.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2001
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: 83,675,588 shares of
Common Stock ($.001 par value) as of June 30, 2001.
Transitional small business disclosure format: Yes No X
--- ---
CARNEGIE INTERNATIONAL CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30, 2001
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Page 1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Operations: Three Months Ended June 30,
2001 and 2000; six months ended June 30, 2001 and 2000
Consolidated Balance Sheets:
June 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows:
Six months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements:
Six months ended June 30, 2001
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.
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Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The accompanying notes are an integral part of these statements.
Income Statement:
Carnegie International Corporation
Consolidated Statement of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Operating $ 2,696,717 $ 2,940,853 $ 5,273,138 $ 6,542,374
Sale of Service Contracts 277,216 367,814 558,541 781,990
------------ ------------ ------------ ------------
2,973,933 3,308,667 5,831,679 7,324,364
COST OF SALES 1,624,407 2,040,110 2,931,212 4,547,867
------------ ------------ ------------ ------------
GROSS PROFIT 1,349,526 1,268,557 2,900,467 2,776,497
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, General & Administrative 2,099,958 2,229,616 4,130,215 3,939,917
Consulting Agreement -- -- -- 316,044
Management Bonus (656,250) -- (656,250) --
Third party equity based compensation 1,000,000 150,469 1,000,000 150,469
Depreciation and amortization 192,325 1,283,235 368,277 2,575,959
------------ ------------ ------------ ------------
Total operating expenses 2,636,033 3,663,320 4,842,242 6,982,389
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,286,507) (2,394,763) (1,941,775) (4,205,892)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 425 8,097 2,273 13,581
Interest expense (878,813) (172,446) (958,055) (306,031)
Other income 268,690 63,252 288,731 186,264
Undistributed Earnings of ACC Telecom -- 287,366 97,867 321,702
Gain on Sale of Subsidiary -- -- 893,022 --
------------ ------------ ------------ ------------
Total other income (expense) (609,698) 186,269 323,838 215,516
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,896,205) (2,208,494) (1,617,937) (3,990,376)
BEFORE INCOME TAXES
INCOME TAXES (BENEFIT) -- -- -- --
LOSS FROM CONTINUING OPERATIONS (1,896,205) (2,208,494) (1,617,937) (3,990,376)
Net Loss per common share (basic and assuming
dilution) $ (0.03) $ (0.03) $ (0.02) $ (0.06)
Weighted average common shares outstanding - basic and
diluted 72,339,116 63,522,923 69,221,888 61,916,779
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS:
Net Loss (1,896,205) (2,208,494) (1,617,937) (3,990,376)
Foreign currency translation -- -- -- --
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,896,205) $ (2,208,494) $ (1,617,937) $ (3,990,376)
============ ============ ============ ============
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Carnegie International Corporation
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and equivalents 134,754 $ 212,973
Accounts receivable, net of allowance for doubtful accounts 1,398,314 1,656,047
Loan receivable -- 24,000
Note receivable 676,653
Inventory 106,937 537,311
Prepaid expenses 245,431 26,975
------------ ------------
Total current assets 2,562,089 2,457,306
Property and equipment, less accumulated depreciation 692,196 1,179,844
Other Assets:
Intangible assets, less accumulated amortization 3,329,359 4,820,322
Due from related parties 415,543 228,417
Security deposits and other assets 37,300 37,569
------------ ------------
Total Other Assets 3,782,202 5,086,308
Total Assets $ 7,036,487 $ 8,723,458
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable - Banks $ -- $ 36,200
Advance on Stock purchases 250,000 250,000
Current Maturities of long term debt 1,584,198 1,547,361
Current Maturities of notes payable to stockholders & affiliates 1,090,573 1,849,722
Current Maturities of capital lease obligations 111,019 85,059
Accounts payable and accrued liabilities 5,450,842 6,717,374
Deferred revenue 81,730 75,410
------------ ------------
Total current liabilities 8,568,362 10,561,126
Long Term Liabilities
Long term debt, less current maturities 86,333 209,757
Long term capital lease obligations, less current maturities 20,185
Notes Payable 58,067
------------ ------------
Total Long Term Liabilities 164,585 209,757
Total Liabilities 8,732,947 10,770,883
Stockholders' Equity:
Convertible preferred stock par value, Series A, E, G, H, J, K.
