UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Telefficiency Holding Corporation
(Name of Small Business Issuer in its Charter)
Delaware 98-0188197
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5155 Spectrum Way, Bldg. 30, Mississauga, Ontario, Canada L4W 5A1
(Address of principal executive offices) (Zip Code)
(416) 324-3030
(Issuer's Telephone Number)
Securities to be Registered under Section 12(b) of the Act: None
Securities to be Registered under Section 12(g) of the Act:
Class "A" Voting and Participating Common Shares,
$.0001 par value per share
Page 1 of 57
Index to Exhibits in on Page 58
1
<PAGE>
Telefficiency Holding Corporation
Registration Statement on Form 10 SB
Part I
Page
Item 1. Description of Business........................................... 3
Item 2. Managements' Discussion and Analysis or Plan of Operation......... 19
Item 3. Description of Property........................................... 23
Item 4. Security Ownership of Certain Beneficial Owners and Management.... 23
Item 5. Directors, Executive Officers, Promoters and Control Persons...... 25
Item 6. Executive Compensation............................................ 27
Item 7. Certain Relationships and Related Transactions ................... 29
Item 8. Description of Securities......................................... 29
Part II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters............ 31
Item 2. Legal Proceeding ................................................. 32
Item 3. Changes in and Disagreements with Accountants..................... 32
Item 4. Recent Sales of Unregistered Securities........................... 32
Item 5. Indemnifications of Directors and Officers........................ 34
Part F/S
Financial Statements.............................................. 38
Part III
Item 1 and 2 Index to and Description of Exhibits......................... 55
2
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
A. Corporate Background
Telefficiency Holding Corporation (the "Company") was incorporated under
the laws of the State of Delaware on April 29, 1998 for the purpose of
effecting, on a tax deferred basis, a reorganization of Telefficiency
Corporation, a corporation organized and existing under the laws of Ontario,
Canada ("Telefficiency"), pursuant to which (i) the shareholders of
Telefficiency received a pro-rata voting interest in the Company and (ii) the
Company acquired all of the issued and outstanding voting securities of
Telefficiency (collectively, the "Reorganization").
Telefficiency was formed under Ontario law on October 27, 1992, as 1005611
Ontario Limited O/A Telefficiency. On August 14, 1995, it changed its name to
Telefficiency Corporation, and on January 8, 1995, it acquired all of the
outstanding capital stock of a related company, 1013747 Ontario Limited O/A
Telefficiency Kitchener ("Kitchener"), which was incorporated under Ontario law
on January 7, 1993. From its incorporation until its acquisition by
Telefficiency, Kitchener was wholly owned by the spouses of Michael Brunet and
William Clubine, the Company's sole officers and directors.
Prior to entering into the Reorganization between the Company and
Telefficiency, the Company was inactive and had no shares issued and
outstanding.
On May 12, 1998, the Company issued 5,500,000 shares of Class B Common
Stock in exchange for all the issued and outstanding common shares of
Telefficiency (5,500,000 shares). The attributes of the Class B Common Stock are
voting and non-participating. As a result of this transaction the former
shareholders of Telefficiency now control the Company, the parent company of
Telefficiency.
From inception, Telefficiency has engaged in the sale, installation and
servicing of business telecommunications products, services and software in
Canada. The Company has never, nor does it currently, license any software
products.
B. General Description of Business
As an "interconnect" company, the Company, through Telefficiency, seeks to
provide "single source solutions" to businesses and other end users of telephone
systems, supplying them with products and services needed to interconnect their
telephone and computer systems internally and with outside public telephone
lines. Telefficiency pursues its business by offering customers integrated,
modular telecommunications equipment and related products manufactured or
produced by independent companies and by providing on-going upgrading and
servicing of such equipment and products through well-trained and
customer-oriented personnel.
The Company's principal products consist of multifeatured, digitally
controlled key switching systems. The Company also sells call processing
products, including call centers, voice messaging and interactive voice response
systems; computer-telephone integration products; individual telephone units and
other related products.
Although the Company sells products manufactured by others, approximately
90% of
3
<PAGE>
the telephone systems sold by the Company are manufactured by Nortel Networks
("Nortel"), formerly Northern Telecom Limited. Nortel is the Company's primary
supplier.
The Company also performs moves, adds and changes related to customers'
existing telephone systems. Moves, adds and changes consist of moving telephones
to new user locations, adding telephones or expansion cards in a telephone
system, and changing system and user features. The Company provides service on
products it sells in the form of regular maintenance and service calls. The
Company also markets wireless communications products.
The Company currently sells and installs equipment and related products
primarily in the southern Ontario market area through three office locations in
the greater Toronto metropolitan area. The Company also maintains accounts with
certain customers on a national Canadian basis.
C. Risks Factors
The Company's Business is substantially dependent on its continuing relationship
with Nortel
Successful operation of the Company's business requires that it provide
superior products and service. Although the Company can exercise direct control
over customer care and support services, it cannot exercise such control over
products provided by others. The Company does not manufacture any of the
products it sells or services. The principal products sold and serviced by the
Company are manufactured by Nortel. Sales of Nortel products accounted for
approximately 90% of the Company's sales of new telecommunications products in
the fiscal years ended December 31, 1998 and 1999.
Nortel distributes its business telecommunications products in Canada
through regional telephone companies and interconnect companies, such as
Telefficiency. Telefficiency purchases products from Nortel through purchase
orders rather than through a long-term supply agreement or similar arrangement.
The Company's non exclusive right to distribute Nortel's products can be
terminated by Nortel or the Company at any time, subject to applicable Canadian
laws governing distribution arrangements.
There can be no assurance that Nortel will continue the Company's
distribution rights or that there will not be adverse developments regarding
such rights. In addition, even while the Company's distribution rights are in
effect, Nortel is free to grant non-exclusive distribution rights to additional
parties or to commence directly distributing its products to retail customers.
Any interruption or adverse change in the Company's business relationship with
Nortel could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's success depends in
large part upon market acceptance of Nortel products. These products compete
with telecommunications products manufactured by other companies. Reduced market
acceptance for Nortel products by reason of competing products or otherwise
could have a material adverse effect on the Company's business, operating
results and financial condition if the Company were not able to access and
distribute products from other suppliers.
The Company faces substantial competition from larger and better financed
companies.
The Company competes within the business telecommunications segment of the
telecommunications industry. This market segment is intensely competitive and
rapidly changing.
4
<PAGE>
Numerous companies throughout the world manufacture and sell business
telecommunications products. Manufacturers distributing such products in Canada
currently include Nortel, Nitsuko, Toshiba Canada, Mitel Corporation, Panasonic
and Lucent (AT&T) to name a few.
Competition among interconnect companies, such as the Company, is localized
and intense. Although interconnect companies in Canada have tended to be small
companies doing business principally within local and regional markets, many of
these companies are larger and better financed than the Company.
The Company believes that regional telephone companies, manufacturers and
interconnect suppliers compete for the sale and servicing of business
telecommunications products on the basis of product quality, availability,
price, warranty, service and support. The ability of the Company to compete
successfully depends on a number of factors both within and outside its control.
Such factors include but are not limited to the quality, price and availability
of and the warranty for, Nortel products; the continuance of the Company's
national distribution rights for Nortel products; the quality and promptness of
the Company's service and support functions; and the entry of new competitors
into the market for the manufacture of business telecommunications.
There are approximately 6,440,000 shares (assuming the conversion of the
outstanding shares of Class B Common Stock into shares of Class A Common Stock)
subject to resale under Rule 144. Such Resales could have a depressive effect on
the price of the Company's Class A Common Stock.
As of May 5, 2000, of the 115,000,000 shares of the Company's shares of
Class "A" Voting and Participating Common Shares (the "Class A Common Stock")
and 30,000,000 of the Company's Class "B" Convertible Voting and
Nonparticipating Common Shares ("Class B Common Stock") authorized, there were
issued and outstanding 10,979,949 and 3,980,051 respectively. As of December 31,
1999, there were 9,460,000 shares of Class A Common Stock and 5,500,000 shares
of Class B Common Stock issued and outstanding. During 2000, 1,519,949 shares of
Class B Common Stock were converted into Class A Common Stock on a one to one
basis. All but approximately 8,520,000 shares of the Class A Common Stock
presently issued and outstanding are "restricted securities" as that term is
defined under the Act, and in the future may be sold in compliance with Rule 144
of the Act, pursuant to a registration statement filed under the Act, or other
applicable exemptions from registration thereunder. There are also approximately
2,198,328 and 2,443,000 shares respectively of Class A Common Stock reserved for
issuance upon exercise of outstanding warrants and options. Such shares reserved
for issuance include 137,000 and 500,000 shares respectively of Class A Common
Stock for warrants and options that have been exercised but for which the shares
have not bet been issued by the Company to date. The Company anticipates that
such shares will be issued shortly. Rule 144 provides, in essence, that a person
holding restricted securities for a period of one (1) year may sell those
securities in unsolicited brokerage transactions or in transactions with a
market maker, in an amount equal to one percent (1%) of the Company's
outstanding Common Stock every three (3) months. Additionally, Rule 144 requires
that an issuer of securities make available adequate current public information
with respect to the issuer. Such information is deemed available if the issuer
satisfies the reporting requirements of Sections 13 or 15(d) of the Exchange Act
and of Rule 15c2-11 thereunder. Rule 144 also permits, under certain
circumstances, the sale of shares by a person who is not an affiliate of the
Company and who has satisfied a two (2) year holding period without any quantity
limitation and whether or not there is adequate current public information
available. Investors should be aware that sales under Rule 144, or pursuant to a
registration statement filed under the Act, may have a depressive effect on the
market price of the Company's securities in any market that may
5
<PAGE>
develop for such shares. No effect is given to the potential exercise of options
and warrants.
Since there is a limited market for the Company's securities shareholders may
find it difficult to sell or otherwise dispose of their shares.
There is only a limited trading market for the Company's Class A Common
Stock on the National Association of Securities Dealers, Inc. ("NASD")
over-the-counter Bulletin Board (the "OTCBB"), which may limit the marketability
and liquidity of the shares of the Class A Common Stock. Please also refer to
"Part II Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters."
The Penny Stock Rules may further hinder resale of shares of Class A Common
Stock by the Company's shareholders.
Under Rule 15g-9 under the Exchange Act, a broker or dealer may sell a
"penny stock" (as defined in Rule 3a51-1) to or effect the purchase of a penny
stock by any person unless:
(1) such sale or purchase is exempt from Rule 15g-9; or
(2) prior to the transaction the broker or dealer has (a) approved the
person's account for transaction in penny stocks in accordance with Rule
15g-9 and (b) received from the person a written agreement to the
transaction setting forth the identity and quantity of the penny stock to
be purchased; and
(3) the purchaser has been provided an appropriate disclosure statement as
to penny stock investment.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that generally define a penny stock to be any equity security other
than a security excluded from such definition by Rule 3a51-1. Such exemptions
include, but are not limited to (a) an equity security issued by an issuer that
has (i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operations for at least three years, (ii) net tangible assets of at
least $5,000,000, if such issuer has been in continuous operation for less than
three years, or (iii) average revenue of at least $6,000,000, for the preceding
three years; (b) except for purposes of Section 7(b) of the Exchange Act and
Rule 419, any security that has a price of $5.00 or more; and (c) a security
that is authorized or approved for authorization upon notice of issuance for
quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System.
It is likely that the Company's Common Stock will be subject to the
regulations on penny stocks; consequently, the market liquidity for the
Company's Common Stock may be adversely affected by such regulations limiting
the ability of broker/dealers to sell the Company's Common Stock and the ability
of purchasers in the offering to sell their securities in the secondary market.
Moreover, the Company's shares may only be sold or transferred by its
stockholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
6
<PAGE>
The Company may experience uncertain revenue growth.
Although the Company recorded gross sales of $5,723,498, $8,144,945 and
$16,565,022 in fiscal 1999, 1998 and 1997, respectively, there can be no
assurance that profitability or revenue growth will be realized. Moreover, the
Company suffered operating losses of $1,219,560, $1,369,735 and $976,482 in
fiscal 1999, 1998 and 1997, respectively. The Company's immediate strategy is to
substantially increase the number of its sales, service and warehouse facilities
and its product lines, each of which will require it to significantly increase
its expenses for personnel, marketing, network infrastructure and the
development of new services. In addition, the Company's operating results may be
affected by various factors, many of which are outside of the Company's control,
including general economic conditions, specific economic conditions in the
business telecommunications market, intensive competition, capital expenditures
and other costs relating to the expansion of operations, and the introduction of
new products and services by the Company or its competitors. In response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions that could have a material
adverse effect on the Company's business or results of operations.
The Company's future profitability is linked to the success of its growth
strategy.
Major elements of the Company's growth strategy are to substantially expand
the number and geographic scope of its sales, service and warehouse facilities
and to leverage and expand its customer base by offering a broader range of
telecommunications products and services. The Company's ability to increase
revenues in future periods will depend to some extent on the success of its
strategy to serve as the single source service provider of business
telecommunications products and services for its customers. To implement its
strategy, the Company must attract, train and retain additional personnel with
specialized expertise necessary to market and service such products and services
and to manage the Company's administrative, operating and software requirements.
