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File No. 0-30220
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
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COMMUNICATIONS WORLD INTERNATIONAL, INC.
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(Name of Small Business Issuer in its Charter)
Colorado 84-0917382
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
7315 S. Revere Parkway, Suite 602,
Englewood, Colorado 80112
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(Address of principal executive offices) (Zip Code)
(303) 721-8200
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Issuer's Telephone Number, Including Area Code
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value per share
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(Title of class)
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PART I
Item l. Description of Business
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Business Development
Communications World International, Inc. ("Registrant," "Company" or
"CommWorld") was incorporated in 1983 under Colorado law and has its principal
executive offices at 7315 South Revere Parkway, Suite 602, Englewood, Colorado
80112. CommWorld has established a distribution network for a variety of
telecommunications products and services, including business telephone systems,
through franchises under the CommWorld name and Company-owned outlets, including
a national accounts subsidiary. The Company had 63 franchises located in 25
states and 3 Company-owned outlets at July 31, 1999. Through its distribution
network the Company sells and services private telephone systems and peripheral
products, such as voice messaging and related systems, for business users. The
Company's franchisees and Company-owned outlets market their products primarily
to small and medium-size businesses while the Company's national accounts
subsidiary markets the same products and services directly to multi-location
businesses.
The Company's franchise division purchases telephone and related communications
equipment from manufacturers and supply houses. The Company sells this
equipment to the franchisees who, in turn, sell the equipment to their customers
and connect this equipment to local telephone company lines servicing areas in
which their customers are located. The principal telephone systems sold to
customers are Key telephone systems, which differ from larger PBX systems in
that each incoming telephone line can be accessed by each telephone in the
particular business.
Company owned operations provide a variety of products and services to
customers, including:
. Telephone equipment sales, installation and service.
. Integrated telecommunication system design, installation, remote management
and support of customer premise telephone equipment for companies having
multiple locations.
. Design and installation of standards based cabling systems.
. Technical consulting for large installations.
. Coordination and installation of access to long distance telephone service.
. On site support for large installations.
The Company has incurred substantial losses in recent fiscal years. The
Company's available cash and other liquid resources have been low and the
Company's ability to expand has been impaired. During the fiscal year ended
April 30, 1999, the Board of Directors of the Company determined that a new
business strategy was needed. As a result the Company made key management
changes, completed a merger with Interconnect Acquisition Corporation ("IAC")
and established as its mission to become a highly profitable and dominant
interconnect company in the southwestern U.S. markets. The Company's strategy to
achieve this mission is to acquire select, local interconnect companies, build a
portfolio of products and services to provide the customer convenient
communications procurement, and conduct an efficient operation.
The Company completed two acquisitions in the fiscal year ended April 30, 1999.
In March, 1999 the Company closed on its acquisition of assets from Texas based
Connective Resources, Inc., (CRI) and in April, 1999 completed the acquisition
of Donaldson and Associates, Inc., a franchisee, which has been doing business
as CommWorld of Denver. These acquisitions are further described in the Notes to
the
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consolidated financial statements. The Company also completed the sale of the
assets of its operating units in Phoenix and Tucson, Arizona and its operating
unit in Alexandria, Virginia. The operating units were repurchased by the
original owners principally in exchange for the cancellation of preferred stock.
The unit in Virginia was not located in the southwestern U.S. where the Company
intends to concentrate its acquisition efforts. Although the strategic business
plan for the Company is to grow through acquisitions in the southwestern U.S.
markets (which may include Arizona), it plans to initially concentrate these
efforts in Colorado and Texas. The Company also considered other factors in
connection with the disposition of these units, principally the size of those
operations relative to the costs involved in coordinating those operations with
other parts of the Company due to their geographic locations.
The Company paid $77,750 in cash and a note payable in the amount of $25,000 for
the purchase of assets from CRI. The note was paid at maturity in July 1999.
Approximately $35,000 of tangible assets were acquired, as well as the customer
base, which was valued at $42,750. The Company paid $550,000 in cash for the
acquisition of CommWorld of Denver and issued three notes payable to the owners
in the principal amounts of $25,000, $225,000 and $450,000, for an aggregate of
$700,000. The notes in the principal amount of $250,000 may be converted at the
holder's option into the Company's common stock on the basis of $1 for each one
share. The note in the principal amount of $450,000 may also be converted at
the option of the holder. The conversion rate will be based on a 10% discount
to the market value of the common stock for the 90 day period immediately
preceding the conversion, but in no event will the value of the common stock be
less than $.50 per share. Accordingly, the maximum number of shares the holder
could receive upon conversion of the $450,000 principal amount of the note would
be 900,000. The scheduled maturities of the notes are: $50,000 in October 1999,
$290,000 in April 1999, and $90,000 annually thereafter for four years.
Approximately $115,000 of tangible assets were acquired and the balance of the
purchase price has been recorded as an intangible asset and is being amortized
over twenty years.
Franchise Program
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At July 31, 1999, the Company had 63 franchises located in 25 states. See Note
7 to the Company's financial statements at April 30, 1999 and for the years
ended April 30, 1999 and 1998. Pursuant to the terms of the Company's current
franchise program, a franchisee will pay a one time, non-refundable, franchise
fee of $3,500. The franchise fee is payable upon the execution of the franchise
agreement.
The franchisee is entitled to purchase equipment from or through the Company on
a "cost mark-up royalty" basis, meaning based on the cost to the Company of
equipment and products purchased plus a mark-up to the franchisee. The amount
of the cost mark-up royalty varies by manufacturer and by the volume of
purchases of the individual franchisee. A franchisee only pays royalties on
equipment purchased through or from the Company.
The franchisee is not required to make any purchases of equipment through the
Company; however, the Company believes it will be able to obtain favorable
pricing from suppliers based on negotiated purchases and quantity buying
arrangements. The Company anticipates these prices will be lower than prices
which the franchisee could negotiate directly with suppliers. Currently, most
franchisees purchase some equipment or services from the Company. The
franchisee is responsible for all warranty service on equipment sold by it and
manufacturers' warranties are passed through to the franchisee. The Company
also offers sales and marketing training and other assistance to the franchisees
for scheduled fees.
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The franchisee is granted a license to use the "COMMWORLD" name and trademarks
in the franchised territory. The franchisee is required to conform to certain
standards of business practices, to maintain minimum inventories of products and
services, and to make arrangements with local telephone companies, as necessary,
to provide installation services to customers. The installation and the service
work performed by the franchisees is either done by their staff or is
subcontracted through installation companies, which are independently owned and
operated. Each franchise is run as an independent business and, as such, is
responsible for the operation of its business including the collection of
receivables, arrangement of any customer financing, and employment of adequate
staff.
Franchisees are permitted to assign their franchise provided the Company
receives advance notice of the proposed assignment, the transferee assumes the
obligations under the franchise agreement, the transferee meets certain
conditions and qualifications, and the Company receives a transfer fee equal to
10 percent of the franchise fee then in effect. In addition, the Company has
the right of first refusal to purchase the franchise prior to its sale to
another party.
The term of the franchise is for 10 years unless earlier terminated provided,
during the first 12 months of the franchise, the franchisee has the right to
terminate the franchise without a refund of the franchise fee. The Company has
the right to terminate any franchise in the event of the franchisee's
bankruptcy, a default under the franchise agreement, or other events. The
franchisee has the right to renew the initial term of the agreement for an
additional 10 years if, at the time of renewal, the franchisee is in good
standing and pays a successor franchisee fee in the amount of 10 percent of the
franchise fee then in effect.
Competition
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The Company's principal business is in the interconnect telephone industry,
which sells and services private telephone systems for the business user. The
interconnect industry, so-called because it involves the connection of privately
manufactured and owned equipment to local telephone systems, developed from the
divestiture of the Bell operating companies and court and regulatory rulings
allowing telephone customers to connect separately purchased equipment to
existing local telephone systems.
The interconnect industry continues to expand beyond sales of traditional
telephone equipment, with the greatest growth in sales of voice processing, data
communications, and data processing equipment. The Company competes with other
interconnect telephone companies on the basis of the equipment offered by the
Company and its franchisees, price and after-sale service. Although the Company
concentrates on the sale of Key systems as opposed to larger PBX systems, the
manufacturers of these systems have been successful in providing state-of-the
art electronic equipment for this market segment. The Company believes
consummating its acquisition strategy will enable it to market larger PBX
Systems.
The Company faces intense competition from AT&T, Williams Communications, the
various former regional Bell operating companies and over 10,000 other companies
believed to be engaged in the interconnect telephone industry. Many of these
companies have resources substantially greater than those of the Company. It
can be expected competition in the interconnect telephone industry will be
intense for the foreseeable future.
The Company believes that it offers certain advantages to its franchises,
including the Company's ability to purchase in larger quantities and obtain
volume discounts from suppliers more readily than an individual dealer. The
Company believes that many factors may enter into a purchase decision by its
direct customers, and customers of its franchises. These factors typically
include pricing, product
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selection, service and support, and the ability to meet the customers' delivery
and installation requirements. Although the Company attempts to satisfy its
prospective customers' needs in these areas, it expects to continue to encounter
significant competition from other firms.
Product Supply
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The Company currently purchases telephone systems and various peripheral
equipment from several major suppliers. One of the suppliers, Toshiba America
Information Systems, Inc. (TAIS), provides approximately 85% of the inventory
and products purchased by the Company while offering flexible credit terms. If
the Company's relationship with TAIS were to cease, or to deteriorate, it could
have a significant adverse impact on the operations of the Company. The Company
has significant indebtedness to TAIS as further described in Item 2. Product
availability from suppliers under open lines of credit has been sufficient for
the Company's current operations. However, all products may not necessarily be
available in the future. The Company continually monitors changes in products
offered by these manufacturers, as well as others, to review its current and
future product mix. The Company's products are warranted by their vendors for
at least one year for defects in material and workmanship.
Regulation
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The Federal Communications Commission ("FCC") regulates the telephone industry.
The FCC has a registration program providing minimum specifications for
customer-owned equipment.
The Federal Trade Commission ("FTC") requires franchisors to provide prospective
franchisees with a Uniform Franchise Offering Circular, which sets forth
detailed information about the franchisor and the franchise program.
A number of states require a franchisor to register prior to selling franchises
in those particular states and the Company registers its offering of the
franchise program in those states in which registration is required. In
addition, states may impose certain minimum requirements on franchises located
within that state. For example, franchises in Iowa, by law, have a three-mile
exclusive territory.
Employees
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As of July 31, 1999, the Company had approximately 88 full-time employees
involved in administration, sales, accounting, warehousing, franchise relations,
and Company owned branches.
Special Cautionary Notice Regarding Forward-Looking Statements
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This Report contains certain forward-looking statements and information relating
to the Company that is based on the beliefs of management, as well as
assumptions made by and information currently available to management. Such
forward-looking statements are principally contained in and include, without
limitation, the Company's plans for its business, including the introduction of
new products and services, expansion into new markets, and mergers and
acquisitions. In addition, in those and other portions of the Report, the words
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions, as they relate to the Company or its management, are
intended to specifically identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties, and assumptions, including the risk
factors described in this Report. In addition to factors described elsewhere in
this Report, the Company specifically cautions the factors listed under the
caption "Risk Factors" could cause actual results to
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differ materially from those expressed in any forward-looking statement. Should
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements.
Risk Factors
In evaluating the Company and its business, this entire Report (including the
Exhibits) should be read carefully and special consideration given to, among
others, the following risk factors in addition to the other information
contained in this Report.
Recent Operating Losses; Accumulated Deficit; Key Customer
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For the quarter ended July 31, 1999, the Company reported a loss of $112,000, as
compared to a loss of $311,000 for the quarter ended July 31, 1998. The Company
reported a loss from continuing operations of $1,351,000 for the fiscal year
ended April 30, 1999. An additional write down of $429,000 is being reported as
a result of the sale of its operating units in Arizona and Virginia. The Company
had an accumulated deficit at July 31, 1999 of approximately $7,434,000. The
losses in the most recent fiscal year are largely attributable to lower revenue
and decreased margins in the Company's national account subsidiary. The lower
revenue results from a reduction in the average size of invoicing from the
subsidiary's major customer, Office Max. This customer accounted for $1,963,044,
and $2,876,467, or 56% and 61% of direct equipment and service sales for the
years ended April 30, 1999 and 1998, respectively. Increased costs from
subcontractors not passed on to the Company's customers are the most significant
contributing factor to decreased margins. Although the Company is making
efforts to improve margins, there can be no assurance that the Company's efforts
will be successful. The Company believes relations with its major customer are
good and the Company is working on several projects. However, the loss of
significant revenues from this customer or continued poor margins would likely
have a material adverse impact on the Company.
Management believes much of the loss in previous periods has been related to the
Company's acquisition efforts, increase in interest expense and increases in
allowance for doubtful accounts. In addition, the Company's losses have been a
direct result of the increased level of general and administrative expense
associated with its direct sales efforts. Management is currently evaluating
the extent to which general and administrative expenses will need to be
increased to maintain support for the planned acquisitions of interconnect
companies and an increased base of franchisees. Although the Company recently
made significant changes in its management personnel, there can be no assurance
the Company will be more successful in its operations, or that the acquisition
candidates selected by the new management will enable the Company to be
profitable in the future.
Lack of Working Capital; Need for Additional Financing
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The Company's operations have historically been adversely affected by a lack of
working capital. The Company uses a line of credit from a lending institution,
which is limited to the extent of available collateral. The Company's line of
credit is fully utilized to the extent of available collateral. The lack of
available funding impedes the Company's ability to fund additional equipment
purchases and to expand its business operations. Although the Company is
involved in efforts to obtain additional capital, it has no firm commitments
from any source and there can be no assurance the Company will obtain the
necessary capital. Moreover, due to the Company's poor liquidity and operating
results and the absence of a Nasdaq listing for its Common Stock, the cost of
obtaining additional capital is expected to be
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significant.
The Company sold equity securities during the fiscal year ended April 30, 1999
in which it received net proceeds of $2,838,000. These proceeds were used to
fund recent operating losses of the Company, to fund the cash purchase price of
the acquisitions completed during 1999, and to repay certain debt obligations.
The Company will need substantial additional capital in order to have reasonable
prospects for achieving its strategic objective of growth through acquisitions,
there can be no assurance that the Company will be successful in obtaining this
capital or that, if obtained, the terms will be satisfactory to the Company.
During the quarter ended July 31, 1999 the Company received net proceeds of
$212,440 from the sale of Units of Subordinated Convertible Notes and Common
Stock Purchase Warrants. Each Unit consists of a $50,000 Subordinated
Convertible Note and 20,000 Warrants. The Notes bear interest at 8% per annum
and are convertible into Common Stock at any time prior to maturity at $1.50.
The Notes mature at the earlier of 36 months from the date of issue or upon the
occurrence of certain other events. The Warrants are exercisable for a period
of five years from the date of issuance at $.40 per Warrant. The Company may
raise additional funds from the sale of these Units, although it has no firm
commitments for funding from any person.
Changes In Technology
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The interconnect industry in which the Company operates has experienced rapid
technological advances and, in order to satisfy customer demands, the Company
has to offer the latest available equipment and services. Although the Company
has established relationships with several major suppliers of telephone
interconnect equipment, in the event other suppliers offer more advanced
equipment, there is no assurance the Company would be able to establish
satisfactory relationships with these other manufacturers.
Relationships With Suppliers
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Although the Company has established relationships with several suppliers of
telephone equipment including Toshiba America Information Systems, Inc.
("TAIS"), Comdial, Inc., Panasonic Communications & Systems Company, a Division
of Matsushita Electric Corporation of America, Sprint/North Supply, Inc.,
Applied Voice Technologies, Inc., and Voice Systems Research, Inc., there is no
assurance the Company will continue to be able to maintain these relationships,
and to purchase products under advantageous terms and conditions from its
suppliers, or that all products will be available to future franchise locations.
This may adversely affect the Company's ability to sell future franchises, to
offer products to its franchisees and customers, and to obtain mark-up royalties
from sales to existing franchisees. The Company has not been granted exclusive
rights to any sales area by its suppliers, and certain suppliers, such as
Sprint, may sell directly to end users. The Company's largest supplier, TAIS,
does not typically sell to end users, but does service certain large accounts,
and may compete with the Company.
TAIS provides approximately 85% of the inventory and products purchased by the
Company while offering flexible credit terms. In December 1995, the Company
negotiated a restructuring of its obligations with TAIS, which included a
requirement that the Company use proceeds from future financings to prepay the
debt owed to TAIS. TAIS has cooperated with the Company in waiving this
provision to accommodate the Company's capital needs. The Company's obligations
to TAIS are more fully described in Item 2. Although the Company believes it
should be able to meet its immediate
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obligations to TAIS and other working capital requirements, the Company believes
that its ability to meet its obligations to TAIS and other material obligations
will be dependent upon the success of its acquisition program and its plan to
increase revenues, improve gross profit margins and contain general and
administrative expenses, which will also be dependent upon obtaining additional
financing. The availability of such financing is not assured. If the Company's
relationship with TAIS were to cease or to deteriorate, it could have a
significant adverse impact on the Company's operations.
Lack of Information Regarding Acquisition Candidates
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Acquisitions of other companies in the telecommunications industry is a
principal strategic objective of the Company. The Company has identified other
candidates for acquisition, but has no firm arrangements for acquisition. The
Company has determined not to provide information regarding any of the
acquisition candidates in this Report, inasmuch as it has no agreements or
understandings regarding the terms of acquisition of any company. Although
management of the Company will endeavor to evaluate the risks inherent in any
particular acquisition candidate, there can be no assurance the Company will
properly ascertain all such risks. Management of the Company will have
virtually unrestricted flexibility in identifying and selecting prospective
acquisition candidates and may have broad discretion with respect to the
specific application of proceeds of future financing.
Although the Company intends to consider the ability of the management of a
prospective acquisition candidate in connection with evaluating the desirability
of effecting a business combination, there can be no assurance that the
Company's assessment of management will prove to be correct. The Company does
not intend to rely upon the assistance of outside consultants to assess the
management skills of acquisition candidates. In addition, there can be no
assurance management of the acquired companies will have the necessary skills to
manage a company intending to implement an aggressive acquisition program.
Appropriate Acquisitions May Not Be Available
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Results of the Company's business plan are dependent upon the Company's ability
to identify, attract and acquire attractive acquisition candidates, which may
take considerable time. No assurances can be given whether the Company will be
successful in identifying, attracting or acquiring desirable acquisition
candidates, such candidates will be successfully integrated into the Company, or
the acquisition candidates, once acquired, will be profitable. The failure to
complete acquisitions or to operate the acquired companies profitably could be
expected to have a material adverse effect on the Company's business, financial
condition and results of operations.
