<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock; Warrants to Purchase Common Stock
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
12,600,000 Shares of Common Stock; Warrants to Purchase 3,000,000
-----------------------------------------------------------------------
Shares of Common Stock at $1.50 per share
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Common Stock Per Unit Price - $2.625 per share is calculated based on
-----------------------------------------------------------------------
the last sale price on April 17, 2000. Warrant Price is calculated
-----------------------------------------------------------------------
based on the exercise price of $1.50 as no market exists for the
-----------------------------------------------------------------------
Warrants.
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$ 37,575,000
-----------------------------------------------------------------------
(5) Total fee paid:
$ 7,515.00
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE> 2
COMMUNICATIONS WORLD INTERNATIONAL, INC.
SPECIAL MEETING OF SHAREHOLDERS
PROPOSED MERGER - YOUR VOTE IS IMPORTANT
The Boards of Directors of Communications World International, Inc.
("CommWorld") and Business Products, Inc. ("BPI") have unanimously approved a
merger in which BPI will become a wholly-owned subsidiary of CommWorld. The
combined company will benefit from the complimentary strengths of CommWorld and
BPI and will be led by Mike St. John, who will be named president and CEO of the
combined company.
In the merger, the shareholders of BPI will receive 12,600,000 shares
of CommWorld common stock and warrants to purchase up to 3,000,000 shares of
CommWorld common stock. The merger will not change the aggregate number of
shares of CommWorld common stock held by CommWorld shareholders before the
merger. However, the CommWorld shareholders' ownership percentage of the total
shares outstanding will decrease as a result of the merger.
Shareholders of CommWorld are being asked, at CommWorld's special
meeting of Shareholders, to approve the merger. The Board of CommWorld has
determined that the merger is advisable and in the best interest of CommWorld
shareholders and recommends that they vote in favor of the merger. Shareholders
of CommWorld are also being asked, at CommWorld's special meeting of
Shareholders, to approve:
o A proposal to amend CommWorld's Articles of Incorporation to
increase the number of authorized shares of CommWorld common
stock from 25,000,000 shares to 75,000,000;
o A proposal to amend CommWorld's 1998 Stock Incentive Plan to
increase the number of shares of common stock available for
Plan purposes by 1,500,000 for a total of 2,500,000 shares.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the CommWorld
special meeting, please take the time to vote by completing and mailing the
enclosed proxy card to CommWorld.
The CommWorld special meeting will be held at CommWorld's executive
offices, 7388 South Revere Parkway, Englewood, Colorado 80112 at 2:30 P.M.,
local time, on June 2, 2000.
CommWorld's common stock trades on the Electronic Bulletin Board system
under the symbol "CWII." BPI's common stock is closely held and is not traded
in any public market.
The proxy statement provides you with detailed information about the
proposed merger and the other proposals. In addition, you may obtain information
about CommWorld from documents that CommWorld has filed with the Securities and
Exchange Commission. We encourage you to read the proxy statement carefully.
-1-
<PAGE> 3
FOR A DESCRIPTION OF CERTAIN SIGNIFICANT CONSIDERATIONS IN CONNECTION
WITH THE MERGER AND RELATED MATTERS DESCRIBED IN THE PROXY STATEMENT, SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE COMMWORLD COMMON STOCK OR WARRANTS TO
BE ISSUED IN THE MERGER OR DETERMINED IF THE PROXY STATEMENT IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement is dated May ___, 2000, and is first being mailed
to CommWorld shareholders on or about May ____, 2000.
-2-
<PAGE> 4
COMMUNICATIONS WORLD INTERNATIONAL, INC.
7388 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 2, 2000
To The Shareholders Of Communications World International, Inc.:
A special meeting of Shareholders of Communications World
International, Inc. ("CommWorld" or the "Company") will be held at 2:30 P.M.,
local time, on June 2, 2000, at CommWorld's executive offices, 7388 South Revere
Parkway, Englewood, Colorado 80112, for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement
dated March 10, 2000, as amended, among CommWorld, Digital
Telecom, Incorporated ("DTI"), a wholly-owned subsidiary of
CommWorld, and Business Products, Inc. ("BPI"), pursuant to
which BPI will be merged with and into DTI, and DTI's name
will be changed to Business Products, Inc. and will continue
as a wholly-owned subsidiary of CommWorld;
2. To consider and vote upon a proposal to approve an amendment
to CommWorld's Articles of Incorporation to increase the
number of authorized shares of CommWorld common stock from
25,000,000 to 75,000,000. The increase in authorized shares
will become effective in connection with the merger. If the
merger is not completed for any reason whatsoever, the
increase in authorized shares will not become effective even
if the shareholders have approved the increase;
3. To consider and vote upon a proposal to amend CommWorld's 1998
Stock Incentive Plan to increase the number of shares of
CommWorld common stock available for Plan purposes by
1,500,000 shares for a total of 2,500,000 shares; and
4. To transact such other business as may properly come before
the CommWorld special meeting or any adjournments or
postponements thereof.
CommWorld's Board has unanimously approved the proposals and recommends
that you vote "FOR" approval of these proposals. We have described these
proposals in more detail in the proxy statement, which you should read before
voting. A copy of the merger agreement is attached as Annex A.
The close of business on April 18, 2000 has been fixed by CommWorld's
Board as the record date for the determination of shareholders entitled to
notice of and to vote at the CommWorld special meeting or any adjournment or
postponement. Only holders of record of CommWorld common stock at the close of
business on the record date may vote at the CommWorld special meeting. A
complete list of the shareholders entitled to vote at the special
-1-
<PAGE> 5
meeting will be available for examination at CommWorld's executive offices in
Englewood, Colorado by any holder of CommWorld common stock. The affirmative
vote of a majority of the outstanding shares of CommWorld common stock is
required to approve the merger agreement and the amendment to the Articles of
Incorporation. The proposal to amend the Plan must be approved by a majority of
the votes cast on the proposal.
All CommWorld shareholders are cordially invited to attend the special
meeting in person. However, to ensure your representation at the special
meeting, you are urged to vote your shares by completing, signing and returning
the enclosed proxy card as promptly as possible in the enclosed envelope. You
may revoke your proxy in the manner described in the proxy statement at any time
before it is voted at the special meeting. Executed proxy cards with no
instructions indicated thereon will be voted "FOR" approval of the merger
agreement, the amendment to the Articles of Incorporation and the Plan.
BY ORDER OF THE BOARD OF DIRECTORS
Englewood, Colorado David E. Welch
May ____, 2000 Secretary
-2-
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................1
SUMMARY...........................................................................................................2
The Companies................................................................................................2
The Merger...................................................................................................3
Other Proposals..............................................................................................5
Market Price Information.....................................................................................6
RISK FACTORS......................................................................................................7
Risks Relating to the Merger.................................................................................7
Risks Relating To The Business Of CommWorld After The Merger.................................................9
THE SPECIAL MEETING..............................................................................................15
Date, Time and Place........................................................................................15
Purpose.....................................................................................................16
CommWorld Board Recommendation..............................................................................16
Record Date, Outstanding Shares and Voting Rights...........................................................16
Vote Required; Quorum.......................................................................................16
Voting of Proxies...........................................................................................17
How You May Revoke Or Change Your Vote......................................................................17
Costs Of Solicitation.......................................................................................17
THE MERGER.......................................................................................................18
Background Of The Merger....................................................................................18
CommWorld's Reasons For The Merger..........................................................................20
Opinion Of Stifel...........................................................................................22
Valuation Analysis Of BPI...................................................................................24
Accounting Treatment........................................................................................26
Tax Consequences To CommWorld Shareholders and CommWorld....................................................27
Appraisal Rights............................................................................................27
Interests Of CommWorld Executive Officers and Directors.....................................................27
THE MERGER AGREEMENT.............................................................................................27
The Merger..................................................................................................27
Conversion Of Securities....................................................................................28
Conduct Of Business Prior To The Merger.....................................................................28
Limitation On Discussing Or Negotiating Other Acquisition Proposals.........................................29
Conditions of the Merger....................................................................................29
Termination, Amendment And Waiver...........................................................................30
AMENDMENT TO THE ARTICLES OF INCORPORATION.......................................................................31
Increase in Authorized Common Stock.........................................................................31
Purpose And Effect Of The Amendment.........................................................................31
</TABLE>
-i-
<PAGE> 7
<TABLE>
<S> <C>
PROPOSAL TO AMEND THE 1998 STOCK INCENTIVE PLAN..................................................................32
Purpose.....................................................................................................32
Administration..............................................................................................32
Eligible Participants.......................................................................................32
Shares Authorized...........................................................................................33
Types of Options............................................................................................33
Federal Income Tax Consequences.............................................................................33
Adjustments.................................................................................................34
Transferability.............................................................................................34
Amendments..................................................................................................35
Term........................................................................................................35
Vote Required...............................................................................................35
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS......................................................35
COMMWORLD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................................43
Results of Operations.......................................................................................43
Liquidity and Capital Resources.............................................................................48
BUSINESS OF COMMWORLD ...........................................................................................49
Business Development........................................................................................49
Franchise Program...........................................................................................50
Competition.................................................................................................52
Product Supply..............................................................................................52
Regulation..................................................................................................53
Employees...................................................................................................53
BPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................................53
Results of Operations.......................................................................................53
BUSINESS OF BPI..................................................................................................55
Overview....................................................................................................55
Evolution of BPI............................................................................................56
Products and Services.......................................................................................57
Directors, Officers and Key Personnel.......................................................................59
Leases and Significant Contracts............................................................................60
Related Party Transactions..................................................................................61
DESCRIPTION OF COMMWORLD CAPITAL STOCK...........................................................................62
CommWorld Common Stock......................................................................................62
CommWorld Preferred Stock...................................................................................62
Series C Preferred Stock....................................................................................63
INDEPENDENT ACCOUNTANTS..........................................................................................63
</TABLE>
-ii-
<PAGE> 8
<TABLE>
<S> <C>
SHAREHOLDER PROPOSALS............................................................................................63
LEGAL MATTERS....................................................................................................63
WHERE YOU CAN FIND MORE INFORMATION..............................................................................64
FORWARD LOOKING STATEMENTS.......................................................................................64
INDEX TO FINANCIAL STATEMENTS....................................................................................65
LIST OF ANNEXES
ANNEX A - MERGER AGREEMENT
ANNEX B - OPINION OF STIFEL, NICOLAUS & COMPANY, INC.
ANNEX C - AMENDMENT TO THE COMMWORLD ARTICLES OF INCORPORATION
ANNEX D - 1998 STOCK INCENTIVE PLAN, AS AMENDED
</TABLE>
-iii-
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS COMMWORLD PROPOSING THIS MERGER?
A: CommWorld is proposing the merger with BPI because we believe the
resulting combination will create a stronger, more competitive company
capable of achieving greater financial strength, operational
efficiencies, earning power and growth potential than CommWorld would
have on its own.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. We
expect the merger to occur within two business days after all
conditions to the merger, including obtaining shareholder approval,
have been satisfied. We currently expect to complete the merger in the
first quarter of our fiscal year 2001.
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this proxy statement carefully, including its
annexes, and to consider how the merger affects you as a shareholder.
Q: HOW DO I VOTE?
A: You should simply indicate on your proxy card how you want to vote and
sign and mail your proxy card in the enclosed return envelope as soon
as possible so that your shares may be represented at the CommWorld
special meeting.
Q: WHAT HAPPENS IF I DON'T RETURN THE PROXY CARD?
A: The failure to return your proxy card will have the effect as voting
against the merger and the other proposals.
Q: IF MY COMMWORLD SHARES ARE HELD IN A BROKERAGE ACCOUNT, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will not be able to vote your shares without instruction
from you. You should instruct your broker to vote your shares,
following the procedure provided by your broker.
Q: MAY I CHANGE MY VOTE?
A: Yes. You may change your vote at any time before your proxy is voted at
the CommWorld special meeting by following the instructions on page 17.
Q: WILL I NEED TO SEND IN MY STOCK CERTIFICATES IN CONNECTION WITH THE
MERGER?
A: No. CommWorld shareholders will not exchange their stock certificates.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you would like additional copies of this proxy statement or if you
have questions about the merger or other proposals, including the
procedures for voting your shares, you should contact CommWorld at
(303) 566-1105.
-1-
<PAGE> 10
SUMMARY
This summary, together with the preceding Questions and Answers
section, highlights selected information from this proxy statement and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms in the
merger, you should read carefully this entire proxy statement and the other
available information referred to in "Where You Can Find More Information" on
page 64. The merger agreement is included as Annex A to this proxy statement. It
is the legal document that governs the merger. Information in this proxy
statement regarding BPI has been supplied by BPI. BPI has not provided or
independently reviewed information in this proxy statement which does not
specifically concern BPI. We have included page references parenthetically to
direct you to a more complete description of the topics presented in this
summary.
THE COMPANIES
Communications World International, Inc. Business Products, Inc.
7388 South Revere Parkway 8136 South Grant Way
Englewood, Colorado 80112 Littleton, Colorado 80122
(303) 721-8200 (303) 798-6136
CommWorld, based in Englewood, Colorado, is a provider of telephony technical
services and solutions through its offices located in the greater Denver, Dallas
and Houston markets and to national companies through its national accounts
program. CommWorld's core services include PBX engineering, installation and
technical support services to customers and to large communications companies;
small and medium business telephony solutions; multi-site installations and
coordinations; and ongoing technical customer service.
BPI, headquartered in Littleton, Colorado, is a regional integrated technology
service provider in network design, communications, and integration. BPI
designs, sells and supports network operating systems and their hardware
platforms. BPI also has offices in Salt Lake City and Seattle.
-2-
<PAGE> 11
THE MERGER
The merger agreement, as amended, is attached to this proxy statement
as Annex A. We encourage you to read the merger agreement as it is the legal
document that governs the merger.
OWNERSHIP OF COMMWORLD FOLLOWING THE MERGER
The BPI shareholders will receive 12.6 million shares of CommWorld common stock
in the merger, and warrants to purchase up to 3 million shares of CommWorld
common stock. BPI is a closely-held corporation, and substantially all of the
BPI common stock is owned by Mike St. John, President of BPI, and his father,
Tony St. John, who was the founder of BPI.
THE BOARD AND MANAGEMENT OF COMMWORLD FOLLOWING THE MERGER
Following the completion of the merger, CommWorld's Board will consist of:
(1) Two designees of Mike St. John:
Mike St. John;
J. Scott Swenson; and
(2) The four current CommWorld Directors:
Samuel D. Addoms
Lionel Brown
Jim Ciccarelli
James M. Corboy
Following completion of the merger, Mike St. John will become president and
chief executive officer of CommWorld. Jim Ciccarelli, who is currently chief
executive officer and chairman of the board of directors of CommWorld, will
remain as chairman of the board. Lionel Brown and David Welch will continue as
officers of CommWorld.
VOTES REQUIRED (PAGE 16)
The proposals to approve the merger agreement and to amend the CommWorld
Articles of Incorporation must be approved by the holders of a majority of
outstanding shares of CommWorld common stock. If the merger is not completed for
any reason whatsoever, the amendment to the Articles of Incorporation will not
become effective, even if the CommWorld shareholders have approved the
amendment. The proposal to amend the 1998 Stock Incentive Plan must be approved
by a majority of the votes cast on the proposal.
RECOMMENDATIONS TO SHAREHOLDERS
(PAGE 16)
The CommWorld Board believes that the merger is advisable and is in your best
interest and unanimously recommends that you vote for the merger and the other
proposals.
OPINION OF FINANCIAL ADVISOR (PAGE 22)
In deciding to approve the merger, the CommWorld Board considered the opinion of
CommWorld's financial advisor, Stifel, Nicolaus & Company, Inc., to the effect
that the issuance of CommWorld stock and warrants to the BPI shareholders is
fair, from a financial point of view, to the CommWorld shareholders.
This opinion describes the basis and assumptions on which it was rendered and is
attached as Annex B. You should read this opinion in its entirety.
-3-
<PAGE> 12
RISKS ASSOCIATED WITH THE MERGER (PAGE 7)
You should be aware of and carefully consider the risks relating to the merger
described under "Risk Factors." These risks include the possible difficulties in
combining two companies that have previously operated independently.
CONDITIONS TO THE MERGER (PAGE 29)
CommWorld will complete the merger only if the conditions to the merger are
satisfied or in some cases waived, including the following:
o The adoption and approval of the merger agreement by the CommWorld
shareholders;
o The approval of the amendment to the CommWorld articles of
incorporation to increase the authorized common stock to 75,000,000
shares;
o The approval of the increase in authorized shares to 2,500,000 under
the 1998 Stock Incentive Plan by the CommWorld shareholders;
o The absence of any law or court order that prohibits the merger;
o Receipt of all necessary third party consents;
o The absence of any material adverse change affecting BPI or CommWorld;
o The signing of employment agreements with CommWorld by Lionel Brown,
Jim Ciccarelli and Mike St. John.
Either BPI or CommWorld may choose to complete the merger even though a
condition has not been satisfied if the law allows them to do so.
TERMINATION OF THE MERGER AGREEMENT (PAGE 30)
BPI and CommWorld can agree to terminate the merger agreement at any time, even
after CommWorld shareholder approval. In addition, either BPI or CommWorld can
terminate the merger agreement in various circumstances, including if the merger
has not been completed by June 30, 2000.
NO SOLICITATION (PAGE 29)
CommWorld and BPI have each agreed not to initiate or engage in any discussions
with another party regarding a business combination while the merger is pending,
without the other company's consent.
ACCOUNTING TREATMENT (PAGE 26)
The merger will, for accounting purposes, be treated as a reverse acquisition,
with BPI deemed to be the acquiring party and CommWorld being deemed to be the
acquired party. The merger will be accounted for using the purchase method of
accounting.
-4-
<PAGE> 13
OTHER PROPOSALS
AMENDMENT TO COMMWORLD'S ARTICLES OF INCORPORATION (PAGE 31)
At the special meeting, you will consider an amendment to CommWorld's Articles
of Incorporation to increase the number of authorized shares of CommWorld common
stock from 25,000,000 to 75,000,000.
AMENDMENT TO 1998 STOCK INCENTIVE PLAN (PAGE 32)
At the special meeting, you will be asked to consider an amendment to the 1998
Stock Incentive Plan to increase the number of shares of CommWorld common stock
available for Plan purposes by 1,500,000 shares for a total of 2,500,000 shares.
-5-
<PAGE> 14
MARKET PRICE INFORMATION
CommWorld common stock trades on the Electronic Bulletin Board system
under the symbol "CWII." BPI stock is not traded in the over-the-counter
market, as BPI is a closely-held corporation. 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 three quarters of the fiscal year ending April
30, 2000. Prior to the quarter ended January 31, 2000, trading in CommWorld
common stock was limited and sporadic. The quotations below represent
inter-dealer quotations without retail markups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
COMMWORLD COMMON STOCK
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998
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
FISCAL 1999
July 31, 1998 2.25 1.75
October 31, 1998 1.75 .72
January 31, 1999 1.13 .90
April 30, 1999 1.50 1.13
FISCAL 2000
July 31, 1999 1.31 1.06
October 31, 1999 1.44 .94
January 31, 2000 2.38 1.00
April 30, 2000 (through April 14, 2000) 5.06 1.88
</TABLE>
CommWorld has not paid any dividends on the CommWorld common stock and does not
anticipate paying cash dividends on the CommWorld common stock in the
foreseeable future. It is anticipated that any earnings after the merger would
be retained to help finance the growth of the combined companies. CommWorld is
currently precluded from paying dividends without the consent of its accounts
receivable financing company.
-6-
<PAGE> 15
RISK FACTORS
In deciding whether to approve the merger and other proposals, you
should consider the following risks related to the merger and to your investment
in the combined company following the merger. You should consider carefully
these risks along with the other information in this proxy statement and the
documents to which we have referred. See "Where You Can Find More Information"
on page 64.
RISKS RELATING TO THE MERGER
When You Vote On The Merger, You Will Not Know The Market Value Of The CommWorld
Common Stock To Be Issued In The Merger.
Upon completion of the merger, the shareholders of BPI will receive
12.6 million shares of CommWorld common stock and warrants to purchase up to an
additional 3.0 million shares of CommWorld common stock. As the amount of
securities to be issued to the shareholders of BPI is fixed, there will be no
change even if the market price of CommWorld common stock changes. There is no
right to terminate the merger agreement based on a change in CommWorld's stock
price. The price of CommWorld common stock at the completion of the merger may
vary from its price on the date of this proxy statement and on the date of the
special meeting. Accordingly, shareholders will not know the specific value of
CommWorld securities to be issued upon completion of the merger when they vote
on the merger.
Although CommWorld And BPI Expect That The Merger Will Result In Benefits, Those
Benefits May Not Be Realized.
CommWorld and BPI entered into the merger agreement with the
expectation that the merger will result in certain benefits, including an
enhanced ability to achieve earnings, improved cash flow to fund future growth
and additional acquisitions, greater capability to achieve additional financing
and operational efficiencies. Achieving the benefits of the merger will depend
in part on the integration of CommWorld's and BPI's technology, operations and
personnel in a timely and efficient manner. The combination of these companies
will require substantial attention from management. The diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on CommWorld's business, financial
condition and operating results. There can be no assurance that CommWorld and
BPI can be successfully integrated or that any of the anticipated benefits will
be realized.
Failure To Complete The Merger Could Negatively Impact CommWorld's Stock Price
And Future Business And Operations.
If the merger is not completed for any reason, CommWorld may be subject
to a number of material risks, including the following:
o The price of CommWorld common stock may decline to the extent
that the current market price of CommWorld common stock
reflects a market assumption that the merger will be
completed; and
o Certain costs related to the merger, such as legal, accounting
and financial advisor fees, must be paid and expensed even if
the merger is not completed.
-7-
<PAGE> 16
In addition, if the merger is terminated and CommWorld's Board
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to agree to more
attractive terms than those which have been negotiated for in the merger.
Also, current and prospective CommWorld and BPI employees may
experience uncertainty about their future role with the combined company until
integration strategies are announced or executed. This may adversely affect
their ability to attract and retain key management and technical personnel.
As A Result Of The Merger, A Significant Number Of Shares Of CommWorld Common
Stock Will Be Owned By Members Of The St. John Family. If Any Of Them Were To
Sell Shares Of CommWorld Common Stock, The Sale Could Cause The Market Price Of
CommWorld Common Stock To Drop Significantly.
As a result of the merger, approximately 12.6 million shares of
CommWorld common stock, and warrants to purchase up to an additional 3.0 million
shares of CommWorld common stock, will be owned by Mike St. John, chief
executive officer of BPI, his father, Anton St. John, who was the founder of
BPI, and a trust in which members of the St. John family are beneficiaries. The
amount of CommWorld stock and warrants to be received by each person is set
forth in the table below. The CommWorld securities being issued to the BPI
shareholders in the merger will not be registered under the Securities Act of
1933, as amended, and no registration rights have been granted to the BPI
shareholders. However, because of their shareholdings these persons would likely
be in a position to cause CommWorld to register their CommWorld securities for
public sale, if they desired. Anton St. John is 76 years old and has informed
CommWorld that he may desire to transfer some of the CommWorld stock for estate
planning purposes. Such transfers may be to members of his family, or in sale
transactions, privately or publicly, to obtain additional liquidity. If any
member of the St. John family were to sell shares of CommWorld common stock or
if the market perceives that any member of the St. John family intends to sell
shares, the market price of CommWorld common stock could drop significantly,
even if CommWorld's business is doing well.
COMMWORLD SECURITIES TO BE RECEIVED IN THE MERGER
<TABLE>
<CAPTION>
WARRANTS TO
SHARES OF PURCHASE SHARES
NAME COMMON STOCK OF COMMON STOCK
---- ------------ ---------------
<S> <C> <C>
Mike St. John 6,804,000 3,000,000
Anton St. John 5,628,000 -0-
Anton St. John Trust 168,000 -0-
</TABLE>
The Concentration Of Voting Power In A Small Number Of Shareholders May
Frustrate Beneficial Transactions.
Upon completion of the merger, the members of the St. John family will
beneficially own approximately 62% of CommWorld's outstanding common stock,
without giving effect to the exercise of any of the warrants issued to them in
connection with the merger or the exercise or conversion of other currently
outstanding securities of CommWorld. As they, in their capacity as shareholders,
may not owe a fiduciary duty to other CommWorld shareholders, they may
individually decide not to accept transactions that may otherwise be beneficial
to other CommWorld shareholders. Unless other issuances of common stock dilute
their interests as shareholders, they
-8-
<PAGE> 17
will effectively have the voting power to prevent takeover transactions. This
could discourage or make more difficult a merger, tender offer, proxy contest or
acquisition of a significant portion of CommWorld common stock even if that
event potentially would be favorable to the interests of the other CommWorld
shareholders.
In addition, although the current members of the CommWorld Board will
continue in their positions immediately following the merger, because the St.
John family will own a majority of the CommWorld common stock, they will be in a
position to replace these directors, and to elect all of the members of the
CommWorld Board.
Risks Relating To The Business Of CommWorld After The Merger
Recent Operating Losses; Accumulated Deficit
For the quarter ended January 31, 2000, CommWorld reported a loss of
$366,000, as compared to a loss of $830,000 for the quarter ended January 31,
1999, which included a loss from continuing operations of $416,000. CommWorld
reported a loss from continuing operations of $1,351,000 for the fiscal year
ended April 30, 1999. CommWorld had an accumulated deficit at January 31, 2000
of approximately $8,013,000. Management believes much of the loss in previous
periods has been related to CommWorld's acquisition efforts, increase in
interest expense, increases in allowance for doubtful accounts, and a reduction
in gross margins in CommWorld's company-owned segment of operations. In
addition, CommWorld's losses have been a direct result of the increased level of
general and administrative expense associated with its direct sales efforts.
Although CommWorld made significant changes in its management personnel in
fiscal 1999, there can be no assurance CommWorld will be more successful in its
operations, or that the acquisition candidates selected by the new management
will enable CommWorld to be profitable in the future. For additional information
regarding CommWorld's operations, see "CommWorld Management's Discussion And
Analysis Of Financial Condition And Results Of Operations" on page 43.
Lack of Working Capital; Need for Additional Financing
CommWorld's operations have historically been adversely affected by a
lack of working capital. CommWorld uses a line of credit from a lending
institution, which is limited to the extent of available collateral. CommWorld's
line of credit is currently fully utilized to the extent of available
collateral. The lack of available funding impedes CommWorld's ability to fund
additional equipment purchases and to expand its business operations. Although
CommWorld's working capital deficit was reduced by approximately $571,000 at
January 31, 2000 as compared to April 30, 1999, CommWorld expects to continue
its efforts to obtain additional capital to improve its liquidity. CommWorld has
no firm commitments from any source and there can be no assurance CommWorld will
obtain additional capital. Moreover, due to CommWorld's historically 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.
Changes In Technology
The interconnect industry in which CommWorld operates has experienced
rapid technological advances and, in order to satisfy customer demands,
CommWorld has to offer the latest available equipment and services. Although
CommWorld has established relationships with
-9-
<PAGE> 18
several major suppliers of telephone interconnect equipment, in the event other
suppliers offer more advanced equipment, there is no assurance CommWorld would
be able to establish satisfactory relationships with these other manufacturers.
Industry Competition and Challenges for BPI.
The information technology services industry in which BPI operates is
extremely competitive and characterized by continuous changes in customer
requirements and improvements in technologies. BPI's competition varies
significantly by the type of service provided. BPI believes that no one
competitor dominates in the market BPI serves, but many of BPI's competitors are
larger and have greater financial, technical sales and marketing resources than
BPI. In addition, BPI at times must compete with a customer's own internal
information technology staff. Furthermore, BPI can be expected to encounter
additional competition as it strives to enter new markets. In order to maintain
and develop new customer relationships, BPI must offer its services at
competitive rates and be able to stay abreast of evolving challenges and
developments in the information technology and systems integration services
marketplace. There can be no assurance that BPI will be able to compete
effectively on pricing or other requirements and, as a result, BPI could lose
customers or be unable to maintain its profitability and regional prominence.
BPI's future success will also depend in part on its ability to hire
and retain properly trained technical personnel who can address the changing and
increasingly sophisticated needs of its customers. In particular, competition
for qualified project managers and professionals with certain specialized
skills, such as working knowledge of certain technologies, is intense.
Potential Loss of Major Customers of BPI.
At present, BPI realizes a significant portion of its revenues from
AT&T (approximately 34.2% of sales for the nine months ended January 31, 2000,
and 22.9% for the year ended April 30, 1999) and other large customer accounts.
There can be no assurance that BPI can maintain this customer base nor continue
to utilize the exposure and reputation that BPI has established in the industry
marketplace to date by virtue of BPI's service to these customers. Loss of one
or more of these larger customers could have a material negative impact on BPI's
business, financial condition and results of operation. Although BPI management
believes that BPI may be reasonably positioned to compensate for such potential
attrition by capturing new customers, there is no certainty that this would
occur.
Attrition Among Key Members of BPI Management.
CommWorld believes Mike St. John's departure from BPI, or the loss of
any of BPI's key management or technical personnel, could have a material
negative impact on BPI's business, operations and profitability. A condition to
completion of the merger is an employment agreement between CommWorld and Mike
St. John.
Dependence by BPI on Third-Party Hardware and Software Vendors.
The network systems solutions delivered by BPI utilize products of
third-party hardware and software vendors. A significant portion of BPI's
revenues are derived from the purchase and resale of these products. Although
BPI operates under various agreements with certain product vendors,
-10-
<PAGE> 19
there can be no assurance that these agreements will be renewed. Any significant
adverse change in any of these relationships could have a material effect on
BPI's business, financial condition and results of operation.
Relationships With Suppliers
Although CommWorld has established relationships with several
suppliers of telephone equipment including NEC, Toshiba America Information
Systems, Inc. ("TAIS"), Comdial, Inc., Panasonic Communications & Systems
Company, a division of Matsushita Electric Corporation of America, and
Sprint/North Supply, Inc., there is no assurance CommWorld will continue to be
able to maintain these relationships, and to purchase products under
advantageous terms and conditions from its suppliers. This may adversely affect
CommWorld's ability to offer products to its customers. CommWorld 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. CommWorld's largest
supplier, TAIS, does not typically sell to end users, but does service certain
large accounts, and may compete with CommWorld.
TAIS provided approximately 68% of the inventory and products
purchased by CommWorld during the nine months ended January 31, 2000 while
offering flexible credit terms. In December 1995, CommWorld negotiated a
restructuring of its obligations with TAIS, which included a requirement that
CommWorld use proceeds from future financings to prepay the debt owed to TAIS.
TAIS has cooperated with CommWorld in waiving this provision to accommodate
CommWorld's capital needs. Although CommWorld believes it should be able to meet
its immediate obligations to TAIS and other working capital requirements,
CommWorld 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 CommWorld's relationship with TAIS were to cease or to deteriorate,
it could have a significant adverse impact on CommWorld's operations.
Lack of Information Regarding Acquisition Candidates
Acquisitions of other companies in the telecommunications industry is a
principal strategic objective of CommWorld. During fiscal 2000, CommWorld has
made three acquisitions. CommWorld has identified other candidates for
acquisition, but has no firm arrangements for acquisition. Although management
of CommWorld will endeavor to evaluate the risks inherent in any particular
acquisition candidate, there can be no assurance CommWorld will properly
ascertain all such risks. Management of CommWorld 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 CommWorld 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
CommWorld's assessment of management will prove to be correct. CommWorld 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
-11-
<PAGE> 20
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 CommWorld's business plan are dependent upon CommWorld's
ability to identify, attract and acquire attractive acquisition candidates,
which may take considerable time. No assurances can be given whether CommWorld
will be successful in identifying, attracting or acquiring desirable acquisition
candidates, whether such candidates will be successfully integrated into
CommWorld, or if 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 CommWorld's
business, financial condition and results of operations.
Integration of Acquisitions
CommWorld's strategic objective, which is subject to additional
financing, anticipates an aggressive acquisition program. The success of
CommWorld will depend, in part, on CommWorld's ability to integrate the
operations of the acquired companies. There can be no assurance CommWorld's
management team will effectively be able to oversee the combined entity and
implement CommWorld's operating and growth strategies. No assurance can be given
CommWorld 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 CommWorld 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
CommWorld's efforts to integrate acquisitions and manage those acquisitions
profitably. Any or all of these factors could have a material adverse effect on
CommWorld's business, financial condition or results of operations.
Risks Related to Acquisition Financing; Leverage
CommWorld is currently planning to obtain additional financing. If
CommWorld is successful in obtaining this financing and other financing related
specifically to acquisitions (of which there is no assurance) CommWorld plans to
use a significant portion of its resources to pursue its business strategy for
growth. The timing, size and success of CommWorld's acquisition efforts and any
associated capital commitments cannot be readily predicted. CommWorld 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, CommWorld 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
-12-
<PAGE> 21
acquisition program. CommWorld may also use preferred stock in connection with
acquisitions. If CommWorld 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 CommWorld will be able to
obtain any additional financing that it may need for its acquisition program on
terms that CommWorld deems acceptable.
CommWorld may borrow money to consummate future acquisitions or assume
or refinance the indebtedness of acquired companies if CommWorld's management
deems it beneficial to CommWorld. CommWorld 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
CommWorld's operating revenues after the acquisitions are insufficient to pay
debt service, there would be a risk of default and foreclosure on CommWorld'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
CommWorld 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, CommWorld 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,
CommWorld would be subject to interest rate fluctuations which could increase
CommWorld's debt service obligations.
Consideration for Operating Companies May Substantially Exceed Asset Value
The purchase price of CommWorld's acquisitions will not be established
by independent appraisals, but generally through arm's length negotiations
between CommWorld'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, CommWorld 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 a substantial portion of CommWorld'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
CommWorld would involve amortization of goodwill over long-term periods with the
amount amortized in a particular period constituting an expense for that period.
Generally, CommWorld amortizes goodwill over a 20-year period. Under accounting
rules, CommWorld 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, CommWorld 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
-13-
<PAGE> 22
adverse impact upon the market price of the common stock. For additional
information regarding the goodwill resulting from the merger with BPI, see
"Unaudited Pro Forma Condensed Combined Financial Statements on page 35."
Hart-Scott-Rodino Requirements
CommWorld'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 CommWorld's acquisitions. In addition,
acquisitions of businesses in regulated industries would subject CommWorld to
regulatory requirements which could limit CommWorld'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. CommWorld 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 CommWorld, the acquisition candidate and their
respective shareholders. There can be no assurance, however, the Internal
Revenue Service (the "IRS") or appropriate state tax authorities will ultimately
assent to CommWorld'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 CommWorld, the acquisition candidate and their
respective shareholders.
Competition for Acquisitions
CommWorld expects to encounter competition in making acquisitions from
other companies with objectives similar to CommWorld, 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, CommWorld may
expect 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 CommWorld is successful in obtaining additional financing and
completing several acquisitions, it is likely certain of its competitors will be
substantially larger than CommWorld and have greater financial resources.
Volatility of Stock Price
There has been significant volatility in the market price for
CommWorld'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 April 17, 2000, the closing bid price of CommWorld's common stock was
$2.63 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
CommWorld's operations, acquisitions, new products and services, prices and
costs of products, sales of products, new technology offered by CommWorld's
competitors, government regulation or other matters may have a significant
impact on the market price of CommWorld's securities.
-14-
<PAGE> 23
Moreover, although trading in CommWorld's common stock has been more active
recently, trading has historically been 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 CommWorld'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. CommWorld believes the penny stock rules may discourage investor
interest in, and limit the marketability of, the common stock of CommWorld.
Preferred Shares Available For Issuance; Current Acquisitions and Financing
Plans
CommWorld has 3,000,000 shares of preferred stock authorized. There are
currently 10,000 shares of Series C Preferred Stock outstanding. Shares of
preferred stock may be issued by CommWorld in the future without shareholder
approval and upon such terms as the Board 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 CommWorld. CommWorld presently has no definitive arrangements for any
acquisitions, and there can be no assurance CommWorld 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
CommWorld.
THE SPECIAL MEETING
Date, Time and Place
A special meeting of CommWorld shareholders will be held at 2:30 P.M.,
local time, on June 2, 2000, at CommWorld's executive offices, 7388 South Revere
Parkway, Englewood, Colorado 80112. We are sending this proxy statement to you
in connection with the solicitation of proxies by the CommWorld Board for use at
the CommWorld special meeting and any adjournments of the CommWorld special
meeting.
-15-
<PAGE> 24
Purpose
The purpose of the CommWorld special meeting is to consider and vote on
the proposals to approve (1) the proposed merger pursuant to which BPI would be
merged with and into DTI, a wholly-owned subsidiary of CommWorld, (2) the
amendment of CommWorld's Articles of Incorporation in connection with the
completion of the merger to provide that the authorized shares of common stock
will be increased from 25,000,000 shares to 75,000,000 shares, and (3) the
amendment of CommWorld's 1998 Stock Incentive Plan to increase the number of
shares of CommWorld common stock available for Plan purposes by 1,500,000 shares
for a total of 2,500,000 shares. CommWorld shareholders also may be asked to
transact other business that may properly come before the CommWorld special
meeting or any adjournments of the CommWorld special meeting.
CommWorld Board Recommendation
THE COMMWORLD BOARD HAS CONCLUDED THAT THE PROPOSALS ARE ADVISABLE AND
IN THE BEST INTEREST OF COMMWORLD AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY
APPROVED AND ADOPTED THE PROPOSALS. ACCORDINGLY, THE COMMWORLD BOARD UNANIMOUSLY
RECOMMENDS THAT ALL COMMWORLD SHAREHOLDERS VOTE "FOR" APPROVAL OF EACH OF THE
PROPOSALS.
Record Date, Outstanding Shares And Voting Rights
The CommWorld Board has fixed the close of business on April 18, 2000
as the record date for the CommWorld special meeting. Only holders of record of
shares of CommWorld common stock on the record date are entitled to notice of
and to vote at the CommWorld special meeting. As of the record date, there were
7,867,044 outstanding shares of CommWorld common stock held by approximately 300
holders of record. At the CommWorld special meeting, each share of CommWorld
common stock will be entitled to one vote on all matters. Votes may be cast at
the CommWorld special meeting in person or by proxy.
Vote Required; Quorum
The representation, in person or by proxy, of the holders of a majority
of the shares of CommWorld common stock entitled to vote at the CommWorld
special meeting is necessary to constitute a quorum at the CommWorld special
meeting. Shares represented by a proxy marked "abstain" on any matter will be
considered present for purposes of determining a quorum and for purposes of
calculating the vote, but will not be considered to have voted in favor of the
proposal. Therefore, any proxy marked "abstain" will have the effect of a vote
against the matter.
If a broker or nominee holding shares of record for a customer
indicates that it does not have discretionary authority to vote as to a
particular matter, those shares, which are referred to as broker non-votes, will
be considered present at the special meeting for purposes of determining a
quorum and for purposes of calculating the vote. Brokers or nominees holding
shares of record for customers will not be entitled to vote on the proposals
unless they receive voting instructions from their customers. Accordingly,
broker non-votes will not be voted in favor of approval of the proposals,
meaning that shares constituting broker non-votes will have the same effect as
shares voted against approval of the proposals.
CommWorld believes that each of its directors and executive officers
intends to vote his shares in favor of approval of the proposals. As of the
record date, CommWorld's directors and
-16-
<PAGE> 25
executive officers beneficially owned approximately 1,951,625 of the outstanding
shares, representing approximately 25% of the total outstanding shares of
CommWorld common stock on the record date.
Voting Of Proxies
All shares of CommWorld common stock that are entitled to vote and are
represented at the CommWorld special meeting by properly executed proxies
received prior to or at the special meeting, and not revoked, will be voted in
accordance with your instructions. If you sign your proxy but do not give voting
instructions, the shares represented by that proxy will be voted as recommended
by the CommWorld Board. Accordingly, such proxies will be voted "FOR" approval
of the proposals.
The CommWorld Board does not know of any matters other than those
described in the notice of the CommWorld special meeting that are to come before
the meeting. If any other matters are properly presented at the CommWorld
special meeting for consideration, including, among other things, consideration
of a motion to adjourn or postpone the meeting to another time and/or place for
the purposes of soliciting additional proxies or allowing additional time for
the satisfaction of conditions to the merger, the persons named in the proxy
will have discretion to vote on such matters in accordance with their best
judgment.
How You May Revoke Or Change Your Vote
You may revoke your proxy at any time before it is voted at the special
meeting by:
o Sending written notice of revocation to the secretary of
CommWorld;
o Submitting another proper proxy; or
o Attending the special meeting and voting in person.
