,721,886
Accumulated deficit (27,350,213) (25,554,823)
Foreign currency translation adjustment 1,378 (4,364)
------------ ------------
36,624,368 38,066,394
Less treasury stock, at cost (1,281,000) (1,281,000)
------------ ------------
Stockholders' equity 35,343,368 36,785,394
------------ ------------
$ 47,014,772 $ 48,642,584
============ ============
See accompanying notes and accountant's report.
CARNEGIE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
2000 1999
----------- -----------
Increase (Decrease) in cash and equivalents:
Cash flows from operating activities
Net Loss $(1,795,390) $(2,940,277)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,381,946 794,277
Accounts receivable 646,168 (1,540,080)
Due from affiliates (21,194) 1,568,937
Inventory (13,750) (186,780)
Prepaid expenses and other assets 10,708 (51,871)
Refundable income taxes (12,046) -
Accounts payable and accrued expenses 267,142 (24,519)
Deferred revenue (144,317) 50,187
Other, net (713,123) 121,101
----------- -----------
Net cash provided by (used in) operating activities (393,856) (2,209,025)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized Software, Net - 435,201
Purchase of property and equipment (60,122) (448,614)
Collection of Loans Receivable 20,119 -
Increase of Notes Receivable (26,293) 486,029
----------- -----------
Net cash provided by (used in) investing activities (66,296) 472,616
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 249,826 644,965
Sale of common stock 53,701 840,400
Proceeds from sale of option to purchase common stock 46,750
-
Proceeds from Capital Leases 82,563 -
----------- -----------
Net cash provided by (used in) financing activities 386,090 1,532,115
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (74,062) (204,294)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 463,374 837,649
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 389,312 $ 633,355
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest 98,006 19,514
Common stock issued in exchange for services and compensation 50,000 87,100
Common stock issued in exchange for acquisitions 43,137,500
See accompanying notes and accountant's report.
CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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 31,2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's December 31, 1999 annual report
included in SEC Form 10-KSB/A.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of 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 Massachusetts corporation; Carnegie
Communications, Inc., a Maryland corporation, Paramount International
Telecommunciations, Inc. ("Paramount"), a Nevada Corporation and American
Telephone & Computers, Inc., a Maryland Corporation.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Segment Information
- -------------------
During 2000 and 1999, the Company operated in two principal industries:
telecommunications 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: 2000 1999
Telecommunications $ 4,584,683 $ 3,023,848
Restaurant 489,740 509,527
Corporate - -
----------- -----------
Total $ 5,074,423 $ 3,533,375
=========== ===========
Interest expense:
Telecommunications $ 95,687 $ 16,059
Restaurant 2,319 -
Corporate 42,809 83,400
----------- -----------
Total $ 140,815 $ 99,459
=========== ===========
Depreciation and amortization:
Telecommunications $ 1,354,906 $ 512,394
Restaurant 9,190 729
Corporate 17,850 281,154
----------- -----------
Total $ 1,381,946 $ 794,277
=========== ===========
Segment profit (loss) before taxes:
Telecommunications $ (946,579) $ (311,343)
Restaurant (29,130) 32,731
Corporate (819,681) (2,661,665)
----------- -----------
Total $(1,795,390) $(2,940,277)
=========== ===========
Segment assets:
Telecommunications $46,057,384 $55,216,570
Restaurant 184,974 330,958
Corporate 772,414 1,117,326
----------- -----------
Total $47,014,772 $56,664,854
=========== ===========
Expenditure for segment assets:
Telecommunications $ 49,621 $ 441,736
Restaurant 10,501 6,878
Corporate - -
----------- -----------
Total $ 60,122 $ 448,614
=========== ===========
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 customers: 2000 1999
United States $ 4,317,426 $ 2,373,832
Canada 752,762 127,328
Mexico - 829,799
Brazil - 187,979
United Kingdom 4,235 14,437
----------- -----------
Total $ 5,074,423 $ 3,533,375
=========== ===========
Segment assets:
U.S., net of intersegment receivables $43,671,524 $51,037,413
Canada 24,683 24,683
Mexico - 59,675
Brazil 6,529 74,975
United Kingdom 3,312,036 5,468,108
----------- -----------
Total $47,014,772 $56,664,854
=========== ===========
NOTE B - SUBSEQUENT EVENTS
On April 28, 2000, the Company was informed by the staff of the SEC that it had
cleared all comments on its 1997, 1998 and 1999 filing.
A market maker filed a 15c-211 on May 2, 2000 to list the Company's securities
on the OTC Bulletin Board (CGYC). The market maker was informed that the
application was accepted on May 3, 2000, and trading of the Company's securities
resumed mid day on May 9, 2000.
During the week ended March 17, 2000, the Company entered into an agreement to
issue 2 million shares of its restricted stock under a consulting agreement with
Vadiari Group International dated July 15, 1998. (See Exhibit 10.22 which is
incorporated by reference herein.)
