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 September 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: 84,208,088 shares of Common Stock
($.001 par value) as of September 30, 2001.
Transitional small business disclosure format: Yes No X
CARNEGIE INTERNATIONAL CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2001
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Operations: Three Months Ended Sept. 30,
2001 and 2000; nine months ended September 30, 2001 and 2000
Consolidated Balance Sheets:
September 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows:
Nine months ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements:
Nine months ended September 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.
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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Operating $ 4,036,560 $ 2,396,213 $ 9,294,584 $ 8,938,587
Sale of Service Contracts 286,559 332,606 845,100 1,114,596
------------ ------------ ------------ ------------
4,323,119 2,728,819 10,139,684 10,053,183
COST OF SALES 3,204,691 1,032,353 6,267,351 5,419,513
------------ ------------ ------------ ------------
GROSS PROFIT 1,118,428 1,696,466 3,872,333 4,633,670
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, General & Administrative 2,589,132 2,260,039 5,907,225 6,199,958
Consulting Agreement -- -- -- 316,044
Management Bonus -- (656,250) --
Impairment expense -- 20,000 -- 20,000
Settlement expense 1,684,627 --
Third party equity based compensation -- -- -- 150,469
Depreciation and amortization 156,303 1,287,415 524,581 3,863,374
------------ ------------ ------------ ------------
Total operating expenses 2,745,435 3,567,454 7,460,183 10,549,845
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,627,007) (1,870,988) (3,587,850) (5,916,175)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 234 5,894 2,506 19,474
Interest expense 675,136 (146,395) (282,918) (452,425)
Other income 300,469 19,784 604,313 45,341
Undistributed Earnings of ACC Telecom -- 65,215 97,867 386,917
Gain on Sale of Subsidiary -- -- 893,022 --
------------ ------------ ------------ ------------
Total other income (expense) 975,839 (55,502) 1,314,790 (693)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION (651,168) (1,926,490) (2,273,060) (5,916,868)
FOR INCOME TAXES
PROVISION FOR INCOME TAXES -- -- -- --
NET LOSS (651,168) (1,926,490) (2,273,060) (5,916,868)
============ ============ ============ ============
Net Loss per common share - Basic and Diluted $ (0.01) $ (0.03) $ (0.03) $ (0.09)
Weighted average common shares outstanding - basic and
diluted 83,815,262 69,401,539 76,918,803 64,429,927
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS:
NET LOSS (651,168) (1,926,490) (2,273,060) (5,916,868)
Foreign currency translation -- -- -- --
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (651,168) (1,926,490) (2,273,060) (5,916,868)
============ ============ ============ ============
Note: Prior Periods have been restated to conform to current
period reporting.
Carnegie International Corporation Consolidated Balance Sheet
(Unaudited) (Audited)
September 30, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and equivalents 19,070 $ 212,973
Accounts receivable, net of allowance for doubtful accounts 1,172,277 1,656,047
Loan receivable -- 24,000
Note receivable 571,653
Inventory 69,511 537,311
Prepaid expenses and other current assets 238,680 26,975
------------ ------------
Total current assets 2,071,191 2,457,306
Property and equipment, less accumulated depreciation 656,283 1,179,844
Other Assets:
Intangible assets, less accumulated amortization 3,255,586 4,820,322
Due from related parties 72,828 228,417
Security deposits and other assets 37,300 37,569
------------ ------------
Total Other Assets 3,365,714 5,086,308
Total Assets $ 6,093,188 $ 8,723,458
============ ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current Liabilities
Notes Payable - Banks $ 36,200 $ 36,200
Advance on Stock purchases 250,000 250,000
Current Maturities of long term debt 1,458,337 1,547,361
Current Maturities of notes payable to stockholders & affiliates 1,148,640 1,849,722
Convertible Note to stockholder 1,418,022 --
Current Maturities of capital lease obligations 106,340 85,059