Integration of Acquisitions
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The Company's strategic objective, which is subject to additional financing,
anticipates an aggressive acquisition program. The success of the Company will
depend, in part, on the Company's ability to integrate the operations of the
acquired companies. There can be no assurance the Company's management team
will effectively be able to oversee the combined entity and implement the
Company's operating and growth strategies. No assurance can be given the
Company will be able to successfully integrate any future acquisitions without
substantial cost, delays or other problems. The cost of integration could have
an adverse effect on short-term operating results. Such costs could include
severance payments to employees of such acquired companies, restructuring
charges associated with the acquisitions and expenses associated with the change
of control.
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There can be no assurance the Company will be able to execute successfully its
consolidation strategy or anticipate all of the changing demands that successive
consolidation transactions will impose on its management personnel, operational
and management information systems and financial systems. The integration of
newly acquired companies may also lead to diversion of management attention from
other ongoing business concerns. In addition, there can be no assurance the
rapid pace of acquisitions will not adversely affect the Company's efforts to
integrate acquisitions and manage those acquisitions profitably. Any or all of
these factors could have a material adverse effect on the Company's business,
financial condition or results of operations.
Risks Related to Acquisition Financing; Leverage
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The Company is currently planning to obtain additional financing. If the
Company is successful in obtaining this financing and other financing related
specifically to acquisitions (of which there is no assurance) the Company plans
to use a significant portion of its resources to pursue its business strategy
for growth. The timing, size and success of the Company's acquisition efforts
and any associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock, cash, borrowed funds, including the issuance of promissory notes to the
sellers of the companies to be acquired, or a combination thereof. If the
Common Stock does not maintain a sufficient market value, or if potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to use more of its cash resources or more borrowed funds, in each case if
available, in order to initiate and maintain its acquisition program. The
Company may also use preferred stock in connection with acquisitions. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
There can be no assurance that the Company will he able to obtain any additional
financing that it may need for its acquisition program on terms that the Company
deems acceptable.
The Company may borrow money to consummate future acquisitions or assume or
refinance the indebtedness of acquired companies if the Company's management
deems it beneficial to the Company. The Company anticipates it will need to
borrow substantial funds to complete additional acquisitions, the availability
of which is not assured. Among the possible adverse effects of borrowings are:
(i) if the Company's operating revenues after the acquisitions are insufficient
to pay debt service, there would be a risk of default and foreclosure on the
Company's assets; (ii) if a loan agreement contains covenants requiring the
maintenance of certain financial ratios or reserves, and any such covenant were
breached without a waiver or re-negotiation of the terms of the covenant, then
the lender could have the right to accelerate the payment of the indebtedness
even if the Company has made all principal and interest payments when due; (iii)
if the terms of a loan did not provide for amortization prior to maturity of the
full amount borrowed and the "balloon" payment could not be refinanced at
maturity on acceptable terms, the Company might be required to seek additional
financing and, to the extent additional financing is not available on acceptable
terms, to liquidate its assets; and (iv) if the interest rate of a loan is
variable, the Company would be subject to interest rate fluctuations which could
increase the Company's debt service obligations.
Consideration for Operating Companies May Substantially Exceed Asset Value
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The purchase prices of the Company's acquisitions will not be established by
independent appraisals, but generally through arm's length negotiations between
the Company's management and representatives of such companies. The
consideration paid for each such company will be based primarily on the value of
such company as a going concern and not on the value of the acquired assets.
Valuations of these
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companies determined solely by appraisals of the acquired assets are likely to
be substantially less than the consideration paid for the companies. No
assurance can be given the future performance of such companies will be
commensurate with the consideration paid. Moreover, the Company expects to incur
significant amortization charges resulting from consideration paid in excess of
the fair value of the net assets of the companies acquired in business
combinations accounted for under the purchase method of accounting.
Material Amount of Intangible Assets
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It is likely that a substantial portion of the Company's total assets subsequent
to the acquisitions will be goodwill. Goodwill is an intangible asset
representing the difference between the aggregate purchase price for the assets
acquired and the amount of such purchase price allocated to such assets for
purposes of the balance sheet. It is expected any acquisitions completed by the
Company would involve amortization of goodwill over long-term periods with the
amount amortized in a particular period constituting an expense reducing the
Company's net income for that period. Generally, the Company may amortize
goodwill over a 15-year period for income tax purposes. Under accounting rules,
the Company is required to periodically evaluate if goodwill has been impaired
by reviewing the cash flows of acquired companies and comparing such amounts
with the carrying value of the associated goodwill. If goodwill is impaired,
the Company would be required to write down goodwill and incur a related charge
to its income. A reduction in net income resulting from the amortization or
write down of goodwill could have an adverse impact upon the market price of the
Common Stock.
Hart-Scott-Rodino Requirements
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The Company's acquisition strategy may be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which could
adversely affect the pace of the Company's acquisitions. In addition,
acquisitions of businesses in regulated industries would subject the Company to
regulatory requirements, which could limit the Company's flexibility in growing
and operating its businesses.
Tax Considerations
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As a general rule, federal and state tax laws and regulations have a significant
impact upon the structuring of business combinations. The Company will evaluate
the possible tax consequences of any prospective business combination and will
endeavor to structure the business combination so as to achieve the most
favorable tax treatment to the Company, the acquisition candidate and their
respective stockholders. There can be no assurance, however, the Internal
Revenue Service (the "IRS") or appropriate state tax authorities will ultimately
assent to the Company's tax treatment of a consummated business combination. To
the extent the IRS or state tax authorities ultimately prevail in re-
characterizing the tax treatment of a business combination, there may be adverse
tax consequences to the Company, the acquisition candidate and their respective
stockholders.
Competition for Acquisitions
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The Company expects to encounter substantial competition in making acquisitions
from other companies with objectives similar to the Company, as well as, from
companies engaged in other acquisition type activities. Many companies have
acquisition strategies similar to CommWorld in the telecommunications industry,
including companies, which are attempting to effect consolidations concurrent
with conducting an initial public offering of securities. Consequently, the
Company may expect stiff competition in attracting
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acquisition candidates and the price to be paid for such candidates may be
higher than the price which would be paid in a less competitive
environment.
Even if the Company is successful in obtaining additional financing and
completing several acquisitions, it is likely certain of its competitors will be
substantially larger than the Company and have greater financial resources.
Volatility of Stock Price
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There are a substantial number of shares of the Common Stock which were issued
recently and constitute "restricted securities" as that term is defined under
the Securities Act of 1933, as amended. The sale of these shares into the
public markets could have a depressive effect on the price of the Common Stock.
See Item 8. There has been significant volatility in the market price for the
Company's Common Stock. The Common Stock is currently traded on the Electronic
Bulletin Board, which may discourage investor interest in trading the Common
Stock. On September 14, 1999, the closing bid price of the Company's Common
Stock was $1.34 per share. There can be no assurance the price of the Common
Stock will remain at or exceed current levels. Factors such as announcements
relating to the Company's operations, acquisitions, new products and services,
prices and costs of products, sales of products, new technology offered by the
Company's competitors, government regulation or other matters may have a
significant impact on the market price of the Company's securities. Moreover,
trading in the Company's Common Stock is limited and sporadic, which may
contribute to volatility of the market price.
Regulation Of Trading In Low-Priced Securities May Discourage Investor Interest
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Trading in the Company's Common Stock is subject to the "penny stock" rules of
the Securities and Exchange Commission (the "SEC"). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prescribed by the SEC, which provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations and
the broker-dealer and salesperson compensation information must be given to the
customer orally or in writing before or with the customer's confirmation. In
addition, the penny stock rules require prior to a transaction in a penny stock
not otherwise exempt from such rules, the broker-dealer must make a special
written determination the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. The Company believes the penny stock rules may discourage investor
interest in, and limit the marketability of, the Common Stock of the Company.
Preferred Shares Available For Issuance; Current Acquisitions and Financing
- ----------------------------------------------------------------------------
Plans
- -----
The Company has 3,000,000 shares of preferred stock authorized. There are
currently 371,545 shares of Series C Preferred Stock outstanding, which were
issued in connection with the acquisition of the Company's subsidiaries. The
Company has also issued 169,818 shares of Series F Preferred Stock in connection
with the conversion of notes issued in connection with certain acquisitions and
issued 45,000 shares of Series F Preferred Stock for cash. Shares of preferred
stock may be issued by the Company in the future without shareholder approval
and upon such terms as the Board of Directors may determine.
-11-
<PAGE>
The rights of the holders of Common Stock will be subject to and may be affected
adversely by the rights of holders of any preferred stock that may be issued in
the future. The availability of preferred stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging a third party from acquiring
control of the Common Stock of the Company. The Company presently has no
definitive arrangements for any acquisitions, and there can be no assurance the
Company will be successful in obtaining additional financing or completing any
acquisitions. Moreover, the terms of any such financing and/or acquisition may
not be beneficial to the Company.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
Results of Operations
For the Quarter Ended July 31, 1999
- -----------------------------------
For the three month period ended July 31, 1999, the Company reported a net loss
of $111,000, as compared to a net loss of $311,000 for the comparable period
ended July 31, 1998. Total revenue for the quarter ended July 31, 1999 was
$3,501,000 compared to total revenue of $2,896,000 for the quarter ended July
31, 1998.
Company Owned Segment
Revenue from company owned operations for the quarter ended July 31, 1999 was
$2,104,000 compared to revenue of $1,485,000 for the quarter ended July 31,
1998. The increase in revenue of $620,000 is the result of higher revenue being
generated in the area of direct equipment sales and service. The Company's
national account sales for the current quarter were approximately $851,000
compared to $759,000 for the comparable quarter of the prior year. Three of the
company owned operations that were included in the First quarter of fiscal year
1999 were sold during fiscal 1999 and two new company owned operations were
acquired. This change of composition of company owned operations had a direct
effect on the change from First quarter fiscal 2000 versus First quarter fiscal
1999 direct equipment sales and service. Sales by company owned operations to
non national account customers for the current quarter were $1,252,000 compared
to $726,000 for the comparable quarter of the prior year. The margin realized on
direct equipment sales and service has decreased from 38.6% in the first quarter
of last year to 36.9% in the current quarter. The decrease in margin was the
result of a 2.5% increase in outside labor costs used to service the national
account customers and a 2.3% decreased margin in the company owned operations
resulting from lower labor rates charged on large service accounts. The decrease
in margin percentage accounted for approximately $36,000 of decrease in gross
margin dollars.
Selling expenses increased by $107,000 from the comparable prior year quarter.
This increase was due to increased commissions on higher sales volume and a
larger sales force in company owned operations.
Franchise Segment
Franchise equipment sales for the quarter ended July 31, 1999 were flat compared
to the same quarter of the prior year. The gross margin percentage realized on
these sales for the current quarter was 8.6% compared to a margin of 13.4% in
the prior year. The decrease in margin was primarily due to a change in the mix
of royalty percentages among the franchisees with fewer franchisee's purchasing
more product at a lower royalty percentage. Royalty rates have been reviewed
for all franchisee's to insure that they are being charged the appropriate rate
for their purchase volume.
Employees
At July 31, 1999, the Company had 88 employees. The number of employees may
change, depending upon the Company's acquisition activity. The Company does not
otherwise expect any significant changes in the number of employees.
For the Year Ended April 30, 1999
- ---------------------------------
-13-
<PAGE>
During the year ended April 30, 1999 ("fiscal 1999") the Company completed its
merger with IAC and focused on raising funds to implement IAC's acquisition
strategy, as well as focusing on improving the performance of the operating
units. Total revenue was $9,150,000 and $10,245,000 for fiscal 1999 and the year
ended April 30, 1998 ("fiscal 1998"), respectively. The Company reported a net
loss of $1,780,000 for fiscal 1999 as compared to a net loss of $1,091,000 for
fiscal 1998. The increase of $689,000 in the net loss compared to the prior
year is largely attributable to a decrease in revenue from direct equipment
sales and also a decrease in the margin realized on those sales. The gross
margin from direct equipment sales was $933,000 lower than in the prior year.
The Company expects that it will continue to incur margin pressure in connection
with its direct equipment sales and services to large multi site customers. The
decrease in gross margin from direct equipment sales was partially offset by a
lower provision for bad debts of $203,000, reduced amortization of intangibles
of $70,000 and reduced interest expense of $160,000. Inventory turnover in
fiscal 1999 was 13.6 times as compared to 9.2 times in fiscal 1998. The
improvement is the result of management's efforts to reduce inventory levels to
the minimum required to support customers. Receivables turnover in fiscal 1999
was 5.4 times as compared to 4.8 in fiscal 1998. The improvement is the result
of management's efforts to expedite realization of receivables. General and
administrative expenses were higher by about $181,000 related to personnel costs
associated with the IAC merger and officer severance compensation related to two
executive officers who are no longer with the Company. The Company is
attempting to improve its overall results by continuing cost control measures
and efforts to increase revenues. The Company is continuing to pursue
acquisition candidates in markets where the Company has existing operations.
The Company believes this will allow greater economies of scale to increase
labor efficiency, and should act to reduce general and administrative expenses
as a percentage of gross revenue. The company does not have any agreements to
make any acquisitions and has no material commitments for capital expenditures.
The Company's merger with IAC, a development stage company which was formed to
acquire interconnect telephony businesses, was completed in October 1998. Prior
to the merger, IAC's business operations consisted principally of formulating a
business plan, organizing a management team, investigating potential acquisition
candidates, and entering into letters of intent to acquire five businesses. Due
to the lack of tangible assets involved in the operation of IAC, the merger was
accounted for using the par value of the preferred stock initially issued to IAC
in the amount of $1,000.
Subsequent to the merger with IAC, the Company completed two acquisitions, CRI
and CommWorld of Denver. The Company paid CRI $77,750 in cash and a note
payable in the amount of $25,000, which was paid during the quarter ended July
31, 1999. The value of the customer base has been recorded as an intangible
asset and is being amortized over five years. In the CommWorld of Denver
acquisition, the Company acquired inventory of approximately $70,000 and fixed
assets with a net book value of approximately $45,000. The Company paid
$550,000 in cash and issued convertible notes payable in the aggregate amount of
$700,000. The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired based on their estimated
fair values as of the date of the acquisition. The excess of the consideration
paid over the fair value of net assets acquired of approximately $1,135,000 was
recorded as goodwill and is being amortized on a straight line basis over 20
years.
During the quarter ended January 31, 1999, the Company sold its company owned
operations in Alexandria, Virginia and Phoenix and Tucson, Arizona. The
divisions were sold to the original owners of those operations primarily for the
return of preferred stock that was issued in connection with the acquisitions.
The Company and the original owners determined to cancel the preferred stock as
a result of arm's-length negotiations. The Company and those persons believed
the cancellation of preferred stock would be in both parties' best interests as
the preferred stock was issued in connection with the
-14-
<PAGE>
initial acquisition and those persons would no longer be involved in the
Company's operations. Although the strategic business plan for the Company is to
grow through acquisitions, these particular operations did not meet the criteria
for new acquisitions because of their relative size or their geographic
location. On a cumulative basis, these operations reported a net loss of $33,000
and $289,000 for the fiscal years ended April 30, 1999 and 1998, respectively. A
loss on the sale of these operations of $396,000 was also reported for fiscal
1999.
Selling expenses in fiscal 1999 were $404,000 or 4.4% of gross revenue compared
to $418,000 or 4.1% of gross revenue for fiscal 1998.
General and administrative expenses for fiscal 1999 were $2,588,000 compared to
$2,407,000 for the previous year, an increase of $181,000. There are numerous
components of general and administrative expense that comprise the change from
year to year. The significant components that decreased during fiscal 1999 are
(1) depreciation expense decreased $136,000 due to a significant portion of the
Company's fixed assets which were fully depreciated at April 30,1998, (2)
charges for outside services and professional fees decreased $97,000 because
fiscal 1998 expense included significant charges, including the services of an
investment banker, associated with an attempted acquisition, and (3) travel and
entertainment expenses decreased $41,000 as management curtailed any
nonessential travel. The significant components of general and administrative
expense that increased from the prior year are (1) payroll costs increased by
approximately $110,000 as a result of new personnel associated with the merger
with IAC, (2) in connection with the merger with IAC, the Company effected
certain management changes; officer severance compensation of $138,500 is
included in general and administrative expense for the current year, (3) office
rent increased by $49,000 due to lease renewals, as well as, a broker commission
of approximately $32,000 related to the subleasing of the Company's office space
in Englewood, Colorado, and (4) general and administrative expenses of the two
new acquisitions for the period that they were owned totaled $61,000. Other
changes were not individually significant.
Interest expense and loan fees for fiscal 1999 were $254,000 compared to
$414,000 in fiscal 1998. The significant decrease results from the lower gross
revenue of the Company resulting in lower accounts receivable and therefore
lower outstanding balances on the Company's collaterallized line of credit.
Also, for a period of approximately 4 months, the Company had excess cash
balances related to its equity fundraising. These balances were later disbursed
in connection with the two acquisitions completed in the fourth quarter of
fiscal 1999.
The provision for bad debts for fiscal 1999 was $47,000 compared to $250,000 in
the prior year. The provision in fiscal 1999 is representative of the normal
experience for bad debts for the Company. The provision in the prior year
reflected substantial additions to cover older stale accounts and certain notes
receivable.
Company Owned Segment
Revenue from direct equipment and service sales for fiscal 1999 decreased
$1,210,000 or 25.7% from the previous year. The gross margin percentage realized
on this revenue was 33.7% for fiscal 1999 compared to 44.8% for the previous
year. The combination of lower revenue and decreased gross margin percentage
resulted in gross margin from this source of revenue being $933,000 lower than
in the
-15-
<PAGE>
previous year. The lower gross revenue accounted for approximately $543,000 of
the decrease in gross margin and the lower gross margin percentage accounted for
$390,000 of the decrease. For both fiscal 1999 and fiscal 1998, substantially
all of the revenue from direct equipment sales and service represent the
operations of the Company's national account subsidiary. During fiscal 1999,
this subsidiary experienced a decrease of approximately 50% in the average size
of its individual invoice to its major customer. The decrease relates to the
size of new telephone system installation for this customer. The most
significant contributing factor to the decreased gross margin percentage is the
increased cost of outside labor used to service the national account customers.
Also contributing to the decreased margin percentage is competition, which keeps
the Company from passing through all of its increased costs to the national
account customers. Although the Company is making efforts to improve margins,
there can be no assurance that the Company's efforts will be successful. The
Company believes relations with its major customer are good and the Company is
working on several projects. However, the loss of significant revenues from this
customer or continued poor margins would likely have a material adverse impact
on the Company.
Franchise Segment
Franchise equipment sales increased $202,000 or 3.9% compared to the prior year.
The gross margin percentage realized on this revenue was relatively constant at
11.2% for fiscal 1999 and 10.9% for fiscal 1998.