$1.00 par value per share; 40,000,000 shares authorized; 3,148,259
issued at June 30, 2001 and 624,100 issued at June 30, 2000 3,148,259 624,100
Common stock, no par with a stated value of $.01 per share; 110,000,000
shares authorized 86,453,607 issued and 83,675,588 outstanding at June
30, 2001; 71,334,748 issued and 68,556,729 outstanding at June 30, 2000 864,536 705,421
Additional paid-in capital 68,867,671 69,582,043
Accumulated Deficit (72,738,135) (71,120,198)
Foreign currency translation adjustment 23,489 23,489
------------ ------------
165,820 (185,145)
Less treasury stock, at cost (1,862,280) (1,862,280)
------------ ------------
Stockholders' equity (1,696,460) (2,047,425)
Total Liabilities & Stockholders Equity $ 7,036,487 $ 8,723,458
============ ============
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Page 4
Carnegie International Corporation
Consolidated Statements of Cash Flow
(Unaudited)
Six Months
Ended June 30,
2001 2000
----------- -----------
Increase (decrease) in cash and equivalents:
Cash flows from operating activities
Net income $(1,617,937) $(3,990,376)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 368,277 2,769,130
Gain on sale of subsidiaries (893,022) --
Issuance of warrants as compensation -- 150,469
Earnings from sold subsidiary (March 2001) 97,867
Accounts receivable (257,733) 427,979
Due from affiliates -- 21,244
Beneficial conversion feature 700,000 --
Imputed interest 800,000 --
Issuance of common stock as settlement 300,000 --
Inventory (430,374) (87,842)
Prepaid expenses & other assets 255,757 32,516
Refundable income taxes -- (12,046)
Accounts payable and accrued expenses (610,282) (777,375)
Deferred revenue 6,320 (163,142)
Other, net 293,572 1,235,767
----------- -----------
Net cash provided by (used in) operations (987,555) (393,676)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (35,828) (96,481)
Collection of Loans receivable 24,000 104,119
Collection of Notes receivable 35,000 (163,323)
----------- -----------
Net cash provided by (used in) investing activities 23,172 (155,685)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 286,164 (362,684)
Proceeds from Capital Leases -- 171,024
Proceeds of advance on Stock Purchases -- (391,000)
Proceeds from consideration of lawsuit 250,000
Sale of common stock -- 121,312
Proceeds from sale of subsidiaries 350,000 --
Proceeds from sale of option to purchase common stock -- 973,000
----------- -----------
Net cash provided by (used in) financing activities 886,164 511,652
NET INCREASE (DECREASE) IN CASH AND CASH EQUIV (78,219) (37,709)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 212,973 463,374
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 134,754 $ 425,665
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest 158,055 140,308
Common stock issued in exchange for services & compensation 453,448 1,928,629
Common stock issued in exchange for acquisitions 700,000 --
Convertible Preferred returned due to Sale of Subsidiary 200,000 --
Convertible Preferred shares issued in exchange for acquisition -- 350,000
Convertible preferred converted to common stock 52,500 --
pursuant to acquisition agreement of RomNet Support Services
Preferred stock issued in exchange for debts 1,031,927 --
Preferred stock issued as settlement 1,500,000 --
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CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
- -------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30,2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001. 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, 2000 annual report
included in SEC Form 10-KSB/A.
In July 2001 the FASB issued SFAS 141, "Business Combinations" and SFAS 142,
"Goodwill And Other Intangible Assets." SFAS 141 requires that the purchase
method of accounting be used to account for all business combinations entered
into after June 30, 2001, SFAS 142 requires that goodwill and other intangible
assets with indefinite lives be tested for impairment annually and not be
subjected to amortization. The provisions of SFAS 142 will apply to us beginning
January 1, 2002. The amortization of goodwill reduced our net income by $204,722
for the six months ended June 30, 2001. We have not quantified the impact of
adopting other provisions of these standards. If amortization of goodwill was
not applied during the six month period ending June 30, 2001 and 2000, loss from
continuing operations before income tax would have been $1,413,215 and
$2,405,362 respectively.
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, American Telephone
& Computers, Inc., a Maryland Corporation and Federation of Associated Health
Systems, Inc., a Texas Corporation.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
SEGMENT INFORMATION
During 2001 and 2000, 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.
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Page 6
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
Revenues from external customers: 2001 2000 2001 2000
------------ ------------ ------------ ------------
Telecommunications $ 2,633,987 $ 2,886,813 $ 5,044,923 $ 6,412,770
Restaurant 339,946 421,854 786,756 911,594
Corporate -- -- -- --
------------ ------------ ------------ ------------
Total $ 2,973,933 $ 3,308,667 $ 5,831,679 $ 7,324,364
============ ============ ============ ============
Interest expense:
Telecommunications $ 38,169 $ 98,683 $ 76,333 $ 187,140
Restaurant 12,567 4,639 30,375 6,958
Corporate 828,077 69,124 851,347 111,933
------------ ------------ ------------ ------------
Total $ 878,813 $ 172,446 $ 958,055 $ 306,031
============ ============ ============ ============
Depreciation and amortization:
Telecommunications $ 125,816 $ 1,243,390 $ 254,393 $ 2,509,074
Restaurant 25,421 18,380 38,083 27,570
Corporate 41,088 21,465 75,801 39,315
------------ ------------ ------------ ------------
Total $ 192,325 $ 1,283,235 $ 368,277 $ 2,575,959
============ ============ ============ ============
Segment profit (loss) before taxes:
Telecommunications $ 545,179 $ (1,160,381) $ 484,689 $ (2,093,451)
Restaurant (190,050) (14,534) (159,577) (43,664)
Corporate (2,251,334) (1,033,580) (1,943,049) (1,853,261)
------------ ------------ ------------ ------------
Total $ (1,896,205) $ (2,208,495) $ (1,617,937) $ (3,990,376)
============ ============ ============ ============
Segment assets:
Telecommunications $ 5,165,682 $ 45,210,095 $ 5,165,682 $ 45,210,095
Restaurant 154,857 165,566 154,857 165,566
Corporate 1,715,948 801,891 1,715,948 801,891
------------ ------------ ------------ ------------
Total $ 7,036,487 $ 46,177,552 $ 7,036,487 $ 46,177,552
============ ============ ============ ============
Expenditure for segment assets:
Telecommunications $ 35,828 $ 36,359 $ 35,828 $ 85,980
Restaurant -- -- -- --
Corporate -- -- -- 10,501
------------ ------------ ------------ ------------
Total $ 35,828 $ 36,359 $ 35,828 $ 96,481
============ ============ ============ ============
The following geographic area data for trade revenues is based on product or
service delivery location and property, plant and equipment is based on physical
location.
