<PAGE>
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
_______________________________
COMMUNICATIONS WORLD INTERNATIONAL, INC.
-------------------------------------------
(Name of Small Business Issuer in its Charter)
Colorado 84-0917382
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7315 S. Revere Parkway, Suite 602, Englewood, Colorado 80112
- ------------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(303) 721-8200
----------------------------------------------
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
------------------------------------
(Title of class)
<PAGE>
PART I
Item l. Description of Business
-----------------------
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
-2-
<PAGE>
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. Effective September 30, 1999, the Company acquired Willpower,
Inc. D/B/A/ RMS Communications (RMS) in Arlington, Texas. The operations of RMS
will be continued as part of the operations of the Company. The Company
acquired inventory of approximately $66,000 and fixed assets with a net book
value of approximately $14,000. The Company issued 185,000 shares of common
stock, at the market price of $1.34 per share on the date of closing; notes
payable of $150,000 with interest at 7% per annum, payable quarterly beginning
December 31, 1999 and principal payments of $50,000 payable quarterly beginning
September 30, 1999; and cash of $225,000. RMS provides communications solutions
to businesses in the Dallas/Ft. Worth metropolitan area.
Franchise Program
- -----------------
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
-3-
<PAGE>
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.
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
- -----------
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
-4-
<PAGE>
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 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
- --------------
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
- ----------
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
- ---------
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
- --------------------------------------------------------------
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,
-5-
<PAGE>
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 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
- ----------------------------------------------------------
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
- ------------------------------------------------------
The Company's operations have historically been adversely affected by a lack of
working capital. The
-6-
<PAGE>
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 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 three months ended September 30, 1999 the Company received net
proceeds of $1,100,000 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 for a purchase price of $50,400. 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 September 30,
2002 or upon the occurrence of certain other events. The Warrants are
exercisable until September 30, 2004 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
- ---------------------
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
- ----------------------------
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
-7-
<PAGE>
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 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
- ----------------------------------------------------
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
- ---------------------------------------------
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
- ---------------------------
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
-8-
<PAGE>
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.
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
- ------------------------------------------------
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
-9-
<PAGE>
debt service obligations.
Consideration for Operating Companies May Substantially Exceed Asset Value
- --------------------------------------------------------------------------
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 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
- ------------------------------------
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
- ------------------------------
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
- ------------------
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.
-10-
<PAGE>
Competition for Acquisitions
- ----------------------------
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 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
- -------------------------
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 October 8, 1999, the closing bid price of the Company's Common Stock
was $1.28 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
- -------------------------------------------------------------------------------
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.
-11-
<PAGE>
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. 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.
-13-
<PAGE>
For the Year Ended April 30, 1999
- ---------------------------------
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
-14-
<PAGE>
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 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 previous year. The lower gross revenue accounted for approximately
$543,000 of the decrease in gross
-15-
<PAGE>
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 fiscal
1998 were $168,000 compared to an operating loss of $171,000 for fiscal 1997.
The estimated loss
-16-
<PAGE>
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
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
-17-
<PAGE>
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 changes in the
lender's operations and that the lender will not renew the financing
arrangement. A representative of the lender has assured the Company that it
will be extended for a reasonable time to allow the Company to obtain
another financing source. The Company is currently in discussions with
several lenders and believes that it will be able to replace
-18-
<PAGE>
the current agreement. The amount of credit available under the financing
arrangement at October 8, 1999, was $390,399. 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.
(C) Beginning in July 1999 the Company has undertaken the sale of Units of
Subordinated Convertible Notes and Warrants with each Unit consists of a
$50,000 Note and 20,000 Warrants for a purchase price of $50,400 The notes
bear interest at 8% per annum and are convertible into common stock at $1.50
per share. The Notes mature September 30, 2002 or earlier if the Company
raises equity financing in excess of $4,000,000 or merges into another
company and the shareholders of the Company receive a minimum of
$10,000,000. The Warrants are exercisable at $.40 per share until September
30, 2004. As of September 30, 1999, the Company had received net proceeds of
approximately $1,100,000. Of the proceeds received, approximately $250,000
is anticipated to be used for working capital with the balance to be used to
fund acquisitions consistent with the strategic goals of the Company.
Based on the sale of equity securities in the past two fiscal years, the
proceeds from the sale of notes and the credit extended to the Company by its
major suppliers, 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
-19-
<PAGE>
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, 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.
-21-
<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
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 subsequently 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.
In making the determination for the Company to proceed with the merger, the
Board of Directors considered the fairness opinion of Century Capital as well as
its evaluation of the strategic plan of expansion of IAC and IAC's measures to
implement the plan, which included not only letters of intent to acquire
specific companies, but also evaluations of other companies targeted for
acquisition, establishment of a program to integrate those acquisitions and the
assembly of a qualified management team. The Board also concluded that the
Company's prospects for future financing would be enhanced substantially by the
merger.
The Board made its evaluation over a period of approximately five months and
concluded that the consideration paid was reasonable based upon the foregoing
factors, as well as its evaluation of the Company's prospects had the merger not
been completed. The fairness determination was not based on completion of the
specifically identified acquisition targets, as the Board concluded that the
Company's prospects for completing one or more of the specifically identified
targets were good, and that the Company's prospects were favorable for
completing acquisitions of other companies that were comparable to the
specifically identified acquisitions. In making its fairness determination, the
Board did not consider the completion of any specifically identified target as
being a significant factor in concluding the merger.
Mr. Ciccarelli abstained from voting on the merger proposal. The remaining
directors of the Company who considered and unanimously approved the transaction
were Messrs. Addoms and Corboy. Mr. Ciccarelli became Chief Executive Officer
of the Company in July 1998 prior to the completion of the merger in October
1998. Based on its preliminary evaluation of the desirability of the merger and
the need to proceed with the business plan designed by IAC, the Board had
determined to elect Mr. Ciccarelli as Chief Executive Officer prior to
completion of the merger. Mr. Ciccarelli was retained on an at-will basis and
had the merger not been completed either the Company or Mr. Ciccarelli could
have terminated Mr. Ciccarelli's employment and officer relationship with 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. Beginning in
July 1999 the Company
-28-
<PAGE>
has undertaken the sale of Units of Subordinated Convertible Notes and Warrants.
Mr. Bathgate and Mr. McColley purchased 2 and 1 units, respectively. Each unit
consists of a $50,000 Subordinated Convertible Note and 20,000 Warrants for a
purchase price of $50,400. BMCG has sold an aggregate of $1,171,800 in debt and
warrants. The Company has paid BMCG a commission of $70,308 and issued warrants
to purchase 116,250 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.
-29-
<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
-30-
<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.
-31-
<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
and the first quaarter of the fiscal year ending April, 30, 2000. 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.
Common Stock
------------
Quarter Ended High Low
- --------------------------- ----- -----
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 October 8, 1999) 1.44 1.06
There were approximately 277 holders of record of the Common Stock as of
September 30, 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.
-32-
<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.
-33-
<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.
Beginning in July 1999 the Company commenced an offering of Units of
Subordinated Convetible Notes and Warrants. Each Unit consists of a $50,000
Note and 20,000 Warrants for a purchase price of $50,400. The Note is
convertible into Common Stock at $1.50 per share. The Warrants are exercisable
at $.40 per share until September 30, 2004. As of September 30, 1999, the
Company had received net proceeds of approximately $1,100,000 from the sale to
30 persons, all of whom were accredited investors. The Company paid $70,308 to
the placement agent, Bathgate, McColley Capital Corp, LLC, as a commission and
issued placement agent warrants for the purchase of 116,250 shares of common
stock exercisable for five years at $1.00 per share. The Company relied on
Sections 4(2) and 3(b) of the Securities Act and Regulation D in connection with
these transactions.
-34-
<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.
-35-
<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.
(f) Merger Agreement dated September 30, 1999 by and among CommWorld
Acquisition Corporation, Willpower, Inc. D/B/A/ RMS Communications,
and Pierre Miossec
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
-36-
<PAGE>
(a) Certificate of Designation establishing Series C Preferred Stock
filed with Amendments to Articles of Incorporation in 3(a) above.
(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.
-37-
<PAGE>
(k) 1998 Stock Incentive Plan.
(l) 1999 Non-discretionary stock option plan.
-38-
<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: October 11, 1999
COMMUNICATIONS WORLD INTERNATIONAL, INC.
(a Colorado Corporation)
By: /s/ James M. Ciccarelli
-------------------------
James M. Ciccarelli, Chief Executive Officer
-39-
<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
Condensed Financial Statements of Donaldson &
Associates, Inc. for the Six Months Ended March 31, 1999
(unaudited)
Balance Sheet F-41
Statement of Operations and Retained Earnings F-42
Statement of Cash Flows F-43
Notes to Financial Statements F-44-46
Pro Forma Condensed Statement of Operations for the Year
Ended April 30, 1999 (unaudited) pertaining to the
acquisition of Donaldson & Associates, Inc. F-47-48
Pro Forma Condensed Financial Statements for the
Year Ended April 30, 1999 (unaudited) pertaining to the
acquisition of Willpower, Inc. D/B/A/ RMS Communications F-49-52
-40-
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
For the Three Months Ended July 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
- ------
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
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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 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.
(3) Subsequent Event
Effective September 30, 1999, the Company acquired Willpower, Inc. D/B/A/
RMS Communications (RMS) in Arlington, Texas. The operations of RMS will
be continued as part of the operations of the Company. The Company
acquired inventory of approximately $66,000 and fixed assets with a net
book value of approximately $14,000. The Company issued 185,000 shares of
common stock, at the market price of $1.34 per share on the date of
closing; notes payable of $150,000 with interest at 7% per annum, payable
quarterly beginning December 31, 1999 and principal payments of $50,000
payable quarterly beginning September 30, 1999; and cash of $225,000.
F-4
<PAGE>
Communications World International, Inc.
and Subsidiaries
Notes to Consolidated 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.
Levine, Hughes & Mithuen, Inc.
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 1999
------ --------------------- --------------------
<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
finanacial 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 Operations 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
income tax benefit of $260,000 in 1998 (396,281) (400,000)
----------- -----------
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 Statement of Stockholders' 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 Cash Flows
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>
F-10
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------------ -------------------
Supplemental disclosures of cash flow information:
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:
1999 1998
-------- --------
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
======== ========
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 was required to make 60 equal installments of $29,598, including
interest at 6% per annum, commencing in February 1996. Additional
provisions of the Note agreement provided for principal reductions based on
the Company's net operating cash flows. The Note is personally guarantee
by the Company's former president, however, the Company has indemnified its
former president relative to this guarantee.
During August, 1997, TAIS modified the terms of the Note to a non-interest
bearing obligation, provided the monthly payments of $29,598 continued in a
timely manner.
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:
Franchised Company-owned
outlets Outlets
---------- -------------
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
----------------------- ==== ====
(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 - $ -
======= ======== ======= ======== ======== ========= ======= ========
</TABLE>
<TABLE>
<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
-------------------------------------------------
<S> <C> <C> <C> <C>
1 2 All Other Total
---------- ---------- ----------- -----------
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.
Levine, Hughes & Mithuen,Inc.
Englewood, Colorado
August 9, 1999
F-32
<PAGE>
Donaldson & Associates, Inc.
Balance Sheet
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
------
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>
The accompanying notes are an integral part of the financial statements.
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>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
Donaldson & Associates, Inc.
Statement of Cash Flows
For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
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>
The accompanying notes are an integral part of the financial statements.
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>
Donaldson & Associates, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(3) Property and Equipment
Property and equipment consists of the following at September 30, 1998:
Estimated
useful life
-----------
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
========
(4) Intangible Assets
Intangible assets consist of the following at September 30, 1998:
Amortization
period
------------
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
========
(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>
Donaldson & 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:
Short Term Long Term
---------- ---------
Unrealized loss on available for sale securities $ 172
Depreciation $ 6,059
(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>
Donaldson & 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
<PAGE>
Donaldson & Associates, Inc.
Balance Sheet (unaudited)
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
- ------
Current assets:
<S> <C>
Cash and cash equivalents $ 39,091
Investment securities - available for sale 19,436
Trade accounts receivable 314,768
Inventory 83,195
Prepaid expenses and other 5,735
--------
Total current assets 462,225
Property and equipment, net 95,968
Officer advances 48,512
Intangible assets, net 44,491
--------
$651,196
========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Trade accounts payable $ 95,434
Income taxes payable 36,500
Accrued expenses, deposits and other liabilities 96,448
--------
Total current liabilities 228,382
Long-term liabilities:
Deferred tax liability 6,059
--------
234,441
--------
Commitments and contingencies (notes 6 and 7)
Stockholder's equity:
Common stock, no par value, 50,000 shares authorized;
1,000 shares issued and outstanding 1,784
Retained earnings 415,739
Unrealized loss on available for sale securities, net of tax (768)
--------
Total stockholder's equity 416,755
--------
$651,196
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
Donaldson & Associates, Inc.
Statement of Operations and Retained Earnings (Unaudited)
For the Six Month Period Ended March 31, 1999
- --------------------------------------------------------------------------------
Revenue:
Direct equipment, installation and service sales $1,274,357
Equipment rentals 28,190
Commissions and other fees 18,604
Interest and other income 170
----------
1,321,321
----------
Costs and expenses:
Cost of direct equipment, installation and service sales 706,777
Selling, general and administrative 505,391
Amortization of intangible assets 6,750
----------
1,218,918
----------
Income from operations before income taxes 102,403
Income tax expense 36,500
----------
Net income 65,903
Retained earnings beginning of year 349,836
----------
Retained earnings end of year $ 415,739
==========
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
Donaldson & Associates, Inc.
Statement of Cash Flows (Unaudited)
For the Six Months Ended March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net income $ 65,903
Adjustments to reconcile to net cash provided by
(used in) operating activities, net of effect of acquisitions:
Depreciation and amortization 35,350
Changes in operating assets and liabilities:
Trade accounts receivable (93,085)
Inventories 1,810
Prepaid expenses and other current assets (3,623)
Trade accounts payable 23,676
Income taxes payable 32,474
Accrued expenses, deposits and other liabilities (16,695)
--------
Net cash provided by operating activities 45,810
--------
Cash flows from investing activities:
Purchase of available for sale securities (1,414)
Capital expenditures (50,267)
--------
Net cash used in investing activities (51,681)
--------
Net decrease in cash (5,871)
Cash at beginning of the year 44,962
--------
Cash at end of the year $ 39,091
========
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,026
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
Donaldson & Associates, Inc.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(1) Condensed Financial Statements
The financial statements included herein have been prepared by Donaldson &
Associates, Inc., d.b.a. CommWorld of Denver (the Company) without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been omitted as allowed by such rules and
regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the Company's annual
consolidated financial statements dated September 30, 1998. While
management believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are, in some
respects, dependent upon the facts that will exist, and procedures that
will be accomplished by the Company later in the year.