Royalty fees represent a cost up charge to certain of the Company's franchises
that purchase product directly from the manufacturer. These fees were $32,000 or
14% lower in fiscal 1999 than in the previous year. The decrease is reflective
of a decrease in purchase volumes by these franchises. Initial franchise fees
for fiscal 1999 were $36,000 compared to $12,500 for the previous year. The
initial fee was lowered in the current year and eleven new franchises were added
to the network. Only one new franchise was added in fiscal 1998. Other revenue
sources for fiscal 1999 were $55,000 compared to $134,000 in the previous year.
In fiscal 1998, the Company received approximately $60,000 in fee revenue from a
leasing program that it maintained; however, there were also general and
administrative expenses of approximately $50,000 associated with this program.
The program was not continued in fiscal 1999 and therefore, other revenue and
certain expenses were lower.
For the Year Ended April 30, 1998
- ---------------------------------
The Company reported a net loss of $1,091,000 for fiscal 1998 as compared to net
income of $83,000 for the year ended April 30, 1997 ("fiscal 1997"). The change
in net income to loss of $1,174,000 is largely attributable to a decrease in
margins realized on equipment sales to franchises, a decrease in margins
realized on direct equipment sales and service, an increase in general and
administrative expenses of $175,000, an increase in interest expense of
$84,000, and an increase in provision for bad debts of $87,000. The Company
recognized $400,000 of income tax credit for fiscal 1998 related to its net
operating loss carryforward compared to $385,000 of tax credit recognized for
the prior year. Additionally, the Company recorded a loss of $400,000 related to
the discontinued operations of its Seattle subsidiary. This loss is net of tax
credits of $260,000.
Effective October 31, 1997, the Company closed its Seattle subsidiary. The
subsidiary incurred substantial operating losses and management determined the
resources necessary to invest in the operation to return it to profitability
were not available. The operating losses of the Seattle subsidiary for
-16-
<PAGE>
fiscal 1998 were $168,000 compared to an operating loss of $171,000 for fiscal
1997. The estimated loss on the disposal of the discontinued operations of
$400,000 (net of income tax benefit of $260,000) represents the estimated loss
on the disposal of the assets of the subsidiary, write off of the remaining
intangible assets of $209,000, and a provision of $100,000 for expenses expected
to be incurred subsequent to October 31, 1997.
Other revenue sources for fiscal 1998 were $147,000 compared to $165,000 for the
previous year. Initial franchise fees for fiscal 1998 were $22,000 lower than in
the previous year. Only one new franchise was added during fiscal 1998.
Selling expenses in fiscal 1998 of $742,000 were 5.6% of gross revenue compared
to selling expenses in fiscal 1997 of $759,000 or 5.5% of gross revenues. The
decrease in expense is directly related to the decrease in gross revenues.
General and administrative expenses for fiscal 1998 were $3,264,000 compared to
$3,089,000 for the previous year or a decrease of $682,000. Although management
continues to assess these expenses and take action to reduce them when necessary
and appropriate, there were some obligations incurred in fiscal 1998 that were
not comparable to prior years. The Company actively pursued the acquisition of a
significant company in the interconnect industry. In connection with this
attempted acquisition, the services of a new investment banker were secured
along with significant outside legal advice. Costs for outside services and
professional fees were $245,000 higher in fiscal 1998 than in the previous year.
A portion of the fees accrued for the services of the investment banker were
paid in fiscal 1999 by the issuance of 25,000 shares of Common Stock. This
obligation was valued at approximately $58,000. Partially offsetting the
increase in the costs of outside services and professional fees was a decrease
in the current year in salaries and employee benefits of $91,000 compared to the
previous year. This reduction is primarily due to attrition and management
choosing not to replace certain positions.
Interest expense and loan fees for fiscal 1998 of $421,000 increased $84,000
from the previous year. Approximately $75,000 of the increase is related to
costs incurred in securing financing for the acquisition that was not completed.
These commitment fees were expensed at the time that it was determined that the
acquisition would not close.
Company Owned Segment
Revenue from direct equipment and service sales for fiscal 1998 decreased
$111,000 or 1.4% from the previous year. The gross margin percentage realized on
this revenue was 40.5% for fiscal 1998 compared to 43.4% for the previous year.
The decrease in margins resulted in a decrease of $224,000 in gross margins
realized by the Company. The most significant contributing factor to the
decreased margin is the increased cost of outside labor used to service the
national account customers. The Company was not able in fiscal 1998 to pass
those increases on to its customers. Also contributing to the decrease in margin
were several larger and more complex installations in the southwest that
required additional time to complete. The margins realized on these
installations were well below average margins for the operation. Management has
also restructured the operations in the southwest and will concentrate on
traditional sources of revenue where margins are more predictable.
Franchise Segment
-17-
<PAGE>
Franchise equipment sales decreased $329,000 or 6% for fiscal 1998. The decrease
in revenue is reflective of a net decrease of 4 franchises in the past fiscal
year and an overall decrease in the purchasing volume of several franchises. The
gross margin percentage realized on this revenue was 10% during fiscal 1998
compared to 13.1% for the previous year. The Company for the last three years
has recorded a charge to the cost of franchise equipment sales on a monthly
basis to allow for obsolescence in its inventory. In the fourth quarter of
fiscal 1998, the overall obsolescence of the inventory was reviewed and an
additional charge of $195,000 was recorded. This additional charge accounts for
the decrease in the gross margins on this revenue for fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
The Company has continually suffered from a lack of working capital and
liquidity as a result of its operating losses. The Company had an accumulated
deficit at July 31, 1999 of $7.4 million and negative working capital of
$1,552,000. Over the past two fiscal years the Company sold equity securities
realizing net proceeds of $2,838,000, which has allowed the Company to continue
to operate. A significant portion of this financing consisted of 13,807.5 shares
of Series H Preferred Stock. The terms of the Series H Preferred Stock provided
for automatic conversion to common stock upon shareholder approval of an
increase in the number of authorized shares of common stock. This approval was
obtained in March 1999 and all of the shares of Series H Preferred Stock were
converted into shares of common stock. The Company issued 1,000 shares of
Series I Preferred Stock to the former shareholders of IAC which contain the
same provision for conversion as the Series H Preferred Stock and which shares
were also converted into common stock upon obtaining shareholder approval of an
increase in authorized common stock in March 1999. Significant non-operating
obligations of the Company in the current year include the installment note
payable to TAIS in the amount of $376,000 ("Note") and notes payable to the
sellers of CommWorld of Denver in the amount of $700,000. TAIS has agreed to
defer payments on the note for a period of four months (June through September
1999) and receive a reduced payment of $10,000 in October 1999 and $20,000 in
November 1999. The seller notes are convertible into equity of the Company at
the holders' option. In addition, there are accumulated dividends of $186,552
at July 31, 1999 attributable to the outstanding preferred stock of the Company.
Significant additional funds will need to be raised in order to complete other
acquisitions and accomplish the strategic goal of the Company. There can be no
assurances the Company will be successful in raising additional funds.
In addition to the sale of equity securities in the past two fiscal years,
management has taken the following actions to improve its liquidity and
capitalization:
(A) In October 1996, the Company re-negotiated and renewed its accounts
receivable financing agreement with its lender for a three year term.
Pursuant to the new agreement, the Company may be extended credit of up to
$2,000,000 based upon its outstanding accounts receivable, at an interest
rate of 5.0% in excess of the prime rate. The agreement is subject to
termination upon 30 days notice by either party. Advances under the line of
credit are limited to 75% of eligible receivables, as defined. The
outstanding amount is reduced by accounts receivable collections and
increased periodically by advances supported by new receivables and
collection activity. The outstanding balances under this line of credit
were $718,000, $497,000 and $1,120,000 at July 31, 1999, April 30, 1999 and
1998, respectively. The agreement is subject to annual renewal in October
1999. The Company has been informed that there have been personnel changes
in the lender's operations, and it is unclear whether the lender will choose
to renew the financing arrangement. A representative of the lender has
assured the Company that if the arrangement is not renewed, it will
-18-
<PAGE>
be extended for a reasonable time to allow the Company to obtain another
financing source. The amount of credit available under the financing
arrangement at July 31, 1999, was $545,655. The Company does not have any
other sources of credit beyond normal trade credit.
(B) Effective December 22, 1995, the Company negotiated with TAIS, its major
supplier and unsecured creditor, to transfer $1,531,000 of current trade
accounts payable and a short-term note payable to a long-term note payable
and to increase the current credit facility by $400,000. This allowed the
Company to meet its immediate obligations, provided a short-term increase in
cash flow, and increased working capital by the long-term portion of the
Note, approximately $1,260,000. The credit facility is currently at $1
million and is fully drawn. The Note balance has been paid down to $376,000.
TAIS has also agreed to treat the note as non-interest bearing.
Pursuant to the Note, the Company is required to make 60 equal installments
of $29,598, including interest at 6% per annum, which began in February
1996. In addition to the monthly installments, the Company is required to
make prepayments of principal of at least $10,000 per month if the monthly
net operating cash flow of the Company, defined as pre-tax income plus
depreciation and amortization, exceeds $75,000 for three consecutive months.
Thereafter, 60% of each additional $5,000 of monthly net operating cash flow
in excess of $75,000 must be paid. The Company is also required to use a
portion of the net proceeds from any offering of its stock or debt
securities to make a principal prepayment. The prepayment will be equal to a
percentage of the net proceeds in excess of $350,000 as follows: 40% of net
proceeds between $350,000 and $1 million and 50% of net proceeds between $1
million and $2 million, but not to exceed the remaining principal balance of
the Note. This provision of the Note was waived during fiscal 1999 as it
related to the private placement of the equity units described above. The
remaining principal balance of this Note at July 31, 1999 is $348,048. The
Company has negotiated with TAIS to defer principal payments on the Note for
the months of June through September 1999 and to make reduced principal
payments in October and November. The former president of the Company
personally guaranteed the Note. The Company has indemnified the former
president relative to this guarantee. The Company does not currently have
any material capital commitments as it has no definitive arrangements for
the acquisition of any company.
Based on the sale of equity securities in the past two fiscal years and the
credit extended to the Company by its major supplier, management believes it has
sufficient financial resources to meet its short-term working capital needs. The
availability of credit under the existing accounts receivable financing
agreement is also necessary for the Company to meet its obligations. However,
there can be no assurance the Company will be able to successfully implement its
acquisition plans and thereby increase revenue, improve gross profit margins and
contain general and administrative expenses. The successful completion of the
acquisition plan, including the raising of additional new equity, is necessary
for the Company to finance its operations over the longer term.
Year 2000 Issue
- ---------------
Based on an assessment in the current fiscal year, the Company determined it
needed to modify or replace its operating computer system, including both
hardware and software, in order for the system to properly utilize dates beyond
December 31, 1999. The Company selected a new operating system in October 1998
and secured the hardware and software in November. The cost of the new system
approximates $100,000 of which $72,000 has been placed on a capital lease with a
three year term. The system conversion from the old software to the new was
started in December 1998 and has now been completed. All of the Company's
operating units, except for the most recently acquired operating unit,
-19-
<PAGE>
CommWorld of Denver, are utilizing the new system which is Year 2000 compliant.
CommWorld of Denver will be fully utilizing the new system by September 30,
1999. The Company does not believe that it will incur any additional material
costs for Year 2000 remediation.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's major suppliers have indicated that their systems are Year
2000 compliant. However, the Company does not have any control over these or
other third parties with whom the Company does business and, therefore, the
Company can not currently determine to what extent future operating results may
be adversely affected by the failure of third parties to successfully address
their Year 2000 Issue. The Company does not have a formal contingency plan for
potential Year 2000 disruptions. The Company does not currently intend to
create a plan inasmuch as any such disruptions would be the result of problems
external to the Company over which the Company would have no practical control
or cost effective means to avert. As a worst case scenario, the Company would
expect a short term interruption of the delivery by suppliers of important goods
or services or of necessary energy, telecommunications and transportation needs
critical to the distribution and sale of the Company's products, the electrical
power and other utilities to sustain operations, or reliable means of obtaining
supplies and transporting products to customers. Should any interruption extend
beyond a few days, it could have a material adverse effect on the results of
operations, liquidity and financial condition of the Company. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for the products it has sold.
-20-
<PAGE>
Item 3. Description of Property
-----------------------
The Company leases (i) 5,310 square feet of office and warehouse space in
Englewood, Colorado, which is used for its corporate headquarters, for
approximately $4,100 per month under a lease which expires in March, 2000, (ii)
6,000 square feet of office and warehouse space in Fort Collins, Colorado under
a lease which expires in November, 2001 for approximately $4,800 per month,
(iii) 5,870 square feet of office space in Dallas, Texas under a lease which
expires in May, 2001 for approximately $4,400 per month, (iv) 3,000 square feet
of office space in Englewood, Colorado under a lease which expires in November,
2003 for approximately $4,600 per month, and (v) approximately 7,700 square feet
of space in Englewood, Colorado for approximately $14,100 per month pursuant to
a lease, which expires in July, 2003. The Company subleased this space in
January 1999, on a recourse basis for the remainder of the lease term on
substantially the same terms as the original lease.
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<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth the persons known to the Company to own
beneficially more than five percent of the outstanding Common Stock on September
14, 1999 and information as of September 14, 1999 with respect to the ownership
of equity by each director of the Company and by all officers and directors as a
group.
Certain Beneficial Owners
- -------------------------
<TABLE>
<CAPTION>
Name & Address of Shares Beneficially
Beneficial Owner Title of Class Owned (1) Percent
----------------- -------------- --------- -------
<S> <C> <C> <C>
Samuel D. Addoms (2) Common Stock 44,625 .5%
1900 Fairfax Street
Denver, Colorado 80220
Lionel Brown (3) Common Stock 737,000 7.9%
7315 S. Revere Parkway, Suite 602
Englewood, Colorado 80112
James M. Ciccarelli (3) Common Stock 1,163,000 12.5%
7315 S. Revere Parkway, Suite 602
Englewood, Colorado 80112
Steven M. Bathgate (4) Common Stock 968,582 10.4%
5350 S. Roslyn, Suite 380
Englewood, Colorado 80111
James M. Corboy (2) Common Stock 67,000 .8%
6530 S. Yosemite St.
Englewood, Colorado 80111
Eugene C. McColley (4) Common Stock 528,198 5.7%
5350 S. Roslyn, Suite 380
Englewood, Colorado 80111
Officers and Directors as Common Stock 2,429,125 26.1%
a Group (6 persons)(2)(5)
</TABLE>
(1) Beneficial ownership results in each case from the possession of sole or
shared voting and investment power with respect to the shares.
(2) The number of shares set forth opposite the name of Samuel D. Addoms
includes options to purchase 44,000 shares. The number of shares set forth
opposite the name of James M. Corboy includes options to purchase 41,000
shares. The number of shares set forth opposite the officers and directors
as a group includes the aforementioned options to Messrs. Addoms and
Corboy.
(3) The number of shares set forth opposite the name of James M. Ciccarelli
includes options to purchase 125,000 shares. The number of shares set
forth opposite the name of Lionel Brown includes options to purchase 89,000
shares.
(4) The shares set forth opposite the names of Steven M. Bathgate and Eugene C.
McColley include warrants to purchase 353,265 and 207,115 shares,
respectively. Also included are 66,667 shares and 33,333 shares which
underlie convertible notes in the principal amounts of $100,000 and $50,000
payable to Mr. Bathgate and Mr. McColley, respectively. Messrs. Bathgate
and McColley are principals of Bathgate McColley Capital Group, LLC. See
Item 7.
(5) The number of shares set forth opposite the officers and directors as a
group includes the aforementioned options to Messrs. Ciccarelli and Brown,
as well as, options to purchase 20,000 shares for Mr. Bennett and 27,500
shares for Mr. Welch
-22-
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons;
--------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The directors and executive officers of the Company are as follows:
Name Position
- ---- --------
Samuel D. Addoms Director
James M. Corboy Director
James M. Ciccarelli Chief Executive Officer and Chairman of the Board of
Directors
Lionel Brown President and Director
Mark Bennett Executive Vice President
David E. Welch Vice President, Secretary and Treasurer
Samuel D. Addoms - Age 59. Mr. Addoms has been a director of the Company since
- ----------------
October, 1992. From November, 1993 to January, 1995 he served as the Executive
Vice President of Frontier Airlines, Inc., and has served as President from
January, 1995 to present. He has also served as a Director of Frontier
Airlines, Inc., from November, 1993 to present. From February, 1996 to present,
he has been an Independent General Partner and a Director of Boettcher Venture
Capital Partners. Mr. Addoms received a BA degree from Wesleyan University.
James M. Corboy - Age 58. Mr. Corboy is a general partner in the investment
- ---------------
banking firm of Corboy and Jerde, LLC. Mr. Corboy served as President of
Century Capital Group, Inc., investment bankers, and its predecessor, SKB Corby,
Inc. from 1995 to 1998. From 1988 to 1995 he was the general partner of Corboy
and Company, LP. Mr. Corboy received a BA degree from Allegheny College and an
MBA Degree from the University of Colorado.
James M. Ciccarelli - Age 47. Mr. Ciccarelli has served as Chief Executive
- -------------------
Officer of the Company since July 1, 1998. He has served as President and CEO
of IAC from its founding in 1997 until its merger with the Company. He has
served as a director of Birner Dental Management Services, Inc., since 1995. He
also serves as a director for Wireless Telcom, Inc. and has served in that
capacity since 1993. From 1990 to 1993, Mr. Ciccarelli was the Vice President
of Intelligent Electronics and the President and CEO of its Reseller Network
Division from 1987 to 1989. From 1988 to 1990, he was President of Connecting
Point of America.
Lionel Brown - Age 51. Mr. Brown has served as President of the Company since
- ------------
October 1998. He has served as Secretary and Chief Operations Officer of IAC
from its founding in 1997 until its merger with the Company. From 1996 to 1997,
he served as the Chief Information Officer of the Reseller Network Division and
XL Source, two operating divisions of Intelligent Electronics, Inc. From 1993
to 1995, he served as the Vice President of Operations and Information Systems
for Wireless Telcom, Inc. From 1989 to 1993, he held the position of Vice
President of Operations and Information Systems for the Reseller Network
Division of Intelligent Electronics, Inc.
-23-
<PAGE>
Mark W. Bennett - Age 43. Mr. Bennett joined CommWorld in September 1998 as
- ---------------
Executive Vice President of Marketing and Franchise Development. From 1997 to
1998, he served as President and CEO of Communication Expo, a telecommunications
company located in Dallas, Texas. From 1994 to 1997, he was a partner in the
firm Rohner & Associates, a channels consulting firm located in Los Gatos,
California. From 1998 to 1994, he served as the President of ISG, a division of
Intelligent Electronics, Inc., a computer reseller and franchisor of retail
computer stores located in Denver, Colorado.
