<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
-------------------------------------------
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended: April 30, 1996
[ ] Transition period under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to ________________.
Commission file number: 0-13652
COMMUNICATIONS WORLD INTERNATIONAL, INC.
-------------------------------------------
(Name of Small Business Issuer in Its Charter)
Colorado 84-0917382
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6025 South Quebec, Suite 300,
Englewood, Colorado 80111
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 721-8200
----------------------------------------------
Issuer's Telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
------------------------------------
(Title of class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $ 12,556,316
The aggregate market value of the voting stock held as of July 19, 1996 by non
affiliates of the issuer was $2,029,175. As of July 19, 1996, the issuer had
1,546,039 shares of its no par value Common Stock issued and outstanding.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
- -------- ----
<S> <C> <C> <C>
Item 1. Description of Business............................ 1
Item 2. Description of Property............................ 5
Item 3. Legal Proceedings.................................. 6
Item 4. Submission of Matters to a Vote of Security-Holders 6
</TABLE>
PART II
--------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Item 5. Market for Common Equity and Related Stockholder Matters... 7
Item 6. Management's Discussion and Analysis or Plan of Operations. 7
Item 7. Financial Statements....................................... 11
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................... 11
</TABLE>
PART III
---------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act............ 12
Item 10. Executive Compensation....................................... 13
Item 11. Security Ownership of Certain Beneficial Owners
and Management.............................................. 14
Item 12. Certain Relationships and Related Transactions........... 15
Item 13. Exhibits and Reports on Form 8-K......................... 16
</TABLE>
i
<PAGE>
PART I
Item 1. Description of Business
-----------------------
Business Development
Communications World International, Inc. ("Registrant", "Company" or
"CommWorld") was incorporated in 1983 under Colorado law and has its principal
executive offices at 6025 South Quebec Street, Suite 300, Englewood, Colorado
80111. CommWorld has established a distribution network for a variety of
telecommunications products and services, including business telephone systems,
through: (1) franchises under the CommWorld name, (2) Company-owned outlets and
(3) direct sales to end users through its corporate sales and marketing
division. The Company had 65 franchises located in 27 states and 7 Company-
owned outlets at April 30, 1996. Through its distribution network the Company
sells and services private telephone systems and peripheral products, such as
voice messaging and related systems for business users. The Company's
franchisees and Company-owned outlets market their products primarily to small
and medium-size businesses while the Company's corporate sales and marketing
department markets the same products and services directly to multi-location
businesses.
The Company purchases telephone and related communications equipment from
manufacturers and supply houses. The Company sells this equipment to the
franchisees who, in turn, sell the equipment to their customers and connect this
equipment to local telephone company lines servicing areas in which their
customers are located. The principal telephone systems sold to customers are
Key telephone systems which differ from larger PBX systems in that each incoming
telephone line can be accessed by each telephone in the particular business.
In April 1994, the Company entered into a merger agreement pursuant to which
Master Franchise, Inc. and Communications World of Phoenix South, Inc. merged
into CommWorld of Phoenix, Inc., an Arizona corporation organized as a
subsidiary of the Company to be the survivor of this merger. Communications
World of Phoenix South, Inc. was one of the Company's oldest and more profitable
franchises. The merger was made to enhance the franchise network of the Company
with profitable Company-owned locations. The Company acquired all of the
outstanding capital stock of Master Franchise, Inc. and Communications World of
Phoenix South, Inc. for approximately $378,000 from the sole shareholder, Mr.
Rolden Heath ("Heath").
The purchase was financed by the issuance of 47,765 shares of common stock,
valued at the market price of the common stock of $4.25 per share on the date of
the letter of intent, 80,088 shares of Series B Preferred Stock, valued at its
estimated market value of $1.00 per share, and the issuance of notes payable in
the aggregate principal amount of $95,000, of which $25,000 was paid in June
1994. Additionally, Heath entered into a three year employment and non-compete
agreement with CommWorld of Phoenix, Inc. This acquisition has been accounted
for as a purchase and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed 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 $200,000 has been recorded as
goodwill and is being amortized on a straight-line basis over ten years.
In July 1994, the Company entered into a merger agreement pursuant to which
Communications World of Seattle North, Inc. merged into CommWorld of Seattle,
Inc., a Washington corporation organized as a subsidiary of the Company to be
the survivor of this merger. Communications World of Seattle North, Inc. was
also one of the Company's more profitable franchises. The Company acquired all
of the outstanding capital stock of CommWorld of Seattle, Inc., for
approximately $453,000 from the shareholders, David and Diane Lepsig
("Lepsigs").
1
<PAGE>
The purchase was financed by the issuance of 50,117 shares of common stock,
valued at the market price of the common stock of $4.25 per share on the date of
the letter of intent, 140,060 shares of a newly created Series C Preferred
Stock, valued at its estimated market value of $1.00 per share, and the issuance
of notes payable in the aggregate principal amount of $100,000, of which $25,000
was paid in July 1994. The remaining $75,000 is payable with interest only for
the first two years and then payable in equal monthly installments over three
years with interest at 10% per annum. The Lepsigs entered into employment and
non-compete agreements and will be entitled to receive, in addition to their
regular salaries, a bonus of 50% of annual net income before taxes of CommWorld
of Seattle, Inc. in excess of $75,000 per year for the next three years, up to a
aggregate maximum amount of $200,000. This acquisition was accounted for as a
purchase and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed 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 $280,000 has been recorded as goodwill and
is being amortized on the straight-line basis over ten years.
In October 1994, Digital Telecom, Incorporated ("DTI") merged into International
Communications Acquisition Corp. of Colorado, a Colorado corporation organized
as a subsidiary of the Company to be the survivor of this merger, d.b.a.
CommWorld NationWide. The Company acquired all of the outstanding capital stock
of DTI from the two shareholders, Russell Withers ("Withers") and Ronald Haines
("Haines"). The purchase price consisted of cash of approximately $102,500, the
issuance of 57,750 shares of common stock, valued at the market price of the
common stock of $4.00 per share on the date of the letter of intent, 181,484
shares of Series C Preferred Stock, valued at the par value of $1.00 per share,
and the issuance of notes payable in the principal amount of $200,000. The
notes are payable with interest only for the first two years, and then payable
in equal monthly installments over three years with interest at 9% per annum.
Withers and Haines each entered into employment and non-compete agreements and
will be entitled to receive, in addition to their regular salaries, 3.5% of
annual net income before taxes of DTI for a period of three years for Withers
and 3.5% of annual net income before taxes of DTI for a period of two years for
Haines, under certain circumstances.
The acquisition of DTI was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
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 $640,000 was recorded as goodwill and amortized on a straight-line
basis over ten years.
Effective August 1, 1995, Communications World of Columbia, Inc. (Columbia) and
Alpha Communications & Technology, Inc. (Alpha), d.b.a. CommWorld of Northern
Virginia, merged with CommWorld National Capitol Area, Inc., a Virginia
corporation organized as a subsidiary of the Company to be the survivor of this
merger. The Company acquired all of the outstanding capital stock of Columbia
from the two shareholders, John E. Hanner and John C. Hanner. The purchase
price consisted of cash of $17,500, the issuance of 10,000 shares of common
stock, valued at the market price of the common stock of $4.00 per share on the
date of the letter of intent, 40,000 shares of Series C Preferred Stock, valued
at the par value of $1.00 per share, and the issuance of notes payable in the
aggregate principal amount of $30,000. The notes are payable with interest only
for the first two years, and then payable in equal monthly installments over
three years with interest at 9% per annum. Each of the individuals entered into
employment and noncompete agreements with the Company. The Company acquired all
of the outstanding common stock of Alpha from the sole shareholder, Bennie
Hester. The purchase price consisted of cash of $7,500, the issuance of 11,875
shares of common stock, valued at the market price of the common stock of $4.00
per share on the date of the letter of intent, and 65,134 shares of Series C
Preferred Stock, valued at the par value of $1.00 per share.
2
<PAGE>
The acquisition of Columbia and Alpha was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed 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 $152,900 was recorded as goodwill and is being
amortized on a straight line basis over ten years.
The Company believes that there may be additional opportunities to acquire other
profitable inter-connect dealers, both inside and outside the Company's
franchise network. The Company also believes that there may be other
opportunities to acquire companies in the telecommunications industry. The
Company's determination of whether to enter into merger and acquisition
agreements in the future will depend upon several factors, including the
Company's financial resources and business operations.
Franchise Program
- ------------------
In 1992, the Company substantially revised its franchise program. Pursuant to
the terms of the Company's current franchise program, a franchisee will pay a
one time, nonrefundable, franchise fee of $12,500 or $7,500, depending upon the
number of businesses in the potential franchisee's market place. The franchise
fee is payable upon the execution of the franchise agreement or on a four-month
installment basis.