The management of the Company believes that the accompanying unaudited
condensed financial statements prepared in conformity with generally
accepted accounting principles, which require the use of management
estimates, contain all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for the period
presented.
(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 March 31, 1999 was $19,436. Gross unrealized
holding losses associated with these securities were approximately $900 at
March 31, 1999.
(3) Property and Equipment
Property and equipment consists of the following at March 31, 1999:
Estimated
useful life
-----------
Furniture, fixtures and equipment 3-10 $126,251
Rental property 5 56,053
Vehicles 5 60,005
--------
242,309
Accumulated depreciation 146,341
--------
Property and equipment, net $ 95,968
========
F-44
<PAGE>
Donaldson & Associates, Inc.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(4) Intangible Assets
Intangible assets consist of the following at March 31, 1999:
Amortization
period
------------
Franchise and customer base 10 years $118,000
Non-compete agreements 5 years 7,000
Goodwill - 5,000
--------
130,000
Accumulated amortization 85,509
--------
Intangible assets, net $ 44,491
========
(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 March 31, 1999, there were no outstanding borrowings
on the line of credit.
(6) Commitments
Operating Leases
The Company leases its primary office facilities under a non-cancelable
operating lease expiring in October 1998. The lease was subsequently
renewed and expired in August 1999. Future minimum lease payments for the
operating lease are $13,450 at March 31, 1999.
Aggregate rental expense under the operating lease was $37,869 for the six
months ended March 31, 1999.
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 $2,920 to
the SIMPLE during the six months ended March 31, 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.
F-45
<PAGE>
Donaldson & Associates, Inc.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(8) Income Taxes
The components of income tax expense at March 31, 1999 are as follows:
Current
Federal $29,500
State 7,000
-------
$36,500
=======
F-46
<PAGE>
Pro Forma Condensed Statement of Operations (unaudited)
The following pro forma summary financial information has been prepared giving
effect to the acquisition of Donaldson & Associates, Inc. as if the transaction
had taken place at May 1, 1998 for the pro forma condensed consolidated
statement of operations for the year ended April 30, 1999.
The acquisition has been accounted for as a purchase.
The pro forma financial information is not necessarily indicative of the results
of operations which would have been attained had the acquisition been
consummated at the foregoing date or which may be attained in the future. The
pro forma financial information should be read in conjunction with the
historical consolidated financial statements of the Communications World
International, Inc.
F-47
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statements of Operations (unaudited)
For the Year Ended April 30, 1999
<TABLE>
<CAPTION>
Historical Financial
Statements
----------------------------------- Pro Forma
April 30, September 30, Consolidated
1999 1998 Pro forma Financial
CommWorld Donaldson Adjustments Statement
---------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Franchise equipment sales $ 5,361,569 $ 5,361,569
Direct equipment and service sales 3,505,436 $2,238,219 5,743,655
Other revenue 282,676 107,960 390,636
------------ ---------- ------------
Total revenue 9,149681 2,346,179 11,495,860
------------ ---------- ------------
Costs and expenses:
Cost of franchise equipment sales 4,759,150 4,759,150
Cost of direct equipment and service sales 2,325,227 1,405,648 3,730,875
Selling, general and administrative 2,991,600 842,724 3,834,324
Interest Expense 253,883 $ 47,250 a 301,133
Other expense 170,747 50,669 56,750 b 278,166
------------ ---------- ------------
10,500,607 2,299,041 12,903,648
------------ ---------- ------------
(1,350,926) 47,138 (1,407,788)
Income tax expense - 10,664 (10,664) c -
------------ ---------- ------------
Income (loss) from continuing operations (1,350,926) 36,474 (1,407,788)
Loss from discontinued operations (429,333) - (429,333)
------------ ---------- ------------
Net income (loss) (1,780,259) 36,474 (1,837,121)
------------ ----------
Cumulative dividend on preferred stock 47,709 - 47,709
------------ ---------- ------------
Net income (loss) applicable to common stock ($1,827,968) $ 36,474 ($1,884,830)
==========
Loss per share:
Basic:
Loss from continuing operations $ (.56) $ (.58)
============ ============
Net Loss $ (.76) $ (.76)
============ ============
Diluted:
Loss from continuing operations $ (.56) $ (.58)
============ ============
Net Loss $ (.76) $ (.76)
============ ============
Weighted average number of common shares
outstanding
Basic: 2,409,816 2,409,816
------------ ------------
Diluted: 4,184,593 4,184,593
------------ ------------
</TABLE>
a. Interest expense calculated at 7% representing the amount due on notes
issued to sellers assuming a May 1, 1998 sale date.
b. Amortization of goodwill on a straight-line basis over twenty years.
c. Elimination of income tax expense, assuming that the losses of the Company
would offset the liability.
F-48
<PAGE>
Communications World International, Inc.
Pro Forma Condensed Consolidated Financial Statements
The following pro forma summary financial information have been prepared giving
effect to the acquisition of Willpower, Inc. as if the transaction had taken
place at May 1, 1998 for the pro forma condensed consolidated balance sheet and
for the year ended April 30, 1999 for the pro forma condensed consolidated
income statement.
The acquisition has been accounted for as a purchase. The carrying values of
assets acquired have been estimated to approximate fair market value.
Accordingly, no pro forma adjustments to these amounts were made to reflect an
allocation of the purchase price.
The pro forma financial information is not necessarily indicative of the results
of operations or the financial position which would have been attained had the
acquisition been consumated at the foregoing date or which may be attained in
the future. The pro forma financial information should be read in conjunction
with the historical consolidated financial statements of the Company is
presented for informational purposes only and does not purport to be indicative
of the financial condition that actually would have resulted if the acquisition
had occurred at May 1, 1998.
F-49
<PAGE>
Communications World International, Inc.
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
April 30, 1999
<TABLE>
<CAPTION>
Historical Financial
Statements
------------------------------------
April 30, December 31, Pro Forma
1999 1998 Consolidated
---------------- ---------------- Pro Forma Financial
CommWorld RMS Adjustments Statement
---------------- ---------------- --------------- ----------------
ASSETS
- ------
Current assets:
<S> <C> <C> <C> <C> <C>
Cash $ 57,118 $ 40,119 ($40,119) (B) $ 57,118
Trade accounts and current portion of
notes receivable 1,353,223 184,336 (184,336) (B) 1,353,223
Inventories 331,696 66,514 398,210
Other current assets 46,228 - 46,228
---------- -------- ----------
Total current assets 1,788,265 290,969 1,854,779
Property and equipment, net 263,775 13,803 277,578
Deposits and other assets 73,875 2,442 (2,442) (B) 73,875
Notes receivable 1,006,037 1,006,037
Intangible assets, net 1,687,328 622,900 (A) 2,202,782
(80,317) (B)
- - (27,129) (C) -
---------- -------- ----------
Total $4,819,280 $307,214 $5,415,051
========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
<S> <C> <C> <C> <C> <C>
Trade accounts payable $ 1,817,103 $ 89,545 ($89,545) (B) $1,817,103
Revolving line of credit 496,753 496,753
Current portion of notes payable 766,219 766,219
Accrued expenses and other 374,916 61,654 (61,654) (B) 404,916
- - 30,000 (D) -
----------- -------- -----------
Total current liabilities 3,454,991 151,199 4,287,816
Notes payable and other 427,825 116,227 (116,227) (B) 802,825
- - 375,000 (A) -
----------- -------- -----------
Total liabilities 3,882,816 267,426 4,287,816
----------- -------- -----------
Stockholders' equity:
Convertible preferred stock 586,363 586,363
Common stock 7,120,812 1,000 (1,000) (B) 7,120,812
Additional paid-in capital 551,429 247,900 (A) 799,329
Accumulated deficit (7,322,140) 38,788 (38,788) (B) (7,379,269)
- - (57,129) (C&D) -
----------- -------- -----------
Total stockholders' equity 936,464 39,788 1,127,235
----------- -------- -----------
$ 4,819,280 $307,214 $5,415,051
=========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-50
<PAGE>
Communications World International, Inc.
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
For the Year Ended April, 30 1999
<TABLE>
<CAPTION>
Historical Financial
Statements
----------------------------------- Pro Forma
April 30, December 31, Consolidated
1999 1998 Pro forma Financial
CommWorld RMS Adjustments Statements
---------------- --------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Franchise equipment sales $ 5,361,569 $ 5,361,569
Direct equipment and service sales 3,505,436 $2,349,485 5,854,921
Other revenue 282,676 - 282,676
------------ ---------- ------------
Total revenue 9,149681 2,349,485 11,499,166
------------ ---------- ------------
Costs and expenses:
Cost of franchise equipment sales 4,759,150 4,759,150
Cost of direct equipment and service 2,325,227 1,165,748 3,490,975
sales
Selling, general and administrative 2,991,600 1,061,429 4,053,029
Interest Expense 253,883 $30,000 (D) 283,883
Other expense 170,747 - 27,129 (C) 197,876
------------ ---------- ------------
10,500,607 2,227,177 12,784,913
------------ ---------- ------------
Income (loss) from continuing operations (1,350,926) 122,307 (1,285,748)
Loss from discontinued operations (429,333) - (429,333)
------------ ---------- ------------
Net income (loss) (1,780,259) 122,307 (1,715,081)
------------ ----------
Cumulative dividend on preferred stock 47,709 - 47,709
------------ ---------- ------------
Net income (loss) applicable to common stock
($1,827,968) $ 122,307 ============
========== ($1,762,748)
Loss per share:
Basic:
Loss from continuing operations $ (.56) $ (.53)
============ ============
Net Loss $ (.76) $ (.71)
============ ============
Diluted:
Loss from continuing operations $ (.56) $ (.53)
============ ============
Net Loss $ (.76) $ (.71)
============ ============
Weighted average number of common shares
outstanding
Basic: 2,409,816 2,409,816
------------ ------------
Diluted: 4,184,593 4,184,593
------------ ------------
</TABLE>
F-51
<PAGE>
Communications World International, Inc.
Notes to Pro Forma Condensed Financial Statements (unaudited)
April, 30 1999
(A) On September 30, 1999 Communications World International, Inc. (the
Company) acquired Willpower, Inc. D/B/A/ RMS Communications, Inc (RMS) for
approximately $622,900. The purchase price was comprised of cash of
$225,000, notes from purchaser of $150,000 and 185,000 shares of Common
Stock.
(B) All of the assets of RMS except inventory and fixed assets will be
liquidated and the proceeds net of all liabilities will be paid to the
sellers.
(C) Amortization of goodwill over 20 years.
(D) Accured interest on acquisition debt at 8% per annum.
F-52
<PAGE>
Communications World International, Inc.