Accounts payable and accrued liabilities 5,231,621 6,717,374
Deferred revenue 73,216 75,410
------------ ------------
Total current liabilities 9,722,376 10,561,126
Long Term Liabilities
Long term debt, less current maturities 77,957 209,757
Long term capital lease obligations, less current maturities 19,715
------------ ------------
Total Long Term Liabilities 97,672 209,757
Total Liabilities 9,820,048 10,770,883
Stockholders' Deficiency:
Convertible preferred stock par value, Series A, E, G, H, J, K, L. $1.00 par
value per share; 40,000,000 shares authorized; 3,148,259
issued at September 30, 2001 and 624,100 issued at December 31, 2000 1,648,259 624,100
Common stock, no par with a stated value of $.01 per share; 110,000,000
shares authorized 86,986,100 issued and 84,208,088 outstanding at
September 30, 2001 70,542,140 issued and 67,764,121 outstanding at
December 31, 2000 869,861 705,421
Additional paid-in capital 68,987,070 69,582,043
Accumulated Deficit (73,393,259) (71,120,198)
Foreign currency translation adjustment 23,489 23,489
------------ ------------
(1,864,580) (185,145)
Less treasury stock, at cost (1,862,280) (1,862,280)
------------ ------------
Stockholders' Deficiency (3,726,860) (2,047,425)
Total Liabilities & Stockholders Deficiency 6,093,188 $ 8,723,458
============ ============
Carnegie International Corporation Consolidated Statements of Cash Flow
(Unaudited)
Nine Months
Ended September 30
2001 2000
------------- -----------
Increase (decrease) in cash and equivalents:
Cash flows from operating activities
Net income $(2,273,060) $(5,916,868)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 524,581 3,863,374
Gain on sale of subsidiary (893,022) --
Issuance of warrants as compensation -- 154,619
Earnings from sold subsidiary (March 2001) 97,867
Accounts receivable 483,770 231,862
Due from affiliates -- 148,159
Bad Debt (115,545) (4,504)
Settlement Expense 1,684,027 --
Inventory 467,800 (155,804)
Prepaid expenses & other assets (211,436) (103,493)
Refundable income taxes -- (12,046)
Accounts payable and accrued expenses (1,485,753) (3,374)
Deferred revenue (2,194) 46,939
Other, net 567,858 691,510
------------ -----------
Net cash (used in) operations (1,154,507) (1,059,626)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (81,924) (482,999)
Collection of Loans receivable 24,000 104,119
Increase of Notes receivable (210,000) (221,656)
------------ ------------
Net cash (used in) investing activities (267,924) (600,536)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 301,750 --
Payment on Capital Leases (12,222) (11,250)
Payment on Notes Payable (51,000) (89,800)
Proceeds of advance on Stock Purchases -- 48,000
Proceeds from consideration of lawsuit 500,000 --
Sale of common stock -- 465,000
Proceeds from sale of subsidiary 490,000 --
Proceeds from sale of option to purchase common stock -- 973,000
------------ ------------
Net cash provided by financing activities 1,228,528 1,384,950
NET DECREASE IN CASH AND CASH EQUIVALENTS (193,903) (275,212)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 212,973 463,374
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,070 $ 188,162
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest 249,524 306,532
Income Taxes Paid -- --
Common stock issued in exchange for services & compensation 480,448 1,933,629
Common stock issued in exchange for acquisitions 715,000 350,000
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 --
Convertible Note issued as settlement 1,500,000 --
Common Stock issued as settlement 300,000 --
CARNEGIE INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month period ended September 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 at least 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 $194,007
for the nine months ended September 30, 2001. We have not quantified the impact
of adopting other provisions of these standards. If amortization of goodwill was
not applied during the nine month period ending September 30, 2001 and 2000,
net loss before provision for income tax would have been $2,079,053 and
$3,747,987 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
Telecommunications, Inc. (Paramount), a Nevada Corporation, American Telephone &
Computers, Inc., a Maryland Corporation and Federation of Associated Health