The franchisee is entitled to purchase equipment from or through the Company on
a "cost mark-up royalty" basis, meaning based on the cost to the Company of
equipment and products purchased plus a mark-up to the franchisee. The amount
of the cost mark-up royalty varies by manufacturer and by the volume of
purchases of the individual franchisee. A franchisee only pays royalties on
equipment purchased through or from the Company.
The franchisee is not required to make any purchases of equipment through the
Company; however, the Company believes that it will be able to obtain favorable
pricing from suppliers based on negotiated purchases and quantity buying
arrangements. The Company anticipates that these prices will be lower than
prices which the franchisee could negotiate directly with suppliers. Currently,
all franchises purchase some equipment or services from the Company. The
franchisee is responsible for all warranty service on equipment sold by it and
manufacturers' warranties are passed through to the franchisee. The Company
also offers sales and marketing training and other assistance to the franchisees
for scheduled fees.
The franchisee is granted a license to use the "COMMWORLD" name and trademarks
in the franchised territory. The franchisee is required to conform to certain
standards of business practices, to maintain minimum inventories of products
and services, and to make arrangements with local telephone companies as
necessary to provide installation services to customers. The installation and
the service work performed by the franchisees is either done by their staff or
is subcontracted through installation companies which are independently owned
and operated. Each franchise is run as an independent business and, as such, is
responsible for the operation of its business including the collection of
receivables, arrangement of any customer financing, and employment of adequate
staff.
Franchisees are permitted to assign their franchise provided that the Company
receives advance notice of the proposed assignment, the transferee assumes the
obligations under the franchise agreement, the transferee meets certain
conditions and qualifications, and the Company receives a transfer fee equal to
10 percent of the franchise fee then in effect. In addition, the Company has
the right of first refusal to purchase the franchise prior to its sale to
another party.
3
<PAGE>
The term of the franchise is for 10 years unless earlier terminated provided
that, during the first 12 months of the franchise, the franchisee has the right
to terminate the franchise without a refund of the franchise fee. The Company
has the right to terminate any franchise in the event of the franchisee's
bankruptcy, a default under the franchise agreement, or other events. The
franchisees have 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.
Reacquired Franchises
- ---------------------
In years prior to fiscal 1995, the Company reacquired one franchise operation
and one franchisee's exclusive territory. The purchased operation is located in
Fort Collins, Colorado and was purchased for approximately $124,000 primarily
through the cancellation of notes and accounts receivable due to the Company.
The reacquired exclusive franchise territory was originally granted under the
pre-1992 franchise program and is located in Dallas, Texas (master franchise).
The Company anticipates selling new franchises in the Dallas, Texas territory
along with other territories reacquired in prior years. Other territories
reacquired in years prior to fiscal 1995 are located in Los Angeles, California
(master franchise) and in Kansas City, Missouri (sales franchise).
The Company sold one reacquired franchise on May 1, 1992 and four reacquired
franchises on July 31, 1992, all of which were located in Denver, Colorado. The
Company also sold one reacquired franchise on April 30, 1993 in Minneapolis,
Minnesota.
Leasing and Rental Program
- ---------------------------
The Company has entered into agreements with several leasing companies to
provide lease financing facilities to customers of the Company's franchisees and
to the Company's direct customers under the CommWorld name. Pursuant to these
agreements, the leasing companies finance and manage the lease of equipment to
customers including matters relating to collections, taxes, legal issues,
residuals and billings.
The Company initiates the leases and directs marketing and training of personnel
working on this program in exchange for fees based on the amount of all leases
entered into under this program and on each individual lease.
Competition
- -----------
The Company's principal business is in the interconnect telephone industry which
sells and services private telephone systems for the business user. The
interconnect industry, so-called because it involves the connection of privately
manufactured and owned equipment to local telephone systems, developed from the
divestiture of the Bell operating companies and court and regulatory rulings
allowing telephone customers to connect separately purchased equipment to
existing local telephone systems.
The interconnect industry continues to expand beyond sales of traditional
telephone equipment, with the greatest growth in sales of voice processing, data
communications, and data processing equipment. The Company competes with other
interconnect telephone companies on the basis of the equipment offered by the
Company's franchisees, price and after-sale service. Although the Company
concentrates on the sale of Key systems as opposed to larger PBX systems, the
manufacturers of these systems have been successful in providing state-of-the
art electronic equipment for this market segment.
4
<PAGE>
The Company faces intense competition from AT&T, the various Bell operating
companies and over 10,000 other companies believed to be engaged in the
interconnect telephone industry. Many of these companies have resources
substantially greater than those of the Company. It can be expected that
competition in the interconnect telephone industry will be intense for the
foreseeable future.
Product Supply
- ---------------
The Company currently purchases telephone systems and various peripheral
equipment from seven major suppliers. One of the suppliers, Toshiba America
Information Systems, Inc. (TAIS), provides approximately 75% of the inventory
and products purchased by the Company while offering flexible credit terms. If
the Company's relationship with TAIS was to cease, it could have a significant
adverse impact on the operations of the Company. Product availability from
suppliers under open lines of credit has been sufficient for the Company's
current franchise locations in the last two years. However, all products may
not necessarily be available to future franchise locations. The Company
continually monitors changes in products offered by these manufacturers, as well
as others, to review its current and future product mix. The Company's products
are warranted by their vendors for at least one year for defects in material and
workmanship.
Regulation
- ----------
The Federal Communications Commission ("FCC") regulates the telephone industry.
The FCC has a registration program providing minimum specifications for
customer-owned equipment.
The Federal Trade Commission ("FTC") requires franchisors to provide prospective
franchisees with a Uniform Franchise Offering Circular which sets forth detailed
information about the franchisor and the franchise program.
A number of states require a franchisor to register prior to selling franchises
in those particular states and the Company registers its offering of the
franchise program in those states in which registration is required. In
addition, states may impose certain minimum requirements on franchises located
within that state. For example, franchises in Iowa, by law, have a three-mile
exclusive territory.
Backlog And Employees
- -----------------------
As of April 30, 1996 and 1995, the Company had backlogs of unfilled franchisees'
orders of less than $50,000. As of July 19, 1996, the Company had approximately
85 full-time employees involved in administration, sales, accounting,
warehousing, franchise relations, and subsidiary company coordination.
In the fiscal year ended April 30, 1996, the Company made an arrangement
with its largest customer to provide the telephone and peripheral systems for
all of the customer's new locations to be built during the period from November
1, 1995 through October 31, 1996. It is anticipated that the gross revenue from
these installations will exceed $2 million. This represents an increase in
gross revenue from this customer of approximately $450,000.
Item 2. Description of Property
-----------------------
The Company leases approximately 7,700 square feet of space at 6025 South Quebec
Street, Suite 300, Englewood, Colorado for approximately $9,900 per month
pursuant to a lease which expires in June 1998.
5
<PAGE>
In addition, the Company leases (i) 5,310 square feet of office and warehouse
space in Englewood, Colorado for approximately $2,700 per month under a lease
which expires in December 1996, (ii) 1,400 square feet of office and warehouse
space in Scottsdale, Arizona on a month-to-month basis for approximately $1,200
per month, (iii) 3,600 square feet of office and warehouse space in Seattle,
Washington for approximately $6,900 per month which expires in October 1997,
(iv) 1,480 square feet of office space in Aurora, Colorado for approximately
$1,400 per month which expires in May 1997 and (v) 2,655 square feet of office
and warehouse space in Falls Church, Virginia for approximately $2,500 per month
which expires in April 1997. In fiscal 1996, the Company relocated the
personnel located in Aurora, Colorado to the Company's main office in the
Englewood, Colorado and continues attempts to sublease the Aurora, Colorado
office space.
Item 3. Legal Proceedings
-----------------
The Company is not currently a party to any material pending or threatened legal
proceedings.
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
During the Company's quarter ended April 30, 1996, no matter was submitted to a
vote of the Company's security holders.
6
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
-------------------------------------------------------------
The Company's common stock (the "Common Stock") trades on the NASDAQ Small-Cap
Market under the symbol "CWII." Additionally, warrants to purchase Common Stock
are traded under the symbol "CWIIW." Set forth in the following table are high
and low bid quotations for each quarter in the fiscal years ended April 30, 1996
and 1995. The quotations represent inter-dealer quotations without retail
markups, markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
July 31, 1994 $4.38 $3.63 $0.34 $0.09
October 31, 1994 4.88 3.63 0.88 0.31
January 31, 1995 6.13 4.75 1.63 1.06
April 30, 1995 6.43 3.38 1.68 0.25
July 31, 1995 4.00 2.25 0.43 0.13
October 31, 1995 3.13 1.13 0.16 0.03
January 31, 1996 2.00 1.13 0.42 0.03
April 30, 1996 1.50 .53 0.03 0.03
</TABLE>
NASDAQ has a minimum equity requirement in the amount of $1,000,000. Currently,
the Company is not in compliance with this requirement. The Company has
developed a plan, whereby, the Company would be in compliance in the future,
however there can be no assurance that the Company will be able to successfully
implement its plan. If the Company is unable to increase its equity above the
minimum equity amount, the Company would most likely be delisted from NASDAQ.