There can be no assurance that such personnel will be available to the Company
on terms acceptable to the Company. The successful implementation of the
Company's strategy also depends to a substantial degree on market acceptance of
Nortel products and the absence of adverse developments with respect to the
Company's national distribution rights for Nortel products. To the extent the
Company is unable to attract, train and retain necessary personnel or if there
is a disruption or adverse change in the Company's relationship with Nortel or
in the market acceptance of its products, the Company's business, operating
results and financial condition could be materially and adversely affected.
The Company will require additional capital financing.
The Company currently anticipates that its available cash resources and
credit facilities, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months,
including the payment of $234,000 in interest on its outstanding Debentures, due
and payable commencing December 31, 2000. During the first quarter of 2000, the
Company received $1,075,000, which constitutes the balance of the proceeds of
the debenture financing commenced in December 1999. In addition, the Company
received $129,850 from the exercise of options and warrants. These funds will be
used for working capital requirements in the current year. Moreover, the Company
is negotiating additional financing which is anticipated to be through private
placements of warrants to purchase common stock. The Company anticipates that
such private placements will be with individual investors who are "accredited
investors." The terms of these arrangements are still being negotiated and are
contingent on many factors, including determination of the final terms, due
diligence by the purchasers, regulatory compliance and obtaining
7
<PAGE>
the commitment of the investors. Funding is also dependent on our business and
financial prospects.
Despite this fact, the Company may need to raise additional funds in order
to support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the costs and timing of expansion of research and development efforts
and the success of such efforts, the success of the Company's existing and new
service offerings and competing technological and market developments.
The Company may be required to raise additional funds through public or
private financing, strategic relationship or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
shareholders will be reduced, shareholders may experience additional dilution in
net book value per share, or such equity securities may have rights, preferences
or privileges senior to those of the holders of the Preferred Stock and or the
Class A or Class B Common Stock. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
business, financial condition and operating results.
In order to achieve its objectives the Company must be able to expand its
physical and human resources.
The Company's plan for growth will place a significant strain on the
Company's administrative, operational, and financial resources and increase the
demands on its systems and controls. There can be no assurance that the Company
will be able to establish or acquire such facilities in new cities at a rate or
according to a schedule to be established by the Company. Accordingly, there can
be no assurance that the Company will be able to manage successfully and
profitably the network of sales, service and warehouse operations contemplated
by its growth strategy. In addition, increase in the Company's customer base
will result in additional demands on the Company's customer support, sales and
marketing, and administrative resources as well as its software infrastructure.
While the Company believes that its plan for operating and financial control
systems are adequate to address expansion plans through 2000, there can be no
assurance that such systems and controls will be adequate to maintain and
effectively monitor future growth. The Company anticipates that its continued
growth also will require it to recruit, hire and train a substantial number of
new managerial, technical, sales, and marketing personnel. The inability to
continue to upgrade the network or the operating and financial control systems,
the inability to recruit and hire necessary personnel, or the emergence of
unexpected expansion difficulties could materially and adversely affect the
Company's business, results of operations and financial condition.
The Company's success may be adversely affected by technological change and the
introduction of new products by its competitors.
The market for products and services marketed by the Company is
characterized by technological change and frequent new product introductions.
Accordingly, the Company believes
8
<PAGE>
that its future success will depend on its ability, and the ability of its
suppliers, such as Nortel, to identify and incorporate in a timely manner
enhancements to existing products and services and new products that gain market
acceptance. There can be no assurance that the Company or its suppliers will be
able to identify, market or support new products successfully, that such new
products will gain market acceptance or that the Company or its suppliers will
be able to respond effectively to technological change.
The loss of the services provided by Messrs. Brunet and Clubine would adversely
affect the Company's operations.
The Company's success depends to a significant degree upon the technical
and management skills of its key employees, including in particular the
Company's founders, Michael R. Brunet and William R. Clubine. Although the
Company maintains key person life insurance on Messrs. Brunet and Clubine, the
loss of the services of either or both Messrs. Brunet or Clubine could have a
material adverse effect on the Company. The Company's success also will depend
upon its ability to attract and retain qualified management, marketing,
technical, and sales executives and personnel. Competition for such executives
and personnel is intense and there are a limited number of persons with
knowledge of and experience in the interconnect market. There can be no
assurance that the Company will be successful in attracting and retaining such
executives and personnel.
The Company's operations are effectively controlled by management 34% and
accordingly shareholders may not be able to direct the Company's affairs.
Messrs. Brunet and Clubine, the founders of the Company, currently own
approximately 18.5%(1) and 16.9%(2), respectively, or 34% in the aggregate of
the Company's outstanding voting Common Shares. Therefore, Messrs., Brunet and
Clubine will continue to be able to control the business and affairs of the
Company in most respects.
D. The Telecommunications Industry in Canada
Commencing in the 1980's, changes in government regulation and business
conditions opened the market for business and residential telecommunications
systems. Following earlier changes in the United States regulatory environment,
in 1980 the Quebec and Ontario provincial authorities first permitted customers
to own their own individual telephone sets. This development was subsequently
adopted by all other Canadian provincial and territory authorities. This
regulatory change opened the business and residential telecommunications market
to manufacturers other than regional telephone companies and selected suppliers
and created market opportunities for interconnect companies to distribute the
products of new and existing manufacturers.
In part as a result of regulatory changes, there currently are a large
number of manufacturers of telecommunications products located throughout the
world that sell such products
- ----------
(1) Deborah Brunet, Mr. Brunet's wife owns 1,173,522 shares of Class B Common
Stock as to which shares Mr. Brunet disclaims beneficial ownership.
(2) Luana Clubine, Mr. Clubine's wife owns 1,047,241 shares of Class B Common
Stock, as to which shares Mr. Clubine disclaims beneficial ownership.
9
<PAGE>
directly and through regional telephone companies and independent companies, as
well as other more specialized companies, which also develop, manufacture and
sell a wide variety of applications relating to traditional telecommunications
products.
The market for wireless communications products is in a formative phase in
North America. Such products are currently relatively expensive and just
starting to offer data connectivity. Wireless products are manufactured by
certain of the companies producing telephone systems and are sold directly or
through regional telephone companies and interconnect companies. The Company
believes that the market for wireless products will grow as customers' exposure
to such products increases, regulatory and technological advances occur and
pricing becomes more attractive.
E. Market Trends
The Company believes that as markets are becoming more global, information
driven and competitive, businesses are placing an increasing emphasis on rapid
and comprehensive communications technology to improve employee productivity and
customer service. As a result, businesses are looking to a variety of new
technologies to enhance the performance of their telecommunications systems and
to increase the speed, accuracy and availability of information. The Company
believes that several trends contribute to a favorable market outlook for the
business telecommunications industry:
o Continuing market for telephone switching systems. The Company
believes that as communications technologies proliferate, businesses
will continue to upgrade and replace their switching systems,
resulting in continuing modest growth in the market for telephone
switching equipment.
o Growth of new communications products and markets. A variety of new
communications technologies have emerged over the past several years
that enhance the capabilities of traditional telephone systems.
Manufacturers have introduced products (including call centers, voice
response units, video conferencing systems and voice messaging
products) that improve the performance and efficiency of
communications systems. Such products constitute an important and
growing component of the business telecommunications product market.
The Company believes that manufacturers that develop integrated,
modular multimedia telecommunications products capable of efficiently
integrating technological advances, together with distributors that
have access to the products of such manufacturers, and that have the
expertise to sell, service and support these extended product lines
will benefit from the growth of existing and emerging communications
markets.
o Convergence of voice, video, data and image markets. Since the
introduction of local and wide area computer networks, the market for
data communications has grown rapidly and comprises a growing portion
of the overall communications market. As the prevalence of computer
networks continues to increase and voice, video, data and image are
increasingly transmitted in a digital format using the same networks,
the Company believes that demand for services related to the
integration of data and voice networks will increase. As these markets
converge, the Company believes that companies with the expertise and
capability to perform communications integration services will have a
significant competitive advantage relative to distribution
10
<PAGE>
companies with narrower product lines and relative to manufacturers of
individual products that sell directly to customers.
o Vendor consolidation. As the number and complexity of communications
technologies grow, the Company believes North American businesses will
increasingly seek to narrow their vendor base to the suppliers that
offer a broad range of products and services, leading to a
consolidation among vendors of communications systems. The Company
believes those vendors with access to integrated, modular product
lines, and with the capability to integrate a broad range of
communications technologies, will benefit from the trend toward vendor
consolidation.
o Wireless systems. The Company believes that the market for wireless
communications will grow, as there is increased consumer awareness of
the benefits of such products, technological and regulatory advances
enhance such products and the pricing of such products becomes more
competitive.
o Increasing complexity of managing communications systems. The Company
believes businesses are increasingly turning to vendors that are
capable of providing complete communications solutions, including the
ability to manage all the voice, video, data and image communications
needs of a business and to provide a single point of contact for
communications systems. The Company also believes an increasing number
of companies will seek a vendor with the ability to manage
communications systems through outsourcing agreements, thereby
enabling customers to focus on their primary business.
F. Growth Strategy
The Company has formulated a growth strategy based on the creation and
maintenance of a nationwide network of sales, service and warehouse facilities;
access to Nortel's full line of modular, integrated business telecommunications
products as well as complimentary products of other manufacturers; and the
leveraging of its existing customer base to capture an increasing portion of
each customer's telecommunications needs.
o Creation of National Network. In addition to the Company's existing
sales and service arrangements with distributors of Nortel's products
throughout the southern tier of Canada, the Company plans to
establish, over the next 3 years, new sales, service and warehouse
facilities, or acquire distributors. There can be no assurance,
however, that the Company's existing business relationship with Nortel
will continue, that Nortel will not grant national distribution rights
to additional companies or elect to distribute its products directly,
or that the Company will be able to capitalize on its relationship
with Nortel.
o Expansion of Product Lines. At the same time, the Company intends to
expand the scope of Nortel's products marketed by it in order to gain
access to a greater share of the business telecommunications market.
The Company also markets Nortel's related application products as well
as complimentary products of other manufacturers. The Company intends
to monitor new
11
<PAGE>
product developments regularly, to expand its line of application
products consistently and provide customers with integrated, modular
"single source solutions" to their telecommunications needs.
o Leveraging of Customer Base. As it expands the geographic scope of its
distribution network and broadens the scope of its customer base, the
Company will seek to capture a broader portion of each customer's
telecommunications needs. The Company believes it will be able to
market additional products and services to existing customers as the
Company adds such additional products to its product lines. The
Company will seek to leverage its customer base by providing better
and faster service than its competitors and by offering integrated,
modular product lines that enable customers to quickly, inexpensively
and effectively upgrade their systems. In order to leverage its
customer base, the Company will rely on attracting, training and
retaining a skilled and customer-oriented force of marketing, sales
and service personnel.
o The Telefficiency Productivity System. The Company plans to implement
a concept called "The Telefficiency Productivity System" ("TPS"). The
Company intends to include in TPS the following:
o Hardware and software service. This component of TPS includes the
systems that the Companys' currently sells; however, as
additional service capabilities are added, more hardware and
software will be available. Most of the hardware and software
will be purchased form the Company's primary communications
hardware and software vendor, Nortel Networks.
o Local and long distance phone services.
o Internet Services. These services will consist of direct access
for the Company's customers to the Internet, Web hosting, e-mail
services as well as Web design and e-commerce Web sites.
These voice and data offerings are necessary to provide the
Company's customers with a true integrated communications
solution with full support to increase productivity. These
bundled services are the direction of today's technological
advances that are linking computers to telephones with the
internet.
o Strategic Acquisitions. The Company's other significant growth
strategy will be through the acquisition of other interconnect and
communications companies. Acquisitions will be targeted for their
"fit" in the overall strategic plan with the primary goal of adding
value to acquired companies by converting customers' line to
Telefficiency's competitive local exchange carrier ("C.L.E.C.")
services. The location of each acquisition relative to an existing or
target customer base and the efficiencies that can be realized in
servicing a combined customer base is important to determining "fit".
Capabilities found to exist in select acquisitions can literally be
the basis of new departments or divisions, provided that the planned
organizational structure can effect cooperation and unity of purpose
in meeting the
12
<PAGE>
strategic business objectives. Additionally, the Company believes that
through acquisitions it can realize savings from increased
productivity of its technical service staff, greater volume discounts
from suppliers and competitive local exchange carriers and
consolidation of insurance programs and other corporate operations,
such as accounting and financial reporting. The Company has entered
into an agreement with Cascade International Capital Corporation, 814
University Center 2, 1320 South University Drive, Fort Worth, Texas
76107 ("Cascade"), pursuant to which Cascade is endeavoring to assist
the Company in obtaining an acquisition financing commitment of
$60,000,000. Through the date of this Registration Statement, no such
commitment has been obtained. Pursuant to this agreement, during 1999
Cascade was paid $15,000 and issued 47,000 warrants to purchase shares
of the Company's Class A Common Stock at $.05 per share. Although such
warrants were exercised on or about March 22, 2000, no shares have
been issued to date. Please refer to "Part I - Item 2. Managements'
Discussion and Analysis or Plan of Operation." The Company's ability
to successfully implement its growth strategy is subject to numerous
factors, many of which are beyond the Company's control. Please refer
to "Part I - Item 1. Description of Business - Risk Factors."