Three Months Ended June 30, Six Months Ended June 30,
Revenues from external customers: 2001 2000 2001 2000
----------- ----------- ----------- -----------
United States $ 2,711,939 $ 2,887,606 $ 5,301,346 $ 6,146,306
Canada 261,994 417,000 530,333 1,169,762
United Kingdom -- 4,061 -- 8,296
----------- ----------- ----------- -----------
Total $ 2,973,933 $ 3,308,667 $ 5,831,679 $ 7,324,364
=========== =========== =========== ===========
Segment assets:
U.S., net of intersegment receivables $ 6,973,282 $43,317,958 6,973,282 $43,317,958
Canada 42,807 24,683 42,807 24,683
Brazil -- 6,530 -- 6,530
United Kingdom 20,398 2,828,381 20,398 2,828,381
----------- ----------- ----------- -----------
Total $ 7,036,487 $46,177,552 $ 7,036,487 $46,177,552
=========== =========== =========== ===========
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NOTE B - SUBSEQUENT EVENTS
Subsequent Events
On August 9, 2001 the Company assigned a portion of recovery rights in its
litigation against its former auditors and certain other party (the litigation
is more fully detailed under Part II, Item 1.) to a third party for
consideration of $250,000 cash. Pursuant to this assignment, the third party
will receive the greater of $1,250,000 or 6% of the recovery of any proceeds
from this lawsuit after any attorney's fee and payment to stockholders, but
before any payment to the Company. SEE NOTE C FOR PRIOR AGREEMENTS.
NOTE C - 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:
2001 $ 703,892
2002 592,701
2003 341,427
2004 510,942
2005 109,940
----------
$2,258,902
==========
Employment Agreements
The Company has entered into various employment agreements as follows:
o A five-year agreement commencing May 10, 1996 providing for an annual
salary of $80,000, plus certain benefits. This has been extended for one
year.
o A two-year agreement commencing May 15, 1997, with an extension through
September 2005, providing for an annual salary of $100,000 - $300,000.
o A five-year agreement commencing August 18, 1997, providing for an annual
salary of $75,000, plus certain benefits.
o A five-year agreement commencing April 8, 1998, with an extension through
April 8, 2005, providing for an annual salary of $350,000, plus bonus.
o Four five-year agreements commencing February 28, 1999, providing for
annual salaries of $130,000 each, plus bonuses.
o A two-year agreement commencing June 1, 2000, providing for an annual
salary of $85,000.
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On December 21, 1998, Gloria Lucas, personal Representative of the Estate of
John Charles Saah, brought suit against Carnegie and two of it's officers in 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
$89,000 plus a disputed amount of $130,654, which are recorded as liabilities.
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
Partner, 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 on
January 10, 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. 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 its conclusion or otherwise resolving the same in Carnegie's
favor.
On or about August 1, 2000, Joseph Fisher filed suit against Paramount
International Telecommunications, Inc. and Call Data Clearing, Inc. for breach
of contract. Thereafter, and on or about October 10, 2000, Paramount
International Telecommunications, Inc. filed a cross-complaint against Joseph
Fisher for breach of fiduciary duty, breach of the implied covenant of good
faith dealing, and fair dealing, negligent interference with prospective
economic advantage, intentional interference with economic advantage and
declaratory relief. The parties have conducted substantial discovery and have
recently attended a mediation, to no avail. It is Paramount International
Telecommunication, Inc.'s position that the claim is baseless and without merit.
A mandatory settlement conference is scheduled for October 17, 2001. Trial is
scheduled in this matter for October 22, 2001.
On November 14, 2000, a lawsuit was commenced in Baltimore County Circuit court
against Carnegie and several other defendants, including E. David Gable,
Carnegie's Chairman, Lawrence Gable, a Vice-President of
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Page 9
Carnegie, and John Gable, a Carnegie employee, by Bel-Ken Associates, alleging
damages against Carnegie as an alleged guarantor on a breached lease agreement.