You should send any written notice of revocation or subsequent proxy to
Communications World International, Inc., 7388 South Revere Parkway, Englewood,
Colorado 80112, Attention: Secretary, or hand deliver it to the secretary of
CommWorld at or before the taking of the vote at the CommWorld special meeting.
If you have instructed a broker to vote your shares, you must follow directions
received from the broker in order to change your vote or to vote at the
CommWorld special meeting.
Costs Of Solicitation
CommWorld will pay for preparing, printing and mailing this proxy
statement. Proxies may be solicited personally or by telephone or by other means
of communication by directors, officers and employees of CommWorld. These
directors, officers and employees will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with the
solicitation. CommWorld will reimburse banks, brokers and other custodians,
nominees and fiduciaries for their costs of sending the proxy materials to
beneficial owners of the shares.
-17-
<PAGE> 26
THE MERGER
Background Of The Merger
On January 7, 2000, Mike St. John, president of BPI, and Jim
Ciccarelli, CEO of CommWorld, met for lunch and discussed the business
activities of BPI and CommWorld. During the lunch meeting, Mr. Ciccarelli asked
Mr. St. John if he would be interested in discussing the possibility of a merger
between BPI and CommWorld. Mr. St. John responded that BPI had been considering
the possibility of a strategic transaction, and had engaged the services of
CeBourn, Ltd. to assist BPI in the evaluation of potential alternatives. Mr. St.
John suggested that Mr. Ciccarelli contact Bill Dews, a principal of CeBourn, to
exchange preliminary information.
Mr. Dews telephoned Mr. Ciccarelli and arranged a meeting at CeBourn's
offices for January 12, 2000. During this meeting, representatives of BPI,
CommWorld and CeBourn discussed the history, financial condition, results of
recent operations, and business strategies for growth of both CommWorld and BPI.
CommWorld agreed to provide to BPI and its representatives copies of CommWorld's
reports filed with the SEC, and BPI agreed to provide CommWorld with BPI's
financial statements and other information regarding the business of BPI.
On January 13, 2000, Mr. Ciccarelli and Mr. Dews had a telephone
conversation to further explore the possibilities of a merger transaction.
On January 26, 2000, Mr. Ciccarelli met with Mr. St. John, and they had
a preliminary discussion of possible terms of the merger transaction.
On January 28, 2000, Mr. Ciccarelli met with Mr. Dews and Mr. St. John.
During this meeting, there was discussion regarding the structure of the merger,
the amount of CommWorld securities to be issued in the merger, and the time line
for accomplishing a merger. Mr. Dews inquired whether CommWorld would be
agreeable to paying cash to the BPI shareholders as part of the merger
consideration. Mr. Ciccarelli noted that CommWorld's cash resources were
limited, and that the possibility of including cash as part of the merger terms
would necessitate CommWorld raising additional funding. Mr. Ciccarelli noted
that obtaining the financing could be time consuming and could delay completion
of the merger.
On February 1, 2000, Mr. Ciccarelli met again with Mr. Dews. Mr. Dews
informed Mr. Ciccarelli that the BPI shareholders would be willing to consider a
merger which involved solely the issuance of CommWorld securities, without any
cash consideration. Mr. Dews suggested that CommWorld prepare a term sheet.
On February 3, 2000, Mr. Ciccarelli and David Welch, CommWorld's chief
financial officer, met with Chris Jensen of Stifel, Nicolaus & Company, Inc., an
investment banker, to discuss retaining Stifel to review the merger.
On February 7, 2000, Mr. Dews telephoned Mr. Ciccarelli to discuss
merger terms.
On February 8, 2000, Mr. Ciccarelli met with Mr. Dews and Mr. St. John,
and a consensus was reached that it would be desirable to continue exploring the
possibility of a merger transaction.
-18-
<PAGE> 27
After this meeting, Mr. Ciccarelli engaged in discussions with each of
the other CommWorld directors to discuss the possible business combination. Mr.
Ciccarelli also asked Mr. Welch to consider various structuring alternatives,
and the accounting and tax treatment of a possible merger transaction.
On February 17, 2000, a meeting of the CommWorld board of directors was
held to review CommWorld's operations and preliminary results for the quarter
ended January 31, 2000. A substantial portion of the Board meeting was devoted
to discussions of the results of preliminary discussions with Mike St. John and
CeBourn, the history, management, business plan and financial statements of BPI,
the preliminary discussions regarding the proposed terms of the business
combination with BPI, the management structure of CommWorld after the merger,
due diligence requests and evaluation of BPI, including the desirability of
retaining an investment banking firm, the timing of a merger transaction, proxy
statement requirements, and a sense of the Board to proceed with discussions and
preparations for a merger transaction, subject to Board approval of final terms.
The Board authorized management to continue discussions and preparations for a
merger transaction.
During the week of February 21, 2000, additional information was
exchanged between BPI and CommWorld about their respective companies, and a
preliminary draft of a proposed merger agreement was prepared. A draft of the
merger agreement was distributed to BPI and its counsel.
On February 24, 2000, a meeting was held involving Jim Ciccarelli, Bill
Dews, Mike St. John, David Welch and legal counsel. It was agreed that
additional due diligence review would be conducted during the next several days,
with a view toward reviewing and discussing the proposed merger agreement during
the following week.
Also, on February 24, 2000, Sam Addoms, a director of CommWorld, joined
Jim Ciccarelli for a tour of BPI's principal facility. After the tour, Mr.
Addoms and Mr. Ciccarelli joined Mr. St. John and Mr. Welch for dinner to
further acquaint themselves with each other and to discuss the business plans of
CommWorld and BPI.
On February 26, 2000, Mr. Ciccarelli, Mr. Welch and CommWorld's legal
counsel met with Mr. Dews and BPI's legal counsel at CommWorld's executive
offices in connection with BPI's review of information regarding CommWorld.
Discussion was also held regarding terms of the transaction and obtaining
additional information regarding BPI.
On February 28, 2000, Mr. Ciccarelli met with Mr. Dews and legal
counsel for BPI and CommWorld to discuss the composition of the CommWorld Board
and management after the merger, the desirability of employment agreements and
the terms of the merger transaction.
On March 3, 2000, Mr. Dews telephoned Mr. Ciccarelli to inform him that
Mr. St. John had determined to discontinue discussions with CommWorld regarding
a merger transaction. Mr. Dews stated that he was not certain of the reasons for
this determination, and that he would talk further with Mr. St. John over the
weekend.
On March 7, 2000, Mr. Dews telephoned Mr. Ciccarelli to inform him that
Mr. St. John had reconsidered and wanted to pursue additional merger
discussions.
-19-
<PAGE> 28
Between March 7, 2000 and March 10, 2000, representatives of BPI and
CommWorld continued merger discussions and their reviews of drafts of the Merger
Agreement and due diligence documents.
On March 9, 2000, the CommWorld Board met to discuss the BPI
transaction and authorize Mr. Ciccarelli to enter into the Merger Agreement on
behalf of CommWorld.
On March 10, 2000, the Merger Agreement was signed. A public
announcement was made concerning the merger on the next business day, March 13,
2000.
On March 30, 2000, the CommWorld Board met and received Stifel's oral
opinion confirming that the merger was fair, from a financial point of view, to
the CommWorld shareholders.
CommWorld's Reasons For The Merger
The CommWorld Board believes that the merger agreement and the terms of
the merger are fair to, and in the best interest of, CommWorld and the CommWorld
shareholders. Therefore, the CommWorld Board recommends that the shareholders of
CommWorld vote FOR adoption of the merger agreement.
In reaching its recommendation, the CommWorld Board consulted with
CommWorld's management, as well as CommWorld's financial and legal advisors, and
considered the following material factors:
o The growth in revenues achieved by BPI, and CommWorld's
management's evaluation of BPI's prospects for continued
growth;
o CommWorld's historic liquidity problems, and the difficulty of
obtaining additional financing;
o The combined company will have greater financial flexibility
and access to capital than CommWorld had on a stand alone
basis, which CommWorld management believes will result in
improved liquidity and lower cost of funding than CommWorld
had on a stand alone basis;
o The merger will result in the combined company being led by a
management team with a track record in telecommunications,
information technology, and in pursuing an acquisition
strategy;
o The combined company will be able to offer an expanded range
of complimentary services. BPI provides engineering and
cabling design services and CommWorld provides implementation.
BPI has a staffing service and CommWorld will use this service
to enhance its national account subcontractor base. Both
companies provide products and services based on the Windows
NT platform, which will allow them to share resources;
o The combined company will be able to share an expanded
customer base into which they will be able to market their
services;
-20-
<PAGE> 29
o The combined company will have a presence in a greater number
of major markets;
o The market for the common stock of the combined company should
be superior to the market for CommWorld's common stock due to
larger market capitalization, greater liquidity and enhanced
visibility and interest;
o The combined company's common stock should have a greater
potential for appreciation than CommWorld's common stock;
o The structure of the merger, with CommWorld's current
shareholders continuing as shareholders of the combined
company, will provide CommWorld's shareholders with the
opportunity to participate in the future value creation
potential of the combined company; and
o The opinion of Stifel that the merger transaction was fair
from a financial point of view to CommWorld.
In reaching the decision to recommend the merger to its shareholders,
the CommWorld Board also considered additional factors including:
o Its discussions with CommWorld's management and legal counsel
regarding the results of CommWorld's investigation of BPI;
o The strategic, operational and financial opportunities
available to CommWorld in the normal course of its business
compared to those that might be available to the combined
company following the merger;
o The historical and current market prices of CommWorld common
stock; and
o The proposed structure of the transaction and the other terms
of the merger agreement and employment agreements with key
management personnel.
The CommWorld Board also considered certain risks and potential
disadvantages associated with the merger, including:
o The risks that the operations of the two companies may not be
successfully integrated;
o The risks that the substantial amount of goodwill that will be
recorded on the combined company's balance sheet as a result
of the merger could have a depressive effect on the price of
the common stock and the combined company's ability to obtain
additional financing;
o The risks that the current BPI shareholders will own a
majority of the combined company's common stock and will be in
a position to elect all of the directors (which could include
replacement of all of CommWorld's current directors), and the
risk that, as majority shareholders, the combined company
could be operated in a manner disadvantageous to CommWorld's
current shareholders;
-21-
<PAGE> 30
o The risk that the merger might not be completed as a result of
a failure to satisfy the conditions to the merger agreement;
and
o Other matters described under "Risk Factors."
In the judgment of the CommWorld Board, the potential benefits of the
merger outweigh these considerations. The foregoing discussion of the
information and factors that were given weight by the CommWorld Board is not
intended to be exhaustive, but it is believed to include all material factors
considered by the CommWorld Board.
In view of the variety of factors considered in connection with its
evaluation of the proposed merger and the terms of the merger agreement, the
CommWorld Board did not believe it was practicable to quantify or assign
relative weights to the factors considered in reaching its conclusion. In
addition, individual CommWorld directors may have given different weights to
different factors.
In considering the recommendation of the CommWorld Board with respect
to the merger, CommWorld shareholders should be aware that certain officers and
directors of CommWorld have interests in the merger that are different from the
interests of CommWorld shareholders generally. The CommWorld Board was aware of
these interests and considered them in approving the merger and merger
agreement. Please refer to "The Merger - Interests Of Certain Persons In The
Merger" for more information about these interests.
Opinion Of Stifel
CommWorld engaged Stifel to render an opinion that the issuance by
CommWorld of its common stock and warrants to BPI in the merger was fair, from a
financial point of view, to CommWorld's shareholders. Stifel is an investment
banking and securities firm with membership on all principal U.S. securities
exchanges. As part of its investment banking activities, Stifel is regularly
engaged in the valuation of businesses and their securities in connection with
merger transactions and other types of acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Stifel was selected by CommWorld
based on Stifel's qualifications, expertise, reputation and proximity to
CommWorld. On March 30, 2000, Stifel rendered its oral opinion, subsequently
confirmed in writing, to CommWorld that as of March 10, 2000, the proposed
transaction was fair, from a financial point of view, to our shareholders.
The full text of the opinion delivered by Stifel to CommWorld, dated
March 10, 2000 which sets forth the assumptions made, general procedures
followed, matters considered, and limitations on the scope of the review
undertaken by Stifel in rendering its opinion, is attached as Annex B to this
proxy statement and is incorporated herein by reference. The Stifel opinion does
not constitute a recommendation to any of CommWorld's shareholders as to how the
shareholders should vote with respect to the merger. The summary of the Stifel
opinion set forth below is qualified in its entirety by reference to the full
text of the fairness opinion. CommWorld shareholders are urged to read the
opinion carefully in its entirety.
In reviewing the merger, and in arriving at its opinion, Stifel, among
other things:
-22-
<PAGE> 31
i. discussed the business, financial condition and prospects of
BPI and CommWorld with certain members of senior management of
BPI and CommWorld;
ii. reviewed the consolidated financial statements for recent
years and interim periods to date and certain other relevant
financial and operating data of BPI and CommWorld made
available to Stifel from published sources and from the
internal records of BPI and CommWorld;
iii. reviewed certain internal and financial operating information,
including certain projections, both actual expected and pro
forma for certain adjustments, relating to BPI and CommWorld
prepared by CommWorld's management and the management of BPI;
iv. reviewed the recent reported prices and trading activity for
the CommWorld common stock and compared such information and
certain financial information for BPI and CommWorld with
similar information for certain other companies engaged in
businesses with characteristics Stifel considered comparable;
v. reviewed the financial terms, to the extent publicly
available, of certain comparable merger and acquisition
transactions;
vi. reviewed the merger agreement and the related agreements; and
vii. performed such other analyses and examinations and considered
such other information, financial studies, analyses and
investigations and financial, economic and market data as
Stifel deemed relevant.
In addition, in rendering its opinion, Stifel assumed and relied on the
accuracy and completeness of all of the information concerning BPI and CommWorld
it considered in connection with its review of the proposed merger. Stifel did
not assume any responsibility for independent verification of this information.
Stifel did not prepare any independent valuation or appraisal of any of the
assets or liabilities of BPI or CommWorld. Stifel assumed that the financial
forecasts and projections made available to it and used in its analysis
reflected the best currently available estimates and judgments of the expected
future financial performance of BPI and CommWorld. For purposes of its opinion,
Stifel assumed that neither BPI nor CommWorld were a party to any pending
transactions, including external recapitalizations or material merger
discussions, other than the proposed transactions and activities undertaken in
the ordinary course of conducting their respective businesses. Stifel's opinion
is based on market, economic, financial and other conditions as they existed and
could be evaluated as of the date of the opinion, and any change in these
conditions would require a reevaluation of the opinion. Stifel expressed no
opinion as to the price at which CommWorld's common stock will trade following
the merger. Stifel assumed that the proposed merger would be completed
substantially on the terms discussed in the merger agreement and related
agreements, without any waiver of any material terms or conditions by any of the
parties to the merger agreement and related agreements.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Stifel analysis below is not a complete description of the presentation
by Stifel to CommWorld. In arriving at its opinion, Stifel
-23-
<PAGE> 32
did not attribute any particular weight to any analyses or factors it
considered, but rather made qualitative judgments as to the significance and
relevance of each analysis and factor. Stifel believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses or of the following summary, without considering all
factors and analyses, could create an incomplete view of the processes
underlying the analyses. In performing its analyses, Stifel made numerous
assumptions about industry performance, general business and economic conditions
and other matters, many of which are beyond the control of BPI and CommWorld.
The analyses summarized below are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by the analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses
actually may be acquired.
No company or transaction used in the below analyses is identical to
BPI or CommWorld or the proposed merger. Accordingly, an analysis of the results
of the below analyses is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading values of the companies or company to which they are compared.
The following discussion summarizes financial analyses performed by
Stifel in connection with its written opinion.
Valuation Analysis of BPI
Discounted Cash Flow Analysis. A discounted cash flow analysis provides
insight into the intrinsic value of a business based on the projected earnings
and capital requirements and the net present value of the subsequent cash flows
anticipated to be generated by the assets of the business. Stifel performed a
discounted cash flow analysis for fiscal 2001 through 2004 to estimate the
present value of the stand-alone, unlevered free cash flows of BPI. For purposes
of this analysis, unlevered free cash flows were defined as after-tax operating
earnings, plus depreciation and amortization, less projected capital
expenditures and investment in working capital. To derive a terminal value,
Stifel applied a range of enterprise value to EBITDA multiples of 8.0x to 10.0x
to the projected EBITDA of BPI in fiscal 2004. The unlevered free cash flows and
terminal value were then discounted to the present using a range of discount
rates of 15.0% to 25.0%. The multiple of enterprise value to EBITDA was
determined from the comparable company analysis described below. Stifel based
its discount rate on its knowledge of required investment returns for businesses
with similar risk profiles. Stifel's discounted cash flow analysis produced an
implied enterprise value range of $36.0 million to $74.7 million, with a
midpoint of $52.7 million.
Inherent in any discounted cash flow valuation is the use of a number
of assumptions and judgments, including the accuracy of projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the equity under examination. Variations in
any of these assumptions or judgments could significantly alter the results of a
discounted cash flow analysis.
Comparison of Selected Public Companies. Stifel compared certain
operating and financial information of BPI to certain publicly available
operating, financial, trading and valuation information of 14 publicly traded
companies which, in Stifel's judgment, were reasonably comparable to BPI or
otherwise relevant (collectively, the "Comparable Companies"). Stifel's
-24-
<PAGE> 33
analysis of the Comparable Companies included, among other things, reviewing
their enterprise values (defined as the market value of a company's publicly
traded equity plus debt less cash and cash equivalents) as a multiple of
revenues and EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization) and their stock prices as a multiple of EPS
(defined as earnings per share). Stifel's analysis of the Comparable Companies
indicated that the range of enterprise value to revenues multiples was 0.1x to
3.8x with an arithmetic mean (excluding the high and low values) of 1.7x.
Stifel's analysis of the Comparable Companies indicated that the range of
enterprise value to EBITDA multiples was 5.1x to 24.5x with an arithmetic mean
(excluding the high and low values) of 9.3x. Stifel noted that of the 14
companies analyzed, five provided meaningful enterprise value to EBITDA
multiples used in Stifel's analysis. Stifel's analysis of the Comparable
Companies indicated that the range of stock price to EPS multiples was 15.9x to
31.0x with an arithmetic mean of 21.5x for 1999, and was 11.5x to 70.8x with an
arithmetic mean (excluding the high and low values) of 28.9x for 2000. Stifel
noted that of the 14 companies analyzed, 3 provided meaningful stock price to
EPS multiples for 1999 and 6 provided meaningful stock price to EPS multiples
for 2000.
Stifel applied these multiples to BPI's estimated fiscal year ended
April 30, 2000 financial results, pro-forma for certain adjustments, to obtain
its relative public market enterprise valuations producing an implied valuation
range of $41.2 million to $82.1 million with a midpoint of $60.3 million.
Analysis of Selected Precedent Merger and Acquisition Transactions.
Stifel reviewed and analyzed the publicly available financial terms of 24 recent
merger and acquisition transactions ("Precedent M&A Transactions") involving
companies that, in Stifel's judgment, were reasonably comparable to BPI or
otherwise relevant for purposes of this analysis based on size and product line.
Stifel reviewed the prices paid in the Precedent M&A Transactions and
analyzed various operating and financial information and imputed valuation
multiples and ratios. Stifel noted that none of the Precedent M&A Transactions
were identical to the merger and that, accordingly, any analysis of the
Precedent M&A Transactions necessarily involved complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that would necessarily affect the value of BPI versus the
acquisition values of the companies to which BPI was being compared. Stifel's
analysis of the Precedent M & A Transactions included, among other things,
reviewing the total invested capital (or "TIC", defined as consideration given
including stock and/or cash plus assumed debt plus any other consideration) as a
multiple of the target's revenues, EBITDA and net income. Stifel's analysis of
the Precedent M&A Transactions indicated that the range of TIC to revenue
multiples was 0.8x to 4.3x with an arithmetic mean (excluding the high and low
values) of 2.3x. Stifel's analysis of the Precedent M&A Transactions indicated
that the range of TIC to EBITDA multiples was 10.8x to 41.2x with an arithmetic
mean (excluding the high and low values) of 18.5x. Stifel noted that of the 24
transactions analyzed, 14 provided meaningful TIC to EBITDA multiples used in
Stifel's analysis. This analysis indicated that the range of TIC to net income
multiples was 10.8x to 43.8x with an arithmetic mean (excluding the high and low
values) of 24.8x. Stifel noted that of the 24 transactions analyzed, 15 provided
meaningful TIC to net income multiples used in Stifel's analysis. Applying these
multiples to BPI's operating results for the fiscal year ending April 30, 2000
produced an implied valuation of $72.0 million.
Stock Market Trading Activity of CommWorld. In reviewing the
transaction value for the purchase of BPI, Stifel considered CommWorld's recent
stock price performance and how this
-25-
<PAGE> 34
affects the consideration received by BPI. During the two year period from
January 1998 to December 1999, CommWorld 's common stock price averaged $1.48
per share, never closing higher than $2.38 per share. The low was $0.75 per
share and volume averaged 4,404 shares traded per day during this period. From
February 1, 2000 to March 10, 2000, CommWorld 's stock price rose from $1.86 per
share to $3.72, or 98.4% on average volume of 33,918 shares traded per day. This
increase in CommWorld's stock price has pushed the value of the transaction up
significantly from its original contemplated value. Thus, Stifel analyzed the
transaction from both the stock price at the closing date of March 10, 2000 and
the thirty-day average as of this date in reviewing the transaction .
Conclusions. Stifel arrived at its opinion based on the foregoing
analyses and factors. However, the summary set forth above does not purport to
be a complete description of the analyses performed and factors considered by
Stifel in arriving at its opinion, although it does reflect all material factors
considered and analyses performed by Stifel. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of the
summary set forth above, without considering the analyses as a whole, could
create an incomplete view of the processes underlying Stifel's opinion. In
arriving at its opinion, Stifel considered the results of all such reviews,
calculations and analyses. The analyses were prepared solely for purposes of
Stifel providing its opinion as to the fairness of the consideration to be
delivered by CommWorld pursuant to the merger, from a financial point of view,
to the CommWorld shareholders and do not purport to be appraisals or to
necessarily reflect the prices at which securities might actually be sold to
other parties. Analyses based upon future prospects are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. As described above, Stifel's opinion
and presentation to the board of directors was one of many factors taken into
consideration by the board of directors in making its determination to approve
the merger and recommend the merger to the CommWorld shareholders.
CommWorld retained Stifel in connection with the merger based upon
Stifel's qualifications, expertise and reputation, including the fact that
Stifel, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. In the ordinary course of its business, Stifel may actively trade
securities of CommWorld for its own account and for the accounts of its
customers and, accordingly, may, at any time, hold a long or short position in
such securities.
Pursuant to the terms of an engagement letter, dated January 10, 2000,
CommWorld has agreed to pay Stifel a total fee of $75,000, of which $25,000 was
paid upon execution of the engagement letter and an additional $50,000 is
payable upon distribution of this proxy statement. In addition, CommWorld has
agreed to indemnify Stifel against certain liabilities, including liabilities
under federal securities laws, in connection with such engagement.
Accounting Treatment
The merger will, for accounting purposes, be treated as a reverse
acquisition, with BPI deemed to be the acquiring party and CommWorld being
deemed to be the acquired party. Under this method of accounting, BPI's
historical results for periods prior to the merger will become the
-26-
<PAGE> 35
results of the combined company. On the date of the merger, the combined company
will record the assets acquired and liabilities assumed from BPI based upon
their historical costs and the assets and liabilities of CommWorld will be
recorded at their estimated fair market values. The increase in the fair value
of the net assets of the combined company will be recorded as an adjustment to
shareholders equity. The merger will be accounted for using the purchase method
of accounting and goodwill.
Tax Consequences To CommWorld Shareholders And CommWorld
For U.S. federal income tax purposes, no gain or loss will be
recognized by CommWorld shareholders as a result of the merger. The merger is
expected to qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. Accordingly, neither CommWorld nor DTI should
recognize gain or loss as a result of the merger.
Appraisal Rights
CommWorld is a Colorado corporation. Under Colorado law, the
shareholders of CommWorld are not entitled to appraisal rights with respect to
the merger.
Interests Of CommWorld Executive Officers And Directors; Employment Agreements
The executive officers and directors of CommWorld may be deemed to have
interests that are different from and in addition to the interests of CommWorld
shareholders. The merger agreement includes a provision that the current
directors of CommWorld will continue as directors of the combined company
immediately following the merger.
The merger agreement also includes provisions that, either CommWorld or
BPI, may terminate the merger agreement, if CommWorld does not enter into
employment agreements with Lionel Brown, Jim Ciccarelli and Mike St. John. Each
of these persons is currently an executive officer of CommWorld.
Mike St. John, Lionel Brown, Jim Ciccarelli and David Welch have orally
agreed to enter into employment agreements with CommWorld, which will be
effective upon completion of the merger. Each employment agreement is for a one
year period, subject to earlier termination by CommWorld for cause. Monthly
salaries to be received by each officer are: Mike St. John - $20,000; Jim
Ciccarelli - $15,000; Lionel Brown - $10,000; and David Welch - $9,583. In
addition, each officer will receive a monthly car allowance not to exceed $700
per month.
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the
merger agreement. A copy of the merger agreement, as amended, is attached as
Annex A and forms a part of this proxy statement. The summary is qualified in
its entirety by reference to the merger agreement. We urge all of the CommWorld
shareholders to read the merger agreement in its entirety for a more complete
description of the terms and conditions in the merger.
The Merger
The merger agreement provides that BPI will be merged with and into
DTI, a wholly-owned subsidiary of CommWorld. Upon completion of the merger, DTI
will continue as the surviving
-27-
<PAGE> 36
corporation in accordance with Colorado law. DTI will also continue as a
wholly-owned subsidiary of CommWorld. In connection with the merger, DTI's name
will be changed to Business Products, Inc. The merger will become effective
after all conditions in the merger agreement are met, including receipt of
approval of the shareholders of CommWorld, and after BPI and DTI file articles
of merger with the Secretary of State of Colorado.
Conversion Of Securities
At the effective time of the merger, the BPI shareholders will receive
as purchase price consideration an aggregate of 12.6 million shares of CommWorld
common stock and warrants to purchase up to an additional 3 million shares of
CommWorld common stock. All of the warrants will be issued to Mike St. John,
BPI's majority shareholder. The warrants will be exercisable for a four year
term commencing on closing of the merger at an exercise price of $1.50 per
share, subject to the CommWorld shares attaining certain pricing levels, as
defined below. The exercise of these warrants is not dependant on Mike St.
John's employment or future involvement with CommWorld and is not tied to any
other performance criteria by Mike St. John or the merged Company. The warrants
will not be exercisable unless the CommWorld common stock price for a period of
ten consecutive trading days equals or exceeds the following prices:
<TABLE>
<CAPTION>
Number of Shares Market Trading Price
---------------- --------------------
<S> <C>
1,000,000 $3.50
1,000,000 $4.50
1,000,000 $5.50
</TABLE>
Each issued and outstanding share of CommWorld common stock will not be
affected by the merger and will represent one share of CommWorld common stock
after the merger.
The merger agreement contains customary representations and warranties
of CommWorld, DTI and BPI relating to various aspects of the various businesses
and financial statements of the parties and other matters.
Conduct Of Business Prior To The Merger
Each of CommWorld, DTI and BPI has agreed that prior to the merger each
will operate its business consistent with past practices and use reasonable
efforts to preserve intact its business organization and relationships with
suppliers and customers and to keep available the services of key employees.
In addition, the merger agreement places specific restrictions on the
ability of CommWorld, DTI and BPI to:
o Amend its articles of incorporation or bylaws;
o Declare or pay any dividends;
o Enter into material contracts, or make substantial capital
expenditures;
o Permit additional encumbrances on assets;
-28-
<PAGE> 37
o Dispose of material properties;
o Make a material acquisition or enter into a new line of
business; and
o Enter into any transaction outside the ordinary course of its
business or prohibited under the merger agreement.
It is also provided in the merger agreement that each company will
maintain or reduce present salaries and commission levels for all officers,
directors, employees and agents except for ordinary and customary bonus and
salary increases for employees in accordance with past practices. An exception
has also been made for a bonus to be paid by BPI to Mike St. John and/or Anton
St. John on or about April 30, 2000 for services rendered to BPI during the
fiscal year ending April 30, 2000. The aggregate bonus may not exceed
$3,000,000, nor may it be in an amount which causes cash or cash equivalent
assets of BPI to be less than $500,000, or BPI's shareholders' equity to be less
than $1,000.
Limitation On Discussing Or Negotiating Other Acquisition Proposals
CommWorld has agreed that it will not solicit, initiate, participate in
any discussions pertaining to, or furnish any information to any person other
than shareholders of BPI, concerning any acquisition or purchase of all or a
material amount of the assets of, or a majority equity interest in, CommWorld or
a merger, consolidation or business combination of CommWorld. BPI has agreed to
the same restrictions with respect to itself.
Conditions Of The Merger
Conditions To The Obligation Of Each Party
The obligations of each party to complete the merger are subject to the
following conditions:
o The shareholders of CommWorld shall have approved the
proposals in this proxy statement;
o All consents and approvals in connection with the merger
agreement shall have been obtained;
o No action or proceeding shall have been instituted or
threatened to restrain or prohibit the completion of the
merger;
o Each of Mike St. John, Lionel Brown and Jim Ciccarelli shall
have entered into an employment agreement with CommWorld; and
o CommWorld shall have received the fairness opinion of Stifel.
Conditions To The Obligations Of CommWorld
The obligation of CommWorld to complete the merger is also subject to
the following additional conditions:
-29-
<PAGE> 38
o The representations and warranties of BPI and its shareholders
in the merger agreement shall be true and correct in all
material respects as of the date of the merger agreement and
as of the closing date;
o All proceedings taken by BPI under the merger agreement and
all documents, instruments and certificates delivered by BPI
under the merger agreement shall be reasonably satisfactory in
form and substance to CommWorld and its counsel; and
o No material adverse effect with respect to BPI shall have
occurred.
Conditions To The Obligation Of BPI
The obligation of BPI to complete the merger is also subject to the
following additional conditions:
o The representations and warranties of CommWorld in the merger
agreement shall be true and correct in all material respects
as of the date of the merger agreement and as of the closing
date;
o All proceedings taken by CommWorld under the merger agreement
and all documents, instruments and certificates delivered by
CommWorld under the merger agreement shall be reasonably
satisfactory in form and substance to BPI and its counsel; and
o No material adverse effect with respect to CommWorld shall
have occurred.
Termination, Amendment And Waiver
The merger agreement may be terminated at any time prior to completion
of the merger, whether before or after approval by the CommWorld shareholders,
by the mutual consent of the parties to the merger agreement or by any party if
the merger has not occurred by June 30, 2000. In addition, the merger agreement
may be terminated if a party is in material breach of the merger agreement, and
such breach has not been cured.
The merger agreement may be amended at any time prior to completion of
the merger, including after approval of the merger by the CommWorld
shareholders. At any time prior to the completion of the merger, we may:
o Extend the time for the performance of any of the obligations
or other acts of the other party required by the merger
agreement;
o Waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered
in connection with the merger agreement; or
o Waive compliance with any of the agreements or conditions
contained in the merger agreement.
-30-
<PAGE> 39
AMENDMENT TO THE ARTICLES OF INCORPORATION
Increase In Authorized Common Stock
You are asked to consider and approve an amendment to the articles of
incorporation as amended (the "Articles") to increase the authorized common
stock. There are currently authorized 25,000,000 shares of common stock, no par
value, and 3,000,000 shares of preferred stock, $1 par value, in various classes
or series, with such designations, voting powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
and restrictions as the CommWorld Board may determine.
The proposed amendment to the Articles would increase the number of
shares of common stock of which CommWorld is authorized to issue from 25,000,000
to 75,000,000. The number of authorized shares of preferred stock will not be
changed by the proposed amendment. The full text of the proposed amendment is
attached as Annex C, and you are urged to read this carefully. In the event the
amendment is adopted, CommWorld will file an amendment to the Articles with the
Secretary of State of the State of Colorado.
CommWorld currently has 7,867,044 shares of common stock issued and
outstanding. A total of 5,106,193 shares are currently reserved for issuance
under outstanding options and warrants. In addition, CommWorld plans to issue
12,600,000 shares and warrants to purchase an additional 3,000,000 shares to the
BPI shareholders in the merger. The merger could not be completed without the
increase in authorized common stock.
Purpose And Effect Of The Amendment
The CommWorld Board believes that it is desirable to have additional
authorized shares of common stock available for issuance upon completion of the
merger, exercise of options and warrants and for future acquisition and
financing transactions, stock dividends or splits, and other corporate purposes.
Having such authorized shares available for issuance in the future would give
CommWorld greater flexibility and allow shares of common stock to be issued
without the expense and delay of a special shareholders meeting. The shares of
common stock would be available for issuance without any further action by the
shareholders unless such action is required by applicable law or the rules of
any stock exchange on which CommWorld's securities may be listed.
The additional shares of common stock for which authorization is sought
would be part of the existing class of common stock and, if and when issued,
would have the same rights and privileges as the shares of common stock
presently outstanding. Such additional shares would not (and the shares of
common stock presently outstanding do not) entitle the holders thereof to
preemptive rights.
Although authorization is not being sought in response to any
indication or proposal that CommWorld is a target for take-over activity, you
should consider the fact that the increase in the authorized common stock,
coupled with the power of the Board to authorize the issuance of the shares and
ability of the Board to set the terms of the preferred stock, means that the
Board could in the future act to cause the issuance of shares in a manner or on
terms which might thwart or complicate efforts of a third party to attempt to
gain control of CommWorld.
-31-
<PAGE> 40
PROPOSAL TO AMEND THE 1998 STOCK INCENTIVE PLAN
You are asked to consider and approve an amendment to the 1998 Stock
Incentive Plan to increase the number of shares available for Plan purposes from
1,000,000 shares to a total of 2,500,000 shares. The following is a summary of
the Plan. Please refer to Annex D to this proxy statement for the full text of
the Plan, as amended.
Purpose
The purpose of the Plan is to promote the interests of CommWorld and
its shareholders by:
o Attracting and retaining key employees;
o Providing participants a significant stake in the performance
of CommWorld;
o Providing an opportunity for participants to increase their
holdings of the common stock.
The Plan would also permit the Board to grant stock options to
individual directors, if the Board decides to do so.
Administration
The Plan is administered by the option committee. The option committee
consists of the Board or a committee of the Board as the Board may from time to
time designate composed of not less than two members of the Board, each of whom
shall be a director who is not employed by CommWorld. The option committee
currently consists of the full Board. The option committee has the authority to
select employees and consultants to receive awards, to determine the type of
awards and the number of shares of common stock covered by awards, and to set
the terms and conditions of awards. The option committee has the authority to
establish rules for the administration of the Plan, and its determinations and
interpretations are binding.
Eligible Participants
o Any employee or officer (including executive officers) of
CommWorld or any of its subsidiaries (which will include
employees and officers of BPI after the merger) will be
eligible for a stock option grant under the Plan if selected
by the option committee. There are currently approximately 144
employees of CommWorld and its subsidiaries who would be
eligible for option grants under the Plan. Upon completion of
the merger, there will be approximately 386 employees who
would be eligible for option grants under the Plan.
o Any consultant to CommWorld, including non-employee directors,
will also be eligible to receive option grants under the Plan
if authorized by the option committee.
-32-
<PAGE> 41
Shares Authorized
The number of shares of the common stock which may be issued upon
exercise of options under the Plan is currently 1,000,000, of which options to
purchase 661,910 shares have been granted. Options granted to CommWorld officers
during the fiscal year ending April 30, 2000 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES PERCENT OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED EXERCISE PRICE EXPIRATION
NAME GRANTED (#) TO EMPLOYEES PER SHARE ($/SH) DATE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Bennett 5,000 1% $1.06 8/23/04
----------------------------------------------------------------------------------------------------------------
Lionel Brown 39,000 6% $.97 - $2.75 8/23/04 - 2/16/05
----------------------------------------------------------------------------------------------------------------
Jim Ciccarelli 74,000 11% $.97 - $2.75 8/23/04 - 2/16/05
----------------------------------------------------------------------------------------------------------------
David Welch 47,500 7% $.97 - $2.75 8/23/04 - 2/16/05
----------------------------------------------------------------------------------------------------------------
</TABLE>
If the amendment is approved by the shareholders, the number of shares
available for Plan purposes will be increased by 1,500,000 shares for a total of
2,500,000 shares.
Types of Options
The option committee may grant stock options that qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code ("ISOs") or
options that do not so qualify ("Non-ISOs").
All options granted will be subject to the following:
o The exercise price must be paid at the time the option is
exercised in either cash or other shares of common stock.
o The exercise price cannot be less than the fair market value
of the common stock on the grant date.
o The option committee will determine the vesting schedule of
options granted under the Plan and may also impose additional
conditions on exercise, including performance goals.
o Options will not be exercisable for at least six months after
they are granted, and they cannot be exercised more than ten
years after grant.
Federal Income Tax Consequences
The following is a summary of the principal U.S. federal income tax
consequences generally applicable to option grants under the Plan:
o The grant of an option is not expected to result in any
taxable income for the recipient.
o The holder of an ISO generally will have no taxable income
upon exercising the ISO if certain requirements are met
(except that a liability may arise for alternative
-33-
<PAGE> 42
minimum tax) and CommWorld will not be entitled to a tax
deduction when an ISO is exercised.
o Upon exercise of a Non-ISO, the holder will recognize ordinary
income equal to the difference between the fair market value
of shares of common stock acquired and the exercise price.
CommWorld will be entitled to a tax deduction for the same
amount.
o The tax consequences upon a sale of shares acquired in an
exercise of an option will depend on how long the shares were
held prior to sale, and upon whether such shares were acquired
in the exercise of an ISO or a Non-ISO.
o If shares acquired upon exercise of an ISO are held for at
least one year after exercise and two years from the date that
the ISO was granted, the holder will recognize long-term
capital gain or loss in an amount equal to the difference
between the option exercise price and the sale price of the
shares. If the shares are not held for that period, gain on
the sale of the shares may be treated as ordinary income.
o Any gain realized upon the sale of shares acquired in the
exercise of a Non-ISO for an amount greater than their fair
market value on the date of exercise, will be capital gain and
any loss will be capital loss. Generally, there will be no tax
consequences to CommWorld in connection with the disposition
of shares acquired in the exercise of an option, except that
CommWorld may be entitled to a tax deduction in the case of a
sale of ISO shares before the holding periods described above
have been satisfied.
Adjustments
Certain corporate transactions or events such as stock splits,
recapitalizations, spin-offs, mergers, etc. may directly affect the number of
outstanding shares and/or the value of the outstanding common stock. If such
transactions occur, the option committee may adjust the number of shares which
may be granted under the Plan, as well as the limits on individual option
grants. The option committee may adjust the number of shares and the exercise
price under outstanding options, and may make other adjustments which are
thought appropriate to protect the value of the award to the recipient.
Transferability
Options granted under the Plan may not be transferred except:
o By will or the laws of descent and distribution; or
o Pursuant to a qualified domestic relations order or the
Employee Retirement Income Security Act.
-34-
<PAGE> 43
Amendments
The Board may amend or terminate the Plan at any time. No amendment,
however, may:
o Increase the number of shares reserved for option grants
without shareholder approval;
o Impair the right of a holder under an option previously
granted except to qualify under SEC rules, or
o Disqualify the plan from the exemption provided by SEC Rule
16b-3.
Term
The Plan will continue until November 11, 2008, unless abandoned or
terminated at an earlier time.
Vote Required
The affirmative vote of a majority of the outstanding shares of common
stock entitled to vote at the special meeting is required for approval of the
amendment to the Plan.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE PLAN
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On March 10, 2000 Communications World International, Inc. ("CommWorld") entered
into an agreement with Business Products, Inc. ("BPI") pursuant to which
CommWorld will issue 12,600,000 shares of its common stock and contingent
warrants to purchase up to 3,000,000 additional shares of its common stock as
purchase price consideration in exchange for all of the issued and outstanding
shares of common stock of BPI (the "Proposed Merger"). No value will be assigned
to the contingent warrants until such time as the contingent warrants become
exercisable.
As the former shareholders of BPI will control CommWorld after the transaction,
the Proposed Merger will be accounted for as a reverse acquisition under which
BPI is deemed for accounting purposes to be the acquirer and CommWorld the
acquired entity. Under these accounting principles, the Company's combined
consolidated financial statements will represent BPI on a historical basis
consolidated with the results of operations of CommWorld reflected from the date
of acquisition. Based on the fair value of the CommWorld common stock, the fair
value of consideration given is expected to exceed the net assets acquired by
approximately $29,447,000, which amount will be reflected as goodwill in the
Company's financial statement and amortized to expense over a twenty year
period, however the amortization period is still under review by management and
could change.