Systems, Inc., a Texas Corporation and Victoria Station Miami, Inc., a Maryland
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.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
Revenues from external customers: 2001 2000 2001 2000
------------ ------------ ------------ ------------
Telecommunications $ 4,047,806 $ 2,370,994 $ 9,092,729 $ 8,763,612
Restaurant 275,313 357,825 1,046,955 1,289,571
Corporate -- -- -- --
------------ ------------ ------------ ------------
Total $ 4,323,119 $ 2,728,819 $ 10,139,684 $ 10,053,183
============ ============ ============ ============
Interest expense:
Telecommunications $ 36,572 $ 69,783 $ 112,904 $ 256,922
Restaurant 12,681 3,720 43,056 10,678
Corporate (724,389) 72,892 126,958 184,825
------------ ------------ ------------ ------------
Total $ (675,136) $ 146,395 $ 282,918 $ 452,425
============ ============ ============ ============
Depreciation and amortization:
Telecommunications $ 113,880 $ 1,246,799 $ 368,273 $ 3,755,872
Restaurant 12,784 (5,155) 50,868 22,416
Corporate 29,639 45,771 105,440 85,086
------------ ------------ ------------ ------------
Total $ 156,303 $ 1,287,415 $ 524,581 $ 3,863,374
============ ============ ============ ============
Segment profit (loss) before taxes:
Telecommunications $ (123,981 $ (1,069,952) $ 360,229 $ (3,153,408)
Restaurant (95,696) (156,212) (258,749) (199,876)
Corporate (431,491) (700,326) (2,374,540) (2,563,584)
------------ ------------ ------------ ------------
Total $ (651,168) $ (1,926,490) $ (2,273,060) $ (5,916,868)
============ ============ ============ ============
Segment assets:
Telecommunications $ 4,712,463 $ 44,504,751 $ 4,712,463 $ 44,504,751
Restaurant 151,914 156,382 151,914 156,382
Corporate 1,228,811 890,220 1,228,811 890,220
------------ ------------ ------------ ------------
Total $ 6,093,188 $ 45,551,353 $ 6,093,188 $ 45,551,353
============ ============ ============ ============
Expenditure for segment assets:
Telecommunications $ 46,096 $ 258,920 $ 81,924 $ 344,900
Restaurant -- 8,103 -- 18,604
Corporate -- 119,495 -- 119,495
------------ ------------ ------------ ------------
Total $ 46,096 $ 386,518 $ 81,924 $ 482,999
============ ============ ============ ============
The following geographic area data for trade revenues is based on product or
service delivery location and property, plant and equipment are based on
physical location.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
Revenues from external customers: 2001 2000 2001 2000
----------- ----------- ----------- -----------
United States $ 4,088,508 $ 2,333,126 $ 9,374,740 $ 8,479,432
Canada 234,611 393,003 764,944 1,562,765
United Kingdom -- 2,690 -- 10,986
----------- ----------- ----------- -----------
Total $ 4,323,119 $ 2,728,819 $10,139,684 $10,053,183
=========== =========== =========== ===========
Segment assets:
U.S., net of intersegment receivables $ 6,044,587 $43,150,431 6,044,587 $43,150,431
Canada 42,807 24,683 42,807 24,683
United Kingdom 5,794 2,376,239 5,794 2,376,239
----------- ----------- ----------- -----------
Total $ 6,093,188 $45,551,353 $ 6,093,188 $45,551,353
=========== =========== =========== ===========
NOTE: PRIOR PERIODS HAVE BEEN RESTATED TO CONFORM TO CURRENT PERIOD REPORTING
NOTE B - SUBSEQUENT EVENTS
Subsequent Events
On October 19, 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 $1,250,000 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 or the right to the Company subsidiary Federation of the Associated
Health Systems. SEE NOTE C FOR PRIOR AGREEMENTS.
On October 25, 2001 the Companies subsidiary Victoria Station Miami, Inc.
("VSM") ceased operations due to its inability to stay an order for eviction
(see item 1. Legal Proceedings.) The Company decided, due to the fall off in
business as a result of the September 11 tragedies affect on the restaurant and
travel industries (VSM operated a restaurant adjacent to the Miami International
Airport) not to seek a stay of the eviction and provide the require funding need
to keep this business open. The Company will have on going cash obligations for
$131,000 that had been guaranteed by the Company. The closing, except for the
above cash requirements over time, will have no effect on Carnegies Financial
Statements.