There were approximately 230 holders of record of the Common Stock as of July
19, 1996.
No dividends have been declared or paid on the shares of Common Stock and the
Company does not anticipate paying cash dividends on the shares of Common Stock
in the foreseeable future. The Company may not pay dividends without the
consent of its accounts receivable finance company. No dividends may be paid on
the Common Stock unless accumulated dividends on the Preferred Stock have been
paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
-----------------------------------------------------------
Overview
--------
The strategy of the Company in fiscal year 1995 centered around the acquisition
of company-owned outlets in order to increase margins and build its own customer
base. These acquisitions discussed previously contributed to an increase in
revenues of 84% in fiscal 1995 and an increase in gross margins from 21% in
fiscal 1994 to 27% in fiscal 1995. The consolidation of the acquired Company-
owned outlets increased selling, general and administrative expenses during
fiscal 1995. These efforts were intended to increase sales revenue in fiscal
1996 and beyond.
7
<PAGE>
In fiscal year 1996, the Company concentrated on operating the Company-owned
outlets. These acquisitions contributed to an increase in revenues of direct
equipment and related services of $2,685,000 or 66% from the prior fiscal year.
The gross margin realized on all equipment sales increased from 24% in fiscal
1995 to 29% in fiscal 1996. Management continues to look for opportunities to
consolidate operations and reduce general and administrative expenses related to
the operations of the subsidiaries.
The Company believes that through the franchise network and its own customer
base it has an opportunity to resell long distance services. In the past, the
Company offered long distance services through third party resellers, but not at
attractive rates or commissions. The Company set up its own reselling program
in fiscal 1995 under the name CommWorld Network Services. Expenses were
incurred in fiscal 1995 for personnel and other expenses to establish this
program. Marketing of the new program began in fiscal 1996; however, no
significant revenues have been generated to date.
Liquidity and Capital Resources
- -------------------------------
The independent auditors' report on the Company's consolidated financial
statements contains an explanatory paragraph that states the accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The ability
of the Company to continue as a going concern is dependent upon the realization
of management's plans to increase revenue, improve gross profit margins and
contain general and administrative expenses. There can be no assurance that the
Company will be able to successfully implement its plans.
As a result of the Company's continued losses, net cash used by operating
activities was $553,136 for the year ended April 30, 1995. Losses sustained
during fiscal year 1995 were funded through increased credit from suppliers and
with the proceeds from the issuance of preferred stock.
The loss incurred for the year ended April 30, 1996 was funded primarily through
increased credit from suppliers offset by an increase in accounts receivable.
The increased credit from suppliers came primarily from the restructuring of
accounts payable into notes payable, as discussed below.
Management has taken the following actions to improve its liquidity and
capitalization in the current and prior years:
(A) Effective December 22, 1995, the Company negotiated with TAIS, its major
supplier and unsecured creditor, to transfer $1,530,950 of current trade
accounts payable and a short-term note payable to a long-term note payable
(the "Note") and to increase the current credit facility by $400,000. This
allowed the Company to meet its immediate obligations, provided a short-
term increase in cash flow, and increased working capital by the long-term
portion of the note, approximately $1,260,000.
Pursuant to the Note, the Company is required to make 60 equal installments
of $29,598, including interest at 6% per annum, which began in February
1996. In addition to the monthly installments, the Company is required to
make prepayments of principal of at least $10,000 per month if the monthly
net operating cash flow of the Company, defined as pre-tax income plus
depreciation and amortization, exceeds $75,000 for three consecutive
months. Thereafter, 60% of each additional $5,000 of monthly net operating
cash flow in excess of $75,000 must be paid. The Company is also required
to use a portion of the net proceeds
8
<PAGE>
from any offering of its stock or debt securities to make a principal
prepayment. The prepayment will be equal to a percentage of the net
proceeds in excess of $350,000 as follows: 40% of net proceeds between
$350,000 and $1 million, 50% of net proceeds between $1 million and $2
million, 60% of net proceeds between $2 million and $3 million and 100% of
net proceeds in excess of $3 million, but not to exceed the remaining
principal balance of the Note. The Note has been guaranteed personally by
Richard D. Olson, President of the Company.
(B) In January 1995, the Company entered into an accounts receivable financing
agreement pursuant to which the Company may be extended credit of up to
$1,000,000 based upon its outstanding accounts receivable, at an interest
rate which is 10% in excess of the prime rate. The agreement is subject to
termination upon 30 days notice by either party. The new financing
agreement contains various covenants which if not complied with could
enable the finance company to demand payment of the amount outstanding.
The Company is not currently in default of any of the covenants.
Advances under the line of credit are limited to 70% of eligible
receivables, as defined. All receivables over 90 days past due and all
receivables from customers with 90-day past due balances in excess of 10%
of their total balances are not considered eligible. The outstanding amount
is reduced by accounts receivable collections and increased periodically by
advances supported by new receivables and collection activity. The
outstanding balance under this line of credit was $689,060 and $691,231 at
April 30, 1996 and 1995, respectively.
(C) In calendar 1994, the Company received net proceeds of $813,812 from the
sale of its securities to private investors. These securities consisted of
149,790 shares of Common Stock, 1,250,000 warrants to purchase an aggregate
of 125,000 shares of Common Stock and 250,000 shares of Series E Preferred
Stock. Ten warrants entitled the holder thereof to purchase one share of
Common Stock at $5.00 per share through December 31, 1995. From January 1,
1996 through June 30, 1997 the exercise price will be $6.00 per share. The
250,000 shares of Series E Preferred Stock were converted into 250,000
shares of Common Stock on June 14, 1995. The proceeds of the offering of
warrants and Series E Preferred Stock enabled the Company to fund its cash
flow deficit from operations for the year ended April 30, 1995.
There are currently no material commitments for capital expenditures.
The Company believes that it has sufficient financial resources available to
meet its short-term working capital needs based on increases in its revenue
growth and the availability of credit from the Company's accounts receivable
financing company and major supplier. However, there can be no assurance that
the Company will be able to successfully implement its plans to increase
revenue, improve gross profit margins and contain general and administrative
expenses and therefore finance its operations over the longer term.
Results of Operations
- ---------------------
For the Year Ended April 30, 1996
- ---------------------------------
The Company incurred a net loss of $1,179,736 during the year ended April 30,
1996 as compared to $710,612 for the year ended April 30, 1995. The increase in
the net loss of $469,000 was largely due to an increase in interest expense of
$105,000 associated with the Company's line of credit being in place for the
entire fiscal year, an increase in the provision for bad debts of $131,000
related to higher sales volume and specific write-offs, and also an increase in
amortization of intangible assets of $50,000 related to the acquisitions of
subsidiaries.
9
<PAGE>
Initial franchise fees of $82,500 for the year ended April 30, 1996 is
comparable to the $90,000 reported in the prior fiscal year. The Company is
actively seeking qualified companies to become new franchises.
Equipment and related service revenue from franchisees decreased $290,000 or 5%
during the year ended April 30, 1996. The decrease in net margin related to
this decrease in sales is approximately $86,000. The net margin on equipment
sales to franchisees was effected during the current fiscal year due to the
Company providing a valuation reserve of approximately $33,000 against its
inventory to properly value replacement parts inventory at the lower of cost or
market.
Revenue from direct sales of equipment and services increased $2,686,000 during
the current fiscal year as a result of a full year of operations of the Company-
owned outlets and from increased sales at the CommWorld NationWide subsidiary.
Cost of goods sold and selling expenses increased a total of $1,347,000 related
to this increased revenue.
General and administrative expenses increased approximately $1,119,000 or 46%
during fiscal year 1996. The increase is largely due to the increased number of
personnel and related overhead expenses associated with the acquisitions of the
Company-owned outlets.
The increase of $1,339,000 in gross profit margin from the direct sales of
equipment and services in fiscal year 1996 compared to fiscal year 1995 was
offset by an increase in general and administrative expenses necessary to
operate the new locations. Management continues to assess these expenses and
take action to reduce them, when necessary and appropriate.
For the Year Ended April 30, 1995
- ---------------------------------
The Company incurred a net loss of $710,612 during the year ended April 30, 1995
as compared to $1,081,589 for the year ended April 30, 1994. The decrease in
the net loss in fiscal 1995 was largely due to a) an increase in revenue of
$4,679,669 and gross profit thereon, b) the absence of litigation expenses in
fiscal 1995 and c) increases in efficiency in utilization of personnel. Gross
profit grew 134% while general and administrative expenses increased 54%.
Initial franchise fees decreased from $176,833 for the year ended April 30, 1994
to $90,000 for the year ended April 30, 1995. The decrease in franchise fees is
a result of the Company's change in franchise sales management and time spent on
the reevaluation of the Company's franchise marketing strategies.
Equipment and related service revenue from franchisees increased 26% in fiscal
1995 as compared to the prior year from $4,494,175 to $5,655,485 due to the
Company's ability to finance additional equipment using the Company's line of
credit that activated in February of 1994. The use of the credit facility
enabled the Company to better meet the demand for equipment from franchisees.