The Plaintiff sought damages of more than $158,000. A settlement agreement has
been reached in this case. Carnegie has no financial obligation as part of the
settlement. David Gable is paying $10,000 to the plaintiff and is providing a
promissory note in the amount of $100,000.
On February 20, 2001, Alltel Communications Products Inc. commenced a lawsuit in
Baltimore county Circuit Court against Carnegie, alleging damages for breach of
contract involving an alleged distributorship agreement entered into on January
20, 1999. Plaintiff claims that it properly returned certain merchandise to
Carnegie and is claiming a refund of $118,855. Carnegie believes that it has
valid defenses to the claim and has filed a counterclaim for Plaintiff's
material breach of the distributorship agreement. The lawsuit is currently in
discovery stages. Carnegie believes that it has no material liability although
there can be no assurance in this regard. A trial date has been set for November
28, 2001.
On October 25, 2000, Edward Lawson, as stockholder and escrow agent, commenced
an interpleader lawsuit against Carnegie, Fountainhead, Inc. and Lucky Dog, LLC
in the Blaine County (Idaho) District court. Plaintiff alleges that he and
defendants entered into an escrow agreement for transaction involving the
purchase and sale of Carnegie Common Stock, pursuant to a November 25, 1999
Letter Agreement. The complaint alleges that Fountainhead delivered certain
stock and Lucky Dog delivered $250,000 out of a required $500,000 to plaintiff,
and plaintiff in turn delivered the $250,000 to Carnegie. The Letter Agreement
required that Lucky Dog fully perform its obligations and tender the full
$500,000. Carnegie has fully performed all of the conditions required of it
under the Agreement. Lucky Dog has filed a cross claim against Carnegie seeking
damages of $500,000 for claims of breach of contract, breach of covenant of good
faith and fair dealing, fraud, violation of Idaho Securities Act, and
negligence.
On May 29, 2001 Martinair, Inc., commenced a lawsuit a Baltimore County District
Court. The complaint alleges that Martinair provide air travel and is seeking
$4,589.50. The Company believes this case is without merit and will defend it in
court. There can be no assurance that the Company will prevail. A trial date has
been set for September 5, 2001.
Several lawsuits were commenced between November 14, 2000 and June 30, 2001
against Carnegie's former subsidiary, Talidan USA, Inc. The Company believes
that any judgments that are or may be entered against Talidan USA, Inc. will
have no material impact upon Carnegie's financial statements.
On May 23, 2000, the Company filed a lawsuit against its former auditors and
certain other parties demanding $2.1 billion in damages. The former auditors
have filed a Motion to Dismiss, which was vigorously opposed by the Company.
Subsequently, the Company has assigned a portion of recovery rights to a third
party for consideration of $500,000 cash. Pursuant to this assignment, the third
party will receive $2,500,000 of any proceeds from this lawsuit after any
attorney's fee and payment to stockholders, but before any payment to the
Company.
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 10-SB 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. The parties
have agreed to a settlement. Grant Thornton, the Company's former auditor, has
objected. A hearing on Grant Thornton's objection is scheduled in October
2001. The Company expects court approval of the settlement, but can give no
assurances of court approval.
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.
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Page 10
The Phone Stop has a line of credit with Verizon Wireless for inventory. Verizon
Wireless filed a lien against The Phone Stop for all inventory from Verizon
Wireless and accounts receivable.
In December 2000, the Company entered into a letter of intent with Host Funding,
Inc (HFI) whereas the Company will exchange Company shares for shares of HFI.
The merger is pending certain conditions of the agreement as follows by HFI: a)
advancement of funds to the company by Sutter Capital Management and MPI
(Investors) for the redemption of the company's preferred stock, b) completion
of legal settlement payable to Auburn Equity Partners c) the satisfaction of all
liabilities to the Investors of HFI, d) the existence of working capital in the
amount of $200,000, in the form of a note payable to the Investors, e)
cancellation of the existing management agreement between the company and MPI
and commencement of a new management agreement between the HFI, MPI, and the
Company, f) cancellation of issued warrants of HFI, g) issuance of new class of
HFI preferred stock, and several other performance criteria as may be required
by the Company.
In connection with the proposed transaction, HFI advanced funds to the Company
in the amount of $150,000. The promissory note from the Company is in the amount
of $175,000, which includes an amendment fee for an amendment to the merger
agreement. A Guarantee Agreement and a Stock Pledge agreement secure the
promissory note from the Company. This note has been personally guaranteed by
the Company Chairman E. David Gable.
The Company contemplated that the proposed merger would close during the second
quarter of 2001. In the event that the closing did not occur prior to May 31,
2001, either party shall have the election to terminate the merger by providing
written notice of such termination to the other party. The Company was informed
by a Press Release by Hosting Funding, Inc (OTC BB: HFDL) dated June 8, 2001
that it has suspended merger negotiations with the Company. The reason given in
the press release were not covered by the above agreement and its first
amendment thereof.