The Company, in issuing the 2 million shares on April 7, 2000, have had 1
million shares held in escrow, since a dispute among the parties to receive the
shares still exists. Even though the Company, at this time, does not know
whether all of the 1 million shares in escrow will be delivered, an additional
consulting fee expense of $316,044, for all of the 2 million shares issued, has
been included in the financial statements for the quarter ended March 31, 2000.
The $316,044 was calculated based on a 15% discount from the $0.375 closing
priced on March 17, 2000 for the 2 million shares less the $321,356 previously
recorded as a consulting fee expense in 1998.
NOTE C - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As of March 31, 2000, the Company
had a working capital deficit of $8,208,810 and an accumulated deficit of
$27,350,213. 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 with the
resumption of trading, additional equity and debt financing will be more readily
available. There can be no assurances that sufficient financing will be
available on terms acceptable to the Company or at all. If the Company is unable
to obtain such financing, the Company will be forced to scale back operations,
which would have an adverse effect on the Company's financial conditions and
result of operation.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended March 31, 2000 and 1999
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of Company
- ----------------------
The Corporation is a holding company that operates a group of owned subsidiaries
in the telecommunications, Internet support & computer service, and restaurant
industry. 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 Company's subsidiaries are in
the 1999 10-KSB/A filed on March 31, 2000
Forward Looking Statements
- --------------------------
This Form 10-QSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements
included herein that address activities, events or developments that the
Corporation expects, believes, estimates, plans, intends, projects or
anticipates will or may occur in the future, are forward-looking statements.
Actual events may differ materially from those anticipated in the forward-
looking statements. Important risks that may cause such a difference include:
general domestic and international economic business conditions, increased
competition in the Corporation's markets and products. Other factors may
include, availability and terms of capital, and/or increases in operating and
supply costs. Market acceptance of existing and new products, rapid
technological changes, availability of qualified personnel also could be
factors. Changes in the Corporation's business strategies and development plans
and changes in government regulation could adversely affect the Company.
Although the Corporation believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions could
be inaccurate. There can be no assurance that the forward-looking statements
included in this filing will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Corporation that the objectives and expectations of the Corporation would be
achieved.
Results of Operations
- ---------------------
The Company's revenues for the three months ended March 31, 2000, increased by
$1,541,048 to $5,074,423, as compared to $3,533,375 for the same period in 1999.
Loss from operations decreased $(1,396,127) to $(1,467,766) for the first three
months of 2000, from $(2,863,893) during the three months ended March 31, 1999.
Cost of sales for the three months ended March 31, 2000 were $2,825,824, an
increase of $1,159,094 from $1,666,730 during the same period in 1999. The
increase is a result of the March 1, 1999, Paramount International
Telecommunications, Inc. acquisition.
Operating expenses decreased $698,129 for the first three months of 2000
compared to the same period in 1999. Operating expenses as a percentage of
revenues were 79.4% in the first three months of 2000 as compared to 133.8% in
1999. Selling, general and administrative decreased $101,842 for the first three
months of 2000 to $2,334,419 from $2,436,261 during the three months ended
March 31, 2000.
Other income and expenses for the three months ended March 31, 2000 resulted in
net expenses of $(11,580) as compared to net expenses of $(76,384) during the
previous three month period ended March 31,1999. The principal component of
other expenses during the three months ended March 31,2000 was interest expense
of $140,815, an increase of $41,356, or 41.5% from $99,459 during the three
months ended March 31, 1999, and other income of $123,012, an increase of
$103,761 from $19,251 during the three months ended March 31, 1999.
Liquidity and Capital Resources
- -------------------------------
As of March 31,2000, the Company had a working capital deficit of $8,208,810
compared to a working capital deficit of $7,175,666 at December 31, 1999 a
decrease in working capital of $1,033,144. The decrease in working capital was
substantially due to the Company's collection of previously recognized
receivables and increase in its bad debt allowance during the first three months
of 2000 plus a one time consulting agreement expense. During the three months
ended March 31, 2000 and 1999, the Company incurred a cash flow deficit from
operating activities of $393,856 in 2000 as compared to a cash flow deficit of
$2,209,025 for the same period in 1999. The Company invested $60,122 in
equipment during the first three months of 2000 compared to $448,614 during the
same period of 1999. The Company met its cash requirements during the first
three months of 2000 through the borrowings of short term debt in the amount of
$605,000. While the Company has raised capital to meet its working capital and
financing needs in the past, additional financing is required in order to meet
the Company's current and projected cash flow deficits from operations. The
Company is seeking financing in the form of equity in order to provide the
necessary working capital. The Company currently has no commitments for
financing. There are no assurances the Company will be successful in raising the
funds required.
The Company has issued shares of its Common Stock from time to time in the past
to satisfy certain obligations, and expects in the future to also acquire
certain services, satisfy indebtedness and/or make acquisitions utilizing
authorized shares of the capital stock of the Company. There are no assurances
the Company will be successful in this regard.
The Company is subject to several lawsuits that are 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 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.
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 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 damages 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.
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 was filed as a motion to dismiss on 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 filed its motion to dismiss the
consolidated complaint for failure to state a cause of action on which relief
may be granted on May 5, 2000. The filing of this 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 2. Changes in Securities.