David E. Welch - Age 52. Mr. Welch joined CommWorld in February 1999. In July,
- --------------
1999 he became Vice President and Chief Financial Officer, Secretary and
Treasurer. During 1998 he served as Chief Information Officer for Language
Management International, Inc., a multinational translation firm located in
Denver, Colorado. From 1996 to 1997, he was Director of Information Systems for
Micromedex, Inc., an electronic publishing firm, located in Denver, Colorado.
From 1989 to 1996, he served as Director of Information Systems, for the
Reseller Division of Intelligent Electronics, Inc.
Each of the directors was elected to serve until the next annual meeting of
shareholders and until their successors have been elected and have qualified.
There are no family relationships between any director or executive officer of
the Company.
-24-
<PAGE>
Item 6. Executive Compensation
-----------------------
The following table sets forth information concerning all compensation paid by
the Company and options granted by the Company to the Chief Executive Officer of
the Company and to each officer who earned more than $100,000, during the years
ended April 30, 1999 and 1998.
<TABLE>
<CAPTION>
Long-term Compensation
-----------------------------
Annual Compensation Awards Payouts
---------------------------------- -------------------- -------
Other Restricted
Name and Annual Stock Options/ LTIP All Other
Principal Position (1) Year Salary $ Bonus Compensation (2) Awards SARs Payouts Compensation
- -------------------------- ---- -------- ----- ---------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. Ciccarelli, CEO 1999 65,600 -0- -0- -0- -0- -0- -0-
Richard D. Olson, CEO 1999 102,000 -0- -0- -0- -0- -0- -0-
Richard D. Olson, CEO 1998 102,000 -0- -0- -0- -0- -0- -0-
</TABLE>
(1) The Company pays health insurance premiums for its executive officers. The
aggregate amount of such compensation is less than either $50,000 or 10% of
the total of annual salary and bonus for the above executive officers, which
includes automobile expense of approximately $4,000. Mr. Olson resigned as
CEO effective June 30, 1998. The compensation listed for Mr. Olson for 1999
includes fees paid to him pursuant to a severance agreement whereby he
provided consulting services to the Company.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
--------------------------------------------------
Number of Percent of Total
Securities Underlying Options/SAR's
Options/SAR's granted to employees Exercise or Expiration
Name Granted (#) in fiscal year or base price ($/sh) Date
- -------------------------- ---------------------- --------------------- -------------------- ----------
<S> <C> <C> <C> <C>
James M. Ciccarelli, CEO 60,000 15.3% $1.00 11/12/2001
James M. Ciccarelli, CEO 65,000 16.6% $1.50 2/5/2002
Richard D. Olson, CEO 100,000 25.5% $1.30 8/11/2001
</TABLE>
401(k) Plan
- -----------
On August 1, 1985, the Company established an Employees' Savings Plan (ESP) for
all full-time employees who have at least twelve months of continuous service by
August 1 of each plan year and who have attained the age of twenty-one. As
amended, the Company may make matching contributions up to 50% of the
participant's contribution (made via salary reduction arrangements) as described
in the ESP. In addition, the Company may also make an annual contribution from
its profits. The Company made no contribution to the ESP in 1999 or 1998.
Stock Option and Stock Appreciation Plans
- -----------------------------------------
In fiscal 1998, the Company adopted the 1997 Stock Option Plan (the "97 Plan"),
pursuant to which options to purchase up to 150,000 shares of Common Stock may
be granted to employees and consultants of the Company. No options were
granted. Additionally, the Plan provided for the specific grant of 135,000
options to certain key employees and consultants. Of these options, 115,000
were granted at $1.30 per share and 20,000 were granted at $1.50 per share,
representing the market values on the respective dates of grant. The options
are fully vested and exercisable and will expire in August 2001.
-25-
<PAGE>
In fiscal 1999, the Company has also adopted the 1998 Stock Incentive Plan (the
"98 Plan"), pursuant to which options to purchase up to 1,000,000 shares of
common stock may be granted to employees and consultants of the Company. Options
to purchase 310,250 shares have been granted. Of this amount, options to
purchase 126,500 shares at $1 per share have been issued, including 119,500 to
officers and directors, and will expire in November 2003 if not exercised.
Options for 114,500 shares are fully vested and the other options vest in one-
third installments over a three year period. Options to purchase 161,250 shares
at $1.50 have been issued, including 136,000 to officers and directors, and will
expire in February 2004 if not exercised. Options to purchase 22,500 shares of
Common Stock, of which 20,000 shares are to an officer of the Company, at $1.30
have been issued, which will expire in March 2004, if not exercised. Options
for 116,000 shares are fully vested and the other options vest in one-third
installments over a three year period.
In fiscal 2000 the Company has issued Options under the 98 Plan for an
additional 100,750 shares. Of this amount, options to purchase 15,000 shares at
$1.25 have been issued and will expire in May of 2002 if not exercised. Options
to purchase 85,750 shares at $1.06 have been issued, including 22,500 to
officers, and will expire in August of 2002 if not exercised. All options vest
in one-third installments over a three-year period.
All options under the 98 Plan were issued at the market value on the date of
grant.
Compensation of Directors
- -------------------------
In 1993, the Company adopted a Non-discretionary Stock Option Plan for non-
employee directors pursuant to which options to purchase up to 20,000 shares of
the Company's Common Stock may be granted to directors who are not employees of
the Company. Options to purchase 8,000 shares of the Company's Common Stock are
currently outstanding and exercisable at prices ranging from $.88 to $5.13 per
share. The Plan expired in November 1997.
The exercise price for all outstanding options is the fair market value of the
Common Stock on the respective grant dates. Each director was entitled to
receive options to purchase 1,000 shares of Common Stock on November 1 of each
year. The options are exercisable for five years from the date of grant.
In fiscal 1999, the Company adopted the 1999 Non-discretionary Stock Option Plan
(the "99 Plan"), pursuant to which options to purchase up to 300,000 shares of
common stock may be granted to non-employee directors of the Company. Options to
purchase 10,000 shares have been granted to each of Samuel Addoms and James
Corboy at $1.50 per share, the fair market value on the date of grant. These
options will expire in February 2004. Options to purchase 10,000 shares will be
granted to any person becoming a director who is not employed by the Company or
any of its subsidiaries. In addition, each non-employee director will receive
options to purchase 10,000 shares annually, commencing February 1, 2000 and
ending February 1, 2004. If any option grant expires or terminates, all shares
which were not issued under the option grant will become available for
additional awards under the 1999 Plan.
The Company does not pay directors for meetings attended. During the year ended
April 30, 1999, the Company held 12 meetings of the Board of Directors and took
action at other times by written consent. Each director attended 75 percent or
more of the meetings held during the period he served as a director.
-26-
<PAGE>
Item 7. Certain Relationships and Related Transactions
----------------------------------------------
Effective June 30, 1998, Richard Olson resigned as President and Chief Executive
Officer and director of the Company. The Company retained the services of Olson
as a consultant for six months thereafter at Olson's previous salary level of
$8,500 per month. The Company also agreed to pay Olson $127,000 at the end of
the consulting period, and Olson agreed to repay a $25,000 loan from the
Company, which amounts are expected to be paid during 1999. All of Olson's
stock options were canceled. The Company issued a Warrant to Olson entitling
Olson to purchase up to 100,000 shares of Common Stock at an exercise price of
$1.30 per share. The Warrants will expire on August 11, 2001. The Company
agreed to indemnify Olson for personal guarantees he made of the Company's
obligations to Toshiba America Information Systems ("TAIS"). In December 1995,
the Company and TAIS agreed to transfer $1,530,950 of current trade accounts
payable and a short-term note payable to a long-term note payable. The
remaining principal balance of the note on July 31, 1999 was $348,048.
Effective July 1, 1998, James M. Ciccarelli became Chief Executive Officer of
the Company. In November 1998, Lionel Brown became President of the Company.
The Company currently pays each of them a monthly salary $5,000. If the
Company's financial position improves, it is likely that the Company will enter
into three year employment agreements with each of these executive at
anticipated monthly salaries of $15,000 for Mr. Ciccarelli and $10,000 for Mr.
Brown. Options have been granted to Messrs. Ciccarelli and Brown pursuant to
the 1998 Stock Incentive Plan.
In September 1997 the Company entered into an agreement with Century Capital
Group, Inc., for Century Capital to provide the Company with financial advisory
and investment banking services. James M. Corboy, a director of the Company,
was President of Century Capital. The Company agreed to pay Century Capital
$1,000 per month and additional compensation if certain acquisitions were
completed. In June, 1998, the Company entered into a new agreement with Century
Capital, which superseded the September, 1997 agreement. Century Capital agreed
to provide financial advisory services to the Company, including due diligence
and a fairness opinion in connection with the Company's merger with IAC. The
Company paid to Century Capital $32,930 during the period from September, 1997
through April 1999, including a $25,000 fee for a fairness opinion delivered to
the Company in connection with the IAC merger.
In October 1998, the Company formed a subsidiary, IAC Acquisition Corporation,
and completed a merger with IAC. The shareholders of IAC received an aggregate
of 1,000 shares of the Company's Series I Preferred Stock, which were converted
into an aggregate of 2,000,000 shares of Common Stock. Of the 1,000 shares
issued, Mr. Ciccarelli received 500 shares and Mr. Brown received 312.5 shares.
Messrs. Ciccarelli and Brown received these shares as former shareholders of
IAC. Messrs. Ciccarelli and Brown were officers, directors, principal
shareholders and founders of IAC. IAC was a development stage company formed to
acquire interconnect telephony businesses. Prior to the merger, IAC had entered
into letters of intent to acquire five such businesses. Of those five
businesses, one (CommWorld of Denver), was subsequently acquired by the Company,
and the Company is currently engaged in discussions regarding possible
acquisition of two of those companies. There are no current discussions with
the remaining two companies. Prior to the merger, IAC's business operations
consisted principally of formulating a business plan, organizing a management
team, investigating potential acquisition candidates, and entering into the
letters of intent to acquire the five businesses. Due to the lack of tangible
assets involved in the operations of IAC, the merger was accounted for using the
par value of the Series I Preferred Stock of $1,000, which was initially issued
to the former shareholders of IAC. The 1,000 shares of the Series I Preferred
Stock were converted into an aggregate of 2,000,000 shares of
-27-
<PAGE>
common stock. The Company's Board of Directors engaged Century Capital Group,
Inc. to provide a fairness opinion. In arriving at its opinion, Century Capital
read signed letters of intent between IAC and target acquisition companies,
analyzed financial statements of the target acquisition companies and took into
account other matters, including the condition of the Company. Century Capital
determined that the terms of the merger transaction were fair from a financial
point of view to the shareholders of the Company.
The Company has used the services of Bathgate McColley Capital Group, LLC
("BMCG"), as a placement agent for offerings in 1998 and 1999 of Common Stock,
Preferred Stock and debt. During this period, BMCG sold an aggregate of
$3,137,000 in equity and debt securities on behalf of the Company. The Company
paid BMCG an aggregate of $253,667 in commissions, and issued warrants to
purchase an aggregate of 250,850 shares of Common Stock. Steven M. Bathgate and
Eugene McColley, principals of BMCG, participated as investors in these
offerings and are principal shareholders of the Company. In the Company's unit
offering completed in May 1998, Mr. Bathgate purchased 40,000 Units and Mr.
McColley purchased 40,000 Units. The purchase price was $1.25 per Unit, with
each Unit consisting of one share of common stock and one warrant exercisable at
$2.50 per share for a five year period. In the private placement completed in
March 1999, Mr. Bathgate purchased 349,250 Units and Mr. McColley purchased
194,250 Units. The purchase price for each Unit was $200, with each Unit
consisting of one share of Series H Preferred Stock and 40 warrants. Each
warrant entitles the holder to purchase one share of common stock at $3.00 share
through March 31, 2004. Each one share of Series H Preferred Stock was
converted into 200 shares of common stock upon the approval of shareholders to
an increase in the authorized shares of common stock. See Item 4. In the
Company's current convertible debt offering, Mr. Bathgate and Mr. McColley have
purchased 2 and 1 units, respectively. The purchase price of each unit was
$50,400. Each unit consists of a $50,000 Subordinated Convertible Note and
20,000 Warrants. BMCG has sold an aggregate of $252,000 in debt and warrants.
The Company has paid BMCG as a commission $15,120 and issued warrants to
purchase 25,000 shares of Common Stock. It is expected that BMCG will be paid
commissions and issued warrants upon the sale of additional securities of the
Company.
-28-
<PAGE>
Item 8. Description of Securities
-------------------------
Common Stock
- ------------
The Company is authorized to issue 25,000,000 shares of Common Stock, no par
value. Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted upon by shareholders generally, and are not entitled to
cumulate votes in the election of directors. Approval of proposals submitted to
shareholders at a meeting requires the favorable vote of a majority of the
shares voting. Shareholders are entitled to receive such dividends as may be
declared from time to time by the Company's Board of Directors out of funds
legally available therefore, the Company has no plans to pay dividends on its
Common Stock in the near future, and is currently restricted in its ability to
pay dividends. In the event of liquidation, dissolution, or winding up of the
Company, holders of shares of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and distribution to holders of
preferred stock. The holders of shares of Common Stock have no preemptive,
conversion or subscription rights. The shares of Common Stock currently
outstanding are validly issued, fully paid, and non-assessable.
At July 31, 1999, the Company had outstanding 6,702,571 shares, of which
5,082,000 shares (representing 76% of the total outstanding shares) are
"restricted securities" as that term is defined by Rule 144 promulgated under
the Securities Act. In general, under Rule 144 under the Securities Act, a
person who has beneficially owned restricted securities for at least one year
will be entitled to sell in any three month period the number of shares that
does not exceed one percent of the then outstanding shares of the Common Stock.
If the Common Stock were listed on The Nasdaq Stock Market, the amount that
could be sold would be the greater of one percent of the then outstanding shares
or the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and the
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and who has beneficially owned restricted
securities for at least two years is entitled to sell such shares under Rule
144(k) without regard to limitations described above.
Preferred Stock - General
- -------------------------
The Company is authorized to issue up to 3,000,000 shares of $1.00 par value
preferred stock, which may be issued from time to time in one or more series.
The Board of Directors is allowed to fix or alter the dividend rights, the terms
of redemption and the liquidation preferences of any unissued series of
preferred stock and may designate the number of shares constituting any such
series.
Series C Preferred Stock
- ------------------------
The Company has authorized 440,000 shares of Series C Preferred Stock of which
371,545 shares are issued and outstanding. Shares of the Series C Preferred
Stock were convertible into Common Stock at the election of the holders.
Effective July 16, 1997 the conversion rights expired. Dividends on the Series
C Preferred Stock are paid when declared by the Board of Directors, at the rate
of $.08 per share per annum before any dividends on shares of the Company's
common stock are paid. Upon liquidation, dissolution or winding up of the
Company, the Series C Preferred Stock shall have a preference of $1.00 per share
plus accumulated and unpaid dividends, payable from the proceeds of sale or
distribution of the
-29-
<PAGE>
Company's assets prior to any distribution to the holders of common stock. The
Company may redeem the Series C Preferred Stock at $1.00 per share plus accrued
and unpaid dividends by giving thirty days notice to the holders of the Series C
Preferred Stock. At July 31, 1999, there were $138,061 in accumulated
dividends.
Series F Preferred Stock
- ------------------------
The Company has authorized 1,100,000 shares of Series F Preferred Stock of which
214,818 shares are issued and outstanding. Shares of the Series F Preferred
Stock are convertible into Common Stock at the election of the holders at a
conversion price equal to 50% of the current market price determined by the 30
day average price prior to conversion. The shares of Series F Preferred Stock
will automatically be converted into fully-paid and non-assessable shares of
Common Stock upon the effective date of a registration statement covering the
Common Stock. Dividends on the Series F Preferred Stock are paid when declared
by the Board of Directors, at the rate of $.08 per share per annum before any
dividends on shares of the Company's common stock are paid. Upon liquidation,
dissolution or winding up of the Company, the Series F Preferred Stock has a
preference of $1.00 per share plus accumulated and unpaid dividends, payable
from the proceeds of sale or distribution of the Company's assets prior to any
distribution to the holders of common stock. At July 31, 1999, there were
$48,491 in accumulated dividends.
-30-
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
----------------------------------------------------------------------
Other Stockholder Matters
- ---------------------------
The Company's Common Stock currently trades on the Electronic Bulletin Board
under the symbol "CWII." The Common Stock was formerly traded on the Nasdaq
Small Cap Market. Set forth in the following table are high and low bid
quotations for each quarter in the fiscal years ended April 30, 1999 and 1998.
Trading in the Common Stock is limited and sporadic. The quotations represent
inter-dealer quotations without retail markups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
------------
Quarter Ended High Low
- ------------- ----- -----
<S> <C> <C>
July 31, 1997 $1.56 $1.00
October 31, 1997 2.50 1.06
January 31, 1998 2.68 2.00
April 30, 1998 2.38 1.25
July 31, 1998 2.25 1.75
October 31, 1998 1.75 .72
January 31, 1999 .90 1.13
April 30, 1999 1.50 1.13
July 31, 1999 1.31 1.06
October 31, 1999
(through September 14, 1999) 1.44 1.06
</TABLE>
There were approximately 270 holders of record of the Common Stock as of
September 14, 1999.
No dividends have been declared or paid on the shares of Common Stock and the
Company does not anticipate paying cash dividends on the shares of Common Stock
in the foreseeable future. The Company may not pay dividends without the
consent of its accounts receivable finance company. No dividends may be paid on
the Common Stock unless accumulated dividends on the Preferred Stock have been
paid.
-31-
<PAGE>
Item 2. Legal Proceedings
-----------------
The Company is not currently a party to any material pending or threatened legal
proceedings.
Item 3. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 4. Recent Sales of Unregistered Securities
---------------------------------------
In September 1996, the Company purchased the assets of a franchise, CommWorld of
Tucson, from the owner/operator of this franchise, and issued 74,222 shares of
common stock valued at $83,500, 143,000 shares of Series F Preferred Stock
valued at $143,000 and 83,500 shares of Series G Preferred Stock valued at
$83,500. The recipient of these shares was the owner/operator of the CommWorld
of Tucson franchise, and was knowledgeable regarding the Company and its
operations. The Company relied on Sections 4(2) and 3(b) of the Securities Act
of 1933, as amended (the "Securities Act") and Regulation D promulgated
thereunder in effecting this transaction.
In September 1996, the Company entered into an exchange transaction with five
existing note holders in which those securities holders converted their notes
into Series F Preferred Stock. The debt owed pursuant to the notes was
$169,818, which was incurred in connection with the sale of the
noteholders'businesses to the Company. All of the security holders were
knowledgeable regarding the Company. The Company relied on Sections 3(a), (9),
4(2) and 3(b) of the Securities Act and Regulation D in effecting this
transaction. The Company also sold 45,000 shares of Series F Preferred Stock to
two "accredited investors" for $45,000. The Company relied on Sections 4(2) and
3(b) of the Securities Act and Regulation D. The Company paid a finder's fee of
$5,850 to Pinnacle Management in connection with this transaction.