G. Products and Services
The Company's core business has been the sale of telephone systems; moves,
adds and changes; and systems maintenance and services. From this core business,
the Company has expanded its operations and shifted its product mix to
incorporate new products and services, such as call processing products and data
communications integration products and C.L.E.C. communications services. This
array of products and services allows the Company to provide single source
solutions to customers' communications needs.
Substantially all of the telecommunications equipment and related products
sold by the Company are digitally based products that are part of or compatible
with integrated, modular telecommunications systems.
Telephone Systems
The Company offers a wide variety of private telephone systems. These
systems typically consist of a telephone switch and individual telephones
located at the customer site. A telephone switch is a device that provides the
connection between the customer's internal telephone sets and the outside
telephone network. The telephone switch, typically owned by the customer, is
available in two primary types: PBX systems and Key systems. PBX switches are
generally used for installations of more than 150 telephone sets and can
accommodate up to several thousand telephone sets. A PBX condenses the number of
internal phone lines to a significantly smaller number of outside trunk lines
that connect to the telephone network. When an incoming call is received, the
PBX switches the call to the appropriate internal telephone extension. When a
call is made from within the business, the PBX determines whether the call is an
internal call, in which case the PBX switches the call to the appropriate
internal telephone extension, or an outgoing call, in which case the PBX directs
the call to an open outside line. The PBX also provides a base platform from
which the customer's telephone system can be upgraded with features such as
voice messaging and caller identification. In contrast to PBX systems, Key
systems are relatively inexpensive and appropriate for small
13
<PAGE>
installations that require fewer than approximately 150 telephone sets. Although
earlier models of Key systems displayed all outside lines and required the user
to select a line when making an outside call, modern Key systems share
attributes of and are operated similarly to PBX systems.
The Company markets one PBX system and three models of Key systems, all of
which are manufactured by Nortel. The Company currently markets Nortel's
Meridian 1 Option 11 PBX system (serving from 30 to 900 "ports" or connections
to the telephone system) and Nortel's Meridian Norstar line of Key systems,
including the Norstar 308 (serving up to 3 lines 8 phones), the Norstar Compact
ICS (serving up to 16 lines and 25 phones), and the Norstar Modular ICS (serving
up to 300 ports).
Moves, Adds and Changes
The Company performs moves, adds and changes related to its customers'
telephone systems. Moves, adds and changes consist of moving telephones to new
user locations, adding telephones or expansion cards in a telephone system and
changing system and user features.
Maintenance and Services
The Company provides service on the products it sells in the form of
preventative maintenance and service calls. Telephone switching systems
generally require a higher level of ongoing maintenance and service than other
products sold by the Company and generate the majority of maintenance and
service revenue.
Call Processing
Call processing consists of three primary functions: call centers, voice
messaging and interactive voice response products.
Call centers are complex systems that can process a large number of
incoming calls per hour and are used by businesses in applications such as
reservation centers, customer support centers and catalog order centers. Call
centers utilize a variety of call processing technologies, such as interactive
voice response products, voice messaging and computer interaction to maximize
the efficiency of large call-receiving operations. A call center utilizing an
interactive voice response product can obtain information from a caller with a
touchtone telephone, permitting more detailed information on the call to be
retrieved from a computer database and be available to an agent when answering
the call. The Company offers a variety of call center products manufactured by
Nortel and Cintech Telemanagement Systems, Inc., which can service from one to
over 500 call-receiving agents. The Company sells Nortel's Meridian Max line of
call centers and Cintech Telemanagement System, Inc.'s Prelude and Cinphony call
centers.
Voice messaging enables verbal communications to be sent, stored and
retrieved at a later time within a user's internal system or from a remote
location. The Company offers integrated voice messaging products from Nortel.
These products include the Flashtalk, Norstar Voice Mail and Meridian Mail
systems, which are compatible with Nortel's key and PBX systems.
Interactive voice response products allow a caller to access a computer
data base to retrieve or input data by using a touchtone telephone. Interactive
voice response products can be
14
<PAGE>
utilized in a stand-alone application, such as when a caller uses a touchtone
telephone to obtain account information from a bank of flight schedules from an
airline's automated retrieval system. Interactive voice response products can
also be utilized in a call center application to route calls and provide data on
the caller based on information from a bank of flight schedules from an
airline's automated retrieval system. Interactive voice response products can
also be utilized in a call center application to route calls and provide data on
the caller based on information input by the caller via a touchtone telephone.
The Company currently markets models manufactured by Nortel Networks. Such
products include Nortel's Meridian Link system, which is compatible with its PBX
systems and Nortel's Norstar IVR.
Wireless Systems
The Company currently markets Nortel's Companion wireless system. This
system is designed to provide mobile communications within a building through
the integration of wireless portable telephones, a base station connecting such
telephones within the building, and a controller which connects the wireless
system with the company's existing telephone system.
Other Products
The Company also markets a variety of related products and services, such
as call accounting software, paging systems and long distance service. The
Company does not license any software products.
Marketing Sales
The Company has approximately 24 telecommunications consultants in the
greater Toronto metropolitan area. These representatives focus on either new
prospects or the sale of additional products or services to the Company's
customer base. In addition to these representatives, the Company has four
training specialists. These specialists work with the representatives to provide
integrated communications solutions for the Company's customers.
The Company's representatives and specialists use a comprehensive approach
to evaluating each customer's communications needs and implementing solutions.
The representative begins with a detailed needs analysis of the customer's
current and future communications requirements. After determining the customer's
needs, the Company proposes solutions to satisfy current and anticipated future
requirements. The Company's operations teams then work with the customer to plan
the installation of purchased technologies and identify required training. By
planning the precise requirements of each installation, the Company's
specialists are able to install, test and bring new equipment on-line with
minimal service interruption. Finally, the Company provides an ongoing support
program tailored to meet the customer's specific application requirements
incorporating remote diagnostics, in-field service and support, additional
training, and help desk support from the Company's customer support
representatives.
The Company uses a variety of methods to communicate with existing and
potential customers, including direct mail and telemarketing campaigns, Yellow
Page advertising, radio, business publications and in-person marketing.
15
<PAGE>
Customers and Customer Service
In line with the products historically offered by the Company, the Company
until recently has focused its marketing initiatives on customers with 100 or
less users. With the expansion of its product lines, the Company has expanded
its marketing objectives to include customers with 200 or more users and those
customers with complex communications requirements. Although the Company has
been active primarily on a local and regional basis in southern Ontario, it
currently maintains accounts with customers on a national Canadian basis. The
Company serves national accounts in part through informal arrangements with
independent distributors of Nortel products in other Canadian cities. Pursuant
to these arrangements, the Company may refer national customers' servicing and
other needs to out-of-area distributors in return for a referral fee. The
Company monitors the quality of service provided by such other distributors.
The Company believes that providing service exceeding customers'
expectations is an important element of its ability to compete effectively in
the communications market. The Company maintains a highly trained force of
service technicians and customer support representatives who provide on-site and
remote service and support. The Company coordinates its customer service
response through a centralized service dispatch center in its head office.
Overall, the Company has approximately 18 employees devoted primarily to
providing customer service.
The Company sells across many industry segments, including banks, retail
stores and restaurant chains. No single customer accounted for more than 5% of
the Company's total revenue for fiscal 1998 and 1999.
In 1999 in an effort to improve customer loyalty, the Company introduced
the "Telefficiency Customer Alliance Program" ("TCAP") pursuant to which the
Company agreed to install and maintain a Remote Access Device ("RAD") on its
customers telecommunications systems, and provide the following services at no
charge (provided the customer is under a warranty or service contract):
o Remote diagnostics performed by Telefficiency's staff
o Regular, scheduled back up of customers' system programming
o Complete programming changes, done remotely
o Printed reports of system status faxed to the Customer
o Secure, off-site storage of customers' system back up ensuring disaster
recovery
o On-line trouble shooting and programming changes by the Company's staff
o Faster on-line services
TCAP is available for a one time registration fee of $210.00 payable at the
time of original sale for new customers or with Maintenance Agreement renewals
for new and existing customers.
To qualify for the program, the customer must have a valid maintenance
agreement or be covered by an original warranty.
In addition to ensuring greater customer loyalty, the program has
additional benefits for the Company as follows:
o Reduction in the number of visits to customer sites when not required
16
<PAGE>
o Ability to troubleshoot the problem before dispatch
o Verification of equipment compatibility
o Allowance for larger system support
H. Suppliers; Relationship with Nortel
Nortel is the Company's principal supplier. The Company estimates that
approximately 90% of its new products sold in 1998 and 1999, were manufactured
by Nortel. Products supplied by Nortel include Key systems, PBX systems, call
centers, voice messaging products, wiring and interactive voice response
products, routers, hubs and instant internet access interface units. In
addition, the Company distributes complementary communications products
manufactured by Cintech Telemanagement Systems, Inc., Bogen, Inc. and a variety
of small companies. The Company regularly monitors new developments and products
in the business and residential telecommunications market in order to expand its
product lines consistently with its strategy of providing integrated modular
"single source" solutions to customers' telecommunications needs.
Nortel is a global manufacturer of telecommunications equipment. Its
business consists of the research and the design, development, manufacture,
marketing, sale, financing, installation and servicing of central office
switching equipment, multimedia communication systems equipment (including
business and residential systems), transmission equipment, wireless systems and
cable and other products and services.
Nortel manufactures and markets integrated, modular key and PBX switching
systems, related products, telephone units and related software and other
products.
Telefficiency purchases products from Nortel on the basis of purchase
orders rather than a long-term supply agreement or similar arrangement.
Telefficiency has a nonexclusive right to distribute a broad range of Nortel's
business and residential telecommunications products on a national basis
throughout Canada. Such right was not granted for a term of years and,
accordingly, can be terminated by Nortel or the Company at any time, subject to
applicable Canadian laws governing distribution arrangements.
I. Backlog
The Company's backlog typically does not exceed $350,000 and is generally
filled within 30 days. The Company maintains an inventory of products that are
used in connection with its servicing activities and typically places orders
with its suppliers only upon receipt of firm orders for products from its
customers. The Company's suppliers typically fill the Company's orders within
three days, and the Company ordinarily delivers the product to the customer
within an additional ten-day period.
J. Competition
The Company competes within the business telecommunications segment of the
telecommunications industry. This market segment is intensely competitive and
rapidly changing. Numerous companies throughout the world manufacture and sell
business telecommunications products. Manufacturers distributing such products
in Canada currently include Nortel, Nitsuko,
17
<PAGE>
Toshiba Canada, Mitel, NEC, Panasonic and Lucent (AT&T) to name a few.
Competition among interconnect companies, such as the Company, currently is
localized and intense. Although interconnect companies in Canada have tended to
be small companies doing business principally within local and regional markets,
many of these companies are larger and better financed than the Company.
The Company believes that regional telephone companies, manufacturers and
interconnect companies compete for the sale and servicing of business and
residential telecommunications products on the basis of product quality,
availability, price, warranty, service and support. The ability of the Company
to compete successfully depends on a number of factors both within and outside
its control, including the quality, price and availability of, and the warranty
for, Nortel products; the continuance of the Company's national distribution
rights for Nortel products; the quality and promptness of the Company's service
and support functions; the entry of new competitors into the market for the
manufacture of business telecommunications products or the sale and servicing of
such products; and the business strategies adopted by the telecommunications
operating companies and manufacturers of business telecommunications products
with respect to the sale and servicing of such products. In addition, although
United States manufacturers and distributors of business telecommunications
products historically have not played a major role in the Canadian market, if
such manufacturers and distributors were to aggressively seek to establish a
greater share of the Canadian market, the Company's business operating results
and financial condition could be materially and adversely affected.
K. Government Regulation
The Canadian Radio-Television and Telecommunications Commission ("CRTC")
has promulgated regulations setting installation and equipment standards for
telecommunications products of the type marketed by the Company in Canada, and
requiring that all such products be registered with, and meet standards adopted
by, the CRTC. The Company's products are designed by manufacturers to comply
with these requirements and registered by such manufacturers with the CRTC. The
CRTC also requires that all regional telephone companies provide
nondiscriminatory interconnection for such products with local exchange services
in order to promote the competitive provision of such products. In addition, the
regional telephone companies must offer local exchange services on an unbundled
basis from such products, again to promote the competitive provision of these
products.
L. Newly Formed C.L.E.C. (Competitive Local Exchange Carrier) Division
Regulatory changes in Canada now allow telecommunications companies to
compete against the existing telephone line supplier. Up until this change,
customers have had to purchase their telephone numbers (lines) from only one
supplier, the incumbent telephone company ("I.L.E.C."). The term C.L.E.C. stands
for Competitive Local Exchange Carriers.
This deregulation now allows the Company to offer it's existing and new
customers a one-stop solution for all their telecommunication needs for
hardware, software and monthly billings of their telephone lines and services.
Earlier this year, the Company launched its new C.L.E.C. communications
services.
18
<PAGE>
These new services allow the Company to be a "Virtual" C.L.E.C. A "Virtual"
C.L.E.C. is a reseller of voice and data network services that it leases from a
C.L.E.C. or I.L.E.C.
The incumbent supplier (Bell Canada) largely provides local line service to
the Company's customers. The Company believes it has an advantage over the
incumbent supplier because it's customers are already dealing with it for their
telephone systems, service and communications solutions. Accordingly, the
Company believes that it will be able to provide voice and data services to its
customers and a true "One Stop Shop" to its current customer base.