Form 10-SB/A
Exhibit 2 (f)
MERGER AGREEMENT
BY AND AMONG
COMMWORLD ACQUISITION CORPORATION,
WILLPOWER, INC. D/B/A RMS COMMUNICATIONS,
AND PIERRE MIOSSEC
Dated as of September 30, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. DEFINITIONS......................................................... 1
1.1 General Definitions................................................. 1
2. MERGER.............................................................. 5
2.1 Terms of Merger..................................................... 5
(a) Merger; Surviving Company........................................ 5
(b) The Effective Date and Time...................................... 5
2.2 Purchase Price and Terms............................................ 5
2.3 Merger Certificates................................................. 6
2.4 Further Assurances.................................................. 6
(a) Assumed Contracts and Assumed Payables........................... 6
(b) Adjustment Period................................................ 7
(c) Payment to Seller................................................ 7
(d) Deduction from Note.............................................. 8
(e) Other Accounts................................................... 8
3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER................... 8
3.1 Transfer of and Title to Stock...................................... 8
3.2 Organization; Qualification......................................... 8
3.3 Authority Relative to this Agreement................................ 8
3.4 Capitalization...................................................... 9
3.5 Consents and Approvals.............................................. 9
3.6 No Violations....................................................... 9
3.7 Title to and Condition of Assets and Property....................... 10
3.8 Inventory........................................................... 10
3.9 Distributors and Suppliers.......................................... 10
3.10 Product Warranties.................................................. 10
3.11 Investigation or Litigation......................................... 10
3.12 Taxes............................................................... 11
3.13 No Brokers.......................................................... 11
3.14 Accounts............................................................ 11
3.15 Insurance........................................................... 11
3.16 Contracts; Oral Commitments; Defaults............................... 11
3.17 Corporate Matters................................................... 12
3.18 Permits............................................................. 12
3.19 Compliance with Laws................................................ 12
3.20 Corporate Name...................................................... 12
3.21 Disclosure.......................................................... 12
3.22 Employee Matters.................................................... 12
3.23 Plans............................................................... 13
3.24 Transactions with Affiliates........................................ 14
3.25 Financial Statements................................................ 14
3.26 Undisclosed Liabilities............................................. 14
3.27 Leases.............................................................. 14
3.28 Real Property....................................................... 14
3.29 Environmental Matters............................................... 15
(a) Compliance Generally............................................. 15
(b) Claims........................................................... 15
(i)
<PAGE>
(c) Certain Environmental Liabilities................................ 15
(d) Operations....................................................... 15
(e) Liability for Others............................................. 15
3.30 Intellectual Property............................................... 15
3.31 Bank Accounts and Powers of Attorney................................ 16
3.32 Knowledge of Shareholder............................................ 16
3.33 Inspection Does Not Affect Warranties............................... 16
3.34 Rights and Assets................................................... 16
3.35 Absence of Certain Changes.......................................... 16
3.36 Books and Records................................................... 17
3.37 Understanding that CWII Shares Will Be Issued Without Registration.. 17
(a) Investment Intent................................................ 18
(b) Investor Awareness............................................... 18
3.38 Receipt of Information; Access to Information....................... 18
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER........................... 19
4.1 Organization......................................................... 19
4.2 Authority Relative to this Agreement................................. 19
4.3 Consents and Approvals............................................... 19
4.4 No Brokers........................................................... 19
5. ADDITIONAL AGREEMENTS................................................. 20
5.1 Conduct of the Company............................................... 20
5.2 Forbearances by Shareholder.......................................... 20
5.3 No Solicitation...................................................... 21
5.4 Investigation of the Company......................................... 21
5.5 Agreement to Consummate.............................................. 22
5.6 Approval of Third Parties............................................ 22
5.7 Agreement Regarding Brokers.......................................... 22
5.8 Notice............................................................... 22
5.9 Disclosure Schedules................................................. 23
5.10 Filings............................................................. 23
5.11 Taxes............................................................... 23
6. CONDITIONS PRECEDENT TO CLOSING....................................... 24
6.1 General Conditions................................................... 24
(a) No Injunction.................................................... 24
(b) Proceedings...................................................... 24
(c) Noncompetition and Employment Agreement.......................... 24
(d) Audited Financials............................................... 24
6.2 Conditions to Closing in Favor of Shareholder........................ 24
(a) Representations and Warranties of Purchaser...................... 24
(b) Purchaser's Officers' Certificate................................ 25
(c) Governmental Consents, Authorizations, Etc....................... 25
(d) Closing Consideration............................................ 25
6.3 Conditions to Closing in Favor of Purchaser.......................... 25
(a) Representations and Warranties of Shareholder.................... 25
(b) Governmental Consents, Authorizations, Etc....................... 25
(c) Shareholder Release.............................................. 25
(d) Shareholder's Certificate........................................ 26
(e) Opinion of Counsel............................................... 26
(f) Legislation...................................................... 26
(g) Litigation....................................................... 26
(h) No Adverse Change................................................ 26
(ii)
<PAGE>
(i) Delivery of Documents/Acceptance of Disclosure Schedules........ 26
(j) Third Party Consents............................................ 26
(k) Purchaser's Investigation....................................... 26
(l) Approval........................................................ 26
(m) Certificate of Authorities...................................... 27
(n) Corporate Records and Books of Account.......................... 27
(o) Bank Accounts................................................... 27
(p) Loan Commitment................................................. 27
(q) Certificate of Merger........................................... 27
(r) Subscription Agreement.......................................... 27
(s) Pledge Agreement................................................ 27
(t) Other Matters................................................... 27
7. CLOSING AND TERMINATION.............................................. 28
7.1 Closing Date........................................................ 28
7.2 Termination......................................................... 28
7.3 Effect of Termination............................................... 28
7.4 Extension; Waiver................................................... 28
8. SURVIVAL AND INDEMNIFICATION......................................... 29
8.1 Survival of Representations and Warranties.......................... 29
8.2 Indemnity........................................................... 29
8.3 Indemnification Notice.............................................. 30
8.4 Offset.............................................................. 30
9. GENERAL PROVISIONS AND OTHER AGREEMENTS.............................. 31
9.1 Notices............................................................. 31
9.2 Fees and Expenses................................................... 32
9.3 Interpretation...................................................... 32
9.4 Counterparts........................................................ 32
9.5 Miscellaneous....................................................... 32
9.6 Publicity........................................................... 33
9.7 Invalid Provisions.................................................. 33
9.8 Binding Effect...................................................... 33
9.9 Captions............................................................ 33
9.10 Attorneys' Fees..................................................... 33
9.11 Jurisdiction and Venue.............................................. 33
9.12 Assignability....................................................... 34
9.13 Entirety............................................................ 34
9.14 Amendment........................................................... 34
9.15 Governing Law....................................................... 34
LIST OF EXHIBITS
Exhibit A - Form of Employment and Noncompetition Agreement
Exhibit B - Form of Subordinated Note
Exhibit C - Form of Shareholder Release
Exhibit D - Form of Opinion of Counsel
Exhibit E - Form of Subscription Agreement
Exhibit F - Form of Pledge Agreement
(iii)
<PAGE>
LIST OF SCHEDULES
Schedule 2.5(a)(1) Assumed Contracts
Schedule 2.5(a)(2) Assumed Payables
Schedule 2.5(a)(3) Liabilities Paid at Closing
Schedule 3.4 Capitalization
Schedule 3.5 Consents and Approvals
Schedule 3.7 Title to and Condition of Assets
Schedule 3.8 Inventory
Schedule 3.9 Distributors and Suppliers
Schedule 3.10 Express Product Warranties and Guaranties
Schedule 3.11 Investigation or Litigation
Schedule 3.14 Accounts
Schedule 3.15 Insurance
Schedule 3.16 Contracts
Schedule 3.18 Permits
Schedule 3.22 Employee Matters
Schedule 3.23 Plans
Schedule 3.24 Transactions with Affiliates
Schedule 3.25 Financial Statements
Schedule 3.27 Leases
Schedule 3.28 Real Property
Schedule 3.30 Intellectual Property
Schedule 3.31 Bank Accounts and Powers of Attorney
Schedule 3.35 Certain Changes
(iv)
<PAGE>
MERGER AGREEMENT
----------------
THIS MERGER AGREEMENT (this "Agreement") is made as of September 30, 1999,
by and among COMMWORLD ACQUISITION CORPORATION, a Texas corporation
("Purchaser"), WILLPOWER, INC., a Texas corporation d/b/a RMS Communications
(the "Company"), and PIERRE MIOSSEC (the "Shareholder").
In consideration of the mutual covenants and agreements contained herein,
the parties covenant and agree as follows:
1. DEFINITIONS
1.1 General Definitions . Unless otherwise stated in this Agreement, the
following terms shall have the following meanings:
"Accounts": All accounts receivable of the Company and other rights of the
Company to payment for services rendered, including, without limitation, those
which are not evidence by instruments or whether or not they have been earned by
performance or have been written off or reserved against as a bad debt or
doubtful account in any financial statement, together with all instruments
representing any of the foregoing, and all rights, title, security and
guaranties in favor of the Company with respect to any of the foregoing.
"Affiliate": Any Person that, directly or indirectly, controls, or is
controlled by or under common control with, another Person. For the purposes of
this definition, "control" (including the terms "controlled by" and "under
common control with"), as used with respect to any Person, means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities or by
contract or otherwise.
"Assumed Contracts": As defined in Section 2.5(a) hereof.
"Assumed Payables": As defined in Section 2.5(a) hereof.
"Best Knowledge": Those matters of which either the Company or Shareholder has
or should have knowledge after (i) suitable inquiries of the appropriate
responsible employees or agents of the Company or Shareholder, and (ii) a
suitable review of appropriate corporate records and documents of the Company or
Shareholder in such parties actual or constructive possession or to which it has
access.
"Broker": As defined in Section 4.4 hereof.
"Closing": As defined in Section 7.1 hereof.
"Closing Date": As defined in Section 7.1 hereof.
1
<PAGE>
"Code": The Internal Revenue Code of 1986, as amended.
"CWII Stock": As defined in Section 2.2 hereof.
"Damages": As defined in Section 8.2 hereof.
"Disclosure Schedules": The package of Disclosure Schedules to this Agreement
delivered by Shareholder to Purchaser prior to the date hereof (and subsequently
supplemented and amended) which are approved by Purchaser (with reservation of
all rights with respect thereto) and incorporated by reference to the Section of
this Agreement to which each such schedule relates. The disclosure of an item
in a Disclosure Schedule or under a heading in a Disclosure Schedule
corresponding to that particular section or subsection of this Agreement shall
not be deemed a disclosure under (i) any other item of such Disclosure Schedule,
(ii) any other Disclosure Schedules or (iii) any other section or subsection
thereof. In the event of any inconsistency between the statements in the body of
this Agreement and those in the Disclosure Schedules hereto (other than an
exception expressly set forth as such in the schedules in relation to a
specifically identified representation or warranty), those in this Agreement
shall control.
"Environmental Requirements": All federal, state, foreign and local laws,
statutes, codes, rules, regulations, ordinances, judgments, orders, decrees and
the like of any Governmental Body, and all obligations concerning public health
and safety, worker health and safety, or pollution or protection of the
environment, including all those relating to the presence, use, production,
generation, handling, transport, treatment, storage, disposal, distribution,
labeling, testing, processing, discharge, release, Threatened release, control
or cleanup of any hazardous or otherwise regulated materials, substances or
wastes, chemical substances or mixtures, pesticides, pollutants, contaminants,
toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls, noise or radiation.
"Financial Statements": As defined in Section 3.25 hereof.
"Governmental Body": Any court or any federal, state, municipal or other
governmental department, commission, board, bureau, agency, authority or
instrumentality, domestic or foreign.
"Indemnification Claim": As defined in Section 8.3 hereof.
"Indemnification Notice": As defined in Section 8.3 hereof.
"Indemnitor": As defined in Section 8.3 hereof.
"Intellectual Property": All domestic and foreign patents, patent applications,
registered trademarks and service marks owned by the Company, registered
copyrights owned by the Company and computer software programs owned by or
licensed to the Company.
"Liabilities" or "Liability": All claims, liabilities, debts, indebtedness and
obligations, whether asserted or unasserted, absolute, liquidated, contingent,
accrued or otherwise.
2
<PAGE>
"Lien": All mortgages, deeds of trust, claims, liens, security interests,
pledges, leases, conditional sale contracts, rights of first refusal, options,
charges, liabilities, obligations, agreements, easements, rights-of-way, powers
of attorney, limitations, reservations, restrictions and other encumbrances of
any kind.
"Material Adverse Effect": Any change (individually or in the aggregate) in the
general affairs, management, business, goodwill, results of operations,
condition (financial or otherwise), assets, liabilities or prospects (whether or
not the result thereof would be covered by insurance) that will or can
reasonably be expected to result in a cost, expense, charge, Liability, loss of
revenue or diminution in value equal to or greater than $10,000.
"Merger": shall mean the merger of the Company with and into the Purchaser in a
transaction qualifying as a tax-free reorganization under Section 368(a)(1)(A)
of the Code.
"Employment and Noncompetition Agreement": The Noncompetition and Employment
Agreement substantially in the form of Exhibit "A" attached hereto.
"Offset Notice": As defined in Section 8.4 hereof.
"Operative Documents": All agreements, instruments, documents, schedules,
exhibits and certificates executed and delivered by or on behalf of Shareholder,
the Company or Purchaser at or before the Closing pursuant to this Agreement.
"Order": Any order, writ, injunction, decree, judgment, award or determination
of any Governmental Body.
"Permits": All permits, authorizations, certificates, approvals, registrations,
variances, exemptions, rights-of-way, franchises, privileges, immunities,
grants, ordinances, licenses and other rights of every kind and character (a)
under any (1) federal, state, local or foreign statute, ordinance or regulation,
(2) Order or (3) contract with any Governmental Body or (b) granted by any
Governmental Body.
"Person": An individual, partnership, joint venture, corporation, company,
limited liability company, bank, trust, unincorporated organization,
Governmental Body or other entity or group.
"Plans": As defined in Section 3.23 hereof.
"Proceeding": Any action, order, claim, suit, proceeding, litigation,
investigation, inquiry, review or notice.
"Prorated Expenses": As defined in Section 2.7 hereof.
"Purchase Price": As defined in Section 2.2 hereof.
"Purchaser Indemnitees": As defined in Section 8.2 hereof.
3
<PAGE>
"Securities Act": As defined in Section 3.37 hereof.
"Shareholder Release": As defined in Section 6.3(c) hereof.
"Stock": One Hundred Thousand (100,000) shares of common stock, no par value
per share, of the Company, which shares represent all of the issued and
outstanding shares of capital stock of the Company.
"Subordinated Note": The Subordinated Note substantially in the form of Exhibit
"C" attached hereto.
"Subsidiary" or "Subsidiaries": with respect to any corporation shall mean any
other corporation of which at least a majority of the securities having by their
terms ordinary voting power to elect a majority of the Board of Directors of
such other corporation is at the time directly or indirectly owned or controlled
by such first corporation, or by such first corporation and one or more of its
Subsidiaries.
"Summary Plan Descriptions": The summary plan descriptions and summary of
material modifications that include the information required by (S)102(b) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and that
are written in a manner calculated to be understood by the average Plan
participant, and that are sufficiently accurate and comprehensive to reasonably
apprise such participants and beneficiaries of their rights and obligations
under the Plans.
"Taxes": Any federal, state, local or foreign income, sales, excise, real or
personal property or other taxes, assessments, fees, levies, imposts, duties,
deductions or other charges of any nature whatsoever (including, without
limitation, interest and penalties) imposed by any law, rule or regulation.
"Third Party Consents": As defined in Section 5.6 hereof.
"Threatened": Any matter or thing will be deemed to have been "Threatened" when
used herein with respect to any party if that party has received notice, in
writing, from the Person to whom the threat is attributable, or such Person's
agents, which makes specific reference to and clearly identifies the matter or
thing being threatened.
"Transaction" or "Transactions": The sale and purchase of the Stock and the
performance of the other covenants and transactions described in this Agreement.
"Transaction Expenses": The expenses incurred in connection with the
preparation, negotiation, execution and performance of this Agreement and the
Transactions, including all fees and expenses of counsel and representatives.
Other defined terms shall have the meanings ascribed to such terms elsewhere
herein.
4
<PAGE>
2. MERGER
2.1 Terms of Merger . Subject to the terms and conditions set forth
herein, on the Closing Date, the Company shall be merged into Purchaser as
described below.
(a) Merger; Surviving Company. In accordance with the applicable
laws of the State of Texas, upon the effectiveness of the Merger the
separate existence of the Company shall thereupon cease, and Purchaser, as
the surviving corporation in the Merger (the "Surviving Corporation"),
shall continue its corporate existence under the laws of the State of
Texas. The Surviving Corporation shall possess all of the rights,
privileges, immunities, powers, franchises and authority, whether of a
public or of a private nature, and be subject to all restrictions,
disabilities and duties of each of the constituent corporations, and all
the rights, privileges, immunities, powers, franchises and authority of
each of the constituent corporations, and all assets and property of every
description, real, personal, and mixed, and every interest therein,
wherever located, and all debts or other obligations belonging or due to
either of the constituent corporations on whatever account, as well as
stock subscriptions and all other choses in action or every other interest
of or belonging to each of such corporations shall be vested in the
Surviving Corporation; and all property, rights, privileges, immunities,
powers, franchises and authority, and all other interests, shall be
thereafter as effectually the property of the Surviving Corporation as they
were of the constituent corporations; but all rights of creditors and all
Liens upon any property of either of the constituent corporations shall be
preserved unimpaired, and the Surviving Corporation shall be liable for the
obligations of each of the constituent corporations and any claim existing,
or action or proceeding pending, by or against either of the constituent
corporations may be prosecuted to judgment with right of appeal, as if the
Merger had not taken place. The directors, officers, articles of
incorporation and bylaws of the Surviving Corporation shall be those of
Purchaser.