In May 1997, the Company issued 10,000 shares of Series C Preferred Stock to an
employee for services rendered. The employee was knowledgeable regarding the
Company, and the Company relied on Section 4(2) and 3(b) of the Securities Act
and Regulation D in connection with this transaction.
In December 1997, the Company issued 12,500 shares to one accredited investor
who paid $25,000 for these shares. The Company paid a finder's fee of $3,250 to
Liaison Consulting in connection with this transaction. The Company relied on
Sections 4(2) and 3(b) of the Securities Act and Regulation D.
In May 1998, the Company completed a private placement of 283,000 Units, with
each Unit consisting of one share of common stock and one warrant to purchase
one share of common stock at $2.50 for a period of five years. The Units were
sold for $1.25 each for total proceeds of $353,750. The Units were purchased by
16 persons, all of whom were accredited investors. The placement agent was
Bathgate McColley Capital Group, LLC. No cash fees were paid to the placement
agent. Warrants for the purchase of 40,000 shares of common stock exercisable
at $1.25 per share for a five year period were issued to the placement agent.
The Company relied on Sections 4(2) and 3(b) of the Securities Act and
Regulation D.
-32-
<PAGE>
In October 1998, the Company completed the acquisition of IAC and issued 1,000
shares of Series I Preferred Stock (which were converted in March 1999 into
2,000,000 shares of common stock). The Company's shares were issued to the four
former shareholders of IAC, each of whom was knowledgeable regarding the
Company. The Company relied on Sections 4(2) and 3(b) of the Securities Act and
Regulation D.
In May 1999, the Company completed an offering of 13,807.5 Units with each Unit
consisting of one share of Series H Preferred Stock and warrants to purchase 40
shares of common stock at $3.00 per share through March 31, 2004. The Company
received $2,761,500 in gross proceeds from this offering. All of the shares of
Series H Preferred Stock have been converted into an aggregate of 2,761,500
shares of common stock. The Company paid $276,150 to the placement agent,
Bathgate McColley Capital Group, LLC as a commission and expense allowance. The
Company also issued to the placement agent warrants for the purchase of 276,150
shares of common stock exercisable at $1.00 per shares and warrants to purchase
55,230 shares of common stock at $3.00 per share. The placement agent warrants
expire on March 31, 2004. The Series H Preferred Stock was purchased by 53
persons, all of whom were accredited investors. The Company relied on Sections
4(2) and 3(b) of the Securities Act and Regulation D.
-33-
<PAGE>
Item 5. Indemnification of Officers and Directors
-----------------------------------------
The Colorado Business Corporation Act provides authority for indemnification by
a corporation of costs incurred by directors, officers, employees and agents in
connection with an action, suit or proceeding brought by reason of their
position as a director, officer, employee or agent. The person being
indemnified must have acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation.
Indemnification may not be provided in proceedings by or for the corporation in
which the director was adjudged liable to the corporation or in which the
director is held liable for deriving an improper personal benefit.
In addition to the general indemnification section, Colorado law provides
further protection for directors under Section 7-108-402 of the Colorado
Business Corporation Act. This section allows a Colorado corporation to include
in its Articles of Incorporation a provision that eliminates and limits certain
personal liability of a director for monetary damages for certain breaches of
the director's fiduciary duty of care, provided that any such provision does not
eliminate or limit the liability of a director (in the words of the statute) for
any of the following:
"Any breach of the director's duty of loyalty to the corporation or its
stockholders; acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; acts specified in
Section 7-108-403 [dealing with violations of the statutory provisions
concerning unlawful distributions]; or any transaction from which the
director derived an improper personal benefit. No such provision shall
eliminate or limit the liability of a director to the Corporation or to its
shareholders for monetary damages for any act or omission occurring prior
to the date when such provision becomes effective."
The Company's Articles of Incorporation, as amended, include such a provision.
The Board of Directors is empowered to make other indemnification as authorized
by the Articles of Incorporation, Bylaws or Corporate Resolutions so long as the
indemnification is consistent with Colorado law. The Company's Bylaws provide
for indemnification of its officers and directors against expenses reasonably
incurred in connection with an action unless the officer or director is adjudged
to have been guilty of or liable for negligence or misconduct in the performance
of his duty. In the event of settlement, the Company shall indemnify officers
and directors as determined in the settlement and approved by court or by a
majority of directors, which majority does not include interested directors.
PART F/S
Consolidated financial statements required to be filed hereunder are included
following Part III.
-34-
<PAGE>
PART III
Item 1. Index to Exhibits
-----------------
(a) Exhibits
--------
2. Plan of Acquisition
(a) Plan and Agreement of Merger dated October 20, 1998 by and
among Interconnect Acquisition Corporation, Communications
World International, Inc. and IAC Acquisition Corporation.
(b) Merger Agreement dated April 26, 1999 by and among Donaldson
& Associates, Inc. and IAC Acquisition Corporation.
(c) Asset Purchase Agreement dated December 31, 1998 between
Communications World International, Inc., CommWorld-National
Capitol Area, Inc., Ben Hester and Alpha Communications &
Technologies, Inc.
(d) Asset Purchase Agreement dated December 3, 1998 between
Communications World International, Inc., CommWorld of
Phoenix, Inc., Mick Heath and Summit Team Investments, Inc..
(e) Asset Purchase Agreement dated December 4, 1998 between
Communications World International, Inc., CommWorld of
Phoenix, Inc., Bill Heath and Digital Voice and Data, Inc.
3. Articles of Incorporation and Bylaws.
(a) Articles of Incorporation, as amended, filed as Exhibit 3(a)
to the Registration Statement on Form SB-2 (File No. 33-
87808) is incorporated herein by this reference.
(b) Bylaws, as amended, filed as Exhibit 3.2 to the Registration
Statement on Form S-1 (File No. 33-53550) is incorporated
herein by this reference.
(c) Articles of Amendment to the Articles of Incorporation of
Communications World International, Inc. filed as Exhibits 2
and 3 to the Form 8-K dated October 16, 1997 is incorporated
herein by this reference.
(d) Articles of Amendment to the Articles of Incorporation dated
August 4, 1998 filed as Exhibit 3 (d) to the report on Form
10-KSB for the year ended April 30, 1998 is incorporated
herein by this reference.
(e) Articles of Amendment to the Articles of Incorporation dated
March 23, 1999.
4. Instruments defining the rights of holders, including indentures
(a) Certificate of Designation establishing Series C Preferred
Stock filed with Amendments to Articles of Incorporation in
3(a) above.
-35-
<PAGE>
(b) Certificate of Designation establishing Series F Preferred
Stock filed with Amendments to the Articles of Incorporation
in 3(c) above.
10. Material Contracts
(a) Current Form of Franchise Agreement.
(b) Non-Discretionary Stock Option Plan filed as Exhibit 10(h)
to the Registration Statement on Form SB-2 (File No. 33-
87808) is incorporated herein by this reference.
(c) Accounts Receivable Financing Agreement dated January 19,
1995 with Republic Acceptance Corporation filed as Exhibit
10(m) to the Registration Statement on Form SB-2 (File No.
33-87808) is incorporated herein by this reference.
(d) Security Agreement dated January 19, 1995 with Republic
Acceptance Corporation filed as Exhibit 10(n) to the
Registration Statement on Form SB-2 (File No. 33-87808) is
incorporated herein by this reference.
(e) Agreement to Restructure Debt, effective December 22, 1995
between Registrant and Toshiba America Information Systems,
Inc., Promissory Note dated December 22, 1995 in the amount
of $1,530,950 made by Registrant to Toshiba America
Information Systems, Inc., and Personal Guaranty by Richard
D. Olson, President of Registrant, in favor of Toshiba
America Information Systems, Inc. effective December 22,
1995, filed as Exhibit (a) to the Report on Form 10-QSB for
the quarter ended January 31, 1996 is incorporated herein by
this reference.
(f) Telecommunications Master Dealer Agreement between
Registrant and Toshiba America Information Systems, Inc.,
dated April 1, 1998 filed as Exhibit 10(k) to the Report on
From 10-KSB for the year ended April 30, 1998 is
incorporated herein by reference.
(g) Amended and Restated 1997 Stock Option Plan filed as Exhibit
10(k) to the Report on From 10-KSB for the year ended April
30, 1998 is incorporated herein by reference.
(h) Consulting and Severance Agreement dated July 24, 1998 with
Richard D. Olson, including Warrant and Proxy filed as
Exhibit 10(m) to the Report on Form 10-KSB for the year
ended April 30, 1998 is incorporated herein by reference.
(i) Agreement between Registrant and M.H. Meyerson and Co.,
Inc., dated May 20, 1997 filed as Exhibit 10(n) to the
Report on Form 10-KSB for the year ended April 30, 1998 is
incorporated herein by reference.
(j) Agreement between Registrant and Century Capital Group,
Inc., dated June 23, 1998 filed as Exhibit 10 (o) to the
Report on Form 10-KSB for the year ended April 30, 1998 is
incorporated herein by reference.
(k) 1998 Stock Incentive Plan.
(l) 1999 Non-discretionary stock option plan.
-36-
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 16, 1999
COMMUNICATIONS WORLD INTERNATIONAL, INC.
(a Colorado Corporation)
By: /s/ James M. Ciccarelli
--------------------------------------------
James M. Ciccarelli, Chief Executive Officer
-37-
<PAGE>
Index to Financial Statements
Page
Consolidated Condensed Financial Statements
for the Three Months Ended July 31, 1999
Consolidated Condensed Balance Sheet F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Cash Flows F-3
Notes to Consolidated Condensed Statements Financial Statements F-4
Consolidated Financial Statements
for the Years Ended April 30, 1999 and 1998
Independent Auditors' Report F-5
Consolidated Balance Sheet F-6, 7
Consolidated Statements of Operations F-8
Consolidated Statements of Stockholders' Equity F-9
Consolidated Statements of Cash Flows F-10-11
Notes to Consolidated Financial Statements F-12-31
Financial Statements of Donaldson & Associates, Inc.
for the Year Ended September 30, 1998
Independent Auditors' Report F-32
Balance Sheet F-33
Statement of Operations and Retained Earnings F-34
Statement of Cash Flows F-35
Notes to Financial Statements F-36-40
-38-
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
For the Three Months Ended July 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
ASSETS
- ------
<S> <C>
Current assets:
Cash $ 2,188
Trade accounts and current portion of notes receivable, less allowance for
doubtful accounts of $228,971 1,892,378
Inventory 289,614
Prepaid expenses 19,546
Deferred tax asset 38,963
-------------
Total current assets 2,242,689
Property and equipment, net 273,622
Deposits and other assets 58,951
Notes receivable 30,283
Intangible assets, net 1,668,610
Deferred tax asset 1,006,037
-------------
$ 5,280,192
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Trade accounts payable $ 1,933,103
Revolving line of credit 717,975
Current portion of notes payable (including $358,788 due to related parties) 683,644
Accrued expenses 439,973
Current portion of capital lease obligations 20,388
-------------
Total current liabilities 3,795,083
Capital lease obligations and deferred revenue 41,259
Notes payable (including $360,000 due to related parties) 617,072
-------------
Total liabilities 4,453,414
-------------
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized:
Series C (cumulative) - 371,545 shares issued and outstanding 371,545
Series F (cumulative) - 214,818 shares issued and outstanding 214,818
Common stock, no par value, 25,000,000 shares authorized,
shares issued and outstanding; 6,702,571 7,120,812
Additional paid-in capital 553,259
Accumulated deficit (7,433,656)
-------------
Total stockholders' equity 826,778
-------------
$ 5,280,192
=============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-1
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Revenue:
Franchise equipment sales $1,338,868 $1,333,861
Direct equipment and service 2,103,700 1,484,519
Royalty fees 41,026 59,394
Other revenue 17,750 18,328
----------------- ----------------
Total revenue 3,501,344 2,896,102
----------------- ----------------
Costs and expenses:
Cost of franchise equipment sales 1,223,263 1,155,180
Cost of direct equipment and service 1,327,782 911,169
Selling 260,787 154,101
General and administrative 693,427 720,926
Executive officer severance compensation - 138,350
Depreciation and amortization 50,970 62,397
Interest expense 56,631 64,934
----------------- ----------------
Total cost and expenses 3,612,860 3,207,057
----------------- ----------------
Net loss $ (111,516) $ (310,955)
================= ================
Loss per share:
Basic:
Net loss $(.02) $(.16)
================= ================
Fully diluted:
Net loss $(.02) $(.16)
================= ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-2
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(111,516) $(310,955)
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation and amortization 50,970 62,397
Provision for losses on accounts and notes receivable 22,214 20,000
Changes in operating assets and liabilities:
Trade accounts and notes receivable (561,327) (19,645)
Inventory 42,082 (95,205)
Deposits and other assets (43,392) 5,024
Trade accounts payable 116,000 (94,935)
Accrued expenses and other liabilities 85,445 68,419)
----------------- -----------------
Net cash used by operating activities (399,536) (364,900)
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (26,347) (6,265)
----------------- -----------------
Net cash used by investing activities (26,347) (6,265)
----------------- -----------------
Cash flows from financing activities:
Proceeds from convertible debt issue 226,800 -
Proceeds from private placement - 310,000
Proceeds from bridge financing - 400,000
Net borrowings under line-of-credit agreement 221,222 (218,127)
Repayment of notes and contract payable (71,978) (93,751)
Repayment of capital lease obligations (5,091) -
------------------ -----------------
Net cash provided by financing activities 370,953 398,122
----------------- -----------------
Net increase (decrease) in cash (54,930) 26,957
Cash at beginning of the period 57,118 13,594
----------------- -----------------
Cash at end of the period $ 2,188 $ 40,551
================= =================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-3
<PAGE>
Communications World International, Inc.
and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation
The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures are adequate to make information presented
not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and notes thereto, at April 30, 1999 and for
the two years then ended included in the Company's report on Form 10-SB/A.
The Company follows the same accounting policies in preparation of interim
reports.
Results of operations for the interim periods are not necessarily
indicative of annual results.
(2) Convertible Debt Offering
During the three months ending July 31, 1999 the Company received net
proceeds of $226,800 from the sale of Units of Subordinated Convertible
Notes and Common Stock Purchase Warrants. Each Unit consists of a $50,000
Subordinated Convertible Note and 20,000 Warrants. The Notes bear interest
at 8% per annum and are convertible into Common Stock at any time prior to
maturity at $1.50. The Notes mature at the earlier of 36 months from the
date of issue or upon the occurrence of certain other events. The Warrants
are exercisable for a period of five years from the date of issuance at
$.40 per Warrant.
F-4
<PAGE>
Communications World International, Inc.