Revenue from direct equipment and services increased from $524,179 in fiscal
1994 to $4,064,784 in fiscal 1995 due to the acquisition of Company-owned
outlets previously discussed. The Company-owned outlets sell telecommunications
equipment and services directly to end users, normally small to medium size
businesses. Direct sales have larger profit margins than equipment and related
service revenue to franchisees.
Leasing fees and rental income increased by 33% due to the continued marketing
efforts and attention to customer service to franchisees.
10
<PAGE>
Selling expenses increased from $378,811 in fiscal 1994 to $536,531 in fiscal
1995, or 42%. The increase was due to the addition of the Company-owned outlets
in fiscal 1995 that utilized sales personnel and advertising more than the
Company's franchise operations.
General and administrative expenses increased approximately 54% to $2,418,428 in
fiscal 1995 from $1,562,220 for the year ended April 30, 1994. The increase was
largely due to an increase in the number of personnel and related overhead
expenses associated with the acquisitions of Company-owned outlets in Phoenix,
Seattle, and Denver. Primarily as a result of the acquisitions, revenue
increased by 84% and gross profit increased by 134% from fiscal 1994 to fiscal
1995. For the same period, general and administrative expenses increased by
54%.
Interest expense increased from $75,291 in fiscal 1994 to $198,908 in fiscal
1995 due to the Company's line of credit being in place and utilized four months
in 1994 while in 1995 lines of credit were available and utilized for the entire
fiscal year. Amortization of intangibles increased due to the addition of
amoritizable assets in connection with the acquisitions completed at the end of
fiscal 1994 and in fiscal 1995. The provision for bad debt increased from
$26,953 to $156,383 due to the increase in accounts receivable resulting from
increased sales both to franchisees and with the acquisitions of Company-owned
outlets in fiscal 1995.
Impact of Recently Issued Accounting Standards
- -----------------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of fiscal 1997 and, based
on current circumstances, does not believe the effect, if any, of adoption will
be material.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative to APB Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation issued
to employees. The Statement allows for a fair value based method of accounting
for employee stock options and similar equity instruments. However, for
companies that continue to account for stock-based compensation arrangements
under Opinion No. 25, Statement 123 requires disclosure of the pro forma effect
on net income and earnings per share of its fair value based accounting for
those arrangements. These disclosure requirements are effective for fiscal
years beginning after December 15, 1995, or upon initial adoption of the
Statement, if earlier. The Company does not expect at this date to adopt the
recognition and measurement provisions of the Statement; however, the required
disclosures will be provided for its fiscal year ended April 30, 1997.
Item 7. Financial Statements
----------------------
Consolidated financial statements required to be filed hereunder are included
following Part III.
Item 8. Changes In and Disagreements With Accountants on Accounting and
----------------------------------------------------------------
Financial Disclosure
--------------------
None.
11
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
--------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Samuel D. Addoms Director
Edwin B. Spievack Director
Richard D. Olson President, Chief Executive Officer, Director
Scott E. Harris Executive Vice President, Chief Financial Officer
George Leonard Executive Vice President, Chief Information Officer
</TABLE>
Samuel D. Addoms - Age 56. Mr. Addoms has been a director of the Company since
- ----------------
October 1992. From November 1993 to January 1995 he served as the Executive
Vice President of Frontier Airlines, Inc. and has served as President from
January 1995 to present. He has also served as a Director of Frontier Airlines,
Inc. from November 1993 to present. From February 1996 to present, he has been
an Independent General Partner and a Director of Boettcher Venture Capital
Partners. From February to October 1993, he served as the President and
Director of Brainwave Systems, Inc., a software company. From September 1992 to
September 1993, he served as a financial consultant to various companies. From
October 1991 to August 1992, he served as President and a Director of CaseWorks
Software, Inc. of Calgary, Alberta, Canada and its U.S. affiliate, CaseWorks
Software International, Inc. of Denver, Colorado. These entities are engaged in
the development and marketing of a proprietary software program used in the
operation of human resource agencies in Canada and the United States. From May
1990 to September 1991, he served as a financial consultant to various
companies. From 1988 until its closing in April 1990, he acted as President and
a Director of Rio Grande Produce Co., a start-up retail/wholesale produce outlet
located in Aurora, Colorado. From 1985 to 1988, he was Chairman of Addoms &
Humphreys, a business development company, which consulted with small to medium-
size businesses interested in start-up, reorganizing, making acquisitions and
raising capital. From 1987 to 1989, he was a Director of Connecting Point of
America, Inc., a franchisor of retail computer stores. From 1991 to 1992, he
was a Director of North Gate Computer Systems, Inc. of Eden Prairie, Minnesota,
a public company which manufactures and markets IBM compatible personal
computers through a direct-response marketing channel. From 1990 to present, he
has served as Director of CWE, Inc., a publicly held computer and electronics
merchandiser. Mr. Addoms received a B.A. degree from Wesleyan University in
1961. He devotes such time to the Company's business as requested by the
Company.
Edwin B. Spievack - Age 64. Mr. Spievack was elected to the Board of Directors
- -----------------
of the Company in February 1993. From March 1995 to present, he has been an
independent consultant to various companies in the telecommunications industry.
From 1982 to March 1995, he was President of North American Telecommunications
Association (NATA). From 1972 to 1982, he served as NATA's General Counsel.
From 1970 through 1971, he served as Vice President and General Counsel for
Arcata Communications, the first major U.S. telecommunications distributor. Mr.
Spievack was employed as a legal assistant for the Federal Communications
Commission in 1969 and 1970. Prior to 1969, he practiced law in Cincinnati,
Ohio. Mr. Spievack is a member of the Board of Directors of TPI Enterprises,
Inc., a publicly held company which owns and operates restaurants. Mr. Spievack
received a B.A. degree from Columbia College in 1954 and received a J.D. from
Columbia University Law School in 1958. He devotes such time to the Company's
business as requested by the Company.
12
<PAGE>
Richard D. Olson - Age 42. Mr. Olson has served as the Chief Executive
- ------------------
Officer of the Company since February 1992 and President since July 1992. From
November 1988 until January 1992, he was a marketing and finance consultant
doing business as R.D. Olson & Associates. From June 1986 until October 1988,
he was the Chief Operating Officer and Executive Vice President of Interstate
Lending Corporation.
Scott E. Harris - Age 42. Mr. Harris has served as Chief Financial Officer of
- ---------------
the Company since August 15, 1995. From October 1992 to November 1994, he
served as Chief Financial Officer of Mortgage Alliance Corporation. From April
1989 to October 1992, he served as Vice President of Finance for the AMC Cancer
Research Center. Mr. Harris received a B.S.B.A. degree from the University of
Denver in 1975. He devotes full time to the Company's business.
George Leonard - Age 46. Mr. Leonard joined CommWorld in May 1996 as Executive
- --------------
Vice President and Chief Operating Officer of the Information Systems and
Marketing Division. From January 1995 to May 1996, Mr. Leonard was Consultant
and Vice President, Business Development for VideoWare Inc. in Dallas, Texas, a
video communications and multimedia development and marketing company. From May
1994 to May 1996, Mr. Leonard was a consultant to the president of Impact
Solutions Corporation of San Diego, California, a company engaged in mobile
computing solutions for the U.S. public safety sector. From August 1992 to May
1994, he was Chief Operating Officer for The Complete Systems Corporation
genesys in Orlando, Florida, and CEO of Discovery Technologies Inc. in Longmont,
Colorado, related companies providing medical imaging systems for the U.S.
health care sector. Mr. Leonard owned Aspencliff Computing from May 1990 to
August 1992, where he provided technology and business development consulting to
high technology companies. Mr. Leonard devotes full time to the Company's
business.
Each of the directors was elected to serve until the next annual meeting of
shareholders and until their successors have been elected and have qualified.
There are no family relationships between any director or executive officer of
the Company.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), during its most recent fiscal year and Form 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and any written representation referred to in Item 405(f)(2)(i), to
the Company's knowledge, no officer, director, or beneficial owner of more than
ten percent of the Company's equity securities failed to file on a timely basis,
as disclosed in the above forms, reports required by Section 16(a) of the 1934
Act during the most recent fiscal year or prior fiscal years.
Item 10. Executive Compensation
-----------------------
The following table sets forth information concerning all compensation paid by
the Company and options granted by the Company to the Chief Executive Officer of
the Company and to each officer who earned more than $100,000, during the years
ended April 30, 1996 and 1995.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------------------------
Annual Compensation Awards
------------------------------- -------------------------
Payouts
-------
Other
Annual Restricted All other
Name and Salary Compensa- Stock Options/ LTIP Compensa-
Principal Position (1) Year ($) Bonus tion (2) Awards SARs Payouts tion
- ---------------------- ---- ----- ----- --------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard D. Olson, CEO 1996 72,000 -0- -0- -0- -0- -0- -0-
Richard D. Olson, CEO 1995 72,000 -0- -0- -0- -0- -0- -0-
</TABLE>
13
<PAGE>
(1) The Company pays health insurance premiums for its executive officers, and
provides its President with the use of a Company-owned automobile. The
aggregate amount of such compensation is less than either $50,000 or 10% of
the total of annual salary and bonus for the above executive officer, which
includes automobile expense of approximately $4,000.