(b) The Effective Date and Time. The Certificate of Merger shall be
filed with and recorded by the Secretary of State of Texas concurrently
with the Closing, and the Merger shall be effective at midnight, local
Dallas time, on the date of such filings.
2.2 Purchase Price and Terms. At the Closing, subject to the terms and
conditions of this Agreement, in consideration for Purchaser's acquisition of
the Stock pursuant to the Merger, Purchaser shall (a) pay to Shareholder the sum
of THREE HUNDRED SEVENTY-FIVE THOUSAND AND NO/100 DOLLARS ($375,000.00) by
delivering to Shareholder: (i) by certified or cashier's cash, the sum of TWO
HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($225,000.00); and (ii) the
Subordinated Note in the original principal amount of ONE HUNDRED FIFTY THOUSAND
AND NO/100 DOLLARS ($150,000.00); and (b) issue to Shareholder an aggregate of
185,000 shares of Common Stock, no par value per share of Communications World
International, Inc. (the "CWII Stock") ((a) and (b) above, collectively, the
"Purchase Price). The portion of the Purchase Price to be paid to each
shareholder of the Company
5
<PAGE>
shall be equal to their pro-rata share of the Stock. The Purchase Price shall be
subject to adjustment as provided in Section 2.5 below.
2.3 Merger Certificates. At the Closing, in addition to such other
instruments as shall be reasonably required in order to fully consummate the
merger, Shareholder and the Company shall deliver to Purchaser articles of
merger, and such other documents, all in form and substance satisfactory to
Purchaser and its legal counsel, as shall be necessary to consummate the Merger.
2.4 Further Assurances. At the Closing, and at all times thereafter as may
be reasonably necessary, Shareholder and the Company shall execute and deliver
to Purchaser such instruments of transfer as shall be reasonably necessary or
appropriate to vest in Purchaser title of the type specified herein to the
assets of the Company and to otherwise comply with the terms, purposes and
intent of this Agreement.
2.5 Closing Adjustments.
(a) Assumed Contracts and Assumed Payables. On or prior to Closing, the
Company shall pay in full, discharge and satisfy completely all Liabilities of
the Company, except for (i) contracts of the Company that are not in default,
entered into in the ordinary course of business and described on Schedule
2.5(a)(1) (the "Assumed Contracts"), and (ii) current trade payables in place at
Closing (for this purpose, a "current" trade payable shall mean an amount
outstanding in accordance with the normal payment cycle of the Company for that
particular vendor, but in no event more than thirty (30) days past invoice date)
entered into or incurred in the ordinary course of business through arm's length
transactions and described on Schedule 2.5(a)(2) (the "Assumed Payables");
provided, however, that Purchaser shall pay at Closing, on behalf of the
Company, the Liabilities described on Schedule 2.5(a)(3) and deduct such
payments from the cash portion of the Purchase Price payable at Closing;
provided, further that Assumed Payables shall not include that portion of
invoices received prior to or within ninety (90) days after the Closing Date
that relate to inventory for pending jobs to be installed and/or services for
pending jobs to be rendered by the Company after the Closing Date to the extent
that Purchaser is entitled to receive payment therefor and such portion of such
invoices shall not be required to be paid, discharged or satisfied by the
Company prior to Closing and shall be assumed and paid by Purchaser; provided,
however, that any such invoices received prior to the Closing Date shall be
described on Schedule 2.5(a)(2) under a heading entitled "Non-Assumed Payables."
Purchaser and Seller acknowledge and agree that the Assumed Payables described
on Schedule 2.5(a)(2) shall be revised by the parties within thirty (30) days
after Closing to reflect invoices received on or after the Closing Date that
relate to inventory installed and/or services rendered by the Company on or
prior to the Closing Date that Seller is entitled to receive payment for
pursuant to Section 2.5(b) below. Any such invoices that relate to inventory
installed and/or services rendered prior to and after the Closing Date shall be
allocated between Purchaser and Seller in good faith and to the extent that any
such disagreements have not been resolved prior to the expiration of the
Resolution Period (hereinafter defined ), such disputes shall be resolved in
accordance with the procedures set forth in Section 2.5(b) below.
6
<PAGE>
(b) Adjustment Period. For a period of ninety (90) days after Closing
(the "Adjustment Period"), Purchaser shall collect (i) all Accounts existing as
of the day immediately prior to the Closing Date (for this purpose, Accounts
existing as of the date immediately prior to Closing shall mean that at Closing
the subject invoice giving rise to the Account has been deposited in the U.S.
Mail in accordance with normal business practices) and described on Schedule
2.5(b) (the "Pre-Closing Receivables"), and (ii) all Accounts arising on and
after the Closing Date and relating, either in whole or in part, to products
sold and services provided by the Company prior to 5:00 p.m. (Dallas time) on
the Closing Date (the "Post-Closing Receivables"). Within five (5) business days
after the Closing Date, Seller shall provide Purchaser with a proposed list (the
"Proposal") of Post-Closing Receivables and the percentage of each such Post-
Closing Receivable relating to the period prior to 5:00 p.m. (Dallas time) on
the Closing Date ("Seller's Portion"). Purchaser shall review the Proposal and
provide Seller with any objections or proposed changes thereto within five (5)
business days after Purchaser's receipt of the Proposal. For a period of
fourteen (14) days after Seller's receipt of Purchaser's objections and proposed
changes to the Proposal, (the "Resolution Period"), Seller and Purchaser shall
negotiate in good faith the resolution of any objections or proposed changes of
Purchaser with respect to the Proposal. If Purchaser and Seller shall fail to
reach an agreement with respect to any objection or proposed change to the
Proposal prior to the expiration of the Resolution Period, then all such
disputed objections or changes shall, not later than five (5) business days
after the earlier to occur of (i) the expiration of the Resolution Period, or
(ii) the date one of the parties affirmatively terminates discussions in writing
with respect to such objections or changes, be submitted for resolution to the
Dallas office of an impartial certified public accounting firm (the
"Accountants") selected by Purchaser and Seller. If Purchaser and Seller cannot
agree on the selection of the Accountants within such five (5) business day
period, then Purchaser and Seller shall each have the right to request the
American Arbitration Association to appoint as the Accountants a certified
public accounting firm that has not had a material relationship with Seller,
Purchaser or the Affiliates of either of them within the preceding five (5)
years. Seller and Purchaser agree to execute, if requested by the Accountants,
an engagement letter and shall share equally the cost of the Accountants. Seller
and Purchaser shall use their reasonable efforts to cause the report of the
Accountants, which shall be in the form of a written statement addressed and
delivered to Purchaser and Seller, to be rendered within thirty (30) days after
the Accountants' appointment. Seller and Purchaser shall request the Accountants
to act as an arbitrator to determine, based solely on presentations by Purchaser
and Seller, and not by independent review, only those issues still in disputes;
provided, however, that the role and the scope of investigation of the
Accountants may be modified by Seller and Purchaser in the event that the
Accountants would otherwise refuse such engagement. The Accountants'
determination as to the appropriateness and extent of such changes (if any) to
the Proposal shall be final and binding on the parties thereto.
(c) Payment to Seller. Within fourteen (14) days after the last to occur
of (i) the ninetieth (90th) day after the Closing Date, and (ii) the final
resolution of any objections or proposed changes with respect to the Proposal
and the Assumed Payables, Purchaser shall pay to Seller the excess, if any, by
which the sum of (i) the Pre-Closing Receivables, and (iii) Seller's Portion of
the Post Closing Receivables collected by Purchaser during the Adjustment Period
exceed the
7
<PAGE>
Assumed Payables. Seller and Purchaser shall use their best efforts to collect
any Pre-Closing Receivables and Seller's Portion of the Post-Closing Receivables
not collected by Purchaser during the Adjustment Period and such funds shall be
promptly paid by Purchaser to Seller after collection, provided that the
aggregate of the Pre-Closing Receivables and Seller's Portion of the Post-
Closing Receivables collected by Purchaser exceed the Assumed Payables and
Purchaser does not otherwise have any claims or offset rights against such
monies.
(d) Deduction from Note. If, at the end of the Adjustment Period, the
Assumed Payables paid by Purchaser during the Adjustment Period exceed the Pre-
Closing Receivables and Seller's Portion of the Post-Closing Receivables
collected by Purchaser during the Adjustment Period, Purchaser shall deduct such
excess from the principal amount of the Subordinated Convertible Promissory
Notes payable to Seller.
(e) Other Accounts. All Accounts of the Company, other than the Pre-
Closing Receivables and Seller's Portion of the Post-Closing Receivables, shall
be collected after Closing by Purchaser for its own account and Seller shall
have no claim or interest therein.
3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
Shareholder and the Company hereby jointly and severally represent and
warrant to Purchaser that the following are true and correct as of the date of
this Agreement and will be true and correct (without limitation) through the
Closing Date, regardless of what investigations, if any, Purchaser shall have
made prior hereto or prior to Closing:
3.1 Transfer of and Title to Stock. Shareholder and Jimmy Welch have good
and marketable title to all shares of the Stock and are the sole record and
beneficial owners thereof. Shareholder has the full legal right, power, capacity
and authority to enter into this Agreement and transfer, convey and sell the
Stock by operation of law to Purchaser at Closing, and upon consummation of the
Merger, Shareholder and Jimmy Welch will transfer to Purchaser by operation of
law good and marketable title to the Stock, free and clear of all Liens.
3.2 Organization; Qualification. The Company (a) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its formation or existence, (b) has all requisite power and authority to own and
lease all of the properties and assets it now owns and leases and to carry on
its businesses as now being conducted, and (c) is duly qualified or licensed to
do business as a foreign corporation and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification necessary.
3.3 Authority Relative to this Agreement. The Company and Shareholder have
full power and authority (corporate and otherwise) to execute, deliver and
perform this Agreement (including, without limitation, execution, delivery and
performance of the Operative Documents to which each of them is a party) and to
consummate the Transactions. The execution and delivery by Shareholder and the
Company of this Agreement and the Operative Documents, and the
8
<PAGE>
consummation of the Transactions, have been duly and validly authorized by the
Company and Shareholder and no other actions on the part of the Company and
Shareholder are necessary with respect thereto. This Agreement and the Operative
Documents have been duly and validly executed and delivered by the Company and
Shareholder, and constitute the legal, valid and binding obligations of
Shareholder and the Company, enforceable against them in accordance with its
terms. The Company will take all corporate action that is necessary for the
Company to complete the Transactions pursuant to this Agreement.
3.4 Capitalization.
(a) The authorized capital stock of the Company consists solely of one
hundred thousand (100,000) shares of common stock, no par value per share,
of which one hundred thousand (100,000) shares are issued and outstanding.
As of the date hereof, the shares of Stock are the only shares of capital
stock of the Company outstanding. All such outstanding shares of Stock
have been duly authorized and validly issued and are fully paid and
nonassessable. There are no outstanding options, warrants, rights,
subscriptions, claims of any character, agreements, obligations,
convertible or exchangeable securities or other commitments, contingent or
otherwise, relating to the capital stock of the Company, pursuant to which
the Company is or may become obligated to issue or exchange any share of
capital stock. There is not now nor has there ever been any Person who
holds shares of capital stock of the Company other than the Shareholders.
(b) Other than as set forth on Schedule 3.34 attached hereto, there is
no outstanding subscription, option, warrant, call, right, agreement or
commitment (including any right of conversion or exchange under any
outstanding security or other instrument) entitling any person to purchase
or otherwise acquire from Shareholder or the Company any capital stock of
the Company or any security convertible into or exchangeable therefor, or
any other right to acquire, any capital stock of the Company or relating to
the issuance, sale, delivery or transfer of Stock by Shareholder or the
Company. Other than as set forth on Schedule 3.34 attached hereto, there
are no outstanding contractual obligations of the Company to repurchase,
redeem or otherwise acquire any of its outstanding of the Company to
repurchase, redeem or otherwise acquire any of its outstanding capital
stock.
3.5 Consents and Approvals. Except as set forth on Schedule 3.5, the
execution, delivery and performance by Shareholder and the Company of this
Agreement and the Operative Documents and the consummation of the Transactions
by them requires no consent, approval, order or authorization of, action by or
in respect of, or registration or filing with, any Governmental Body or other
Person.
3.6 No Violations. The execution, delivery and performance of this
Agreement and the Operative Documents by Shareholder and the Company, the
consummation by Shareholder and the Company of the Transactions and compliance
by Shareholder and the Company with the provisions hereof does not and will not
(a) conflict with or result in any breach or violation of any provision of the
Articles of Incorporation or Bylaws of the Company, (b) result in a default, or
give rise to any
9
<PAGE>
right of termination, cancellation or acceleration or loss under any of the
provisions of any note, bond, mortgage, indenture, license, trust, agreement,
lease or other instrument or obligation to which Shareholder or the Company are
a party or by which Shareholder or the Company may be bound, (c) result in the
creation or imposition of any Lien on any of the property of Shareholder or the
Company, (d) violate any Order, statute, rule or regulation applicable to
Shareholder or the Company, or (e) violate any territorial restriction on the
Company or Shareholder or any noncompetition or similar arrangement.
3.7 Title to and Condition of Assets and Property. Except as specifically
set forth on Schedule 3.7, the Company has good and marketable title to all its
properties and assets (real and personal, tangible and intangible), such
properties and assets are free and clear of all Liens, and such properties and
assets are in good operating condition and a state of good maintenance and
repair and are sufficient to conduct the Company's operations after Closing in
the ordinary course of business and consistent with past practices.
3.8 Inventory. Except as set for on Schedule 3.8, the Company has good
title to all inventory reflected on the Financial Statements and all inventory
purchased or created since the date of the Financial Statements (other than
inventory disposed of since such date in the ordinary course of business
consistent with past practices), free and clear of all Liens. The inventory is
adequate for the conduct of the Company's operations. The inventory levels are
not in excess of the normal operating requirements of the Company. The value at
which the inventory is carried on the Financial Statements reflects the normal
inventory policies of the Company and has been determined in accordance with
generally accepted accounting principles. Except as set forth on Schedule 3.8,
all inventory is or will be at Closing, located at the Company's offices at 3201
Bishop Drive, Arlington, Texas 76010. The Company is under no obligation to
repurchase any inventory previously sold in connection with the operation of the
Company.