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, through its subsidiary, Telefficiency, which is based in
Ontario, Canada engages in the sale, installation and servicing of business
telecommunications products, services and software in Canada.
The Company was incorporated under the laws of Delaware on April 29, 1998
for the purpose of effecting, on a tax deferred basis, a reorganization of
Telefficiency, a corporation organized and existing under the laws of Ontario,
Canada, pursuant to which (i) the shareholders of Telefficiency received a pro
rata voting interest in the Company and (ii) the Company acquired all of the
issued and outstanding voting securities of Telefficiency.
Telefficiency was incorporated and entered the communications business in
1992.
Prior to entering into the Reorganization between the Company and
Telefficiency, the Company was inactive and had no shares issued and
outstanding.
On May 12, 1998, the Company issued 5,500,000 shares of Class B Common
Stock in exchange for all of the issued and outstanding share of Telefficiency
(5,500,000 shares). The attributes of the Class B Common Stock are voting and
non-participating. As a result of this transaction, the former shareholders of
Telefficiency now control the Company, the parent Company of Telefficiency.
The Company believes that the following trends contribute to a favorable
market outlook for the business telecommunications industry. There is a
continuing market for telephone systems as businesses continue to upgrade and
replace such systems. In addition, a variety of new communications technologies
have emerged in the last few years that enhance the capabilities of traditional
telephone systems and will continue to do so. The Company believes that
distributors like the Company, that have access to products that integrate such
technological advances will benefit from the growth of existing and emerging
communications markets.
Moreover, the Company believes that demand for services related to the
integration of data and voice networks will increase and as these markets
converge, companies, such as Telefficiency, which have expertise and capability
to perform these services will have a significant competitive advantage.
Finally, as the management of communications systems becomes more complex,
businesses increasingly turn to vendors such as the Company that are able to
provide complete communications solutions and a single point of contact.
A combination of these trends should have a favorable impact on the
Company's
19
<PAGE>
revenues from continuing operations.
The Company estimates that approximately 90% of its new products sold in
1998 and 1999 were manufactured by Nortel. Indeed, Nortel is the Company's
principal supplier. The Company purchases products from Nortel on the basis of
purchase orders rather then a long-term supply agreement or similar arrangement.
Telefficiency has a nonexclusive right to distribute a broad range of Nortel's
products throughout Canada, other than British Columbia. However, such right may
be terminated by Nortel or the Company at any time. A termination of the right
to distribute Nortel products or any other adverse changes in the Company's
business relationship with Nortel would have a material adverse impact on the
Company's business, operating results and financial condition.
The Company has formulated a growth strategy designed to make the Company a
premier provider of integrated business telecommunications products and services
in Canada and the United States. This growth strategy is based on the creation
and maintenance of a nationwide network of sales, service and warehouse
facilities; access to Nortel's full line of modular, integrated business
telecommunications products as well as complimentary products of other
manufacturers; and the leveraging of its existing customer base to capture an
increasing portion of each customer's telecommunications needs.
To implement its strategy, the Company must attract, train and retain
additional personnel with specialized expertise necessary to market and service
such products and services and to manage the Company's administrative, operating
and software requirements. In addition, the Company will rely in part upon the
acquisition of established distributors to implement its planned expansion of
sales, service and warehouse facilities. The successful implementation of the
Company's strategy also depends to a substantial degree on market acceptance of
Nortel products and the absence of adverse developments with respect to the
Company's national distribution rights for Nortel products. To the extent the
Company is unable to attract, train and retain necessary personnel or to acquire
and integrate existing distributors on acceptable terms, or there is a
disruption of adverse change in the Company's relationship with Nortel or the
market acceptance of its products, the Company's business, operating results and
financial condition could be materially and adversely affected.
Basis of Presentation
The following discussion is based on the Company's consolidated audited
financial statements for the years ended December 31, 1999 and 1998. This
discussion is qualified in its entirety by reference to such financial
statements. The audited financial statements were prepared in accordance with
United States GAAP.
Results of operations - Years ended December 31, 1999 and 1998
For the year ended December 31, 1999 the Company had a net loss of
$1,219,560 compared to a net loss of $1,369,735 for the year ended December 31,
1998. The decrease in net loss is due to management's decision to focus on
higher margin business. In addition, the 1999 loss has been increased by
$341,000 to account for the value of stock options issued to employees for
compensation during the fourth quarter.
Total revenue for the year ended December 31, 1999 was $5,723,498 compared
with
20
<PAGE>
$8,144,945 in 1998. The decline in sales is due to the Company's decision to
focus on higher margin business in 1999 and provide complete solutions for
customers. In 1998 a substantial portion of the Company's sales were to the
wholesale market. While this provided significant sales volume, the margins were
small and administration costs were high. Providing complete solutions for
customers enables the Company to achieve higher margins.
The cost of sales is comprised almost entirely of the costs of the products
sold by the Company. For the year ended December 31, 1999, the Company's cost of
sales decreased by 2,845,584 or 47% from $6,075,396 in 1998. This decrease is
due to the abandonment of the wholesale business by the Company.
Operating expenses in the year ended December 31, 1999 were $3,713,246, an
increase of $273,962 or 8% from $3,439,284 in 1998. Included in 1999 expenses is
$341,000 to account for the value of stock options issued for compensation in
1999. In 1998, no stock options were issued. Eliminating the stock option
compensation amount, 1999 expenses were $3,372,246, a decrease of $67,038 or 2%
from 1998 expenses.
Gross profit for the year ended December 31, 1999 was $2,493,686, an
increase of $424,137 or 20% from $2,069,549 in 1998. The increase in gross
profit is due to the Company's decision to focus on higher margin business in
1999 and provide complete solutions for customers. The Company's ability to
accomplish this 20% increase in gross profit and reduction of expenses by 2%
from 1998 is attributable to the aforementioned change in business focus and to
changes in management and employees. The changes in the numbers of employees and
management is primarily due to attrition in the ordinary course of business. The
Company has no continuing or unrecognized severance liability for the staff
changes.
Individual expense categories fluctuate from year to year depending on the
mix of business the Company completes in the year. For the year ended December
31, 1999 subcontract costs increased by $235,095 or 55% from $424,693. This
increase is due to the Company's decision to focus on higher margin business in
1999 and provide complete solutions for customers. The Company required
subcontractors to assist its staff with systems installations during the year.
Wages and salaries have increased by $402,310 or 32% from $1,251,474. The
majority of this increase is attributable to the compensation value of stock
options issued for compensation to employees in the fourth quarter of 1999. For
the year ended December 31, 1999 professional fees decreased by $105,255 or 49%
to $110,522. This decrease is due to professional fees incurred in 1998 in
connection with the preparation of financial statements and documentation
required as a precondition to the Company's qualification on the NASD.OTC on
August 17, 1998.
For the year ended December 31, 1999 the Company had negative cash flow
from operating activities of $1,024,327 compared to a negative cash flow of
$2,118,215 for 1998. The negative cash flow in 1999 is primarily attributable to
the net use of cash in operating activities. Investing activities were nominal.
The Company financed negative cash flow through additional borrowings and loan
receivable repayments. Related companies repaid $108,158 of their outstanding
debt to the Company. In September of 1999, the Company borrowed $500,000 from
Mr. Leo Maa, a stockholder of the Company. Such loan was reflected by a $500,000
promissory note (the "Note") which bore interest at 10% per annum calculated
quarterly. The terms of the Note required it to be repaid from the proceeds of
any new financing. In December of 1999 the Company received proceeds of $725,000
from the sale of 13% Debentures due at December 31, 2000 (the "Debentures"). The
21
<PAGE>
Company repaid $400,000 of the Note from the Debenture proceeds and the balance
of the proceeds were used in operations. In addition, the Company borrowed an
additional $258,059 under its line of credit with the Royal Bank of Canada.
A significant proportion of the Company's cash flow requirement for
operating activities arises from inventory, accounts receivable as well as for a
reduction of $658,164 in our payables and accrued liabilities for the year ended
December 31, 1999. The Company typically requires payment for new products in
cash upon delivery or within 30 days. Payment terms tend to be given by the
Company in connection with sales of larger systems and sales to national
accounts or larger companies. Other sales are typically made against cash.
Accounts receivable were reduced by 40% or $399,405 from $996,395 at
December 31, 1998 to $596,990 at December 31, 1999. The reduction in accounts
receivable is largely attributable to management and staff focusing on
collections of aged accounts to provide the Company with better cash flow.
The Company met its cash needs in the year ending December 31,1999 through
borrowings under a CDN$705,000 (approximately US$488,466 at the December 31,
1999 exchange rate) line of credit with the Royal Bank of Canada (the "Bank Line
of Credit"), the Note and the offering of $1,800,000 aggregate principal amount
of 13% Debentures due December 31, 2002 ("Debentures"). The Bank Line of Credit
provides for demand loans and is secured by substantially all of the Company's
assets. Interest on borrowings is at the prime rate plus 2%. The Company can
borrow against the Bank Line of Credit if needed, assuming there is no breach of
the covenants (which include requirement for minimum working capital and net
worth and limit management salaries, and require that the aggregate principal
amount outstanding at any time under the credit agreement not exceed the
"borrowing base" which is based on inventory and receivables) set forth in the
credit agreement. The Company has been in default with the net worth covenant as
at December 31, 1999. However, the Royal Bank of Canada has not declared an
event of default under the Bank Line of Credit or required outstanding loans to
be repaid.
On September 9, 1999, the Company borrowed $500,000 from Mr. Leo Maa. This
loan was reflected by the Note which bore interest at 10% per annum calculated
quarterly. The Note was due upon the receipt of funds by the Company in
connection with an equity or debt financing. During the month of December 1999,
the Company received proceeds of $725,000 from the sale of the Debentures as
part of the total offering of an aggregate principal amount of $1,800,000, which
was completed subsequent to year-end. The Company used $400,000 of the proceeds
to repay part of the Note and the balance of the proceeds were used for working
capital. On February 14, 2000, the Company paid back the outstanding principal
balance and interest on the Note.
On or about September 29, 1999 the Company entered into an agreement with
Cascade, pursuant to which Cascade will assist the Company in obtaining an
acquisition financing Commitment of $60,000,000. To date, no such commitment has
been obtained.
Inflation; Seasonally
The Company does not believe inflation has a significant impact on its
results of operations, nor are its sales from operations materially affected by
seasons, with the exception of July and August with more decision-makers taking
vacation during this time. However, as the Company
22
<PAGE>
increases its service contract revenues and adds revenue from C.L.E.C. services,
any changes of operations during these months should be reduced.
Liquidity and Capital Resources
To date, the Company has met its cash needs from:
o the Bank Line of Credit
o the Note
o the issuance of capital stock and warrants
o advances from related companies.
In February 2000, the Company completed its offering of an aggregate
principal amount of $1,800,000 of 13% Debentures due December 31, 2002.
The Company believes the implementation of its growth strategy will result
in greater working capital needs. The Company expects that such needs will arise
as a result of increased sales, giving risk to proportionate increases in
accounts receivable, and in connection with the training of new sales and
marketing personnel. In addition, the Company expects that the amount of its
account receivable as a percentage of its total revenues will increase if, as
anticipated, the Company increases the proportion of its sales attributable to
larger telecommunication systems and national accounts.
At January 31, 2000, the Company did not have any material commitments for
capital expenditures. The Company currently anticipates that its available cash
resources and credit facilities, will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months, including the payment of $234,000 in interest due in 2001.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's facilities are comprised of the facilities of its subsidiary,
Telefficiency. The Company maintains its headquarters at the central offices of
Telefficiency located at 5155 Spectrum Way, Building 30, Mississauga, Ontario,
Canada L4W 5A1. The Mississauga premises consist of approximately 9,400 square
feet of space used for offices and the warehousing of electronics. The premises
are leased through June 30, 2000 at a monthly rental of $5,767. The Company
believes that it will be able to either renew the lease or find other suitable
space in the same general area.
Telefficiency leases an additional office on a month to month basis at 277
Manitou Drive, Unit E, Kitchener, Ontario, Canada N2C 1L4. Monthly rent is $748.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 5, 2000 by (i) each person who
is known by the Company to own beneficially more than five percent (5%) of the
Company's outstanding Class A Common Stock; (ii) each of the Company's directors
and officers; and (iii) all directors and officers of the Company as a group. As
at May 5, 2000 there were 10,979,949 shares of Class A
23
<PAGE>
Common Stock and 3,980,051 shares of Class B Common Stock issued and
outstanding.
Class A Voting Stock
<TABLE>
<CAPTION>
Approximate
Name and Address Amount of Percentage of
of Beneficial Owner Beneficial Ownership(1) Total Voting Securities
------------------- -------------------- -----------------------
<S> <C> <C>
Deborah-Ann Brunet(2) 2,854,188(2) 18.46%
1328 Deerwood Trail
Oakville, Ontario
L6M 2H4 Canada
Luana M. Clubine(3) 2,612,341(3) 16.90%
37 Jolana Court
Woodbridge, Ontario
L4H 3B7 Canada
Officers and Directors
- -----------------------
Michael R. Brunet(4) 2,854,188(4) 18.46%
1328 Deerwood Trail
Oakville, Ontario
L6M 2H4 Canada
William R. Clubine(5) 2,612,341(5) 16.90%
37 Jolana Court
Woodbridge, Ontario
L4H 3B7 Canada
Officers and Directors as a group 5,466,529(6) 34.25%
(2 people)
</TABLE>
(1) Unless indicated otherwise, each beneficial owner has direct ownership of
the shares indicated. All shares of Class B Common Stock are exchangeable,
at the option of the holder, to Class A Common Stock on a one for one
basis.