On June 8, 2001 Cross Host, Inc., a whole owned subsidiary of Host Funding filed
suit in Superior Court of California, County of Contra Costa vs. E. David Gable,
an individual for $175,000 plus interest and attorney fees. E. David Gable was a
guarantor of the advanced funds. The Company will indemnify E. David Gable in
this matter. An answer and a cross complaint on behalf of E. David Gable and the
Company has been filed in this case. There can be no assurance that the Company
will prevail.
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 as of June 30, 2001.
NOTE D - DISPOSITION OF HARBOR CITY CORPORATION, D.B.A. ACC TELECOM
On March 23, 2001 the Company sold its wholly owned interconnect subsidiary
Harbor City Corporation, d.b.a. ACC Telecom (ACC) of Columbia, Maryland to its
former owners Barry and Susan Hunt for $3.5 million, concurrently ending a
pending dispute between the parties. The transaction was comprised of $700,000
in cash and notes to be paid over a one (1) year period, waiver of debt of
$800,000 owed from the original purchase agreement and return of 200,000
preferred shares that were convertible to $2,000,000 worth of the Company's
restricted common stock. The Company's financial statement will reflect a gain
of $893,022 on this sale during this reporting quarter. The Company has
performed significant tests under Rule 11-01(b) and is not required to provide
any additional financial information at this time.
Mr. Hunt was president and Mrs. Hunt was an officer of ACC Telecom when Carnegie
acquired it in May of 1998. Mr. Hunt has served as a member of Carnegie's Board
of Directors since that time, before resigning on March 1, 2001. (See Changes in
Directors and Management).
ACC sold, serviced and installed telephony equipment in the greater
Baltimore/Washington area. Under the purchase agreement ACC had the exclusive
marketing rights in North America for the Company's MAVIS/(TM)/ voice activated
auto attendant. With the sale of ACC the Company will now be able to explore
other avenues for marketing this product in North America. It should be noted
that the Company has a wholly owned subsidiary in a similar business in the
Greater Chicago area. (See 8K filed April 6, 2001, and referenced herein.)
NOTE E - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As of June 30, 2001, the Company
had a working capital deficit of $6,006,273 and an accumulated deficit of
$72,738,135. 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
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Company's working capital. The Company is actively seeking additional equity and
debt financing. The Company believes that since 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 Six Months Ended June 30, 2001 and 2000.
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 telecommunications 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 2000 10-KSB filed on March 31, 2001
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 six months ended June 30, 2001, decreased by
$1,492,685 to $5,831,679 as compared to $7,324,364 for the same period in 2000.
Loss from operations decreased $2,264,117 to $(1,941,775) for the first six
months of 2001, from $(4,205,892) during the six months ended June 30, 2000.
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The decrease in revenue was due to the loss of client contracts in the
telecommunication segment.
Due to the sale of Acc Telecom in March 2001, the consolidated statement of
operations has been adjusted to record only the undistributed earnings of Acc
Telecom. All other operating categories such as revenue, cost of sales, SG&A,
etc. have been eliminated to reflect a more comparable statement.
Cost of sales for the six months ended June, 2001 were $2,931,212, a decrease of
$1,616,655 from $4,547,867 during the same period in 2000.
Operating expenses decreased $2,140,147 for the first six months of 2001
compared to the same period in 2000. Operating expenses as a percentage of
revenues were 83% in the first six months of 2001 as compared to 95.3% in 2000.
Selling, general and administrative increased $190,298 to $4,130,215 from
$3,939,917 during the six months ended June 30, 2001.
Management bonus of $(656,250) is an adjustment of accrued bonuses recorded in
1999, but never paid. $1.2m was originally accrued with $75k subsequently paid,
leaving a balance of $1.125m. $656,250 was adjusted in June 2001, leaving a
current accrued MGT bonus balance of $468,750. The bonus was recorded as part of
the Paramount International Telecommunications, Inc. acquisition, in March 1999.
$1m third party based compensation is due to a $1.5m preferred stock settlement
with Infinity Ventures. $700k was charged to operating expense as a beneficial
conversion feature. The remaining $800k was charged to "imputed" interest
expense. Infinity Ventures was also issued 10m shares of common stock as part of
the settlement, whereby leading to an additional charge of $300k, to equal the
$1m. -- See Item 6 for more information regarding Infinity Ventures.Net.
Other income and expenses for the six months ended June 30, 2001 resulted in
total other income of $323,828 as compared to total other income of
$215,516 during the six month period ended June 30,2000. The principal
components of other income during the six months ended June 30,2001 was the gain
on sale of subsidiary for $893,022, plus $250,000 received from a third party
for consideration regarding the former auditor lawsuit. Also, as noted above,
due to the sale of Acc Telecom in March 2001, the consolidated statement of
operations has been adjusted to reflect only the undistributed earnings of Acc
Telecom in the other income (expense) section, for the current and prior year
periods.