During fiscal 2000 CommWorld completed three acquisitions. On September 30, 1999
CommWorld acquired Willpower, Inc. d/b/a RMS Communications, Inc ("RMS") for
approximately $622,900.
-35-
<PAGE> 44
The purchase price was comprised of cash of $225,000, notes from CommWorld of
$150,000 and 185,000 shares of CommWorld common stock. On October 29, 1999
CommWorld acquired the operations of West-Tech Communications Corp.
("West-Tech") and certain assets net of liabilities assumed for $1,190,523. The
purchase price was comprised of cash of $558,947, notes from CommWorld of
$370,000 and 270,000 shares of CommWorld common stock. Included in the cash
portion of the purchase price was $138,947 representing the difference between
accounts receivable purchased and accounts payable assumed. CommWorld completed
the acquisition of Telecom Systems ("Telecom"), a wholly owned business unit of
Allstar Systems, Inc. on March 16, 2000. The purchase price was comprised of
$250,000 in cash and a provision for up to $30,000 of warranty service to
Telecom's customers. The carrying values of the assets acquired have been
adjusted to reflect the estimated fair market value at the date of acquisition.
The acquisitions were accounted for using the purchase method of accounting;
accordingly, the operating results of these acquired entities have been included
in the historical results of CommWorld's operations for the period subsequent to
their acquisition.
The unaudited pro forma combined condensed financial statements of CommWorld are
based upon the historical financial statements of CommWorld and BPI after giving
effect to the Proposed Merger and the acquisitions discussed above. These
unaudited pro forma combined condensed financial statements are not necessarily
indicative of the financial position and results of operations that would have
been attained had the transactions actually taken place at the date indicated
and do not purport to be indicative of the effects that may be expected to occur
in the future.
The accompanying unaudited pro forma combined condensed financial statements
illustrate the effect of the Proposed Merger and the acquisitions on CommWorld's
financial position and results of operations. The unaudited pro forma combined
condensed balance sheet as of January 31, 2000 is based on the historical
balance sheets of CommWorld and BPI and assumes the Proposed Merger took place
on that date. The unaudited pro forma combined condensed statements of
operations for the nine months ended January 31, 2000 and the year ended April
30, 1999 are based on the historical statements of operations of CommWorld and
BPI for the same periods and assume the Proposed Merger and the acquisitions
occurred as of May 1, 1999.
The accompanying unaudited pro forma combined condensed financial statements
should be read in connection with the historical financial statements of
CommWorld and BPI.
-36-
<PAGE> 45
Communications World International, Inc. And Subsidiaries
Pro Forma Condensed Combined Balance Sheet (unaudited)
January 31, 2000
(in thousands)
<TABLE>
<CAPTION>
January December CommWorld
31, 31, Pro forma
2000 1999 Combined
Telecom Pro forma Financial
CWII Systems Adjustments Statements
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and investments $ 200 $ -- $ -- $ 200
Trade accounts and current
portion of notes receivable 1,799 1,799
Commissions receivable
Inventories 386 1,267 (1,217) (1) 436
Other current assets 80 80
------------ ------------
Total current assets 2,465 2,515
Property and equipment, net 371 371
Deposits and other assets 1,100 1,100
Deferred tax asset 1,045 1,045
Intangible assets, net 3,197 230 (1) 3,427
------------ ------------
Total $ 8,178 $ 8,458
============ ============
</TABLE>
<TABLE>
<CAPTION>
January CWII & BPI
31, Pro forma
2000 Combined
Pro forma Financial
BPI Adjustments Statements
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and investments $ 1,842 $ -- $ 2,042
Trade accounts and current
portion of notes receivable 3,916 5,715
Commissions receivable 688 688
Inventories 71 507
Other current assets 244 324
------------ ------------
Total current assets 6,761 9,276
Property and equipment, net 662 1,033
Deposits and other assets 63 1,163
Deferred tax asset 1,045
Intangible assets, net -- 29,447 (2) 32,874
------------ ------------
Total $ 7,486 $ 45,391
============ ============
</TABLE>
-37-
<PAGE> 46
Communications World International, Inc. And Subsidiaries
Pro Forma Condensed Combined Balance Sheet (unaudited)
January 31, 2000
(in thousands)
<TABLE>
<CAPTION>
January December CWII
31, 31, Pro forma
2000 1999 Combined
Telecom Pro forma Financial
CWII Systems Adjustments Statements
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,343 $ -- $ -- $ 1,343
Revolving line of credit 1,007 1,007
Current portion of notes
payable 682 682
Accrued expenses and other 529 30(1) 559
Deferred revenue 30 30
Income taxes payable
Deferred income tax liability -- --
------------ ------------
Total current liabilities 3,591 3,621
Notes payable and other 2,914 250(1) 3,164
------------ ------------
Total liabilities 6,505 6,785
------------ ------------
Stockholders' equity:
Convertible preferred stock 80 80
Common stock 8,119 8,119
Additional paid-in capital 1,604 1,604
Accumulated other
comprehensive income
Retained earnings (Accumulated
deficit) (8,130) (8,130)
------------ ------------
Total shareholders' equity 1,673 1,673
------------ ------------
$ 8,178 $ 8,458
============ ============
</TABLE>
<TABLE>
<CAPTION>
January CWII & BPI
31, Pro forma
2000 Combined
Pro forma Financial
BPI Adjustments Statements
------------ ------------ ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,963 $ -- $ 3,306
Revolving line of credit 1,007
Current portion of notes
payable 682
Accrued expenses and other 1,189 1,748
Deferred revenue 1,206 1,236
Income taxes payable 722 722
Deferred income tax liability 301 301
------------ ------------
Total current liabilities 5,381 9,002
Notes payable and other -- 3,164
------------ ------------
Total liabilities 5,381 12,166
------------ ------------
Stockholders' equity:
Convertible preferred stock 80
Common stock 2 22,921 (2) 31,042
Additional paid-in capital (1,604)(2)
Accumulated other
comprehensive income 37 37
Retained earnings (Accumulated
deficit) 2,066 8,130 (2) 2,066
------------ ------------
Total shareholders' equity 2,105 33,225
------------ ------------
$ 7,486 $ 45,391
============ ============
</TABLE>
-38-
<PAGE> 47
Communications World International, Inc. And Subsidiaries
Pro Forma Condensed Combined Statement of Operations (unaudited)
For the Nine Months Ended January 31, 2000
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Historical
Financial Statements
January 31, December 31, Pro forma
2000 1999 Consolidated
Telecom Pro forma Financial
CWII Systems Adjustments Statements
---- ------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Franchise equipment sales $ 3,950 $ -- $ -- $ 3,950
Direct equipment and service
sales 6,789 2,773 979 (3) 11,366
825 (4)
Other revenue 300 -- 300
---------- --------- -----------
Total revenue 11,039 2,773 15,616
---------- --------- -----------
COSTS AND EXPENSES:
Cost of franchise equipment
sales 3,602 3,602
Cost of direct equipment and
service sales 4,530 2,490 486 (3) 8,064
558 (4)
Selling, general and
administrative 3,159 1,738 442 (3) 5,548
209 (4)
Interest Expense 375 -- 375
Depreciation and amortization 181 -- 9 (6) 190
---------- --------- -----------
11,847 4,228 17,779
---------- --------- -----------
INCOME (LOSS) BEFORE TAXES ON
INCOME (808) (1,455) (2,163)
TAXES ON INCOME -- -- --
---------- --------- -----------
NET INCOME (LOSS) $ (808) $ (1,455) $ (2,163)
========== ========= ===========
LOSS PER SHARE:
Net Loss $ (.12)
==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,734,900
</TABLE>
<TABLE>
<CAPTION>
Historical
Financial CWII &
Statements BPI
January 31, Pro Forma
2000 Combined
Pro forma Financial
BPI Adjustments Statements
--- ----------- ----------
<S> <C> <C> <C>
REVENUE:
Franchise equipment sales $ -- $ -- $ 3,950
Direct equipment and service
sales 29,898 41,264
Other revenue 66 366
--------- ------------
Total revenue 29,964 45,580
--------- ------------
COSTS AND EXPENSES:
Cost of franchise equipment
sales 3,602
Cost of direct equipment and
service sales 23,663 31,727
Selling, general and
administrative 4,753 (1,084) (5) 9,217
Interest Expense 69 444
Depreciation and amortization 91 1,104 (6) 1,385
--------- ------------
28,576 46,375
--------- ------------
INCOME (LOSS) BEFORE TAXES ON
INCOME 1,388 (795)
TAXES ON INCOME 635 (461) (7) 174
--------- ------------
NET INCOME (LOSS) $ 753 $ (969)
========= ============
LOSS PER SHARE:
Net Loss $ (.05)
============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 12,600,000 (8) 19,334,900
</TABLE>
-39-
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) On March 16, 2000 CommWorld acquired the operations of Telecom Systems,
a wholly owned business unit of Allstar Systems, Inc., and inventory
for $250,000 in cash. The inventory was recorded at the estimated
liquidation value of $50,000 at the date of acquisition. A provision of
$30,000 was provided to reflect the agreement to provide warranty
service to Telecom's customers.
(2) Pursuant to the merger agreement, BPI shareholders will receive
12,600,000 shares of CommWorld common stock and 3,000,000 contingent
warrants. As BPI shareholders will receive approximately 62% of the
issued and outstanding common stock of CommWorld, the merger will be
accounted for as a "reverse acquisition" such that CommWorld will be
designated as the accounting acquiree and BPI the accounting acquiror.
As such, the net assets of CommWorld will be recorded at the average
market value of CommWorld's issued and outstanding common stock,
calculated during the three day period before and after the merger
agreement was signed. The pre-merger financial statements of BPI will
become the historical financial statements of CommWorld. The increase
in the fair value of the net assets of CommWorld will be recorded as an
adjustment to shareholders equity and goodwill. No value will be
assigned to the contingent warrants until such time as the warrants
become exercisable under the terms of the agreement.
(3) To record results of operations of RMS for the five months prior to the
acquisition that are not included in CommWorld's results of operations
for the nine months ended January 31, 2000.
(4) To record results of operations of West-Tech for the six months prior
to the acquisition that are not included in CommWorld's results of
operations for the nine months ended January 31, 2000.
(5) Reflects the elimination of salaries of specific individuals not
continuing with the combined companies and reduction of salary pursuant
to an employment agreement.
(6) Amortization of goodwill over a period of 20 years.
(7) Provision for income taxes based on statutory tax rates after
adjustment for goodwill amortization not deductible.
(8) Common shares to be issued as part of the merger are assumed to be
issued and outstanding at the beginning of the pro forma period
presented. The fully diluted weighted average common shares outstanding
and the fully diluted loss per share are not presented, as the effect
would be anti-dilutive.
-40-
<PAGE> 49
Communications World International, Inc. And Subsidiaries
Pro Forma Condensed Combined Statement of Operations (unaudited)
For the Year Ended April 30, 1999
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Financial Financial Financial Financial
Statement Statement Statement Statement
December
April 30, 31, April 30, April 30,
1999 1998 1999 1999
Telecom Pro forma
CWII RMS West-Tech Systems Adjustments
---- --- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE:
Franchise equipment sales $ 5,362 $ -- $ -- $ -- $ --
Direct equipment and service
sales 3,505 2,350 1,617 7,669
Other revenue 283 -- -- --
---------- ---------- ----------- ----------
Total revenue 9,150 2,350 1,617 7,669
---------- ---------- ----------- ----------
COSTS AND EXPENSES:
Cost of franchise equipment
sales 4,759
Cost of direct equipment and
service sales 2,325 1,166 1,162 5,210
Selling, general and
administrative 3,040 1,061 360 2,634
Interest Expense 254 30 (2)
74 (4)
20 (5)
Depreciation and amortization 123 1 27 (1)
54 (3)
-- -- -- -- 11 (6)
---------- ---------- ----------- ----------
10,501 2,227 1,523 7,844
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE TAXES ON
INCOME FROM CONTINUING OPERATIONS (1,351) 123 94 (175)
TAXES ON INCOME -- -- -- --
---------- ---------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (1,351) $ 123 $ 94 $ (175)
========== ========== =========== ==========
LOSS PER SHARE:
Loss from continuing
operations $ (.56)
==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,409,816
</TABLE>
<TABLE>
<CAPTION>
Historical
Financial
Statement CWII &
CWII BPI
Pro forma April 30, Pro forma
Combined 1999 Combined
Financial Pro forma Financial
Statements BPI Adjustments Statements
---------- --- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Franchise equipment sales $ 5,362 $ -- $ -- $ 5,362
Direct equipment and service
sales 15,141 23,921 39,062
Other revenue 283 87 370
----------- ----------- -----------
Total revenue 20,786 24,008 44,794
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of franchise equipment
sales 4,759 4,759
Cost of direct equipment and
service sales 9,863 17,626 27,489
Selling, general and
administrative 7,095 5,024 (1,918) (7) 10,201
Interest Expense 378 1 379
Depreciation and amortization 216 1,472 (8) 1,688
-- -- --
----------- ----------- -----------
22,311 22,651 44,516
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES ON
INCOME FROM CONTINUING OPERATIONS (1,525) 1,357 278
TAXES ON INCOME -- 542 194 (9) 736
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (1,525) $ 815 $ (458)
=========== =========== ===========
LOSS PER SHARE:
Loss from continuing
operations $ (.03)
===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (10) 15,464,816
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial statements.
-41-
<PAGE> 50
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Amortization of goodwill, resulting from RMS acquisition, over a period
of 20 years.
(2) Accrued interest on RMS acquisition debt at 8% per annum.
(3) Amortization of goodwill, resulting from West-Tech acquisition, over a
period of 20 years.
(4) Accrued interest on West-Tech acquisition debt at 8% per annum.
(5) Accrued interest on acquisition debt at 8% per annum.
(6) Amortization of goodwill, resulting from Telecom acquisition, over a
period of 20 years.
(7) Reflects the elimination of salaries of specific individuals not
continuing with the combined companies and reduction of salary pursuant
to an employment agreement.
(8) Amortization of goodwill over a period of 20 years.
(9) Provision for income taxes based on statutory tax rates after
adjustment for goodwill amortization not deductible.
(10) The average number of shares outstanding during the period is
calculated as follows:
<TABLE>
<S> <C>
CommWorld weighted average common shares outstanding 2,409,816
Adjustment for shares issued for RMS 185,000
Adjustment for shares issued for West-Tech 270,000
Adjustment for shares to be issued for BPI 12,600,000
----------
15,464,816
==========
</TABLE>
(11) The financial information presented for RMS is presented as of December
31, 1998. It was not practical to roll forward the information to April
30, 1999.
-42-
<PAGE> 51
COMMWORLD MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for Nine Months Ended January 31, 2000, Compared to Nine
Months Ended January 31, 1999
For the nine months ended January 31, 2000, CommWorld reported a net
loss from continuing operations of $808,000, as compared to a net loss of
$1,021,000 for the comparable period ended January 31, 1999. For the nine month
period ended January 31, 2000, total revenue was $11,039,000 compared to total
revenue of $6,755,000 for the nine month period ended January 31, 1999. For the
nine months ended January 31, 2000, CommWorld completed two acquisitions. The
acquisition of Willpower, Inc. (doing business as RMS) was completed on
September 30, 1999, and the acquisition of West-Tech Communications Corp. was
completed on October 29, 1999. Results of operations for these two acquisitions
have been included in CommWorld's Consolidated Statements of Operations since
the respective dates of acquisition.
Franchise Segment
The sales of the franchise segment in the nine month period ended
January 31, 2000, remained relatively stable as compared to the same time period
from the prior year. The gross margin percentage on franchise equipment sales
was approximately 9% for the nine month period ended January 31, 2000 as
compared to gross margins of approximately 11% for the same period in the prior
year. The prior year gross margins were improved by a discount of $127,000 to an
agreement with TAIS, CommWorld's principal supplier, to treat as non-interest
bearing a note payable to TAIS 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 $8,000 in the nine month period ended
January 31, 1999. Management does not expect future sales of the franchise
segment to materially increase over present levels.
-43-
<PAGE> 52
Company Owned Segment
The increase in revenue from direct equipment sales and service was
$4,307,000 for the nine month period ended January 31, 2000, compared to the
same time period from the prior year. The gross margin percentage on direct
equipment sales and service declined approximately 4% from 37% for the nine
months ended January 31, 1999 to 33% for the nine months ended January 31, 2000.
The decrease in gross margin reflects an increase in less profitable service
business versus higher margin equipment installation and sales in CommWorld's
national account operations. The decrease in equipment installation and sales in
CommWorld's national account operations is the result of reduced activity with
CommWorld's largest national account customer. The increase in sales reflects
CommWorld's strategy to grow by acquisition in selected United States markets.
Sales for the nine months ended January 31, 2000 include two acquisitions in the
Dallas (completed in March and September 1999) and two acquisitions in the
Denver (completed in April and October 1999) markets. During the nine month
period ended January 31, 1999 the operations of three subsidiaries were disposed
of and were not included in the respective periods' operations.
The increase in selling expense was $279,000 for the nine month period
ended January 31, 2000, compared to the same time period for the prior year
after giving effect to $220,000 of selling expenses for the prior year
comparable periods included in loss from operations sold. This net increase was
due to increased commissions on higher sales volume and a larger sales force in
company owned operations.
In June 1998, CommWorld entered into a letter of intent to merge with
Interconnect Acquisition Corporation ("IAC"), a privately-held company. The
merger was completed January 28, 1999. In connection with the merger, CommWorld
effected management changes, including the election of Jim Ciccarelli as chief
executive officer and a director of CommWorld and Lionel Brown as president and
a director of CommWorld. Included in the loss for the nine months ended January
31, 1999 is officer severance compensation of $138,000 related to two executive
officers who are no longer with CommWorld.
In conjunction with the merger of IAC, CommWorld pursued 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 of the nine months ended January 31, 1999 is
$78,000 of costs associated with expired letters of intent.
The increase in general and administrative expenses was $176,000 for
the nine month period ended January 31, 2000, compared to the same time periods
from the prior year after giving effect to $444,000 of general and
administrative expenses for the prior year comparable period included in loss
from operations sold. This net increase is due to the increased number of
locations where CommWorld conducts operations and on the resulting higher volume
of Company activity. Additionally, executive compensation increased by
approximately $93,000 for the nine month period ended January 31, 2000, compared
to the same time period from the prior year.
-44-
<PAGE> 53
Interest expense increased $182,000 for the nine month period ended
January 31, 2000, compared to the same time period from the prior year. This
increase includes $117,000 of debt issuance costs related to warrants issued in
conjunction with an offering of convertible debt.
Year Ended April 30, 1999 Compared to Year Ended April 30, 1998
During the year ended April 30, 1999 ("fiscal 1999") CommWorld
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. CommWorld
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. CommWorld 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 CommWorld.
CommWorld is attempting to improve its overall results by continuing cost
control measures and efforts to increase revenues. CommWorld is continuing to
pursue acquisition candidates in markets where CommWorld has existing
operations. CommWorld 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. CommWorld does not have any
agreements to make any acquisitions and has no material commitments for capital
expenditures.
CommWorld'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, CommWorld completed two
acquisitions, CRI and CommWorld of Denver. CommWorld 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, CommWorld acquired inventory of
-45-
<PAGE> 54
approximately $70,000 and fixed assets with a net book value of approximately
$45,000. CommWorld 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, CommWorld 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.
CommWorld and the original owners determined to cancel the preferred stock as a
result of arm's-length negotiations. CommWorld 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 CommWorld's operations. Although the
strategic business plan for CommWorld 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 fiscal 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 CommWorld'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
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, CommWorld effected certain
management changes; officer severance compensation of $138,500 is included in
general and administrative expense for fiscal 1999, (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 CommWorld'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 CommWorld resulting in lower accounts receivable and therefore
lower outstanding balances on CommWorld's collateralized line of credit. Also,
for a period of approximately 4 months,
-46-
<PAGE> 55
CommWorld 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 CommWorld. 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 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 CommWorld'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. This customer accounted for approximately $1,580,000 and $1,963,000,
or 23% and 56%, for the nine months ended January 31, 2000 and fiscal 1999,
respectively. 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 CommWorld from passing through all of its increased
costs to the national account customers. Although CommWorld is making efforts to
improve margins, there can be no assurance that CommWorld's efforts will be
successful. CommWorld believes relations with its major customer are good and
CommWorld 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 CommWorld.
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 CommWorld'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, CommWorld received approximately $60,000 in fee
revenue from a
-47-
<PAGE> 56
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.
Liquidity and Capital Resources
CommWorld's operations have historically been adversely affected by a
lack of working capital. CommWorld uses a line of credit from a lending
institution, which is limited to the extent of available collateral. CommWorld's
line of credit is fully utilized to the extent of available collateral at April
14, 2000. The lack of available funding impedes CommWorld's ability to fund
additional equipment purchases and to expand its business operations. Although
CommWorld's working capital deficit has been reduced by approximately $570,000
at January 31, 2000 as compared to its position at April 30, 1999, CommWorld
expects to continue its efforts to obtain additional capital. CommWorld has no
firm commitments from any source and there can be no assurance CommWorld will
obtain the necessary capital. Moreover, due to CommWorld'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.
In May 1999, CommWorld 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.
CommWorld 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.
In October 1999 CommWorld completed an offer of units of subordinated
convertible 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 which may be lowered under certain circumstances. Each
warrant is exercisable at $.40 per share until September 30, 2004. CommWorld
received net proceeds of approximately $1,362,000 from the sale of these units.
In November 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. CommWorld 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 nine
months from the date of exercise of the acceleration right. If the institutional
investors exercise the right to accelerate the maturity of their notes CommWorld
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. CommWorld is
also restricted in its ability to prepay these notes.
In January 2000, CommWorld entered into a new revolving line of credit
agreement with a finance company. The revolving line of credit permits CommWorld
to borrow up to $2,000,000 subject to certain collateral limitations. Interest,
at the rate of prime plus 3.5% per annum, is due monthly. The revolving line of
credit is collateralized by substantially all
-48-
<PAGE> 57
of the assets of CommWorld. At April 14, 2000, $1,090,000 was outstanding under
the line of credit.
Year 2000 Issue Update
CommWorld did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to 2000. Based
on operations since January 1, 2000, CommWorld does not expect any significant
impact to its on-going business as a result of the "Year 2000 issue." However,
it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues, such as leap year-related problems, may occur with billing,
payroll, or financial closings at month, quarterly or year end. CommWorld
believes that any such problems are likely to be minor and correctable. In
addition, CommWorld could still be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar problems that have
arisen for its customers and suppliers.
BUSINESS OF COMMWORLD
Business Development
CommWorld was incorporated in 1983 under Colorado law and has its
principal executive offices at 7388 South Revere Parkway, Englewood, Colorado
80112. The Company markets a range of communications products and technical
services to large communication companies and directly to large and small end
users in the Denver, Houston and Dallas/Ft. Worth metropolitan areas. The
Company's national accounts program markets the same products and services
directly to multi-location businesses. In addition, the Company has a franchise
distribution network that sells telephone systems and peripheral products, such
as voice messaging and related systems, for business users. At January 31, 2000
the Company had 64 franchises located in 25 states.
COMPANY OPERATIONS
Company operations provide a variety of products and services to
customers, including:
o Telephone equipment sales, installation and service, which
includes sales of PBX and key systems, telephone system
accessories like NT based voice messaging and voice switch
accessory products and ACD.
o PBX network engineering.
o Integrated telecommunication system design, installation,
remote management and support of customer premise telephone
equipment for companies having multiple locations.
o Design and installation of structured cabling systems.
o Project management and technical consulting for large
installations.
-49-
<PAGE> 58
o Coordination and installation of access to long distance
telephone service.
o On site technical support for large installations.
o Subcontracting of above services to communications companies.
CommWorld has incurred substantial losses in recent fiscal years.
CommWorld's available cash and other liquid resources have been low and
CommWorld's ability to expand has been impaired. During the fiscal year ended
April 30, 1999, the Board of Directors of CommWorld determined that a new
business strategy was needed. As a result CommWorld made key management changes,
completed a merger with IAC and established as its mission to become a highly
profitable and dominant interconnect company in selected U.S. markets.
CommWorld'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.
CommWorld completed its first two acquisitions in fiscal 1999. In
March, 1999 CommWorld closed on its acquisition of assets from Texas based 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 consolidated financial
statements. CommWorld 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. Although the
strategic business plan for CommWorld is to grow through acquisitions in
selected U.S. markets, it plans to initially concentrate these efforts in
Colorado and Texas. CommWorld 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 CommWorld due to their geographic locations and profitability.
During fiscal 2000 CommWorld has completed three additional
acquisitions. In September 1999 CommWorld acquired RMS with operations in the
metropolitan Dallas/Ft. Worth area. In October 1999 CommWorld acquired the
operations of West-Tech, in the Denver metropolitan area. Both of these
acquisitions complimented existing operations in their respective locations. In
March 2000 CommWorld acquired the operations of Allstar Telecom Systems, a
division of Allstar Systems, Inc., in the Houston metropolitan area.
Franchise Program
CommWorld's franchise division purchases telephone and related
communications equipment from manufacturers and supply houses. CommWorld 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.
-50-
<PAGE> 59
At January 31, 2000, CommWorld had 64 franchises located in 25 states.
Pursuant to the terms of CommWorld'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
CommWorld on a "cost mark-up royalty" basis, meaning based on the cost to
CommWorld 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 CommWorld.
The franchisee is not required to make any purchases of equipment
through CommWorld; however, CommWorld believes it will be able to obtain
favorable pricing from suppliers based on negotiated purchases and quantity
buying arrangements. CommWorld 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 CommWorld. The
franchisee is responsible for all warranty service on equipment sold by it and
manufacturers' warranties are passed through to the franchisee. CommWorld 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 CommWorld
receives advance notice of the proposed assignment, the transferee assumes the
obligations under the franchise agreement, the transferee meets certain
conditions and qualifications, and CommWorld receives a transfer fee equal to 10
percent of the franchise fee then in effect. In addition, CommWorld 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.
CommWorld 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.
-51-
<PAGE> 60
Competition
CommWorld'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. CommWorld
competes with other interconnect telephone companies on the basis of the
equipment offered by CommWorld and its franchisees, price and after-sale
service. CommWorld believes consummating its acquisition strategy will enable it
to improve its marketing of larger PBX Systems.
CommWorld faces intense competition from AT&T, Williams Communications,
the various former regional Bell operating companies and over 10,000 other
companies believed to be engaged in the interconnect telephone industry. Many of
these companies have resources substantially greater than those of CommWorld. It
can be expected competition in the interconnect telephone industry will be
intense for the foreseeable future.
CommWorld believes that it offers certain advantages to its end
customers and franchises, including CommWorld's ability to purchase in larger
quantities and obtain volume discounts from suppliers more readily than an
individual dealer. CommWorld 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 CommWorld attempts to satisfy its prospective customers' needs in these
areas, it expects to continue to encounter significant competition from other
firms.
Product Supply
CommWorld currently purchases telephone systems and various peripheral
equipment from several major suppliers. One of the suppliers, TAIS, provided
approximately 68% of the inventory and products purchased by CommWorld during
the nine months ended January 31, 2000 while offering flexible credit terms. If
CommWorld's relationship with TAIS were to cease, or to deteriorate, it could
have a significant adverse impact on the operations of CommWorld. Product
availability from suppliers under open lines of credit has been sufficient for
CommWorld's current operations. However, all products may not necessarily be
available in the future. CommWorld continually monitors changes in products
offered by these manufacturers, as well as others, to review its current and
future product mix. CommWorld's products are warranted by their vendors for at
least one year for defects in material and workmanship.
-52-
<PAGE> 61
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 CommWorld 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 January 31, 2000, CommWorld had approximately 144 full-time
employees involved in technical service, maintenance, installation,
administration, sales, accounting, warehousing, and franchise relations.
BPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations For the Nine Months Ended January 31, 2000 as Compared to
the Nine Months Ended January 31, 1999
For the nine months ended January 31, 2000 ("fiscal 2000") BPI reported
net income of approximately $753,000 as compared to net income for the nine
months ended January 31, 1999 ("fiscal 1999") of approximately $631,000. Total
revenue increased from approximately $14,491,000 to $29,907,000 from fiscal 1999
to fiscal 2000 respectively.
Revenue from system sales increased from $4,564,000 to $8,339,000 from
fiscal 1999 to fiscal 2000 respectively. This increase is primarily related to
new customers to whom BPI sold product directly in the initial stages of the
relationship but later moved to an agency model relationship. Support, update,
configuration and training revenues increased from $4,120,000 to $16,208,000
from fiscal 1999 to fiscal 2000 respectively. Of the increase, Y2K related
revenues were approximately $6,000,000 and broad band services, which are new
service offerings, were approximately $1,000,000. The remainder of the increase
is due to the expanded sales emphasis on service revenue. Cost of sales
increased from $10,998,000 to $23,663,000 from fiscal 1999 to fiscal 2000
respectively. Gross margins decreased from 24% to 21% for the respective
periods. The decline in gross profit is primarily related to an increase in the
use of contractor services, necessitated by the rapid growth of services
provided by BPI. In addition, BPI significantly added to its management team in
preparation for expanded future activities.
-53-
<PAGE> 62
Selling, general and administrative expenses increased from
approximately $2,402,000 to $4,844,000 from fiscal 1999 to fiscal 2000
respectively. The major components of the increase were related to increases in
officer bonuses of $452,000, facilities costs of $208,000, office expenses of
$187,000, professional services of $96,000 as well as significant infrastructure
and administrative personnel requirements related to BPI's rapid growth during
this period.
For the nine months ended January 31, 2000, BPI incurred income taxes
of $635,000. The income tax is a direct result of income before tax for the nine
months ended January 31, 2000 of $1,388,000.
Results of Operations For the Year Ended April 30, 1999 as Compared to the Year
Ended April 30, 1998
For the year ended April 30, 1999 ("fiscal 1999") BPI reported net
income of approximately $815,000 as compared to net income for the year ended
April 30, 1998 ("fiscal 1998") of approximately $420,000. Total revenue
increased from approximately $21,125,000 to $23,964,000 from fiscal 1998 to
fiscal 1999 respectively. In fiscal 1998 BPI wrote off bad debts of $292,000
owed by a related party, with $50,000 being written off in fiscal 1999. Adding
back these extraordinary write-offs, the net income after taxes as a percent of
revenue is 3.6% for fiscal 1999 and 3.4% for fiscal 1998.
Revenue from system sales decreased from $9,762,000 to $5,738,000 from
fiscal 1998 to fiscal 1999 respectively; support, update, configuration and
training revenues increased from $3,294,000 to $10,387,000 from fiscal 1998 to
fiscal 1999 respectively, reflecting the shift in business focus for BPI from
system sales to services-related income. Cost of sales increased from
approximately $16,684,000 to $17,626,000 from fiscal 1998 to fiscal 1999
respectively. However, the gross margin improved from 21% to 26% for the
respective periods. This improvement is also the result of the shift from system
sales to higher-margin support, update, configuration and training sales.
Selling, general and administrative expenses increased from
approximately $3,369,000 to $4,974,000 from fiscal 1998 to fiscal 1999
respectively. The main components of the increase in selling, general and
administrative expenses were increases in officer bonuses of $1,200,000, the
previously-mentioned related party write-offs of $292,000 and increased rent
related to BPI's new location of $118,000.
For the year ended April 30, 1999, BPI incurred income taxes of
$542,000 compared to income taxes of $384,000 for the prior comparable period.
The increase in tax is directly related to an increase in income before tax of
$553,000 for the year ended April 30, 1999
Liquidity And Capital Resources
For fiscal 1999 net cash used in operating activities was $1,032,000
compared to net cash provided by operations of $1,031,000 for fiscal 1998. The
change was primarily due to an increase in accounts receivable. At April 30,
1999, BPI had unusually high accounts
-54-
<PAGE> 63
receivable related to Y2K work done for a particular customer; that receivable
has since been paid.
In the nine months ended January 31, 2000 operating activities provided
net cash of $2,580,000 compared to $258,000 for the nine months ended January
31, 1999. The change was primarily a result of reductions in accounts
receivable.
Net cash used in investing activities was $349,000 for fiscal 1999
compared to $299,000 for fiscal 1998. The primary investing activity in both
periods was the purchase of fixed assets of $200,000 and $268,000 and purchases
of investment securities of $118,000 in the year ended April 30, 1999.
For the nine months ended January 31, 2000, net cash used in investing
activities was $449,000 compared to net cash used in investing activities of
$158,000 for the comparable period ended January 31, 1999. The primary investing
activity in both periods was the purchase of fixed assets of $303,000 and
$96,000 and investment purchases of $5,000 and $30,000, respectively.
Net cash provided by financing activities for fiscal 1999 was $556,000
compared to net cash used in financing activities of $321,000 for fiscal 1998.
The change was primarily the result of increased bank borrowings of $750,000.
For the nine months ended January 31, 2000 net cash used in financing
activities was $664,000 compared to $104,000 for the nine months ended January
31, 1999. The increase was primarily due to payments on bank borrowings.
BPI has primarily used its $750,000 line of credit with Norwest Bank to
fund officer bonuses and has met requirements to retire the balance for 60 days
each year. Previous capital expenditures have been funded by cash from
operations.
BUSINESS OF BPI
Overview
Headquartered in Littleton, Colorado, BPI is a Colorado corporation
established in 1975. BPI is a regional integrated technology service provider in
network design, communications, and integration. BPI designs, sells and supports
network operating systems and their hardware platforms. In 1999, BPI expanded
its service area by opening offices in Salt Lake City and Seattle.
The customer base of BPI includes AT&T, Level 3, Bay Networks,
Oppenheimer Funds, US West Communications and Media One Group. Industries in
which BPI customers are engaged include aviation, education and healthcare
systems. BPI has also donated the information systems and timing devices that
were used at the World Alpine Skiing Championships in Vail, Colorado.
-55-
<PAGE> 64
Management of BPI believes that retaining quality personnel,
particularly in the information technology arena, as well as its onsite life
cycle center, will be important to its future financial success. BPI's current
business strategy is to continue to add profitable, technical services to its
current set of services and to attract new contracts with major accounts.
Evolution of BPI
BPI was founded in 1975 by Anton St. John after his retirement from a
25-year career as the Western Regional Manager for Remington Rand. BPI initially
sold typewriters, calculators and supplies, and employed six people. BPI
subsequently added word processors and computers to its inventory service
products. BPI continued to evolve from these origins. It focused on developments
in computers, peripherals, imaging and other services believed necessary to
support network systems. BPI also provides training and back-end service as part
of its product and service package.
Anton St. John retired as BPI's president in 1989 and was succeeded by
his son, Mike St. John. Mike St. John joined BPI in 1984 as a sales
representative marketing office products. Mike St. John is currently President
of BPI. He also actively manages customer relationships and the development of
new business opportunities for BPI.
BPI devotes ongoing attention to in-house service, engineering and
sales staff training. It has evolved as a regional services provider in alliance
with various companies in the data networking and broadband technology arenas.
In April 1998, BPI moved from its original Denver facility to a new
location in Littleton, Colorado. The facility at the new location contains
23,000 square feet of office space, remodeled and reconfigured specifically to
accommodate the needs of BPI. BPI has also recently leased additional space
within nearby buildings.
BPI's focus historically has been on the Colorado market. During the
last three years, BPI has experienced an increase of business in other states,
partly as a result of an extension of services to its Colorado customer-base. In
1999, BPI expanded its engineering and project management service coverage
through new offices in Seattle and Salt Lake City. This expansion occurred
partly in response to a demand for technical services in other locations by a
major customer of BPI. BPI anticipates that its new presence in these areas may
spawn additional customer relationships. BPI currently employs approximately 250
people on a full-time basis in its three locations.
In recent years, BPI has been engaged in Y2K evaluation and remediation
projects, expansion and facilitation of educational systems through design and
implementation of video conferencing systems, and diagnosis and inoculation of
the network systems necessary for reliable operations and communications within
the health and hospitals sector. In 1999, BPI provided the computer systems and
on-site support to provide real-time data on scores and rankings in the Alpine
Ski World Championships held in Vail, Colorado to members of the European
Broadcast Association.
-56-
<PAGE> 65
BPI operates in a highly competitive environment in which it has
numerous competitors for its products and services. Some of its competitors are
larger and better financed than BPI, and may enjoy certain competitive
advantages. While BPI believes that its role as a network and data communication
service company gives it certain competitive advantages, no assurance exists
that BPI will be able to maintain its market share or current level of
profitability.
Products and Services
Summary
BPI is an integrated technology service provider in network design,
communications and integration. BPI specializes in high-speed data, voice and
video networks and designs, and sells and supports network operating systems and
hardware of platforms. In addition, BPI operates a placement organization that
provides permanent staffing to customers in support of its other products and
services.
The principal providers of these services are the Technical Services,
Staffing Services, Life Cycle Services, and Field Operations divisions of BPI.
The Project Management and Consulting groups of BPI provide business
re-engineering services to medium and large businesses in the field of
information and communication technology.
The Technical Services division of BPI provides information technology
engineering and support. Staffing Services provides internal and/or external
resources when the necessary service is not readily available from BPI. Life
Cycle Services coordinates and manages the services provided by the Consulting
and Management groups. The role of this group includes technology evaluation,
purchasing, configuration, deployment, tracking, support, asset management and
disposal. The Broadband Infrastructure Division of Field Operations supplements
BPI's services by providing plant infrastructure such as structured data and
broadband network cabling.
Advanced Systems
BPI's Advanced Systems Group designs, sells and supports
enterprise-wide information technology services.
BPI's Advanced Systems service offerings include: System Administration
(outsourcing, remote system and network administration, and assistance with
operational processes and physical design); System Utilization (performance
tuning); High Availability capacity (MC/ServiceGuard, EMC2 Symmetric Storage
Systems); Internet/Intranet Security (firewall design and implementation,
firewall and web server security audits); and HP Open View (enterprise backup
solutions).
Communications Systems
BPI's Communications Group designs, installs, and supports services for
high-speed data, voice and video networks. It concentrates its efforts in three
primary areas:
-57-
<PAGE> 66
Core Business Technologies. This area includes interactive video
conferencing, fiber optic transport services, RF/coaxial integration,
Internet/I-Net access, local area network, wide area network and
metropolitan area network integration, video file servers, data/voice
services, and hybrid fiber/coax design.
Technology Services. This area includes vendor comparison, testing and
selection; system design, implementation and layout; documentation and
graphical representation, and minimization of disparate technologies.
Support Services. Support services provided through the Communications
Group include remote monitoring and diagnostics, problem resolution,
hardware service and maintenance, as well as updates and upgrades.
Consulting Services
Consulting services include consultation on local and wide area network
design; network design and auditing; switch, router and gateway design; existing
network redesign; micro/mainframe connectivity; FAX servers; remote
communications, and cabling requirements. In addition, BPI provides analysis of
storage and expansion needs, virus detection and inoculation, and security
policy deployment services.
BPI has established a mixed environment network at its headquarters,
referred to as the Network Operations Center ("NOC"). The NOC is designed to
emulate an information technology environment and to test new applications
before they are loaded onto a customer's network.
Procurement Services
BPI sells and services a variety of hardware and software. BPI's
product lines include networking hardware, platforms, software, storage systems,
video conferencing and power components. BPI has sales and service relationships
with various vendors, including Hewlett-Packard, Microsoft, Novell, Compaq, IBM,
Storagetek, Toshiba and Oracle.
Professional Services
BPI's Professional Services Group focuses on three core areas of
service: engineering and support; local and national enterprise services; and
network performance analysis (baselining and monitoring).
Engineering and Support. The Professional Services Group provides
network engineering and support under five major platforms: Microsoft,
Novell, Banyan, UNIX-HP UX, and Apple Macintosh. The BPI Professional
Services Group also deals with ATM, or auto-synchronized transfer mode
networking, a type transmission technology used with voice, video and
data over high speed networks, and ATM infrastructure design and
planning.
Local and National Enterprise Services. This category of BPI
professional services includes local and national maintenance contract
service on a same-day or next-day response basis, as well as Help Desk
support.
-58-
<PAGE> 67
Network Performance Analysis. BPI services provided through this
category include network management utilizing BPI's High Availability
System, running Hewlett Packard's OpenView. This system provides both
real-time redundant storage as well as real-time network monitoring and
support.
BPI also employs network analysis technology intended to perform
network baselining services.