401(k) Plan
- -----------
On August 1, 1985, the Company established an Employees' Savings Plan (ESP) for
all full-time employees who have at least twelve months of continuous service by
August 1 of each plan year and who have attained the age of twenty-one. As
amended, the Company may make matching contributions up to 50% of the
participant's contribution (made via salary reduction arrangements) as described
in the ESP. In addition, the Company may also make an annual contribution from
its profits.
Stock Option and Stock Appreciation Plans
- -----------------------------------------
In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"), subject to
shareholder approval, pursuant to which options to purchase up to 257,000 shares
of Common Stock could be granted to employees of the Company. There are
currently outstanding options to purchase 23,500 shares of Common Stock at
$4.125 per share, options to purchase 25,000 shares of Common Stock at $2.75 per
share, options to purchase 25,000 shares of Common Stock at $1.56 per share, and
options to purchase 50,000 shares of Common Stock at $1.00 per share pursuant to
this Plan; all of which were granted at the market value on the date of grant.
The options have been granted subject to shareholder approval of the Plan and
become exercisable over a three-year period and must be exercised within five
years of the date of grant.
Compensation of Directors
- -------------------------
In 1993, the Company also adopted a Non-discretionary Stock Option Plan for non-
employee directors pursuant to which options to purchase up to 20,000 shares of
the Company's Common Stock would be granted to directors of the Company who are
not employees of the Company. Options to purchase 9,583 shares of the Company's
Common Stock are currently outstanding and exercisable at prices ranging from
$2.19 to $6.25 per share. The exercise price for all outstanding options and
for future grants is the fair market value of the Common Stock on the respective
dates of grant. Each director is entitled to receive options to purchase 1,000
shares of Common Stock on November 1 of each year. During the fiscal year ended
April 30, 1996, both Samuel D. Addoms and Edwin B. Spievack received options to
purchase 1,000 shares of Common Stock. The options are exercisable for three
years from the date of grant.
The Company does not pay directors for meetings attended. During the year ended
April 30, 1996, the Company held four meetings of the Board of Directors and
took action at other times by written consent. Each director attended 75
percent or more of the meetings held during the period he served as a director.
Item 11. Security Ownership of Certain Beneficial Owners and Management
---------------------------------------------------------------
The following table sets forth the persons known to the Company to own
beneficially more than five percent of the outstanding Common Stock on July 19,
1996 and information as of July 19, 1996 with respect to the ownership of equity
by each director of the Company and by all officers and directors as a group.
14
<PAGE>
Certain Beneficial Owners
- -------------------------
<TABLE>
<CAPTION>
Name & Address of Shares Beneifically
Beneficial Owner Title of Class Owned (1) Percent (2)
- ----------------- -------------- ------------------ -----------
<S> <C> <C> <C>
Samuel D. Addoms (3) Common Stock 6,000 0.4%
1900 Fairfax Street
Denver, CO 80220
Richard D. Olson (4) Common Stock 325,424 19.7%
10414 Strasburg Way
Parker, CO 80134
Edwin B. Spievack (3) Common Stock 3,583 .2%
2000 M Street, N.W., #550
Washington, D.C. 20036
Officers and Directors as Common Stock 397,507 24%
a Group (5 persons)(3)
</TABLE>
(1) Beneficial ownership results in each case from the possession of sole or
shared voting and investment power with respect to the shares.
(2) Gives effect to the issuance of 250,000 shares of Common Stock pursuant to
the mandatory conversion of 250,000 shares of Series E Preferred Stock (see
Item 6).
(3) The number of shares set forth opposite the name of Samuel D. Addoms
include options to purchase 4,000 shares. All of the shares set forth
opposite the name of Edwin B. Spievack underlie options held by Mr.
Spievack. The number of shares set forth opposite the officers and
directors as a group include the aforementioned options to Messrs. Addoms
and Spievack.
(4) The shares set forth opposite the name of Richard D. Olson include 32,000
common shares owned by H. David Hunt. Pursuant to an agreement with Mr.
Hunt, Mr. Olson, as the Company's President, may be deemed to be the
beneficial owner, insofar as Mr. Hunt has assigned his voting rights to the
Company. Additionally, of the shares set forth opposite the name of
Richard D. Olson, 135,084 shares are pledged to TAIS as security for a note
payable by Mr. Olson to TAIS.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------
In October 1992, the Company authorized the establishment and designation of
1,000,000 shares of Series A Preferred Stock and issued 600,000 shares of the
Series A Preferred Stock to Toshiba America Information Systems, Inc. (TAIS) in
consideration for cancellation of $600,000 of indebtedness owed by the Company
to TAIS. The Series A Preferred Stock was convertible into Common Stock at the
election of the holders at a conversion price equal to the average price of the
Common Stock in the immediately preceding 30 trading days. Dividends were
payable at the rate of $.08 per share per annum and accrued, if not paid. The
Series A Preferred Stock had no voting rights, but the holders had the right to
designate a nonvoting observer to the Board of Directors.
15
<PAGE>
Upon liquidation, dissolution or winding up of the Company, the Series A
Preferred Stock was entitled to a preference of $1.00 per share plus accrued and
unpaid dividends from the proceeds of the sale or distribution of the Company's
assets prior to any distribution from such sources to the holders of Common
Stock. The Company had the right to redeem up to one-half of the Series A
Preferred Stock at $1.00 per share plus accumulated and unpaid dividends on the
shares being redeemed. In December 1992, the Company redeemed 300,000 shares of
the Convertible Preferred Stock outstanding for $1.00 per share plus accumulated
and unpaid dividends of $4,537.
In February 1994, the remaining 300,000 shares of Series A Preferred Stock were
converted into 135,084 shares of Common Stock. The shares of Common Stock were
then sold to the Company's President, Richard D. Olson, in exchange for Mr.
Olson's promissory note in the amount of $300,000. The note is secured by the
stock purchased by Mr. Olson.
As previously discussed, the Company negotiated with TAIS, effective December
22, 1995, to transfer $1,530,950 of current trade accounts payable and a short-
term note payable to a long-term note payable. The note has been guaranteed
personally by Richard D. Olson, President of the Company.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
2. Plan of Acquisition
(a) Plan and Agreement of Merger with Communications World of Seattle-North
filed as Exhibit 10.13 to the Report on Form 10-KSB for the year ended
April 30, 1994 is incorporated herein by this reference.
(b) Plan and Agreement of Merger with Digital Telecom, Inc. filed as
Exhibit to the Report on Form 8-K filed on October 5, 1994 is
incorporated herein by reference.
(c) Merger Agreement dated as of August 1, 1995 among the Registrant,
CommWorld National Capitol Area, Inc., Communications World of
Columbia, Inc., John E. Hanner and John C. Hanner.
(d) Merger Agreement, dated as of August 1, 1995, among the Registrant,
CommWorld National Capitol Area, Inc., Alpha Communications &
Technology, Inc. and Bennie R. Hester.
3. Articles of Incorporation and Bylaws.
(a) Articles of Incorporation, as amended, filed as Exhibit 3(a) to the
Registration Statement on Form SB-2 (File No. 33-87808) is incorporated
herein by this reference.
(b) Bylaws, as amended, filed as Exhibit 3.2 to the Registration Statement
on Form S-1 (File No. 33-53550) is incorporated herein by this
reference.
4. Instruments defining the rights of holders, incl. indentures
Forms of Warrants filed as Exhibits 1.4 and 4 to the Registration Statement
on Form S-1 (File No. 33-53550) are incorporated herein by this reference.
Certificates of Designation establishing Series B, C and E Preferred Stock
filed with Amendments to Articles of Incorporation in 3(a) above.
10. Material Contracts
(a) Asset Purchase, Sale and Security Agreement dated as of July 31, 1992,
between Registrant and Donaldson & Associates, Inc., filed as Exhibit
10.5 to the Registration Statement on Form S-1 (File No. 33-53550) is
incorporated herein by this reference.
16
<PAGE>
(b) Amendment to Agreement dated July 1994, between Registrant and H.
David Hunt, filed as Exhibit 10.7 to the Report on Form 10-KSB for the
year ended April 30, 1994 is incorporated herein by this reference.
(c) Current Form of Franchise Agreement filed as Exhibit 10(f) to the
Registration Statement on Form SB-2 (File No. 33-87808) is
incorporated herein by this reference.
(d) 1994 Stock Option Plan filed as Exhibit 10(g) to the Registration
Statement on Form SB-2 (File No. 33-87808) is incorporated herein by
this reference.
(e) Non-Discretionary Stock Option Plan filed as Exhibit 10(h) to the
Registration Statement on Form SB-2 (File No. 33-87808) is
incorporated herein by this reference.