During this reporting period the Company issued 250,000 restricted shares of
common stock under Section 4 (2) of the Securities Act of 1933 to an accredited
investor.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Letter of Intent
- ----------------
In July, 1999, Paramount entered into a non-binding letter of intent to acquire
all of the outstanding stock or assets of Federation of Associated Health
Systems, Inc., a Texas corporation, an outside service provider to hospitals and
other medical facilities of operated assisted ("0+") and credit card direct dial
("0-") phone services. There is no certainty that a definitive purchase
agreement will be executed. A new Letter of Intent was signed between the
parties on February 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.
10-KSB/A Filing and Suspension of Trading of Common Stock on AMEX
- -----------------------------------------------------------------
On March 29, 1999 the SEC advised the Corporation of certain accounting comments
to its previously filed Form 10-KSB/A. On April 27, 1999, the Corporation, in
the belief that the accounting issues had been resolved, filed its annual report
on Form 10-KSB. On April 28, 1999, the Company's Common Stock was listed on the
American Stock Exchange ("AMEX") and the Corporation's Common Stock began
trading there. On April 29, 1999, the SEC advised the Corporation that it had
questions regarding certain accounting issues and requested additional
information. As a result of this SEC request, trading of the Corporation's
Common Stock was suspended by AMEX pending resolution of such accounting issues.
The issues have been discussed at length with the SEC and the Company has
restated 1997 and 1998 audited consolidated financial statements reflecting such
discussions, which are filed as part of Form 10-KSB/A for 1998 & 1999. (See 1998
& 1999 10-KSB/A for additional detailed information.)
The AMEX notified the Company on January 19, 2000 that the Exchange was filing
its application to strike the Companies listing and registration with the
Securities and Exchange Commission on that date. This is pursuant to Rule 12d2-2
under Section 12 of the Securities Exchange Act of 1934 effective at the opening
of the trading session on January 31, 2000.
The assumptions supporting the current value of goodwill are:
The current intangible value at 3/31/00 is $39,300,202. The $39,300,202 value
consists of Goodwill, Customer lists and assembled workforces. Goodwill is
amortized over 15 years. Customer lists and assembled workforces are amortized
over a shorter period of time. Please refer to the 1999 10-KSB/A for applicable
periods of amortization. In order to assess the recoverability of the net
Goodwill value, a cash flow is completed annually and quarterly for each
subsidiary that recognizes Goodwill. Cash flow reports are completed for each
subsidiary to determine whether or not the cash flow obtained solely from the
subsidiary is equal to or greater than the subsidiary's net Goodwill. If it is
not, the Goodwill is considered impaired. Based on cash flow, no impairment of
goodwill existed at 3/31/00, except for American Telephone and Computers, Inc.,
which was purchased for $25,000 on 4/6/99. Goodwill totaling $21,112 was
impaired and charged to operating expense at 12/31/99.
Purchase Agreement Issues
- -------------------------
The purchase agreement for ACC Telecom required quarterly payments of $50,000
per quarter over 5 years for a total of $1,000,000 of principal and interest.
The first payment was due on the closing with quarterly payments starting on
September 1, 1998. A payment was due on September 1, 1999, which was not made
resulting in a balance of $800,000 due under this agreement. The company fully
expects to make these payments in the future. The selling shareholders and the
Company have a buy back/sell back agreement that could be invoked based on the
marketability of MAVIS or cash flows. The buy back/sell back agreement has been
mutually extended to March 3, 2001.
The purchase agreement for Paramount calls for payment due the Eberle Family
Trust on May 25, 1999 in the amount of $1,244,774.48. This payment has not been
made to date 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 upon.
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.
Changes in Directors and Management
- -----------------------------------
In January 2000 Arthur Abraham, Corporate Controller was appointed a Vice
President of the Company.
Item 6. Exhibits and Reports on Form 8-K.
The Company filed an 8K & 8K/A's on the discharge of the Company's Auditor on
dated 9/28, 10/13/,10/22 & 10/25 and incorporated by reference herein.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARNEGIE INTERNATIONAL CORPORATION
Registrant
May 15, 2000 By: /s/ Lowell Farkas
Date -----------------------
Lowell Farkas
President and Chief Executive Officer
By: /s/ Richard Greene
-----------------------
Richard Greene, CPA
Corporate Secretary and Vice President,
Acting Chief Financial Officer
INDEPENDENT ACCOUNTANT'S REPORT
-------------------------------
To the Stockholders and Board of Directors
Carnegie International, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of Carnegie
International, Inc. and Subsidiaries as of March 31, 2000, and the related
statements of operations, comprehensive income (loss) and cash flows for the
three months then ended. These financial statements are the responsibility of
the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be 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 (C) 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 (C). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet as of December 31, 1999, and the related consolidated
statements of operations, comprehensive loss, stockholders equity, and cash
flows for the year then ended (not presented herein); and in our report dated
March 18, 2000, we expressed an unqualified opinion on those consolidated
financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
May 12, 2000