<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: October 31, 1999
[_] Transition period under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _________________ to ______________.
Commission file No. 0-30220
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COMMUNICATIONS WORLD INTERNATIONAL, INC.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-0917382
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7315 S. Revere Parkway, Englewood, Colorado 80112
- ------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(303) 721-8200
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Issuer's Telephone Number, Including Area Code
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of November 30, 1999, the issuer had 7,193,351 shares of its no par value
Common Stock issued and outstanding.
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
October 31, 1999
(In Thousands of Dollars)
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Current assets:
Cash $ 160
Trade accounts and current portion of notes receivable, less allowance for
doubtful accounts of $295 2,334
Inventory 315
Prepaid expenses 67
-------
Total current assets 2,876
Property and equipment, net 339
Deposits and other assets 142
Intangible assets, net 3,175
Deferred tax asset 1,045
-------
$ 7,577
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,146
Revolving line of credit 893
Current portion of notes payable 760
Accrued expenses 343
Deposits and other current liabilities 80
-------
Total current liabilities 4,223
Capital lease obligations and deferred revenue 36
Notes payable (including $880 due to related parties) 2,187
-------
Total liabilities 6,446
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized:
Series C (cumulative) - 371,545 shares issued and outstanding, 371
Series F (cumulative) - 214,818 shares issued and outstanding 215
Common stock, no par value, 25,000,000 shares authorized,
shares issued and outstanding; 7,159,621 7,628
Additional paid-in capital 563
Accumulated deficit (7,646)
-------
Total stockholders' equity 1,131
-------
$ 7,577
=======
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended October 31, 1999 and 1998
(In Thousands of Dollars except Earnings Per Share data)
________________________________________________________________________________
<TABLE>
<CAPTION>
For the Three Months Ended October 31,
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1999 1998
---- ----
<S> <C> <C>
Revenue:
Franchise equipment sales $ 1,283 $ 1,214
Direct equipment sales and service 2,030 1,811
Royalty fees 41 46
Other revenue 105 29
------- -------
Total revenue 3,459 3,100
Costs and expenses:
Cost of franchise equipment sales 1,160 1,058
Cost of direct equipment sales and service 1,346 1,202
Selling 238 149
General and administrative 807 820
Cost of expired letters of intent -- 45
Depreciation and amortization 53 62
Interest expense 67 73
------- -------
Total cost and expenses 3,671 3,409
(Loss) from operations before income taxes (212) (309)
Income tax benefit -- --
------- -------
Net (loss) $ (212) $ (309)
======= =======
Earning per share:
Basic:
Net (loss) $ (.03) $ (.20)
======= =======
Fully diluted:
Net (loss) $ (.03) $ (.20)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the Six Months Ended October 31, 1999 and 1998
(In Thousands of Dollars except Earnings Per Share data)
________________________________________________________________________________
<TABLE>
<CAPTION>
For the Six Months Ended October 31,
------------------------------------
1999 1998
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<S> <C> <C>
Revenue:
Franchise equipment sales $ 2,622 $ 2,548
Direct equipment sales and service 4,134 3,295
Royalty fees 81 105
Other revenue 123 48
------- -------
Total revenue 6,960 5,996
Costs and expenses:
Cost of franchise equipment sales 2,383 2,214
Cost of direct equipment sales and service 2,674 2,113
Selling 499 303
General and administrative 1,500 1,541
Executive officer severance compensation -- 138
Cost of expired letters of intent -- 45
Depreciation and amortization 104 124
Interest expense 124 138
------- -------
Total cost and expenses 7,284 6,616
(Loss) from operations before income taxes (324) (620)
Income tax benefit -- --
------- -------
Net (loss) $ (324) $ (620)
======= =======
Earning per share:
Basic:
Net (loss) $ (.05) $ (.37)
======= =======
Fully diluted:
Net (loss) $ (.05) $ (.37)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended October 31, 1999 and 1998
(In Thousands of Dollars)
________________________________________________________________________________
<TABLE>
<CAPTION>
For the Six Months Ended October 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (324) $ (620)
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation and amortization 104 124
Provision for losses on accounts and notes receivable 62 33
Changes in operating assets and liabilities:
Trade accounts and notes receivable (1,013) (318)
Inventories 16 (64)
Prepaid expenses (59) (83)
Deposits and other assets (97) (28)
Trade accounts payable 329 317
Accrued expenses (11) (63)
Other liabilities 60 0
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Net cash (used) by operating activities (933) (702)
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Cash flows from investing activities:
Acquisitions (1,559) (83)
Capital expenditures (108) (12)
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Net cash used by investing activities (1,667) (135)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement 396 (208)
Sale of Common Stock 507 310
Sale of warrants 11
Net proceeds from sale of Preferred Stock -- 917
Notes payable 1,993 --
Repayment of notes and contract payable (194) (191)
Repayment of capital lease obligations (10) (3)
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Net cash provided by financing activities 2,703 825
Net increase (decrease) in cash 103 (12)
Cash at beginning of the period 57 13
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Cash at end of the period $ 160 $ 1
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) - continued
For the Six Months Ended October 31, 1999 and 1998
(In Thousands of Dollars)
________________________________________________________________________________
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $124 $ 38
Non-cash investing activities:
Issuance of preferred stock as bonus compensation $ 10
Business acquisitions financed by:
Issuance of common stock $492
Conversion of notes payable to common stock $ 15
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
________________________________________________________________________________
(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) Acquisitions
During the six months ended October 31, 1999 the Company completed the
acquisitions of two companies. The purchase prices for these companies
resulted in an increase in the excess of purchase price over tangible
assets of approximately $1,559,000. The acquisitions were made with a
combination of cash, issuance of common stock and notes. Common stock
was issued at the quoted market price within five business days of the
closing of the sale. A total of 442,050 shares of common stock were
issued at the total market price of $492,123. Notes were issued in the
aggregate principal amount of $509,500 at an interest rate of 7% per
annum with various maturities through 2003.