BPI also performs network "health checks" and analysis of network
performance intended to determine whether a network is secure from viruses,
outside intruders, and network fatigue.
BPI's Life Cycle Services Center. BPI's life cycle services center
offers customization of computer networking equipment and configuration services
to its customers. These services include: customization of hardware and software
to customer specifications; responses to changing specifications; workstation
standardization; quality control; asset tagging and labeling; bar-coding to
assist with inventory accounting; and, configuration documentation.
Business Professional Staffing
BPI provides Business Professional Staffing ("BPS") as a division of
BPI. BPS is a placement organization that specializes in technological
personnel.
Directors to be Named by BPI Shareholders
Mike St. John, Director and President
Mike St. John has served as president since 1989. He also has served as
BPI's corporate director. Mike originally joined BPI in 1984 as a sales
representative after completing his Master's of Business Administration degree,
with emphasis in marketing and finance, at the University of Colorado and
previously earning a Bachelor's degree at the University of Denver School of
Business.
Scott Swenson, Director
Scott co-founded and has served as General Counsel and Secretary for
Enhanced Video, Voice and Data Systems, Inc. ("E3SI"), a telecommunications
consulting group that was formed in February 1997. In addition, Scott is a
co-founder and board member of Jumpstart Capital, Inc. located in Littleton,
Colorado. Scott is also a co-founder and advisory board member of LaunchCloud,
Inc., formed in September 1999. For nine years prior to his involvement with
E3SI, Jumpstart and LaunchCloud, Scott was a partner with the Denver-based law
firm of Rothgerber, Johnson & Lyons where he began his law practice after
graduation from the University of Denver College of Law in 1981. Scott focused
primarily on a national financial institutions mergers and acquisition practice
and also performed corporate and securities work for early stage companies in
both regulated and unregulated industries.
-59-
<PAGE> 68
Leases and Significant Contracts
Property Leases
BPI has leases at five property locations. Three of these lease sites
are located in the Denver metropolitan area where BPI is headquartered. The
principal facility includes 23,000 square feet of space and is located at 8136
S. Grant Way in Littleton, Colorado. BPI recently acquired leases on additional
space in two nearby office and warehouse buildings. In early 1999 BPI acquired a
lease on 3,000 feet of office space at 8024 S. Grant Way. BPI also leases 5,375
square feet of office/warehouse space at 8121 S. Grant Way, with the option to
renew this lease for an additional three years after expiration of its initial
term in March 2003.
As of July 1999, BPI entered into contracts with HQ Global Workplaces,
Inc. for office space and related office services at locations in Washington and
in Utah. These BPI facilities are located at 500 108th Avenue NE in Bellevue,
Washington, and at 4001 S. 700 East, Suite 500, Salt Lake City, Utah.
Contracts and Commitments
Norwest Bank Line of Credit. BPI maintains a $750,000 line of credit
with Norwest Bank, secured by BPI's accounts receivable. The terms of the credit
line require BPI to retire the balance to zero for a minimum 60-day period each
year. As of March 2000, principal outstanding on the BPI line of credit was at
zero, but a draw is anticipated in the near future to address pending executive
compensation.
Service Contracts. BPI utilizes a standard form of service contract for
customer purchases of BPI goods and services. Many of these contracts involve
customers expected to make purchases having aggregate payments in excess of
$50,000. BPI believes that the majority of these customer relationships are
good.
Major Customers
BPI has historically received a significant amount of its annual
revenues from two major customers, AT&T and TCI. In 1999, TCI merged with AT&T.
The combined AT&T and TCI accounted for 16.4% and 22.9% of BPI's revenues in
fiscal 1998 and 1999, respectively. For the nine-month period from May 1999
through January 2000, AT&T represented 34.2% of BPI's total revenues.
Sales and Revenue Distribution
Three major revenue streams contribute to BPI's operations. These
consist of engineering services, systems (hardware/software) sales, and
professional placement. BPI estimates the revenue proportions attributable to
these categories for 1999 at 43% due to services, 56% to systems, and the
remaining 1% accounted for by placement commissions. For the nine months ending
January 31, 2000, this breakdown is 54%, 45%, and 1%, respectively.
-60-
<PAGE> 69
Engineering services are routinely sold in blocks of hours that a
customer may use over a defined period, typically eighteen months. In special
circumstances such as those involving large customers or government agencies,
alternative sales options may be used. BPI makes systems sales of computer
systems and networks in two ways. Typically, BPI prefers to act as an agent to
sell the product to the customer, remaining out of the billing and payment cycle
between the distributor and customer. In cases where BPI considers a small
customer as a sound credit risk but needing assistance with an acquisition, BPI
will use its own credit to buy a product from the distributor and then bill the
customer.
BPI's Professional Placement services are charged out as a fee
calculated as a percentage of the annual salary payable upon signing the
agreement for placement.
Related Party Transactions
Real Estate Leases
BPI currently leases its primary 23,000 square-foot facility in
Colorado on a month-to-month basis from 8136 S. Grant Way, LLC, a business
entity which is 80% owned by Mike St. John, BPI's president, on an informal,
oral basis which the parties have operated under since BPI moved into this
facility in April 1998. BPI and 8136 S. Grant Way, LLC have recently executed a
written lease agreement due to become effective on May 1, 2000. The initial term
of this lease runs through April 30, 2002, with an option to extend for an
additional two-year term. Base monthly rent is $27,875 under the written lease,
with additional monthly charges for maintenance and repairs, insurance, taxes
and utilities under the lease estimated at an additional $5.10 per square foot
on an annualized basis.
Advances and Receivables
BPI has advances receivable from Mike St. John of $50,000, and a demand
note receivable with a current balance of $77,869 from E3SI, a company in which
Mike St. John has a 46% ownership interest. E3SI engages the services of BPI
from time to time to assist in implementation and completion of certain E3SI
projects. Under this arrangement, for the nine months ended January 31, 2000,
BPI's revenues from E3SI totaled $245,783, of which $96,721 was due to BPI from
E3SI on January 31, 2000. BPI wrote off amounts receivable from E3SI of $50,000
and $292,000 in fiscal 1999, and 1998, respectively. BPI accrues interest on the
officer advances and the E3SI note at 8% per annum. E3SI utilizes approximately
500 square feet of space in BPI's primary facility incident to E3SI's working
relationship with BPI. E3SI employs and pays its three-person staff from E3SI
revenues. E3SI engages primarily in government cable and fiber optic franchise
consulting, design and implementation primarily for owners of destination
resorts, sports arenas and state and local governments.
BPI also had accounts receivables from two entities with common
ownership, 8136 S. Grant Way, LLC (80% owned by Mike St. John) for $4,834 and
LaunchCloud, LLC (19% owned by Mike St. John) for $51,878, which amounts were
subsequently paid. For the nine months ended January 31, 2000, BPI's revenues
from LaunchCloud were $50,898.
-61-
<PAGE> 70
Equipment Acquisitions and Leases
In February 2000, BPI purchased the Unix computer system and a phone
system used in its operations but owned by Mike St. John for $50,000. BPI had
formerly leased this equipment from its president under two month-to-month
leases for approximately $4,500 per month.
DESCRIPTION OF COMMWORLD CAPITAL STOCK
If the proposal to amend the articles of incorporation to increase the
authorized common stock is approved, the CommWorld articles of incorporation
will provide that the authorized capital stock of CommWorld will consist of
75,000,000 shares of common stock and 3,000,000 shares of preferred stock.
CommWorld Common Stock
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 Board out of funds legally available therefor.
CommWorld 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 CommWorld, 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 pre-emptive, conversion or subscription rights.
The shares of common stock currently outstanding are validly issued, fully paid,
and non-assessable.
CommWorld Preferred Stock
CommWorld is authorized to issue up to 3,000,000 shares of $1 par value
preferred stock, which may be issued from time to time in one or more series.
The Board 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.
-62-
<PAGE> 71
Series C Preferred Stock
CommWorld has authorized 440,000 shares of Series C preferred stock of
which 10,000 shares are issued and outstanding. Dividends on the Series C
preferred stock are paid when declared by the Board, at the rate of $.08 per
share per annum before any dividends on shares of the common stock are paid.
Upon liquidation, dissolution or winding up of CommWorld, the Series C preferred
stock will have a preference of $1 per share plus accumulated and unpaid
dividends, payable from the proceeds of sale or distribution of CommWorld's
assets prior to any distribution to the holders of common stock. CommWorld may
redeem the Series C preferred stock at $1 per share plus accrued and unpaid
dividends by giving 30 days' notice to the holders of the Series C preferred
stock. At January 31, 2000, there were $2,200 in accumulated dividends.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of CommWorld as of April 30, 1999
and 1998, and for each of the two years in the period ended April 30, 1999,
included in this proxy statement have been so included in reliance on the report
of Levine, Hughes & Mithuen, Inc., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of BPI as of April 30, 1999 and 1998, and for
each of the two years in the period ended April 30, 1999, included in this proxy
statement have been so included in reliance on the report of BDO Seidman, LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CommWorld's Board has not yet made the selection of CommWorld's
independent auditors for the year ending April 30, 2000.
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in proxy materials for CommWorld's
2000 annual meeting of shareholders should be submitted by the shareholder to
the secretary of CommWorld in writing and received at the executive offices of
CommWorld by June 30, 2000.
LEGAL MATTERS
Patton Boggs, LLP, Denver, Colorado, special counsel to CommWorld, will
pass upon the validity of the CommWorld securities to be issued in connection
with the merger. Certain legal matters in connection with the merger will be
passed upon for BPI by Rothgerber Johnson & Lyons LLP.
-63-
<PAGE> 72
WHERE YOU CAN FIND MORE INFORMATION
CommWorld files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document that
CommWorld files at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. CommWorld's SEC filings are
also available to the public from commercial document retrieval services and at
the web site maintained by the SEC at http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
This proxy statement contains certain forward-looking statements and
information relating to CommWorld and BPI that are based on the beliefs of
CommWorld 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, CommWorld's plans for its business
upon completion of the merger with BPI, including the introduction of new
products and services, expansion into new markets, and mergers and acquisitions.
In addition, in those and other portions of the proxy statement, the words
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions, as they relate to CommWorld or its management, are intended
to specifically identify forward-looking statements. Such statements reflect the
current views of CommWorld with respect to future events and are subject to
certain risks, uncertainties, and assumptions, including the risk factors
described in this proxy statement. In addition to factors described elsewhere in
this proxy statement, CommWorld 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. CommWorld does not intend to
update these forward-looking statements.
-64-
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
Consolidated Condensed Financial Statements of CommWorld for the Nine Months
Ended January 31, 2000 and 1999
Consolidated Condensed Balance Sheets F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Cash Flows F-3-4
Notes to Consolidated Condensed Statements Financial Statements F-5-7
Financial Statements of Business Products, Inc.
for the Nine Months Ended January 31, 2000 and 1999
Balance Sheets F-8, 9
Statements of Income and Comprehensive Income F-10
Statements of Stockholders' Equity F-11
Statements of Cash Flows F-12
Notes to Financial Statements F-13-22
Consolidated Financial Statements of CommWorld
for the Years Ended April 30, 1999 and 1998
Independent Auditors' Report F-23
Consolidated Balance Sheets F-24, 25
Consolidated Statements of Operations F-26
Consolidated Statements of Stockholders' Equity F-27
Consolidated Statements of Cash Flows F-28, 29
Notes to Consolidated Financial Statements F-30-49
Financial Statements of Business Products, Inc.
for the Years Ended April 30, 1999 and 1998
Independent Auditors' Report F-50
Balance Sheets F-51, 52
Statements of Income and Comprehensive Income F-53
Statements of Stockholders' Equity F-54
Statement of Cash Flows F-55
Notes to Financial Statements F-56-65
</TABLE>
-65-
<PAGE> 74
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JANUARY 31, 2000
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 200
Trade accounts and current portion of notes receivable, less allowance for
doubtful accounts of $239 1,799
Inventory 386
Prepaid expenses 80
-------
Total current assets 2,465
Property and equipment, net 371
Deposits and other assets 1,100
Intangible assets, net 3,197
Deferred tax asset 1,045
-------
$ 8,178
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,343
Revolving line of credit 1,007
Current portion of notes payable 682
Accrued expenses 462
Deposits and other current liabilities 67
-------
Total current liabilities 3,561
Capital lease obligations and deferred revenue 30
Notes payable (including $857 due to related parties) 2,914
-------
Total liabilities 6,505
-------
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized:
Series C (cumulative) - 50,000 shares issued and outstanding, 50
Series F (cumulative) - 30,000 shares issued and outstanding 30
Common stock, no par value, 25,000,000 shares authorized,
shares issued and outstanding; 7,628,668
8,119
Additional paid-in capital
1,604
Accumulated deficit (8,130)
-------
Total stockholders' equity 1,673
-------
$ 8,178
=======
</TABLE>
See accompanying notes to consolidated financial statements
F-1
<PAGE> 75
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
(IN THOUSANDS OF DOLLARS EXCEPT EARNINGS PER SHARE DATA)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended January 31,
-------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
Franchise equipment sales $ 3,950 $ 4,069
Direct equipment sales and services 6,789 2,482
Royalty fees 111 148
Other revenue 189 56
------------ ------------
Total revenue 11,039 6,755
Costs and expenses:
Cost of franchise equipment sales 3,602 3,610
Cost of direct equipment sales and service 4,530 1,567
Selling 774 275
General and administrative 2,385 1,765
Executive officer severance compensation -- 138
Cost of expired letters of intent -- 78
Depreciation and amortization 181 150
Interest expense 375 193
------------ ------------
Total cost and expenses 11,847 7,776
(Loss) from operations before income taxes (808) (1,021)
Income tax benefit -- --
------------ ------------
(Loss) from continuing operations (808) (1,021)
Discontinued operations, net of income taxes:
Loss from operations of subsidiaries sold -- (33)
Loss on sale of subsidiaries -- (396)
------------ ------------
Loss from discontinued operations -- (429)
------------ ------------
Net (loss) $ (808) $ (1,450)
============ ============
Earning per share:
Basic:
(Loss) from continuing operations $ (.12) $ (.53)
============ ============
Net (loss) $ (.12) $ (.75)
============ ============
Fully diluted:
(Loss) from continuing operations $ (.12) $ (.53)
============ ============
Net (loss) $ (.12) $ (.75)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 76
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
For the Nine Months Ended January 31,
-------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (808) $ (1,450)
Adjustments to reconcile to net cash provided
(used) by operating activities:
Depreciation and amortization 181 150
Debt issuance costs 117 --
Provision for losses on accounts and notes receivable 101 34
Intangible write off - discontinued operations -- 259
Changes in operating assets and liabilities:
Trade accounts and notes receivable (445) 573
Inventories (54) 150
Prepaid expenses (72) (23)
Deposits and other assets (141) 2
Notes receivable (44) --
Trade accounts payable (474) (126)
Accrued expenses 107 (185)
Other liabilities 47 (56)
------------ ------------
Net cash (used) by operating activities (1,485) (672)
------------ ------------
Cash flows from investing activities:
Acquisitions (1,636) (64)
Capital expenditures (219) (22)
------------ ------------
Net cash used by investing activities (1,855) (86)
------------ ------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreement 510 (961)
Sale of Common Stock 507 310
Sale of warrants 18 --
Net proceeds from sale of Preferred Stock -- 1,759
Redemption of Preferred Stock 16 --
Notes payable 2,756 --
Repayment of notes and contract payable (308) (294)
Repayment of capital lease obligations (16) (15)
------------ ------------
Net cash provided by financing activities 3,483 799
Net increase (decrease) in cash 143 41
Cash at beginning of the period 57 14
------------ ------------
Cash at end of the period $ 200 $ 55
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 77
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 164 $ 192
Non-cash financing activities:
Issuance of warrants in connection with
convertible debt $ 1, 035
Non-cash investing activities:
Sale of operating subsidiaries:
Exchange of preferred stock as consideration $ 372
Note receivable taken as partial consideration $ 25
Business acquisitions financed by:
Issuance of common stock $ 492
Conversion of preferred stock to common stock $ 491
Conversion of notes payable to common stock $ 15
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 78
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) ACQUISTIONS
During the nine months ended January 31, 2000, the Company completed
the acquisitions of two companies. On September 30, 1999 CommWorld
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 CommWorld of $150,000 and 185,000 shares of
CommWorld common stock. On October 29, 1999 CommWorld acquired the
operations of West-Tech Communications Corp. ("West-Tech") and certain
assets net of liabilities assumed for $1,190,523. The purchase price
was comprised of cash of $558,947, notes from CommWorld of $370,000 and
270,000 shares of CommWorld common stock. Included in the cash portion
of the purchase price was $138,947 representing the difference between
accounts receivable purchased and accounts payable assumed. The
acquisitions were accounted for using the purchase method of
accounting; accordingly, the operating results of these acquired
entities have been included in the historical results of CommWorld's
operations for the period subsequent to their acquisition.
The assets acquired, including the cost in excess of net assets
acquired, and liabilities assumed in the acquisitions of RMS and
West-Tech are as follows:
<TABLE>
<CAPTION>
RMS West-Tech
------- ---------
(in thousands)
<S> <C> <C>
Tangible assets acquired at fair value $ 80 $ 218
Costs in excess of net assets acquired 543 1,082
Liabilities assumed at fair value -- (110)
------- -------
Total purchase price $ 623 $ 1,190
======= =======
</TABLE>
F-5
<PAGE> 79
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
(2) ACQUISITIONS (CONTINUED)
Selected unaudited pro forma combined results of operations for the
nine months ended January 31, 2000, assuming the RMS and West-Tech
acquisitions occurred on May 1, 1999, are presented as follows:
<TABLE>
<CAPTION>
(in thousands except for per
share amounts)
----------------------------
<S> <C>
Revenue $ 15,596
Net loss $ (1,774)
Net loss per common share $ (.26)
</TABLE>
(3) CONVERTIBLE DEBT OFFERINGS
During the nine months ended January 31, 2000, 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 consisted 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 exercisable at $.40 per share until September 30, 2004.
In November 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 nine 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.
F-6
<PAGE> 80
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
(3) CONVERTIBLE DEBT OFFERINGS (CONTINUED)
In connection with the issuance of the Company's convertible debt, the
Company issued 1,101,760 warrants, including 221,760 of placement agent
warrants, to acquire shares of the Company's common stock. The warrants
are exercisable at prices ranging from $.40 to $1.00 expiring September
30, 2004. At January 31, 2000 the issuance of the warrants resulted in
the recognition of approximately $1,035,000 of additional debt issuance
cost of which $117,000 has been expensed and $918,000 remains
unamortized at January 31, 2000.
(4) REVOLVING LINE OF CREDIT
In January 2000 the Company entered into a new revolving line of credit
agreement 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 3.5% per annum, is due
monthly. The revolving line of credit is collaterallized by
substantially all of the assets of the Company.
F-7
<PAGE> 81
BUSINESS PRODUCTS, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
January 31, 2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 1,599,418 $ 952,652
Investment in equity securities (Note 1) 242,567 30,300
Accounts receivable, less provision of
$150,000 and $88,000 for returns and
doubtful accounts (Notes 2, 4, and 8) 3,916,097 2,246,399
Commissions receivable 688,251 938,770
Inventories 70,625 31,000
Related party receivables (Note 4) 133,683 129,613
Prepaid expenses and other current assets (Note 4) 110,841 20,133
------------ ------------
Total current assets 6,761,482 4,348,867
------------ ------------
PROPERTY AND EQUIPMENT:
Office and computer equipment 579,781 123,529
Leasehold improvements 271,558 240,676
------------ ------------
851,339 364,205
Less accumulated depreciation and amortization 189,476 78,606
------------ ------------
Net property and equipment 661,863 285,599
------------ ------------
DEPOSITS (Note 5) 62,500 62,500
------------ ------------
$ 7,485,845 $ 4,696,966
============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-8
<PAGE> 82
BUSINESS PRODUCTS, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
January 31, 2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 2) $ -- $ --
Accounts payable 1,962,632 1,269,832
Accrued payroll, commissions and
compensated absences 1,077,741 589,448
Payroll taxes and employee benefit plans
payable (Note 6) 111,440 234,296
Deferred revenue 1,206,056 992,240
Income taxes payable (Note 3) 721,708 465,632
Deferred income tax liability (Note 3) 301,308 15,042
------------ ------------
Total current liabilities 5,380,885 3,566,490
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 4, 5, 6, 7 and 10)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000 shares
authorized; 1,500 shares issued and
outstanding 1,500 1,500
Accumulated other comprehensive income 37,298 --
Retained earnings 2,066,162 1,128,976
------------ ------------
Total stockholders' equity 2,104,960 1,130,476
------------ ------------
$ 7,485,845 $ 4,696,966
============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-9
<PAGE> 83
BUSINESS PRODUCTS, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
------------ ------------
<S> <C> <C>
REVENUES: (Notes 4 and 8)
Support, update, configuration and training $ 16,207,645 $ 4,120,179
System sales 8,339,500 4,564,031
Commissions 5,351,150 5,766,743
Other income 8,294 39,773
------------ ------------
Total revenues 29,906,589 14,490,726
COST OF REVENUES 23,663,374 10,998,408
------------ ------------
GROSS PROFIT 6,243,215 3,492,318
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 4) 4,843,671 2,402,188
------------ ------------
OPERATING INCOME 1,399,544 1,090,130
OTHER INCOME (EXPENSE):
Interest and investment income 57,638 29,161
Interest expense (69,567) (472)
Write off of related party advances (Note 4) -- (50,000)
------------ ------------
Total other income (expense) (11,929) (21,311)
------------ ------------
INCOME BEFORE TAXES ON INCOME 1,387,615 1,068,819
TAXES ON INCOME (Note 3) 634,560 437,507
------------ ------------
NET INCOME 753,055 631,312
Other comprehensive income, net of income tax
Unrealized holding gains (Note 1) 35,171 --
------------ ------------
COMPREHENSIVE INCOME $ 788,226 $ 631,312
============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-10
<PAGE> 84
BUSINESS PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
----------------------- Comprehensive Retained
Nine Months Ended January 31, 2000 and 1999 Shares Amount Income Earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, May 1, 1998 1,500 $ 1,500 $ -- $ 497,664 $ 499,164
Comprehensive income:
Net income for the nine month period -- -- -- 631,312 631,312
---------- ---------- ---------- ---------- ----------
BALANCE, January 31, 1999 1,500 $ 1,500 $ -- $1,128,976 $1,130,476
========== ========== ========== ========== ==========
BALANCE, May 1, 1999 1,500 $ 1,500 $ 2,127 $1,313,107 $1,316,734
Comprehensive income:
Net income for the nine month period -- -- -- 753,055 753,055
Unrealized holding gains for the nine month
period -- -- 35,171 -- 35,171
---------- ---------- ---------- ---------- ----------
BALANCE, January 31, 2000 1,500 $ 1,500 $ 37,298 $2,066,162 $2,104,960
========== ========== ========== ========== ==========
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-11
<PAGE> 85
BUSINESS PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 753,055 $ 631,312
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 91,520 58,051
Provision for returns and doubtful accounts -- 32,000
Write off of related party advances -- 50,000
Deferred income taxes (86,855) (28,125)
Changes in operating assets and liabilities:
Accounts receivable 570,832 (1,386,284)
Commissions receivable 179,490 145,140
Inventories (17,625) (16,000)
Prepaid expenses 134,150 (14,736)
Accounts payable and accrued expenses (145,231) 300,273
Accrued payroll, commissions, compensated absences,
payroll taxes and employee benefit plans 317,992 (13,086)
Deferred revenue 280,914 208,563
Income taxes payable 502,174 290,910
----------- -----------
Net cash provided by operating activities 2,580,416 258,018
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (383,419) (96,169)
Purchases of investment securities (65,289) (30,300)
Additions to deposits -- (31,250)
----------- -----------
Net cash used in investing activities (448,708) (157,719)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from note payable 300,000 --
Payments on note payable (1,049,484) --
Advances to related parties (199,236) (104,013)
Payments received from related parties 285,000 --
----------- -----------
Net cash used in financing activities (663,720) (104,013)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,467,988 (3,714)
CASH AND CASH EQUIVALENTS, beginning of period 131,430 956,366
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,599,418 $ 952,652
=========== ===========
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-12
<PAGE> 86
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BUSINESS Business Products, Inc. (the "Company") is engaged in
the business of providing value-added systems
integration as an information technology solution
provider. The Company designs and installs computer
networks and communications systems, procures and
supports computer hardware and software, performs
engineering and other technical services, and
provides staffing solutions. The Company was
incorporated in Colorado in 1975.
The Company primarily does business in Colorado,
Utah, and Washington, but may sell products or
perform services anywhere in the United States
depending on the needs of customers.
CONCENTRATIONS
OF CREDIT RISK The Company's financial instruments that are exposed
to concentrations of credit risk consist primarily of
cash equivalent balances in excess of the insurance
provided by governmental insurance authorities and
accounts receivable. The Company's cash equivalents
are placed with major financial institutions and are
primarily invested in money market investments.
A majority of the Company's business activities are
with customers in the technology, telecommunications,
government and not-for-profit industries. Accounts
receivable consist primarily of amounts due from a
large number of entities in these sectors. The
Company does not require collateral to support such
receivables.
F-13
<PAGE> 87
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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 disclosures of contingent assets and
liabilities at the date of the financial statements
and revenues and expenses during the reporting
period. Actual results could differ from those
estimates and assumptions.
INVESTMENT IN EQUITY
SECURITIES Marketable securities classified as available for
sale are those securities that the Company does not
have a positive intent to hold to maturity or does
not intend to trade actively. These securities are
reported at fair value with unrealized gains and
losses reported, net of applicable income taxes, as a
component of stockholders' equity in other
comprehensive income.
INVENTORIES Inventories of computer hardware and accessories are
stated at cost on a first in, first out basis.
PROPERTY AND
EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed using accelerated methods
over the estimated useful lives (generally five to
seven years) of the assets. Leasehold improvements
are amortized over the shorter of the useful lives of
the assets or the lives of the respective leases.
Depreciation and amortization expense was $91,520 and
$58,051 for the nine months ended January 31, 2000
and 1999.
REVENUE
RECOGNITION Revenues for systems sales are recognized at the time
the system is configured and installed. Revenue from
block time support service agreements is deferred at
the time the agreement is executed and recognized as
the related services are provided over the
contractual period. The Company recognizes revenues
from customer training and consulting services when
such services are provided.
Agency commissions related to hardware or software
sales facilitated by the Company's sales
representatives that are direct between the
distributor and the customer are recognized when the
distributor has completed the sale to the customer.
F-14
<PAGE> 88
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
INCOME TAXES The Company accounts for income taxes under
Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes".
Deferred income taxes result from temporary
differences. Temporary differences are differences
between the tax basis of assets and liabilities and
their reported amounts in the financial statements
that will result in taxable or deductible amounts in
future years.
CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.
COMPREHENSIVE INCOME The Company follows Statement of Financial Accounting
Standards ("SFAS") SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires the
reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a
more inclusive financial reporting methodology that
includes disclosure of certain financial information
that historically has not been recognized in the
calculation of net income.
The change in net unrealized securities gains
(losses) recognized in other comprehensive income
includes unrealized gains (losses) that arose during
the period from changes in market value of securities
that were held during the period (holding gains
(losses)).
NEW ACCOUNTING
PRONOUNCEMENT In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" which requires companies to record
derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or
losses, resulting from changes in the values of those
derivatives would be accounted for depending on the
use of the derivatives and whether it qualifies for
hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in
fair value or cash flows. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning
after June 15, 2000. Management believes the adoption
of this statement will have no material impact on the
Company's financial statements.
F-15
<PAGE> 89
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. INVESTMENT IN EQUITY
SECURITIES The Company's market value of available for sale
equity securities consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Estimated Fair Unrealized Unrealized
Value gains losses Cost
---------------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
JANUARY 31, 2000 $ 242,567 $ 67,205 $ 7,529 $ 182,891
January 31, 1999 $ 30,300 $ -- $ -- $ 30,300
</TABLE>
2. NOTE PAYABLE On April 30, 1999, the Company entered into a bank
promissory note payable. No amount was outstanding
under the note agreement at January 31, 2000. The
maximum availability under the note is $750,000. The
original note matured in November 1999 and was
renewed to April 30, 2000. Interest is payable
monthly at the prime rate charged by Norwest Bank
Colorado, N.A, (8.50% at January 31, 2000). The note
is secured by accounts receivable and general
intangibles of the Company and is guaranteed by the
Company's President.
The agreement contains loan covenants that require
the Company to provide monthly accounts receivable
agings, annual and quarterly Company financial
statements, and provide annual personal financial
statements and tax returns of the guarantor. The loan
requires the Company to annually "rest" the loan for
60 days with a zero balance. The Company was in
compliance with these covenants.
F-16
<PAGE> 90
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. TAXES ON Taxes on income consisted of the following:
INCOME
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
----------------------------- ---------------- ----------------
<S> <C> <C>
CURRENT:
Federal $ 607,634 $ 392,034
State 114,074 73,598
---------------- ----------------
721,708 465,632
---------------- ----------------
DEFERRED:
Federal (73,204) (23,625)
State (13,944) (4,500)
---------------- ----------------
(87,148) (28,125)
---------------- ----------------
$ 634,560 $ 437,507
================ ================
</TABLE>
The components of deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
January 31, 2000 1999
------------ ---------------- ----------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Contributions carryovers $ 104,500 $ 55,000
Accounts receivable reserve 56,500 33,000
Accrued compensated absences 51,500 54,500
Net deferred revenue (491,500) (157,500)
Unrealized holding gains on
available for sale securities (22,500) --
---------------- ----------------
$ (301,500) $ (15,000)
================ ================
</TABLE>
F-17
<PAGE> 91
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
A reconciliation of taxes on income at the federal
statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
----------------------------- ---------------- ----------------
<S> <C> <C>
Taxes on income computed at the federal
statutory rate $ 472,000 $ 363,500
State income taxes, net of federal tax
benefit 75,500 48,500
Non-deductible expenses 87,000 28,500
Other - (3,000)
---------------- ----------------
Income tax expense $ 634,500 $ 437,500
================ ================
</TABLE>
4 RELATED Leases
PARTY
TRANSACTIONS The Company leases its facilities on a month-to-month
basis from 8136 S. Grant Way, LLC, which is 80% owned
by the President of the Company. The Company moved
into the facilities at 8136 S. Grant Way in April
1998. Rent for the period of April to December 1998
was $9,059 monthly and was increased to $27,875
monthly in January 1999. Rent expense under the
leases was $250,875 and $109,404 for the nine months
ended January 31, 2000 and 1999.
Additionally, the Company leases, using an informal
arrangement, a Unix computer system ($2,500 monthly)
and a phone system ($2,000 monthly) from the
President of the Company under two month-to-month
leases. Rent expense under the equipment leases was
$40,500 for each of the nine month periods ended
January 31, 2000 and 1999.
F-18
<PAGE> 92
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Advances and Receivables
The Company has advances receivable from two officers
and a demand note receivable from E3SI, Inc., a
company in which the Company's President has a 46%
ownership interest. The Company also has receivables
from two entities with common ownership, 8136 S.
Grant Way, LLC (80% owned by the Company's President)
and Launch Cloud, LLC (19% owned by the Company's
President), for legal expenses paid on behalf of
these entities. The amounts receivable are as
follows:
<TABLE>
<CAPTION>
January 31, 2000 1999
----------- ------------ ------------
<S> <C> <C>
Advances to officers $ 50,000 $ 50,000
Related party receivables:
E3SI, Inc. 77,869 79,613
8136 S. Grant Way, LLC 4,834 --
Launch Cloud, LLC 980 --
------------ ------------
Total related party
receivables $ 133,683 $ 129,613
============ ============
</TABLE>
In connection with the receivable from E3SI, the
Company wrote-off an amount receivable from E3SI,
Inc. of $50,000 during the nine months ended January
31, 1999. The amount advanced to E3SI as of January
31, 1999 was formalized in a note agreement as of
December 27, 1999, which requires interest at 8%
payable annually on the anniversary date of the note.
Prior to entering the formal note agreement the
Company charged E3SI interest at 8% per annum. The
Company also accrues interest on the advances to
officers at 8% per annum. Interest receivable as of
the balance sheet dates is included in prepaid
expenses and other current assets and consisted of
the following:
F-19
<PAGE> 93
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
January 31, 2000 1999
----------- ------------ ------------
<S> <C> <C>
Advances to officers $ 11,029 $ 4,778
E3SI, Inc. 10,360 3,836
------------ ------------
$ 21,389 $ 8,614
============ ============
</TABLE>
E3SI and the Company have an ongoing business
relationship whereby either party may occasionally
perform work for the other party. Under this
arrangement the following transactions have taken
place during the periods presented:
<TABLE>
As of and for the Nine Months Ended
January 31, 2000 1999
------------------------------------ ------------ ------------
<S> <C> <C>
Accounts receivable -E3SI, Inc. $ 96,721 $ 270
------------ --------
Accounts receivable - Launch Cloud, LLC $ 50,898 $ -
Revenues from E3SI, Inc. $ 245,783 $ 270
Revenues from Launch Cloud, LLC $ 50,898 $ -
</TABLE>
5. LEASE
COMMITMENTS The Company leases certain business/entertainment
facilities under a cancelable operating lease
agreement, which expire at various dates through
2003. The lease became effective August 1999 and is
scheduled to end August 31, 2004 unless terminated
sooner. At the end of the first year the Company may
elect to terminate the agreement, effective at the
end of the third year (August 31, 2002). The Company
has made a security deposit of $62,500 under the
agreement. The Company is also leasing certain office
facilities under non-cancelable operating lease
agreements, which expire at various dates through
2001. Rent and entertainment expense for the nine
months ended January 31, 2000 was $104,267. No rent
or entertainment expense was incurred under these
agreements during the nine months ended January 31,
1999.
Future minimum lease payments under the
non-cancelable portion of the operating leases are as
follows:
F-20
<PAGE> 94
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Twelve months ending January 31,
--------------------------------
<S> <C>
2001 $ 178,500
2002 125,000
------------
$ 303,500
============
</TABLE>
6. EMPLOYEE
BENEFIT PLANS The Company has a deferred savings plan (the "Plan")
which allows participants to make contributions by
salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. Participants may contribute up
to 15% of their compensation; not to exceed the
maximum allowed by law. The Company makes a matching
contribution to the Plan equal to 100% of the first
6% of employee contributions. The Company may make
discretionary contributions to the Plan as determined
by the Company's Board of Directors. Participants are
100% vested in their voluntary contributions and vest
20% per year beginning after two years of service in
the Company matching contributions. The Company's
contributions to the Plan for the nine months ended
January 31, 2000 and 1999 were $161,134 and $187,826.
7. LITIGATION The Company is engaged in various litigation matters
from time to time in the ordinary course of business.
In the opinion of management, the outcome of any such
litigation will not materially affect the financial
position, results of operations, or cash flows of the
Company. The Company currently does not have any
litigation pending.
F-21
<PAGE> 95
8. MAJOR
CUSTOMERS The Company has historically received greater than
10% of its annual revenues from several customers. A
summary of significant customers by period is as
follows:
<TABLE>
<CAPTION>
January 31, 2000 1999
----------- ------------ ------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Customer A 8.7% 36.3%
Customer B -- 18.7%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
----------------------------- ------------ ------------
<S> <C> <C>
REVENUES:
Customer A 34.2% 5.4%
</TABLE>
9. SUPPLEMENTAL
DISCLOSURE OF
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended January 31, 2000 1999
----------------------------- ------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 69,567 $ 472
============ ============
Income taxes $ 219,534 $ 174,522
============ ============
</TABLE>
10. SUBSEQUENT EVENTS On March 10, 2000, the Company and its shareholders
entered into a definitive agreement for a business
combination with Communications World International,
Inc. ("CommWorld"). CommWorld's primary business
focus is 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. CommWorld is headquartered in Englewood,
Colorado, and has other offices in Golden, Colorado,
and the Dallas/Fort Worth area. CommWorld is a
publicly traded Over the Counter ("OTC") company. It
is contemplated that in connection with the merger
that shareholders of BPI will receive an aggregate of
12,600,000 shares of CommWorld's common stock and
warrants to purchase an additional 3,000,000 shares
at $1.50 per share if certain benchmarks related to
the fair market value of CommWorld's stock are met.
The merger is subject to approval of CommWorld's
shareholders as well as obtaining various approvals,
and customary closing conditions. When the merger
closes BPI's operations will be reflected in a
currently inactive subsidiary of CommWorld and BPI
will cease to have separate corporate existence.
F-22
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
COMMUNICATIONS WORLD INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets 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 audits.
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-23
<PAGE> 97
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 57,118 $ 13,594
Trade accounts and current portion of notes receivable, less
allowance for doubtful accounts of $206,757 and $363,735 in 1999
and 1998, respectively 1,353,223 1,711,959
Inventory 331,696 624,610
Prepaid expenses 7,265 16,678
Deferred tax asset 38,963 100,240
---------- ----------
TOTAL CURRENT ASSETS 1,788,265 2,467,081
Property and equipment, net 263,775 246,805
Deposits and other assets 40,592 49,818
Notes receivable 33,283 81,017
Intangible assets, net 1,687,328 864,425
Deferred tax asset 1,006,037 944,760
---------- ----------
$4,819,280 $4,653,906
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-24
<PAGE> 98
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-25
<PAGE> 99
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)
============ ============
WEIGHTED - 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-26
<PAGE> 100
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 -- 59,420
Issuance of common stock -- -- 273,000 367,825 -- -- 367,825
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-27
<PAGE> 101
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>
The accompanying notes are an integral part of the
consolidated financial statements.
F-28
<PAGE> 102
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>
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>
The accompanying notes are an integral part of the
consolidated financial statements.
F-29
<PAGE> 103
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-30
<PAGE> 104
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-31
<PAGE> 105
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-32
<PAGE> 106
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-33
<PAGE> 107
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
April 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-34
<PAGE> 108
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 loans of comparable maturity.
(4) NOTES RECEIVABLE
Occasionally, amounts due on open account from various franchisees were
converted to promissory notes bearing interest at rates ranging from
8.5% to 12% per annum, payable in installment periods ranging from 12
to 36 months, and secured by the franchisee's business assets. In prior
years, the Company sold various Company-owned outlets (see Note 7) with
a portion of the sales financed with promissory notes. The fair value
of notes receivable approximates the carrying amount and is estimated
using discounted cash flow analyses.
The Company also may finance payments of initial franchise fees with
promissory notes for up to four months. Notes receivable consist of the
following at April 30:
<TABLE>
<CAPTION>
1999 1998
-------------- ----------------
<S> <C> <C>
Equipment sales $ 53,935 $ 81,975
Company-owned outlet sales 22,000 97,987
Franchise fees 9,000 9,375
Former president of the Company 25,000 25,000
-------------- --------------
109,935 214,337
Less current portion 76,652 133,320
-------------- --------------
Non-current portion $ 33,283 $ 81,107
============== ==============
</TABLE>
A provision for $38,283 is included in the allowance for doubtful
accounts for potential credit losses.
F-35
<PAGE> 109
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-36
<PAGE> 110
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
(7) FRANCHISED AND COMPANY-OWNED OUTLETS
The following table provides data on franchised outlets and
Company-owned outlets:
<TABLE>
<CAPTION>
Franchised Company-owned
outlets Outlets
---------- -------------
<S> <C> <C>
Total at April 30, 1997 57 5
Additions 1 -
Terminated (5) (1)
Acquired franchises - -
------ -------
Total at April 30, 1998 53 4
Additions 11 -
Terminated (1) (3)
Acquired franchises - 2
------ -------
Total at April 30, 1999 63 3
====== =======
</TABLE>
(8) INTANGIBLE ASSETS
Intangible assets consist of the following at April 30:
<TABLE>
<CAPTION>
Amortization
period 1999 1998
---------------- ------------- -------------
<S> <C> <C> <C>
Goodwill 5-20 years $ 1,987,369 $ 1,259,608
Franchises reacquired 5 years 315,567 315,567
Non-compete agreements 2-5 years 172,500 172,500
------------- -------------
2,475,436 1,747,675
Less accumulated amortization 788,108 883,250
------------- -------------
Intangible assets, net $ 1,687,328 $ 864,425
============= =============
</TABLE>
At April 30, 1999 franchises reacquired and non-compete agreements were
fully amortized. At April 30, 1998, franchises reacquired and
non-compete agreements had accumulated amortization of $299,195 and
$172,196, respectively. Included in goodwill at April 30, 1999 is
$42,750 attributable to the purchase of the existing customer base of
Connective Resources, Inc. (see Note 2).