(2) Deborah-Ann Brunet is the wife of Michael Brunet. Includes 82,142 shares of
Class B Common Stock owned by Michael Brunet. Also includes 1,098,524
shares of Class A Common Stock owned by Michael Brunet, 250,000 shares of
Class A Common Stock which can be purchased by Mr. Brunet upon exercise of
options granted in 2000, and 250,000 shares of Class A Common Stock which
were purchased by Michael Brunet on April 7, 2000 upon the exercise of
250,000 options granted in 1999. Although Mr. Brunet has tendered payment
to the Company for such shares, the shares have not been issued to date.
(3) Luana M. Clubine is the wife of William Clubine. Includes 1,065,100 shares
of Class B Common Stock owned by William Clubine. Also includes 250,000
shares of Class A Common Stock which can be purchased by Mr. William
Clubine upon exercise of options granted in 2000, and 250,000
24
<PAGE>
shares of Class A Common Stock which were purchased by William Clubine on
April 7, 2000 upon the exercise of 250,000 options granted in 1999.
Although Mr. Clubine has tendered payment to the Company for such shares,
the shares have not been issued to date. Does not include 89,285 shares of
Class A Common Stock and 163,276 shares of Class B Common Stock owned by
Mr. John D. Clubine, Luana Clubine's brother-in-law, as to which Luana
Clubine disclaims beneficial ownership.
(4) Includes 1,173,522 shares of Class B Common Stock owned by Mrs. Deborah-Ann
Brunet, Mr. Brunet's wife, 250,000 shares of Class A Common Stock which can
be purchased by Mr. Brunet upon exercise of options granted in 2000, and
250,000 shares of Class A Common Stock which were purchased by Mr. Brunet
on April 7, 2000 upon exercise of 250,000 options granted in 1999. However,
although Mr. Brunet has tendered payment for such shares to the Company,
the shares have not been issued to date.
(5) Includes 1,047,241 shares of Class B Common Stock owned by Mrs. Luana
Clubine, Mr. Clubine's wife, 250,000 shares of Class A Common Stock which
can be purchased by Mr. Clubine upon exercise of options granted in 2000,
and 250,000 shares of Class A Common Stock which were purchased by Mr.
Clubine on April 7, 2000 upon exercise of 250,000 options granted in 1999.
However, although Mr. Clubine has tendered payment for such shares to the
Company, the shares have not been issued to date. Does not include 89,285
shares of Class A Common Stock and 163,276 shares of Class B Common Stock
owned by Mr. John D. Clubine, Mr. William Clubine's brother, as to which
Mr. William Clubine disclaims beneficial ownership.
(6) Includes 1,098,524 shares of Class A Common Stock and 82,142 shares of
Class B Common Stock owned by Michael Brunet, 250,000 shares of Class A
Common Stock which can be purchased by each of Messrs. Brunet and Clubine
upon exercise of options granted in 2000, 250,000 shares of Class A Common
Stock which were purchased by each of Messrs. Brunet and Clubine on April
7, 2000 upon exercise of options granted in 1999 but such shares have not
yet been issued, 1,065,100 shares of Class B Common Stock owned by Mr.
William Clubine, 1,173,522 shares of Class B Common Stock owned by Mrs.
Deborah-Ann Brunet, Mr. Brunet wife, and 1,047,241 shares of Class B Common
Stock owned by Luana M. Clubine, Mr. Clubine's wife. Does not include
89,285 shares of Class A Common Stock and 163,276 shares of Class B Common
Stock owned by Mr. John D. Clubine, Mr. William Clubine's brother, as to
which Mr. William Clubine disclaims beneficial ownership.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following persons are the directors, executive officers and/or key
employees of the Company:
Name Age Position
Michael R. Brunet 44 President, Chief Executive Officer, and
Director since May 12, 1998
William R. Clubine 45 Chief Development Officer, Secretary, and
Director since May 12, 1998
All directors and officers of the Company are elected annually to serve for
one year or until
25
<PAGE>
their successors are duly elected and qualified.
Management's business experience during the past five years is as follows:
Michael R. Brunet, President, Chief Executive Officer and Director
Michael R. Burnet is a co-founder of Telefficiency Corporation and has been
President and Chief Executive Officer since its incorporation in October 1992.
Mr. Brunet is responsible for the overall profitability of Marketing and Sales.
Mr. Brunet has over 23 years experience in the telecommunications industry both
nationally and internationally. He has successfully established and operated
companies in telecommunications, construction and insurance.
William R. Clubine, Chief Development Officer, Secretary and Director
William R. Clubine is a co-founder of Telefficiency Corporation and has
been Chief Financial Officer since its incorporation in October 1992 until May
1998. Mr. Clubine has been Chief Development Officer since May 1998. As such, he
is responsible for the development through acquisitions of interconnect
companies and continues to raise money for Telefficiency's growth and expansion.
He has established and operated an independent telecommunications company and
has extensive experience in the investment field.
During the past five years no director, executive officer, promoter or
control person of the Company:
(1) was the subject of any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
(2) was convicted in a criminal proceeding or is subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; and
(4) was found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
26
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
General
The following table sets forth information concerning the compensation of
the named executive officers for each of the registrant's last three completed
fiscal years:
<TABLE>
<CAPTION>
===================================================================================================================================
Annual Compensation Long-Term Compensation
Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All other
Position Year Salary Bonuses Compensation Award(s) Options/SARs Payouts Compensation
(a) (b) ($)(c) ($)(d) ($)(e) ($)(f) (=)(g) ($)(h) ($)(i)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Brunet 1999 140,000 -- -- 250,000 -- --
CEO, President and 1998 140,000 -- -- -- --
Director 1997 0 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
William R. Clubine 1999 140,000 -- -- 250,000 -- --
Chief Development 1998 140,000 -- -- -- --
Officer, Secretary and 1997 0 -- -- -- --
Director
===================================================================================================================================
</TABLE>
Options/SAR Grants Table
The following table sets forth information concerning individual grants of
stock options (whether or not in tandem with stock appreciation rights
("SARs")), and freestanding SARs made during the last completed fiscal year to
each of the named executive officers:
<TABLE>
<CAPTION>
=======================================================================================================
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- -------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Option/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted Fiscal Year Price
(a) (#)(b) (c) ($/Sh)(d) Expiration Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Brunet 250,000(1) 13.75%(2) $.21/Share October 21, 2004
- -------------------------------------------------------------------------------------------------------
William R. Clubine 250,000(1) 13.75%(2) $.21/Share October 21, 2004
=======================================================================================================
</TABLE>
(1) Granted on October 21, 1999. Option expires subject to earlier termination
on October 21, 2004. Such Options were exercised by Messrs. Brunet and
Clubine on April 7, 2000. However, although Messrs. Brunet and Clubine
tendered payment to the Company for the exercise of these options, the
underlying shares have not been issued to date.
(2) A total of 1,818,000 options were granted to Company employees in 1999.
27
<PAGE>
Aggregated Option/SAR Exercises and Fiscal Year-End Option/Sar Value Table
The following table sets forth information concerning each exercise of
stock options (or tandem SARs) and free standing SARs during the last completed
fiscal year by each of the named executive officers, other employees and
consultants and the fiscal year-end value of unexercised options and SARs.
<TABLE>
<CAPTION>
====================================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs at Options/SARs At
FY-End($) 12/31/99
Shares Acquired Exercisable/ Exercisable/
Name On Exercise Value Realized Unexercisable Unexercisable(4)
(a) (#)(b) ($)(c) (d) (e)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Brunet N/A N/A 250,000(1) $150,000
- ----------------------------------------------------------------------------------------------------
William R. Clubine N/A N/A 250,000(1) $150,000
- ----------------------------------------------------------------------------------------------------
All other employees(2) N/A N/A 1,318,000(3) $733,190
====================================================================================================
</TABLE>
- ----------
(1) Granted on October 21, 1999. Exercise price is $.21 per share. Option
expires subject to earlier termination on October 21, 2004.
(2) All grants of options to employees were pursuant to Rule 701 of the
Securities Act.
(3) Includes: (a) 497,000 options granted on November 9, 1999 with an exercise
price of $0.37 and an expiration date, subject to earlier termination, of
January 1, 2002; (b) 100,000 options granted on October 15, 1999 with an
exercise price of $0.15 and an expiration date, subject to earlier
termination, of October 15, 2000; (c) 200,000 options granted on June 30,
1999 with an exercise price of $0.05 and an expiration date, subject to
earlier termination, of June 30, 2001; (d) 300,000 options granted on June
17, 1999 vesting on July 1, 1999 with an exercise price of $0.05 and an
expiration date, subject to earlier termination, of July 1, 2004; and (e)
221,000 options granted on June 17, 1999 vesting on January 31, 2000 with
an exercise price of $0.50 and an expiration date, subject to earlier
termination of January 31, 2005.
(4) On December 31, 1999, the closing price of the Company's Class A Common
Stock as reported on the OTC BB was $0.81 per share.
The Company's directors are not compensated for their services provided as
directors of the Company. There are no arrangements pursuant to which any
director has been or is currently compensated for any service provided as a
director. In addition, directors and/or officers will receive expense
reimbursement for expenses reasonably incurred on behalf of the Company.
In addition to the foregoing grants of options which occurred in 1999, on
January 4, 2000 Messrs. Michael Brunet and William Clubine were each granted
250,000 options with an exercise price of $0.75 and an expiration date, subject
to earlier termination, of January 4, 2002. Such options have not been
exercised. Moreover, three consultants were granted options in consideration of
services rendered to the Company in connection with the development of an
in-house public relations group. Upon the exercise of such options, the
underlying securities will be restricted.
28
<PAGE>
Such options include Includes: (a) 75,000 options granted on January 1, 2000
with an exercise price of $1.00 and an expiration date, subject to earlier
termination, of December 31, 2000; and (b) 50,000 options granted on January 1,
2000 with an exercise price of $0.75 and an expiration date, subject to earlier
termination, of December 31, 2000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was organized under the laws of Delaware on April 29, 1998 for
the purpose of effecting on a tax deferred basis, a reorganization of
Telefficiency.
Pursuant to the Plan of Reorganization and Share Purchase Agreement dated
May 11, 1998 between the Company and Telefficiency, (1) each shareholder of
Telefficiency (including Messrs. Brunet and Clubine and their spouses) received
Class B Common Stock representing a pro rata voting interest in the Company and
(2) the Company acquired all of the issued and outstanding voting securities of
Telefficiency.
On September 9, 1999, the Company borrowed $500,000 form Mr. Leo Maa, a
stockholder of the Company. This loan was reflected by the Note which bore
interest at 10% per annum calculated quarterly. The Note was due upon the
receipt of funds by the Company in connection with an equity or debt financing.
The Company repaid $400,000 during December 1999 when it received proceeds from
the sale of Debentures. On February 14, 2000, the Company paid back the
outstanding principal balance and interest on the Note. Please refer to "Part I
- - Item 2. Managements' Discussion and Analysis or Plan of Operation."
Other than the foregoing transaction, there has been no transaction during
the last two years, or proposed transactions, to which the Company is or will be
a party in which any of its officers, directors, principal stockholders or any
family member of such person had or will have a direct or indirect material
interest.
ITEM 8. DESCRIPTION OF SECURITIES
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock, of
which none were issued and outstanding as of the date of this Registration
Statement. The Company's Board of Directors has not designated any series of
Preferred Stock to date. However, shares of Preferred Stock of any one series
shall be of equal rank and identical in all respects.
As such, the holders of equally ranking series of Preferred Stock in
preference to the holders of the Class A and B Common Stock and the holders of
any junior ranking series of Preferred Stock; (i) will have equal rights to
dividends from funds legally available therefor, when, and if, declared by the
Board of Directors of the Company; (ii) upon liquidation, dissolution or winding
up of the affairs of the Company, will be entitled to share ratably in all of
the assets of the Company available for distribution to the holders of such
equally ranking series of Preferred Stock to receive the amount per share fixed
by the Board of Directors when creating the series of which these shares are a
part; and (iii) do not have preemptive, subscription or conversion rights.
The holders of Preferred Stock will have no voting power or voting rights
with respect to
29
<PAGE>
any matter whatsoever, except as may otherwise by required by law or as may be
set forth by the Board of Directors when creating the series of which such
shares are a part.
Common Stock
The Company is authorized to issue 115,000,000 shares of Class A Common
Stock and 30,000,000 shares of Class B Common Stock, of which 10,979,949 shares
of Class A Common Stock and 3,980,051 shares of Class B Common Stock were issued
and outstanding as of the date of this Registration Statement. Each outstanding
share of Class A or Class B Common Stock entitles the holder to one vote, either
in person or by proxy, on all matters that may be voted upon by the owners
thereof at meetings of the stockholders.
After the requirements with respect to preferential dividends, if any, on
any series of Preferred Stock shall have been met, the holders of Class A Common
Stock shall have equal rights to dividends from funds legally available
therefor, when, and if, declared by the Board of Directors of the Company. In
the event a dividend payable in Class A Common Stock is declared on shares of
Class A Common Stock, holders of Class B Common Stock shall be entitled to
receive a like proportionate dividend payable in shares of Class B Common Stock.