Depreciation and amortization for the six months ended June 30, 2001 and 2000
was $368,277 and $2,575,959 respectively. The decrease of $2,207,682 was due to
the impairment of goodwill at 12/31/00 (see note #6 10KSB for the period ended
12/31/00 filed 4/17/01)
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2001, the Company had a working capital deficit of $6,006,273
compared to a working capital deficit of $8,103,820 at December 31, 2000 an
increase in working capital of $2,097,547. The increase in working capital was
mainly due to the Company's conversion of debt to equity and write-off of debt
to current officers. During the six months ended June 30, 2001 and 2000, the
Company incurred a cash flow deficit from operating activities of $903,788 in
2001 as compared to a cash flow deficit of $393,676 for the same period in 2000.
The Company invested $35,828 in property and equipment during the first six
months of 2001 compared to $96,481 during the same period of 2000. The Company
met its cash requirements during the first six months of 2001 through the sale
of a subsidiary and consideration regarding the former auditor lawsuit. 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 have been discussed in detail in
prior filings as well those filed since our last filing. Below under Part II,
Item 1. are material updates to prior Carnegie disclosed actions against the
Company as well as several new or changes to actions against the Company and in
one case actions by the Company. The Company intends to vigorously defend the
complaints, which have been filed against the Company and in at least one case
against its officers and directors. 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On February 20, 2001 Alltel Communications Products Inc. commenced a
lawsuit in Baltimore County Circuit Court against Carnegie, alleging damages for
breach of contract involving an alleged distributorship agreement entered into
on January 20, 1999. Plaintiff claims that it properly returned certain
merchandise to Carnegie and is claiming a refund of $118,855 therefore. Carnegie
believes that it has valid defenses to the claim, and has filed a counterclaim
for Plaintiff's material breach of the distributorship agreement. The lawsuit is
currently in discovery stages. Carnegie believes that it has no material
liability although there can be no assurance in this regard. A trial date of
November 28, 2001 has been set for this matter.
On November 22, 2000 Kathleen Cover and several other persons commenced a
lawsuit individually and on behalf of Strongput, Inc. in Baltimore City Circuit
Court against Carnegie, and several other defendants, including DAR Products
Corporation, a former Carnegie subsidiary until September 15, 1997, E. David
Gable, Carnegie's Chairman, Scott Caruthers, a former Carnegie Director and
Shareholder, Dashielle Lashra, Scott Caruthers spouse, David Pearl, a former
Carnegie Secretary, Richard Greene, a former Carnegie Secretary, and Acting
Chief Financial Officer, Gary Dahne, a Carnegie employee, Richard Gershberg, a
former law partner of David Pearl, Gershberg and Pearl, Gershberg and Pearl,
LLP, Gershberg and Pearl, LLC, Dan Eckert, and Strongput, Inc. Carnegie believes
the lawsuit is without merit against it and certain other defendants, and as a
result thereof, Plaintiffs on April 13, 2001 agreed to dismiss the lawsuit
against Carnegie, E. David Gable, Richard Greene, and Gary Dahne.
Carnegie previously reported certain disagreements with J-Net Group, the
former owners of Carnegie's subsidiary RomNet, concerning certain payment
issues. On March 2, 2000, as previously reported, Carnegie and J-Net agreed to
the withdrawal of the Request for Arbitration, without Prejudice to the rights
of either party. Carnegie and J-Net has since resolved this matter with the
execution by Carnegie of a promissory note in the amount of $112,000, with equal
monthly payments over 12 months, commencing March, 2001 and the issuance to
J-Net of 525,000 shares of the Corporation's Common Stock in exchange for
previously issued 52,500 shares of Series F Preferred. The Company is behind in
its payment schedule which it full expects to be current on by September 1,
2001.
On March 22, 2001 Capital Media Networks Inc. commenced a lawsuit in the
Circuit Court of Palm Beach, Florida against Carnegie, alleging damages of
$16,333 for breach of contract involving an infomercial. Plaintiff claims that
it fully performed the Agreement and is claiming a balance due on the contract.
Carnegie believes that it has valid defenses to the claim, and that the Florida
court has no jurisdiction. Carnegie filed a motion to dismiss the case on a
jurisdictional basis. On May 9, 2001 Carnegie's motion to dismiss was upheld by
the Circuit Court of Palm Beach, Florida.
Several lawsuits were commenced between November 14, 2000 and June 30,
2001 against Carnegie's former subsidiary, Talidan, USA, Inc. The Company
believes that any judgments that are or may be entered against Talidan USA, Inc.
will have no material impact upon Carnegie's financial statements.
On May 2, 2001 the Company's subsidiary Victoria Station Miami, Inc.
received a Complaint for Eviction and Breach of Lease Agreement from its
Landlord. The complaint alleges unpaid rent and taxes of $186.610.77. On May 25,
2001 a final judgment of eviction and termination of the lease was entered in
favor of the Landlord. A Writ of Possession was issued but agreed not to be
acted upon until August 1, 2001. On August 1, 2001 Victoria Station Miami, Inc.
and the Landlord agreed to allow Victoria Station Miami, Inc. to remain in
possession for and additional Month. The Company expects that the management of
Victoria Station Miami, Inc. will be able to resolve this matter for continued
possession, but can give no assurances. The Court also entered a final judgment
in favor of the Landlord in the amount of $186,610.77 plus unpaid real estate
taxes. The Company believes that the judgment that been entered against Victoria
Station Miami, Inc. will have no material impact upon Carnegie's financial
statements.