3.9 Distributors and Suppliers. Except as set forth on Schedule 3.9, the
Company is not involved in any controversy with any of the distributors,
customers, or suppliers of the Company. Schedule 3.9 lists all distributors,
customers and suppliers which, as of date of the Financial Statements and for
the period then ended, accounted for five percent (5%) or more of (i) the
Company's revenues, and (ii) purchases of products, supplies, equipment or parts
used exclusively in connection with the operation of the Company.
3.10 Product Warranties. Schedule 3.10 contains the forms of express product
and service warranties and guaranties which have been used by the Company.
Except as set forth on Schedule 3.10, the Company has not offered any materially
different forms of express product warranties and guaranties. To the Company's
and the Shareholder's Best Knowledge, no events have occurred or facts exist
which could result in a material increase to the Company's product warranty
expenses.
3.11 Investigation or Litigation. Except as set forth on Schedule 3.11,
there is no Proceeding pending or, to the Company's and the Shareholder's Best
Knowledge, Threatened against, relating to or affecting the Company. The Company
is not subject to any currently existing
10
<PAGE>
Proceeding by any Governmental Body. There is no basis for the assertion of any
Proceeding by any Governmental Body or any Person regarding any violation of
federal or state laws.
3.12 Taxes. All Taxes that are due and payable by the Company, other than
those presently payable without penalty or interest, have been timely paid, and
the Company has timely filed (and, through the Closing Date, will timely file)
all Tax reports and returns required by law to be filed by them. All such Tax
reports and returns are true, complete and correct in all respects with regard
to the Company for the periods covered thereby. The Company is not delinquent in
the payment of any Tax. There is no Tax deficiency asserted against the Company,
and there is no unpaid assessment, proposal for additional Taxes, deficiency or
delinquency in the payment of any of the Taxes of the Company or any violation
of any Tax law that could be asserted by any taxing authority. There are no Tax
Liens upon any properties or assets of the Company nor has notice been given of
any event which could lead to any such Lien. No Internal Revenue Service, state
or local, audit, investigation or Proceeding of the Company is pending or
Threatened, and the results of any completed audits are properly reflected in
the Financial Statements. The Company has not granted any extension to any
taxing authority of the limitation period during which any Tax Liability may be
asserted. The Company has not committed any violation of any Tax laws. All
monies required for the payment of Taxes not yet due and payable with respect to
the operations of the Company through and including the Closing Date have been
approved, reserved against and entered upon the books and Financial Statements.
All monies required to be withheld by the Company from employees, if any,
independent contractors, or others or collected from customers for income taxes,
social security and unemployment insurance taxes and sales, excise and use
taxes, and the portion of any such taxes to be paid by the Company to
governmental agencies or set aside in accounts for such purpose have been
approved, reserved against and entered upon the books and Financial Statements.
3.13 No Brokers. Shareholder have not employed any broker, agent, or finder
or incurred any Liability for any brokerage fees, commissions or finders' fees
in connection with the Transactions.
3.14 Accounts. Schedule 3.14 contains a complete and accurate list of all
the Company's Accounts as of September 30, 1999, showing the name of each
account debtor and the amount due from each by invoice number and date. All of
such Accounts have arisen in the ordinary course of business for services
rendered or products sold. Except as set forth on Schedule 3.14, there is no
event or condition with respect to a specific customer that will cause such
Accounts to not be collected in full in due course without resort to litigation
and such Accounts will not be subject to counterclaim or setoff.
3.15 Insurance. All the insurance policies maintained by the Company are in
full force and effect, all insurance premiums have been timely paid to date, and
no such policy will be canceled prior to Closing. A description of the Company's
insurance policies (including, without limitation, insurance providing benefits
for employees) is attached hereto as Schedule 3.15. The insurance policies set
forth on Schedule 3.15 provide adequate coverage, less deductibles, against the
risks involved in the operation of the Company.
11
<PAGE>
3.16 Contracts; Oral Commitments; Defaults. Schedule 3.16 sets forth a true
and correct list of all contracts and agreements of the Company (or summaries of
all oral commitments) and the Company has provided true, correct and complete
copies of such contracts and agreements to Purchaser prior to the date hereof.
There exists no breach or default under any of such contracts and no event
exists which, with the like giving of notice, passage of time, or happening of
any other event, would constitute a breach or default under such contract.
3.17 Corporate Matters. The Board of Directors and shareholders of the
Company have approved the execution and delivery of this Agreement and the
consummation of the Transactions contemplated hereby in accordance with
applicable law.
3.18 Permits. Schedule 3.18 lists all Permits held by the Company. Such
Permits are valid, and neither the Company nor Shareholder have received any
notice that any Governmental Body intends to cancel, terminate or not renew any
such Permit. The Company holds all licenses, franchise, permits and other
governmental authorizations required by any Governmental Body or any Order. The
Company is not being conducted, in violation of any statute, law, ordinance,
regulation, rule or Permit of any Governmental Body or any Order.
3.19 Compliance with Laws. The Company has complied with and is in compliance
with all federal, state, local and foreign statutes, laws, ordinances,
regulations, rules, permits, judgments, orders or decrees applicable to the
Company or any of its properties, assets, operations and businesses, and there
does not exist any basis for any claim or default under or violation of any such
statute, law, ordinance, regulation, rule, judgment, order or decree.
3.20 Corporate Name. The Company's use of the Company's corporate name and
any assumed names used by the Company, do not infringe upon the right of any
third party.
3.21 Disclosure.
(a) Shareholder have delivered or made available to Purchaser complete
and accurate copies of all documents listed on the Disclosure Schedules
delivered as a part hereof and all other information requested by Purchaser
pursuant hereto. No representation or warranty of Shareholder contained in
this Agreement or any statement in the Disclosure Schedules hereto contains
any untrue statement. No representation or warranty of Shareholder contained
in this Agreement or statement in the Disclosure Schedules hereto omits to
state a material fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
(b) There is no facts known to Shareholder which have specific
application to Purchaser and which could have a Material Adverse Effect on the
Company but which has not been set forth in this Agreement or the Disclosure
Schedules hereto.
3.22 Employee Matters. Schedule 3.22 contains a list of the names and current
aggregate annual cash compensation and identifies the other material benefits
with respect to
12
<PAGE>
salaried employees, of each employee of the Company expected to be hired by
Purchaser and any employment contracts, secrecy or confidentiality agreements,
or noncompetition agreements to which the Company is a party. Except as set
forth on Schedule 3.22, no labor organization, collective bargaining
representative, or group represents or, to Shareholder' Best Knowledge, claims
to represent any of the Company's present employees, and except as set for on
Schedule 3.22, the Company has no collective bargaining or employment or
consulting agreements with any consultants or employees of the Company. As set
forth on Schedule 3.22, with respect to employees of the Company, (a) there is
no labor strike, work stoppage, organized slowdown, or lockout actually pending
or, to the Best Knowledge of Shareholder, Threatened against or affecting the
Company and no such action has been pending; (b) to the Best Knowledge of
Shareholder, no union organization campaign is in progress and no question
concerning representation exists; (c) the Company is in compliance in all
material respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, and is not
engaged in any unfair labor practice; (d) there is no unfair labor practice
charge or complaint against the Company pending or, to the Best Knowledge of
Shareholder, Threatened before the National Labor Relations Board; (e) there is
no pending or, to the Best Knowledge of Shareholder, Threatened grievance before
any Governmental Body; and (f) (i) no charges with respect to or relating to the
Company are pending or, to Shareholder' Best Knowledge, Threatened before the
Equal Employment Opportunity Commission or any state or local agency responsible
for the prevention of unlawful employment practices; and (ii) the Company has
received no notice of the intent of any federal or other Governmental Body
responsible for the enforcement of labor or employment laws to conduct an
investigation with respect to or relating to the Company, and no such
investigation is in progress.
3.23 Plans. Schedule 3.23 sets forth a complete and accurate description of
all employee benefit plans and all collective bargaining agreements relating to
employee benefits with respect to which the Company or any of its predecessors
contributes or is required to contribute and has or may incur any future or
contingent obligations, including, without limitation, all plans, agreements or
arrangements relating to deferred compensation, pension, profit sharing,
retirement income or other benefits, stock purchase and stock option plans,
bonuses, severance arrangements, health benefits, insurance benefits, welfare
benefits and all other material employee benefits or fringe benefits
(collectively referred to as the "Plans"). Except as set forth on Schedule 3.23:
(a) true, correct and complete copies of each Plan, all related Summary Plan
Descriptions and material employee communications, related trust agreements or
annuity contracts (or any other funding instruments), annual reports on the Form
5500 series required to be filed with any governmental agency for each Plan for
the two most recent Plan years and the most recent actuarial reports and
trustee's reports relating thereto (if applicable) have been furnished to
Purchaser; (b) each Plan has been administered and operated in accordance with
its terms and applicable law, and to the extent applicable, each Plan is
"qualified" within the meaning of Section 401(a) of the Code and each related
trust is exempt from tax under Section 501(a) of the Code; (c) each qualified
Plan has been amended to conform to the requirements of all applicable federal
statutes and regulations, and no Liability under any applicable law has been
incurred with respect to any Plan; (d) all reports and disclosures relating to
such Plans required to be filed with any agency of the federal, state or local
13
<PAGE>
government or distributed to employees or beneficiaries have been or will be
properly and timely filed or distributed in compliance with applicable law; (e)
the Company does not maintain and has not been maintaining a "defined
contribution plan" or has incurred any Liability with respect to such a plan;
and (f) full payment has been made of all amounts which were required under the
terms of any of the Plans to have been paid as a contribution to such Plan.
3.24 Transactions with Affiliates. Schedule 3.24 contains a complete
and accurate description of all contracts, agreements and other arrangements
(whether written, oral, express or implied) between the Company and any
Affiliate of the Company.
3.25 Financial Statements. Attached to Schedule 3.25 are true,
complete and correct copies of the balance sheet of the Company as of December
31, 1998 and July 31, 1999, and the related statements of income, and changes in
shareholder's equity and net worth for the periods then ended of the Company
(the "Financial Statements") provided by Shareholder to Purchaser. The Financial
Statements are true, complete and correct, have been prepared in conformity with
generally accepted accounting principles consistently applied, present fairly
the financial position of the Company at the respective dates indicated and do
not omit to state or reflect any material fact concerning the Company required
to be stated or reflected therein or necessary to make the statements therein
not misleading, and shall be accompanied by an unqualified opinion audit report
of an independent accounting firm engaged at Shareholder' sole cost and expense.
3.26 Undisclosed Liabilities. The Company does not have any
Liabilities and there are no claims against the Company for any Liabilities,
except as disclosed in the Financial Statements or incurred subsequent to the
date of the Financial Statements in the ordinary course of business not
involving borrowing by the Company.
3.27 Leases. Schedule 3.27 contains an accurate and complete list and
description of the terms of all real and personal property leases to which the
Company is a party (as lessee or lessor). Each lease set forth on Schedule 3.27
(or required to be set forth on Schedule 3.27) is in full force and effect; all
rents and additional rents due to date on each such lease have been paid; in
each case, the lessee has been in peaceable possession since the commencement of
the original term of such lease and is not in default thereunder and no waiver,
indulgence or postponement of the lessee's obligations hereunder has been
granted by the lessor; and there exists no event of default or event,
occurrence, condition or act (including the purchase of the Stock hereunder)
which, with the giving of notice, the lapse of time or the happening of any
further event or condition, would become a default under such lease. The Company
has not violated any of the terms or conditions under any such lease in any
material respect, and, to the Best Knowledge of the Company, all of the
covenants to be performed by any other party under any such lease have been
fully performed. Any property leased by the Company is in a state of good
maintenance and repair and is adequate and suitable for the purposes for which
it is presently being used.
3.28 Real Property. Schedule 3.28 contains an accurate and complete
list of all real property owned in whole or in part by the Company and includes
the name of the record title holder thereof and a list of all indebtedness
secured by a lien, mortgage or deed of trust thereon. The
14
<PAGE>
Company has good and marketable title in fee simple to all the real property
specified as owned by it on Schedule 3.28 (or required to be set forth on
Schedule 3.28), free and clear of all Liens. All of the buildings, structures
and appurtenances situated on the real property listed on Schedule 3.28 (or
required to be set forth on Schedule 3.28) are in good operating condition and
in a state of good maintenance and repair, are adequate and suitable for the
purposes for which they are presently being used and with respect to each, the
Company has adequate rights of ingress and egress in the ordinary course. None
of such buildings, structured or appurtenances (or any equipment therein), nor
the operation or maintenance thereof, violates any restrictive covenant or any
provision of any federal, state or local law, ordinance, rule or regulation, or
encroaches on any property owned by others. Except as set forth on Schedule
3.28, no condemnation proceeding is pending, or to the Best Knowledge of
Shareholder, Threatened which would preclude or impair the use of any such
property by the Company for the purposes for which it is currently used.
3.29 Environmental Matters.
(a) Compliance Generally. The Company complied and is in material
compliance with all Environmental Requirements.
(b) Claims. The Company has not received any claim, complaint,
citation, report or other notice regarding any liabilities or potential
liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective
obligations, arising under the Environmental Requirements.
(c) Certain Environmental Liabilities. The Company has not
stored, disposed of, arranged for or permitted the disposal of,
transported, handled or released any substance, including, without
limitation, any hazardous substance, pollutant, contaminant or waste,
or owned or operated any facility or property, so as to give rise to
Liabilities of the Company pursuant to the Environmental Requirements,
including, without limitation, any Liability of response costs,
corrective action, natural resources damages, personal injury, property
damage or attorneys fees.
(d) Operations. The Company has taken no action relating to the
past or present facilities, properties or operations of the Company
that will prevent, hinder or limit continued compliance with the
Environmental Requirements, give rise to any investigatory, remedial or
corrective obligations pursuant to the Environmental Requirements, or
give rise to any other Liabilities pursuant to the Environmental
Requirements, including any Environmental Requirements relating to
onsite or offsite releases or threatened releases of hazardous or
otherwise regulated materials, substances or wastes, personal injury,
property damages or natural resources damage.
(e) Liability for Others. The Company has not, either expressly or
by operation of law, assumed or undertaken any Liability or corrective
or remedial obligations of any other Person relating to Environmental
Requirements.
15
<PAGE>
3.30 Intellectual Property. The operation of the Company, in the ordinary
course and as presently conducted, requires no rights under Intellectual
Property (as hereinafter defined) other than rights related to Intellectual
Property owned by the Company and listed on Schedule 3.30. Except as set forth
on Schedule 3.30, all licenses or similar agreements listed on Schedule 3.30 are
in full force and effect. Except as otherwise set forth on Schedule 3.30, with
respect to Intellectual Property which is owned by the Company, the Company owns
all right, title and interest in such Intellectual Property, including, without
limitation, exclusive rights to use and license the same to third parties.