(f) Merger Agreement, Non-Compete Agreement and Employment Agreement dated
as of April 29, 1994, between Registrant, Master Franchise, Inc.,
Communications World of Phoenix South, Inc. and Roland Heath, filed as
Exhibit 10.12 to the Report on Form 10-KSB for the year ended April
30, 1994 is incorporated herein by this reference.
(g) Merger Agreement, Non-Compete Agreements and Employment Agreements
dated as of July 15, 1994 between Registrant and Communications World
of Seattle-North, Inc., David Lepsig and Diane Lepsig, individually,
filed as Exhibit 10.13 to the Report on Form 10-KSB for the year ended
April 30, 1994 is incorporated herein by this reference.
(h) Accounts Receivable Financing Agreement dated January 19, 1995 with
Republic Acceptance Corporation filed as Exhibit 10(m) to the
Registration Statement on Form SB-2 (File No. 33-87808) is
incorporated herein by this reference.
(i) Security Agreement dated January 19, 1995 with Republic Acceptance
Corporation filed as Exhibit 10(n) to the Registration Statement on
Form SB-2 (File No. 33-87808) is incorporated herein by this
reference.
(j) Agreement to Restructure Debt, effective December 22, 1995 between
Registrant and Toshiba America Information Systems, Inc., Promissory
Note dated December 22, 1995 in the amount of $1,530,950 made by
Registrant to Toshiba America Information Systems, Inc., and Personal
Guaranty by Richard D. Olson, President of Registrant, in favor of
Toshiba America Information Systems, Inc. effective December 22, 1995.
(b) Reports on Form 8-K
-------------------
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 13, 1996
COMMUNICATIONS WORLD
INTERNATIONAL, INC.
(a Colorado Corporation)
By: /s/ Richard D. Olson
---------------------------------------
Richard D. Olson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Dated: August 13, 1996 By: /s/ Richard D. Olson
-------------------------------------------------
Richard D. Olson, President, Chief Executive
Officer and Director
Dated: August 13, 1996 By: /s/ Scott E. Harris
-------------------------------------------------
Scott E. Harris, Executive Vice President, Chief
Financial Officer
Dated: August 13, 1996 By: /s/ George Leonard
-------------------------------------------------
George Leonard, Executive Vice President, Chief
Information Officer
Dated: August 13, 1996 By: /s/ Samuel D. Addoms
-------------------------------------------------
Samuel D. Addoms, Director
Dated: August 13, 1996 By: /s/ Edwin Spievack
-------------------------------------------------
Edwin Spievack, Director
</TABLE>
18
<PAGE>
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, 1996 and 1995, 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, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 13. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
July 22, 1996
F-1
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets (Note 3) 1996 1995
- ---------------------------------------- ------------ -----------
<S> <C> <C>
Current assets:
Cash $ 103,748 68,998
Trade accounts and current portion of
notes receivable, less allowance for
doubtful accounts of $204,805 in 1996
and $140,782 in 1995 (note 4) 1,887,393 1,955,976
Inventories 807,884 896,662
Prepaid expenses 33,069 163,296
----------- ----------
Total current assets 2,832,094 3,084,932
Property and equipment, net (notes 5
and 9) 495,305 481,524
Deposits and other assets 27,689 20,298
Notes receivable (note 4) 83,576 71,442
Intangible assets, net (notes 2 and 8) 1,302,058 1,389,277
----------- ----------
$ 4,740,722 5,047,473
=========== ==========
Liabilities and Stockholders' Equity
- ----------------------------------------
Current liabilities:
Trade accounts payable $ 1,240,319 1,966,791
Revolving line of credit (note 3) 689,060 691,231
Current portion of notes payable,
including amounts due to related
parties of $83,688 in 1996 (notes 2
and 6) 388,111 87,175
Accrued expenses, deposits and other
liabilities 278,494 341,119
Current portion of capital lease
obligations (note 9) 29,736 22,659
----------- ----------
Total current liabilities 2,625,720 3,108,975
Capital lease obligations (note 9) 62,600 39,398
Notes payable, including amounts due to
related parties of $300,220
in 1996 (notes 2 and 6) 1,485,028 344,624
----------- ----------
Total liabilities 4,173,348 3,492,997
Stockholders' equity (notes 2, 10 and
11):
Convertible preferred stock, $1.00 par
value, 3,000,000 shares authorized:
Series B (cumulative) 80,088 shares
issued and outstanding in 1996
and 1995 (Liquidation preference
of $92,902) 80,088 80,088
Series C (cumulative) 426,679
shares issued and outstanding in
1996 and 321,545 shares issued and
outstanding in 1995 (Liquidation
preference of $473,299) 426,679 321,545
Series E 250,000 shares issued and
outstanding in 1995 - 611,994
Common stock, no par value, 2,000,000
shares authorized; issued and
outstanding 1,546,039 shares in 1996
and 1,274,164 shares in 1995 4,141,012 3,441,518
Additional paid-in capital 452,884 452,884
Accumulated deficit (4,533,289) (3,353,553)
----------- ----------
Total stockholders' equity 567,374 1,554,476
----------- ----------
Commitments and contingencies (notes 9
and 10) $ 4,740,722 5,047,473
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended April 30, 1996 and 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Revenue:
Initial franchise fees $ 82,500 90,000
Royalty fees 200,722 182,016
Equipment and related service revenue 5,365,658 5,655,485
Direct equipment and service sales 6,750,372 4,064,784
Leasing fees and rental income 91,092 119,001
Interest and other income 65,972 118,885
----------- ----------
12,556,316 10,230,171
----------- ----------
Costs and expenses:
Cost of equipment and related service
revenue 4,858,706 5,062,243
Cost of direct equipment and service
sales 3,737,404 2,390,992
Cost of leasing and rental revenue 7,114 3,177
Selling 778,704 536,531
General and administrative 3,537,585 2,418,428
Interest expense and loan fees,
including related party
interest of $21,273 in 1996 and
$23,162 in 1995 279,268 174,121
Amortization of intangible assets 249,441 198,908
Provision for bad debts 287,830 156,383
----------- ----------
13,736,052 10,940,783
----------- ----------
Net loss (1,179,736) (710,612)
Cumulative dividends on preferred stock 38,438 20,995
----------- ----------
Loss applicable to common stock $(1,218,174) (731,607)
=========== ==========
Weighted average number of shares 1,510,388 1,238,729
outstanding =========== ==========
Loss per common share $(.81) (.59)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended April 30, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series B Series C Series E
Preferred Stock Preferred Stock Preferred Stock Common Stock
------------------ ----------------- -------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- -------- ------- -------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, May 1, 1994 80,088 $80,088 -- $ -- -- $ -- 1,166,296 $2,999,482
Net loss -- -- -- -- -- -- -- --
Issuance of preferred stock,
net of offering costs (note 10) -- -- -- -- 250,000 611,994 -- --
Issuance of preferred stock for
acquisitions (notes 2 and 10) -- -- 321,545 321,545 -- -- -- --
Issuance of common stock for
acquisition (notes 2 and 10) -- -- -- -- -- -- 107,868 442,036
------ ------- ------- -------- --------- --------- --------- ----------
Balances, April 30, 1995 80,088 80,088 321,545 321,545 250,000 611,994 1,274,164 3,441,518
Net loss -- -- -- -- -- -- -- --
Issuance of preferred stock for
acquisitions (notes 2 and 10) -- -- 105,134 105,134 -- -- -- --
Issuance of common stock for
acquisition (notes 2 and 10) -- -- -- -- -- -- 21,875 87,500
Conversion of Series E Preferred
Stock to Common Stock -- -- -- -- (250,000) (611,994) 250,000 611,994
----- -------- ------- -------- -------- --------- --------- ----------
Balances, April 30, 1996 80,088 $80,088 426,679 $426,679 -- $ -- 1,546,039 $4,141,012
====== ======= ======= ======== ======== ========= ========= ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
paid-in Accumulated stockholders'
capital deficit equity
---------- ----------- -------------
<S> <C> <C> <C>
Balances, May 1, 1994 452,884 (2,642,941) 889,513
Net loss -- (710,612) (710,612)
Issuance of preferred stock,
net of offering costs (note 10) -- -- 611,994
Issuance of preferred stock for
acquisitions (notes 2 and 10) -- -- 321,545
Issuance of common stock for
acquisition (notes 2 and 10) -- -- 442,036
------- ---------- ----------
Balances, April 30, 1995 452,884 (3,353,553) 1,554,476
Net loss -- (1,179,736) (1,179,736)
Issuance of preferred stock for
acquisitions (notes 2 and 10) -- -- 105,134
Issuance of common stock for
acquisition (notes 2 and 10) -- -- 87,500
Conversion of Series E Preferred
Stock to Common Stock -- -- --
------- ---------- -------
Balances, April 30, 1996 452,884 (4,533,289) 567,374
======= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1996 and 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,179,736) (710,612)
Adjustments to reconcile to net cash
provided by
(used in) operating activities, net
of effect of acquisitions:
Depreciation and amortization 414,412 280,757
Provision for bad debts on
accounts and notes 287,830 156,383
receivable
Gain on sale of assets, net -- (3,191)
Changes in operating assets and
liabilities:
Trade accounts and notes
receivable (170,093) (479,453)
Inventories 133,549 (32,515)
Prepaid expenses 130,227 (99,873)
Deposits and other assets (7,391) 14,733
Trade accounts payable 774,684 497,028
Accrued expenses, deposits and
other liabilities (112,625) (176,393)
----------- --------
Net cash provided by (used
in) operating activities 270,857 (553,136)
----------- --------
Cash flows from investing activities,
net of effect of acquisitions:
Proceeds from sale of assets -- 9,500
Cash paid for acquisition (15,958)
Cash acquired in acquisitions in
excess of cash paid -- 14,147
Capital expenditures (68,647) (96,646)
----------- --------
Net cash used in investing
activities (84,605) (72,999)
----------- --------
Cash flows from financing activities:
Net borrowings (payments) under