F-37
<PAGE> 111
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
-----------
$ 900,000
===========
</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-38
<PAGE> 112
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-39
<PAGE> 113
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-40
<PAGE> 114
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-41
<PAGE> 115
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
(10) SHAREHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Series B Series C Series F Series G
--------------------- --------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1997 80,088 $ 80,088 426,679 $ 426,679 357,818 $ 357,818 83,500 $ 83,500
Issuance of preferred stock -- -- 10,000 10,000 -- -- -- --
BALANCES, APRIL 30, 1998 80,088 80,088 436,679 436,679 357,818 357,818 83,500 83,500
Issuance of preferred stock -- -- -- -- -- -- -- --
Cancellation of preferred
stock in connection with
sale of operating units (80,088) (80,088) (65,134) (65,134) (143,000) (143,000) (83,500) (83,500)
Conversion of preferred
stock into common stock
upon shareholder approval
of additional authorized
common shares -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCES, APRIL 30, 1999 -- $ -- 371,545 $ 371,545 214,818 $ 214,818 -- $ --
========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
Series H Series I Total Preferred Stock
--------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1997 -- $ -- -- -- 948,085 $ 948,085
Issuance of preferred stock -- -- -- -- 10,000 10,000
BALANCES, APRIL 30, 1998 -- -- -- -- 958,085 958,085
Issuance of preferred stock 13,807 13,807 1,000 1,000 14,807 14,807
Cancellation of preferred
stock in connection with
sale of operating units -- -- -- -- (371,722) (371,722)
Conversion of preferred
stock into common stock
upon shareholder approval
of additional authorized
common shares (13,807) (13,807) (1,000) (1,000) (14,807) (14,807)
--------- --------- --------- --------- --------- ---------
BALANCES, APRIL 30, 1999 -- $ -- -- $ -- 586,363 $ 586,363
========= ========= ========= ========= ======= =========
</TABLE>
F-42
<PAGE> 116
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-43
<PAGE> 117
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-44
<PAGE> 118
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-45
<PAGE> 119
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:
<TABLE>
<S> <C>
Risk-fee interest 5.0% - 6.0%
Expected life 3 years
Expected volatility 30%
Expected dividend $0
</TABLE>
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-46
<PAGE> 120
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-47
<PAGE> 121
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
F-48
<PAGE> 122
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
loss of approximately $33,000 and $289,000 for the years ended April
30, 1999 and 1998, respectively.
(14) DISPOSAL OF OPERATING SUBSIDIARIES (CONTINUED)
Net sales of the operating subsidiaries for fiscal 1999 and 1998 were
$667,000 and $957,000, respectively. These amount are not included in
net sales in the accompanying statements of operations. The prior year
financial statements have been restated to conform to the current year
presentation reflecting the sale and disposal of the operating
subsidiaries.
(15) SUBSEQUENT EVENTS
During the quarter ending July 31, 1999 the Company received net
proceeds of $212,440 from the sale of Units of Subordinated Convertible
Notes and Common Stock Purchase Warrants. Each Unit consists of a
$50,000 Subordinated Convertible Note and 20,000 Warrants. The Notes
bear interest at 8% per annum and are convertible into Common Stock at
any time prior to maturity at $1.50. The Notes mature at the earlier of
36 months from the date of issue or upon the occurrence of certain
other events. The Warrants are exercisable for a period of five years
from the date of issuance at $.40 per Warrant.
(16) SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131 Disclosures About Segments of an Enterprise and Related
Information, effective May 1, 1998. Reportable segments are based on
products and services, geography, legal structure, management
structure, and any other method in which management disaggregates a
company. Based on the management approach model, the Company has
determined its business operations are classified into two principal
reporting segments. Separate management of each segment is required
because each business unit is subject to different marketing, sales,
and implementation strategies.
<TABLE>
<CAPTION>
Reportable Segments
-------------------------------------------------------------------------
1 2 All Other Total
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
External revenue $ 3,252,787 $ 5,361,569 $ 248,374 $ 8,862,730
Interest and other revenue 4,447 277,796 4,708 286,951
-------------- ------------- ------------- -------------
3,257,234 5,639,365 253,082 9,149,681
Profit 197,344 374,920 (1,923,190) (1,350,926)
Assets 1,807,965 -- 3,011,315 4,819,280
</TABLE>
Reportable Segment 1, the Company-owned segment, derives its revenues
from the sales, service and installation of telephone systems to small
and medium sized enterprises with single, multi-state and national
locations. Segment 2, the Company's franchise program segment, derives
its revenues from sales of equipment to franchisees and franchise fees.
F-49
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Business Products, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Business Products, Inc. as of
April 30, 1999 and 1998, and the related statements of income and comprehensive
income, stockholders' equity, and cash flows for the years ended April 30, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Business Products, Inc. at
April 30, 1999 and 1998, and the results of its operations and its cash flows
for the years ended April 30, 1999 and 1998, in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
January 5, 2000
Denver, Colorado
F-50
<PAGE> 124
BUSINESS PRODUCTS, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
April 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 131,430 $ 956,365
Investment in equity securities (Note 1) 121,005 --
Accounts receivable, less allowance of
$150,000 and $56,000 for
doubtful accounts as of April 30,
1999 and 1998. (Notes 2, 4, and 8) 4,486,929 892,115
Commissions receivable 867,741 1,083,910
Inventories 53,000 15,000
Related party receivables (Note 4) 219,447 75,600
Prepaid expenses and other current assets 244,991 5,397
---------- ----------
Total current assets 6,124,543 3,028,387
---------- ----------
PROPERTY AND EQUIPMENT:
Office and computer equipment 214,998 78,176
Leasehold improvements 252,922 189,860
---------- ----------
467,920 268,036
Less accumulated depreciation and
amortization 97,956 20,555
---------- ----------
Net property and equipment 369,964 247,481
DEPOSITS (Note 5) 62,500 31,250
---------- ----------
$6,557,007 $3,307,118
========== ==========
</TABLE>
F-51
<PAGE> 125
BUSINESS PRODUCTS, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
April 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $2,107,863 $ 969,558
Accrued payroll, commissions and
compensated absences 663,927 538,918
Payroll taxes and employee benefit plans
payable (Note 6) 207,262 297,912
Deferred revenue 925,142 783,677
Note payable (Note 2) 749,484 --
Income taxes payable (Note 3) 219,534 174,722
Deferred income tax liability (Note 3) 367,061 43,167
---------- ----------
Total current liabilities 5,240,273 2,807,954
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 4, 5, 6, 7 and 10)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000 shares
Authorized; 1,500 shares issued and
Outstanding 1,500 1,500
Accumulated other comprehensive income 2,127 --
Retained earnings 1,313,107 497,664
---------- ----------
Total stockholders' equity 1,316,734 499,164
---------- ----------
$6,557,007 $3,307,118
========== ==========
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-52
<PAGE> 126
BUSINESS PRODUCTS, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
================================================================================
<TABLE>
<CAPTION>
Years ended April 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
System sales $ 5,737,601 $ 9,761,911
Support, update, configuration and training 10,387,020 3,294,175
Commissions 7,796,234 7,859,894
Other income 42,930 209,262
------------ ------------
Total revenues 23,963,785 21,125,242
COST OF SALES 17,625,581 16,684,015
------------ ------------
GROSS PROFIT 6,338,204 4,441,227
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,973,980 3,369,368
------------ ------------
OPERATING INCOME 1,364,224 1,071,859
OTHER INCOME (EXPENSE):
Interest income 44,039 24,888
Interest expense (819) --
Write off of related party advances (Note 4) (50,000) (292,400)
------------ ------------
Total other income (expense) (6,780) (267,512)
------------ ------------
INCOME BEFORE TAXES ON INCOME 1,357,444 804,347
TAXES ON INCOME (Note 3) 542,000 384,000
------------ ------------
NET INCOME 815,444 420,347
Other comprehensive income, net of income tax:
Unrealized holding gains (Note 1) 2,127 --
------------ ------------
COMPREHENSIVE INCOME $ 817,571 $ 420,347
============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-53
<PAGE> 127
BUSINESS PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1998 AND 1999
================================================================================
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------------- Retained Comprehensive
Shares Amount Earnings Income Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, May 1, 1997 1,500 $ 1,500 $ 77,316 $ -- $ 78,816
Comprehensive income:
Net income -- -- 420,347 -- 420,347
Unrealized holding gains -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, April 30, 1998 1,500 1,500 497,663 -- 499,163
Comprehensive income:
Net income -- -- 815,444 -- 815,444
Unrealized holding gains -- -- -- 2,127 2,127
------------ ------------ ------------ ------------ ------------
BALANCE, April 30, 1999 1,500 $ 1,500 $ 1,313,107 $ 2,127 $ 1,316,734
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-54
<PAGE> 128
BUSINESS PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended April 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 815,444 $ 420,347
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 77,401 83,762
Allowance for doubtful accounts 94,000 (20,000)
Write off of related party advances 50,000 292,400
Deferred income taxes 322,617 209,365
Changes in operating assets and liabilities:
Accounts receivable (3,688,814) 489,427
Commissions receivable 216,169 (394,805)
Inventories (38,000) 2,000
Prepaid expenses (239,594) (5,397)
Accounts payable and accrued expenses 1,138,304 (680,732)
Accrued payroll, payroll taxes and
compensated absences 34,359 231,454
Deferred revenue 141,465 387,788
Income taxes payable 44,812 15,913
------------ ------------
Net cash provided by (used in) operating activities (1,031,837) 1,031,522
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (199,884) (268,036)
Purchases of investment securities (117,601) --
Additions to deposits (31,250) (31,250)
------------ ------------
Net cash used in investing activities (348,735) (299,286)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from note payable 749,484 --
Payments on note payable -- --
Advances to related parties (324,847) (368,000)
Payments received from related parties 131,000 47,500
------------ ------------
Net cash provided by (used in) financing activities 555,637 (320,500)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (824,935) 411,736
CASH AND CASH EQUIVALENTS, at beginning of period 956,365 544,629
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 131,430 $ 956,365
============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-55
<PAGE> 129
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BUSINESS Business Products, Inc. (the "Company") is engaged in
the business of providing value-added systems
integration as an information technology solution
provider. The Company designs and installs computer
networks and communications systems, procures and
supports computer hardware and software, performs
engineering and other technical services, and
provides staffing solutions. The Company was
incorporated in Colorado in 1975.
The Company primarily does business in Colorado,
Utah, and Washington, but may sell products or
perform services anywhere in the United States
depending on the needs of customers.
CONCENTRATIONS
OF CREDIT RISK The Company's financial instruments that are exposed
to concentrations of credit risk consist primarily of
cash equivalent balances in excess of the insurance
provided by governmental insurance authorities and
accounts receivable. The Company's cash equivalents
are placed with major financial institutions and are
primarily invested in money market investments. The
Company holds securities available for sale in a
variety of corporate equity securities.
A majority of the Company's business activities are
with customers in the technology, telecommunications,
government and not-for-profit industries. Net
receivables consist primarily of amounts due from a
large number of entities in these sectors. The
Company does not require collateral to support such
receivables.
F-56
<PAGE> 130
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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 disclosures of contingent assets and
liabilities at the date of the financial statements
and revenues and expenses during the reporting
period. Actual results could differ from those
estimates and assumptions.
INVESTMENT IN EQUITY
SECURITIES Marketable securities classified as available for
sale are those securities that the Company does not
have a positive intent to hold to maturity or does
not intend to trade actively. These securities are
reported at fair value with unrealized gains and
losses reported as a net amount (net of applicable
income taxes), as a component of stockholders' equity
in other comprehensive income.
INVENTORIES Inventories of computer hardware and accessories are
stated at cost on a first in, first out basis.
PROPERTY AND
EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed using accelerated methods
over the estimated useful lives (generally five to
seven years) of the assets. Leasehold improvements
are amortized over the shorter of the useful lives of
the assets or the lives of the respective leases.
Depreciation expense was $77,401 and $83,762 for the
years ended April 30, 1999 and 1998.
REVENUE
RECOGNITION Revenues for systems sales are recognized at the time
the system is configured and installed. Revenue from
block time support service agreements is deferred at
the time the agreement is executed and recognized as
the related services are provided over the
contractual period. The Company recognizes revenues
from customer training and consulting services when
such services are provided.
Agency commissions related to hardware or software
sales facilitated by the Company's sales
representatives that are direct between the
distributor and the customer are recognized when the
distributor has completed the sale to the customer.
F-57
<PAGE> 131
BUSINESS PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
================================================================================
INCOME TAXES The Company accounts for income taxes under SFAS No.
109. Deferred income taxes result from temporary
differences. Temporary differences are differences
between the tax basis of assets and liabilities and
their reported amounts in the financial statements
that will result in taxable or deductible amounts in
future years.
CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.
COMPREHENSIVE INCOME The Company follows Financial Accounting Standards
Board ("FASB") Statement No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). SFAS No. 130
requires the reporting of comprehensive income in
addition to net income from operations. Comprehensive
income is a more inclusive financial reporting
methodology that includes disclosure of certain
financial information that historically has not been
recognized in the calculation of net income.
The change in net unrealized securities gains
(losses) recognized in other comprehensive income
includes unrealized gains (losses) that arose during
the period from changes in market value of securities
that were held during the period (holding gains
(losses)).
NEW ACCOUNTING
PRONOUNCEMENT In June 1998, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which
requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at
fair market value. Gains or losses, resulting from
changes in the values of those derivatives would be
accounted for depending on the use of the derivatives
and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the
hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash
flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management believes
the adoption of this statement will have no material
impact on the Company's financial statements.
F-58
<PAGE> 132
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. INVESTMENT IN EQUITY The Company's market value of available for sale
SECURITIES equity securities consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Estimated Fair Unrealized Unrealized
Value gains losses Cost
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
APRIL 30, 1999 $ 121,005 $ 9,885 $ (6,481) $ 117,601
---------- ----------- --------- -----------
</TABLE>
2. NOTE PAYABLE The Company's short-term obligations consist of a
bank promissory note payable for borrowings made on
April 30, 1999. The amount payable under the note
agreement was $749,484 at April 30, 1999. The maximum
availability under the note is $750,000. The original
note matured in November 1999 and was renewed until
April 30, 2000. Interest is payable monthly at the
prime rate charged by Norwest Bank Colorado, N.A.,
7.75% at April 30, 1999. The note is secured by
accounts receivable and general intangibles of the
Company and is guaranteed by the Company's president.
The agreement contains loan covenants that require
the Company to provide monthly accounts receivable
agings, annual and quarterly Company financial
statements, and annual personal financial statements
and tax returns of the guarantor. The loan requires
the Company to annually "rest" the loan for 60 days
with a zero balance. The Company was in compliance
with these covenants.
F-59
<PAGE> 133
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. TAXES ON Taxes on income consisted of the following:
INCOME
<TABLE>
<CAPTION>
Years ended April 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT:
Federal $ 191,500 $ 152,000
State 28,000 22,500
----------- -----------
219,500 174,500
----------- -----------
DEFERRED:
Federal 277,500 180,500
State 45,000 29,000
----------- -----------
322,500 209,500
----------- -----------
$ 542,000 $ 384,000
=========== ===========
</TABLE>
The components of deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
April 30,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Contributions carryovers $ 104,500 $ 55,000
Accounts receivable reserve 56,500 21,000
Accrued compensated absences 60,000 38,500
Net deferred revenue (586,500) (157,500)
Unrealized holding gains on
available for sale securities (1,500) --
----------- ------------
$ (367,000) $ (43,000)
=========== ============
</TABLE>
F-60
<PAGE> 134
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
A reconciliation of income tax expense at the federal
statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
Years ended April 30,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Income tax expense
computed at the federal
statutory rate $ 461,500 $ 273,500
State income tax
expense, net of federal
tax benefit 28,000 22,500
Non-deductible
expenses 22,500 68,500
Rate differential 30,000 19,500
-------------- --------------
Income tax expense $ 542,000 $ 384,000
============== ==============
</TABLE>
4. RELATED Leases
PARTY
TRANSACTIONS The Company leases its facilities from 8136 S. Grant
Way, LLC, which is 80% owned by the President of the
Company on a month-to-month basis. Rent is $27,875
monthly. The Company moved into the facilities at
8136 S. Grant Way in April 1998. Rent payable to 8136
South Grant Way was $334,500 at April 30, 1999.
Prior to April 1998 the Company leased its facilities
at 114 Federal Boulevard from the spouse of the
majority stockholder under a lease agreement which
was scheduled to expire December 31, 1999. This
agreement called for rental payments of $7,000
monthly, plus a payment of $1,500 monthly to three
stockholders of the Company to lease the land
adjacent to the building.
F-61
<PAGE> 135
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Rent expense under the leases was $218,029 and
$100,625 for the years ended April 30, 1999 and 1998.
Additionally, the Company leases a Unix computer
system ($2,500 monthly) and a phone system ($2,000
monthly) from the President of the Company under two
month-to-month leases. Rent expense under the leases
was $54,000 for each of the years ended April 30,
1999 and 1998.
Advances and Receivables
The Company has advances receivable from two officers
and a demand note receivable from E3SI, Inc., a
company in which the Company's President has a 46%
ownership interest. The Company also has receivables
from two entities with common ownership, 8136 S.
Grant Way, LLC (80% owned by the Company's President)
and Launch Cloud, LLC (19% owned by the Company's
President), for legal expenses paid on behalf of
these entities. The amounts receivable are as
follows:
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1999 1998
----------- ----------
<S> <C> <C>
ADVANCES TO OFFICERS $ 135,000 $ 50,000
RELATED PARTY RECEIVABLES:
E3SI, Inc. 79,613 25,600
8136 S. Grant Way,
LLC 4,834 --
Launch Cloud, LLC -- --
----------- ----------
Total related party
receivables $ 219,447 $ 75,600
=========== ==========
</TABLE>
F-62
<PAGE> 136
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In connection with the receivable from E3SI, the
Company wrote-off amounts receivable from E3SI, Inc.
of $50,000 and $292,400 in the years ended April 30,
1999 and 1998. The amount advanced to E3SI as of
April 30, 1999 was formalized in a note agreement as
of December 27, 1999 which requires interest at 8%
payable annually on the anniversary date of the note.
Prior to entering the formal note agreement the
Company charged E3SI interest at 8% per annum. The
Company also accrues interest on the advances to
officers at 8% per annum. Interest receivable as of
the balance sheet dates is included in prepaid
expenses and other current assets and consisted of
the following:
<TABLE>
<CAPTION>
April 30,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
INTEREST RECEIVABLE:
Advances to officers $ 5,000 $ 778
E3SI, Inc. 5,400 119
--------------- --------------
$ 10,400 $ 897
=============== ==============
</TABLE>
E3SI and the Company have an ongoing business
relationship whereby occasionally either party may
perform work for the other party. Under this
arrangement the following transactions have taken
place during the periods presented:
<TABLE>
<CAPTION>
Years ended April 30,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Accounts receivable -
E3SI, Inc. (trade) $ 23,730 $ --
Revenues from
E3SI, Inc. $ 24,000 $ 560
-------------- --------------
</TABLE>
F-63
<PAGE> 137
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. LEASE COMMITMENTS The Company leases certain business/entertainment
facilities under a cancelable operating lease
agreements, which expire at various dates through
2003. The lease became effective August 1999 and is
scheduled to end August 31, 2004 unless terminated
sooner. At the end of the first year the Company may
elect to terminate the agreement, effective the end
of the third year (August 31, 2002). The Company has
made a security deposit of $62,500 under the
agreement. Subsequent to April 30, 1999, the Company
leased certain office facilities under non-cancelable
operating lease agreements which expire at various
dates through 2001. There was no rent expense under
the agreements for the years ended April 30, 1999 and
1998.
Future minimum lease payments under the
non-cancelable portion of the operating leases are as
follows:
<TABLE>
<CAPTION>
Years ending April 30,
----------------------
<S> <C>
2000 $ 178,000
2001 147,500
2002 62,500
------------
$ 388,000
============
</TABLE>
6. EMPLOYEE BENEFIT
PLANS The Company has a deferred savings plan (the "Plan")
which allows participants to make contributions by
salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. Participants may contribute up
to 15% of their compensation; not to exceed the
maximum allowed by law. The Company makes a matching
contribution to the Plan of 100% of the first 6% of
employee contributions. The Company may make
discretionary contributions to the Plan as determined
by the Company's Board of Directors. Participants are
100% vested in their voluntary contributions and vest
20% per year beginning after two years of service.
During the years ended April 30, 1999 and 1998 the
Company's contributions to the Plan totaled $254,410
and $184,455.
7. LITIGATION The Company may be engaged in various litigation
matters from time to time in the ordinary course of
business. In the opinion of management, the outcome
of any such litigation will not materially affect the
financial position, results of operations, or cash
flows of the Company. The Company currently does not
have any litigation pending.
F-64
<PAGE> 138
BUSINESS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. MAJOR CUSTOMERS The Company has historically received greater than
10% of its annual revenues from several customers. A
summary of significant customers by period is as
follows:
<TABLE>
<CAPTION>
Years ended April 30,
-------------------------------
ACCOUNTS RECEIVABLE 1999 1998
------------- ------------
<S> <C> <C>
Customer A* 14.4% -
Customer B* 51.8% 6.3%
</TABLE>
* Customer A and Customer B have legally merged in
1999.
<TABLE>
<CAPTION>
Years ended April 30,
-------------------------------
REVENUES 1999 1998
------------- ------------
<S> <C> <C>
Customer A* 6.5% 15.1%
Customer B* 16.4% 1.3%
</TABLE>
9. SUPPLEMENTAL
DISCLOSURE OF
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
Years ended April 30,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 819 $ --
============= ============
Income taxes $ 174,722 $ 158,809
============= ============
</TABLE>
F-65
<PAGE> 139
ANNEX A
AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into on March 10, 2000,
among Communications World International, Inc., a Colorado corporation
("CommWorld"), Digital Telecom, Incorporated, a Colorado corporation ("DTI"),
Business Products, Inc., a Colorado corporation ("BPI"), Anton C. St. John and
Michael G. St. John (each individually a "Shareholder" and collectively the
"Shareholders").
RECITALS
A. The Shareholders own an aggregate of 98.7% of the outstanding
capital stock of BPI The balance of 1.3% of the capitol stock of BPI is owned by
Elizabeth A. St. John, Trustee of Anton C. St. John Irrevocable Life Insurance
Trust.
B. The respective Boards of Directors of CommWorld, DTI and BPI deem it
advisable and in the best interest of each corporation and their respective
shareholders that BPI merge with and into DTI pursuant to this Agreement.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, and intending to be legally bound
hereby, the parties agree as follows:
1. THE MERGER.
1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, BPI shall be merged with and into DTI (the "Merger").
Following the Merger, the separate corporate existence of BPI shall cease and
DTI shall continue as the surviving party in the Merger (DTI is sometimes
referred to as the "Surviving Corporation").
1.2 EFFECTIVE TIME OF THE MERGER. At the Closing, DTI and BPI
shall file Articles of Merger in such form as is required by and executed in
accordance with Section 7-111-105 of the Colorado Business Corporation Act. The
Merger shall become effective at such time as the Articles of Merger are duly
filed with the Colorado Secretary of State or at such time as DTI and BPI shall
agree and as shall be specified in the Articles of Merger (the "Effective Time
of the Merger").
1.3 CERTIFICATE OF INCORPORATION, BYLAWS, BOARD OF DIRECTORS AND
OFFICERS OF THE SURVIVING CORPORATION.
(i) The Certificate of Incorporation of DTI as in effect
immediately prior to the Effective Time of the Merger shall be the Articles of
Incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law, except that the name of the Surviving
Corporation shall be changed to a name selected by CommWorld and BPI.
<PAGE> 140
(ii) At the Effective Time of the Merger, the Bylaws as in
effect immediately prior to the Effective Time of the Merger shall be the Bylaws
of the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
(iii) Directors and officers of the Surviving Corporation
shall be the persons listed in Schedule 1.3(iii), and each person shall hold his
or her respective office or offices from and after the Effective Time of the
Merger until his or her successor shall have been elected and shall have
qualified or as otherwise provided in the Bylaws of the Surviving Corporation.
1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF DTI
AND BPI. The respective designations and numbers of outstanding shares of each
class of outstanding capital stock of DTI and BPI as of the date of this
Agreement are as follows:
(i) The authorized and outstanding capital stock of DTI
consists of 100 shares of common stock, of which 100 shares are issued and
outstanding (the "DTI Stock").
(ii) The authorized capital stock of BPI consists of 50,000
shares of common stock, no par value, of which 1,500 shares are issued and
outstanding (the "BPI Stock").
1.5 EFFECT OF MERGER. At the Effective Time of the Merger the
effect of the Merger shall be as provided in Section 7-111-106 of the Colorado
Business Corporation Act.
1.6 CONVERSION OF BPI STOCK. At the Effective Time of the Merger
and without any action on the part of the holders of the BPI Stock, the BPI
Stock shall be converted into the right to receive the securities of CommWorld
as set forth in Schedule 1.6.
1.7 EFFECT OF MERGER ON DTI CAPITAL STOCK. At the Effective Time
of the Merger without any action on the part of the holders of DTI Stock, each
share of DTI Stock issued and outstanding immediately prior to the Effective
Time of the Merger shall remain outstanding as one share of DTI Stock.
1.8 EXCHANGE PROCEDURE; DELIVERY OF CERTIFICATES. At the
Effective Time of the Merger the holders of the BPI Stock shall, on surrender of
certificates representing the BPI Stock (the "BPI Certificates"), receive
instruments evidencing the ownership of the securities of CommWorld as set forth
on Schedule 1.6. Each holder of the BPI Stock shall deliver to DTI and CommWorld
at the Closing the BPI Certificates representing the shares of BPI Stock owned
by the holder, duly endorsed in blank by the holder, or accompanied by blank
stock powers. Each Shareholder agrees promptly to cure any deficiencies with
respect to the endorsement of his BPI Certificates or other documents of
conveyance with respect to the BPI Stock or with respect to the stock powers
accompanying any BPI Stock. Until surrender is contemplated by this Section 1.8,
each BPI Certificate shall be deemed at any time after the Effective Time of the
Merger to represent only the right to receive upon such surrender the
consideration set forth in Schedule 1.6, and each holder of a BPI Certificate
shall cease to have any rights with respect to the BPI Stock.
2. CLOSING.
Subject to the terms and conditions of this Agreement, the
closing of the transactions contemplated by this Agreement (the "Closing") will
take place on the second business
-2-
<PAGE> 141
day after the satisfaction or waiver (subject to applicable law) of the
conditions set forth in Sections 8 and 9, unless another time or date is agreed
to in writing by the parties hereto (the actual time and date of the Closing
being referred to herein as the "Closing Date"). The Closing shall be held at
the offices of Patton Boggs, LLP, 1660 Lincoln Street, Suite 1900, Denver,
Colorado 80264, unless another place is agreed to in writing by the parties
hereto.
3. REPRESENTATIONS AND WARRANTIES OF BPI AND THE SHAREHOLDERS
CONCERNING BPI.
Except as provided in the BPI Disclosure Letter (as defined
below) to be delivered pursuant to Section 10.2, BPI and the Shareholders
jointly and severally represent and warrant to CommWorld and DTI that all of the
following representations and warranties in this Section 3 are true at the date
of this Agreement and shall be true at the time of Closing. As used in this
Agreement, the "BPI Disclosure Letter" shall mean the disclosure letter
delivered by BPI and the Shareholders regarding BPI pursuant to this Section 3
upon execution of this Agreement.
3.1 DUE ORGANIZATION. BPI is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. BPI is duly qualified to do business and
is in good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification necessary,
except (i) as set forth on Schedule 3.1 to the BPI Disclosure Letter or (ii)
where the failure to be so authorized or qualified would not have a material
adverse effect on the business, operations, properties, assets or condition
(financial or otherwise), of BPI taken as a whole (as used herein with respect
to BPI, or with respect to any other person, a "Material Adverse Effect").
Schedule 3.1 to the BPI Disclosure Letter sets forth the jurisdiction in which
BPI is incorporated and contains a list of all jurisdictions in which BPI is
authorized or qualified to do business. True, complete and correct copies of the
Articles of Incorporation and Bylaws, each as amended, of BPI (the "BPI Charter
Documents") have been made available to Comm World. The stock records of BPI as
heretofore made available to CommWorld, are correct and complete in all material
respects. There are no minutes or other records or proceedings of BPI which have
not been made available to CommWorld, and all of such minutes or other records
of proceedings are correct and complete in all respects.
3.2 SUBSIDIARIES. BPI has no subsidiaries.
3.3 CAPITAL STRUCTURE. The authorized capital stock of BPI
consists of 50,000 shares of common stock, no par value, of which 1,500 shares
are issued and outstanding on March 1, 2000. All of the outstanding shares of
common stock have been duly authorized and are validly issued, fully paid and
non-assessable. BPI has no common stock or other shares of capital stock
reserved for or otherwise subject to issuance. The names of all of the holders
of the BPI Stock and the number of shares owned by each holder are set forth in
Schedule 3.3. Except as listed in Schedule 3.3 or as set forth above, there are
no pre-emptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or sell any shares of capital
stock or other securities of BPI or any securities or obligations convertible or
exchangeable into or exercisable for, or giving any person a right to subscribe
for or acquire, any securities of BPI, and no securities or obligations
evidencing such rights are authorized, issued or outstanding. BPI does not have
-3-
<PAGE> 142
outstanding any bonds, debentures, notes or other debt obligations the holders
of which have the right to vote (or convertible into or exercisable for
securities having the right to vote). There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to BPI. There are no voting trusts, proxies or other agreements or
understandings with respect to the voting of the capital stock of BPI.
3.4 PREDECESSOR STATUS; ETC. Set forth in Schedule 3.4 to the BPI
Disclosure Letter is an accurate list of all names of all predecessor companies
of BPI, including the names of any entities acquired by BPI (by stock purchase,
merger or otherwise) or owned by BPI or from whom BPI previously acquired
material assets, in any case, from the earliest date upon which any person
acquired his or her stock in BPI. Except as disclosed on Schedule 3.4 to the BPI
Disclosure Letter, BPI has not been, within such period of time, a subsidiary or
division of another corporation or a part of an acquisition which was later
rescinded.
3.5 SPIN-OFF BY BPI. Except as set forth on Schedule 3.5 to the
BPI Disclosure Letter, there has not been any sale, spin-off or split-up of
material assets of either BPI or any other person or entity that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, BPI ("Affiliates") since its inception.
3.6 FINANCIAL STATEMENTS. Schedule 3.6 to the BPI Disclosure
Letter includes copies of the following financial statements (the "BPI Financial
Statements") of BPI: BPI's audited Balance Sheets as of April 30, 1999 and 1998
and audited Statements of Income and Comprehensive Income, Stockholders' Equity
and Cash Flows for each of the fiscal years ended April 30, 1999 and 1998 and,
unaudited Balance Sheet as of January 31, 2000 and unaudited Statements of
Income and Comprehensive Income, Stockholders' Equity and Cash Flows for each of
the nine month periods ended January 31, 2000 and 1999 (January 31, 2000 being
hereinafter referred to as the "Balance Sheet Date"). The BPI Financial
Statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
indicated (except as noted thereon or on Schedule 3.6 to the BPI Disclosure
Letter). Except as set forth on Schedule 3.6 to the BPI Disclosure Letter, such
Balance Sheets present fairly in all material respects the financial position of
BPI as of the dates indicated thereon, and such Statements of Income and
Comprehensive Income, Stockholders' Equity and Cash Flows present fairly in all
material respects the results of operations for the periods indicated thereon,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount.
3.7 LIABILITIES AND OBLIGATIONS. Schedule 3.7 to the BPI
Disclosure Letter includes accurate lists as of January 31, 2000 (the "Balance
Sheet Date") of (i) all material liabilities of BPI which are not reflected on
the Balance Sheet of BPI at the Balance Sheet Date or otherwise reflected in the
BPI Financial Statements at the Balance Sheet Date which by their nature would
be required in accordance with GAAP to be reflected in the Balance Sheet, and
(ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages,
liens, pledges or other security agreements. Except as set forth on Schedule 3.7
to the BPI Disclosure Letter, since the Balance Sheet Date BPI has not incurred
any material liabilities of any kind, character and description, whether
accrued, absolute, secured or unsecured, contingent or otherwise, other than
liabilities incurred in the ordinary course of business. Schedule 3.7 to the BPI
Disclosure Letter also includes, in the case of
-4-
<PAGE> 143
those contingent liabilities related to pending or threatened litigation, or
other liabilities which are not fixed or otherwise accrued or reserved, a good
faith and reasonable estimate of the maximum amount which BPI reasonably expects
will be payable. For each such contingent liability or liability for which the
amount is not fixed or is contested, BPI has provided to CommWorld the following
information:
(a) A summary description of the liability together with the
following:
(i) copies of all relevant documentation relating thereto;
(ii) amounts claimed and any other action or relief sought;
and
(iii) name of claimant and all other parties to the claim,
suit or proceeding;
(b) The name of each court or agency before which such claim,
suit or proceeding is pending; and
(c) The date such claim, suit or proceeding was instituted; and
(d) A good faith and reasonable estimate of the maximum amount,
if any, which is likely to become payable with respect to each such liability.
If no estimate is provided, the estimate shall for purposes of this Agreement be
deemed to be zero.
3.8 PERMITS AND INTANGIBLES.
(i) BPI holds all licenses, franchises, permits and other
governmental authorizations the absence of any of which could have a Material
Adverse Effect on BPI's business and Schedule 3.8 to the BPI Disclosure Letter
includes an accurate list and summary description of all such licenses,
franchises, permits and other governmental authorizations, including permits (it
being understood and agreed that a list of all environmental permits and other
environmental approvals is set forth on Schedule 3.9 to the BPI Disclosure
Letter), titles (including motor vehicle titles and current registrations), fuel
permits, licenses, franchises and certificates, as well as (a) registered or
unregistered trademarks, trade names, patents, patent applications and
inventions and discoveries that may be patentable, (b) copyrights owned or held
by BPI or any of its employees (including interests in software or other
technology systems, programs and intellectual property). The licenses,
franchises, permits and other governmental authorizations listed on Schedules
3.8 and 3.9 to the BPI Disclosure Letter are valid, and BPI has not received any
notice that any governmental authority intends to cancel, terminate or not renew
any such license, franchise, permit or other governmental authorization. BPI has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in the licenses, franchises,
permits and other governmental authorizations listed on Schedules 3.8 and 3.9 of
the BPI Disclosure letter and is not in violation of any of the foregoing except
where such non-compliance or violation would not have a Material Adverse Effect
on BPI. Except as specifically provided in Schedule 3.8 to the BPI Disclosure
Letter, the transactions contemplated by this Agreement will not
-5-
<PAGE> 144
result in a default under or a breach or violation of, or adversely affect the
rights and benefits afforded to BPI by, any such licenses, franchises, permits
or government authorizations.
(ii) The patents, the marks and copyrights, as well as the
know how, trade secrets, confidential information, customer lists, software,
technical information, data, process technology, plans and drawings owned, used
or licensed by BPI (collectively, the "Trade Secrets") are all those necessary
to enable BPI to conduct and to continue to conduct its business as it is
currently conducted. Schedule 3.8 of the BPI Disclosure Letter also contains a
description of all material Trade Secrets owned or used by BPI. Except as set
forth on Schedule 3.8 to the BPI Disclosure Letter (a) all of the patents,
marks, copyrights and Trade Secrets (collectively, the "Intellectual Property")
are owned, or used under valid licenses by BPI, and are free and clear of all
liens and other adverse claims; (b) BPI has not infringed on or misappropriated,
is not now infringing on or misappropriating, and has not received any notice
that it is infringing on, misappropriating, or otherwise conflicting with the
intellectual property rights of any third parties; (c) there is no claim pending
or threatened against BPI with respect to the alleged infringement or
misappropriation by BPI or a conflict with, any intellectual property rights of
others; (d) the operation of any aspect of the business in the manner in which
it has heretofore been operated or is presently operated does not give rise to
any such infringement or misappropriation; and (e) there is no infringement or
misappropriation of the Intellectual Property by a third party or claim, pending
or threatened, against any third party with respect to the alleged infringement
or misappropriation of the Intellectual Property by such third party.
3.9 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.9 to
the BPI Disclosure Letter, and except where any failure to comply or action
would not have a Material Adverse Effect, (i) BPI has complied with and is in
compliance with all Federal, state, local and foreign statutes (civil and
criminal), laws, ordinances, regulations, rules, notices, permits, judgments,
orders and decrees applicable to any of them or any of their respective
properties, assets, operations and businesses relating to environmental
protection (collectively "Environmental Laws") including, without limitation,
Environmental Laws relating to air, water, land and the generation, storage,
use, handling, transportation, treatment or disposal of Hazardous Wastes and
Hazardous Substances including petroleum and petroleum products (as such terms
are defined in any applicable Environmental Laws); (ii) BPI has obtained and
adhered to all necessary permits and other approvals necessary to treat,
transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous
Substances, an accurate list of all of which permits and approvals is set forth
on Schedule 3.9 to the BPI Disclosure Letter, and have reported to the
appropriate authorities, to the extent required by all Environmental Laws, all
past and present sites owned and operated by BPI where Hazardous Wastes or
Hazardous Substances have been treated, stored, disposed of or otherwise
handled; (iii) there have been no releases or threats of releases (as defined in
Environmental Laws) at, from, in or on any property owned or operated by BPI
except as permitted by Environmental Laws; (iv) there is no on-site or off-site
location to which BPI has transported or disposed of Hazardous Wastes and
Hazardous Substances or arranged for the transportation of Hazardous Wastes and
Hazardous Substances, which site is the subject of any Federal, state, local or
foreign enforcement action or any other investigation which is reasonably likely
to lead to any claim against BPI for any clean-up cost, remedial work, damage to
natural resources, property damage or personal injury, including, but not
limited to, any claim under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended; and (v) BPI has no
contingent
-6-
<PAGE> 145
liability in connection with any release of any Hazardous Waste or Hazardous
Substance into the environment.
3.10 PERSONAL PROPERTY. Schedule 3.10 to the BPI Disclosure
Letter includes an accurate list of (i) all personal property owned by BPI with
an individual value in excess of $50,000 acquired since January 31, 2000 and
(ii) all leases and agreements in respect of personal property, including, in
the case of each of (i) and (ii), (1) true, complete and correct copies of all
such leases and (2) an indication as to which assets are currently owned, or
were formerly owned, by shareholders, relatives of shareholders, or Affiliates
of BPI. Except as set forth on Schedule 3.10 to the BPI Disclosure Letter, (x)
all material personal property used by BPI in its business is either owned by
BPI or leased by BPI pursuant to a lease included on Schedule 3.10 to the BPI
Disclosure Letter, (y) all of the personal property listed on Schedule 3.10 to
the BPI Disclosure Letter is in good working order and condition, ordinary wear
and tear excepted and (z) all leases and agreements included on Schedule 3.10 to
the BPI Disclosure Letter are in full force and effect and constitute valid and
binding agreements of the parties (and their successors) thereto in accordance
with their respective terms.
3.11 MATERIAL CONTRACTS AND COMMITMENTS. Schedule 3.11 to the BPI
Disclosure Letter includes an accurate list as of or on the date hereof, of all
material written or oral leases, agreements or other contracts or legally
binding contractual rights or contractual obligations or contractual commitments
relating to or in any way affecting the operation or ownership of the business
of BPI (the "Material Contracts"), including but not limited, those of a type
described below:
(i) Any consulting agreement, employment agreement,
change-in-control agreement, and collective bargaining arrangements with any
labor union and any such agreements currently in negotiation or proposed;
(ii) Any contract for capital expenditures or the
acquisition or construction of fixed assets in excess of $50,000.