Similarly, in the event a dividend payable in shares of Class B Common Stock is
declared on shares of Class B Common Stock, holders of Class A Common Stock
shall be entitled to receive a like proportionate dividend payable in shares of
Class A Common Stock.
In the event of liquidation, dissolution or winding up of the affairs of
the Company, subject to prior repayment of (1) the payments required in respect
of Preferred Stock and (2) the capital of the Class A Common Stock, the holders
of the Class B Common Stock shall be entitled to receive ratably out of the net
assets of the Company, no more than the par value per share of such Class B
Common Stock.
Each share of Class B Common Stock shall be subject to redemption by the
Company, at the discretion of the Board of Directors for cash, property or
rights provided that at the time of such redemption, the Company shall have
issued and outstanding shares of its Class A Common Stock.
No combination, reclassification, subdivision, split or any other change
with respect to shares of Class A Common Stock or Class B Common Stock or the
capitalization of the Company or any other action or transaction may be effected
which will change the relative voting rights between shares of Class B Common
Stock and Class A Common Stock, unless all adjustments are made as may be
necessary to preserve to holders of the shares of Class A Common Stock and Class
B Common Stock those rights and privileges which are substantially proportionate
to the rights and privileges of such shares existing prior to said event or
events.
Each share of Class B Common Stock is exchangeable into one Class A Common
Stock upon the transfer to the Company of such shares of Class B Common Stock
together with (i) one Class A Exchangeable Share of Telefficiency or (ii) two
Class B Exchangeable Shares of Telefficiency as pursuant to the Plan of
Reorganization and Share Purchase Agreement between the Company and
Telefficiency.
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, voting for the
30
<PAGE>
election of directors, can elect all directors of the Company if they so choose
and, in such event, the holders of the remaining shares will not be able to
elect any of the Company's directors. The present officers and directors of the
Company own approximately 36% of the outstanding shares of the Company.
PART II
ITEM 1. MARKET PRICE OF DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Class A Common Stock of the Company was quoted on the OTC BB from
August 17, 1998 through May 3, 2000. The Company is currently quoted on the pink
sheets as it was not in full compliance with its reporting obligations under the
Exchange Act of 1934 by the deadline of May 3, 2000 imposed by the NASD. The
Company intends to prepare all required applications to be quoted on the OTC BB
as soon as it becomes a reporting issuer. The following table sets forth high
and low bid prices for the Class A Common Stock for the calendar quarters
indicated as reported by the OTC BB from September 30, 1998 through December 31,
1999. These prices represent quotations between dealers without adjustment for
retail markup, markdown or commission and may not represent actual transactions.
=========================================================================
Quarter Ending: High Low Volume
- --------------- ---- --- ------
- -------------------------------------------------------------------------
March 31, 2000 $2.375 $0.75 6,625,100
- -------------------------------------------------------------------------
December 31, 1999 $1.34 $.375 8,538,400
- -------------------------------------------------------------------------
September 30, 1999 .75 .25 6,530,100
- -------------------------------------------------------------------------
June 30, 1999 .88 .22 2,110,600
- -------------------------------------------------------------------------
March 31, 1999 1.28 .31 2,521,300
- -------------------------------------------------------------------------
December 31, 1998 4.38 1.19 2,163,300
- -------------------------------------------------------------------------
September 30, 1998 4.75 4.0 2,532,600
- -------------------------------------------------------------------------
June 30, 1998 N/A N/A N/A
=========================================================================
No assurance can be given that a market for the Company's Class A Common
Stock will be sustained or that the Class A Common Stock will again to be quoted
on the OTC BB.
On April 19, 2000, the closing price of the Company's Class A Common Stock
as reported on the OTC BB was $1.10 per share.
There is no established public trading market for the Company's Class B
Common Stock. There are no shares of Class B Common Stock that are subject to
outstanding options or warrants to purchase, or securities convertible into
shares of the Company's Class B Common Stock.
As of March 31, 2000, there were approximately 300 holders of the Company's
Class A Common Stock and 36 holders of the Company's Class B Common Stock.
Dividend
The Company has not declared any dividends since inception, and has no
present intention of paying any dividends on its Class A or Class B Common Stock
in the foreseeable future. The payment by the Company of dividends, if any, in
the future, rests within the discretion of the Board of Directors and will
depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors.
31
<PAGE>
In addition, although the Company has not designated any series of
Preferred Stock, upon the designation and issuance of such shares of Preferred
Stock, no dividends may be paid on shares of Class A or Class B Common Stock
until all requirements with respect to preferential dividends of the shares of
Preferred Stock have been met and after the Company shall have complied with all
requirements with respect to the setting aside of sums in a sinking fund for the
purchase or redemption of the shares of Preferred Stock.
Only the holders of the Company's Class A Common Stock shall be entitled to
receive dividends payable in cash or property (other than capital stock of the
Company) as declared by the Board of Directors. In the event a dividend payable
in Class A Common Stock is declared on shares of Class A Common Stock, holders
of Class B Common Stock shall be entitled to receive a like proportionate
dividend payable in shares of Class B Common Stock. Similarly, in the event a
dividend payable in shares of Class B Common Stock is declared on shares of
Class B Common Stock, holders of Class A Common Stock shall be entitled to
receive a like proportionate dividend payable in shares of Class A Common Stock.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any material litigation, and has no knowledge
of any pending or threatened litigation against it.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since inception the Company has sold securities in the manner set forth
below without registration under Securities Act of 1933, as amended (the "Act").
1. On May 12, 1998, the Company issued in an exchange transaction pursuant
to the Plan of Reorganization and Share Purchase Agreement dated May 11, 1998
between the Company and its subsidiary, Telefficiency, 5,500,000 shares of Class
B Common stock in exchange for all of the issued and outstanding shares of
Telefficiency. The Company believes that such transaction was exempt from
registration under the Act pursuant to Section 4(2) and the rules and
regulations promulgated thereunder as a transaction by an issuer not involving
any public offering.
2. Prior to the Reorganization, Telefficiency has 146,328 stock purchase
warrants issued and outstanding. Such warrants had been granted to Fox & Co. in
exchange for obtaining funding for Telefficiency. After the Reorganization, the
Company issued 146,328 replacement warrants to Fox & Co. on May 12, 1998 (the
"Replacement Warrants") which had an adjusted exercise price and the same
expiration date. Each Replacement Warrant entitled the holder thereof to
purchase one share of Class A Common Stock at $6.21 up to December 31, 1998; at
$7.59 after December 31, 1998 and up to December 31, 1999; and at $8.97 after
December 31, 1999 and up to the expiration date of December 31, 2001. The
Company believes that such transaction was exempt from registration under the
Act pursuant to Section 4(2) and the rules and regulations promulgated
thereunder as a transaction by an issuer not involving any public offering.
32
<PAGE>
3. During May 1998 through July 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to Rule 504 of Regulation D, 8,500,000
shares of Class A Common Stock at $.115 per share to accredited investors, for
aggregate gross proceeds of $977,500.
4. During May 1998 through September 1998, the Company offered and sold in
an ongoing offering by the Company pursuant to the terms of Regulation S,
5,500,000 Stock Purchase Warrants at $.01 per warrant for aggregate gross
proceeds of $55,000. Each Warrant entitled the holder thereof to purchase one
share of Class A Common Stock at a price of $1.00 per share. The Warrants
expired unexercised in May 1999.
5. During June 1998 through August 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to Rule 504 of Regulation D, 20,000
shares of Class A Common Stock at $1.00 per share for aggregate gross proceeds
of $20,000.
6. During June 1998 through August 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to the terms of Regulation S, 165,000
Stock Purchase Units at a price of $1.00 per Unit, comprised of (i) one share of
Class A Common Stock; and (ii) one Class A Stock Purchase Warrant entitling the
holder thereof to purchase one share of Class A Common Stock at a price of $1.00
per share for aggregate gross proceeds of $165,000.
7. During August 1998 through January 1999, the Company offered and sold in
an ongoing offering by the Company pursuant to the terms of Regulation S,
775,000 shares of Class A Common Stock at a price of $1.00 per share for
aggregate gross proceeds of $775,000.
8. On September 29, 1999, pursuant to an agreement between the Company and
Cascade International Capital Corporation, the Company issued Cascade 47,000
warrants to purchase shares of the Company's Class A Common Stock at $0.05 per
share in consideration for Cascade's future services in assisting the Company to
obtain an acquisition financing commitment of $60,000,000. The Company believes
that the transaction was exempt from registration under the Act, pursuant to
Section 4(2) and the rules and regulations promulgated thereunder as a
transaction by an issuer not involving any public offering.
9. During December 1999 through February 2000, the Company offered and
sold, through Shepherd Financial Group, Inc., 1465 Greenbriar Drive, Green Oaks,
Illinois, 18 units at a price of $100,000 per unit consisting of (i) $100,000
principal amount of the Company's Series A 13% Debentures due December 31, 2002
and (ii) a stock purchase warrant entitling the holder thereof to purchase up to
30,000 shares of Class A Common Stock at an exercise price of $0.25 per share
(the "Debenture Units"). In connection with the offer and sale of the 18
Debenture Units, the Company agreed to pay Shepherd Financial Group, Inc. a
placement fee calculated as follows: (i) for every Debenture Unit sold, up to a
maximum of 10 Debenture Units, a warrant to purchase up to 70,000 shares of
Class A Common Stock at a price of $0.25 per share for a period of 2 years
following the closing date; and (ii) for every Debenture Unit sold in excess of
10 Debenture Units, a cash payment equal to 5% ($5,000 per Debenture Unit) of
the proceeds received by the Company from the sale of any Debenture Unit in
excess of 10 Debenture Units. The Company believes that the transactions were
exempt from registration under the Act, pursuant to Section 4(2) and the rules
and regulations promulgated thereunder as a transaction by an issuer not
involving any public offering.
33
<PAGE>
10. On January 1, 2000, in consideration of services to be rendered to the
Company in connection with the development of an in-house public relations
group, the Company granted consultants 50,000 shares of Class A Common Stock;
75,000 options to purchase Class A Common Stock with an exercise price of $1.00
and an expiration date of December 31, 2000; and 50,000 options to purchase
Class A Common Stock with an exercise price of $0.75 and an expiration date of
December 31, 2000. The Company believes that the transaction was exempt from
registration under the Act, pursuant to Section 4(2) and the rules and
regulations promulgated thereunder as a transaction by an issuer not involving
any public offering.
11. On March 9, 2000 in consideration of services to be rendered to the
Company in connection with assisting the Company to obtain financing
commitments, the Company issued a consultant 600,000 warrants to purchase shares
of the Company's Class A Common Stock at a price of $0.25 per share. The Company
believes that the transaction was exempt from registration under the Act,
pursuant to Section 4(2) and the rules and regulations promulgated thereunder as
a transaction by an issuer not involving any public offering.
Except for shares issued pursuant to Rule 504, such shares are "restricted
securities," as that term is defined in the rules and regulations promulgated
under the Securities Act subject to certain restrictions regarding resale.
Certificates evidencing all of the above-referenced securities have been stamped
with a restrictive legend and will be subject to stop transfer orders.
ITEM 5. INDEMNIFICATIONS OF DIRECTORS AND OFFICERS
Except as hereinafter set forth there is no charter provision, bylaw,
contract, arrangement or statute under which any officer or director of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such.
Statutory indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors and corporate
employees and agents under certain circumstances as follows:
Indemnification of Officers, Directors, Employee and Agents; Insurance
(a) A corporation may indemnify any person who was or is party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fee),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporations, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding, by judgment, order, settlement,
34
<PAGE>
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he if or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person if fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of such court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of ay
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of nay claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsection (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of the directors who were not parties to
such action, suit or proceeding, or (2) if such a quorum is not obtainable, or,
even, if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in written opinion, or (3) by the stockholders.
(e) Expenses (including attorney's fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of any undertaking by or on
behalf of such director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses including attorney's fees incurred by
other employees and agents may be so paid such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
35
<PAGE>
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
including ( any constituent of a constituent) absorbed in a consolidation or
merger which, if separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, reference to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
services as a director, officer, employee or agent of the corporation which
imposes duties on, or involve services by, such director, officer, employee, or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
The Company's Certificate of Incorporation eliminates the personal
liability of directors of the Company to the fullest extent permitted by the
General Corporation Law of the State of Delaware and sets forth that the Company
shall indemnify those persons it shall have the power to indemnify under Section
145 of the Delaware General Corporation Law.
The Company's by-laws also provide that any person who was involved in any
action, suit or proceeding by reason of the fact that he is a director or
officer of the Company or was serving at the request of the Company as a
director, officer, employee or agent of another corporation shall be indemnified
and held harmless by the corporation to the fullest extent permitted by the
General Corporation Law of Delaware.