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:
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.
A three-year agreement commencing July 1, 2001 providing for an annual salary
of $125,000 plus bonus and options.
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 had been pending in the Circuit Court for Oakland
County, Michigan has been dismissed.
On or about August 1, 2000, Joseph Fisher filed suit against Paramount
International Telecommunications, Inc. and Call Data Clearing, Inc. for breach
of contract. This was settled during the quarter for a nominal cost to the
Company.
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. Plaintiff, with Carnegies consent has
requested that the trial date of November 28, 2001 be adjourned to January 2002.
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 a 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. A hearing is scheduled for November 19, 2001 on the Motion for
Judgment.
On May 29, 2001 Martinair, Inc., commenced a lawsuit a Baltimore County District
Court. The complaint alleges that Martinair provide air travel and was 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 was held
on September 5, 2001 and judgment entered for the Company with all charges
dismissed.
Several lawsuits were commenced between November 14, 2000 and September 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,
objected. After a hearing on Grant Thornton's objection October 2001, the court
ruled that the settlement
did not violate provisions of the PSLRA, and that a fairness hearing should be
held concerning the terms of the settlement. The parties will submit documents
to the court in connection with that fairness hearing in late November. The
Company expects court approval of the settlement, but can give no assurances
that such court approval will be obtained. Grant Thornton has appealed the
court's ruling to the United States Court of Appeals for the Fourth Circuit. The
appeal will not delay further proceedings on the settlement agreement. Although
the Company is optimistic about the outcome of any appeal, no assurance can be
given of the outcome of any such appeal.
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 to 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 September 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 reflects a gain of
$893,022 on this sale. 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 September 30, 2001, the
Company had a working capital deficit of $7,651,185 and an accumulated deficit
of $73,393,259. 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 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 Nine Months Ended September 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
industry. 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 nine months ended September 30, 2001, increased
by $86,501 to $10,139,684 as compared to $10,053,183 for the same period in
2000. Loss from operations decreased $2,328,325 to $3,587,850 for the first nine
months of 2001, from $5,916,175 during the nine months ended September 30, 2000.
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 nine months ended September, 2001 were $6,267,351, an
increase of $847,838 from $5,419,513 during the same period in 2000.
Operating expenses decreased $3,089,662 for the first nine months of 2001
compared to the same period in 2000. Operating expenses as a percentage of
revenues were 74% in the first nine months of 2001 as compared to 105% in 2000.
Selling, general and administrative decreased $292,733 to $5,907,225 from
$6,199,958 during the nine months ended September 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.
$1.685m settlement expense is due to a $1.5m convertible note settlement with
Infinity Ventures. $1,384,627 was charged to operations as settlement expense
with the remaining $115,373 charged to unamortized discount. 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 $1.685m. -- See Item 6
for more information regarding Infinity Ventures.Net.
Other income and expenses for the nine months ended September 30, 2001 resulted
in total other income of $1,314,790 as compared to total other expense of $693
during the nine month period ended September 30,2000. The principal components
of other income during the nine months ended September 30,2001 was the gain on
sale of subsidiary for $893,022, plus $500,000 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 nine months ended September 30, 2001 and
2000 was $524,581 and $3,863,374 respectively. The decrease of $3,338,793 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 September 30, 2001, the Company had a working capital deficit of
$7,651,185 compared to a working capital deficit of $8,103,820 at December 31,
2000 an increase in working capital of $452,635. 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 nine months ended September 30, 2001 and
2000, the Company incurred a cash flow deficit from operating activities of
$1,154,507 in 2001 as compared to a cash flow deficit of $1,059,626 for the same
period in 2000. The Company invested $81,924 in property and equipment during
the first nine months of 2001 compared to $482,999 during the same period of
2000. The Company met its cash requirements during the first nine 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.
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 September 30, 2001, and the related
statements of operations, comprehensive loss and cash flows for the nine 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 (E) 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 (E). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated balance sheet as of December 31,
2000, 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 April 6, 2001, 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, 2000 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
November 15, 2001
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. Plaintiff, with
Carnegies consent has requested that the trial date of November 28, 2001 be
adjourned to January 2001.