and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Communications World International, Inc.:
We have audited the accompanying consolidated balance sheet of Communications
World International, Inc. and subsidiaries as of April 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit 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 used 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Communications World
International, Inc. and subsidiaries as of April 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Denver, Colorado
July 9, 1999
F-5
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Assets 1999 1998
------ --------------------- ---------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,118 $ 13,594
Trade accounts and current portion of notes receivable, less
allowance for doubtful accounts of $206,757 and $363,735 in
1999 and 1998, respectively 1,353,223 1,711,959
Inventory 331,696 624,610
Prepaid expenses 7,265 16,678
Deferred tax asset 38,963 100,240
--------------------- ---------------------
Total current assets 1,788,265 2,467,081
Property and equipment, net 263,775 246,805
Deposits and other assets 40,592 49,818
Notes receivable 33,283 81,017
Intangible assets, net 1,687,328 864,425
Deferred tax asset 1,006,037 944,760
--------------------- ---------------------
$4,819,280 $4,653,906
===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1999 1998
------------------------------------ --------------------- ---------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 1,817,103 $ 1,809,766
Revolving line of credit 496,753 1,120,022
Current portion of notes payable, including amounts due to
related parties of $402,168 in 1999 and $69,537 in 1998 766,219 387,541
Accrued expenses, deposits and other liabilities 354,528 699,921
Current portion of capital lease obligations 20,388 13,200
-------------------- --------------------
Total current liabilities 3,454,991 4,030,450
Long-term liabilities:
Capital lease obligations 46,350 10,218
Notes payable, including amounts due to related parties
of $360,000 in 1999 and $37,177 in 1998 381,475 415,013
-------------------- --------------------
3,882,816 4,455,681
-------------------- --------------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Convertible preferred stock, $1.00 par value, 3,000,000
shares authorized:
Series B (cumulative) - 80,088 shares issued and
outstanding in 1998 - 80,088
Series C (cumulative) - 371,545 shares issued and
outstanding in 1999 and 436,679 in 1998
(Liquidation preference $502,175) 371,545 436,679
Series F (cumulative) - 214,818 shares issued and
outstanding in 1999 and 357,818 in 1998
(Liquidation preference $259,013) 214,818 357,818
Series G (cumulative) - 83,500 shares issued and
outstanding in 1998 - 83,500
Common stock, no par value, 25,000,000 shares authorized;
6,702,571 issued and outstanding shares in 1999 and
1,668,071 shares in 1998 7,120,812 4,290,012
Additional paid-in capital 551,429 492,009
Accumulated deficit (7,322,140) (5,541,881)
-------------------- --------------------
Total stockholders' equity 936,464 198,225
-------------------- --------------------
$ 4,819,280 $ 4,653,906
==================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Operational and Comprehensive Income
Years Ended April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Franchise equipment sales $ 5,361,569 $ 5,159,968
Direct equipment and service sales 3,505,436 4,715,519
Royalty fees 191,368 222,987
Initial franchise fees 36,000 12,500
Interest and other income 55,308 134,522
----------- -----------
9,149,681 10,245,496
----------- -----------
Costs and expenses:
Cost of franchise equipment sales 4,759,150 4,596,432
Cost of direct equipment and service sales 2,325,227 2,602,656
Selling 403,767 417,928
General and administrative 2,587,833 2,406,900
Interest expense and loan fees, including related party
interest of $6,783 in 1999 and $11,875 in 1998 253,883 413,687
Amortization of intangible assets 123,367 193,085
Provision for bad debts 47,380 250,000
----------- -----------
10,500,607 10,880,688
----------- -----------
Loss from operations before income taxes (1,350,926) (635,192)
Income tax benefit - 400,000
----------- -----------
Loss from continuing operations (1,350,926) (235,192)
----------- -----------
Discontinued operations, net of income taxes:
Loss from operations of discontinued subsidiaries (33,052) (456,220)
Loss on disposal of discontinued subsidiaries, net of
(396,281) (400,000)
income tax benefit of $260,000 in 1998 ----------- -----------
Loss from discontinued operations (429,333) (856,220)
----------- -----------
Net loss (1,780,259) (1,091,412)
Cumulative dividends on preferred stock 47,709 76,647
----------- -----------
Loss applicable to common stock $(1,827,968) $(1,168,059)
=========== ===========
Loss per share:
Basic:
Loss from continuing operations $ (.56) $ (.14)
=========== ===========
Net loss $ (.76) $ (.72)
=========== ===========
Diluted:
Loss from continuing operations $ (.56) $ (.14)
=========== ===========
Net loss $ (.76) $ (.72)
=========== ===========
Weighed - average number of outstanding common shares
Basic: 2,409,816 1,622,824
----------- -----------
Diluted: 4,184,593 1,960,464
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years Ended April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(Note 10)
Preferred Stock
Series B, C, F ,G,H,& I Common Stock Additional Accumulated Shareholders'
---------------------------------------------------
Shares Amount Shares Amount Paid-in Capital Deficit Equity
----------- ------------ --------- ----------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 948,085 $ 948,085 1,620,571 $4,224,512 $ 447,009 $(4,450,469) $ 1,169,137
Issuance of preferred stock 10,000 10,000 - - - - 10,000
Issuance of common stock - - 47,500 65,500 - - 65,500
Issuance of options and
warrants to consultants - - - - 45,000 - 45,000
Net loss - - - - - (1,091,412) (1,091,412)
-------- --------- --------- ---------- ----------- ----------- -----------
Balances, April 30, 1998 958,085 $ 958,085 1,668,071 $4,290,012 $ 492,009 $(5,541,881) $ 198,225
Issuance of preferred stock 14,807 14,807 - - 2,746,693 - 2,761,500
Preferred stock offering
costs - - - - (298,525) - (298,525)
Conversion of preferred stock
into common upon shareholder
approval of additional
authorized shares (14,807) (14,807) 4,761,500 2,462,975 (2,448,168) - -
Cancellation of preferred
stock taken as partial
consideration for sale of
subsidiary operation (371,722) (371,722) - - - - (371,722)
Issuance of options and
warrants to consultants and
non-employee directors - - - - 59,420 - 117,245
Issuance of common stock - - 273,000 367,825 - - 310,000
Net loss - - - - - (1,780,259) (1,780,259)
-------- --------- --------- ---------- ----------- ----------- -----------
Balances, April 30, 1999 586,363 $ 586,363 6,702,571 $7,120,812 $ 551,429 $(7,322,140) $ 936,464
======== ========= ========= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years Ended April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,780,259) $(1,091,412)
Adjustments to reconcile to net cash provided by
(used in) operating activities, net of effect of acquisitions:
Depreciation and amortization 181,545 396,372
Provision for bad debts 47,380 250,000
Provision for inventory obsolescence - 233,000
Stock options and warrant compensation 117,245 55,000
Intangible write off-discontinued operations 341,432 258,055
Changes in operating assets and liabilities:
Trade accounts and notes receivable 334,090 615,505
Inventories 57,914 89,941
Prepaid expenses 9,413 55,959
Deferred taxes - (660,000)
Deposits and other assets 9,226 (10,344)
Trade accounts payable 7,337 (368,819)
Accrued expenses, deposits and other liabilities (345,393) 429,669
------------------ -------------------
Net cash provided by (used in) operating activities (1,020,070) 252,926
------------------ -------------------
Cash flows from investing activities
Capital expenditures (75,427) (40,657)
Cash paid for acquisitions (602,570) -
------------------ -------------------
Net cash used in investing activities (677,997) (40,657)
------------------ -------------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement (623,269) 157,551
Payments of notes payable (379,860) (470,687)
Principal payments on capital lease obligations (28,255) (31,599)
Issuance of preferred stock, net of offering costs 2,462,975 -
Issuance of common stock 310,000 65,500
------------------ -------------------
Net cash provided by (used in) financing activities 1,741,591 (279,235)
------------------ -------------------
Net increase (decrease) in cash 43,524 (66,966)
Cash at beginning of the year 13,594 80,560
------------------ -------------------
Cash at end of the year $ 57,118 $ 13,594
================== ===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1999 1998
------------------ -------------------
Supplemental disclosures of cash flow information:
<S> <C> <C>
Interest paid $256,993 $351,843
Non-cash investing activities:
Business acquisitions financed by:
Issuance of notes payable 725,000 -
Capital acquisitions financed by leases 71,575 -
Non-cash financing activities:
Issuance of preferred stock as
bonus compensation - 10,000
Issuance of stock options and warrants to outside
consultants 117,245 45,000
</TABLE>
F-11
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Presentation
The consolidated financial statements presented are those of Communications
World International, Inc., and its subsidiaries, CommWorld Acquisition
Corporation d.b.a. CRI, IAC Acquisition Corporation d.b.a. CommWorld of
Denver, CommWorld of Phoenix, Inc., CommWorld of Seattle, Inc., Digital
Telecom, Inc. d.b.a. CommWorld NationWide and CommWorld National Capitol
Area, Inc. (collectively, the "Company" or "CommWorld"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
Organization and Nature of Operations
CommWorld was incorporated under Colorado law in 1983 and has its principal
executive offices at 7315 South Revere Parkway, Suite 602, Englewood,
Colorado 80112. CommWorld is engaged in the distribution of franchise
licenses within the telephone interconnect industry. The Company derives
income primarily from the sale of equipment and services to franchisees,
multi-location customers (national accounts), and through its Company-owned
outlets, leasing fees and initial franchise fees.
Revenue Recognition
Initial Franchise Fees
----------------------
Franchise fees are recognized upon execution of the franchise agreement as
all material services and conditions relating to the sale have been
substantially performed or satisfied. Direct costs associated with the
sale, including franchisor obligations, are expensed upon the recognition
of the related revenue.
Royalty Fees
------------
Royalty fees are cost mark-up fees charged to certain franchisees who
purchase equipment directly from suppliers with whom the Company has
purchasing contracts. The Company is notified by the supplier when the
franchisees makes purchases and the fees are charged to the franchisee and
recognized as income on a monthly basis.
Franchise Equipment Sales
-------------------------
Revenue from franchise equipment sales is generally recognized when
products are shipped. The franchisee is entitled to purchase equipment
from or through the Company on a "cost mark-up royalty" basis; based on the
cost to the Company of the equipment and products purchased plus a mark-up
to the franchisee. The amount of the cost mark-up royalty varies by
manufacturer and by the volume of purchases of the individual franchise.
F-12
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Direct Equipment and Service Sales
----------------------------------
Revenue from direct equipment and service sales is generally recognized
upon completion of the installation of the equipment or upon completion of
the service provided by the Company for telephone systems, voice processing
products and related peripherals, since most contracts are completed as of
a period end. For significant projects not complete as of a period end, a
percentage of revenue and expense for the entire project is recognized
based on the estimated percentage of completion.
Use of 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 at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory is valued at the lower of cost (first-in, first-out method) or
estimated market value and includes used and replacement stock items.
Property and Equipment
Property and equipment are reported at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes.
Intangible Assets
Goodwill and Non-compete Agreements
-----------------------------------
Acquisitions of interconnect dealers, including franchise outlets, are
accounted for using the purchase method of accounting. Under this method,
the purchase price is allocated to assets acquired and liabilities assumed
based on their estimated fair values as of the date of acquisition. The
excess of the consideration paid over the fair value of net assets acquired
has been recorded as goodwill and is amortized on the straight-line basis
over periods ranging from ten to twenty years. Non-compete agreements
associated with business acquisitions are amortized over the term of the
agreement. The Company reviews unamortized intangible assets whenever
events or changes in circumstances indicate that the carrying value of the
asset may not be recoverable. If there is an indication the carrying
amount may not be recoverable, the Company estimates the future cash flows
expected to result from the operation of the applicable Company-owned
outlet and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less than the
carrying amount of the intangible asset, the Company recognizes an
impairment loss by reducing the unamortized cost of the intangible asset to
its estimated fair value.
F-13
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Reacquired Franchises
---------------------
Reacquired franchises include individual franchises taken over by the
Company upon termination of the franchise agreements and/or abandonment by
the franchisee. Reacquired franchises are recorded based upon the estimated
fair value of the assets received less any liabilities assumed by the
Company, but not in excess of the Company's cost. Costs in excess of
amounts allocated to inventory, equipment and other assets are classified
as franchises reacquired to the extent supportable by the fair value of the
customer bases and territories acquired based upon estimates by Company
management.
The Company amortizes its investment in franchises reacquired to the extent
of the annual pre-tax operating income, if any, of the reacquired franchise
and may recognize additional amortization to reduce the investment to its
net realizable value as estimated by Company management.
Reacquired franchises also include the cost of master franchise territories
reacquired. Reacquired master franchise territories are amortized when
individual franchises in the related territories are sold. The maximum
amortization period for reacquired franchises is five years from the date
of reacquisition. There were no franchises reacquired in fiscal years 1999
or 1998.
Loss Per Common Share
Loss per common share is computed using the weighted average number of
common shares outstanding during each period. Common stock equivalents are
not material and do not affect the income per share. Common stock
equivalents are not included in the calculation of loss per share since
they are anti-dilutive.
Income Taxes
The Company provides for income taxes using the asset and liability method
as prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Financial Instruments
The Company periodically maintains cash balances at a commercial bank in
excess of the Federal Deposit Insurance Corporation Insurance limit of
$100,000.
The carrying value of financial instruments potentially subject to
valuation risk, consisting principally of cash and cash equivalents,
accounts receivable and accounts payable, approximate fair value.
F-14
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130 Reporting Comprehensive Income, effective May 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components
(revenues, expenses, gains and losses). Components of comprehensive income
are net income and all other non-owner changes in equity. SFAS No. 130
requires an enterprise to (a) classify items of other comprehensive income
by their nature in a financial statement, and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. Reclassifications of financial statements for earlier
periods provided for comparative purposes is required. The Company has no
items of comprehensive income at April 30, 1999 or 1998, respectively.
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the presentation used in the 1999 consolidated
financial statements.
Operating Segments
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
131 Disclosures About Segments of an Enterprise and Related Information,
effective May 1, 1998. SFAS No. 131 establishes standards for reporting
information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting called the
"management approach." The management approach is based on the way the
chief operating decision maker organizes segments within the Company for
making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, and any other method in which management disaggregates a company
(see Note 16).
Recent Pronouncements
The FASB issued SFAS No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities. SFAS No. 133, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The adoption of the standard is not expected to have a
significant impact on the consolidated financial statements of the Company.
(2) Business Acquisitions
The Company entered into a letter of intent on June 25, 1998 to merge with
Interconnect Acquisition Corporation ("IAC"), a privately held company. In
connection with the IAC merger agreement, the Company formed a wholly-owned
subsidiary, IAC Acquisition Corporation, a Colorado corporation, and merged
IAC into IAC Acquisition Corporation in October, 1998. Pursuant to the
terms of the merger agreement, the Company issued to the shareholders of
IAC 1,000 shares of $1.00 par value, Series I Preferred Stock, in exchange
for 100% of the issued and outstanding shares of IAC common stock. The
Series I Preferred Stock was automatically convertible into 2 million
shares of Common
F-15
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Business Acquisitions (continued)
Stock upon amendment of the Company's Articles of Incorporation to increase
the number of authorized common shares. On the effective date of the
merger agreement, IAC had no assets or liabilities. Accordingly, the
transaction was accounted for at $1,000, represented by the issuance of
1,000 shares of $1.00 par value, Series I Preferred Stock. IAC was a
development stage company formed to acquire interconnect telephony
businesses. Prior to the merger, IAC had entered into letters of intent to
acquire five such businesses, subject to obtaining financing, as well as,
customary conditions of mergers and acquisitions. Due to the lack of
tangible assets of IAC, the merger was accounted for using the par value of
the Series I Preferred Stock. During March, 1999 the Series I Preferred
Stock was converted into 2 million shares of the Company's Common
Stock.
The Company completed two acquisitions during the fiscal year ended Aril
30, 1999. During March, 1999, the Company, through a wholly-owned
subsidiary (CommWorld Acquisition Corporation), acquired certain assets
from Connective Resources, Inc. in Dallas, Texas. The Company, in a
transaction structured as an asset purchase, acquired inventory of
approximately $20,000, fixed assets of approximately $15,000 and the
existing customer base valued at $42,750. The Company paid $52,750 in cash
and issued a note payable for $25,000, which was paid subsequent to year
end. The value of the customer base has been recorded as an intangible
asset and is being amortized over five years.
During April, 1999, the Company, through a wholly-owned subsidiary (IAC
Acquisition Corporation), acquired Donaldson and Associates, Inc. (formerly
doing business as CommWorld of Denver, a franchisee). The Company acquired
inventory of approximately $70,000 and fixed assets with a net book value
of approximately $45,000. The Company paid $550,000 in cash and issued
notes payable in the total amount of $700,000. The notes are convertible
into common stock of the Company at the option of the holder on the basis
of $1 per share for $250,000 of the notes and at a 10% discount of market
value for the other $450,000 of notes. The acquisition was accounted for
as a purchase and, accordingly, the purchase price was allocated to the
assets acquired based on their estimated fair values as of the date of the
merger. The excess of the consideration paid over the fair value of net
assets acquired of approximately $1,135,000 was recorded as goodwill and is
being amortized on a straight line basis over twenty years. In connection
with the transaction the principals of CommWorld of Denver entered into
employment and non-compete agreements with the Company. The employment
agreements range from one to five years and call for the principals, among
other things, to receive their regular salaries during the term of the
agreements.
The following unaudited pro forma information for the years ended April 30,
1999 and 1998 assumes the acquisition of CRI and CommWorld of Denver
occurred as of May 1, 1997. The pro forma results do not purport to be
indicative of the results of operations which would actually have occurred
had the acquisitions occurred on May 1, 1997, or which may occur in the
future.
<TABLE>
<CAPTION>
Year ended April 30,
-----------------------------------
1999 1998
-----------------------------------
(unaudited)
-----------------------------------
<S> <C> <C>
Gross revenue $11,488,289 $12,622,428
Net loss (1,769,318) (1,060,665)
Loss per common share from continuing operations (.57) (.17)
</TABLE>
F-16
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) Revolving Line of Credit
The Company entered into a revolving line of credit agreement in January,
1995 with a finance company. The revolving line of credit permits the
Company to borrow up to $2,000,000 subject to certain collateral
limitations. Interest, at the rate of prime plus 5% per annum, is due
monthly. The revolving line of credit is collaterallized by substantially
all of the assets of the Company. At April 30, 1999 and 1998 the Company
had outstanding borrowings on the line of credit of $496,753 and
$1,120,022, respectively.
The fair value of the line of credit approximates the carrying amount and
is based on the amount of future cash flows discounted using the Company's
current borrowing rate for loan of comparable maturity.
(4) Notes Receivable
Occasionally, amounts due on open account from various franchisees were
converted to promissory notes bearing interest at rates ranging from 8.5%
to 12% per annum, payable in installment periods ranging from 12 to 36
months, and secured by the franchisee's business assets. In prior years,
the Company sold various Company-owned outlets (see Note 7) with a portion
of the sales financed with promissory notes. The fair value of notes
receivable approximates the carrying amount and is estimated using
discounted cash flow analyses.
The Company also may finance payments of initial franchise fees with
promissory notes for up to four months. Notes receivable consist of the
following at April 30:
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Equipment sales $ 53,935 $ 81,975
Company-owned outlet sales 22,000 97,987
Franchise fees 9,000 9,375
Former president of the Company 25,000 25,000
-------- --------
109,935 214,337
Less current portion 76,652 133,320
-------- --------
Non-current portion $ 33,283 $ 81,107
======== ========
</TABLE>
A provision for $38,283 is included in the allowance for doubtful accounts
for potential credit losses.
F-17
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment consists of the following at April 30:
<TABLE>
<CAPTION>
Estimated
useful life 1999 1998
------------ -------------- ----------------
<S> <C> <C> <C>
Furniture, fixtures and equipment 3-5 $396,007 $ 957,371
Rental property 5 - 33,830
Vehicles 5 9,000 115,087
Leasehold improvements and other 5 22,040 967
-------- ----------
427,047 1,107,255
Less accumulated depreciation and amortization 163,272 860,450
-------- ----------
Property and equipment, net $263,775 $ 246,805
======== ==========
</TABLE>
(6) Notes Payable
Notes payable consist of the following at April 30:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Installment note payable to Toshiba America Information Systems,
Inc. (TAIS), net of discount $ 376,646 $675,275
Notes payable to sellers of acquired companies
(see Note 2) 762,168 106,705
Other notes payable 8,880 20,574
---------- --------
1,147,694 802,554
Less current portion 766,219 387,541
---------- --------
Non-current portion $ 381,475 $415,013
========== ========
</TABLE>
Effective December 22, 1995, the Company entered into an agreement with TAIS,
its major supplier and unsecured creditor, to transfer $1,530,950 of accounts
and note payable to a long-term obligation (the "Note") and to increase its
credit facility by $400,000. Under the terms of the Note, the Company is
required to make 60 equal installments of $29,598, including interest at 6% per
annum, commencing in February 1996. Additionally, the Company is required to
make principal prepayments of at least $10,000 per month if the monthly net
operating cash flow of the Company, defined as pre-tax income plus depreciation
and amortization, exceeds $75,000 for three consecutive months. Thereafter, 60%
of each additional $5,000 of monthly net operating cash flow in excess of
$75,000 must be paid. The Company is also required to use a protion of the net
proceeds from the offering of its stock or debt securities to make a principal
prepayment. The prepayment is equal to a percentage of the net proceeds in
excess of $350,000 as follows: 40% of net proceeds between $350,000 and $1
million, 50% of net proceeds between $1 million and $2 million, 60% of net
proceeds between $2 million and $3 million and 100% of net proceeds in excess of
$3 million, but not to exceed the remaining principal balance of the Note
($376,646 as of April 30, 1999). The provisions for additional principal
payments during 1999 were waived related to the Company's private placement of
equity securities. The Note contains the personal guarantee of the Company's
former president. The Company has indemnified its former president relative to
this guarantee.
Effective April 30, 1997 TAIS agreed to treat the Note as a non-interest bearing
obligation from inception through April 30, 1997, resulting in a discount of
the note balance of approxiamtely $103,000. The discount was treated as a
reduction of cost of franchise equipment slaes for the year ended April 30,
1997. During the year ended April 30, 1998, TAIS agreed to treat the note as a
non-interest bearing obligation provided monthly payments are continued in
timely manner. A discount of $127,958 was recorded on the note and treated as a
reduction of cost of franchise equipment sales for the year ended April 30,
1998. Imputed interest in the amount of $56,522 and $68,796 was recognized on
the Note during the years ended April 30, 1999 and 1998.
The fair value of the note payable to TAIS is estimated based on the amount of
future cash flows discounted using the Company's current borrowing rate for
loans of comparable maturity. At April 30, 1999 and 1998, the estimated fair
value of the TAIS note was approximately $335,000 and $599,000, respectively.
The scheduled maturities of notes payable, by fiscal year, are, $766,219 in
2000, $111,475 in 2001, $90,000 in 2002, $90,000 in 2003, and $90,000 in 2004.