(3) Convertible Debt Offerings
During the six months ended October 31, 1999, the Company received net
proceeds of approximately $1,362,000 from the sale of Units of
Subordinated Convertible Notes and Common Stock Purchase Warrants. Each
Unit consists of a $50,000 Note and 20,000 Warrants for a purchase
price of $50,400. Each Note is convertible into Common Stock at $1.50
per share which may be lowered under certain circumstances. Each
Warrant is exerciseable at $.40 per share until September 30, 2004.
Subsequent to October 31, 1999 additional net proceeds of approximately
$722,000 were received from the sale of Notes and Warrants to two
institutional investors. The terms of these transactions were similar
to the Unit offering, with certain exceptions. The Company agreed to
register the common stock which may be received upon conversion of
these notes, and that if the registration statement is not declared
effective by April 30,
7
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2000, the institutional investors have the right to accelerate the
maturity date of their notes to six months from the date of exercise of
the acceleration right. If the institutional investors exercise the
right to accelerate the maturity of their notes, the Company will
redeem their Warrants at $.02 per Warrant. The exercise price for these
warrants is $.60, instead of the $.40 exercise price in the Units. The
Company is also restricted in its ability to prepay these notes.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Statements herein, other than historical fact, may be deemed forward-looking.
These statements may be accompanied by words such as "believe," "estimate,"
"project," "expect," "anticipate," or "predict," that convey the uncertainty of
future events or outcomes. These statements are based on assumptions that the
Company believes are reasonable; however, many factors could cause the Company's
actual results in the future to differ materially from the forward-looking
statements made herein and in any other documents or oral presentations made by,
or on behalf of, the Company. Important factors which could cause actual results
to differ materially from those in forward-looking statements, include, among
others, the ability to obtain additional financing, which is not assured; price
and product competition by foreign and domestic competitors, including new
entrants; rapid technological developments and changes; the Company's
relationship with its suppliers and suppliers' ability to provide products on a
timely basis; the achievement of lower costs and expenses; reliance on large
customers; the Company's ability to attract acquisition candidates and to
successfully integrate acquisitions into the Company's business; interest rate
fluctuations and other general economic conditions. In light of the assumptions
and uncertainties inherent in forward-looking information, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the plans of the Company will be realized.
Results of Operations
For the three month and six month periods ended October 31, 1999, Communications
World International, Inc. ("CommWorld" or the "Company") reported net losses of
$212,000 and $324,000, respectively, as compared to net losses of $309,000 and
$620,000 for the comparable periods ended October 31, 1998. Total revenue for
the quarter ended October 31, 1999 was $3,459,000 compared to total revenue of
$3,100,000 for the quarter ended October 31, 1998. For the six month period
ended October 31, 1999, total revenue was $6,960,000 compared to total revenue
of $5,997,000 for the six month period ended October 31, 1998.
Franchise Segment
The sales of the franchise segment in the current three month and six month
periods ended October 31, 1999 have remained relatively stable as compared to
the same time periods from the prior year. The gross margin percentage on
franchise equipment sales is approximately 9% for the three month and six month
periods ended October 31, 1999 as compared to gross margins of approximately 13%
for the same periods in the prior year. The prior year gross margins were
improved by a discount of $127,000 related to an agreement with Toshiba America
Information Systems, Inc., the Company's principal supplier, to treat as non
interest bearing a note payable to it in the amount of $1,086,000. Exclusive of
the $127,000 discount, the gross margins from franchise equipment sales would
have resulted in a decrease in gross margin of $26,000 and $23,000 for the three
month and six month periods ended October 31, 1998. Management does not expect
future sales of the franchise segment to materially increase over present
levels.