(iii) Any contract for the purchase, maintenance or
acquisition, or the sale or furnishing, of materials, supplies, merchandise,
products, machinery, equipment, parts or other property or services (except if
such contract is made in the ordinary course of business and requires aggregate
future payments of less than $50,000);
(iv) Any contract other than trade payables in the ordinary
course of business relating to the borrowing of money, or the guaranty of
another person's borrowing of money, including, without limitation, any notes,
mortgages, indentures and other obligations, guarantees of performance,
agreements and instruments for or relating to any lending or borrowing,
including assumed indebtedness;
(v) Any contract granting any person a lien on all or any
part of the assets of BPI;
-7-
<PAGE> 146
(vi) Any contract for the cleanup, abatement or other
actions in connection with hazardous materials as defined under any
Environmental Laws, the remediation of any existing environmental liabilities or
relating to the performance of any environmental audit or study;
(vii) Any contract granting to any person an option or a
first refusal, first-offer or similar preferential right to purchase or acquire
any material assets of BPI;
(viii) Any contract with any agent, distributor or
representative which is not terminable by BPI upon ninety calendar days' or less
notice without penalty;
(ix) Any contract under which BPI is (1) a lessee or
sublessee of any machinery, equipment, vehicle or other tangible personal
property, or (2) a lessor of any tangible personal property owned by BPI, in
either case having an original value in excess of $50,000;
(x) Any contract under which BPI has granted or received a
license or sublicense or under which it is obligated to pay or has the right to
receive a royalty, license fee or similar payment;
(xi) Any contract concerning any Affiliates;
(xii) Any contract providing for the indemnification or
holding harmless of any officer, director, employee or other person, other than
as provided in the by-laws of BPI;
(xiii) Any contract for purchase or sale by BPI or the
granting of any options with respect to, or providing for any labor, services or
materials (including brokerage or management services) involving any real
property on which BPI conducts any aspect of its business involving aggregate
future payments of more than $50,000;
(xiv) Any contract limiting, restricting or prohibiting BPI
from conducting business anywhere in the United States or elsewhere in the
world;
(xv) Any joint venture or partnership agreement;
(xvi) Any lease, sublease or associated agreements relating
to the property leased by BPI;
(xvii) Any material contract requiring prior notice, consent
or other approval upon a change of control in the equity ownership of BPI, which
contracts shall be separately identified on Schedule 3.11 to the BPI Disclosure
Letter;
(xviii) Any contract with a customer of BPI involving work
to be performed or product to be delivered, in each case subsequent to January
31, 2000, in excess of $50,000;
-8-
<PAGE> 147
(xix) Any other contract, whether or not made in the
ordinary course of business, which involves future payments in excess of
$50,000.
BPI has provided CommWorld a true and complete copy of each written Material
Contract and a true and complete summary of each oral Material Contract, in each
case including all amendments or other modifications thereto. Except as set
forth on Schedule 3.11 to the BPI Disclosure Letter, each Material Contract is a
valid and binding obligation of, and enforceable in accordance with its terms
against, BPI, and the other parties thereto, and is in full force and effect,
subject only to bankruptcy, reorganization, receivership and other laws
affecting creditors' rights generally. Except as set forth on Schedule 3.11 of
the BPI Disclosure Letter, BPI has performed all obligations required to be
performed by it as of the date hereof and will have performed all obligations
required to be performed by it as of the Closing Date under each Material
Contract and neither BPI, nor any other party to any Material Contract is in
breach or default thereunder, and there exists no condition which would, with or
without the lapse of time or the giving of notice, or both, constitute a breach
or default thereunder. BPI has not been notified that any party to any Material
Contract intends to cancel, terminate, not renew, or exercise an option under
any Material Contract, whether in connection with the transactions contemplated
hereby or otherwise.
3.12 REAL PROPERTY. Schedule 3.12 to the BPI Disclosure Letter is
a correct and complete list, and a brief description of all real property leased
by BPI (the "Leased Real Property"), and all facilities thereon. Except as
lessee of Leased Real Property, BPI is not a lessee under or otherwise a party
to any lease, sublease, license, concession or other agreement, whether written
or oral, pursuant to which another person or entity has granted to BPI the right
to use or occupy all or any portion of any real property. BPI does not have an
ownership interest in any real property.
BPI has, assuming good title in the landlord (which is
represented to be so with respect to the leased property owned by Michael G. St.
John), a valid leasehold interest in the Leased Property free and clear of all
liens, assessments or restrictions (including, without limitation, inchoate
liens arising out of the provision of labor, services or materials to any such
Real Property) other than (a) mortgages shown on the BPI Financial Statements as
securing specified liabilities or obligations, with respect to which no default
(or event that, with notice or lapse of time or both, would constitute a
default) exists, (b) liens for current taxes not yet due, and (c) minor
imperfections of title, such as utility and access easements that do not impair
the intended use of the Real Property, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of BPI, and zoning laws and other land use
restrictions or restrictive covenants that do not materially impair the present
use of the property subject thereto. The Real Property constitutes all the real
properties reflected on the BPI Financial Statements or used or occupied by BPI
in connection with its business or otherwise.
With respect to the Leased Real Property, except as reflected on
Schedule 3.12 to the BPI Disclosure Letter:
(i) BPI is in exclusive possession thereof and no easements,
licenses or rights are necessary to conduct business thereon in addition to
those which exist as of the date hereof;
-9-
<PAGE> 148
(ii) No portion thereof is subject to any pending
condemnation proceeding or proceeding by any public or quasi-public authority
materially adverse to the Leased Real Property and there is no threatened
condemnation or proceeding with respect thereto;
(iii) (a) the buildings, plants, improvements, structures
and fixtures at the Leased Real Property, including, without limitation,
heating, ventilation and air conditioning systems, roofs, foundations and
floors, are in good operating condition and repair; (b) the Leased Real Property
is not in violation of any health, safety, building, or environmental
ordinances, laws, codes or regulations; nor has any notice of any claimed
violation of any such ordinances, laws, codes or regulations been served on BPI;
(iv) The Leased Real Property is supplied with utilities and
other third-party services, such as water, sewer, electricity, gas, roads, rail
service and garbage collection, necessary for the current operation of the
business and such Leased Real Property is maintained in all material respects in
accordance with all laws applicable to BPI or the Leased Real Property;
(v) BPI is not a party to any written or oral agreement or
undertaking with owners or users of properties adjacent to the Leased Real
Property relating to the use, operation or maintenance of such facility or any
adjacent real property;
(vi) BPI is not a party to any lease, sublease, license,
concession or other agreement, whether written or oral, pursuant to which BPI
has granted to any party or parties the right to use or occupy all or any
portion of the Leased Real Property;
(vii) To the extent that BPI has responsibility under the
lease(s) for the Leased Real Property for compliance with the provisions of the
ADA, all alterations, rehabilitations, structures, or improvements in the Leased
Property comply with the ADA;
(viii) (a) There are no material defects in any improvements
on or to the Leased Real Property; (b) the Leased Real Property is free from
regulated quantities of asbestos; and (c) the Leased Real Property is free from
flooding and leaks.
3.13 INSURANCE. Schedule 3.13 to the BPI Disclosure Letter
includes (i) an accurate list of all insurance policies carried by BPI since May
1, 1997, and (ii) an accurate list of all insurance loss claims or workers
compensation claims received since May 1, 1997 and complete copies of the
foregoing items have been delivered to CommWorld. Such insurance policies
evidence all of the insurance that BPI has been required to carry pursuant to
all of its contracts and other agreements and pursuant to all applicable laws.
All insurance policies for the current policy periods are in full force and
effect and shall remain in full force and effect through the Closing Date. Since
May 1, 1997, no insurance carried by BPI has been canceled by the insurer and
BPI has not been denied coverage.
3.14 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR
MATTERS. Schedule 3.14 to the BPI Disclosure Letter includes an accurate list of
(i) all officers, directors and key employees of BPI, (ii) all employment
agreements with such officers, directors and key employees and the rate of
compensation (and the portions thereof attributable to salary, bonus and
-10-
<PAGE> 149
other compensation, respectively) of each of such persons as of the Balance
Sheet Date and the date hereof. BPI has provided to CommWorld true, complete and
correct copies of any employment agreements for persons listed on Schedule 3.14
to the BPI Disclosure Letter. Since the Balance Sheet Date, there have been no
increases in the compensation payable or any special bonuses to any officer,
director, key employee or other employee, except ordinary salary increases
implemented on a basis consistent with past practices. Except as set forth on
Schedule 3.14 to the BPI Disclosure Letter, (i) BPI is not bound by or subject
to (and none of its assets or properties is bound by or subject to) any
arrangement with any labor union, (ii) no employees of BPI are represented by
any labor union or covered by any collective bargaining agreement, (iii) no
campaign to establish such representation is in progress and (iv) there is no
pending or threatened labor dispute involving BPI and any group of its employees
nor has BPI experienced any labor interruptions over the past three years. BPI
believes its relationship with its employees to be good.
3.15 EMPLOYEE BENEFIT PLANS. Schedule 3.15 to the BPI Disclosure
Letter sets forth all employee benefit plans of BPI, including all employment
agreements and other agreements or arrangements containing "golden parachute" or
other similar provisions, and deferred compensation agreements. BPI has
delivered to CommWorld true, complete and correct copies of such plans,
agreements and any trusts related thereto, and classifications of employees
covered thereby as of the Balance Sheet Date. Except for the employee benefit
plans, if any, described on Schedule 3.15 to the BPI Disclosure Letter, BPI does
not sponsor, maintain or contribute to any plan program, fund or arrangement
that constitutes an "employee pension benefit plan," nor has BPI any obligation
to contribute to or accrue or pay any benefits under any deferred compensation
or retirement funding arrangement on behalf of any employee or employees (such
as, for example, and without limitation, any individual retirement account or
annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
non-qualified deferred compensation arrangement). For the purposes of this
Agreement, the term "employee pension benefit plan" shall have the same meaning
as is given that term in Section 3(2) of ERISA. BPI has not sponsored,
maintained or contributed to any employee pension benefit plan other than the
plans set forth on Schedule 3.15 to the BPI Disclosure Letter, nor is BPI
required to contribute to any retirement plan pursuant to the provisions of any
collective bargaining agreement establishing the terms and conditions or
employment of any employees of BPI. All accrued contribution obligations of BPI
with respect to any plan listed on Schedule 3.15 to the BPI Disclosure Letter
have either been fulfilled in their entirety or are fully reflected on the
balance sheet of the BPI as of the Balance Sheet Date.
3.16 COMPLIANCE WITH ERISA. All plans listed on Schedule 3.15 to
the BPI Disclosure Letter that are intended to qualify (the "Qualified Plans")
under Section 401(a) of the Code are, and have been so qualified and have been
determined by the Internal Revenue Service to be so qualified, and copies of
such determination letters are included as part of Schedule 3.15 to the BPI
Disclosure Letter. Except as disclosed on Schedule 3.16 to the BPI Disclosure
Letter, all reports and other documents required to be filed with any
governmental agency or distributed to plan participants or beneficiaries
(including, but not limited to, actuarial reports, audits or tax returns) have
been timely filed or distributed, and copies thereof are included as part of
Schedule 3.15 to the BPI Disclosure Letter. None of the BPI stockholders has
engaged in any transaction prohibited under the provisions of Section 4975 of
the Code or Section 406 of ERISA. No plan listed in Schedule 3.15 to the BPI
Disclosure Letter has incurred an accumulated funding deficiency,
-11-
<PAGE> 150
as defined in Section 412(a) of the Code and Section 302(1) of ERISA; and BPI
has not incurred any liability for excise tax or penalty due to the Internal
Revenue Service nor any liability to the Pension Benefit Guaranty Corporation.
(i) There have been no terminations, partial terminations or
discontinuance of contributions to any such Qualified Plan intended to qualify
under Section 401(a) of the Code without notice to and approval by the Internal
Revenue Service;
(ii) No plan listed in Schedule 3.15 to the BPI Disclosure
Letter, subject to the provisions of Title IV of ERISA, has been terminated;
(iii) There have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 3.15 to the BPI Disclosure Letter;
(iv) BPI has not incurred liability under Section 4062 of
ERISA; and
(v) No circumstances exist pursuant to which BPI could have
any direct or indirect liability whatsoever (including, but not limited to, any
liability to any multiemployer plan or the PBGC under Title IV of ERISA or to
the Internal Revenue Service for any excise tax or penalty, or being subject to
any statutory lien to secure payment of any such liability) with respect to any
plan now or heretofore maintained or contributed to by any entity other than BPI
that is, or at any time was, a member of a "controlled group" (as defined in
Section 412(n)(6)(B) of the Code) that includes BPI.
3.17 CONFORMITY WITH LAW; LITIGATION.
(i) Except to the extent set forth on Schedule 3.17 to the
BPI Disclosure Letter, BPI is not in violation of any law or regulation or any
order of any court or Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over it which would have a Material Adverse Effect.
(ii) Except as set forth on Schedule 3.17 to the BPI
Disclosure Letter (which shall disclose the parties to, nature of and relief
sought for each matter to be disclosed), other than collection actions by BPI,
in the ordinary course of business on its own behalf, none of which is greater
than $25,000 and which in the aggregate do not exceed $50,000:
(a) There is no suit, action, proceeding,
investigation, claim or order pending or threatened against BPI, or with respect
to any Employee Plan, or any fiduciary of any such plan (or pending or
threatened against any of the officers, directors or employees of BPI with
respect to the business or currently proposed business activities of BPI, or to
which BPI is otherwise a party, or which may have or is likely to have a
Material Adverse Effect, before any court, or before any governmental authority,
department, commission, bureau, agency or other governmental department or
arbitrator (collectively, "Claims"), nor is there any basis for any such Claims.
-12-
<PAGE> 151
(b) BPI is not subject to any unsatisfied or continuing
judgment, order or decree of any court or governmental authority, and BPI is not
otherwise exposed, from a legal standpoint, to any liability or disadvantage
which could have a Material Adverse Effect. Schedule 3.17 to the BPI Disclosure
Letter sets forth all closed litigation matters to which BPI was a party during
the preceding five years, the dates such litigation was commenced and concluded,
and the nature of the resolution thereof (including amounts paid in settlement
or judgment).
3.18 TAXES. BPI has timely filed all requisite federal, state and
other tax returns or extension requests for all fiscal periods ended on or
before the Balance Sheet Date; and except as set forth on Schedule 3.18 to the
BPI Disclosure Letter, there are no examinations in progress or claims against
any of them for federal, state and other Taxes (including penalties and
interest) for any period or periods prior to and including the Balance Sheet
Date and no notice of any claim for taxes, whether pending or threatened, has
been received. All Taxes, including interest and penalties (whether or not shown
on any tax return) owed by BPI, any member of an affiliated or consolidated
group which includes or included BPI, or with respect to any payment made or
deemed made by BPI herein have been paid. The amounts shown as accruals for
Taxes on the BPI Financial Statements are sufficient for the payment of all
Taxes of the kinds indicated (including penalties and interest) for all fiscal
periods ended on or before that date. Copies of (i) any tax examinations, (ii)
extensions of statutory limitations and (iii) the federal and local income tax
returns and franchise tax returns of BPI for the last three fiscal years, are
attached as Schedule 3.18 to the BPI Disclosure Letter.
3.19 NO VIOLATIONS. BPI is not in violation of any of its Charter
Documents. BPI is not in default under any lease, instrument, agreement,
license, or permit set forth on the Schedules to the BPI Disclosure Letter, or
any other material agreement to which it is a party or by which its properties
are bound (the "Material Documents"); and, except as set forth in Schedule 3.19
to the BPI Disclosure Letter, (a) the rights and benefits of BPI under the
Material Documents will not be adversely affected by the transactions
contemplated hereby and (b) the execution of this Agreement and the performance
of the obligations hereunder and the consummation of the transactions
contemplated hereby will not result in any violation of, or breach of, or
constitute a default under, any of the terms or provisions of the Material
Documents or the Charter Documents. Except as set forth on Schedule 3.19 to the
BPI Disclosure Letter, none of the Material Documents requires notice to, or the
consent or approval of, any governmental agency or other third party with
respect to any of the transactions contemplated hereby in order to remain in
full force and effect and consummation of the transactions contemplated hereby
will not give rise to any right to termination, cancellation or acceleration or
loss of any right or benefit. Except as set forth on Schedule 3.19 to the BPI
Disclosure Letter, none of the Material Documents prohibits the use or
publication by BPI of the name of any other party to such Material Document, and
none of the Material Documents prohibits or restricts BPI from freely providing
services to any other customer or potential customer of BPI.
3.20 GOVERNMENT CONTRACTS. Except as set forth on Schedule 3.20
to the BPI Disclosure Letter, BPI is not now a party to any governmental
contract subject to price redetermination or renegotiation.
-13-
<PAGE> 152
3.21 ABSENCE OF CHANGES. Since January 31, 2000, except as set
forth on Schedule 3.21 to the BPI Disclosure Letter, there has not been:
(i) Any material adverse change in the financial condition,
assets, liabilities (contingent or otherwise), income or business of BPI;
(ii) Any damage, destruction or loss (whether or not covered
by insurance) materially adversely affecting the properties or business of BPI;
(iii) Any change in the authorized capital of BPI or its
outstanding securities or any change in its ownership interests or any grant of
any options, warrants, calls, conversion rights or commitments;
(iv) Any declaration or payment of any dividend or
distribution in respect of the capital stock or any direct or indirect
redemption, purchase or other acquisition of any of the capital stock of BPI;
(v) Any increase in the compensation, bonus, sales
commissions or fee arrangement payable or to become payable by BPI to any of
their respective officers, directors, stockholders, employees, consultants or
agents, except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) Any work interruptions, labor grievances or claims
filed, or any event or condition of any character, materially adversely
affecting the business of BPI;
(vii) Any sale or transfer, or any agreement to sell or
transfer, any material assets, property or rights of BPI to any person,
including, without limitation, any of the stockholders and their affiliates;
(viii) Any cancellation, or agreement to cancel, any
indebtedness or other obligation owing to BPI, including without limitation any
indebtedness or obligation of any stockholder or any affiliate thereof;
(ix) Any plan, agreement or arrangement granting any
preferential rights to purchase or acquire any interest in any of the assets,
property or rights of BPI or requiring consent of any party to the transfer and
assignment of any such assets, property or rights;
(x) Any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside of
the ordinary course of business of BPI;
(xi) Any waiver of any material rights or claims of BPI;
(xii) Any amendment or termination of any Material Documents
or other right to which BPI is a party;
(xiii) Any transaction by BPI outside the ordinary course of
its business;
-14-
<PAGE> 153
(xiv) Any cancellation or termination of a Material Contract
with a customer or client prior to the scheduled termination date; or
(xv) Any other distribution of property or assets by BPI
other than in the ordinary course of business.
3.22 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 3.22 to the
BPI Disclosure Letter includes an accurate list as of the date of the Agreement
of: (i) the name of each financial institution in which BPI has accounts or safe
deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the
type of account and account number; and (iv) the name of each person authorized
to draw thereon or have access thereto. Schedule 3.22 to the BPI Disclosure
Letter also sets forth the name of each person, corporation, firm or other
entity holding a general or special power of attorney from BPI and a description
of the terms of such power.
3.23 RELATIONS WITH GOVERNMENTS. Except for political
contributions made in a lawful manner which, in the aggregate, do not exceed
$10,000 per year since 1996, BPI has not made, offered or agreed to offer
anything of value to any governmental official, political party or candidate for
government office nor has it otherwise taken any action which would cause BPI to
be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any
law of similar effect.
3.24 DISCLOSURE. This Agreement, including the Exhibits and BPI
Disclosure Letter and the Schedules thereto, together with the other information
furnished to CommWorld and DTI by BPI and the Shareholders in connection
herewith, do not contain an untrue statement of a material fact or omit to state
a material fact necessary to make the statements herein and therein, in light of
the circumstances under which they were made, not misleading.
3.25 PROHIBITED ACTIVITIES. Except as set forth on Schedule 3.25
to the BPI Disclosure Letter, BPI has not, between January 31, 2000 and the date
hereof, taken any of the actions (Prohibited Activities) set forth in Section
6.3.
3.26 NO CONFLICTS. The execution, delivery and performance of
this Agreement by the Shareholders and the consummation by the Shareholders of
the transactions contemplated hereby will not conflict with or result in a
breach or violation of any term or provision of, or (with or without notice or
passage of time, or both) constitute a default under, any indenture, mortgage,
deed of trust, trust (constructive and other), loan agreement or other agreement
or instrument to which BPI is a party or violate the provisions of any statute,
or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over BPI or the property of BPI.
3.27 CERTAIN BUSINESS RELATIONSHIPS WITH BPI. Except as listed in
Schedule 3.27, neither of the Shareholders nor any relative of any Shareholder
or Affiliate of BPI has been involved in any business arrangement or
relationship with BPI since May 1, 1997, and neither of the Shareholders, nor
any relative of any Shareholder or Affiliate of BPI owns any asset, tangible or
intangible, which is used in BPI's operations.
-15-
<PAGE> 154
3.28 AUTHORIZATION. The representatives of BPI executing this
Agreement have the authority to enter into and bind BPI to the terms of this
Agreement and BPI has the full legal right, power and authority to enter into
this Agreement and the Merger.
4. REPRESENTATIONS AND WARRANTIES OF COMMWORLD AND DTI
Except as provided in the CommWorld Disclosure Letter (as defined
below) to be delivered pursuant to Section 10.2, CommWorld and DTI jointly and
severally represent and warrant to BPI and the Shareholders that all of the
following representations and warranties in this Section 4 are true at the date
of this Agreement and shall be true at the time of Closing. As used in this
Agreement, the "CommWorld Disclosure Letter" shall mean the disclosure letter
delivered by CommWorld and DTI to BPI and the Shareholders regarding CommWorld
and DTI pursuant to this Section 4 upon execution of this Agreement. As used in
this Section 4, CommWorld refers to CommWorld and all of its wholly-owned
subsidiaries.
4.1 DUE ORGANIZATION. Each of CommWorld and DTI is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation, and has the requisite power and authority to carry
on its business as it is now being conducted. Each of CommWorld and DTI is duly
qualified to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification necessary, except (i) as set forth on Schedule 4.1 to
CommWorld Disclosure Letter or (ii) where the failure to be so authorized or
qualified would not have a material adverse effect on the business, operations,
properties, assets or condition (financial or otherwise), of CommWorld taken as
a whole (as used herein with respect to CommWorld, or with respect to any other
person, a "Material Adverse Effect"). Schedule 4.1 to the CommWorld Disclosure
Letter sets forth the jurisdiction in which CommWorld and DTI is incorporated
and contains a list of all jurisdictions in which CommWorld and DTI are
authorized or qualified to do business. True, complete and correct copies of the
Articles of Incorporation and Bylaws, each as amended, of CommWorld (the
"CommWorld Charter Documents") have been made available to BPI and the
Shareholders. True, complete and correct copies of the Articles of Incorporation
and Bylaws, each as amended, of DTI (the "DTI Charter Documents") have been made
available to the Shareholders. The stock records of CommWorld and DTI as
heretofore made available to BPI the Shareholders, are correct and complete in
all material respects. There are no minutes or other records or proceedings of
CommWorld and DTI which have not been made available to BPI and the
Shareholders, and all of such minutes or other records of proceedings are
correct and complete in all respects.
4.2 SUBSIDIARIES. The names and jurisdiction of incorporation of
the subsidiaries of CommWorld are set forth in Schedule 4.2. DTI has no
subsidiaries.
4.3 CAPITAL STRUCTURE. The authorized capital stock of DTI is as
set forth in Section 1.4(i). All of the issued and outstanding shares of the
capital stock of DTI have been duly authorized and are validly issued, fully
paid and non-assessable. The authorized capital stock of CommWorld consists of
25,000,000 shares of common stock, no par value, of which 7,680,894 shares are
issued and outstanding on March 1, 2000, and 3,000,000 shares of preferred
stock, of which 10,000 shares are issued and outstanding on March 1, 2000. All
of the outstanding shares of
-16-
<PAGE> 155
common stock and preferred stock have been duly authorized and are validly
issued, fully paid and non-assessable. Except as listed in Schedule 4.3, each of
CommWorld and DTI has no common stock or other shares of capital stock reserved
for or otherwise subject to issuance. Except as listed in Schedule 4.3 or as set
forth above, there are no pre-emptive or other outstanding rights, options,
warrants, conversion rights, stock appreciation rights, redemption rights,
repurchase rights, agreements, arrangements or commitments to issue or sell any
shares of capital stock or other securities of each of DTI and CommWorld or any
securities or obligations convertible or exchangeable into or exercisable for,
or giving any person a right to subscribe for or acquire, any securities of each
of DTI and CommWorld, and no securities or obligations evidencing such rights
are authorized, issued or outstanding. Each of DTI and CommWorld does not have
outstanding any bonds, debentures, notes or other debt obligations the holders
of which have the right to vote (or convertible into or exercisable for
securities having the right to vote). There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to each of DTI and CommWorld. There are no voting trusts, proxies or
other agreements or understandings with respect to the voting of the capital
stock of each of DTI and CommWorld.
4.4 PREDECESSOR STATUS; ETC. Set forth in Schedule 4.4 to
CommWorld Disclosure Letter is an accurate list of all names of all predecessor
companies of CommWorld since May 1, 1994, including the names of any entities
acquired by CommWorld (by stock purchase, merger or otherwise) or owned by
CommWorld or from whom CommWorld previously acquired material assets, in any
case, from the earliest date upon which any person acquired his or her stock in
CommWorld. Except as disclosed on Schedule 4.4 to CommWorld Disclosure Letter,
CommWorld has not been, within such period of time, a subsidiary or division of
another corporation or a part of an acquisition which was later rescinded.
4.5 SPIN-OFF BY COMMWORLD. Except as set forth on Schedule 4.5 to
CommWorld Disclosure Letter, there has not been any sale, spin-off or split-up
of material assets of either CommWorld or any other person or entity that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, CommWorld ("Affiliates") since
its inception.
4.6 FINANCIAL STATEMENTS. Schedule 4.6 to CommWorld Disclosure
Letter includes copies of the following financial statements (the "CommWorld
Financial Statements") of CommWorld: CommWorld's audited Balance Sheets as of
April 30, 1999 and 1998 and audited Statements of Income and Comprehensive
Income, Stockholders' Equity and Cash Flows for each of the fiscal years ended
April 30, 1999 and 1998 and, unaudited Balance Sheet as of January 31, 2000 and
unaudited Statements of Income and Comprehensive Income, Stockholders' Equity
and Cash Flows for each of the nine month periods ended January 31, 2000 and
1999 (January 31, 2000 being hereinafter referred to as the "Balance Sheet
Date"). The CommWorld Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods indicated (except as noted thereon or on Schedule 4.6 to
CommWorld Disclosure Letter). Except as set forth on Schedule 4.6 to CommWorld
Disclosure Letter, such Balance Sheets present fairly in all material respects
the financial position of CommWorld as of the dates indicated thereon, and such
Statements of Income and Comprehensive Income, Stockholders' Equity and Cash
Flows present fairly in all material respects the results of operations for the
periods indicated thereon, except that the unaudited interim financial
statements
-17-
<PAGE> 156
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount.
4.7 LIABILITIES AND OBLIGATIONS. Schedule 4.7 to CommWorld
Disclosure Letter includes accurate lists as of January 31, 2000 (the "Balance
Sheet Date") of (i) all material liabilities of CommWorld which are not
reflected on the Balance Sheet of CommWorld at the Balance Sheet Date or
otherwise reflected in CommWorld Financial Statements at the Balance Sheet Date
which by their nature would be required in accordance with GAAP to be reflected
in the Balance Sheet, and (ii) all loan agreements, indemnity or guaranty
agreements, bonds, mortgages, liens, pledges or other security agreements.
Except as set forth on Schedule 4.7 to CommWorld Disclosure Letter, since the
Balance Sheet Date CommWorld has not incurred any material liabilities of any
kind, character and description, whether accrued, absolute, secured or
unsecured, contingent or otherwise, other than liabilities incurred in the
ordinary course of business. Schedule 4.7 to CommWorld Disclosure Letter also
includes, in the case of those contingent liabilities related to pending or
threatened litigation, or other liabilities which are not fixed or otherwise
accrued or reserved, a good faith and reasonable estimate of the maximum amount
which CommWorld reasonably expects will be payable. For each such contingent
liability or liability for which the amount is not fixed or is contested,
CommWorld has provided to BPI and the Shareholders the following information:
(a) A summary description of the liability together with the
following:
(i) copies of all relevant documentation relating
thereto;
(ii) amounts claimed and any other action or relief
sought; and
(iii) name of claimant and all other parties to the
claim, suit or proceeding;
(b) The name of each court or agency before which such
claim, suit or proceeding is pending; and
(c) The date such claim, suit or proceeding was instituted;
and
(d) A good faith and reasonable estimate of the maximum
amount, if any, which is likely to become payable with respect to each such
liability. If no estimate is provided, the estimate shall for purposes of this
Agreement be deemed to be zero.
-18-
<PAGE> 157
4.8 PERMITS AND INTANGIBLES.
(i) CommWorld holds all licenses, franchises, permits and
other governmental authorizations the absence of any of which could have a
Material Adverse Effect on CommWorld's business and Schedule 4.8 to CommWorld
Disclosure Letter includes an accurate list and summary description of all such
licenses, franchises, permits and other governmental authorizations, including
permits (it being understood and agreed that a list of all environmental permits
and other environmental approvals is set forth on Schedule 4.9 to CommWorld
Disclosure Letter), titles (including motor vehicle titles and current
registrations), fuel permits, licenses, franchises and certificates, as well as
(a) registered or unregistered trademarks, trade names, patents, patent
applications and inventions and discoveries that may be patentable, (b)
copyrights owned or held by CommWorld or any of its employees (including
interests in software or other technology systems, programs and intellectual
property). The licenses, franchises, permits and other governmental
authorizations listed on Schedules 4.8 and 4.9 to CommWorld Disclosure Letter
are valid, and CommWorld has not received any notice that any governmental
authority intends to cancel, terminate or not renew any such license, franchise,
permit or other governmental authorization. CommWorld has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in the licenses, franchises, permits and other
governmental authorizations listed on Schedules 4.8 and 4.9 of CommWorld
Disclosure letter and is not in violation of any of the foregoing except where
such non-compliance or violation would not have a Material Adverse Effect on
CommWorld. Except as specifically provided in Schedule 4.8 to CommWorld
Disclosure Letter, the transactions contemplated by this Agreement will not
result in a default under or a breach or violation of, or adversely affect the
rights and benefits afforded to CommWorld by, any such licenses, franchises,
permits or government authorizations.
(ii) The patents, the marks and copyrights, as well as the
know how, trade secrets, confidential information, customer lists, software,
technical information, data, process technology, plans and drawings owned, used
or licensed by CommWorld (collectively, the "Trade Secrets") are all those
necessary to enable CommWorld to conduct and to continue to conduct its business
as it is currently conducted. Schedule 4.8 of CommWorld Disclosure Letter also
contains a description of all material Trade Secrets owned or used by CommWorld.
Except as set forth on Schedule 4.8 to CommWorld Disclosure Letter (a) all of
the patents, marks, copyrights and Trade Secrets (collectively, the
"Intellectual Property") are owned, or used under valid licenses by CommWorld,
and are free and clear of all liens and other adverse claims; (b) CommWorld has
not infringed on or misappropriated, is not now infringing on or
misappropriating, and has not received any notice that it is infringing on,
misappropriating, or otherwise conflicting with the intellectual property rights
of any third parties; (c) there is no claim pending or threatened against
CommWorld with respect to the alleged infringement or misappropriation by
CommWorld or a conflict with, any intellectual property rights of others; (d)
the operation of any aspect of the business in the manner in which it has
heretofore been operated or is presently operated does not give rise to any such
infringement or misappropriation; and (e) there is no infringement or
misappropriation of the Intellectual Property by a third party or claim, pending
or threatened, against any third party with respect to the alleged infringement
or misappropriation of the Intellectual Property by such third party.
-19-
<PAGE> 158
4.9 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 4.9 to
CommWorld Disclosure Letter, and except where any failure to comply or action
would not have a Material Adverse Effect, (i) CommWorld has complied with and is
in compliance with all Federal, state, local and foreign statutes (civil and
criminal), laws, ordinances, regulations, rules, notices, permits, judgments,
orders and decrees applicable to any of them or any of their respective
properties, assets, operations and businesses relating to environmental
protection (collectively "Environmental Laws") including, without limitation,
Environmental Laws relating to air, water, land and the generation, storage,
use, handling, transportation, treatment or disposal of Hazardous Wastes and
Hazardous Substances including petroleum and petroleum products (as such terms
are defined in any applicable Environmental Laws); (ii) CommWorld has obtained
and adhered to all necessary permits and other approvals necessary to treat,
transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous
Substances, an accurate list of all of which permits and approvals is set forth
on Schedule 4.9 to CommWorld Disclosure Letter, and have reported to the
appropriate authorities, to the extent required by all Environmental Laws, all
past and present sites owned and operated by CommWorld where Hazardous Wastes or
Hazardous Substances have been treated, stored, disposed of or otherwise
handled; (iii) there have been no releases or threats of releases (as defined in
Environmental Laws) at, from, in or on any property owned or operated by
CommWorld except as permitted by Environmental Laws; (iv) there is no on-site or
off-site location to which CommWorld has transported or disposed of Hazardous
Wastes and Hazardous Substances or arranged for the transportation of Hazardous
Wastes and Hazardous Substances, which site is the subject of any Federal,
state, local or foreign enforcement action or any other investigation which is
reasonably likely to lead to any claim against CommWorld for any clean-up cost,
remedial work, damage to natural resources, property damage or personal injury,
including, but not limited to, any claim under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended; and (v) CommWorld
has no contingent liability in connection with any release of any Hazardous
Waste or Hazardous Substance into the environment.
4.10 PERSONAL PROPERTY. Schedule 4.10 to CommWorld Disclosure
Letter includes an accurate list of (i) all personal property owned by CommWorld
with an individual value in excess of $50,000 acquired since January 31, 2000
and (ii) all leases and agreements in respect of personal property, including,
in the case of each of (i) and (ii), (1) true, complete and correct copies of
all such leases and (2) an indication as to which assets are currently owned, or
were formerly owned, by stockholders, relatives of stockholders, or Affiliates
of CommWorld. Except as set forth on Schedule 4.10 to CommWorld Disclosure
Letter, (x) all material personal property used by CommWorld in its business is
either owned by CommWorld or leased by CommWorld pursuant to a lease included on
Schedule 4.10 to CommWorld Disclosure Letter, (y) all of the personal property
listed on Schedule 4.10 to CommWorld Disclosure Letter is in good working order
and condition, ordinary wear and tear excepted and (z) all leases and agreements
included on Schedule 4.10 to CommWorld Disclosure Letter are in full force and
effect and constitute valid and binding agreements of the parties (and their
successors) thereto in accordance with their respective terms.
4.11 MATERIAL CONTRACTS AND COMMITMENTS. Schedule 4.11 to
CommWorld Disclosure Letter includes an accurate list as of or on the date
hereof, of all material written or oral leases, agreements or other contracts or
legally binding contractual rights or contractual obligations or contractual
commitments relating to or in any way affecting the operation or ownership of
the
-20-
<PAGE> 159
business of CommWorld (the "Material Contracts"), including but not limited,
those of a type described below:
(i) Any consulting agreement, employment agreement,
change-in-control agreement, and collective bargaining arrangements with any
labor union and any such agreements currently in negotiation or proposed;
(ii) Any contract for capital expenditures or the
acquisition or construction of fixed assets in excess of $50,000.
(iii) Any contract for the purchase, maintenance or
acquisition, or the sale or furnishing, of materials, supplies, merchandise,
products, machinery, equipment, parts or other property or services (except if
such contract is made in the ordinary course of business and requires aggregate
future payments of less than $50,000);
(iv) Any contract other than trade payables in the ordinary
course of business relating to the borrowing of money, or the guaranty of
another person's borrowing of money, including, without limitation, any notes,
mortgages, indentures and other obligations, guarantees of performance,
agreements and instruments for or relating to any lending or borrowing,
including assumed indebtedness;
(v) Any contract granting any person a lien on all or any
part of the assets of CommWorld;
(vi) Any contract for the cleanup, abatement or other
actions in connection with hazardous materials as defined under any
Environmental Laws, the remediation of any existing environmental liabilities or
relating to the performance of any environmental audit or study;
(vii) Any contract granting to any person an option or a
first refusal, first-offer or similar preferential right to purchase or acquire
any material assets of CommWorld;
(viii) Any contract with any agent, distributor or
representative which is not terminable by CommWorld upon ninety calendar days'
or less notice without penalty;
(ix) Any contract under which CommWorld is (1) a lessee or
sublessee of any machinery, equipment, vehicle or other tangible personal
property, or (2) a lessor of any tangible personal property owned by CommWorld,
in either case having an original value in excess of $50,000;
(x) Any contract under which CommWorld has granted or
received a license or sublicense or under which it is obligated to pay or has
the right to receive a royalty, license fee or similar payment;
(xi) Any contract concerning any Affiliates;
-21-
<PAGE> 160
(xii) Any contract providing for the indemnification or
holding harmless of any officer, director, employee or other person, other than
as provided in the by-laws of CommWorld;
(xiii) Any contract for purchase or sale by CommWorld or the
granting of any options with respect to, or providing for any labor, services or
materials (including brokerage or management services) involving any real
property on which CommWorld conducts any aspect of its business involving
aggregate future payments of more than $50,000;
(xiv) Any contract limiting, restricting or prohibiting
CommWorld from conducting business anywhere in the United States or elsewhere in
the world;
(xv) Any joint venture or partnership agreement;
(xvi) Any lease, sublease or associated agreements relating
to the property leased by CommWorld;
(xvii) Any material contract requiring prior notice, consent
or other approval upon a change of control in the equity ownership of CommWorld,
which contracts shall be separately identified on Schedule 3.11 to CommWorld
Disclosure Letter;
(xviii) Any contract with a customer of CommWorld involving
work to be performed or product to be delivered, in each case subsequent to
January 31, 2000, in excess of $50,000;
( xix) Any other contract, whether or not made in the
ordinary course of business, which involves future payments in excess of
$50,000.
CommWorld has provided BPI and the Shareholders a true and complete copy of each
written Material Contract and a true and complete summary of each oral Material
Contract, in each case including all amendments or other modifications thereto.
Except as set forth on Schedule 4.11 to CommWorld Disclosure Letter, each
Material Contract is a valid and binding obligation of, and enforceable in
accordance with its terms against, CommWorld, and the other parties thereto, and
is in full force and effect, subject only to bankruptcy, reorganization,
receivership and other laws affecting creditors' rights generally. Except as set
forth on Schedule 4.11 of CommWorld Disclosure Letter, CommWorld has performed
all obligations required to be performed by it as of the date hereof and will
have performed all obligations required to be performed by it as of the Closing
Date under each Material Contract and neither CommWorld, nor any other party to
any Material Contract is in breach or default thereunder, and there exists no
condition which would, with or without the lapse of time or the giving of
notice, or both, constitute a breach or default thereunder. CommWorld has not
been notified that any party to any Material Contract intends to cancel,
terminate, not renew, or exercise an option under any Material Contract, whether
in connection with the transactions contemplated hereby or otherwise.
4.12 REAL PROPERTY. Schedule 4.12 to CommWorld Disclosure Letter is a
correct and complete list, and a brief description of, all real property leased
by CommWorld (the "Leased
-22-
<PAGE> 161
Real Property"), and all facilities thereon. Except as lessee of Leased Real
Property, CommWorld is not a lessee under or otherwise a party to any lease,
sublease, license, concession or other agreement, whether written or oral,
pursuant to which another person or entity has granted to CommWorld the right to
use or occupy all or any portion of any real property. CommWorld does not have
an ownership interest in any real property.
CommWorld has, assuming good title in the landlord, a valid
leasehold interest in the Leased Property, in each case free and clear of all
liens, assessments or restrictions (including, without limitation, inchoate
liens arising out of the provision of labor, services or materials to any such
Real Property) other than (a) mortgages shown on CommWorld Financial Statements
as securing specified liabilities or obligations, with respect to which no
default (or event that, with notice or lapse of time or both, would constitute a
default) exists, (b) liens for current taxes not yet due, and (c) minor
imperfections of title, such as utility and access easements that do not impair
the intended use of the Real Property, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of CommWorld, and zoning laws and other land
use restrictions or restrictive covenants that do not materially impair the
present use of the property subject thereto. The Real Property constitutes all
the real properties reflected on CommWorld Financial Statements or used or
occupied by CommWorld in connection with its business or otherwise.