Except as set forth on Schedule 3.30, during the past seven (7) years no claim
adverse to the interests of the Company in the Intellectual Property has been
made. To the Best Knowledge of Shareholder, except as set forth on Schedule
3.30, no such claim has been Threatened, no valid basis exists for any such
claim and no person has infringed or otherwise violated the Company's rights in
any of the Intellectual Property. Neither the execution of this Agreement and
the Operative Documents nor the consummation of the Transactions will materially
adversely alter or materially impair the rights of the Company to use any of the
Intellectual Property listed on Schedule 3.30.
3.31 Bank Accounts and Powers of Attorney. Set forth on Schedule 3.31 is an
accurate and complete list showing (a) the name and address of each bank in
which the Company has an account or safe deposit box, the number of any such
account or any such box and the names of all persons authorized to draw thereon
or to have access thereto, and (b) the names of all persons, if any, holding
powers of attorney from the Company and a summary statement of the terms
thereof.
3.32 Knowledge of Shareholder. Where any representations or warranty contained
in this Article III is expressly qualified by reference to the Best Knowledge of
Shareholder, Shareholder, who are officers of the Company, confirm that, as to
the matters that are the subject of such representations and warranties, they
have made suitable inquiries of the appropriate responsible Company employees
and have made a suitable review of appropriate corporate records and documents
within their possession or control, and Shareholder who are directors of the
Company confirm that, as to matters that are the subject of such representations
and warranties, they have made a suitable review of appropriate corporate
records and documents which have been furnished to them or are otherwise within
their possession or control.
3.33 Inspection Does Not Affect Warranties. The representations and warranties
of Shareholder contained in this Agreement shall in no way be abridged, reduced,
waived, be considered fulfilled or otherwise be affected by any examination or
inspection made by Purchaser at any time.
3.34 Rights and Assets. The Company shall receive at Closing all tangible and
intangible rights and assets necessary for the Company to operate the Company's
business after Closing in the same manner as the business of the Company was
conducted prior to Closing.
3.35 Absence of Certain Changes. Since the date of Financial Statements, there
has been no material adverse change in the assets or liabilities, or in the
results of operations of the
16
<PAGE>
Company, and, to the Best Knowledge of Shareholder, no fact or condition (other
than general economic conditions) exists or is contemplated or Threatened which
might cause such a change in the future. Except as set forth on Schedule 3.35,
since the date of the Financial Statements, the Company has not, (a) incurred,
or assumed or become subject to, whether directly or by way of guarantee or
otherwise, any material Liability, (b) permitted any of its assets to be
subjected to any Lien, (c) sold, transferred or otherwise disposed of any
assets, except in the ordinary course of business, (d) made any material capital
expenditure, additions to property, plant or equipment or acquisition of other
property or assets or commitment therefor, (e) declared or paid any dividend or
made any distribution on any shares of its capital stock, or redeemed, purchased
or otherwise acquired any shares of its capital stock or any option, warrant or
other right to purchase or acquire any shares, (f) made any bonus or profit
sharing distribution or payment of any kind, (g) increased its indebtedness for
borrowed money or made any loan to any party, (h) written off as uncollectible
any notes or accounts receivable, (i) granted any increase in the rate of wages,
salaries, bonuses or other remuneration of any executive employee or other
employees, except in the ordinary course of business, (j) canceled or waived any
debts, claims or rights or material value, (k) made any change in any method of
accounting or auditing practice, (l) suffered any damage, destruction or loss
materially adversely affecting the properties or assets of the Company, (m) made
any change or amendment in its Articles of Incorporation or Bylaws or other
governing instruments, (n) issued or sold any of its capital stock or redemption
or otherwise, any such capital stock, reclassified, split up or otherwise
changed any such capital stock or granted or entered into any options, warrants,
calls or commitments of any kind with respect thereto, (o) paid, discharged or
satisfied any Liabilities, other than in the ordinary course of business, (p)
prepaid any material obligations having a maturity of more than ninety (90) days
from the date such obligation was issued or incurred, (q) disposed of or
permitted to lapse any rights to the use of any material patent, trademark,
copyright, license or other intellectual property owned or used by it, (r)
entered into any collective bargaining or union contract or agreement, (s)
incurred any material Liability required by generally accepted accounting
principles to be reflected on a balance sheet, other than in the ordinary course
of business, or (t) agreed, whether or not in writing, to do any of the
foregoing. As used in this Section 3.35 the reference to "material" Liabilities,
assets, capital expenditures or values of claims or rights shall mean such items
individually or in the aggregate in excess of $5,000.00.
3.36 Books and Records. The minute books and other corporate records of the
Company, as previously made available to Purchaser and its representatives,
constitute all of the minute books and other corporate records of the Company
and such corporate records of the Company and such books and records contain
accurate records of all meetings of and corporate actions or written consents by
the respective shareholders and Board of Directors of the Company and the
subsidiaries. The Company does not have any of its respective records, systems,
controls, data or information recorded, stored, maintained, operated or
otherwise wholly or partly dependent upon or held by any means (including any
electronic, mechanical or photographic process, whether computerized or not)
which (including all means of access thereto and therefrom) are not under the
exclusive ownership and direct control of the Company.
17
<PAGE>
3.37 Understanding that CWII Shares Will Be Issued Without Registration.
Shareholder understands that the CWII Shares will be issued without registration
under the Securities Act of 1933, as amended (the "Securities Act"), in reliance
upon certain exemptions from registration under the Securities Act including,
without limitation, the safe harbor provided by Regulation D promulgated under
the Securities Act. Shareholder further understands that such exemptions depend
in part upon, and such shares will be issued in reliance on the representations
and warranties made by Shareholder in this Section 3.37. Accordingly,
Shareholder represents and warrants to Purchaser, as of the date of this
Agreement and as of the Closing Date as follows:
(a) Investment Intent. Shareholder will acquire the CWII Shares for
their own account for investment purposes only and not with a view to
resale or other distribution thereof, in whole or in part and Shareholder
will not assign, sell, hypothecate or otherwise transfer any of the CWII
Shares unless (i) a registration statement is in effect under the
Securities Act and all applicable state securities laws with respect to the
CWII Shares, (ii) a written opinion of counsel acceptable to Purchaser is
obtained to the effect that no such registration is required, or (iii) such
transfer is effected in accordance with Rule 144 promulgated under the
Securities Act.
(b) Investor Awareness. Shareholder acknowledges, agrees and is aware
that: (i) no federal, state or any foreign agency has made any finding or
determination as to the fairness of an investment in the CWII Shares; (ii)
there are substantial restrictions on the transferability of the CWII
Shares; (iii) the CWII Shares have not been registered under the Securities
Act or under the securities laws of any other jurisdiction; (iv) an offer
or sale of any of the CWII Shares by Shareholder in the absence of
registration under the Securities Act will require the availability of an
exemption thereunder; and (v) a restrictive legend shall be placed on the
certificates representing the CWII Shares and in the appropriate records of
Purchaser indicating that the CWII Shares are subject to restrictions on
transfer.
3.38 Receipt of Information; Access to Information. Shareholder
acknowledges that they:
(a) have been given the opportunity to ask questions of, and receive
answers from, Purchaser and its officers and employees concerning the terms
and conditions of their acquisition of the CWII Shares and other matters
pertaining to an investment in the CWII Shares, have been given the
opportunity to obtain such additional information necessary to evaluate the
merits and risks of acquiring the CWII Shares to the extent Purchaser
possesses such information, and have received all documents and information
that they have requested relating to an investment in the CWII Shares;
18
<PAGE>
(b) have not relied upon any representations or other information
(whether oral or written) from Purchaser or its directors, officers or
Affiliates, or from any other persons, other than the representations of
Purchaser made in this Agreement;
(c) are familiar with the nature of and risks attendant to investments
in the business of Purchaser and securities in general and have carefully
considered and have, to the extent they believe such discussion necessary,
discussed with their professional legal, financial and tax advisers the
suitability of an investment in the CWII Shares for their particular
financial and tax situation and have determined that the CWII Shares are a
suitable investment for them; and
(d) have made, and are solely responsible for making, their own
independent evaluation of the economic and other risks involved in his
investment in the CWII Shares and their own independent decision to make
such investment.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Shareholder that the following are
true and correct as of the date of this Agreement and will be true and correct
through the Closing Date, regardless of what investigations, if any, Shareholder
shall have made prior hereto or prior to the Closing:
4.1 Organization. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas.
4.2 Authority Relative to this Agreement. Purchaser has full power and
authority (corporate and otherwise) to execute, deliver and perform this
Agreement (including, without limitation, execution, delivery and performance of
the Operative Documents to which it is a party) and to consummate the
Transactions. The execution and delivery by Purchaser of this Agreement, and the
consummation of the Transactions, have been duly and validly authorized by the
Board of Directors of Purchaser and no other corporate proceedings on the part
of Purchaser are necessary with respect thereto.
4.3 Consents and Approvals. Except as set forth in or otherwise required
by this Agreement or the Operative Documents, the execution, delivery and
performance by Purchaser of this Agreement and the consummation of the
Transactions by it requires no consent, approval, order or authorization of,
action by or in respect of, or registration or filing with, any Governmental
Body or other Person.
4.4 No Brokers. Purchaser has not employed any broker, agent or finder or
incurred any Liability for any brokerage fees, commissions or finders' fees in
connection with the Transactions.
19
<PAGE>
5. ADDITIONAL AGREEMENTS
5.1 Conduct of the Company. After the date hereof and prior to the Closing
Date, Shareholder shall cause the Company to conduct its operations according to
its normal course of business to preserve its business organization, keep
available the services of its employees and independent contractors, maintain
satisfactory relationships with Governmental Bodies, suppliers, customers and
all others having business relationships with the Company and continue to
service and maintain all of its respective assets in a manner consistent with
past practices. All risk of loss arising out of fire and casualty and all
Liability to third parties arising out of the operations of the Company prior to
the Closing Date shall be that of Shareholder, and Purchaser shall have no
obligation or Liability in connection therewith.
5.2 Forbearances by Shareholder. Shareholder covenant that except as
contemplated by this Agreement, Shareholder shall not, after the date hereof and
prior to the Closing Date, without the prior written consent of Purchaser,
permit the Company to:
(a) change or amend its Articles of Incorporation or Bylaws (or other
similar documents);
(b) issue, encumber, sell or otherwise dispose of any shares of its
capital stock or any other securities (except upon the exercise of
currently outstanding options), pledge or agree to pledge any capital stock
or other securities owned by it, acquire directly or indirectly, by
redemption or otherwise, any such capital stock, reclassify, combine or
split up any such capital stock or grant or enter into any options,
warrants, calls or commitments of any kind with respect thereto;
(c) declare, set aside or pay any dividend payable in cash, stock or
property, or make any other distribution with respect to its capital stock
or redeem or otherwise acquire any of its securities;
(d) except in the ordinary course of business, incur or assume any
debt, or assume, guarantee or otherwise become liable or responsible for
the obligations of any other person or make any loans, advances or capital
contributions to, or investments in, any other person or entity, or grant
any security interest on any properties or assets of the Company;
(e) merge or consolidate with any other person or entity, or organize
any new subsidiary or other person or entity, acquire any capital stock or
other equity securities or all or substantially all of the assets of any
person or entity or acquire any equity or other ownership interest in any
business or person or entity;
(f) cancel any debt or waive any claim or right or cancel any debts or
waive any claims or rights;
20
<PAGE>
(g) transfer, lease, license, sell, mortgage, pledge, dispose of or
encumber any of its properties or assets, other than property disposed of
in the ordinary course of business consistent with past practice;
(h) grant any increase in the compensation payable or to become
payable by the Company or enter into any new employment agreement,
severance agreement or other contract or arrangement with respect to the
performance of personal services, or adopt any new, or amend or otherwise
increase the amounts payable or to become payable under any existing,
bonus, incentive compensation, deferred compensation, profit sharing, stock
option, stock purchase, insurance, pension, retirement, health insurance or
other employee benefit plan (including, without limitation, the granting of
stock options, stock appreciation rights or restricted stock awards);
(i) change or alter the manner in keeping books, accounts or records
of the Company or change accounting principles or methods;
(j) enter into any agreement with any person or entity involving or
reasonably likely to involve an expenditure by the Company in excess of
$5,000.00.
(k) make any capital expenditure or acquire any property or assets
(other than inventory) for a cost in excess of $5,000.00 in the aggregate;
(l) enter into any agreement that materially restricts the Company
from carrying on its business;
(m) pay, discharge or satisfy any material Liability, other than
payment, discharge or satisfaction in the ordinary course of business of
Liabilities or obligations incurred in the ordinary course of business and
consistent with past practice;
(n) enter into or amend any lease of real or personal property; or
(o) write-off as uncollectible any notes or Accounts.
5.3 No Solicitation. Shareholder covenant and agree that they will not and
will not permit any of its agents or representatives (including, without
limitation, investment bankers, attorneys and accountants) to, directly or
indirectly (a) solicit, initiate or encourage submission of proposals or offers
by, or (b) furnish any information with respect to or otherwise cooperate in any
way with, or participate in any discussions or negotiations with, any Person
with respect to any proposal regarding the acquisition or purchase of all or a
material portion of the assets of the Company or any equity interest in the
Company or any business combination with the Company.
5.4 Investigation of the Company. Prior to the Closing Date, Purchaser may
make or cause to be made such investigation of the Company and of its financial
and legal condition as appropriate or advisable to familiarize itself therewith.
The Company agrees to furnish Purchaser and its employees, officers, agents,
accountants, legal counsel and other representatives with all
21
<PAGE>
financial, operating and other data and information concerning the Company and
commitments of the Company as Purchaser shall from time to time reasonably
request and will afford Purchaser and its employees, officers, accountants,
attorneys, agents, investment bankers and other authorized representatives
access to the Company's offices (including access during normal business hours)
to review such documents and its books and records and will be given opportunity
to ask questions of, and receive answers from, representatives of the Company
with respect to such matters. No investigations by Purchaser or its employees,
representatives or agents shall reduce or otherwise affect the Liability of the
Company or Shareholder with respect to any representations, warranties,
covenants or agreements made herein or in an exhibit, schedule or other
certificate, instrument, agreement or document (including the Disclosure
Schedule), executed or delivered in connection with this Agreement. Any
confidential information disclosed by the Company to Purchaser shall be subject
to the non-disclosure obligations set forth in the Letter of Intent between
Shareholder and Purchaser with respect to the Transaction.