Company Owned Segment
The increase in revenue from direct equipment sales and service was $219,000 and
$839,000 for the three month and six month periods ended October 31, 1999,
respectively, compared to the same time periods from the prior year. The gross
margin percentage on direct equipment sales and service declined approximately
1% from 34% for the six months ended October 31, 1998 to 35 % for the six months
ended October 31, 1999. Gross margins for the three month periods ending October
31, 1999 compared
9
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to the same periods of the prior year were unchanged. The increase in sales
reflects the Company's strategy to grow by acquisition in the Southwest United
States. Sales for the three and six months ended include two acquisitions in the
Dallas and one acquisition in the Denver markets. A second acquisition in Denver
was completed at the end of October 1999 in Denver, but had no operations
included for the reporting periods. Included in the direct equipment sales and
service amounts for the three month and six month periods ended October 31, 1998
were the operations of three subsidiaries that were disposed of and are not
included in the current periods' operations. The Company's national account
sales for the six months ended October 31, 1999 were $1,580,000 compared to
$1,780,000 for the first six months of the prior year. The gross margin
percentage realized on these sales for both periods was 38%. The decrease in
sales is the result of reduced activity with the Company's largest national
account customer.
The increase in selling expenses was $89,000 and $196,000 for the three month
and six month periods ended October 31, 1999, respectively, compared to the same
time periods from the prior year. This increase was due to increased commissions
on higher sales volume and a larger sales force in company owned operations.
In June of 1998, the Company entered into a letter of intent to merge with
Interconnect Acquisition Corporation ("IAC"), a privately-held company. The
merger was completed October 28, 1998. In connection with the merger, the
Company effected management changes, including the election of Jim Ciccarelli as
Chief Executive Officer and a director of the Company and Lionel Brown as
President of the Company. Included in the loss for the six months ended October
31, 1998 is officer severance compensation of $138,000 related to two executive
officers who are no longer with the Company.
In conjunction with the merger with IAC, the Company is pursuing several
acquisition targets. Costs associated with these potential acquisitions are
deferred and either capitalized as part of the cost of acquisition or are
expensed at the time that it is determined that the acquisition will not be
completed. Included in the loss for the six months ended October 31, 1998 are
$45,000 of costs associated with expired letters of intent.
Lack of Working Capital; Need for Additional Financing
- ------------------------------------------------------
The Company's operations have historically been adversely affected by a lack of
working capital. The Company uses a line of credit from a lending institution,
which is limited to the extent of available collateral. The Company's line of
credit is fully utilized to the extent of available collateral. The lack of
available funding impedes the Company's ability to fund additional equipment
purchases and to expand its business operations. Although the Company's working
capital deficit has been reduced by approximately $300,000 at October 31, 1999
as compared to its position at April 30, 1999, the Company is continuing its
efforts to obtain additional capital. The Company 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 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. Total proceeds from this offering were
$353,000 of which $310,000 were received during the six months ended October 31,
1998.
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
10
<PAGE>
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. On October 21, 1998, the
Company closed escrow on $1,035,000 from the offering of preferred stock and
common stock purchase warrants.
During the six months ended October 31, 1999, the Company received net proceeds
of approximately $1,362,000 from the sale of Units of Subordinated Convertible
Notes and Common Stock Purchase 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 which may be lowered under certain
circumstances. Each Warrant is exercisable at $.40 per share until September 30,
2004. Subsequent to October 31, 1999 additional net proceeds of approximately
$722,000 were received from the sale of Notes and Warrants to two institutional
investors. The terms of these transactions were similar to the Unit offering,
with certain exceptions. The Company agreed to register the common stock which
may be received upon conversion of these notes, and that if the registration
statement is not declared effective by April 30, 2000, the institutional
investors have the right to accelerate the maturity date of their notes to six
months from the date of exercise of the acceleration right.If the institutional
investors exercise the right to accelerate the maturity of their notes the
Company will redeem their Warrants at $.02 per Warrant. The exercise price for
these warrants is $.60, instead of the $.40 exercise price in the Units. The
Company is also restricted in its ability to prepay these notes.
The Company's accounts receivable financing agreement was subject to annual
renewal in October 1999. The Company was informed that there had been changes in
the lender's operations and that the lender would 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 another lender
and believes that it should be able to replace the current agreement.
Year 2000 Issue
- ---------------
Based on an assessment in the prior 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 are utilizing the new system which is Year 2000 compliant. 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
11
<PAGE>
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.
12
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Part II
Other Information
Not applicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Communications World International, Inc.
---------------------------------------------
(Registrant)
Date: December 13, 1999 /s/ James M. Ciccarelli
----------------- ---------------------------------------------
James M. Ciccarelli, Chief Executive Officer
Date: December 13, 1999 /s/ David E. Welch
----------------- ---------------------------------------------
David E. Welch, Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 160
<SECURITIES> 0
<RECEIVABLES> 2,629
<ALLOWANCES> (295)
<INVENTORY> 315
<CURRENT-ASSETS> 2,876
<PP&E> 535
<DEPRECIATION> (196)
<TOTAL-ASSETS> 7,577
<CURRENT-LIABILITIES> 4,223
<BONDS> 2,187
0
586
<COMMON> 7,628
<OTHER-SE> (7,083)
<TOTAL-LIABILITY-AND-EQUITY> 7,577
<SALES> 6,753
<TOTAL-REVENUES> 6,960
<CGS> 5,057
<TOTAL-COSTS> 5,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (324)
<INCOME-TAX> 0
<INCOME-CONTINUING> (324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (324)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