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 January 1, 2002.
Several lawsuits were commenced between November 14, 2000 and September 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 an
additional Month. The Company expected that the management of Victoria Station
Miami, Inc. would 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.
(See subsequent events)
On May 29, 2001 Martinair, Inc., commenced a lawsuit a Baltimore County District
Court. The complaint alleges that Martinair provide air travel and was 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 was held
on September 5, 2001 and judgment entered for the Company with all charges
dismissed.
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. In an October 12 ruling, the
Federal court denied Grant Thornton's motions to bar Carnegie's state court
claims, and it cleared the way for approval of the settlement reached late last
year. Certain procedural steps remain to be taken, in the typical process for
approval of shareholder class action settlements through approval by the
"class."
The Judge also granted the Company's motion to stay the federal court lawsuit
filed by certain shareholders against Grant Thornton. As part of the settlement
agreement in the class action litigation, Carnegie will be assigned any "class"
rights against Grant Thornton which might exist that certain shareholders
asserted against Grant Thornton in federal court.
The ruling for the Company rejected Grant Thornton's arguments that issues
relating to the Company's proof of damages in the state court litigation must be
decided by the federal court. The federal court decided, instead, that all such
issues must be decided by the state court. As a result of this ruling, the
Company will not be barred by federal law from presenting proof of damages
through reference to losses in the Company's market capitalization; the question
whether that proof will be allowed is left to the state court, under Maryland
law. Grant Thornton has since filed motions in the state court proceedings,
seeking to limit the company's proof of damages in the state court litigation.
The state court judge has reserved ruling on those motions until after proof of
damages has been presented at trial.
Following entry of the federal court's ruling on October 12, Grant Thornton
appealed the ruling to the United States Court of Appeals for the Fourth
Circuit. The appeal will not delay further proceedings on the settlement
agreement. Although the Company is optimistic about the outcome of any appeal,
no assurance can be given of the outcome of any such appeal.
The Company can give no assurances that the federal court will accept the
proposals for settlement 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, 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, In October, 2001 the Court rendered a decision rejecting all
but one of the causes of action subject to Grant Thornton's Motion to Dismiss.
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 Court did not find for Carnegie on the
default motion, but did write a finding of fact that J.W.Mike Starr did in fact
destroy documents. An Order dated October 18, 2001 the Court Granted Grant
Thornton's motion to enforce Carnegie's contractual waiver of a jury trial,
except for count 8, the Gable and Farkas individual claims, which will be
bifurcated for a jury trial at a later date. The Court in another Order dated
October 18, 2001, the Court Denied Grant Thornton's motion to modify the
scheduling Order. The Court also scheduled the trial to start in the Circuit
Court for Baltimore City on Monday, November 5, 2001. Trial commenced on
November 5, 2001 in Maryland state court. The trial was expected to last four to
six weeks. The Company has retained the law firms of William H. Murphy, Jr. &
Associates, P.A.; Blank Rome, LLP; and Gary, Williams, Parenti, Finny, Lewis,
McManus, Watson & Sperando as co-counsel in the matter. As a result of the
contingent fee arrangements which exist between the company and its lawyers, the
company will not incur legal expenses (except a contingent fee taken from the
proceeds of any recovery, in the event the litigation is successful).
Item 2. Changes in Securities.
On July 1, 2001, the Company issued to Michael Eberle its Executive Vice
President, a Convertible Promissory Note and Series L Convertible Preferred
Stock in exchange for amounts due as accrued salary in the aggregate amount of
$125,000. Although the Series L 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 L documents will convert the
Series L Preferred Stock into shares of common stock of the Company, which
conversion will extinguish the debt under the Convertible Promissory notes. The
Series L Preferred Stock gives the holder of the Series L 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 July 1, 2001, with a discount of 35% applied for
the extended holding period. The holders of the Series L Preferred Stock will
not receive dividends thereon, but do receive voting rights equal to the number
of shares of common stock underlying the Series L Preferred Stock. The holder of
the Series L Preferred Stock, acquired the right to vote a significant number of
shares on matters requiring stockholder approval. The Series L 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.