F-18
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Franchised and Company-Owned Outlets
The following table provides data on franchised outlets and Company-owned
outlets:
<TABLE>
<CAPTION>
Franchised Company-owned
outlets Outlets
---------------- -------------------------
<S> <C> <C>
Total at April 30, 1997 57 5
------------------------
Additions 1 -
Terminated (5) (1)
Acquired franchises - -
------ ------
Total at April 30, 1998 53 4
------------------------
Additions 11 -
Terminated (1) (3)
Acquired franchises - 2
------ ------
Total at April 30, 1999 63 3
------------------------ ====== ======
</TABLE>
(8) Intangible Assets
Intangible assets consist of the following at April 30:
<TABLE>
<CAPTION>
Amortization
period 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Goodwill 5-20 years $1,987,369 $1,259,608
Franchises reacquired 5 years 315,567 315,567
Non-compete agreements 2-5 years 172,500 172,500
---------- ----------
2,475,436 1,747,675
Less accumulated amortization 788,108 883,250
---------- ----------
Intangible assets, net $1,687,328 $ 864,425
========== ==========
</TABLE>
At April 30, 1999 franchises reacquired and non-compete agreements were
fully amortized. At April 30, 1998, franchises reacquired and non-compete
agreements had accumulated amortization of $299,195 and $172,196,
respectively. Included in goodwill at April 30, 1999 is $42,750
attributable to the purchase of the existing customer base of Connective
Resources, Inc. (see Note 2).
F-19
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Commitments
Employment Agreements
The Company has entered into Employment Agreements (the "Agreements") with
several individuals in connection with various business acquisitions during
fiscal years 1994 to 1999. Generally, the terms of these Agreements
provide for a two to five year term of employment and a fixed minimum
amount of annual compensation and bonus-performance incentives. Total
compensation paid under these Agreements during fiscal years ended April
30, 1999 and 1998 was $107,792 and $193,345, respectively.
The future minimum payments required under these Agreements at April 30,
1999 are as follows:
<TABLE>
<CAPTION>
Year ended April 30:
--------------------
<S> <C>
2000 $210,000
2001 210,000
2002 120,000
2003 120,000
2004 120,000
Thereafter 120,000
--------
$780,000
========
</TABLE>
Operating Leases
The Company leases office space and related facilities, equipment and
vehicles under non-cancelable operating leases. Future minimum lease
payments for such operating leases are as follows:
<TABLE>
<CAPTION>
Year ended April 30:
--------------------
<S> <C>
2000 $ 442,500
2001 366,000
2002 279,400
2003 205,400
2004 68,900
Thereafter -
----------
$1,362,200
==========
</TABLE>
Aggregate rental expense under operating leases was $254,754 and $286,925
for the years ended April 30, 1999 and 1998, respectively.
During fiscal 1999, the Company relocated its corporate headquarters to one
of the Company's other operating facilities. The Company entered into
sublease agreements, with recourse, on the vacated facilities, under terms
substantially the same as the original leases.
F-20
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Commitments (continued)
Capital Leases
The Company leases computer equipment under capital leases. At April 30,
1999, scheduled future minimum payments under capital leases with initial
or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year ended April 30:
----------------------
<S> <C>
1999 $ 32,580
2000 32,580
2001 21,720
------
Total minimum lease payments 86,880
Less interest 20,142
-------
Present value of net minimum lease payments 66,738
Less current portion 20,388
---------
Non-current portion $ 46,350
=========
</TABLE>
The following is a summary of property and equipment under capital leases
at April 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Computer equipment $ 71,575 $ 80,692
Vehicles - 78,935
--------- --------
71,575 159,627
Accumulated amortization (7,953) (119,796)
--------- --------
$ 63,622 $ 39,831
========= ========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(10) Shareholders' Equity and Related Party Transactions
Series A Preferred Stock
In October 1992, the Company authorized the establishment and designation
of 1,000,000 shares of Series A Preferred Stock. There were no Series A
Preferred Stock shares issued and outstanding at April 30, 1999 and 1998.
Series B Preferred Stock
In connection with the Company's acquisition of Master Franchise, Inc. and
Communications World of Phoenix South, Inc. in April 1994, the Company
authorized 100,000 shares of Series B Preferred Stock and issued 80,088
shares to the sole shareholder of the acquirees. Shares of the Series B
Preferred Stock were convertible into common stock at the election of the
holders. The conversion rights were not exercised and expired April 30,
1997. In 1999, the Company sold its operating unit in Phoenix back to the
original owner. As partial consideration for the purchase, the Company took
back and canceled all of the outstanding shares of Series B Preferred Stock
and the rights to accumulated and unpaid dividends were waived.
F-21
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
Series C Preferred Stock
The Company authorized 440,000 shares of Series C Preferred Stock and
issued 140,060 shares to the shareholders of CommWorld of Seattle North,
Inc., and issued 181,484 shares to the shareholders of Digital Telecom
Incorporated, and issued 40,000 shares to the shareholders of
Communications World of Columbia, Inc., and issued 65,135 shares to the
sole shareholder of Alpha Communications & Technology, Inc. and issued
10,000 shares to employees as incentive compensation. In connection with
the Company's sale of certain operating units during the current fiscal
year, 65,135 shares of Series C Preferred Stock were taken as partial
consideration and were canceled by the Company. The rights to accumulated
and unpaid dividends on these shares of stock were waived. Shares of the
Series C Preferred Stock were convertible into common stock at the election
of the holders. Effective July 16, 1997 the conversion rights expired.
Dividends on the Series C Preferred Stock are paid when declared by the
Board of Directors, at the rate of $.08 per share per annum before any
dividends on shares of the Company's common stock are paid. Upon
liquidation, dissolution or winding up of the Company, the Series C
Preferred Stock shall have a preference of $1.00 per share plus accumulated
and unpaid dividends, payable from the proceeds of sale or distribution of
the Company's assets prior to any distribution to the holders of common
stock. The Company may redeem the Series C Preferred Stock at $1.00 per
share plus accrued and unpaid dividends by giving thirty days notice to the
holders of the Series C Preferred Stock. At April 30, 1999, there were
$130,630 in accumulated dividends.
Series F Preferred Stock
The Company authorized 1,100,000 shares of Series F Preferred Stock. Shares
of the Series F Preferred Stock are convertible into Common Stock at the
election of the holders at a conversion price equal to 50% of the current
market price determined by the 30 day average price prior to conversion.
The shares of Series F Preferred Stock will automatically be converted into
fully-paid and non-assessable shares of Common Stock upon the effective
date of a registration statement covering the Common Stock. Dividends on
the Series F Preferred Stock are paid when declared by the Board of
Directors, at the rate of $.08 per share per annum before any dividends on
shares of the Company's common stock are paid. Upon liquidation,
dissolution or winding up of the Company, the Series F Preferred Stock has
a preference of $1.00 per share plus accumulated and unpaid dividends,
payable from the proceeds of sale or distribution of the Company's assets
prior to any distribution to the holders of common stock. At April 30,
1999, there were $44,195 in accumulated dividends.
The Company issued 143,000 shares of Series F Preferred Stock in connection
with the acquisition of the assets of its franchise, CommWorld of Tucson.
The Company also issued, for cash, 45,000 shares of Series F Preferred
Stock, realizing net proceeds of $39,150, in connection with a private
offering of the shares. The Company issued, for cash, 169,818 shares in
connection with the exercise and conversion of certain notes payable into
equity (see Note 11). In connection with the Company's sale of certain
operating units in 1999, 143,000 shares of Series F Preferred Stock were
received as partial consideration and canceled by the Company. The rights
to accumulated and unpaid dividends on these shares of stock were waived.
F-22
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
Series G Preferred Stock
The Company authorized and issued 83,500 shares of Series G Preferred Stock
to an individual in connection with the acquisition of the assets of
CommWorld of Tucson (see Note 2). Shares of the Series G Preferred Stock
were convertible into common stock at the election of the holders at a
conversion price of $1.625. Dividends on the Series G Preferred Stock are
paid when declared by the Board of Directors, at the rate of $.08 per share
per annum before any dividends on shares of the Company's common stock are
paid. In 1999, the Company sold its operating unit in Tucson to the
original owner. As partial consideration for the sale, the Company received
in exchange and canceled all of the previously issued and outstanding
Series G preferred shares. All rights to accumulated and unpaid dividends
were waived.
Series H Preferred Stock
The Company authorized 17,700 shares of Series H Preferred Stock in 1999 in
connection with a private placement of equity securities. The shares of
Series H Preferred Stock were offered in a unit offering of securities with
each unit consisting of one share of Series H Preferred Stock and 40 common
stock purchase warrants exercisable at $3 per share. Each share of Series H
Preferred Stock was convertible into 200 shares of common stock upon
approval of the shareholders of the Company of an increase in the
authorized shares of common stock, which approval was granted in March of
1999. There were 13,807.5 shares of Series H Preferred Stock issued which
were converted into 2,761,500 shares of common stock.
Series I Preferred Stock
The Company authorized 1,000 shares of Series I Preferred Stock in
connection with the merger with Interconnect Acquisition Corporation (IAC)
and issued all of the shares to the shareholders of IAC. Each share of
Series I Preferred Stock was converted into 2,000 shares of common stock
upon the approval of the shareholders of the Company of an increase in
authorized shares of common stock, which approval was granted in March,
1999 and the Series I Preferred Stock was converted into 2,000,000 shares
of common stock.
The schedule on the following page summarizes the preferred stock activity
for Series B, C, F, G, H and I for fiscal years ended April 30, 1999 and
1998:
F-23
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
<TABLE>
<CAPTION>
Series B Series C Series F Series G
------------------- ------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 80,088 $ 80,088 426,679 $426,679 357,818 $ 357,818 83,500 $ 83,500
Issuance of preferred
stock - - 10,000 10,000 - - - -
------- -------- ------- -------- -------- --------- ------- --------
Balances, April 30, 1998 80,088 80,088 436,679 436,679 357,818 357,818 83,500 83,500
Issuance of preferred
stock - - - - - - - -
Cancellation of preferred
stock in connection with
sale of operating units (80,088) (80,088) (65,134) (65,134) (143,000) (143,000) (83,500) (83,500)
Conversion of preferred
stock into common stock
upon shareholder approval
of additional authorized
common shares - - - - - - - -
------- -------- ------- -------- -------- --------- ------- --------
Balances, April 30, 1999 - $ - 371,545 $371,545 214,818 $ 214,818 - $ -
======= ======== ======= ======== ======== ========= ======= ========
<CAPTION>
Series H Series I Total Preferred Stock
------------------- ----------------- -----------------------
Shares Amount Shares Amount Shares Amount
-------- --------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1997 - $ - - - 948,085 $ 948,085
Issuance of preferred
stock - - - - 10,000 10,000
------- -------- ------ ------- -------- ---------
Balances, April 30, 1998 - - - - 958,085 958,085
Issuance of preferred
stock 13,807 13,807 1,000 1,000 14,807 14,807
Cancellation of preferred
stock in connection with
sale of operating units - - - - (371,722) (371,722)
Conversion of preferred
stock into common stock
upon shareholder approval
of additional authorized
common shares (13,807) (13,807) (1,000) (1,000) (14,807) (14,807)
------- -------- ------ ------- -------- ---------
Balances, April 30, 1999 - $ - - $ - 586,363 $ 586,363
======= ======== ====== ======= ======== =========
</TABLE>
F-24
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
During the year ended April 30, 1999, shares of Series H and Series I
Preferred Stock were issued and subsequently converted into Common Stock.
There were 13,807.5 shares of Series H Preferred Stock issued which were
converted into 2,761,500 shares of Common Stock; there were 1,000 shares of
Series I Preferred Stock issued which were converted into 2,000,000 shares
of Common Stock.
Common Stock Purchase Warrants
On May 20, 1997, the Company entered into an investment banking agreement
(the Agreement) with M.H. Meyerson & Co., Inc. (Meyerson). Under the terms
of the Agreement, Meyerson provides investment banking services for the
Company, on a best efforts basis, including assistance with mergers and
acquisitions, internal capital structuring and the placement of new debt
and equity issues for a period of up to five years commencing from the date
of the Agreement. In consideration of the services to be performed, the
Company granted Meyerson warrants to purchase 175,000 shares of Common
Stock at a price of $1.20 per share. The warrants are fully vested and may
be exercised at any time up to and including May 20, 2002. The warrants
carry piggyback registration rights. The warrants were valued at $.30 each
and a charge of $37,000 was recorded in the year ended April 30, 1998, with
an offsetting increase to additional paid-in capital.
The Company completed a private placement of equity securities on May 25,
1998. The private placement consisted of 283,000 Units with each Unit
consisting of one share of common stock and one common stock purchase
warrant exercisable at $2.50 for a period of five years. The Units were
sold for $1.25 each for total proceeds of $353,750. In addition to the
Units, the Company sold to the Placement Agent 40,000 Common Stock purchase
warrants for $100, exercisable at $1.25 per share for a period of five
years.
The Company completed an additional private placement of equity securities
in March, 1999. The private placement consisted of 13,807.5 Units with each
Unit consisting of one share of Series H Preferred Stock and 40 common
stock purchase warrants. Each warrant entitles the holder to purchase one
share of common stock at $3 per share at any time up to and including March
31, 2004. Additionally, 331,380 common stock purchase warrants were issued
to the placement agent. The warrants may also be exercised at any time up
to March 31, 2004; 276,150 warrants are exercisable at $1 per share and
55,230 are exercisable at $3 per share.
As a part of severance agreements with executive officers of the Company,
common stock purchase warrants were issued which entitle the holders to
purchase 135,000 shares of common stock at $1.30 per share and 25,000
shares at $1.00 per share. The 135,000 warrants may be exercised at any
time up to August 11, 2001 and the 25,000 warrants may be exercised at any
time up to September 20, 1999. The warrants were fair valued at $.31 and
$.13 per share, respectively, and a charge of $45,100 was recorded for
fiscal year ended April 30, 1999 with an offsetting increase to additional
paid in capital.
F-25
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
Other Related Party Transactions
In September, 1997 the Company entered into an agreement with Century
Capital Group, Inc., for Century Capital to provide the Company with
financial advisory and investment banking services. James M. Corboy, a
director of the Company, was President of Century Capital. The Company
agreed to pay Century Capital $1,000 per month and additional compensation
if certain acquisitions were completed. In June, 1998, the Company entered
into a new agreement with Century Capital, which superseded the September,
1997 agreement. Century Capital agreed to provide financial advisory
services to the Company, including due diligence and a fairness opinion in
connection with the Company's merger with IAC. The Company paid to Century
Capital $32,930 during the period from September, 1997 through April, 1999,
including a $25,000 fee for a fairness opinion delivered to the Company in
connection with the IAC merger.
The Company has used the services of Bathgate McColley Capital Group, LLC
("BMCG"), as a placement agent for offerings in 1998 and 1999 of Common
Stock, Preferred Stock and debt. During this period, BMCG sold an aggregate
of $3,137,000 in equity and debt securities on behalf of the Company. The
Company paid BMCG an aggregate of $253,667 in commissions, and issued
warrants to purchase an aggregate of 250,850 shares of Common Stock. Steven
M. Bathgate and Eugene McColley, principals of BMCG, participated as
investors in these offerings and are principal shareholders of the Company.
(11) Benefit Plans
Stock Options
The Company has adopted two stock incentive plans for its employees and
consultants. The 1997 Stock Option Plan provides for the reservation of
130,000 shares of the Company's Common Stock. Pursuant to the terms of the
1997 Plan, options may be granted to employees of the Company and
consultants to the Company. In addition to the shares reserved under the
Plan for future issuance, there was a specific grant of 135,000 options to
certain employees, directors and consultants. Options to purchase 115,000
shares are exercisable at $1.30 per share and options to purchase 20,000
shares are exercisable at $1.50 per share, the fair market values of the
Common Stock on the respective dates of grant. The specific grants are
fully vested and will expire in August 2001.
The 1998 Stock Incentive Plan provides authority for the grant of options
to purchase up to 1,000,000 shares of common stock. Options to purchase
310,250 shares have been granted. Of this amount, options to purchase
126,500 shares at $1 per share have been issued, including 119,500 to
officers and directors, and will expire in November, 2003 if not exercised.
Options for 114,500 shares are fully vested and the other options vest in
one-third installments over a three year period. Options to purchase
161,250 shares at $1.50 have been issued, including 136,000 to officers and
directors, and will expire in February, 2004 if not exercised. Options to
purchase 22,500 shares of Common Stock, of which 20,000 shares are to an
officer of the Company, at $1.30 have been issued, which will expire in
March, 2004, if not exercised. Options for 116,000 shares are fully vested
and the other options vest in one-third installments over a three year
period. All options under the 98 Plan were issued at the market value on
the date of grant.
F-26
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Benefit Plans (continued)
Additionally, in accordance with a stock option plan adopted in February,
1993, the Company's board of directors authorized the issuance of options
to purchase up to 20,000 common shares to non-employee directors of the
Company. Options are granted at the market value on the date of grant. The
options granted become exercisable over a three-year period and must be
exercised within five years from the date of grant. At April 30, 1999, the
Company had 8,000 options granted to purchase common stock at prices
ranging from $.88 to $5.13 per share, with expirations occurring through
November 1, 2002. The Plan expired in November, 1997. During fiscal years
1999 and 1998 no stock options were exercised.
In fiscal year 1999, the Company adopted the 1999 Non-discretionary Stock
Option Plan (the "99 Plan"), pursuant to which options to purchase up to
300,000 shares of Common Stock could be granted to non-employee directors
of the Company. Options to purchase 10,000 shares each have been granted to
two non-employee board members at $1.50 per share, the fair market value on
the date of grant. The options were valued at $.36 each and a charge of
$14,320 was recorded in the year ended April 30, 1999, with an offsetting
increase in additional paid-in capital. These options will expire in
February 2004. Options to purchase 10,000 shares will be granted to any
person becoming a director who is not employed by the Company or any of its
subsidiaries. In addition, each non-employee director will receive options
to purchase 10,000 shares annually, commencing February 1, 2000 and ending
February 1, 2004. If any option grant expires or terminates, all shares
which were not issued under the option grant will become available for
additional awards under the 1999 Plan.
Furthermore, in 1996 the board of directors granted options to a consultant
that were not issued pursuant to any plan. At April 30, 1999, the Company
had 37,500 options outstanding to purchase common stock at prices ranging
from $1.00 to $3.13 per share, the fair market values of the Common Stock
on the dates of grant. These options are fully vested and expire September
20, 1999. During fiscal 1999 and 1998, no stock options were exercised.