With respect to the Leased Real Property, except as reflected on
Schedule 3.12 to CommWorld Disclosure Letter:
(i) CommWorld is in exclusive possession thereof and no
easements, licenses or rights are necessary to conduct business thereon in
addition to those which exist as of the date hereof;
(ii) No portion thereof is subject to any pending
condemnation proceeding or proceeding by any public or quasi-public authority
materially adverse to the Leased Real Property and there is no threatened
condemnation or proceeding with respect thereto;
(iii) (a) the buildings, plants, improvements, structures
and fixtures at the Leased Real Property, including, without limitation,
heating, ventilation and air conditioning systems, roofs, foundations and
floors, are in good operating condition and repair; (b) the Leased Real Property
is not in violation of any health, safety, building, or environmental
ordinances, laws, codes or regulations; nor has any notice of any claimed
violation of any such ordinances, laws, codes or regulations been served on
CommWorld;
(iv) The Leased Real Property is supplied with utilities and
other third-party services, such as water, sewer, electricity, gas, roads, rail
service and garbage collection, necessary for the current operation of the
business and such Leased Real Property is maintained in all material respects in
accordance with all laws applicable to CommWorld or the Leased Real Property;
-23-
<PAGE> 162
(v) CommWorld is not a party to any written or oral
agreement or undertaking with owners or users of properties adjacent to the
Leased Real Property relating to the use, operation or maintenance of such
facility or any adjacent real property;
(vi) CommWorld is not a party to any lease, sublease,
license, concession or other agreement, whether written or oral, pursuant to
which CommWorld has granted to any party or parties the right to use or occupy
all or any portion of the Leased Real Property;
(vii) To the extent that CommWorld has responsibility under
the lease(s) for the Leased Real Property for compliance with the provisions of
the ADA, all alterations, rehabilitations, structures, or improvements in the
Leased Property comply with the ADA;
(viii) (a) There are no material defects in any improvements
on or to the Leased Real Property; (b) the Leased Real Property is free from
regulated quantities of asbestos; and (c) the Leased Real Property is free from
flooding and leaks.
4.13 INSURANCE. Schedule 4.13 to CommWorld Disclosure Letter
includes (i) an accurate list of all insurance policies carried by CommWorld
since May 1, 1997, and (ii) an accurate list of all insurance loss claims or
workers compensation claims received since May 1, 1997 and complete copies of
the foregoing items have been delivered to the Shareholders. Such insurance
policies evidence all of the insurance that CommWorld has been required to carry
pursuant to all of its contracts and other agreements and pursuant to all
applicable laws. All insurance policies for the current policy periods are in
full force and effect and shall remain in full force and effect through the
Closing Date. Since May 1, 1997, no insurance carried by CommWorld has been
canceled by the insurer and CommWorld has not been denied coverage.
4.14 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR
MATTERS. Schedule 4.14 to CommWorld Disclosure Letter includes an accurate list
of (i) all officers, directors and key employees of CommWorld, (ii) all
employment agreements with such officers, directors and key employees and the
rate of compensation (and the portions thereof attributable to salary, bonus and
other compensation, respectively) of each of such persons as of the Balance
Sheet Date and the date hereof. CommWorld has provided to the Shareholders true,
complete and correct copies of any employment agreements for persons listed on
Schedule 4.14 to CommWorld Disclosure Letter. Since the Balance Sheet Date,
there have been no increases in the compensation payable or any special bonuses
to any officer, director, key employee or other employee, except ordinary salary
increases implemented on a basis consistent with past practices. Except as set
forth on Schedule 4.14 to CommWorld Disclosure Letter, (i) CommWorld is not
bound by or subject to (and none of its assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of CommWorld
are represented by any labor union or covered by any collective bargaining
agreement, (iii) no campaign to establish such representation is in progress and
(iv) there is no pending or threatened labor dispute involving CommWorld and any
group of its employees nor has CommWorld experienced any labor interruptions
over the past three years. CommWorld believes its relationship with its
employees to be good.
4.15 EMPLOYEE BENEFIT PLANS. Schedule 4.15 to CommWorld
Disclosure Letter sets forth all employee benefit plans of CommWorld, including
all employment agreements and
-24-
<PAGE> 163
other agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements. CommWorld has delivered to the
Shareholders true, complete and correct copies of such plans, agreements and any
trusts related thereto, and classifications of employees covered thereby as of
the Balance Sheet Date. Except for the employee benefit plans, if any, described
on Schedule 4.15 to CommWorld Disclosure Letter, CommWorld does not sponsor,
maintain or contribute to any plan program, fund or arrangement that constitutes
an "employee pension benefit plan," nor has CommWorld any obligation to
contribute to or accrue or pay any benefits under any deferred compensation or
retirement funding arrangement on behalf of any employee or employees (such as,
for example, and without limitation, any individual retirement account or
annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
non-qualified deferred compensation arrangement). For the purposes of this
Agreement, the term "employee pension benefit plan" shall have the same meaning
as is given that term in Section 3(2) of ERISA. CommWorld has not sponsored,
maintained or contributed to any employee pension benefit plan other than the
plans set forth on Schedule 4.15 to CommWorld Disclosure Letter, nor is
CommWorld required to contribute to any retirement plan pursuant to the
provisions of any collective bargaining agreement establishing the terms and
conditions or employment of any employees of CommWorld. All accrued contribution
obligations of CommWorld with respect to any plan listed on Schedule 4.15 to
CommWorld Disclosure Letter have either been fulfilled in their entirety or are
fully reflected on the balance sheet of CommWorld as of the Balance Sheet Date.
4.16 COMPLIANCE WITH ERISA. All plans listed on Schedule 4.15 to
CommWorld Disclosure Letter that are intended to qualify (the "Qualified Plans")
under Section 401(a) of the Code are, and have been so qualified and have been
determined by the Internal Revenue Service to be so qualified, and copies of
such determination letters are included as part of Schedule 4.15 to CommWorld
Disclosure Letter. Except as disclosed on Schedule 4.16 to CommWorld Disclosure
Letter, all reports and other documents required to be filed with any
governmental agency or distributed to plan participants or beneficiaries
(including, but not limited to, actuarial reports, audits or tax returns) have
been timely filed or distributed, and copies thereof are included as part of
Schedule 4.15 to CommWorld Disclosure Letter. None of CommWorld stockholders has
engaged in any transaction prohibited under the provisions of Section 4975 of
the Code or Section 406 of ERISA. No plan listed in Schedule 4.15 to CommWorld
Disclosure Letter has incurred an accumulated funding deficiency, as defined in
Section 412(a) of the Code and Section 302(1) of ERISA; and CommWorld has not
incurred any liability for excise tax or penalty due to the Internal Revenue
Service nor any liability to the Pension Benefit Guaranty Corporation.
(i) There have been no terminations, partial terminations or
discontinuance of contributions to any such Qualified Plan intended to qualify
under Section 401(a) of the Code without notice to and approval by the Internal
Revenue Service;
(ii) No plan listed in Schedule 4.15 to CommWorld Disclosure
Letter, subject to the provisions of Title IV of ERISA, has been terminated;
(iii) There have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 4.15 to CommWorld Disclosure Letter;
-25-
<PAGE> 164
(iv) CommWorld has not incurred liability under Section 4062
of ERISA; and
(v) No circumstances exist pursuant to which CommWorld could
have any direct or indirect liability whatsoever (including, but not limited to,
any liability to any multiemployer plan or the PBGC under Title IV of ERISA or
to the Internal Revenue Service for any excise tax or penalty, or being subject
to any statutory lien to secure payment of any such liability) with respect to
any plan now or heretofore maintained or contributed to by any entity other than
CommWorld that is, or at any time was, a member of a "controlled group" (as
defined in Section 412(n)(6)(B) of the Code) that includes CommWorld.
4.17 CONFORMITY WITH LAW; LITIGATION.
(i) Except to the extent set forth on Schedule 4.17 to
CommWorld Disclosure Letter, CommWorld is not in violation of any law or
regulation or any order of any court or Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
having jurisdiction over it which would have a Material Adverse Effect.
(ii) Except as set forth on Schedule 4.17 to CommWorld
Disclosure Letter (which shall disclose the parties to, nature of and relief
sought for each matter to be disclosed), other than collection actions by
CommWorld, in the ordinary course of business on its own behalf, none of which
is greater than $25,000 and which in the aggregate do not exceed $50,000:
(a) There is no suit, action, proceeding,
investigation, claim or order pending or threatened against CommWorld, or with
respect to any Employee Plan, or any fiduciary of any such plan (or pending or
threatened against any of the officers, directors or employees of CommWorld with
respect to the business or currently proposed business activities of CommWorld,
or to which CommWorld is otherwise a party, or which may have or is likely to
have a Material Adverse Effect, before any court, or before any governmental
authority, department, commission, bureau, agency or other governmental
department or arbitrator (collectively, "Claims"), nor is there any basis for
any such Claims.
(b) Except as set forth in Schedule 4.17(b) to the
CommWorld Disclosure Letter, CommWorld is not subject to any unsatisfied or
continuing judgment, order or decree of any court or governmental authority, and
CommWorld is not otherwise exposed, from a legal standpoint, to any liability or
disadvantage which could have a Material Adverse Effect. Schedule 4.17 to
CommWorld Disclosure Letter sets forth all closed litigation matters to which
CommWorld was a party during the preceding five years, the dates such litigation
was commenced and concluded, and the nature of the resolution thereof (including
amounts paid in settlement or judgment).
4.18 TAXES. CommWorld has timely filed all requisite federal,
state and other tax returns or extension requests for all fiscal periods ended
on the Balance Sheet Date; and except as set forth on Schedule 4.18 to CommWorld
Disclosure Letter, there are no examinations in progress or claims against any
of them for federal, state and other Taxes (including penalties and interest)
for
-26-
<PAGE> 165
any period or periods prior to and including the Balance Sheet Date and no
notice of any claim for taxes, whether pending or threatened, has been received.
All Taxes, including interest and penalties (whether or not shown on any tax
return) owed by CommWorld, any member of an affiliated or consolidated group
which includes or included CommWorld, or with respect to any payment made or
deemed made by CommWorld herein have been paid. The amounts shown as accruals
for Taxes on CommWorld Financial Statements are sufficient for the payment of
all Taxes of the kinds indicated (including penalties and interest) for all
fiscal periods ended on or before that date. Copies of (i) any tax examinations,
(ii) extensions of statutory limitations and (iii) the federal and local income
tax returns and franchise tax returns of CommWorld for the last three fiscal
years have been made available to BPI and the Shareholders.
4.19 NO VIOLATIONS. CommWorld is not in violation of any of its
Charter Documents. CommWorld is not in default under any lease, instrument,
agreement, license, or permit set forth on the Schedules to CommWorld Disclosure
Letter, or any other material agreement to which it is a party or by which its
properties are bound (the "Material Documents"); and, except as set forth in
Schedule 4.19 to CommWorld Disclosure Letter, (a) the rights and benefits of
CommWorld under the Material Documents will not be adversely affected by the
transactions contemplated hereby and (b) the execution of this Agreement and the
performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation of, or breach
of, or constitute a default under, any of the terms or provisions of the
Material Documents or the Charter Documents. Except as set forth on Schedule
4.19 to CommWorld Disclosure Letter, none of the Material Documents requires
notice to, or the consent or approval of, any governmental agency or other third
party with respect to any of the transactions contemplated hereby in order to
remain in full force and effect and consummation of the transactions
contemplated hereby will not give rise to any right to termination, cancellation
or acceleration or loss of any right or benefit. Except as set forth on Schedule
4.19 to CommWorld Disclosure Letter, none of the Material Documents prohibits
the use or publication by CommWorld of the name of any other party to such
Material Document, and none of the Material Documents prohibits or restricts
CommWorld from freely providing services to any other customer or potential
customer of CommWorld.
4.20 GOVERNMENT CONTRACTS. Except as set forth on Schedule 4.20
to CommWorld Disclosure Letter, CommWorld is not now a party to any governmental
contract subject to price redetermination or renegotiation.
4.21 ABSENCE OF CHANGES. Since January 31, 2000, except as set
forth on Schedule 4.21 to CommWorld Disclosure Letter, there has not been:
(i) Any material adverse change in the financial condition,
assets, liabilities (contingent or otherwise), income or business of CommWorld;
(ii) Any damage, destruction or loss (whether or not covered
by insurance) materially adversely affecting the properties or business of
CommWorld;
-27-
<PAGE> 166
(iii) Any change in the authorized capital of CommWorld or
its outstanding securities or any change in its ownership interests or any grant
of any options, warrants, calls, conversion rights or commitments;
(iv) Any declaration or payment of any dividend or
distribution in respect of the capital stock or any direct or indirect
redemption, purchase or other acquisition of any of the capital stock of
CommWorld;
(v) Any increase in the compensation, bonus, sales
commissions or fee arrangement payable or to become payable by CommWorld to any
of their respective officers, directors, stockholders, employees, consultants or
agents, except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) Any work interruptions, labor grievances or claims
filed, or any event or condition of any character, materially adversely
affecting the business of CommWorld;
(vii) Any sale or transfer, or any agreement to sell or
transfer, any material assets, property or rights of CommWorld to any person,
including, without limitation, any of the stockholders and their affiliates;
(viii) Any cancellation, or agreement to cancel, any
indebtedness or other obligation owing to CommWorld, including without
limitation any indebtedness or obligation of any stockholder or any affiliate
thereof;
(ix) Any plan, agreement or arrangement granting any
preferential rights to purchase or acquire any interest in any of the assets,
property or rights of CommWorld or requiring consent of any party to the
transfer and assignment of any such assets, property or rights;
(x) Any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside of
the ordinary course of business of CommWorld;
(xi) Any waiver of any material rights or claims of
CommWorld;
(xii) Any amendment or termination of any Material Documents
or other right to which CommWorld is a party;
(xiii) Any transaction by CommWorld outside the ordinary
course of its business;
(xiv) Any cancellation or termination of a Material Contract
with a customer or client prior to the scheduled termination date; or
(xv) Any other distribution of property or assets by
CommWorld other than in the ordinary course of business.
-28-
<PAGE> 167
4.22 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 4.22 to
CommWorld Disclosure Letter includes an accurate list as of the date of the
Agreement of: (i) the name of each financial institution in which CommWorld has
accounts or safe deposit boxes; (ii) the names in which the accounts or boxes
are held; (iii) the type of account and account number; and (iv) the name of
each person authorized to draw thereon or have access thereto. Schedule 4.22 to
CommWorld Disclosure Letter also sets forth the name of each person,
corporation, firm or other entity holding a general or special power of attorney
from CommWorld and a description of the terms of such power.
4.23 RELATIONS WITH GOVERNMENTS. Except for political
contributions made in a lawful manner which, in the aggregate, do not exceed
$10,000 per year since 1996, CommWorld has not made, offered or agreed to offer
anything of value to any governmental official, political party or candidate for
government office nor has it otherwise taken any action which would cause
CommWorld to be in violation of the Foreign Corrupt Practices Act of 1977, as
amended or any law of similar effect.
4.24 DISCLOSURE. This Agreement, including the Exhibits and
CommWorld Disclosure Letter and the Schedules thereto, together with the other
information furnished to BPI and the Shareholders by CommWorld and DTI in
connection herewith, do not contain an untrue statement of a material fact or
omit to state a material fact necessary to make the statements herein and
therein, in light of the circumstances under which they were made, not
misleading.
4.25 PROHIBITED ACTIVITIES. Except as set forth on Schedule 4.25
to CommWorld Disclosure Letter, CommWorld has not, between January 31, 2000 and
the date hereof, taken any of the actions (Prohibited Activities) set forth in
Section 6.3.
4.26 NO CONFLICTS. The execution, delivery and performance of
this Agreement by CommWorld and the consummation by CommWorld of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any term or provision of, or (with or without notice or passage of
time, or both) constitute a default under, any indenture, mortgage, deed of
trust, trust (constructive and other), loan agreement or other agreement or
instrument to which CommWorld is a party or violate the provisions of any
statute, or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over CommWorld or the property of
CommWorld.
4.27 CERTAIN BUSINESS RELATIONSHIPS WITH COMMWORLD. Except as
listed in Schedule 4.27, no current officer or director of CommWorld has been
involved in any business arrangement or relationship with CommWorld since May 1,
1997, and none of the officers or directors, nor any relative of any officer or
director or affiliate of an officer or director of CommWorld, owns any asset,
tangible or intangible, which is used in CommWorld's operations.
4.28 AUTHORIZATION. The representatives of CommWorld and DTI
executing this Agreement have the authority to enter into and bind CommWorld and
DTI to the terms of this Agreement and CommWorld and DTI have the full legal
right, power and authority to enter into
-29-
<PAGE> 168
this Agreement and the Merger, subject to the approval of the shareholders of
CommWorld as provided in Sections 8.4 and 9.4.
5. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS CONCERNING THE
TRANSACTION.
Each of the Shareholders represents and warrants to CommWorld and
DTI, as to himself, that all of the following representations and warranties in
this Section 5 are true at the date of this Agreement and shall be true at the
time of Closing. As used in this Section 5, the Shareholders means all holders
of the BPI Stock.
5.1 AUTHORIZATION. All action on the part of the Shareholder
necessary for the authorization, execution and delivery of this Agreement and
the performance of all obligations of the Shareholder hereunder has been taken,
and this Agreement constitutes a valid and legally binding obligation of the
Shareholder, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
5.2 TITLE TO THE SHARES. The Shareholder owns, and is
transferring to CommWorld at the Closing, good, valid and marketable title to
the number of Shares set forth opposite the name of the Shareholder in Section
1.1 free and clear of all liens, claims, options and encumbrances whatsoever.
There are no outstanding options, warrants or rights to purchase or acquire any
of the Shares of the Shareholder or any of the capital stock of BPI.
5.3 NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Shareholder and the consummation by the Shareholder of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any term or provision of, or (with or without notice or passage of
time, or both) constitute a default under, any indenture, mortgage, deed of
trust, trust (constructive and other), loan agreement or other agreement or
instrument to which the Shareholder is a party or violate the provisions of any
statute, or any order, rule or regulation of any governmental body or agency or
instrumentality thereof, or any order, writ, injunction or decree of any court
or any arbitrator, having jurisdiction over the Shareholder or the property of
the Shareholder.
5.4 PURCHASE ENTIRELY FOR HIS OWN ACCOUNT. The CommWorld
securities will be acquired for investment for the Shareholder's own account,
not as a nominee or agent, and not with the view to the resale or distribution
of any part thereof, and the Shareholder has no present intention of selling,
granting any participation in, or otherwise distributing CommWorld securities.
The Shareholder has no contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person with respect to
any of the securities of CommWorld. Notwithstanding the foregoing, it is
understood that the Shareholders may transfer a part of the CommWorld securities
to be received by them in the Merger to CeBourn, Ltd., provided that CeBourn,
Ltd. executes and delivers a representation of investment intent letter to
CommWorld which includes the representations and warranties in this Section 5.
-30-
<PAGE> 169
5.5 DISCLOSURE OF INFORMATION. Shareholder has received and had
the opportunity to review the reports filed by CommWorld with the Securities and
Exchange Commission and has had the opportunity to ask questions of, and receive
answers from, representatives of CommWorld to obtain additional information
regarding CommWorld.
5.6 RESTRICTIONS ON TRANSFER.
(i) The securities of CommWorld that the Shareholder will
acquire have not been registered under the Securities Act of 1933, as amended
(the "Securities Act") and, accordingly, such securities will not be fully
transferable except as permitted under various exemptions contained in the
Securities Act or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. The Shareholder must bear the economic risk
of his investment in such securities for an indefinite period of time as such
securities have not been registered under the Securities Act and therefore
cannot be sold unless they are subsequently registered or an exemption from
registration is available. The Shareholder is an Accredited Investor as defined
under Rule 501(a) of the Securities Act and is acquiring the securities for
investment purposes only, for his own account, and not as nominee or agent for
any other person, and not with the view to, or for resale in connection with,
any distribution thereof within the meaning of the Securities Act.
(ii) The certificates evidencing the securities of CommWorld
he will acquire pursuant to this Agreement, and each instrument or certificate
issued in transfer thereof, will bear substantially the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE
BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO
THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. IF THE SECURITIES ARE TO BE SOLD OR
TRANSFERRED PURSUANT TO AN EXEMPTION THE CORPORATION MAY REQUIRE
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND
WILL NOT VIOLATE SUCH ACT OR ANY OTHER APPLICABLE SECURITIES
LAWS.
(iii) Shareholder understands a notation on the records of
CommWorld and its transfer agent will be made in order to implement the
restrictions on transfer set forth in this Section 5.6.
-31-
<PAGE> 170
6. COVENANTS OF BPI AND THE SHAREHOLDERS PRIOR TO CLOSING.
6.1 ACCESS AND COOPERATION; DUE DILIGENCE. Between the date of
this Agreement and the Closing Date, BPI and the Shareholders will afford to the
officers and authorized representatives of CommWorld and DTI access to all of
the sites, properties, books and records of BPI and will furnish CommWorld and
DTI such additional financial and operating data and other information as to the
business and properties of BPI as CommWorld and DTI may from time to time
reasonably request. The Shareholders and BPI will cooperate with CommWorld and
DTI, their representatives, auditors and counsel in the preparation of any
documents or other material which may be required in connection with any
documents or materials required by this Agreement or necessary to complete the
transactions contemplated hereunder
6.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Closing, BPI will, except as set forth on Schedule 6.2 to the
BPI Disclosure Letter:
(i) Carry on its business in substantially the same manner
as it has heretofore and not introduce any material new method of management,
operation or accounting;
(ii) Maintain its properties and facilities in as good
working order and condition as at present, ordinary wear and tear excepted;
(iii) Perform in all material respects all of its
obligations under agreements relating to or affecting its respective assets,
properties or rights;
(iv) Use all reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
(v) Use its reasonable efforts to maintain and preserve its
business organization intact, retain its present key employees and maintain its
relationships with suppliers, customers and others having business relations
with it;
(vi) Maintain compliance with all material permits, laws,
rules and regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities;
(vii) Maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments, without the knowledge and
consent of CommWorld (which consent shall not be unreasonably withheld),
provided that debt and/or lease instruments may be replaced without the consent
of CommWorld if such replacement instruments are on terms at least as favorable
to BPI as the instruments being replaced; and
(viii) Maintain or reduce present salaries and commission
levels for all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with past
practices, except that a bonus may be paid by BPI
-32-
<PAGE> 171
to Michael G. St. John and/or Anton C. St. John on or about April 30, 2000 for
his services to BPI during the fiscal year ending April 30, 2000; however, the
bonus may not be in an amount which causes (1) cash or cash equivalent assets
(as those terms are recognized in accordance with GAAP) to be less than
$1,000,000, or (2) BPI's stockholders' equity (as that term is recognized in
accordance with GAAP) to be less than $1,000.
6.3 PROHIBITED ACTIVITIES. Between the date hereof and the
Closing Date, BPI will not, without the prior written consent of CommWorld,
engage in any of the following (the "Prohibited Activities"):
(i) Make any change in its Charter Documents;
(ii) Issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any kind other
than in connection with the exercise of options or warrants listed in Schedule
3.3 to the BPI Disclosure Letter;
(iii) Declare or pay any dividend, or make any distribution
in respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock;
(iv) Except as listed in Schedule 6.3, enter into any
contract or commitment or incur or agree to incur any liability or make any
capital expenditures, except if it is in the normal course of business
(consistent with past practice) and involves an amount not in excess of $50,000;
(v) Create, assume or permit to exist any mortgage, pledge
or other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of $50,000 necessary or desirable for the conduct of the businesses of
BPI, (2) (A) liens for taxes either not yet due or being contested in good faith
and by appropriate proceedings (and for which contested taxes adequate reserves
have been established and are being maintained) or (B) materialmen's, mechanics'
or other like liens arising in the ordinary course of business (the liens set
forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens
set forth on Schedule 3.7 and/or 3.11 to the BPI Disclosure Letter;
(vi) Sell, assign, lease or otherwise transfer or dispose of
any property or equipment except in the normal course of business;
(vii) Negotiate for the acquisition of any business or the
start-up of any new business;
(viii) Merge or consolidate or agree to merge or consolidate
with or into any other corporation;
-33-
<PAGE> 172
(ix) Waive any material rights or claims of BPI, provided
that BPI may negotiate and adjust bills in the course of good faith disputes
with customers in a manner consistent with past practice;
(x) Commit a breach or amend or terminate any Material
Documents or right of BPI; or
(xi) Enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
6.4 NO SHOP. Neither BPI, nor any agent, officer, director,
trustee or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate the submission of
proposals or offers from any person for; (ii) participate in any discussions
pertaining to; or (iii) furnish any information to any person other than
CommWorld or their authorized agents relating to, any acquisition or purchase of
all or a material amount of the assets of, or any equity interest in, BPI or a
merger, consolidation or business combination of BPI.
6.5 NOTIFICATION OF CERTAIN MATTERS. BPI and the Shareholders
shall give prompt notice to CommWorld and DTI of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of BPI contained herein or in the
BPI Disclosure Letter to be untrue or inaccurate in any material respect at or
prior to the Closing and (ii) any material failure of BPI to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
such person hereunder. The delivery of any notice pursuant to this Section 6.5
shall not be deemed to (i) modify the representations or warranties of the party
delivering such notice, (ii) modify the conditions set forth in Sections 7 and
8, or (iii) limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
6.6 FINAL FINANCIAL STATEMENTS. The Shareholders shall provide to
CommWorld to the Closing Date, the unaudited balance sheets of BPI as of the end
of all months following the Balance Sheet Date, and the unaudited statement of
income and comprehensive income and cash flows for all months ended after the
Balance Sheet Date, disclosing no material adverse change in the financial
condition or the results of its operations from the financial statements as of
the Balance Sheet Date. Such financial statements shall have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
indicated (except as noted therein). Except as noted in such financial
statements, all of such financial statements will present fairly the results of
operations for the periods indicated therein.
-34-
<PAGE> 173
7. COVENANTS OF COMMWORLD AND DTI PRIOR TO CLOSING.
7.1 ACCESS AND COOPERATION; DUE DILIGENCE. Between the date of
this Agreement and the Closing Date, each of CommWorld and DTI will afford to
the authorized representatives of BPI and the Shareholders access to all of the
sites, properties, books and records of CommWorld and DTI and will furnish BPI
and the Shareholders such additional financial and operating data and other
information as to the business and properties of CommWorld and DTI as BPI and
the Shareholders may from time to time reasonably request. Each of CommWorld and
DTI will cooperate with BPI and the Shareholders, their representatives,
auditors and counsel in the preparation of any documents or other material which
may be required in connection with any documents or materials required by this
Agreement or necessary to complete the transactions contemplated hereunder
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Closing, each of CommWorld and DTI will, except as set forth
on Schedule 7.2 to the CommWorld Disclosure Letter:
(i) Carry on its business in substantially the same manner
as it has heretofore and not introduce any material new method of management,
operation or accounting;
(ii) Maintain its respective properties and facilities in as
good working order and condition as at present, ordinary wear and tear excepted;
(iii) Perform in all material respects all of its
obligations under agreements relating to or affecting its respective assets,
properties or rights;
(iv) Use all reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
(v) Use its reasonable efforts to maintain and preserve its
business organization intact, retain its present key employees and maintain its
relationships with suppliers, customers and others having business relations
with it;
(vi) Maintain compliance with all material permits, laws,
rules and regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities;
(vii) Maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments, without the knowledge and
consent of the Shareholders (which consent shall not be unreasonably withheld),
provided that debt and/or lease instruments may be replaced without the consent
of the Shareholders if such replacement instruments are on terms at least as
favorable to CommWorld as the instruments being replaced; and
-35-
<PAGE> 174
(viii) Maintain or reduce present salaries and commission
levels for all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with past
practices.
7.3 PROHIBITED ACTIVITIES. Between the date hereof and the
Closing Date, each of CommWorld and DTI will not, without the prior written
consent of Michael G. St. John, engage in any of the following (the "Prohibited
Activities"):
(i) Make any change in its Charter Documents;
(ii) Issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any kind other
than in connection with the exercise of options or warrants listed in Schedule
4.3 to the CommWorld Disclosure Letter;
(iii) Declare or pay any dividend, or make any distribution
in respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock;
(iv) Except as listed in Schedule 7.3, enter into any
contract or commitment or incur or agree to incur any liability or make any
capital expenditures, except if it is in the normal course of business
(consistent with past practice) and involves an amount not in excess of $50,000;
(v) Create, assume or permit to exist any mortgage, pledge
or other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of $50,000 necessary or desirable for the conduct of the businesses of
CommWorld, (2) (A) liens for taxes either not yet due or being contested in good
faith and by appropriate proceedings (and for which contested taxes adequate
reserves have been established and are being maintained) or (B) materialmen's,
mechanics' or other like liens arising in the ordinary course of business (the
liens set forth in clause (2) being referred to herein as "Statutory Liens"), or
(3) liens set forth on Schedule 4.7 and/or 4.11 to the CommWorld Disclosure
Letter;
(vi) Sell, assign, lease or otherwise transfer or dispose of
any property or equipment except in the normal course of business;
(vii) Negotiate for the acquisition of any business or the
start-up of any new business;
(viii) Merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(ix) Waive any material rights or claims of CommWorld,
provided that CommWorld may negotiate and adjust bills in the course of good
faith disputes with customers in a manner consistent with past practice;
-36-
<PAGE> 175
(x) Commit a breach or amend or terminate any Material
Documents or right of CommWorld; or
(xi) Enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
7.4 NO SHOP. Neither CommWorld, nor any agent, officer, director,
trustee or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate the submission of
proposals or offers from any person for; (ii) participate in any discussions
pertaining to; or (iii) furnish any information to any person other than the
Shareholders or their authorized agents relating to, any acquisition or purchase
of all or a material amount of the assets of, or a majority equity interest in,
CommWorld or a merger, consolidation or business combination of CommWorld.
7.5 NOTIFICATION OF CERTAIN MATTERS. CommWorld and DTI shall give
prompt notice to BPI and the Shareholders of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of CommWorld contained herein or
in the CommWorld Disclosure Letter to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of CommWorld to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by such person hereunder. The delivery of any notice pursuant to
this Section 7.5 shall not be deemed to (i) modify the representations or
warranties of the party delivering such notice, (ii) modify the conditions set
forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
7.6 FINAL FINANCIAL STATEMENTS. CommWorld shall provide to BPI
and the Shareholders to the Closing Date, the unaudited consolidated balance
sheets of CommWorld as of the end of all months following the Balance Sheet
Date, and the unaudited consolidated statements of income and cash flows for all
months ended after the Balance Sheet Date, disclosing no material adverse change
in the financial condition or the results of its operations from the financial
statements as of the Balance Sheet Date. Such financial statements shall have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods indicated (except as noted therein). Except as noted in such
financial statements, all of such financial statements will present fairly the
results of operations for the periods indicated therein.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF COMMWORLD AND DTI.
The obligations of CommWorld and DTI with respect to actions to
be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions.
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS.
All representations and warranties of BPI and the Shareholders contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date as though such representations and
-37-
<PAGE> 176
warranties had been made as of that time; all the terms, covenants and
conditions of this Agreement to be complied with and performed by BPI and the
Shareholders on or before the Closing Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date, and signed by BPI and the Shareholders shall have been
delivered to CommWorld.
8.2 SATISFACTION. All actions, proceedings, instruments and
documents required to carry out this Agreement or incidental hereto and all
other related legal matters shall be reasonably satisfactory to CommWorld and
its counsel.
8.3 NO LITIGATION. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions contemplated hereunder and no governmental
agency or body shall have taken any other action or made any request of BPI or
the Shareholders as a result of which CommWorld deems it inadvisable to proceed
with the transactions hereunder.
8.4 CONSENTS AND APPROVALS. This Agreement shall have been duly
adopted by the shareholders of CommWorld. All necessary consents and approvals
as listed in Schedule 3.19 shall have been obtained. All necessary consent of
and filings with any governmental authority or agency relating to the
consummation of the transaction contemplated herein shall have been obtained and
made and no action or proceeding shall have been instituted or threatened to
restrain or prohibit the transactions hereunder and no governmental agency or
body shall have taken any other action or made any request of BPI or the
Shareholders as a result of which CommWorld deems it inadvisable to proceed with
the transactions hereunder.
8.5 GOOD STANDING CERTIFICATES. The Shareholders shall have
delivered to CommWorld a certificate, dated as of a date no later than ten days
prior to the Closing Date, duly issued by the Secretary of State of BPI's state
of incorporation that BPI is in good standing and that all state franchise
and/or income tax returns and taxes for each for all periods prior to the
Closing have been filed and paid.
8.6 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall
have occurred with respect to BPI which would constitute a Material Adverse
Effect.
8.7 OFFICER'S CERTIFICATE. CommWorld shall have received a
certificate or certificates, dated the Closing Date and signed by the President
of BPI, certifying the truth and correctness of attached copies of its Articles
of Incorporation (including amendments thereto) and Bylaws (including amendments
thereto).
8.8 INCUMBENCY CERTIFICATE AND OTHER DOCUMENTS. CommWorld shall
have received an incumbency certificate or certificates, dated the Closing Date
and signed by the Secretary of BPI certifying the names, titles and signatures
of the officers authorized to execute the documents referred to in this Section
8 and such additional supporting documentation and other information with
respect to the transactions contemplated hereunder as CommWorld or their counsel
may reasonably request.
-38-
<PAGE> 177
8.9 OPINION OF COUNSEL. CommWorld shall have received an opinion
from counsel for BPI and the Shareholders, dated the Closing Date, in form and
substance reasonably satisfactory to counsel for CommWorld.
8.10 EMPLOYMENT AGREEMENTS . At the Closing, each of Michael G.
St. John, Lionel Brown and James Ciccarelli will enter into a Non-Competition
and Employment Agreement satisfactory to CommWorld.
8.11 RELEASE OF OBLIGATIONS AND STOCK OPTIONS. CommWorld shall
have obtained a release of each of the officers and directors of BPI related to
all matters involving BPI, as well as a cancellation of any stock options held
by them to purchase shares of BPI common stock.
8.12 FAIRNESS OPINION. CommWorld shall have received the fairness
opinion of Stifel, Nicolaus & Company, Incorporated as to the fairness of the
transactions contemplated hereby from a financial point of view.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF BPI AND THE SHAREHOLDERS.
The obligations of BPI and the Shareholders with respect to
actions to be taken on the Closing Date are subject to the satisfaction or
waiver on or prior to the Closing Date of all of the following conditions.
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS.
All the representations and warranties of CommWorld and DTI contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of that time; all the terms, covenants and conditions of this
Agreement to be complied with and performed by CommWorld and DTI on or before
the Closing Date shall have been duly complied with and performed in all
material respects; and certificates to the foregoing effect dated the Closing
Date, and signed by CommWorld and DTI shall have been delivered to BPI.
9.2 SATISFACTION. All actions, proceedings, instruments and
documents required to carry out this Agreement or incidental hereto and all
other related legal matters shall be reasonably satisfactory to the Shareholders
and their counsel.
9.3 NO LITIGATION. No action or proceeding before a court or any
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the transactions hereunder and no governmental agency or
body shall have taken any other action or made any request of CommWorld as a
result of which BPI and the Shareholders deem it inadvisable to proceed with the
transactions hereunder.
9.4 CONSENTS AND APPROVALS. This Agreement shall have been duly
adopted by the stockholders of CommWorld. All necessary consents and approvals
as listed in Schedule 4.19 shall have been obtained. All necessary consent of
and filings with any governmental authority or agency relating to the
consummation of the transaction contemplated herein shall have been
-39-
<PAGE> 178
obtained and made and no action or proceeding shall have been instituted or
threatened to restrain or prohibit the transactions hereunder and no
governmental agency or body shall have taken any other action or made any
request of CommWorld as a result of which the Shareholders deem it inadvisable
to proceed with the transactions hereunder.
9.5 GOOD STANDING CERTIFICATES. CommWorld and DTI shall have
delivered to BPI and the Shareholders certificates, dated as of the date no
later than 10 days prior to the Closing Date, duly issued by the Secretary of
State of Colorado that each of CommWorld and DTI is in good standing.
9.6 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall
have occurred with respect to CommWorld or DTI which would constitute a Material
Adverse Effect.
9.7 OFFICER'S CERTIFICATE. BPI and the Shareholders shall have
received a certificate or certificates, dated the Closing Date and signed by the
President of CommWorld, certifying the truth and correctness of attached copies
of CommWorld's Articles of Incorporation (including amendments thereto), and
Bylaws (including amendments thereto). BPI and the Shareholders shall have
received a certificate or certificates, dated the Closing Date and signed by the
President of DTI, certifying the truth and correctness of attached copies of
DTI's Articles of Incorporation (including amendments thereto), and Bylaws
(including amendments thereto).
9.8 INCUMBENCY CERTIFICATE AND OTHER DOCUMENTS. BPI and the
Shareholders shall have received an incumbency certificate or certificates,
dated the Closing Date, and signed by the Secretary of CommWorld, certifying the
names, titles and signatures of the officers authorized to execute the documents
referred to in this Section 9 and such additional supporting documentation and
other information with respect to the transactions contemplated hereunder as BPI
and the Shareholders or their counsel may reasonably request. 9.9 OPINION OF
COUNSEL. BPI shall have received an opinion from counsel for CommWorld and DTI,
dated the Closing Date, in form and substance reasonably satisfactory to counsel
for BPI.
9.10 EMPLOYMENT AGREEMENTS . At the Closing, each of Michael G.
St. John, Lionel Brown and James Ciccarelli will enter into a Non-Competition
and Employment Agreement satisfactory to the Shareholders.
9.11 RELEASE OF OBLIGATIONS. BPI and the Shareholders shall have
obtained a release of each of the officers and directors related to all matters
involving CommWorld except for obligations pursuant to stock option agreements.
9.12 RELEASE OF OBLIGATIONS AND STOCK OPTIONS. CommWorld shall
have obtained a release of each of the officers and directors of BPI related to
all matters involving BPI, as well as a cancellation of any stock options held
by them to purchase shares of BPI common stock.
10. ADDITIONAL AGREEMENTS.
-40-
<PAGE> 179
10.1 REASONABLE BEST EFFORTS. Subject to the terms and conditions
of this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement as soon as
practicable after the date hereof. CommWorld, shall promptly prepare and file
with the Securities and Exchange Commission a proxy statement (the "Proxy
Statement") and CommWorld will take, in accordance with applicable law and its
Articles of Incorporation and Bylaws, all action necessary to convene a meeting
of its shareholders to consider and vote upon the adoption of this Agreement.
BPI and the Shareholders shall cooperate with CommWorld in the preparation of
the Proxy Statement, including providing such information about BPI and the
Shareholders and their plans with respect to CommWorld after the Merger as may
be reasonably requested by CommWorld.
10.2 COMPLETION OF THE DISCLOSURE LETTERS. BPI and the
Shareholders shall use their reasonable best efforts to complete and deliver to
CommWorld and DTI the BPI Disclosure Letter by March 17, 2000. CommWorld and DTI
shall use their reasonable best efforts to complete and deliver to BPI and the
Shareholders the CommWorld Disclosure letter by March 17, 2000.
10.3 PUBLIC ANNOUNCEMENTS. The initial press release of CommWorld
with respect to this Agreement shall be reviewed by BPI and the Shareholders.
Thereafter, CommWorld shall consult with BPI and the Shareholders prior to
issuing any press releases or otherwise making public announcements with respect
to this Agreement and the transactions contemplated by this Agreement, except as
may be required by law.
10.4 FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, common, proper or advisable under applicable legal
requirements, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, CommWorld, DTI, BPI
and the Shareholders, as the case may be, shall take or cause to be taken all
such necessary or convenient action and execute, and deliver and file, or cause
to be executed, delivered and filed, all necessary or convenient documentation.
10.5 TAXES. The Shareholders shall be solely responsible for the
payment of any and all taxes arising as a result of the purchase and sale of the
securities pursuant to this Agreement. In addition, the Shareholders shall be
solely responsible for the payment of any taxes of BPI with respect to taxable
periods that end on or prior to the Closing Date and the Shareholders covenant
to timely pay any taxes when due. In the case of taxable periods beginning prior
to and ending after the Closing date, the Shareholders covenant to reimburse
CommWorld for their pro-rata share of such taxes which shall be calculated (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.
-41-
<PAGE> 180
11. TERMINATION OF AGREEMENT.
11.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date solely:
(i) By mutual consent of all of the parties hereto;
(ii) By the Shareholders and BPI, on the one hand, or by
CommWorld and DTI on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by June
30, 2000, unless the failure of such transactions to be consummated is due to
the failure of the party seeking to terminate this Agreement to perform any of
its obligations under this Agreement to the extent required to be performed by
it prior to or on the Closing Date; or
(iii) By the Shareholders and BPI, on the one hand, or by
CommWorld and DTI, on the other hand, if a material breach of the
representations or a material breach or default shall be made by the other party
in the observance or in the due and timely performance of any of the covenants
or agreements contained herein, and the curing of such default shall not have
been made on or before the Closing Date or by the Shareholders, if the
conditions set forth in Section 8 hereof have not been satisfied or waived as of
the Closing Date, or by CommWorld, if the conditions set forth in Section 7
hereof have not been satisfied or waived as of the Closing Date.