line-of-credit agreement (2,171) 608,484
Payments of notes payable (119,610) (547,097)
Principal payments on capital lease
obligations (29,721) (23,477)
Issuance of preferred stock, net of -- 611,994
offering costs ----------- --------
Net cash provided by (used
in) financing activities (151,502) 649,904
----------- --------
Net increase in cash 34,750 23,769
Cash at beginning of the year 68,998 45,229
----------- --------
Cash at end of the year $ 103,748 68,998
=========== ========
</TABLE>
(Continued)
F-5
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---------- -------
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid $ 265,268 161,240
Non-cash investing activities:
Business acquisitions financed by:
Issuance of common stock 87,500 442,036
Issuance of preferred stock 105,134 321,545
Issuance of notes payable 30,000 300,000
Accrued expenses -- 64,376
Conversion of:
Trade accounts payable to note payable 1,530,950 --
Preferred stock to common stock 611,994 --
Equipment acquisitions through capital
lease obligations 60,000 44,459
Equipment acquisitions through issuance
of notes payable -- 60,488
</TABLE>
The Company purchased all of the capital stock of Digital Telecom, Incorporated
in October 1994 for consideration of approximately $715,000, all of the capital
stock of Communications World of Seattle North, Inc. in July 1994 for
consideration of approximately $453,060 and all of the capital stock of
Communications World of Columbia, Inc. and Alpha Communications & Technology,
Inc. (now doing business as CommWorld National Capitol Area, Inc.) in August
1995 for consideration of approximately $247,430. In conjunction with the
acquisitions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
National
Digital Seattle Capitol
---------- --------- ----------
<S> <C> <C> <C>
Fair value of assets acquired $ 994,467 835,254 277,228
Value of consideration paid for the
capital stock (715,000) (453,060) (247,430)
---------- --------- ----------
Liabilities assumed $ 279,467 382,194 29,798
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1996 and 1995
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Presentation
The consolidated financial statements presented are those of Communications
World International, Inc. and its subsidiaries, CommWorld of Phoenix, Inc.,
CommWorld of Seattle, Inc., Digital Telecom, Inc. and CommWorld National
Capitol Area, Inc. (collectively, the "Company" or "CommWorld"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
General Business
CommWorld was incorporated under Colorado law in 1983 and has its principal
executive offices at 6025 South Quebec Street, Suite 300, Englewood,
Colorado 80111. CommWorld is engaged in the distribution of franchise
licenses in the telephone interconnect industry and derives its income from
five primary sources; initial franchise fees, the sale of equipment and
services to franchisees, the sale of equipment and services to multi-
location customers (national accounts), the sale of equipment and services
to customers of Company-owned outlets, and revenue from leasing fees and
rental of equipment.
The Company currently purchases telephone systems and various peripheral
equipment from seven major suppliers. One of the suppliers provides
approximately 75% 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. The Company had 65 franchises located in 27
states and 7 Company-owned outlets at April 30, 1996.
Revenue Recognition
Initial Franchise Fees
----------------------
Initial franchise fees from the sale of franchises are recognized upon the
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 franchiser obligations, are
expensed upon the recognition of the related revenue. These direct costs are
approximately 40% of gross initial franchise fees.
Royalty Fees
------------
Royalty fees are cost mark-up royalties charged to certain franchisees who
purchase equipment directly from suppliers with whom the Company has
purchasing contracts. The Company is notified by the supplier of the
purchases by the franchisees and the fees are charged to the franchisee and
recognized as income on a monthly basis.
F-7
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Equipment and Related Service Revenue
- -------------------------------------
Revenue from sales is generally recognized when products are shipped or
otherwise delivered to franchisees. The franchisee is entitled to purchase
equipment from or through the Company on a "cost mark-up royalty" basis, i.e.
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.
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.
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.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
estimated market value and include 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 ten 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
F-8
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
changes in circumstances indicate that the carrying amount 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.
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. Cost in excess of amounts allocated to
inventory, equipment and other assets is classified as franchises reacquired to
the extent supportable by the fair value of the customer base(s) 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.
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
included in the calculation as 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.
F-9
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Business Acquisitions
In April 1994, the Company entered into a merger agreement pursuant to which
Master Franchise, Inc. and Communications World of Phoenix South, Inc. merged
into CommWorld of Phoenix, Inc., an Arizona corporation organized as a
subsidiary of the Company to be the survivor of this merger. The Company
acquired all of the outstanding capital stock of Master Franchise, Inc. and
Communications World of Phoenix South, Inc. for approximately $378,000 from the
sole shareholder, Mr. Rolden Heath ("Heath").
Prior to the merger, Master Franchise, Inc. and Communications World of Phoenix
South, Inc. sold and serviced telephone systems, voice processing products and
related peripherals. These activities have been continued subsequent to the
merger under the same management. The assets acquired consist of cash, trade
accounts receivable, inventory and furniture, fixtures and equipment. The
liabilities assumed consist of trade accounts payable and accrued expenses.
The purchase was financed by the issuance of 47,765 shares of common stock,
valued at the market price of the common stock on the date of the letter of
intent, 80,088 shares of Series B Preferred Stock valued at its estimated fair
value of $1.00 per share, and the issuance of notes payable in the aggregate
principal amount of $95,000, of which $25,000 was paid in June 1994. The notes
are payable with interest only for the first year and then payable in equal
monthly installments over three years with interest at 9% per annum.
Additionally, Heath entered into a three year employment and non-compete
agreement with CommWorld of Phoenix, Inc. This acquisition has been accounted
for as a purchase and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed 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 $200,000 has been recorded as
goodwill and is being amortized on a straight-line basis over ten years.
In July 1994, Communications World of Seattle North, Inc. ("CWSN") merged into
International Communications Acquisition Corp. of Washington, a Washington
corporation organized as a subsidiary of the Company to be the survivor of this
merger. In connection with the merger, the name of the surviving corporation
was changed to CommWorld of Seattle, Inc.
The Company acquired all of the outstanding capital stock of CWSN for
approximately $453,000 from the shareholders, David and Diane Lepsig
("Lepsigs"). Prior to the merger, CWSN was a franchisee of the Company which
sold and serviced telephone systems, voice processing products and related
peripherals. These activities have continued subsequent to the merger under the
same management. The assets acquired consist of cash, trade accounts
receivable, inventory and furniture, fixtures and equipment. The liabilities
assumed consist of trade accounts payable, accrued expenses and a bank line-of-
credit.
F-10
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Business Acquisitions (continued)
The purchase was financed by the issuance of 50,117 shares of common stock,
valued at the market price of the common stock on the date of the letter of
intent, 140,060 shares of Series C Preferred Stock valued at its estimated fair
value of $1.00 per share, and the issuance of notes payable in the principal
amount of $100,000, of which $25,000 was paid in July 1994. The remaining
$75,000 is payable with interest only for the first two years and then payable
in equal monthly installments over three years with interest at 10% per annum.
The Lepsigs entered into employment and non-compete agreements and are entitled
to receive, in addition to their regular salaries, 50% of the annual net income
before taxes of CommWorld of Seattle, Inc. greater than $75,000 per year for a
three-year period, up to a aggregate maximum amount of $200,000 for the three
years. This acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated to the assets acquired and liabilities
assumed 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 $280,000 has been recorded as goodwill and is being amortized on a
straight-line basis over ten years.
In October 1994, Digital Telecom Incorporated ("DTI") merged into International
Communications Acquisition Corp. of Colorado, a Colorado corporation organized
as a subsidiary of the Company to be the survivor of this merger. In connection
with the merger, the name of the surviving corporation was changed to Digital
Telecom, Inc., d.b.a. CommWorld NationWide. The Company acquired all of the
outstanding capital stock of DTI for approximately $595,000 from the two
shareholders, Russell Withers ("Withers") and Ronald Haines ("Haines").