During this reporting period the Company issued 150,000 restricted shares of
common stock under Section 4 (2) of the Securities Act of 1933, for settlement
of a prior acquisition and 450,000 shares of non-restricted common stock to
individuals for 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 Company's subsidiary, Paramount International Telecommunications, Inc.
revenue have been adversely affected by the effects of September 11, 2001. The
Companies revenues in a great measure are from its hotel clients. The traffic
from hotels during the first week following 9/11/01 was down by 60%. The Company
expects by the next 6 months for sales to increase to last years level, but can
give no assurances of this.
The assumptions supporting the current value of goodwill are:
The current intangible value at 9/30/01 is $3,210,266. 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 during 2001.
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. This purchase agreement also called for a finder's
fee of $350,000 due to Bristol Asset Management. This fee is outstanding and
accruing interest at the rate of 15%. The Company believes that this obligation
will be cured shortly.
Item 6. Exhibits and Reports on Form 8-K.
A. During the Quarter ending September 30, 2001, no form 8K was filed.
B. On August 29, 2001, the Company filed a Form S-8 Registration and
incorporated by reference herein.
INDEX OF EXHIBITS
Exhibit
No. Exhibit Description
- ------- -------------------
3.1 Articles of Incorporation, as amended, (filed as Exhibit 3.1 to the
Corporation's form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein).
3.2 Bylaws (filed as Exhibit 3.2 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.1 Employment Agreement between the Corporation and Lowell Farkas, as
amended (filed as Exhibit 10.1 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.2 Employment Agreement between the Corporation and E. David Gable (filed
as Exhibit 10.2 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.3 Employment Agreement between the Corporation and Bennett H. Goldstein,
(filed as Exhibit 10.3 to the Corporation's form 10-KSB, filed with
the Commission on April 27, 1999 and incorporated by reference
herein).
10.4 1998 Stock Option Plan (filed as Exhibit 10.4 to the Corporation's
Form 10-SB, filed with the Commission on October 28, 1998 and
incorporated by reference herein).
10.5 Exchange Agreement between A&W Corporation, Inc. and Grandname Limited
(filed as Exhibit 10.5 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.6 Assignment Agreement by and between First USA Merchant Services, Inc.
and Electronic Card Acceptance Corporation (filed as Exhibit 10.6 to
the Corporation's Form 10-SB, filed with the Commission on October 28,
1998 and incorporated by reference herein).
10.7 Agreement between Tiller Holdings Limited and the Corporation (filed
as Exhibit 10.7 to the Corporation's Form 10-SB, filed with the
Commission on October 28, 1998 and incorporated by reference herein).
10.8 Form of Warrant (filed as Exhibit 10.8 to the Corporation's Form 10-
SB, filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.9 Form of Stock Option Agreement (filed as Exhibit 10.9 to the
Corporation's Form 10-SB, filed with the Commission on October 28,
1998 and incorporated by reference herein).
10.10 Preemption Agreement (filed as Exhibit 10.10 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated
by reference herein).
10.11 Stock and Asset Purchase Agreement for Victoria Station Restaurant
(filed as Exhibit 10.11 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference
herein).
10.12 Purchase Agreement and Promissory Note between the Corporation and the
Alpina Tours, LLC (filed as Exhibit 10.12 to the Corporation's Form
10-SB, filed with the Commission on October 28, 1998 and incorporated
by reference herein).
10.13 Stock Purchase Agreement between the Corporation and Value Partners,
Ltd. (filed as Exhibit 10.13 to the Corporation's Form 10-SB, filed
with the Commission on October 28, 1998 and incorporated by reference
herein).
10.14 Stock Purchase Agreement for Harbor City Corporation, t/a ACC Telecom
(filed as Exhibit 10.14 to the Corporation's Form 10-SB, filed with
the Commission on October 28, 1998 and incorporated by reference
herein).
10.15 Buy-Back/Sell-Back Agreement for Purchase of Harbor City Corporation,
t/a ACC Telecom (filed as Exhibit 10.15 to the Corporation's Form 10-
SB, filed with the Commission on October 28, 1998 and incorporated by
reference herein).