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On May 29, 2001 Martinair, Inc., commenced a lawsuit a Baltimore County District
Court. The complaint alleges that Martinair provide air travel and is seeking
$4,589.50. The Company believes this case is without merit and will defend it in
court. There can be no assurance that the Company will prevail. A trial date has
been set for September 5, 2001.
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. An agreement has been reached between the parties. This agreement and its
terms require approval by the Court. The settlement will provide for the
dismissal of the shareholder suits against the Company and Grant Thornton. The
settlement terms include a payment to the shareholders by the Company's insurer
in the amount of $2.25 million. The shareholders will also receive $3 million in
warrants in the Company's stock and a 3% interest in the Company's suit against
Grant Thornton in the Baltimore City Circuit Court, described below. At a
hearing on April 27, 2001 Grant Thornton raised questions concerning the effect
of the PSLRA on future actions by Carnegie in the Maryland state court
litigation commenced by Carnegie against Grant Thornton, described below. The
questions raised by Grant Thornton have been briefed by the parties and will be
considered by the court at a hearing scheduled for August 21, 2001. The Company
can give no assurances that the Court will accept the proposals for settlement
as agreed to between the Company and the shareholders.
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. The SEC also asked the Company and its employees to
submit certain documents or information pursuant to a private investigation. The
Company's insurance has also paid for the submission of those documents and
information. The Company may be subject to repayment of all or some portion of
these costs. On May 23, 2000, the Company filed a Complaint against Grant
Thornton and Arthur Flach, in the Circuit Court for Baltimore City, alleging
claims of breach of contract, negligence in preparation of the Company's 1997
and 1998 financial statements and defamation of certain company officers, who
are also plaintiffs in the action. The Complaint entitled Carnegie International
Corporation, et al. v. Grant Thornton, LLP, et al., Civil No. 24-C-00-002639,
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demands $2.1 billion in damages and is scheduled for trial in October 2001.
Grant Thornton filed a Motion to Dismiss certain claims in the Complaint which
was vigorously opposed by the Company. A hearing on Grant Thornton's motion was
argued before the Court in February 2001, however no decision has yet been
rendered. Discovery in the litigation has been continuing. On June 22, 2001,
Grant Thornton filed a motion to extend the discovery deadline and to postpone
the October trial date. In a telephonic hearing, the Court extended the fact
witness discovery deadline to August 20, 2001 and the expert witness discovery
deadline to September 20, 2001, but denied Grant Thornton's request to continue
the October trial date. The Court will allow Grant Thornton to again argue its
request to continue the October trial date in open court on August 13, 2001. On
July 25, 2001 the Company filed a Motion For Default Judgment as to all Counts
of the Complaint after the Company learned in a deposition that a Grant Thornton
Partner, J.W. Mike Starr, had destroyed and deleted relevant documents from his
computer. The Court also has heard argument on the Company's Motion for Default
Judgment on August 13, 2001. The Judge has not ruled on this motion. The parties
are engaging in the exchange of documents and depositions at this time, which
should be completed by months end.
The Company has retained the law firm of William H. Murphy, Jr. and Associates,
P.A. with the law firm of Gary, Williams, Parenti, Finny, Lewis, McManus, Watson
& Sperando as co-council on a full contingency so the Company will have no
financial loss from this action.
Item 2. Changes in Securities.
On June 11, 2001, the Company issued to several creditors, including its
Chairman, E. David Gable and its Chief Executive Officer, Lowell Farkas, its
Convertible Promissory Notes and Series J Convertible Preferred Stock in
exchange for forbearances and/or settlements of amounts due as accrued salaries,
expense reimbursements, debts and legal fees in the aggregate amount of
$1,026,659. Although the Series J documents are structured as debt instruments
to defer income tax liabilities to the holders until the obligations are paid,
the Company believes that the holders of the Series J documents will convert the
Series J Preferred Stock into shares of common stock of the Company, which
conversion will extinguish the debt under the Convertible Promissory notes. The
Series J Preferred Stock gives the holders of the Series J Preferred Stock the
right, at any time after July 1, 2002, to convert the face amount thereof into
restricted shares of Common Stock of the Company at a conversion price
determined by using the average closing price of the Company's Common Stock for
the 20 trading days prior to June 11, 2001, with a discount of 35% applied for
the extended holding period. The holders of the Series J Preferred Stock will
not receive dividends thereon, but do receive voting rights equal to the number
of shares of common stock underlying the Series J Preferred Stock. The various
holders of the Series J Preferred Stock, including Messrs. Gable and Farkas,
each acquired the right to vote a significant number of shares on matters
requiring stockholder approval. The Series J Preferred Stock may be redeemed by
the Company, at the option of the holders, at any time after July 1, 2002 for
the face amount thereof.