5.5 Agreement to Consummate. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use their best efforts to do all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective, as soon as reasonably practicable, the
Transactions contemplated by the Operative Documents, including, but not limited
to, the obtaining of all consents, authorizations, orders and approvals of any
Governmental Body required in connection therewith and initiating or defending
any legal action that is necessary or appropriate to permit the Transactions to
be consummated. At any time after the Closing Date, if any further action is
necessary, proper or advisable to carry out the purposes of this Agreement,
then, as soon as is reasonably practicable, each party to this Agreement shall
take, or cause its proper officers to take, such action. Each of the parties
hereto further agree that it will cooperate with the other after the
consummation of the Transactions for the purpose of providing Purchaser with the
information and access to information necessary to ensure Purchaser with a
reasonably smooth transition into the ownership of the Company. No party to this
Agreement shall take or cause to be taken any action that would cause the
representations or warranties expressed herein to be untrue or incorrect on the
Closing Date.
5.6 Approval of Third Parties. As soon as practicable after the execution
of this Agreement, Shareholder will use their best efforts to obtain all
necessary approvals and consents of all third parties required on the part of
Shareholder for the consummation of the Transactions (the "Third Party
Consents"). Purchaser will reasonably cooperate with Shareholder in securing any
necessary consents from, or in making any filings with or giving any notice to
any third parties necessary for Shareholder to comply with this Section 5.6.
5.7 Agreement Regarding Brokers. Each party agrees that it will pay or
dispute, and hold the other party harmless from, any claims of brokers or others
for finder's or brokerage fees asserted as a result of representations by such
party to such brokers or others, regardless of whether the existence of such
brokers or others are disclosed herein.
5.8 Notice. Shareholder shall promptly give written notice to Purchaser
upon becoming aware of the occurrence or failure to occur, or the impending or
Threatened occurrence or failure to
22
<PAGE>
occur,of any event that would cause or constitute, any of their representations
or warranties being or becoming untrue.
5.9 Disclosure Schedules. Shareholder shall have delivered to Purchaser,
prior to the date hereof, the proposed final version of the Disclosure Schedules
containing all of the disclosures, exhibits and other information or items
required by the various provisions of this Agreement. Thereafter, Shareholder
shall deliver to Purchaser any supplements or amendments to such Disclosure
Schedule promptly after Shareholder become aware of any event which changes any
representation, warranty or disclosure made by Shareholder or the Company in
this Agreement or any statement made by the Disclosure Schedule or in any
supplement or amendment thereto. Within ten (10) business days after receipt of
any supplements or amendment to such Disclosure Schedule, if in Purchaser's sole
and absolute judgment such amendment and/or supplement represents, reflects or
results in a Material Adverse Effect on or to the Company, its business
prospects, assets, financial condition or result or operations (and in making
such judgment, Purchaser shall have the right to consider the effect of any such
amendment and/or supplement in the aggregate with all prior amendments and/or
supplements), this Agreement and the transactions contemplated hereby may be
terminated and abandoned by Purchaser by written notification to Shareholder.
5.10 Filings. The parties will each make or cause to be made any filings
and submissions under the laws of any jurisdiction, to the extent that such
filings are necessary to consummate the transactions contemplated hereby and
will take all actions necessary to consummate the transactions contemplated
hereby in a manner consistent with the applicable laws of such jurisdiction.
Each party will furnish to the other party such necessary information and
reasonable assistance as such other party may request in connection with its
preparation of necessary filings or submissions to any governmental entity.
5.11 Taxes.
(a) Shareholder shall pay, and shall hold Purchaser and the Company
harmless from, any and all Taxes, and any and all notarial or similar fees,
arising as a result of the purchase and sale of the shares of Stock
pursuant to this Agreement. Shareholder hereby agree to cooperate fully
with Purchaser and the Company in connection with the preparation of any
returns or reports, any examinations of the Company by any governmental
taxing authority, including, without limitation, making available records,
books of account or other materials reasonably necessary or helpful for the
preparation of such returns or reports or the defense against the
assertions of any taxing authority as to any tax returns.
(b) Shareholder shall be solely responsible for the payment of any
Taxes of the Company with respect to taxable periods that end on or prior
to the Closing Date and Shareholder shall timely pay same when due.
Shareholder shall reimburse Purchaser for their pro-rata share of any Taxes
of the Company with respect to taxable periods beginning prior to and
ending after the Closing Date within fifteen (15) days of the payment of
such Taxes. In the case of taxable periods beginning prior to and ending
after the Closing Date,
23
<PAGE>
Shareholder pro-rata share of such Taxes shall be (i) in the case of any
Taxes other than Taxes based upon or related to income, the amount of such
Tax for the entire taxable period multiplied by a fraction the numerator of
which is the number of days in the taxable period ending on the Closing
Date and the denominator of which is the number of days in the entire
taxable period, and (ii) in the case of any Tax based upon or related to
income, the amount of such Tax that would have been payable if the relevant
taxable period ended on the Closing Date.
(c) This agreement terminates any and all sharing or other
allocation agreements or arrangements for Taxes in effect as of the Closing
to which the Company was a party.
6. CONDITIONS PRECEDENT TO CLOSING
6.1 General Conditions. Consummation of the Transactions shall be subject
to the fulfillment at the Closing Date of each of the following conditions:
(a) No Injunction. No court having jurisdiction shall have issued,
to the Best Knowledge of Purchaser or Shareholder, an injunction preventing
the consummation of the Transactions that shall not have been stayed or
dissolved prior to or on the Closing Date.
(b) Proceedings. All proceedings taken or to be taken in connection
with the Transactions, and all documents incident thereto shall be
reasonably satisfactory in form and substance to the parties and their
counsel, and the parties and their counsel shall have received all such
counterpart originals or certified or other copies of such documents as the
parties or their counsel may reasonably request.
(c) Noncompetition and Employment Agreement. At the Closing,
Purchaser and each Shareholder shall enter into a Noncompetition and
Employment Agreement.
(d) Audited Financials. The Company shall have provided Purchaser at
least fourteen (14) days prior to Closing, at the Company's sole cost and
expense, with audited financial statements of the Company, prepared by
independent auditors selected by Purchaser, as required by Item 310 of
Regulation S-B, which is the source of disclosure requirements for "small
business issuer" filings under the Securities Act and the Securities
Exchange Act of 1934, as amended.
6.2 Conditions to Closing in Favor of Shareholder. Consummation of the
Transactions shall be subject to the fulfillment, to the reasonable satisfaction
of Shareholder, or their written waiver, at or before the Closing Date, of each
of the following conditions:
(a) Representations and Warranties of Purchaser. The
representations, warranties and statements of Purchaser contained in this
Agreement and the Operative Documents shall be complete and accurate as of
the date of this Agreement and shall also
24
<PAGE>
be complete and accurate at and as of the Closing Date, except for changes
contemplated by this Agreement, as if made on the Closing Date; and
Purchaser shall have performed or complied with all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Closing Date.
(b) Purchaser's Officers' Certificate. Purchaser shall have
delivered to Shareholder an Officers' Certificate, dated the Closing Date,
of Purchaser certifying to (a) the due adoption by the Board of Directors of
the attached resolutions approving the execution and delivery of this
Agreement, and the consummation of the Transactions and (b) the incumbency
of the President, Secretary and other officers of Purchaser executing any of
the Operative Documents.
(c) Governmental Consents, Authorizations, Etc. All material
consents, authorizations, orders or approvals of, and filings or
registrations with, and any permits, licenses or other authorizations
required by, any applicable Governmental Body that are required for, or in
connection with, the execution and delivery of this Agreement by Purchaser
and the consummation by Purchaser of the Transactions shall have been
obtained or made.
(d) Closing Consideration. Purchaser shall have delivered to
Shareholder the Purchase Price required by Section 2.2 hereof, including the
Subordinated Note.
6.3 Conditions to Closing in Favor of Purchaser. Consummation of the
Transactions shall be subject to the fulfillment, to the reasonable satisfaction
of Purchaser, or its written waiver, at or before the Closing Date of the
following conditions:
(a) Representations and Warranties of Shareholder. The
representations, warranties and statements of Shareholder contained in this
Agreement, the exhibits hereto and the Disclosure Schedules shall be
complete and accurate as of the date of this Agreement and shall also be
complete and accurate at and as of the Closing Date, except for changes
contemplated by this Agreement, as if made at and as of the Closing Date;
and Shareholder shall have performed or complied with all agreements and
covenants required by this Agreement to be performed or complied with by
them at or prior to the Closing Date.
(b) Governmental Consents, Authorizations, Etc. All material consents,
authorizations, orders or approvals of, and filings or registrations with,
and any permits, licenses or other authorizations required by, any
applicable Governmental Body that are required for or in connection with,
the execution and delivery of this Agreement by Shareholder and the
consummation by Shareholder of the Transactions shall have been obtained or
made.
25
<PAGE>
(c) Shareholder Release. Shareholder shall execute and deliver to
Purchaser a general release releasing any and all claims for compensation
or otherwise as directors, officers, employees and shareholders in the form
attached hereto as Exhibit "C".
(d) Shareholder's Certificate. Shareholder shall have delivered to
Purchaser Shareholder's certificates dated the Closing Date, certifying as
to the fulfillment of the conditions set forth in Section 6.3(a) and (b).
(e) Opinion of Counsel. Shareholder shall have furnished Purchaser
with an opinion dated the Closing Date of a law firm suitable to Purchaser
in the form attached as Exhibit "D" hereto, or with such modifications
thereto as are approved by Purchaser, in its sole and absolute discretion.
(f) Legislation. No law or legally binding regulation shall have
been enacted that does or would prohibit, restrict or delay consummation of
the Transactions or any of the conditions to the consummation of the
Transactions or that does or would have a Material Adverse Effect on the
Company.
(g) Litigation. There shall be no effective Order of any nature
(including any temporary restraining order) issued by a Governmental Body
of competent jurisdiction restraining or prohibiting consummation or
altering the terms of any of the Transactions, or actions seeking damages
based upon the foregoing which Purchaser reasonably deems material.
Shareholder shall not have become subject to any litigation, which, if
adversely determined, could, in the opinion of Purchaser, have a Material
Adverse Effect on the Company.
(h) No Adverse Change. There shall have occurred no adverse change
(whether or not covered by insurance) in operations, assets, liabilities,
properties or financial condition of the Company since the date of the
Financial Statements.
(i) Delivery of Documents/Acceptance of Disclosure. Shareholder
shall have timely delivered any Schedules and all amendments and/or
supplements to the Disclosure Schedules and all other documents,
instruments, schedules and financial statements required hereunder to
Purchaser. The Disclosure Schedules, as amended and supplemented, shall be
acceptable in form and substance to Purchaser, in its absolute discretion.
(j) Third Party Consents. Shareholder shall have delivered copies of
all Third Party Consents, if any, necessary to permit the consummation of
the Transactions contemplated by this Agreement shall have been obtained in
a form satisfactory to Purchaser.
(k) Purchaser's Investigation. The investigations by Purchaser and
its representatives in connection with the proposed Transactions shall not
have caused Purchaser or its representatives to become aware of any facts
or circumstances relating to
26
<PAGE>
the Company that in the sole discretion of Purchasers make it inadvisable
for Purchaser to proceed with the Transactions.
(l) Approval. The Board of Directors of the Company and Shareholder
each shall have approved this Agreement and the transactions contemplated
hereby.
(m) Certificate of Authorities. Shareholder shall have furnished to
Purchaser (i) certificates of the Secretary of State of each state in which
the Company is organized or incorporated, dated as of a date not more than
five (5) business days prior to the Closing Date, attesting to the
incorporation and good standing of the Company, (ii) a copy, certified by
the Secretary of State of each state in which the Company is organized or
incorporated, as of a date not more than five (5) business days prior to
the Closing Date, of the Articles of Incorporation and all amendments
thereto for the Company, (iii) a copy, certified by the Secretary of the
Company, of the Bylaws of the Company, as amended and in effect as of the
Closing Date, and (iv) a copy, certified by the Secretary of the Company,
of resolutions duly adopted by the Board of Directors of the Company duly
authorizing the transactions contemplated in this Agreement.
(n) Corporate Records and Books of Account. The respective corporate
seals, articles of incorporation, bylaws, stock certificates, stock
transfer ledgers, and corporate books and records of the Company, updated
up to the Closing Date, shall be delivered to Purchaser.
(o) Bank Accounts. Shareholder shall have caused the Company to have
revoked all existing authorities and all instructions to banks in respect
of the operations of the bank accounts of the Company and new authorities
and instructions shall be given to such persons on such terms as Purchasers
may require.
(p) Loan Commitment. Purchaser shall have received a loan commitment
from Purchaser's lender to fund such portion of the acquisition as
Purchaser shall deem necessary in its sole and absolute discretion.
(q) Certificate of Merger. Purchaser shall have received fully
executed Certificates of Merger sufficient for filing with the State of
Delaware and State of Texas in order to consummate the Merger.
(r) Subscription Agreement. Jimmy Welch shall have executed and
delivered to Purchaser the Subscription Agreement in the from attached
hereto as Exhibit "E".
(s) Pledge Agreement. Shareholder shall have executed and delivered
to Purchaser the Pledge Agreement in the form attached hereto as Exhibit
"F", together with fully-executed blank stock powers and the original stock
certificates evidencing the CWII Stock.
27
<PAGE>
(t) Other Matters. Shareholder shall have delivered to Purchaser, in
form and substance reasonably satisfactory to counsel for Purchaser, such
certificates and other evidence as Purchaser may reasonably request as to
the satisfaction of the conditions contained in this Section 6.3.
7. CLOSING AND TERMINATION
7.1 Closing Date. Subject to the right of Purchaser and Shareholder to
terminate this Agreement pursuant to Section 7.2 hereof, the closing of the
Transactions (the "Closing") shall, unless another date or place is agreed to in
writing by Shareholder and Purchaser, take place at the offices of Bell,
Nunnally & Martin PLLC, 3232 McKinney Avenue, Suite 1400, Dallas, Texas 75204,
at 10:00 a.m. on September 30, 1999 (the "Closing Date") or such other place and
date as the parties may mutually agree upon in writing. Purchaser shall, at its
option, have the right, but not the obligation to extend the Closing Date by not
more than forty-five (45) days by giving written notice thereof to Shareholder
at least three (3) business days prior to the Closing Date referred to in the
preceding sentence. If Purchaser exercises its option hereunder to extend the
Closing Date, the term Closing Date as used herein shall mean and refer to such
Closing Date as extended.