10.16 Employment Agreement between Barry N. Hunt and Harbor City
Corporation, t/a ACC Telecom (filed as Exhibit 10.16 to Amendment
Number 1 of the Corporation's Form 10-SB/A, filed with the Commission
on February 12, 1999 and incorporated by reference herein).
10.17 Distributor Agreement between the Corporation and ALLTEL Supply, Inc.
(filed as Exhibit 10.17 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.18 Stock Purchase Agreement between the Corporation and Voice Quest, Inc.
(filed as Exhibit 10.18 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.19 Employment Agreement between Voice Quest, Inc. and Mark S. Ortner
(filed as Exhibit 10.19 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.20 Asset Purchase Agreement between the Corporation and the J-Net Group,
Inc. (filed as Exhibit 10.20 to Amendment Number 1 of the
corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
10.21 Employment Agreement between RomNet Support Services, Inc. and
Nicholas R. Gentile (filed as Exhibit 10.21 to Amendment Number 1 of
the Corporation's Form 10-SB/A, filed with the Commission on February
12, 1999 and incorporated by reference herein).
10.22 Consulting Agreement between the Corporation and the Vadiari Group
International (filed as Exhibit 10.22 to Amendment Number 1 of the
Corporation's Form 10-SB/A, filed with the Commission on February 12,
1999 and incorporated by reference herein).
10.23 Distributor Agreement between the Corporation and Tiller International
(filed as Exhibit 10.23 to Amendment Number 1 of the Corporation's
Form 10-SB/A, filed with the Commission on February 12, 1999 and
incorporated by reference herein).
10.24 Acquisition Agreement between the Corporation and Paramount
International Telecommunications, Inc., (filed as Exhibit 10.24 to the
Corporation's Form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein.)
10.25 Employment Agreement between Paramount International
Telecommunications, Inc. and Michael Eberle, (filed as Exhibit 10.25
to the Corporation's Form 10-KSB, filed with the Commission on April
27, 1999 and incorporated by reference herein.)
10.26 Agreement of Sale by and between Talidan Limited and Westshire
Trading, Inc. (filed as Exhibit 10.26 to the Corporation's Form 10-
KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.27 Agreement between the Corporation and Bristol Capital, LLC dated
February 27, 1997 in connection with payment of a finders fee. (filed
as Exhibit 10.27 to the Corporation's Form 10-KSB/A Amendment 1 filed
with the Commission on January 25, 2000 and incorporated by reference
herein.)
10.28 Termination and Consulting Agreement between the Corporation and
Bennett H. Goldstein dated September 30, 1999. (filed as Exhibit 10.28
to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.29 Loan Agreement between Carnegie and American Champion Entertainment
dated June 25, 1999. (filed as Exhibit 10.29 to the Corporation's Form
10-KSB/Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.30 Letter of Intent between the Corporation and R.G.G. Communications,
Inc. dated April 1, 1999. (filed as Exhibit 10.30 to the Corporation's
Form 10-KSB/A. Amendment 1 filed with the Commission on January 25,
2000 and incorporated by reference herein.)
10.31 Sublease of The Phone Stop dated May 14, 1999 and underlying Lease as
amended, between American Telecommunications & Computer Inc. and
Korman/Lederer Management Co. dated May 13, 1999. (filed as Exhibit
10.31 to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.32 Lease Agreement between The Equitable Life Assurance Society of the
United States and the Harbour Financial Mortgage Corporation t/a New
America Financial. (filed as Exhibit 10.32 to the Corporation's Form
10-KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.33 Lease Termination Agreement between the Corporation and Centre 1000
Limited Partnership dated as of October 1, 1999. (filed as Exhibit
10.33 to the Corporation's Form 10-KSB/A Amendment 1 filed with the
Commission on January 25, 2000 and incorporated by reference herein.)