On June 19, 2001 the Board of Directors of the Company approved a Settlement and
Mutual Release Agreement between the Company and a creditor, which provides for
the issuance of 10,000,000 shares of common stock of the Company, which is
restricted stock, as well as a Convertible Promissory Note of the Company with a
face value of $1.5 million, that will be secured by the issuance of Series K
Preferred Stock of the Company. The Convertible Promissory Note shall be due
and payable, to the extent the Series K Preferred Stock has not been converted,
on the earlier of one year from the date thereof or the settlement of the
pending legal action against the Company's former auditors. The Series K
Preferred Stock issued is convertible at any time prior to maturity at a
conversion price determined by using the average closing price of the Company's
common stock for the 15 day period prior to conversion, with a 35% discount
applied for the holding period. The holders of the Series K Preferred Stock
will not receive dividends thereon, but do receive voting rights equivalent to
7,500,000 shares of common stock. The holder of the Series K Preferred Stock
was also provided certain demand and piggyback registration rights with respect
to the common stock received upon conversion of the Series K Preferred Stock.
During this reporting period the Company issued 992,500 restricted shares of
common stock under Section 4 (2) of the Securities Act of 1933, for cash and
payment of services.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
The Company has suspended operations at its subsidiary Profit Thru
Telecommunications (Europe) LTD. (PTT) in March 2001. The Suspension will
continue until the company believes market conditions improve sufficiently and
can again fund PTT operations. All IVR marketing efforts have ceased related to
Order Master, Wage Master, Database Management, Profiling and Travel
Information. Relationships with Call-a-Card, Security Micro Dot, Employee
Supervision and the Scottish Tourist Board will be interrupted since these
relationships have not produced profits. The Company still believes that
MAVIS/(TM)/ is an extremely attractive and useful product that has great
potential. MAVIS/(TM)/ is a voice activated auto attendant. MAVIS/(TM)/ is
designed for small business use. MAVIS/(TM)/ eliminates the need for a human
telephone operator and incorporates its own voice mail, email and unified
message system at a very competitive price. MAVIS/(TM)/ was developed, however
using the voice engine of Lernout & Hauspie (L&H). The Company believes the L&H
speech engine component of MAVIS/(TM)/ must be changed before any further
efforts are made to market the product or develop additional enhancements. There
have been substantial and well documented difficulties relating to the voice
engine and its producer L&H resulting in a loss of market confidence. To that
end, the Company has instructed the remaining employees at PTT to explore a
relationship with a new speech engine provider. Vocalis, Speech Works and others
are potential development partners currently being pursued by PTT for
MAVIS/(TM)/. This will be the only development project for the foreseeable
future at PTT and will likely produce no revenue in year 2001. There can be no
guarantee that a suitable engine or development partner will be found but the
company continues to believe that voice activated products have unlimited market
potential and will continue to pursue the development of MAVIS/(TM)/ and
MAVIS/(TM)/ derivative products in the future as a key component of the
Company's business plan.
The assumptions supporting the current value of goodwill are:
The current intangible value at 6/30/01 is $3,274,934. The $3,274,934 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
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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 6/30/01.
Purchase Agreement Issues
The purchase agreement for Paramount calls for payment due to the Eberle Family
Trust on May 25, 1999 in the amount of $1,244,774.48. This payment has not been
made to date. The Trust has agreed to accept monthly interest payments until the
Company can satisfy this obligation. At this time no payment schedule has been
agreed upon. Despite the forbearance of the Eberle Family Trust, the possibility
exists for an attempted rescission of this transaction although the Company
believes this is unlikely, but there can be no assurances of such. If a payment
schedule is not agreed upon by both parties litigation could ultimately result.
The Company does not believe this will occur, and can give no assurance of this
not happening in the future.
Item 6. Exhibits and Reports on Form 8-K.
During the Quarter ending June 30, 2001 the filed three (3) Form 8-K:
1. As a subsequent event the Company filed an 8-K on the sale of Harbor City
Corporation on April 6, 2001 and is incorporated by reference herein.
2. On June 26, 2001 the Company filed a Form 8-K (and is incorporated by
reference herein) reporting that E. David Gable, Chairman, Lowell Farkas,
President and CEO and the former shareholders of Paramount International
Telecommunication, Inc agreed to convert monies owing to them by the Company to
equity. 3. On June 29, 2001 the Company filed a Form 8-K (and is incorporated by
reference herein) as a result of a Settlement and Mutual Release Agreement
between the Company and Infinity Ventures.net to settle issues arising out of a
transaction on February 13, 2000 (exhibits 10.46 & 10.47 of the Company's 10-KSB
filed on April 17, 2001 and incorporated by reference herein).
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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
August 17, 2001 By: /s/ Lowell Farkas
Date ---------------------
Lowell Farkas
President and Chief Executive Officer
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