7.2 Termination. This Agreement may be terminated at any time prior to the
Closing Date:
(a) by mutual written agreement of Purchaser and Shareholder;
(b) by Shareholder if any representation or warranty of Purchaser or by
Purchaser if any representation or warranty of Shareholder contained herein
shall have been incorrect or breached in any material respect, as to which
notice shall have been given to the breaching party, and shall not have
been cured or otherwise resolved to the reasonable satisfaction of the
other party on or before the Closing Date, or by either Purchaser or
Shareholder if any condition to the consummation of the Transactions
contemplated hereunder that must be fulfilled to its satisfaction has
become impractical to be fulfilled;
(c) by either Purchaser or Shareholder if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Transactions shall have become final and non-
appealable; or
(d) by Purchaser or Shareholder if the Closing has not occurred by
October 29, 1999; provided, however, that such date may be extended by
written agreement among the parties and provided, further, that no party
shall be permitted to terminate hereunder if such party is in violation of
this Agreement.
7.3 Effect of Termination. In the event of the termination of this
Agreement as provided herein, this Agreement shall become wholly void and have
no further force and effect except as hereinafter provided; and there shall be
no Liability on the part of Shareholder or Purchaser (or Purchaser's respective
officers of directors) except to comply with the provisions of Section 5.7
regarding brokers, to pay the fees and expenses as apportioned in Section 9.2
and
28
<PAGE>
except as otherwise expressly provided herein. Nothing contained herein shall
relieve any party from Liability for its breach of this Agreement.
7.4 Extension; Waiver. At any time prior to the Closing Date, any party
hereto that is entitled to the benefits hereof (with respect to any such
corporate party by action taken by its Board of Directors or a duly authorized
officer), may (a) extend the time for the performance of any of the obligations
or other acts of any of the other parties hereto, (b) in whole or in part, waive
any inaccuracy in the representations and warranties of any of the other parties
hereto contained herein or in any exhibit or schedule hereto or in any document
delivered pursuant hereto, and (c) in whole or in part, waive compliance with
any of the agreements of any of the other parties hereto or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall only be valid if same is set forth in an instrument in writing
signed and delivered on behalf of such party.
8. SURVIVAL AND INDEMNIFICATION
8.1 Survival of Representations and Warranties. The respective
representations and warranties of Shareholder contained in this Agreement, the
Operative Documents and any investigation shall survive the consummation of the
Transactions contemplated in this Agreement and shall continue in full force and
effect after the Closing for a period of four (4) years from the Closing at
which time they shall expire, except as to claims made in respect thereof in
writing by Purchaser on or before the expiration of such period; provided,
however that (a) the representations and warranties contained in Section 3.12
shall survive until the expiration of the statutory period of limitations for
assessment of Tax deficiencies, including any extensions thereof, for each
taxable year of the Company which begins before the Closing, and (b) the
representations and warranties contained in Sections 3.1 and 3.29 shall survive
indefinitely. The covenants and agreements of Shareholder shall not be affected
by the expiration of any representation or warranty pursuant to this Section 8.1
and shall survive indefinitely.
8.2 Indemnity. Shareholder and the Company agree to jointly and severally
indemnify and hold Purchaser, its officers, directors, agents, attorneys and
accountants ("Purchaser Indemnitees") harmless from any and all damages, losses
(which shall include any diminution in value, liabilities, joint or several),
payments, obligations, penalties, claims, litigation, demands, defenses,
judgments, suits, proceedings, costs, disbursements or expenses (including
without limitation, fees, disbursements and expenses of attorneys, accountants
and other professional advisors and of expert witnesses and costs of
investigation and preparation) of any kind or nature whatsoever (collectively
"Damages"), directly or indirectly resulting from, relating to or arising out
of:
(a) any breach or nonperformance (partial or total) of or inaccuracy in
any representation or warranty or covenant or agreement of Shareholder
contained in this Agreement or any Operative Document which survives the
Closing hereof;
29
<PAGE>
(b) Liability arising out of the Company's business conducted prior to
the Closing and not expressly assumed by Purchaser pursuant to this
Agreement;
(c) any losses or costs of defending against any claims which may be
made against Purchaser by any Person claiming violations by the Company of
any local, state, or federal law relating to the employment relationship,
including, but not limited to, wages, hours, concerted activity,
nondiscrimination, occupational health and safety and the payment and
withholding of Taxes, where such claims arise out of circumstances
occurring prior to the Closing Date;
(d) any actual or threatened violation of or non-compliance with, or
remedial obligation arising under, any environmental laws arising from any
event, condition, circumstance, activity, practice, incident, action or
plan existing or occurring prior to the Closing relating in any way to the
Company;
(e) any claims or demands made by Jimmy Welch, or the failure of Jimmy
Welch to take any action or execute any documents requested by Purchaser,
or any Damages caused by or relating to any acts or omissions of Jimmy
Welch; and
(f) the Transaction Expenses incurred by Shareholder.
8.3 Indemnification Notice. If a Purchaser Indemnitee intends to exercise
its right to indemnification provided in this Article 8, such Purchaser
Indemnitee shall provide the party or parties from whom the indemnification will
be sought (the "Indemnitor") at least fifteen (15) days prior written notice
(the "Indemnification Notice") of such Purchaser Indemnitee's intention to do so
and the facts or circumstances giving rise to the claim ("Indemnification
Claim"). Nothing contained herein shall preclude any Purchaser Indemnitee from
taking any actions deemed reasonably necessary or appropriate in response to any
third party claims during such interim period. An Indemnification Claim may, at
the option of Purchaser Indemnitee, be asserted as soon as any situation, event
or occurrence has been noticed by Purchaser Indemnitee regardless whether actual
harm has been suffered or out-of-pocket expenses incurred. During such fifteen
(15) day period, the Indemnitor shall be entitled to cure the defect or
situation giving rise to the Indemnification Claim to the satisfaction of
Purchaser Indemnitee. If the Indemnitor is unwilling or unable to cure the
defect giving rise to the Indemnification Claim during such fifteen (15) period,
Purchaser Indemnitee may, on the sixteenth (16th) day after the Indemnification
Notice, seek indemnification as provided in this Article 8.
8.4 Offset. At any time or from time to time prior to the final payment by
Purchaser to Shareholder of any amounts or sums due under or pursuant to this
Agreement or the Operative Documents, including, without limitation, the
Subordinated Note, Purchaser shall be entitled, in addition to, and not in lieu
of, any other right or remedy which Purchaser may have against Shareholder,
under or pursuant to this Agreement, or otherwise, to notify Shareholder in
writing (an "Offset Notice") that Purchaser reasonably believes that it is
entitled to indemnity for Damages under Section 8.2. Any Offset Notice provided
hereunder shall identify the provision
30
<PAGE>
of this Agreement which Purchaser believes entitles it to such indemnity for
Damages and shall briefly identify the facts which constitute the basis for each
such claim of indemnity and the dollar amount of such claim. If on or before
thirty (30) days after delivery of the Offset Notice, Shareholder shall not have
objected thereto, Purchaser may, but, shall not be required to, offset against
any portion of the amounts due under this Agreement then remaining unpaid, the
amount of the Damages claimed in the Offset Notice (and thus to reduce the
amounts due under this Agreement). Notwithstanding any offset exercised pursuant
to this Section 8.4, to the extent that the actual amount of any Damages arising
from a claim for indemnity set forth in an Offset Notice shall exceed the value
of the offset against the amounts due under this Agreement claimed, Shareholder
shall remain liable for, and shall promptly reimburse Purchaser the amount of,
any such excess Damages. If on or before thirty (30) days following delivery of
the Offset Notice, Shareholder shall notify Purchaser that Shareholder questions
the amount of any Damages for which indemnity is claimed therein (or the
entitlement to indemnity), Purchaser shall nonetheless be entitled to exercise
its rights of offset provided for in this Section 8.4, but in lieu of reducing
the amounts due under this Agreement immediately, shall defer payment of a
portion or portions of the amounts due under this Agreement remaining unpaid in
the amount of the disputed claim until such time as (i) Purchaser shall have
received written authorization from Shareholder to retain such unpaid portion of
the amounts due under this Agreement in partial or total satisfaction of
Purchaser's claim for indemnity, or (ii) Shareholder shall have delivered to
Purchaser, a certified or file-stamped copy of a final decision of a court of
competent jurisdiction establishing the amount of such Damages or directing a
specific distribution of all or any part of the amounts due under this Agreement
being held by Purchaser pursuant to this Section 8.4. It shall be a condition to
Purchaser's obligation to defer applying any unpaid portion of the amounts due
under this Agreement, subject to the resolution of Shareholder' objection to the
amount of Damages claimed or the entitlement to indemnity with regard thereto,
that Shareholder, as applicable, specify in writing the provisions of this
Agreement and other facts supporting such objection. Purchaser shall not be
obligated to exercise the rights of offset provided for in this Section 8.4, and
no failure to exercise any such right of offset shall relieve Shareholder of any
indemnity obligations under Section 8.2, or otherwise. This Section 8.4 shall
survive the Closing indefinitely.
9. GENERAL PROVISIONS AND OTHER AGREEMENTS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if and when delivered personally or
transmitted by telex, facsimile (receipt confirmed) or telegram, mailed by
registered or certified mail (return receipt requested) or sent by a recognized
next business day courier to the following persons at the following addresses
(or at such other address for a party as shall be specified by like notice):
31
<PAGE>
(a) If to Purchaser:
CommWorld Acquisition Corporation
c/o Communications World International, Inc.
7315 South Revere Parkway, Suite 602
Englewood, Colorado 80112
Attn: James M. Ciccarelli, Chief Executive Officer
Facsimile: (303) 741-1137
with a copy to:
Bell, Nunnally & Martin PLLC
3232 McKinney Avenue, Suite 1400
Dallas, Texas 75204
Attn: Larry L. Shosid, Esq.
Facsimile: (214) 740-1499
(b) If to Shareholder or the Company:
RMS Communications
3201 Bishop Drive, No. 105
Arlington, Texas 76010-5235
Attn: Pierre Miossec, President
Facsimile: (817) 633-4774
9.2 Fees and Expenses. Shareholder and Purchaser shall each pay all of
their own fees, costs and expenses (including without limitation, those of
accountants, appraisers and attorneys) incurred in connection with or related to
the preparation, negotiation, execution, delivery, satisfaction, compliance and
consummation of this Agreement and the Transactions contemplated hereby and the
closing conditions hereunder.
9.3 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. Terms such as "herein," "hereof," "hereinafter" refer to this
Agreement as a whole and not to the particular sentence or paragraph where they
appear, unless the context otherwise requires. Terms used in the plural include
the singular, and vice versa, unless the context otherwise requires.
9.4 Counterparts. This Agreement may be executed by facsimile in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 Miscellaneous. This Agreement (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof;
(b) is not intended to and shall not confer upon any
32
<PAGE>
other person any rights or remedies hereunder or otherwise with respect to the
subject matter hereof, except for rights that may expressly arise as a
consequence of the Transactions; (c) may not be assigned by operation of law or
otherwise; (d) has been drafted by all of the parties to this Agreement and
should not be construed against any of the parties hereto; and (e) shall be
governed in all respects, including validity, interpretation and effect by the
substantive laws of the State of Texas without regard to conflict of law
provisions.
9.6 Publicity. Prior to Closing, no party hereto shall issue any press
release or make any other public statement, in either case relating to or
connected with or arising out of this Agreement or the matters contained herein,
without obtaining the prior written approval of the other parties to the
contents and the manner of presentation and publication thereof, which approval
shall not be unreasonably withheld.
9.7 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable. This Agreement shall
be construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or its severance from this
Agreement. Furthermore, in lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as part hereof a provision as
similar in terms, but in any event no more restrictive than, such illegal,
invalid or unenforceable provision as may be possible and be legal, valid and
enforceable.
9.8 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and permitted assigns.
9.9 Captions. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect, limit or
amplify the provisions hereof.
9.10 Attorneys' Fees. In the event that any Proceeding is commenced by
any party hereto for the purpose of enforcing any provision of this Agreement,
the party to such Proceeding may receive as part of any award, judgment,
decision or other resolution of such Proceeding its costs and attorneys' fees as
determined by the person or body making such award, judgment, decision or
resolution. Should any claim hereunder be settled short of the commencement of
any such Proceeding, the parties in such settlement may mutually agree to
include as part of the damages alleged to have been incurred reasonable costs of
attorneys or other professionals in investigation or counseling on such claim.
9.11 Jurisdiction and Venue. Any judicial proceedings brought by or
against any party on any dispute arising out of this Agreement or any matter
related thereto shall be brought in the state or federal courts of Dallas
County, Texas and, by execution and delivery of this Agreement, each of the
parties accepts for itself the exclusive jurisdiction and venue of the
33
<PAGE>
aforesaid courts as trial courts, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement after exhaustion of
all appeals taken (or by the appropriate appellate court if such appellate court
renders judgment).
9.12 Assignability. This Agreement may not be transferred, assigned,
pledged or hypothecated by any party hereto without the prior written consent of
the other parties to this Agreement.
9.13 Entirety. This Agreement and the documents executed and delivered
pursuant hereto, executed on the date hereof or in connection herewith, contain
the entire agreement among the parties with respect to the matters addressed
herein and supersede all prior representations, inducements, promises or
agreements, oral or otherwise, which are not embodied herein or therein.
9.14 Amendment. This Agreement and the exhibits and schedules hereto may be
amended by the parties hereto at any time prior to the Closing Date; provided,
however, that any amendment must be by an instrument or instruments in writing
signed and delivered on behalf of each of the parties hereto.
9.15 Governing Law. This Agreement shall be governed by the substantive
laws of the State of Texas without regard to principles of choice or conflict of
law.
[Signature Page Follows]
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers.
PURCHASER:
COMMWORLD ACQUISITION CORPORATION,
a Colorado corporation
By:__________________________________________
Printed Name:________________________________
Title:_______________________________________
COMPANY:
WILLPOWER, INC., d/b/a RMS COMMUNICATIONS,
a Texas corporation
By:__________________________________________
Pierre Miossec, President
SHAREHOLDER:
_____________________________________________
Pierre Miossec
35