10.34 Services Agreement between Anthony Redfern and Talidan dated as of
September 1, 1997. (filed as Exhibit 10.34 to the Corporation's Form
10-KSB/A Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
10.35 Acquisition Agreement between Paramount International
Telecommunications, Inc., and a wholly owned subsidiary of Carnegie
International Corporation and S.R. Alexander Benningfield, and Craig
N. Bass and incorporated by reference herein.
10.36 Asset Purchase Agreement dated July 20, 2000, between Carnegie
International Corporation and Remington Tech Corporation and
incorporated by reference herein.
10.37 Asset Purchase Agreement dated July 27, 2000 between Carnegie
International Corporation and Eileen Milsna and incorporated by
reference herein.
10.38 Employment Agreement between Carnegie International and Lowell Farkas
effective September 20, 2000, and incorporated by reference herein.
10.39 Employment Agreement between Carnegie International and E. David
Gable effective September 20, 2000, and incorporated by reference
herein.
10.40 American Stock Exchange letter to Lowell Farkas dated October 1, 1999
and incorporated by reference herein.
10.41 Lease agreement between Remington Oak and Carnegie International
Corporation dated August 1, 1999 and incorporated by reference herein.
10.42 Employment Agreement between the Corporation and Alexander
Benningfield dated June 1, 2000 incorporated by reference herein.
10.43 Employment Agreement between Federation of Associated Health Systems
and Craig Bass dated June 1, 2000 and incorporated by reference
herein.
10.44 Consulting Agreement between Federation of Associated Health Systems,
Inc. and Vacco, Inc., dated June 3, 2000, and incorporated by
reference herein.
10.45 Consulting Agreement between Federation of Associated Health Systems,
Inc., and Rangeland, dated June 1, 2000 and incorporated by reference
herein.
10.46 Letter of Agreement between the Corporation and Jonathan Mirsky dated
February 14, 2001 and incorporated by reference herein.
10.47 Letter of Agreement between the Corporation and Jonathan Mirsky
(Infinity Ventures) dated January 13, 2000 and incorporated by
reference herein.
10.48 Employment Agreement between the Corporation and Arthur Abraham
effective June 1, 2000 and incorporated by reference herein.
10.49 Form S-8 Registration Statement under the Securities Act of 1933
(filed with the Securities and Exchange Commission on August 29,
2001).
21.1 Subsidiaries of the Registrant, (filed as Exhibit 21.1 to the
Corporation's form 10-KSB, filed with the Commission on April 27, 1999
and incorporated by reference herein.)
99.1 Company Public Statement, dated October 23, 1999, responding to
allegations of Grant Thornton LLP. (filed as Exhibit 99.1 to the
Corporation's Form 10-KSB/A. Amendment 1 filed with the Commission on
January 25, 2000 and incorporated by reference herein.)
99.2 Resignation Letter of Director Richard M. Cohen, dated September 24,
1999. (filed as Exhibit 99.2 to the Corporation's Form 10-KSB/A
Amendment 1 filed with the Commission on January 25, 2000 and
incorporated by reference herein.)
99.3 Resignation Letter of Director Stuart Agranoff, dated September, 1999.
(filed as Exhibit 99.3 to the Corporation's Form 10-KSB/A Amendment 1
filed with the Commission on January 25, 2000 and incorporated by
reference herein.)
99.4 Stipulation filed with the United District Court for the Northern
District of Maryland on September 14, 1999 with respect to G. William
Higbee in connection with Carnegie v. Kelley Allen, Ark Capital Inc.,
Indianhead and G. William Higbee. (filed as Exhibit 9.4 to the
Corporation's Form 10-KSB/A Amendment 1 filed with the Commission on
January 25, 2000 and incorporated by reference herein.)
99.5 Head of Agreement dated February 18, 2000 between Paramount
International Telecommunications, Inc. (PIC), a Nevada Corporation
and a wholly owned subsidiary of Carnegie International Corporation, a
Colorado Corporation (Carnegie), Federation of Associated Health
Services, Inc (FASH) a Texas Corporation and its subsidiary,
Transcontinental Communications, Inc. (TCI). (Filed as Exhibit 99.5
to the Corporations Form 10-KSB filed with the Commission on March
30, 2000 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
November 19, 2001 By: /s/ Lowell Farkas
Date -----------------------
Lowell Farkas
President and Chief Executive Officer