(iv) By the Shareholders and BPI if the CommWorld Disclosure
Letter shall not have been completed and delivered to BPI and the Shareholders
on or before March 17, 2000, or if the CommWorld Disclosure Letter contains
information which causes BPI and the Shareholders to determine it would be
inadvisable to proceed with the transactions hereunder.
(v) By CommWorld and DTI if the BPI Disclosure Letter shall
not have been completed and delivered to CommWorld and DTI on or before March
17, 2000, or if the BPI Disclosure Letter contains information which causes
CommWorld and DTI to determine it would be inadvisable to proceed with the
transactions hereunder.
11.2 LIABILITIES IN EVENT OF TERMINATION. Termination of this
Agreement will in no way limit any obligation or liability of any party based on
or arising from a breach or default by such party with respect to any of its
representations, warranties, covenants or agreements contained in this Agreement
or in the Schedules delivered by such party, including, but not limited to,
legal and audit costs and out of pocket expenses.
-42-
<PAGE> 181
12. INDEMNIFICATION.
12.1 INDEMNIFICATION BY THE SHAREHOLDERS. Each of the
Shareholders, jointly and severally, agree to indemnify and hold harmless
CommWorld and its officers, directors, agents and representatives against any
and all losses, claims, damages, liabilities, costs and expenses (including but
not limited to, attorneys' fees and other expenses of investigation and defense
of any claims or actions), directly or indirectly resulting from, relating to or
arising out of: (i) any breach of any covenant, agreement, warranty or
representation of the Shareholders contained in this Agreement, (ii) any
misstatement of a material fact contained in this Agreement or in any of the
documents executed in connection with the transactions contemplated by this
Agreement, including the Proxy Statement, but only if the misstatement relates
to information concerning the Shareholders or BPI's operations, or (iii) the
omission to state any fact necessary to make the statements contained in this
Agreement or in any of the documents executed in connection with the
transactions contemplated by this Agreement not misleading, but only if the
omission relates to information concerning the Shareholders or BPI's operations.
12.2 INDEMNIFICATION BY COMMWORLD. CommWorld agrees to indemnify
and hold harmless the Shareholders against any and all losses, claims, damages,
liabilities, costs and expenses (including but not limited to, attorneys' fees
and other expenses of investigation and defense of any claims or actions)
directly or indirectly resulting from, relating to or arising out of: (i) any
breach of any covenant, agreement, warranty or representation of CommWorld
contained in this Agreement, (ii) any misstatement of a material fact contained
in this Agreement or in any of the documents executed in connection with the
transactions contemplated by this Agreement, including the Proxy Statement, but
only if the misstatement relates to information concerning CommWorld or its
operations, or (iii) the omission to state any fact necessary to make the
statements contained in this Agreement or in any of the documents executed in
connection with the transactions contemplated by this Agreement not misleading,
but only if the omission relates to information concerning CommWorld or its
operations.
12.3 INDEMNIFICATION NOTICE. Should any party (the "Indemnified
Party") suffer any loss, damage or expense for which another party (the
"Indemnifying Party") is obligated to indemnify and hold such Indemnified Party
harmless pursuant to this Section 12 of this Agreement, the following shall
apply: If an Indemnified Party intends to exercise its right to indemnification
provided in this Section 12, such Indemnified Party shall notify each
Indemnifying Party in writing of such Indemnified Party's intention to do so and
the facts or circumstances giving rise to the claim (the "Indemnification
Claim"). An Indemnification Claim, at the option of the Indemnified Party, may
be asserted as soon as any situation, event or occurrence has been noticed by
the Indemnified Party regardless of whether actual harm has been suffered or
out-of-pocket expenses incurred. During the period of 15 days after notice by
the Indemnified Party, each Indemnifying Party shall be entitled to cure the
defect or situation giving rise to the Indemnification Claim to the satisfaction
of the Indemnified Party. If the Indemnifying Parties are unwilling or unable to
cure the defect giving rise to the Indemnification Claim during the 15-day
period, the Indemnified Party shall thereafter be entitled to indemnification as
provided in this Section 12.
12.4 MATTERS INVOLVING THIRD PARTIES. If any third party shall
notify any Indemnified Party with respect to any matter (a "Third Party Claim")
which may give rise to a claim
-43-
<PAGE> 182
for indemnification against any Indemnifying Party under this Section 12, then
the Indemnified Party shall promptly notify each Indemnifying Party thereof in
writing. Provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced. Any Indemnifying Party will have the right to
defend the Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (i) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from any adverse
consequences the Indemnified Party may suffer resulting from or caused by the
Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, and (iii) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently. The Indemnifying Party shall not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnified Party, which consent shall
not be withheld unreasonably.
13. GENERAL PROVISIONS.
13.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations and warranties of the parties hereto contained in this Agreement
or in any writing delivered pursuant hereto or at the Closing shall survive the
execution and delivery of this Agreement and the Closing and the consummation of
the transactions contemplated hereby (and any examination or investigation by or
on behalf of any party hereto) until the date three years after the Closing Date
except for claims in respect thereof pending at such time, which shall survive
until finally resolved or settled). No action may be commenced with respect to
any representation, warranty, covenant or agreement in this Agreement, or in any
writing delivered pursuant hereto, unless written notice, setting forth in
reasonable detail the claimed breach thereof, shall be delivered pursuant to
Section 13.7 to the party or parties against whom liability for the claimed
breach is charged on or before the termination of the survival period specified
in Section 13.1 for such representation, warranty, covenant or agreement.
13.2 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto, in whole or in part (whether by operation of law or otherwise), without
the prior written consent of the other parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
13.3 ENTIRE AGREEMENT. This Agreement and any attachments hereto,
the BPI Disclosure letter and the Schedules thereto (including the schedules,
exhibits and annexes attached hereto and thereto), the CommWorld Disclosure
Letter and the Schedules thereto (including the schedules, exhibits and annexes
attached hereto and thereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the parties and
supersede any prior agreement and understanding relating to the subject matter
of this Agreement. This Agreement,
-44-
<PAGE> 183
upon execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only by
a written instrument executed by all parties.
13.4 COUNTERPARTS. This Agreement may be executed simultaneously
in counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
13.5 BROKERS AND AGENTS. Each party represents and warrants that
it employed no broker or agent in connection with this transaction, except as
provided in Schedule 13.5.
13.6 EXPENSES. Except as otherwise specifically provided herein,
each party to this Agreement shall bear its own direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees and fees of any brokers, finders
or similar agents; provided, however, that the fees and expenses of Stifel,
Nicolaus & Company, Incorporated in rendering an opinion as to the fairness of
the transactions contemplated hereby, shall be borne equally by CommWorld and
the Shareholders.
13.7 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed duly given (i) on the date of delivery
if delivered personally, or by telecopy or facsimile upon confirmation of
receipt, (ii) on the first business day following the date of dispatch if
delivered by a recognized next-day courier service, or (iii) on the 5th business
day following the date of mailing if delivered by registered or certified mail,
return receipt requested, postage prepaid. All notices hereunder shall be
delivered as set forth below, or pursuant to such other instructions as may be
designated in writing by the party to receive such notice:
(a) If to CommWorld or DTI:
Communications World International, Inc.
7315 South Revere Parkway, #602
Englewood, Colorado 80112
Facsimile: (303) 721-8299
Attention: Jim Ciccarelli, CEO
with a copy to:
Patton Boggs, L.L.P.
1660 Lincoln Street, Suite 1900
Denver, Colorado 80264
Facsimile No.: (303) 894-9239
Attention: Robert M. Bearman, Esq.
-45-
<PAGE> 184
(b) If to BPI or the Shareholders:
Michael G. St. John
c/o Business Products, Inc.
8136 South Grant Way
Littleton, Colorado 80122
Facsimile: _______________
with a copy to:
Rothgerber Johnson & Lyons LLP
1200 17th Street, Suite 3000
Denver, Colorado 80202
Facsimile: (303) 623-9222
Attention: Marc J. Musyl, Esq.
13.8 GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of Colorado.
13.9 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms. It is accordingly agreed that
the parties shall be entitled to specific performance of the terms hereof, this
being in addition to any other remedy to which they are entitled at law or in
equity.
13.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise
provided herein, no delay of or omission in the exercise of any right, power or
remedy accruing to any party as a result of any breach or default by any other
party under this Agreement shall impair any such right, power or remedy, nor
shall it be construed as a waiver of or acquiescence in any such breach or
default, or of any similar breach or default occurring later; nor shall any
waiver of any single breach or default be deemed a waiver of any other breach or
default occurring before or after that waiver.
13.11 TIME. Time is of the essence with respect to this
Agreement.
13.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
13.13 REMEDIES CUMULATIVE. No right, remedy or election given by
any term of this Agreement shall be deemed exclusive, but each shall be
cumulative with all other rights, remedies and elections available at law or in
equity.
-46-
<PAGE> 185
13.14 CAPTIONS; CONSTRUCTION. The headings of this Agreement are
inserted for convenience only, and shall not constitute a part of this Agreement
or be used to construe or interpret any provision hereof. This Agreement has
been fully reviewed and negotiated by the parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed strictly
against any party under any rule of construction or otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
COMMUNICATIONS WORLD THE SHAREHOLDERS
INTERNATIONAL, INC.
By:
--------------------------- ---------------------------
Anton C. St. John
Name:
Title:
---------------------------
Michael G. St. John
DIGITAL TELECOM, INCORPORATED BUSINESS PRODUCTS, INC.
By: By:
--------------------------- ------------------------
Name: Name:
Title: Title:
-47-
<PAGE> 186
FIRST AMENDMENT
TO THE
AGREEMENT
This First Amendment to the Agreement (this "First Amendment"), dated
as of April 3, 2000, among Communications World International, Inc., a Colorado
corporation ("CommWorld"), Digital Telecom, Incorporated, a Colorado corporation
("DTI"), Business Products, Inc., a Colorado corporation ("BPI"), Anton C. St.
John and Michael G. St. John (each individually a "Shareholder" and collectively
the "Shareholders").
RECITALS
A. The parties hereto are also parties to that certain Agreement dated
March 10, 2000 (the "Merger Agreement").
B. The parties hereto desire to amend the Merger Agreement to reflect
the completion of the BPI Disclosure Letter and the CommWorld Disclosure Letter,
and to correct the typographical errors in Schedule 1.6.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, and intending to be legally bound
hereby, the parties agree as follows:
1. Capitalized terms used but not otherwise defined herein shall have
the meanings assigned to such terms in the Merger Agreement.
2. CommWorld and DTI acknowledge timely receipt of the BPI Disclosure
Letter referred to in Sections 3, 10.2 and 11.1(v) of the Merger Agreement.
3. BPI and the Shareholders acknowledge timely receipt of the CommWorld
Disclosure Letter referred to in Sections 4, 10.2 and 11.1(iv) of the Merger
Agreement.
4. The first sentence of Section 10.5 of the Merger Agreement is hereby
amended and restated as follows:
10.5 TAXES. Each Shareholder shall be solely responsible for the
payment of any and all taxes which may be due in his or its capacity
as a Shareholder as a result of the transactions contemplated pursuant
to this Agreement.
5. Schedule 1.6 to the Merger Agreement shall be deleted and replaced
in its entirety with amended Schedule 1.6 attached hereto.
6. Except where inconsistent with the express terms of this First
Amendment, all provisions of the Merger Agreement as originally entered into
shall remain in full force and effect.
<PAGE> 187
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the day and year first above written.
COMMUNICATIONS WORLD THE SHAREHOLDERS
INTERNATIONAL, INC.
By:
-------------------------- ------------------------------
Name: Anton C. St. John
Title:
Michael G. St. John
DIGITAL TELECOM, INCORPORATED BUSINESS PRODUCTS, INC.
By: By:
-------------------------- ------------------------------
Name: Name:
Title: Title:
-2-
<PAGE> 188
AMENDED SCHEDULE 1.6
The holders of BPI Stock shall receive securities of CommWorld, as
follows:
<TABLE>
<CAPTION>
Shares of Warrants to Purchase
Number of Shares CommWorld Stock CommWorld Stock to
Name of BPI Stock to be Received be Received
- - ----------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>
Anton C. St. John 670 5,628,000 -0-
Michael G. St. John 810 6,804,000 3,000,000
Elizabeth A. St. John, 20 168,000 -0-
Trustee of Anton C
St. John Irrevocable
Life Insurance Trust
(as to Section 5 only)
----------------- --------------- --------------------
1,500 12,600,000 3,000,000
</TABLE>
The Warrants will be exercisable for a four year term at an exercise
price of $1.50 per share commencing on the Closing Date, subject to the
following benchmarks:
<TABLE>
<CAPTION>
Number of Shares Market Trading Price*
---------------- ---------------------
<S> <C>
1,000,000 $3.50
1,000,000 4.50
1,000,000 5.50
</TABLE>
* Market Trading Price refers to a period of 10 consecutive trading days in
which the closing sale price of the CommWorld common stock equals or exceeds
the price set forth in the table above.
<PAGE> 189
[STIFEL, NICOLAUS LETTERHEAD]
ANNEX B
**DRAFT**
PRIVILEGED AND CONFIDENTIAL
March 10, 2000
Confidential
The Board of Directors
Communications World International, Inc.
7388 S. Revere Parkway #1001
Englewood, CO 80112
To the Members of the Board of Directors:
You have requested our opinion to the effect that the Proposed
Transaction (as described below) is fair, from a financial point of view, to the
shareholders of Communications World International, Inc. ("CommWorld"). Pursuant
to the Agreement and Plan of Merger, dated March 10, 2000, by and among
CommWorld and Business Products Inc. ("BPI"), whereby CommWorld will acquire for
stock all of the outstanding shares of BPI Common Stock and BPI will merge with
and into a subsidiary of CommWorld (the "Merger"). The Agreement, inclusive of
exhibits, is incorporated herein by reference. Unless otherwise defined, all
capitalization terms incorporated herein have the meanings ascribed to them in
the Agreement.
Stifel, Nicolaus & Company, Inc. ("Stifel"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We will receive a fee in connection with the rendering of
this opinion.
In the ordinary course of business, Stifel may actively trade in the
equity and derivative securities of CommWorld for its own account and/or for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Stifel may in the future provide additional
investment banking or other financial advisory services to CommWorld.
In connection with our review of the Proposed Transaction, and in
arriving at our opinion, we have, among other things:
i. reviewed the financial statements of CommWorld and BPI for recent
years and interim periods to date and certain other relevant
financial and operating data of CommWorld and BPI made available
to us from the internal records of CommWorld and BPI;
<PAGE> 190
March 10, 2000
Page 2
ii. reviewed certain internal financial and operating information,
including certain projections, relating to CommWorld and BPI
prepared by the management of CommWorld and BPI;
iii. discussed the business, financial condition and prospects of
CommWorld and BPI with certain members of senior management of
CommWorld and BPI;
iv. reviewed the publicly available consolidated financial
statements of CommWorld for recent years and interim periods to
date and certain other relevant financial and operating
CommWorld and BPI made available to us from published sources
and from the internal records of CommWorld and BPI;
v. reviewed certain internal and financial operating information,
including certain projections, relating to CommWorld and BPI
prepared by the management of CommWorld and BPI;
vi. discussed the business, financial condition and prospects of
CommWorld and BPI with certain members of senior management;
vii. reviewed the recent reported prices and trading activity for the
common stock of CommWorld and compared such information and
certain financial information for CommWorld and BPI with similar
information for certain other companies engaged in businesses
with characteristics we considered comparable;
viii. reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions;
ix. reviewed the Agreement; and
x. performed such other analyses and examinations and considered
such other information, financial studies, analyses and
investigations and financial, economic and market data as we
deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of all of the information concerning CommWorld and BPI
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of the assets or liabilities of CommWorld or BPI, nor have we conducted a
physical inspection of the properties and facilities or either company. With
respect to the financial forecasts and projections made available to us and used
in our analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of
CommWorld and BPI. For purposes of this opinion, we have assumed that neither
CommWorld nor BPI is a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
Proposed Transaction and those activities undertaken in the ordinary course of
conducting their respective businesses. Our opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can be
evaluated as of the date of this letter and any change in such conditions would
require a reevaluation of this opinion. We express no opinion as to the price at
which CommWorld common stock will trade subsequent to the Proposed Transaction.
We have assumed the Proposed Transaction will be consummated substantially on
the terms
<PAGE> 191
March 10, 2000
Page 3
discussed in the Agreement, without any waiver of any material terms or
conditions by any party thereto.
It is understood that this letter is for the information of the Board
of Directors in connection with its evaluation of the Proposed Transaction and
may not be used for any other purpose without prior written consent; provided,
however, that this letter may be reproduced in full in the Proxy Statement to be
filed in connection with the Proposed Transaction. This letter does not
constitute a recommendation to any shareholder as to how such shareholder should
vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such
other matters as we deem relevant, we are of the opinion that as of the date
hereof the Proposed Transaction is fair, from a financial point of view, to the
shareholders of CommWorld.
Sincerely,
STIFEL, NICOLAUS & COMPANY, INC.
<PAGE> 192
ANNEX C
PROPOSED AMENDMENT
TO
COMMUNICATIONS WORLD INTERNATIONAL, INC.'S
ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
The first paragraph of Article Four of the Articles of Incorporation of
Communications World International, Inc. is proposed to be amended in its
entirety to read as follows:
Article Four. The aggregate number of shares which the Corporation
shall have authority to issue is 78,000,000 shares, of which 75,000,000 shall be
no par value common shares, and 3,000,000 shall be preferred shares, each having
a par value of $1.00. All shares shall be fully paid and non-assessable for any
purpose.
<PAGE> 193
ANNEX D
COMMUNICATIONS WORLD INTERNATIONAL, INC.
1998 STOCK INCENTIVE PLAN
ADOPTED ORIGINALLY IN NOVEMBER 1998
AND AS AMENDED THROUGH MARCH 2000
This 1998 Stock Incentive Plan (the "Plan") is adopted in consideration
for services rendered and to be rendered to Communications World International,
Inc. and related companies.
1. Definitions.
The terms used in this Plan shall, unless otherwise indicated or
required by the particular context, have the following meanings:
Board: The Board of Directors of Communications World
International, Inc.
Change in Control: (i) The acquisition, directly or indirectly,
by any person or group (within the meaning of Section 13(d)(3) of the Exchange
Act) of the beneficial ownership of more than fifty percent of the outstanding
securities of the Company, (ii) a merger or consolidation in which the Company
is not the surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated, (iii) the
sale, transfer or other disposition of all or substantially all of the assets of
the Company, (iv) a complete liquidation or dissolution of the Company, or (v)
any reverse merger in which the Company is the surviving entity but in which
securities possessing more than fifty percent of the total combined voting power
of the Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
merger.
Code: The Internal Revenue Code of 1986, as amended.
Common Stock: The no par value Common Stock of Communications
World International, Inc.
Company: Communications World International, Inc., a corporation
incorporated under the laws of Colorado, and any successors in interest by
merger, operation of law, assignment or purchase of all or substantially all of
the property, assets or business of the Company.
<PAGE> 194
Consultant: A Consultant is any person, including any advisor,
engaged by the Company or any Related Company to render consulting services and
may include members of the Board.
Continuous Status as an Employee or Consultant: The employment
by, or relationship as a Consultant with, the Company or any Related Company is
not interrupted or terminated. The Board, at its sole discretion, may determine
whether Continuous Status as an Employee or Consultant shall be considered
interrupted due to personal or other mitigating circumstances.
Date of Grant: The date on which an Option is granted under the
Plan.
Employee: An Employee is an employee of the Company or any
Related Company.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exercise Price: The price per share of Common Stock payable upon
exercise of an Option.
Fair Market Value: The Fair Market Value of the Option Shares.
Such Fair Market Value as of any date shall be reasonably determined by the
Option Committee; provided, however, that if there is a public market for the
Common Stock, the Fair Market Value of the Option Shares as of any date shall be
the officially quoted closing price, if available, through The Nasdaq Stock
Market, Inc., or a stock exchange, or if no officially quoted closing price is
available, the representative closing bid price, on the date in question. In the
event there is no officially quoted closing price or bid price or the Common
Stock is not traded publicly, the Fair Market Value of a share of Common Stock
on any date shall be determined, in good faith, by the Board or the Option
Committee after such consultation with outside legal, accounting and other
experts as the Board or the Option Committee may deem advisable, and the Board
or the Option Committee shall maintain a written record of its method of
determining such value.
Incentive Stock Options ("ISOs"): "Incentive Stock Options" as
that term is defined in Section 422 of the Code.
Non-Incentive Stock Options ("Non-ISOs"): Options which are
not intended to qualify as "Incentive Stock Options" under Section 422 of the
Code.
Offeree: An Employee or Consultant to whom a Right to Purchase
has been offered or who has acquired Restricted Stock under the Plan.
Option: The rights granted to an Employee or Consultant to
purchase Common Stock pursuant to the terms and conditions of an Option
Agreement.
-2-
<PAGE> 195
Option Agreement: The written agreement (and any amendment or
supplement thereto) between the Company and an Employee or Consultant
designating the terms and conditions of an Option.
Option Committee: The Plan shall be administered by the Option
Committee which shall consist of the Board or a committee of the Board as the
Board may from time to time designate composed of not less than two members of
the Board who are not employees of the Company or a Related Company.
Option Shares: The shares of Common Stock underlying an Option
granted to an Employee or Consultant.
Optionee: An Employee or Consultant who has been granted an
Option.
Participant: An Employee or Consultant who holds an Option, a
Right to Purchase or Restricted Stock under the Plan.
Purchase Price: The Purchase Price per share of Restricted Stock
payable upon acceptance of a Right to Purchase.
Related Company: Any subsidiary of the Company and any other
business venture in which the Company has a significant interest as determined
in the discretion of the Option Committee.
Restricted Stock: The shares of Common Stock issued pursuant to
Section 15, subject to any restrictions and conditions as are established
pursuant to such Section 15.
Right to Purchase: A right to purchase Restricted Stock granted
to an Offeree pursuant to Section 15 hereof.
Rule 16b-3: Rule 16b-3 as promulgated by the Securities and
Exchange Commission under Section 16(b) of the Exchange Act.
2. Purpose and Scope.
(a) The purpose of this Plan is to advance the interests of the
Company and its stockholders by affording Employees and Consultants an
opportunity for investment in the Company and the incentive advantages inherent
in stock ownership in this Company.
(b) This Plan authorizes the Option Committee to grant Options to
purchase shares of Common Stock to Employees and Consultants selected by the
Option Committee while considering criteria such as employment position or other
relationship with the Company, duties and responsibilities, ability,
productivity, length of service or association, morale, interest in the Company,
recommendations by supervisors, and other matters.
-3-
<PAGE> 196
3. Administration of the Plan. The Plan shall be administered by the
Option Committee. The Option Committee shall have the authority granted to it
under this section and under each other section of the Plan.
In accordance with and subject to the provisions of the Plan, the
Option Committee shall select the Optionees and Offerees, shall determine (i)
the number of shares of Common Stock to be subject to each Option and Right to
Purchase, (ii) the time at which each Option or Right to Purchase is to be
granted, (iii) whether an Option or Right to Purchase shall be granted in
exchange for the cancellation and termination of a previously granted option or
options under the Plan or otherwise, (iv) the Exercise Price for the Option
Shares, (v) the Purchase Price of Restricted Stock, (vi) the option period, and
(vii) the manner in which the Option becomes exercisable. In addition, the
Option Committee shall fix such other terms of each Option and Right to Purchase
as the Option Committee may deem necessary or desirable. The Option Committee
shall determine the form of Option Agreement to evidence each Option and the
form of Stock Purchase Agreement to evidence each Right to Purchase.
The Option Committee from time to time may adopt such rules and
regulations for carrying out the purposes of the Plan as it may deem proper and
in the best interests of the Company. The Option Committee shall keep minutes of
its meetings and those minutes shall be distributed to every member of the
Board.
All actions taken and all interpretations and determinations made by
the Option Committee in good faith (including determinations of Fair Market
Value) shall be final and binding upon all Employees, Consultants, the Company
and all other interested persons. No member of the Option Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan, and all members of the Option Committee shall,
in addition to rights they may have if Directors of the Company, be fully
protected by the Company with respect to any such action, determination or
interpretation.
4. The Common Stock. The Board is authorized to appropriate, issue and
sell for the purposes of the Plan, and the Option Committee is authorized to
grant Options and Rights to Purchase with respect to, a total number, not in
excess of 2,500,000 shares of Common Stock, either treasury or authorized but
unissued, or the number and kind of shares of stock or other securities which in
accordance with Section 16 shall be substituted for the 2,500,000 shares or into
which such 2,500,000 shares shall be adjusted. All or any unsold shares subject
to an Option or Right to Purchase that for any reason expires or otherwise
terminates may again be made subject to Options or Rights to Purchase under the
Plan. No person may be granted Options or Rights to Purchase under this Plan
covering in excess of an aggregate of 500,000 Option Shares and shares of
Restricted Stock in any calendar year, subject to adjustments in connection with
Section 16.
5. Eligibility. Options which are intended to qualify as ISOs will be
granted only to Employees. Employees and Consultants may hold more than one
Option under the Plan and may hold Options under the Plan and options granted
pursuant to other plans or otherwise, and may hold Rights to Purchase under the
Plan.
-4-
<PAGE> 197
6. Option Price. The Exercise Price for the Option Shares shall be
established by the Option Committee or shall be determined by a method
established by the Option Committee; provided that the Exercise Price to be paid
by Optionees for the Option Shares that are intended to qualify as ISOs, shall
not be less than 100 percent of the Fair Market Value of the Option Shares on
the Date of Grant, or the date on which the Optionee is hired or promoted (or
similar event), if the Date of Grant occurs not more than 90 days after the date
of such hiring, promotion or other event.
7. Duration and Exercise of Options.
(a) The option period shall commence on the Date of Grant and
shall be as set by the Option Committee, but not to exceed 10 years in length.
Except as otherwise provided herein or as determined by the Option Committee, no
Option shall be exercised for the period of one year following the Date of
Grant; provided, however, that this limitation shall not apply to the exercise
of an Option pursuant to the terms of the relevant Option Agreement upon the
Optionee's death.
(b) During the lifetime of the Optionee, the Option shall be
exercisable only by the Optionee; provided, that in the event of the legal
disability of an Optionee, the guardian or personal representative of the
Optionee may exercise the Option. However, if the Option is an ISO it may be
exercised by the guardian or personal representative of the Optionee only if
such guardian or personal representative obtains a ruling from the Internal
Revenue Service or an opinion of counsel to the effect that neither the grant
nor the exercise of such power is violative of the Code. Any opinion of counsel
must be both from counsel and in a form acceptable to the Option Committee.
(c) The Option Committee may determine whether any Option shall
be exercisable in installments only; if the Option Committee determines that an
Option shall be exercisable in installments, it shall determine the number of
installments and the percentage of the Option exercisable at each installment
date. All such installments shall be cumulative.
(d) In the event an Optionee's Continuous Status as an Employee
or Consultant terminates for any reason, any Option held by the Optionee on the
date of termination may be exercised within 90 days after the date of
termination, but only to the extent that the Option was exercisable according to
its terms on the date of termination. After such 90-day period, any unexercised
portion of an Option shall expire.
(e) Each Option shall be exercised in whole or in part by
delivering to the office of the Treasurer of the Company written notice of the
number of shares with respect to which the Option is to be exercised and by
paying in full the Exercise Price for the Option Shares purchased as set forth
in Section 8; provided, that an Option may not be exercised in part unless the
Exercise Price for the Option Shares purchased is at least $2,000.
-5-
<PAGE> 198
(f) No Option may be exercised until the Plan is approved by the
shareholders of the Company as provided in Section 17 below.
8. Payment for Option Shares. If the Exercise Price of the Option
Shares purchased by any Optionee at one time exceeds $2,000, the Option
Committee may permit all or part of the Exercise Price for the Option Shares to
be paid by delivery to the Company for cancellation shares of the Company's
Common Stock previously owned by the Optionee with a Fair Market Value as of the
date of payment equal to the portion of the Exercise Price for the Option Shares
that the Optionee does not pay in cash. In the case of all other Option
exercises, the Exercise Price shall be paid in cash or check upon exercise of
the Option, except that the Option Committee may permit an Optionee to elect to
pay the Exercise Price upon the exercise of an Option by authorizing a third
party to sell some or all of the Option Shares acquired upon exercise of an
Option and remit to the Company a sufficient portion of the sale proceeds to pay
the entire Exercise Price and any tax withholding resulting from such exercise.
9. Relationship to Employment or Position. Nothing contained in the
Plan, or in any Option or Right to Purchase granted pursuant to the Plan, shall
confer upon any Participant any right with respect to continuance of employment
by the Company, as an Employee or as a Consultant or interfere in any way with
the right of the Company to terminate the Participant's employment as an
Employee or position as a Consultant, at any time.
10. Nontransferability of Option. Except as otherwise provided by the
Option Committee, no Option granted under the Plan shall be transferable by the
Optionee, either voluntarily or involuntarily, except by will or the laws of
descent and distribution.
11. Rights as a Stockholder. No person shall have any rights as a
shareholder with respect to any share covered by an Option until that person
shall become the holder of record of such share and, except as provided in
Section 16, no adjustments shall be made for dividends or other distributions or
other rights as to which there is an earlier record date.
12. Securities Laws Requirements. No Option Shares shall be issued
unless and until, in the opinion of the Company, any applicable registration
requirements of the Securities Act of 1933, as amended, any applicable listing
requirements of any securities exchange on which stock of the same class is then
listed, and any other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery, have been fully complied with.
Each Option and each Option Share certificate may be imprinted with legends
reflecting federal and state securities laws, restrictions and conditions, and
the Company may comply therewith and issue "stop transfer" instructions to its
transfer agent and registrar in good faith without liability.
13. Disposition of Shares. Each Optionee, as a condition of exercise,
shall represent, warrant and agree, in a form of written certificate approved by
the Company, as follows: (a) that all Option Shares are being acquired solely
for his own account and not on behalf of any other person or entity; (b) that no
Option Shares will be sold or otherwise distributed in violation of the
Securities Act of 1933, as amended, or any other applicable federal or state
-6-
<PAGE> 199
securities laws; (c) that if he is subject to reporting requirements under
Section 16(a) of the Exchange Act, he will (i) not violate Section 16(b) of the
Exchange Act, (ii) furnish the Company with a copy of each Form 4 and Form 5
filed by him, and (iii) timely file all reports required under the federal
securities laws; and (d) that he will report all sales of Option Shares to the
Company in writing on a form prescribed by the Company.
14. Ten Percent Shareholder Rule. With respect to ISO's, no Option may
be granted to an Employee who, at the time the Option is granted, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company, unless at the time the Option is granted the
purchase price for the Option Shares is at least 110 percent of the Fair Market
Value of the Option Shares on the Date of Grant and such Option by its terms is
not exercisable after the expiration of five years from the Date of Grant.
15. Rights to Purchase
15.1 Nature of Right to Purchase. A Right to Purchase granted to
an Offeree entitles the Offeree to purchase, for a Purchase Price determined by
the Option Committee, shares of Common Stock subject to such terms, restrictions
and conditions as the Option Committee may determine at the time of grant
("Restricted Stock"). Such conditions may include, but are not limited to,
continued employment or the achievement of specified performance goals or
objectives.
15.2 Acceptance of Right to Purchase. An Offeree shall have no
rights with respect to the Restricted Stock subject to a Right to Purchase
unless the Offeree shall have accepted the Right to Purchase within ten days (or
such longer or shorter period as the Option Committee may specify) following the
grant of the Right to Purchase by making payment of the full Purchase Price to
the Company in the manner set forth in Section 15.3 hereof and by executing and
delivering to the Company a Stock Purchase Agreement. Each Stock Purchase
Agreement shall be in such form, and shall set forth the Purchase Price and such
other terms, conditions and restrictions of the Restricted Stock, not
inconsistent with the provisions of this Plan, as the Option Committee shall,
from time to time, deem desirable. Each Stock Purchase Agreement may be
different from each other Stock Purchase Agreement.
15.3 Payment of Purchase Price. Subject to any legal
restrictions, payment of the Purchase Price upon acceptance of a Right to
Purchase Restricted Stock may be made, in the discretion of the Option
Committee, by (a) cash; (b) check; (c) the surrender of shares of Common Stock
owned by the Offeree that have been held by the Offeree for at least six months,
which surrendered shares shall be valued at Fair Market Value as of the date of
such exercise; (d) any combination of the foregoing methods of payment or any
other consideration or method of payment as shall be permitted by applicable
corporate law.
15.4 Rights as a Shareholder. Upon complying with the provisions
of Section 15.2 hereof, an Offeree shall have the rights of a shareholder with
respect to the Restricted Stock purchased pursuant to the Right to Purchase,
including voting and dividend rights, subject to the terms, restrictions and
conditions as are set forth in the Stock Purchase Agreement. Unless the
-7-
<PAGE> 200
Option Committee shall determine otherwise, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company in accordance
with the terms of the Stock Purchase Agreement.
15.5 Restrictions. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in the Stock Purchase Agreement or by the Option
Committee. In the event a Participant's Continuous Service as an Employee or
Consultant terminates for any reason, the Stock Purchase Agreement may provide,
in the discretion of the Option Committee, that the Company shall have the
right, exercisable at the discretion of the Option Committee , to repurchase (a)
at the original Purchase Price, any shares of Restricted Stock which have not
vested as of the date of termination, and (b) at Fair Market Value, any shares
of Restricted Stock which have vested as of such date, on such terms as may be
provided in the Stock Purchase Agreement.
15.6 Vesting of Restricted Stock. The Stock Purchase Agreement
shall specify the date or dates, the performance goals or objectives which must
be achieved, and any other conditions on which the Restricted Stock may vest.
15.7 Dividends. If payment for shares of Restricted Stock is made
by promissory note, any cash dividends paid with respect to the Restricted Stock
may be applied, in the discretion of the Option Committee, to repayment of such
note.
15.8 Non-Assignability of Rights. No Right to Purchase shall be
assignable or transferable except by will or the laws of descent and
distribution or as otherwise provided by the Option Committee.
16. Change in Stock, Adjustments, Etc. In the event that each of the
outstanding shares of Common Stock (other than shares held by dissenting
shareholders which are not changed or exchanged) should be changed into, or
exchanged for, a different number or kind of shares of stock or other securities
of the Company, or, if further changes or exchanges of any stock or other
securities into which the Common Stock shall have been changed, or for which it
shall have been exchanged, shall be made (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividends,
reclassification, split-up, combination of shares or otherwise), then
appropriate adjustment shall be made by the Option Committee to the aggregate
number and kind of shares subject to this Plan, and the number and kind of
shares and the price per share subject to outstanding Options and Rights to
Purchase as provided in the respective Option Agreements and Stock Purchase
Agreements in order to preserve, as nearly as practical, but not to increase,
the benefits to Participants.
17. Effective Date of Plan; Termination Date of Plan. Subject to the
approval of the Plan by the affirmative vote of the holders of a majority of the
Company's securities entitled to vote and represented at a meeting duly held in
accordance with applicable law, the Plan shall be deemed effective November 12,
1998. The Plan shall terminate at midnight on November 11, 2008, except as to
Options previously granted and outstanding under the Plan at that time. No
Options or Rights to Purchase shall be granted after the date on which the Plan
terminates. The
-9-
<PAGE> 201
Plan may be abandoned or terminated at any earlier time by the Board, except
with respect to any Options or Rights to Purchase then outstanding under the
Plan.
18. Withholding Taxes. The Company, or any Related Company, may take
such steps as it may deem necessary or appropriate for the withholding of any
taxes which the Company, or any Related Company, is required by any law or
regulation or any governmental authority, whether federal, state or local,
domestic or foreign, to withhold in connection with any Option or Right to
Purchase including, but not limited to, the withholding of all or any portion of
any payment or the withholding of issuance of Option Shares or Restricted Stock
to be issued upon the exercise of any Option.
19. Change in Control.
In the event of a Change in Control of the Company, (a) the
Option Committee, in its discretion, may, at any time an Option or Right to
Purchase is granted, or at any time thereafter, accelerate the time period
relating to the exercise or realization of any Options, Rights to Purchase and
Restricted Stock and (b) with respect to Options and Rights to Purchase, the
Option Committee in its discretion may, at any time an Option or Right to
Purchase is granted, or at any time thereafter, take one or more of the
following actions: (i) provide for the purchase of each Option or Right to
Purchase for an amount of cash or other property that could have been received
upon the exercise of the Option or Right to Purchase had the Option been
currently exercisable, (ii) adjust the terms of the Options and Rights to
Purchase in a manner determined by the Option Committee to reflect the Change in
Control, (iii) cause the Options and Rights to Purchase to be assumed, or new
rights substituted therefor, by another entity, through the continuance of the
Plan and the assumption of outstanding Options and Rights to Purchase, or the
substitution for such Options and Rights to Purchase of new options and new
rights to purchase of comparable value covering shares of a successor
corporation, with appropriate adjustments as to the number and kind of shares
and exercise prices, in which event the Plan and such Options and Rights to
Purchase, or the new options and rights to purchase substituted therefor, shall
continue in the manner and under the terms so provided or (iv) make such other
provision as the Committee may consider equitable. If the Option Committee does
not take any of the foregoing actions, all Options and Rights to Purchase shall
terminate upon the consummation of the Change in Control and the Option
Committee shall cause written notice of the proposed transaction to be given to
all Participants not less than fifteen days prior to the anticipated effective
date of the proposed transaction.
20. Amendment.
(a) The Board may amend, alter or discontinue the Plan, but no
amendment, alteration or discontinuation shall be made which would (i) impair
the right of a Participant under an outstanding Option Agreement or Stock
Purchase Agreement, except such an amendment made to cause the Plan to qualify
for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the
exemption provided by Rule 16b-3. In addition, no such amendment shall be made
without the approval of the Company's shareholders to the extent such approval
is required by law or agreement
-9-
<PAGE> 202
(b) The Committee may amend the terms of any Option or Right to
Purchase theretofore granted, prospectively or retroactively, but no such
amendment shall impair the rights of any Participant without the Participant's
consent except such an amendment made to cause the Plan to qualify for the
exemption provided by Rule 16b-3.
(c) Subject to the above provisions, the Board shall have
authority to amend the Plan to take into account changes in law and tax and
accounting rules as well as other developments, and to grant Options and Rights
to Purchase which qualify for beneficial treatment under such rules without
shareholder approval.
21. Other Provisions.
(a) The use of a masculine gender in the Plan shall also include
within its meaning the feminine, and the singular may include the plural, and
the plural may include the singular, unless the context clearly indicates to the
contrary.
(b) Any expenses of administering the Plan shall be borne by the
Company.
(c) This Plan shall be construed to be in addition to any and all
other compensation plans or programs. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the shareholders of the Company for
approval shall be construed as creating any limitations on the power or
authority of the Board to adopt such other additional incentive or other
compensation arrangements as the Board may deem necessary or desirable.
(d) The validity, construction, interpretation, administration
and effect of the Plan and of its rules and regulations, and the rights of any
and all personnel having or claiming to have an interest therein or thereunder
shall be governed by and determined exclusively and solely in accordance with
the laws of the State of Colorado.
* * * * * * * *
-10-
<PAGE> 203
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoint James M. Ciccarelli and Lionel Brown, or
either of them, as Proxies or __________________________________ (shareholder
may strike the Proxy Committee designated by management and insert the name and
address of another person(s)) with power of substitution to vote all the shares
of the undersigned with all of the powers which the undersigned would possess if
personally present at the Special Meeting of the Shareholders of Communications
World International, Inc. (the "Company") to be held at 2:30 P.M. on June 2,
2000 at 7388 South Revere Parkway, Suite 1000, Englewood, Colorado 80111, or any
adjournment thereof, on the following matters:
<TABLE>
<S> <C> <C> <C>
1. APPROVAL OF MERGER AGREEMENT
For Against Abstain
--------- --------- ---------
2. APPROVAL OF THE AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK
For Against Abstain
--------- --------- ---------
3. APPROVE THE AMENDMENT TO THE COMPANY'S 1998 STOCK INCENTIVE
PLAN TO INCREASE AVAILABLE SHARES
For Against Abstain
--------- --------- ---------
</TABLE>
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
Unless contrary instructions are given, the shares represented by this
Proxy will be voted for the proposals set forth above.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY. EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE, DATE, SIGN AND
RETURN THIS PROXY IN THE ACCOMPANYING ENVELOPE.
Please sign exactly as shown on your stock certificate and on the
envelope in which this Proxy was mailed. When signing as Partner, Officer,
Trustee, etc., give full title as such and sign your own name as well. If stock
is held jointly, each joint owner should sign.
Signature(s):
--------------------------------
Signature(s):
--------------------------------
Date:
------------------------------------