The Securities and Exchange Commission's Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to any provisions contained in its Certificate of Incorporation, or
by-laws, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful
36
<PAGE>
defenses of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
37
<PAGE>
PART F/S
Financial Statements
TELEFFICIENCY HOLDING CORPORATION
Page
----
Audited Financial Statements:
Report of Independent Auditors dated April 7, 2000 .......................39
Consolidated Balance Sheets as at December 31, 1999 and 1998..............40
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998.............................................41
Consolidated Statements of Stockholders' Deficit
for the Years Ended December 31, 1999 and 1998.........................42
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................................43
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999 and 1998.............................................44
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Telefficiency Holding Corporation
We have audited the consolidated balance sheets of Telefficiency Holding
Corporation as at December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Telefficiency
Holding Corporation as at December 31, 1999 and 1998 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16, the Company
has suffered significant operating losses for the years ended December 31, 1999
and 1998. Further, at December 31, 1999, the Company has a working capital
deficit of $1,353,839 and a stockholders' deficit of $1,338,147. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
16. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
CERTIFIED PUBLIC ACCOUNTANTS
April 7, 2000
New York, New York
39
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net $ 596,990 $ 996,395
Inventory 446,920 544,912
Prepaid expenses 27,354 21,933
----------- -----------
Total current assets 1,071,264 1,563,240
Property and equipment - net 59,525 56,357
Advances to related companies 200,338 308,496
Deferred finance costs, net 279,125
Intangibles, net 97,011 34,104
----------- -----------
TOTAL ASSETS $ 1,707,263 $ 1,962,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank indebtedness $ 694,212 $ 436,153
Accounts payable and accrued liabilities 1,049,789 1,707,953
Deferred revenue 162,745 181,701
Customers' deposits 398,788 417,903
Loan payable 100,000
Obligation under capital leases - current portion 19,569 42,513
----------- -----------
Total current liabilities 2,425,103 2,786,223
Debentures payable, net of discount of $119,625 605,375
Obligation under capital leases, net of
current portion 14,932 25,157
----------- -----------
Total liabilities 3,045,410 2,811,380
----------- -----------
Commitments (Notes 10 and 14)
Stockholders' deficit:
Capital stock 1,496 1,496
Additional paid in capital 3,445,736 2,642,301
Cumulative translation adjustment 99,605 172,444
Accumulated deficit (4,884,984) (3,665,424)
----------- -----------
Total stockholders' deficit (1,338,147) (849,183)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,707,263 $ 1,962,197
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
Sales $ 5,723,498 $ 8,144,945
Cost of sales 3,229,812 6,075,396
----------- -----------
Gross profit 2,493,686 2,069,549
----------- -----------
Expenses:
Wages and salaries 1,653,784 1,251,474
Subcontract costs 659,788 424,693
Management salaries 204,453 285,214
Automobile 201,671 256,194
Sales commissions 167,171 218,766
Professional fees 110,522 215,777
Office and general 148,182 132,557
Employee benefits 130,284 121,057
Advertising and promotion 124,960 114,523
Telephone 71,662 98,737
Bad debts (recovery) (19,700) 96,658
Premises lease cost 73,761 84,389
Bank charges and interest 105,798 79,194
Insurance 30,578 13,406
Utilities 13,765 12,640
Repairs and maintenance 5,075 10,673
Depreciation and amortization 31,492 23,332
----------- -----------
3,713,246 3,439,284
----------- -----------
NET LOSS $(1,219,560) $(1,369,735)
=========== ===========
NET LOSS PER SHARE $ (0.08) $ (0.13)
=========== ===========
See accompanying notes to consolidated financial statements.
41
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumul- Cumulative Comprehen- Share-
-------------------------- Paid in ated Translation sive Income holder's
Shares Amount Capital Deficit Adjustment (Loss) Deficit
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 5,500,000 $ 550 $ 1,052,484 $ (2,295,689) $ 93,786 $ (1,148,869)
Common stock, Class A,
issued in private placements 9,460,000 946 1,542,446 1,543,392
Warrants issued in private
placements 47,371 47,371
Net loss (1,369,735) $ (1,369,735)
Other comprehensive income:
Cumulative translation adjustment 78,658 78,658
------------
Total comprehensive loss $ (1,291,077) (1,291,077)
------------ ------------ ------------ ------------ ------------ ============ ------------
Balance - December 31, 1998 14,960,000 1,496 2,642,301 (3,665,424) 172,444 (849,183)
Adjustment of share issue costs 36,685 36,685
Options granted for services,
un-exercised 341,000 341,000
Warrants issued for services 27,000 27,000
Warrants committed for services 279,125 279,125
Warrants issued with debentures 119,625 119,625
Net loss (1,219,560) $ (1,219,560)
Other comprehensive income:
Cumulative translation adjustment (72,839) (72,839)
------------
Total comprehensive loss $ (1,292,399) (1,292,399)
------------ ------------ ------------ ------------ ------------ ============ ------------
Balance - December 31, 1999 14,960,000 $ 1,496 $ 3,445,736 $ (4,884,984) $ 99,605 $ (1,338,147)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(1,219,560) $(1,369,735)
Adjustments for items not affecting cash:
Depreciation and amortization 31,492 23,332
Provision for doubtful accounts (132,461)
Operating expenses paid with warrants 27,000
Options granted for compensation 341,000
Changes in assets and liabilities:
Accounts receivable 531,866 (186,604)
Inventory 97,992 (27,901)
Prepaid expenses (5,421) 44,544
Accounts payable and accrued
liabilities (658,164) (644,403)
Income taxes payable (16,559)
Customers' deposits (19,115) 22,456
Deferred revenue (18,956) 81,567
----------- -----------
Net cash used by
operating activities (1,024,327) (2,118,215)
----------- -----------
Cash flows from investing activities:
Purchase of customer lists (74,232)
Purchase of capital assets (18,138) (8,401)
----------- -----------
Net cash used by investing activities (92,370) (8,401)
----------- -----------
Cash flows from financing activities:
Issuance of capital stock and warrants 1,590,763
Advances from related companies 108,158 577,364
Obligations under capital leases (33,169) (31,693)
Bank indebtedness 258,059 (91,468)
Proceeds from demand loans 500,000
Repayment of demand loan (400,000)
Proceeds from issue of debentures 725,000
----------- -----------
Net cash provided by financing
activities 1,158,048 2,044,966
----------- -----------
Effect of exchange rate changes on cash (41,351) 81,650
----------- -----------
Increase in cash -- --
Cash - beginning -- --
----------- -----------
CASH - ENDING $ -- $ --
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 71,627 $ 79,194
=========== ===========
Cash paid for income taxes $ -- $ 17,296
=========== ===========
Non-cash financing transactions -
Assets acquired under capital lease $ -- $ 11,217
=========== ===========
Deferred finance costs paid with warrants $ 279,125 $ --
=========== ===========
See accompanying notes to consolidated financial statements.
43
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - NATURE OF BUSINESS
The Company operates in one industry segment and is engaged in the sales,
installation and service of telephone systems throughout Canada.
Substantially all of the Company's net assets are within Canada.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The financial statements are prepared in accordance with US GAAP.
Organization and principles of consolidation
On April 29, 1998, Telefficiency Holding Corporation ("THC") was
incorporated by Certificate of Incorporation under the laws of the State of
Delaware. Prior to entering into the Plan of Reorganization and Share
Purchase Agreement (the "Purchase Agreement") dated May 11, 1998 between
the Company and Telefficiency Corporation ("TEL"), a corporation formed and
existing under the laws of Ontario, Canada, the Company was inactive.
On May 12, 1998, the Company issued 5,500,000 shares of Class B Common
Stock in exchange for 5,500,000 shares representing all the issued and
outstanding common shares of TEL. The attributes of the Class B Common
Stock are voting and non-participating. As a result of this transaction the
former shareholders of TEL now control THC, the parent company of TEL.
Thus, this transaction is considered a reverse takeover.
The consolidated financial statements include the accounts of the Company
and its subsidiaries after eliminating all intercompany accounts and
transactions.
Translation of foreign currencies
The Company uses the local currency as the functional currency and
translates all assets and liabilities at year-end exchange rates, all
income and expense accounts at average rates and records adjustments
resulting from the translation in a separate component of equity.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on a first-in first-out basis.
44
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable
It is the policy of management to review the outstanding accounts
receivable at year end, as well as the bad debts write off experienced in
the past, and establish an allowance for estimated uncollectible amounts.
The allowance at December 31, 1999 and 1998, respectively, is $39,010 and
$171,471.
In December 1999, the Company began selling selected trade receivables to a
commercial factor with recourse. Trade receivables approved by the factor
are purchased for full value. The factor retains 13% until the receivable
is fully collected. Interest is charged at 1/10th of 1% per day, 36.5% per
annum, on amounts advanced by the factor. During the year proceeds received
from the factor under this arrangement amounted to $274,469. At December
31, 1999, amounts due from the factor amounted to $17,026. Also, at
December 31, 1999, the Company was contingently liable to the factor for
$59,804 in advances that have not been collected by the factor. Interest
expense incurred for the year ended December 31, 1999 under this
arrangement was $10,570.
Property and equipment
Property and equipment are recorded at cost. Depreciation is calculated
using the declining balance method over the useful life of the assets.
Furniture and fixtures and other equipment are depreciated over seven
years. Computer equipment under capital lease is depreciated over the life
of the lease, 2 to 5 years, and included in depreciation expense.
Leasehold improvements are amortized on the straight-line basis over the
term of the leased premises, three years and six months. The original lease
expired on December 31, 1999 with the improvements fully amortized.
However, the lease was renewed for an additional six months.
Intangibles
The excess of the cost of a prior acquisition of a Canadian company over
the fair value of the assets acquired, and is being amortized over 10 years
using the straight-line basis.
During 1999 the Company purchased the customer lists of two small companies
engaged in the sales and servicing of telephone systems in Canada. The
consideration for the purchases was cash of $74,232. The cost of these
acquisitions has been included in intangibles on the accompanying
consolidated balance sheets. The cost is being amortized over 10 years
using the straight-line basis.
45
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred financing
Deferred finance costs represent costs incurred in conjunction with the
issue of debentures. Such costs will be amortized over the life of the
debentures, three years, on a straight-line basis commencing in 2000.
Revenue recognition
Revenue is recognized upon shipment of product or upon completion of
installation, if required. Installation is generally over a short period of
one to several days. Accordingly, no material amounts of work in process
exist at any point in time. Service contracts are sold for one year
periods. The terms of the contracts require payment in advance. Revenues
for service contracts are amortized on a straight-line basis over the life
of the contract.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates and assumptions.
Financial instruments
The Company's financial instruments consist of accounts receivable,
advances to related companies, bank indebtedness, accounts payable and
accrued liabilities, obligations under capital leases and debentures
payable. Unless otherwise noted, it is management's opinion that the
Company is not exposed to significant interest, currency or credit risks
arising from these financial instruments. The fair value of these financial
instruments approximate their carrying values, unless otherwise noted.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109. Deferred income taxes are provided
on material temporary differences between book and tax bases of assets and
liabilities when such differences arise. As of December 31, 1999, there are
no material differences between the book and tax bases of the Company's
assets and liabilities. Deferred taxes are also recognized for operating
losses available
46
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes (continued)
to offset future income taxes. A valuation allowance is provided if it is
more likely than not that the Company will not realize the benefits of a
deferred tax asset.
NOTE 3 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
Overview
We have evaluated the potential impact of the situation commonly referred
to as the "Year 2000 Issue". Y2K concerns the inability of information
systems, primarily computer software programs, to properly recognize and
process date sensitive information relating to the year 2000 and beyond.
Many of the world's computer systems currently record years in a two-digit
format. These computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally. The potential costs and uncertainties associated with
Y2K will depend on a number of factors, including software, hardware and
the nature of the industry in which a company operates.
Accounting Systems
Management made an informal assessment of our computer programs and the
products we purchased and determined that we did not have any assets with
embedded computer chips or programs that would be affected by the Y2K
issues.
Other Entity Compliance
We do not engage in electronic date interchange with other entities on any
significant basis. Therefore, management believes that we do not have any
significant Y2K exposure directly from other entities and their failure to
be Y2K compliant. However, the failure of other entities to be Y2K
compliant may cause impairment that is not yet apparent to management of
the Company's operations.
Contingency Planning
We do not have any contingency plan for computer systems that may be found
not to be Y2K compliant in the future, nor do we have a contingency plan in
the event a critical service, supplier or customer will not be Y2K
compliant.
47
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED)
Cost of Year 2000 Compliance
We did not spend any amount on Y2K compliance nor do we expect to have to
spend any material amount on Y2K compliance in the future.
NOTE 4 - PROPERTY AND EQUIPMENT
1999
----
Accumulated
Depreciation Net Book
and Amorti- Net Book Value
Cost zation Value 1998
-------- ------------ -------- --------
Furniture & fixtures $ 71,755 $ 47,884 $ 23,871 $ 24,105
Computer hardware 43,482 20,800 22,682 13,155
Computer equipment under
capital lease 36,534 23,562 12,972 17,443
Computer software 7,413 7,413 -- 210
Leasehold improvements 7,753 7,753 -- 1,444
-------- -------- -------- --------
$166,937 $107,412 $ 59,525 $ 56,357
======== ======== ======== ========
NOTE 5 - ADVANCES TO RELATED COMPANIES
1999 1998
--------- ---------
Vema Holdings Inc. $ (27,203) $ 18,660
W.R.C. Holdings Limited 227,541 289,836
--------- ---------
$ 200,338 $ 308,496
========= =========
These advances are non-interest bearing, and have no fixed terms of
repayment. These companies are controlled by shareholders of the Company.
The amounts owed are personally guaranteed by the shareholders.