The following is a summary of the status of options granted:
<TABLE>
<CAPTION>
Number Aggregate Weighted Average
of Shares Exercise Price Exercise Price
----------------- ----------------- --------------------
<S> <C> <C> <C>
Balances, April 30, 1997 216,583 $ 470,966 $2.17
Options granted 257,000 335,500 1.30
Options canceled (3,583) (20,590) 5.75
-------- ---------
Balances, April 30, 1998 470,000 785,876 1.67
Options granted 354,750 464,375 1.31
Options canceled (314,000) (532,976) 1.70
-------- ---------
Balances, April 30, 1999 510,750 $ 717,275 $1.40
======== ========= =====
</TABLE>
The weighted average fair value of options granted during fiscal years 1999
and 1998 was $1.31 and $1.30 per share, respectively.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-
Based Compensation. Accordingly, no
F-27
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Benefit Plans (continued)
compensation cost has been recognized. Had compensation cost for these
option plans been determined based on the fair value at the grant date for
options granted in 1999 and 1998, consistent with the provisions of SFAS
123, the Company's net loss and net loss per share applicable to common
stock for 1999 and 1998 would have been the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
<S> <C> <C>
Net loss applicable to common stock -
as reported $(1,827,968) $(1,168,059)
Net loss applicable to common stock -
pro forma (1,903,724) (1,264,879)
Loss per common share -
as reported (.76) (.72)
Loss per common share -
pro forma $ (.79) $ (.78)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Risk-fee interest 5.0% - 6.0%
Expected life 3 years
Expected volatility 30%
Expected dividend $0
The following table summarizes the stock options outstanding at April 30,
1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ---------------------------------------
Range of Number Weighted Average Number Weighted Average
Exercise Prices Outstanding Exercise Price Exercisable Exercise Price
----------------- -------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
$ 0.88 - 1.00 141,000 $ 1.00 129,000 $ 1.00
1.01 - 1.30 137,500 1.30 115,000 1.30
1.31 - 2.00 201,250 1.50 156,000 1.50
2.01 - 5.13 31,000 3.09 27,000 3.28
------- -------
$ 0.88 - 5.13 510,750 $ 1.40 427,000 $ 1.41
======= =======
</TABLE>
401(k) Plan
On August 1, 1985, the Company established an Employees' Savings Plan (ESP)
for all full-time employees who have at least twelve months of continuous
service and who have attained the age of twenty-one. The Company may make
matching contributions of up to 50% of the participant's contribution, made
via salary reduction arrangements, as described in the ESP. In addition,
the Company may also make an annual contribution from its profits. The
Company made no contributions to the ESP in fiscal 1999 or 1998.
F-28
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Income Taxes
There was no income tax expense attributable to income from operations for
the years ended April 30, 1999 and 1998 due to losses incurred from
operations. The Company's net deferred tax asset for future deductions and
its net operating loss carryforward in excess of future taxable amounts is
offset by a valuation allowance. The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities at April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 2,843,000 $ 2,492,000
Allowance for doubtful accounts 83,000 145,000
Allowance for obsolete inventory 28,000 139,000
Amortization of goodwill 11,000 153,000
Other, net 6,000 16,000
----------- -----------
Total gross deferred taxes 2,971,000 2,945,000
Valuation allowance (1,926,000) (1,900,000)
----------- -----------
Net deferred taxes $ 1,045,000 $ 1,045,000
=========== ===========
</TABLE>
In accordance with the provisions of Internal Revenue Code Section 382,
based upon the Company's change in control resulting from the issuance of
equity securities, utilization of the Company's net operating loss
carryforwards is estimated to be limited. At April 30, 1999 the Company had
aggregate net operating loss carryforwards of approximately $5,808,000 for
income tax purposes, which expire in varying amounts from 2005 through
2013. Generally, these operating losses are available to offset future
federal and state taxable income. The Company expects the utilization of
its net operating loss will be limited to approximately $3,300,000 in
future years.
(13) Certain Risks and Concentrations
The Company is reporting a loss from continuing operations of $1,351,000
for the fiscal year ended April 30, 1999. The Company's operations have
historically been adversely affected by a lack of working capital. The
Company uses a line of credit from a lending institution, which is limited
to the extent of available collateral. The Company's line of credit is
fully utilized to the extent of available collateral at April 30, 1999.
The lack of available funding impedes the Company's ability to fund
additional equipment purchases and to expand its business operations. The
Company sold equity securities during the fiscal year. These proceeds were
used to fund recent operating losses of the Company, to fund the cash
purchase price of the acquisitions completed during 1999, and to repay
certain debt obligations. The Company will need substantial additional
capital in order to have reasonable prospects for achieving its strategic
objective of growth through acquisitions.
The Company currently purchases telephone systems and various peripheral
equipment from several major suppliers. One of the suppliers provides
approximately 85% of the inventory and products purchased by the Company
while offering flexible credit terms. If the Company's relationship with
the supplier was to cease, it could have a significant adverse impact on
the operations of the Company.
F-29
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Certain Risks and Concentrations (continued)
The Company had 63 franchises located in 25 states and three Company-owned
outlets at April 30, 1999. The Company sells its products and services
primarily to franchisees, multi-location customers, and to customers of
Company-owned outlets, generally without requiring any collateral. The
Company maintains adequate allowances for potential credit losses and
performs ongoing credit evaluations. One customer accounted for
approximately 56% and 61% of the Company's direct equipment sales at April
30, 1999 and 1998, respectively.
The Company's products are concentrated in the telephone interconnect
industry, which is highly competitive and rapidly changing. Significant
technological changes in the industry could affect operating results
adversely. The Company's inventories include spare parts and components,
which are specialized in nature and subject to technological obsolescence.
While the Company has programs to minimize the required inventories on hand
and considers technological obsolescence in estimating required allowances
to reduce recorded amounts to market values, such estimates could change in
the future.
(14) Disposal of Operating Subsidiaries
During September, 1998 the Company adopted a formal plan to dispose of its
operating subsidiaries in Alexandria, Virginia, and Phoenix and Tucson,
Arizona. During the Company's fiscal quarter ended January, 1999, the
Company completed the sale of these operating subsidiaries. Each of the
subsidiaries were sold to the original owners of those operations under the
terms of assets sales agreements, respectively.
The Company sold the assets of the Phoenix location for $65,044. In
consideration for the assets acquired, the purchasers assumed certain
liabilities and the purchaser returned 80,088 shares of $1.00 par value
Series B Preferred Stock plus any accumulated and unpaid dividends, and
returned 114,812 shares of $1.00 par value Series F Preferred Stock plus
any accumulated and unpaid dividends.
The Company sold the assets of the Tucson location for $88,250. In
consideration for the assets acquired, the purchasers assumed certain
liabilities and the purchaser returned 83,500 shares of $1.00 par value
Series G Preferred Stock plus any accumulated and unpaid dividends, and
returned 93,000 shares of $1.00 par value Series F Preferred Stock plus any
accumulated and unpaid dividends. The preferred stock was returned at the
rate $.50 per share under the terms of the sale agreement.
The Company sold the assets of the Alexandria location for $57,567. In
consideration for the assets acquired, the purchasers assumed certain
liabilities, executed a promissory note in the amount of $25,000 and the
purchaser returned 65,134 shares of $1.00 par value Series C Preferred
Stock plus any accumulated and unpaid dividends. The preferred stock was
returned at the rate $.50 per share under the terms of the sale agreement.
The Company realized an aggregate loss from the sale of the operating
subsidiaries of approximately $396,000. On a cumulative basis, the
operating subsidiaries reported a net loss of approximately $33,000 and
$289,000 for the years ended April 30, 1999 and 1998, respectively.
F-30
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) Disposal of Operating Subsidiaries (continued)
Net sales of the operating subsidiaries for fiscal 1999 and 1998 were
$667,000 and $957,000, respectively. These amount are not included in net
sales in the accompanying statements of operations. The prior year
financial statements have been restated to conform to the current year
presentation reflecting the sale and disposal of the operating
subsidiaries.
(15) Subsequent Events
During the quarter ending July 31, 1999 the Company received net proceeds
of $212,440 from the sale of Units of Subordinated Convertible Notes and
Common Stock Purchase Warrants. Each Unit consists of a $50,000
Subordinated Convertible Note and 20,000 Warrants. The Notes bear interest
at 8% per annum and are convertible into Common Stock at any time prior to
maturity at $1.50. The Notes mature at the earlier of 36 months from the
date of issue or upon the occurrence of certain other events. The Warrants
are exercisable for a period of five years from the date of issuance at
$.40 per Warrant.
(16) Segment Information
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
131 Disclosures About Segments of an Enterprise and Related Information,
effective May 1, 1998. Reportable segments are based on products and
services, geography, legal structure, management structure, and any other
method in which management disaggregates a company. Based on the
management approach model, the Company has determined its business
operations are classified into two principal reporting segments. Separate
management of each segment is required because each business unit is
subject to different marketing, sales, and implementation strategies.
<TABLE>
<CAPTION>
Reportable Segments
-------------------------------------------------
1 2 All Other Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
External revenue $3,252,787 $5,361,569 $ 248,374 $ 8,862,730
Interest and other revenue 4,447 277,796 4,708 286,951
---------- ---------- ----------- -----------
3,257,234 5,639,365 253,082 9,149,681
Profit 197,344 374,920 (1,923,190) (1,350,926)
Assets 1,807,965 - 3,011,315 4,819,280
</TABLE>
Reportable Segment 1, the Company-owned segment, derives its revenues from
the sales, service and installation of telephone systems to small and
medium sized enterprises with single, multi-state and national locations.
Segment 2, the Company's franchise program segment, derives its revenues
from sales of equipment to franchisees and franchise fees.
F-31
<PAGE>
Independent Auditors' Report
----------------------------
Stockholder
Donaldson & Associates, Inc.
Englewood, Colorado:
We have audited the accompanying balance sheet of Donaldson & Associates, Inc.
as of September 30, 1998, and the related statement of operations and retained
earnings, and cash flow for the year 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit 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 used 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 financial statements referred to above present fairly, in
all material respects, the financial position of Donaldson & Associates, Inc.,
as of September 30, 1998, and the results of its operations and cash flow for
the year then ended, in conformity with generally accepted accounting
principles.
Englewood, Colorado
August 9, 1999
F-32
<PAGE>
Donaldson & Associates, Inc.
Balance Sheet
September 30, 1998
- ------------------------------------------------------------------------------
Assets
------
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 44,962
Investment securities - available for sale 18,022
Trade accounts receivable 221,683
Inventory 85,005
Prepaid expenses 1,940
Deferred tax asset 172
--------
Total current assets 371,784
Property and equipment, net 74,301
Officer advances 48,512
Intangible assets, net 51,241
--------
$545,838
========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 71,758
Income taxes payable 4,026
Accrued expenses, deposits and other liabilities 113,143
----------
Total current liabilities 188,927
Long-term liabilities:
Deferred tax liability 6,059
----------
194,986
----------
Commitments and contingencies (Notes 6, 7 and 9)
Stockholder's equity:
Common stock, no par value, 50,000 shares authorized;
1,000 shares issued and outstanding 1,784
Retained earnings 349,836
Unrealized loss on available for sale securities, net of tax (768)
----------
Total stockholder's equity 350,852
----------
$ 545,838
==========
</TABLE>
F-33
<PAGE>
Donaldson & Associates, Inc.
Statement of Operations and Retained Earnings
For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Direct equipment, installation and service sales $2,238,219
Equipment rentals 71,262
Commissions and other fees 29,425
Interest and other income 7,273
----------
2,346,179
----------
Costs and expenses:
Cost of direct equipment, installation and service sales 1,405,648
Selling, general and administrative 842,724
Legal settlement 31,000
Amortization of intangible assets 11,796
Provision for bad debts 7,873
----------
2,299,041
----------
Income from operations before income taxes 47,138
Income tax expense 10,664
----------
Net income 36,474
Retained earnings beginning of year 313,362
----------
Retained earnings end of year $ 349,836
==========
</TABLE>
F-34
<PAGE>
Donaldson & Associates, Inc.
Statement of Cash Flows
For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 36,474
Adjustments to reconcile to net cash provided by
(used in) operating activities, net of effect of acquisitions:
Depreciation and amortization 39,302
Provision for bad debts 7,873
Loss on disposal of fixed assets 4,957
Changes in operating assets and liabilities:
Trade accounts receivable 43,957
Inventories 26,995
Prepaid expenses (1,940)
Deferred taxes 1,167
Other assets (40,392)
Trade accounts payable (17,127)
Accrued expenses, deposits and other liabilities 544
--------
Net cash provided by operating activities 101,810
--------
Cash flows from investing activities:
Purchase of available for sale securities (940)
Capital expenditures (28,093)
--------
Net cash used in investing activities (29,033)
--------
Cash flows from financing activities:
Net payments under line-of-credit agreement (30,022)
--------
Net cash used financing activities (30,022)
--------
Net increase in cash 42,755
Cash at beginning of the year 2,207
--------
Cash at end of the year $ 44,962
========
Supplemental disclosures of cash flow information:
Interest paid $ 1,788
Income taxes paid $ 3,500
</TABLE>
F-35
<PAGE>
Donaldson & Associates, Inc.
Notes to Financial Statements
- ------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Organization and Nature of Operations
The financial statements presented are those of Donaldson & Associates,
Inc., d.b.a. CommWorld of Denver (the Company). The Company was
incorporated under Colorado law in 1983. Its principal executive offices
are located at 6050 Greenwood Plaza Boulevard, Suite 130, Englewood,
Colorado 80112. The Company is engaged in sales, installation and
maintenance of telephone interconnect equipment.
Revenue Recognition
Revenue from direct equipment, installation and service sales is generally
recognized upon completion of the installation or upon completion of the
service provided by the Company for telephone systems, voice processing
products and related peripherals, since most contracts are completed as of
a period end. For significant projects not complete as of a period end, a
percentage of revenue and expense for the entire project is recognized
based on the estimated percentage of completion.
Use of 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 at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory is valued at the lower of cost (first-in, first-out method) or
estimated market value and includes used and replacement stock items.
Property and Equipment
Property and equipment are reported at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes. Depreciation and amortization expense at
September 30, 1998 was $27,506.
Upon the disposition of assets, the related cost and accumulated
depreciation are removed from the books and the resulting gain or loss is
recognized in the year of disposition.
Allowance for Doubtful Accounts
Bad debts are provided for using the allowance method based on historical
experience and ongoing evaluation of outstanding accounts receivable.
Based on the Company's collection experience, management determined no
allowance for bad debt was necessary for the year ended September 30, 1998.
F-36
<PAGE>
Donaldson & Associates, Inc.
Notes to Financial Statements
- ------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Equipment Rentals
The Company leases equipment under month-to-month operating lease terms.
Rental income is recognized upon receipt.
Intangible Assets
The excess of the consideration paid over the fair value of net assets
acquired has been recorded as goodwill.
Non-compete agreements associated with business acquisitions are amortized
over the term of the agreement.
Franchise and customer base acquisition costs are amortized on a straight
line basis over ten years.
Long-lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets based upon the estimated future cash flows from the related asset.
Impairment would be recognized in operations if permanent diminution in
value occurs.
Income Taxes
The Company provides for income taxes using the asset and liability method
as prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less
cash equivalents.
(2) Investment Securities
The Company's investments in marketable equity securities are held for an
indefinite period and are classified as available for sale. The fair value
of these securities at September 30, 1998 was $18,022. Gross unrealized
holding losses associated with these securities were $940 at September 30,
1998.
F-37
<PAGE>
Donald & Associates, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(3) Property and Equipment
Property and equipment consists of the following at September 30, 1998:
<TABLE>
<CAPTION>
Estimated
useful life
-----------
<S> <C> <C>
Furniture, fixtures and equipment 3-10 $120,788
Rental property 5 56,053
Vehicles 5 15,201
--------
192,042
Accumulated depreciation 117,741
--------
Property and equipment, net $ 74,301
========
</TABLE>
(4) Intangible Assets
Intangible assets consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
Amortization
period
-----------------
<S> <C> <C>
Franchise and customer base 10 years $118,000
Non-compete agreements 5 years 7,000
Goodwill - 5,000
--------
130,000
Accumulated amortization 78,759
--------
Intangible assets, net $ 51,241
========
</TABLE>
(5) Revolving Line of Credit
The Company entered into a revolving line of credit agreement with a bank
in September, 1997. The revolving line of credit permits the Company to
borrow up to $250,000. Interest, at the bank's reference rate plus .75% per
annum, is due monthly. The revolving line of credit is collateralized by
substantially all of the assets of the Company and matured in October,
1998. The Company renewed the line of credit agreement under substantially
the same terms as the original agreement. The new line of credit matures in
October, 1999. At September 30, 1998 there were no outstanding borrowings
on the line of credit.
(6) Commitments
Operating Leases
The Company leases is primary office facilities under a non-cancelable
operating lease expiring in October, 1998. The lease was subsequently
renewed and expired in May, 1999. Future minimum lease payments for the
operating lease are $53,800 at September 30, 1998.
Aggregate rental expense under the operating lease was $43,924 for fiscal
1998.
F-38
<PAGE>
Donald & Associates, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(6) Commitments (continued)
Simple-IRA Plan
During fiscal 1998, the Company established a Savings Incentive Match Plan
for Employees of Small Employers (SIMPLE) for all employees who are
reasonably expected to receive at lease $5,000 in compensation during the
calendar year. The Company is required to make matching contributions equal
to an employee's salary reduction contribution not to exceed 3% of the
employee's compensation. The Company made contributions of $7,020 to the
SIMPLE during fiscal 1999.
(7) Litigation
The Company was a party in a civil action for wrongful termination in
fiscal 1998. The case was settled in June, 1999. The Company recorded
$31,000 at September 30, 1998 for settlement of the case.
(8) Income Taxes
The components of income tax expense at September 30, 1998 are as follows:
Current
Federal $ 7,030
State 2,467
-------
9,497
-------
Deferred
Federal 957
State 210
-------
1,167
-------
$10,664
=======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
Short Term Long Term
---------- ---------
<S> <C> <C>
Unrealized loss on available for sale securities $ 172
Depreciation $ 6,059
</TABLE>
(9) Certain Risks and Concentrations
The Company's products are concentrated in the telephone interconnect
industry, which is highly competitive and rapidly changing. Significant
technological changes in the industry could affect operating results
adversely. The Company's inventories include spare parts and components,
which are specialized in nature and subject to technological obsolescence.
F-39
<PAGE>
Donald & Associates, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(10) Subsequent Events
During April, 1999, the Company was acquired by IAC Acquisition
Corporation, a wholly-owned subsidiary of Communications World
International, Inc. (CommWorld). The Company received $550,000 in cash and
promissory notes in the amount of $700,000. The notes are convertible into
common stock of CommWorld at the option of the holder on the basis of $1
per share for $250,000 of the notes and at a 10% discount of market value
for the remaining $450,000 of notes. In connection with the transaction the
principals of the Company entered into employment and non-compete
agreements with the Company. The employment agreements range from one to
five years and call for the principals, among other things, to receive
their regular salaries during the term of the agreements.
F-40