NOTE 6 - INTANGIBLES
1999 1998
-------- --------
Customer lists $ 74,232 $ --
Excess of cost over assets acquired 60,384 56,840
Less: accumulated amortization (37,605) (22,736)
-------- --------
$ 97,011 $ 34,104
======== ========
The value of the excess cost in U.S. currency varies as a result of foreign
exchange rate fluctuation. The amount represents $87,150 Canadian dollars.
48
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - BANK INDEBTEDNESS
1999 1998
-------- --------
Bank indebtedness is represented by:
Bank overdraft $205,746 $ 80,709
Demand loan 488,466 355,444
-------- --------
$694,212 $436,153
======== ========
The amount available for borrowing under the demand loan, at current
exchange rates, is approximately $488,000 ($705,000 Canadian). Actual
amounts outstanding in U.S. dollars may vary due to foreign exchange rate
fluctuation.
Bank indebtedness is secured by a general security agreement covering all
the assets of the company and a security agreement covering all the
accounts receivable. The bank loan agreement contains provisions which
require the Company to maintain a stated working capital, to maintain a
minimum net worth, to limit management salaries and to provide financial
statements within a certain time period. As at December 31, 1999, the
Company was in default of certain of these covenants. However, without
obtaining a formal waiver, the Company has disclosed this to the bank and
normal relations with the bank are being maintained subsequent to year end.
The loan bears interest at the bank's prime rate plus 2%. At December 31,
1999, the applicable rate was 8.5%.
NOTE 8 - LOAN PAYABLE
The loan payable, originally $500,000, is to a stockholder and bears
interest at 10% per annum. The loan is secured by a blanket security
agreement and is subordinate to the bank indebtedness. During December
1999, $400,000 was repaid with the proceeds of the debentures. In 2000, the
loan was fully repaid. Interest expense for the year ended December 31,
1999 was $16,100.
NOTE 9 - DEBENTURES PAYABLE
In December 1999, the Company offered for sale up to 18 units each
consisting of $100,000 principal amount of Series A 13% debentures due
December 31, 2002 and a warrant to purchase up to 30,000 shares of the
Company's Class A common stock at a price of $0.25 per share. Each unit was
offered for $100,000. Interest is payable annually in arrears commencing
December 31, 2000. The debentures are redeemable, prior to maturity, at a
price of 105% of the principal amount, limiting the Company's exposure to
interest rate risk. As of December 31, 1999, the Company sold 7.25 units,
receiving $725,000. At the time of sale, the stock price averaged $0.80 per
share. Accordingly, $119,625 was attributable to warrants and the
debentures were recorded at a discounted value of $605,375. The discount
will be amortized over the life of the debentures using the interest method
with an effective interest rate of 20.9%. Since the debentures were issued
in December 1999, interest expense attributable to them for the year ended
December 31, 1999 is negligible.
49
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - OBLIGATION UNDER CAPITAL LEASES
The Company is obligated under various capital leases for computer
equipment that expire at various dates during the next four years. As of
December 31, 1999 the future minimum lease payments under capital leases
are computed as follows:
2000 $23,773
2001 12,151
2002 617
-------
Total minimum lease payments 36,541
Less: amount representing interest 2,040
-------
Balance of obligation 34,501
Less: current portion 19,569
-------
$14,932
=======
The leases bear implicit interest rates ranging from 10.65% to 11.29%.
NOTE 11 - CAPITAL STOCK, OPTIONS AND WARRANTS
At December 31, 1999 and 1998 capital stock is comprised as follows:
Authorized Issued
5,000,000 Preferenced shares,
par value $.0001 $ --
115,000,000 9,460,000 Class A common shares,
par value $.0001 946
30,000,000 5,500,000 Class B common shares,
par value $.0001 550
--------
$ 1,496
========
Class A common shares are voting and participating. Class B common shares
are voting and non-participating and may be exchanged to obtain Class A
common shares after a restriction period.
On January 1, 2000, the Company granted 50,000 shares of Class A Common
Stock and options to purchase 125,000 shares to third parties for services
to be rendered.
The following comprises the warrants outstanding or committed to be issued
at December 31, 1999, each for one share of Class A common stock:
<TABLE>
<CAPTION>
Number of Warrants Value Exercise Price Expiration Date
------------------ ----- -------------- ---------------
<S> <C> <C> <C> <C>
165,000 N/A - Issued with 165,000 $1.00 May, 2000
CL A shares
146,328 N/A - Issued with $6.21 - $8.97 December, 2001
146,328 CL A shares
47,000* $27,000 $0.05 September, 2001
507,500 $279,125 $0.25 December, 2001
217,500** $119,625 $0.25 December, 2001
---------
1,083,328
=========
</TABLE>
* Subsequently exercised. ** 90,000 subsequently exercised.
50
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - CAPITAL STOCK, OPTIONS AND WARRANTS (CONTINUED)
All warrants are exercisable upon grant. The warrants have no separate
market. The underlying shares, at December 31, 1999, are trading below the
exercise price. However, subsequent to year end the stock had risen above
$1.00 per share.
These warrants have been excluded from the calculation of loss per share
since the assumed exercise would decrease the loss per share and,
therefore, are anti-dilutive.
The value assigned to warrants was based upon the fair market value.
In connection with the issuance of debentures subsequent to December 31,
1999, the Company issued the following warrants:
Number of Warrants Value Exercise Price Expiration Date
------------------ -------------- -------------- ---------------
322,500 $403,125 $0.25 February 2002
192,500 $240,625 $0.25 February 2002
In addition, in March 2000 the Company committed to issue 50,000 shares for
services to be rendered by a third party.
On March 9, 2000 in consideration of services to be rendered to the Company
in connection with assisting the Company to obtain financing commitments,
the Company issued a consultant 600,000 warrants to purchase shares of the
Company's Class A Common Stock at a price of $0.25 per share.
During 1998, the Company sold 5,500,000 warrants entitling holders to
purchase one share of Class A common stock at $1.00 per share. The warrants
were sold at a stated value of $0.01 each for aggregate gross proceeds of
$55,000. The warrants expired unexercised in May 1999.
At December 31, 1999 and subsequently, the Company had issued the following
options:
<TABLE>
<CAPTION>
Number of
Issued To Options Grant Date Date Exercisable Exercise Price Expiration
--------- --------- ---------- ---------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Officers 500,000* 10/21/1999 Immediate $0.21 10/21/2004
Employees 497,000 11/09/1999 Immediate $0.37 01/01/2002
100,000 10/15/1999 Immediate $0.15 10/15/2000
200,000 06/30/1999 Immediate $0.05 06/30/2001
300,000 06/17/1999 07/01/1999 $0.05 07/01/2004
221,000 06/17/1999 01/31/2000 $0.50 01/31/2005
---------
1,818,000
Consultants 75,000 01/01/2000 Immediate $1.00 12/31/2000
50,000 01/01/2000 Immediate $0.75 12/31/2000
Officers 500,000 01/04/2000 Immediate $0.75 01/04/2002
---------
2,443,000
</TABLE>
o Subsequently exercised.
51
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - CAPITAL STOCK, OPTIONS AND WARRANTS (CONTINUED)
In conjunction with the issue of options to officers and employees the
Company has recorded compensation cost of $341,000. Such cost is based upon
the prices of the underlying shares as traded on the open market at the
date of grant for options with exercise prices at less than the underlying
share price.
The options and warrants issued subsequent to December 31, 1999 were for
services to be rendered in the subsequent period by third parties. An
appropriate amount will be charged to operations in the subsequent period
based on the fair value of such services or the options whichever is more
readily determinable.
Had the Company recorded compensation in accordance with Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, the compensation cost recorded, net loss and loss per share,
as determined using the Black-Scholes option pricing model, would be as
follows:
Pro-forma compensation cost $ 719,000.00
Pro-forma net loss 1,597,560.00
Pro-forma loss per share 0.11
The per share fair value of options and warrants granted during the year
ended December 31, 1999 ranged from $.21 to $.57 using the following
assumptions: Expected dividend yield -0-; risk free interest rate 6%;
expected stock volatility 141.9% and expected option life 1-5 years.
Exercise of such options could potentially dilute future earnings per
share. However, in the event of a loss, as with the years ended December
31, 1999 and 1998, the underlying shares issued would reduce the loss per
share and, thus, would be anti-dilutive.
At December 31, 1999, 1,083,328 shares and 1,818,000 shares have been
reserved for issued or committed and outstanding warrants and options,
respectively.
NOTE 12 - INCOME TAXES
A reconciliation comparing income taxes calculated at the Canadian
statutory rate to the amount provided in the accompanying consolidated
financial statements is as follows:
1999 1998
------------ ------------
Combined Canadian federal and provincial
income tax rates 44.6% 44.6%
============ ============
Loss before income taxes $ (1,219,560) $ (1,369,735)
============ ============
52
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12 - INCOME TAXES (CONTINUED)
Expected income taxes (recovery) $(544,000) $(610,000)
Permanent differences 37,000 42,000
Operating losses for which tax benefit
has been negated by an increase in
the valuation allowance 507,000 568,000
--------- ---------
Income tax provision $ -- $ --
========= =========
The Company and its subsidiaries are subject to income taxes on an
individual basis rather than a consolidated basis. Cumulatively, for
Canadian tax purposes at current exchange rates, the Company has
non-capital losses for carryforward aggregating approximately $3,587,000
which are available for the reduction of future years' taxable incomes.
These losses expire as follows:
2003 $ 711,000
2004 902,000
2005 1,294,000
2006 680,000
----------
$3,587,000
==========
For U.S. purposes, the Company has a net operating loss carryforwards of
$68,000 and $430,000 that expire in 2018 and 2019, respectively.
At December 31, 1999 the Company's net deferred tax assets are estimated as
follows:
Canada U.S. Total
----------- ----------- ------------
Net operating loss
carryforward $ 1,600,040 $ 169,320 $ 1,769,360
Valuation allowance (1,600,040) (169,320) (1,769,360)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
NOTE 13 - NET LOSS PER SHARE
Net consolidated loss per share has been computed by dividing the net
consolidated loss applicable to common shareholders by the weighted average
number of shares of common stock outstanding during the respective years
(14,960,000 in 1999 and 10,626,593 in 1998). The effect of the exercise of
the stock warrants and options referred to in Note 11 is not dilutive since
they would reduce the loss per share.
53
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - COMMITMENTS
The Company is committed under various operating leases for occupied
premises and vehicles, which expire from 2000 to 2003. Future minimum
annual payments (exclusive of taxes, insurance and maintenance costs) are
as follows:
2000 $104,220
2001 29,961
2002 8,365
2003 4,010
--------
$146,556
========
NOTE 15 - MAJOR VENDORS
The Company purchases 95% of its inventory from a single vendor. The
Company estimates that approximately 90% of its new products sold are from
this vendor. During the year ended December 31, 1999, the Company had no
minimum purchase commitments with this vendor.
NOTE 16 - GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial
statements, the Company has suffered significant operating losses for the
years ended December 31, 1999 and 1998. Further, at December 31, 1999, the
Company has a working capital deficit of $1,353,839 and a stockholders'
deficit of $1,338,147.
During the first quarter of 2000, the Company received $1,075,000, the
balance of the proceeds of the debenture financing commenced in December of
1999 and received $129,850 from the exercise of options and warrants. The
proceeds were used to pay existing short-term loans and trade payables.
In addition the Company is negotiating additional financing which is
anticipated to be through private placements of warrants to purchase common
stock. The Company believes the private placements will be with individual
investors who are "accredited investors." The terms of these arrangements
are still being negotiated and are contingent on many factors, including
due diligence by the purchasers, regulatory compliance and obtaining the
commitment of the investors.
54
<PAGE>
PART III
Item 1 and 2. INDEX TO AND DESCRIPTION OF EXHIBITS
2(1) Amended and Restated Certificate of Incorporation*
2(2) By-laws*
2(3) Plan of Reorganization and Share Purchase Agreement dated May 11, 1998
between the Company and Telefficiency.*
21 Subsidiaries of the Company*
27 Financial Data Schedule
- --------------------
* Previously filed.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Telefficiency Holding Corporation
---------------------------------
(Registrant)
Date: May 9, 2000 By: /s/ Michael Brunet
------------------------------
Michael Brunet
President and Chief Executive Officer
56
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
Registration Statement - Form 10SB
Exhibits
Exhibit Page
2(1) Amended and Restated Certificate of Incorporation*
2(2) By-laws*
2(3) Plan of Reorganization and Share Purchase Agreement dated
May 11, 1998 between the Company and Telefficiency*
21 Subsidiaries of the Company*
27 Financial Data Schedule ....................................... 58
- --------
* Previously Filed.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Telefficiency Holding Corporation Consolidated Balance Sheet and Income
Statement and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 636,000
<ALLOWANCES> 39,010
<INVENTORY> 446,920
<CURRENT-ASSETS> 1,071,264
<PP&E> 166,937
<DEPRECIATION> 107,412
<TOTAL-ASSETS> 1,707,263
<CURRENT-LIABILITIES> 2,425,103
<BONDS> 620,307
0
0
<COMMON> 1,496
<OTHER-SE> (1,339,643)
<TOTAL-LIABILITY-AND-EQUITY> 1,707,263
<SALES> 5,723,498
<TOTAL-REVENUES> 5,723,498
<CGS> 3,229,812
<TOTAL-COSTS> 3,229,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,798
<INCOME-PRETAX> (1,219,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,219,560)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