Prior to the merger, DTI sold and serviced telephone systems, voice processing
products and related peripherals. These activities have been continued
subsequent to the merger under the same management. The assets acquired consist
of cash, trade accounts receivable, inventory and furniture, fixtures and
equipment. The liabilities assumed consist of trade accounts payable and
accrued expenses.
The purchase price consisted of cash of $38,000, the issuance of 57,750 shares
of common stock, valued at the market price of the common stock on the date of
the letter of intent, 126,000 shares of Series C Preferred Stock valued at its
estimated fair value of $1.00 per share and the issuance of notes payable in the
principal amount of $200,000. The notes are payable with interest only for the
first two years and then payable in equal monthly installments over three years
with interest at 9% per annum. Withers and Haines each entered into employment
and non-compete agreements and will be entitled to receive, in addition to their
regular salaries, 3.5% of annual net income before taxes of CommWorld NationWide
for a period of three years for Withers and two years for Haines, respectively,
under certain circumstances.
F-11
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) Business Acquisitions (continued)
The consideration for the DTI acquisition was in part contingent on achieving
specified earnings levels for the seven-month period between October 1, 1994 and
April 30, 1995. DTI met the terms of the earn-out provisions of the agreement
that increased the acquisition price by approximately $120,000. In
consideration for the earn-out, the Company issued 55,484 shares of Series C
Preferred Stock effective April 30, 1995 and paid $64,516 to Haines and Withers
in fiscal 1996.
This acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed 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
$640,000 was recorded as goodwill and is being amortized on a straight-line
basis over ten years.
Effective August 1, 1995, Communications World of Columbia, Inc. (Columbia) and
Alpha Communications & Technology, Inc. (Alpha), d.b.a. CommWorld of Northern
Virginia, merged with CommWorld National Capitol Area, Inc., a subsidiary of the
Company organized to be the survivor of this merger. The Company acquired all
of the outstanding capital stock of Columbia from the two shareholders, John E.
Hanner and John C. Hanner. The purchase price consisted of cash of $17,500, the
issuance of 10,000 shares of common stock, valued at the market price of the
common stock at the date of the letter of intent, 40,000 shares of Series C
Preferred Stock valued at $1.00 per share, and the issuance of notes payable in
the aggregate principal amount of $30,000. The notes are payable with interest
only for the first two years, and then payable in equal monthly installments
over three years with interest at 9% per annum. Each of the individuals entered
into employment and non-compete agreements with the Company. The Company
acquired all of the outstanding common stock of Alpha from the sole shareholder,
Bennie Hester. The purchase price consisted of cash of $7,500, the issuance of
11,875 shares of common stock, valued at the market price of the common stock at
the date of the letter of intent, and 65,134 shares of Series C Preferred Stock
valued at $1.00 per share.
The acquisition of Columbia and Alpha was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed 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 $152,900 was recorded as goodwill and is being
amortized on a straight line basis over ten years.
The operations of Phoenix, CWSN and DTI are included in the consolidated
financial statements for the entire year ended April 30, 1996 and substantially
all of the year ended April 30, 1995. The operations of Columbia and Alpha for
the periods prior to acquisition would not have had a material effect on net
sales or net loss of the consolidated operations on a pro forma basis.
F-12
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(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 $1,000,000 subject to certain collateral limitations. Interest at
the rate of prime plus 10% per annum is due monthly. The revolving line of
credit is collateralized by substantially all of the assets of the Company.
(4) Notes Receivable
In prior years and in the current year, amounts due on open account from various
franchisees were converted to promissory notes receivable bearing interest at
rates ranging from 8.5% to 12% per annum payable in 12, 24 or 36 monthly
installments 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
such sales financed under promissory notes receivable. The Company also may
finance payments of initial franchise fees under promissory notes for up to four
months. Promissory notes receivable consist of the following at April 30:
1996 1995
---- ----
Equipment sales $ 121,013 103,510
Company-owned outlet sales 134,987 160,986
Franchise fees 33,333 39,209
President - Commworld (note 10) 25,000 25,000
--------- --------
314,333 328,705
Less current portion 230,757 257,263
--------- --------
Non-current portion $ 83,576 71,442
========= ========
(5) Property and Equipment
Property and equipment consists of the following at April 30:
Estimated
useful life 1996 1995
----------- ---- ----
Furniture, fixtures and equipment 3-5 $ 885,868 774,467
Rental property 5 10,047 10,047
Vehicles 5 103,393 43,393
Leasehold improvements and other 5 5,039 5,039
----------- -------
1,004,347 832,946
Less accumulated depreciation and
amortization (509,042) (351,422)
----------- -------
Property and equipment, net $ 495,305 481,524
=========== =======
F-13
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(6) Notes Payable
Notes payable consist of the following at April 30:
1996 1995
---- ----
Installment note payable to Toshiba America Information
Systems, Inc. (TAIS) $ 1,456,735 -
Note payable to the President - CommWorld of Phoenix,
Inc. (note 2) 50,606 70,000
Note payable to the Vice President - CommWorld of
Seattle, Inc. (note 2) 37,500 37,500
Note payable to the President - CommWorld of Seattle,
Inc. (note 2) 37,500 37,500
Note payable to the Vice President - CommWorld NationWide
(note 2) 50,000 50,000
Note payable to the President - CommWorld NationWide
(note 2) 150,000 150,000
Note payable to the President of the Company's
video production unit - Infinity Visual Communications
16% interest, payable monthly and maturing in March
1998 28,302 51,816
Notes payable to former owners of CommWorld
of Columbia (note 2) 30,000 -
Installment note payable to one of the Company's law
firms, 12% interest, payable on demand 26,743 26,749
Note payable to a bank, secured by a vehicle, 9.5%
interest, payable monthly and maturing in February
1998 5,753 8,234
----------- -------
1,873,139 431,799
Less current portion 388,111 87,175
----------- -------
Non-current portion $ 1,485,028 344,624
=========== =======
Effective December 22, 1995, the Company entered into an agreement with TAIS,
its major supplier and unsecured creditor, to transfer $1,530,950 of current
trade accounts payable and short-term note payable to a long-term note payable
(the "Note") and to increase the current credit facility by $400,000. Pursuant
to the Note, the Company is required to make 60 equal installments of $29,598,
including interest at 6% per annum, which began in February 1996. In addition
to the monthly installments, the Company is required to make prepayments of
principal of at least $10,000 per month if the monthly net operating cash flow
of the Company, defined as pre-tax income plus depreciation and amortization,
exceeds $75,000 for three consecutive months. Thereafter, 60% of each
additional $5,000 of monthly net operating cash flow in excess of $75,000 must
be paid. The Company is also
F-14
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
required to use a portion of the net proceeds from the offering of its stock or
debt securities to make a principal prepayment. The prepayment will be equal to
a percentage of the net proceeds in excess of $350,000 as follows: 40% of net
proceeds between $350,000 and $1 million, 50% of net proceeds between $1 million
and $2 million, 60% of net proceeds between $2 million and $3 million and 100%
of net proceeds in excess of $3 million, but not to exceed the remaining
principal balance of the Note. The Company has no present plans for an
offering. The Note has been guaranteed personally by Richard D. Olson,
President of the Company.
The fair value of the note payable to Toshiba America Information Systems, Inc.
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,
1996, the estimated fair value of the TAIS note was approximately $982,000.
The scheduled maturities of notes payable, by fiscal year, are $388,111 in 1997,
$422,554 in 1998, $425,079 in 1999, $385,615 in 2000, and $251,780 in 2001.
(7) Franchised and Company-Owned Outlets
The following table provides data on franchised outlets and Company-owned
outlets:
Company-
Franchised owned
outlets outlets
---------- --------
May 1, 1994 58 5
Sold 8 -
Terminated (2) -
Acquired franchises (1) 1
-- --
April 30, 1995 63 6
Sold 7 -
Terminated (3) (1)
Acquired franchises (2) 2
-- --
April 30, 1996 65 7
== ==
F-15
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(8) Intangible Assets
Intangible assets consist of the following at April 30:
Amortization
period 1996 1995
------------ ----------- ---------
Goodwill 10 years $ 1,248,111 1,161,867
Franchises reacquired 5 years 307,580 307,580
Non-compete agreements 2-5 years 184,500 142,500
----------- ---------
1,740,191 1,611,947
Less accumulated amortization 438,133 222,670
----------- ---------
Intangible assets, net $ 1,302,058 1,389,277
=========== =========
(9) Leased Property
Operating Leases
The Company leases office space and related facilities, equipment and vehicles
under noncancelable operating leases. Future minimum lease payments for such
operating leases are as follows:
Year ended April 30:
1997 $ 281,866
1998 174,743
1999 30,579
---------
$ 487,188
=========
Aggregate rental expense under operating leases was $339,237 and $259,617 for
the years ended April 30, 1996 and 1995, respectively.
F-16
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(9) Leased Property (continued)
Capital Leases
The Company leases computer equipment and vehicles under capital leases. At
April 30, 1996, scheduled future minimum payments under capital leases with
initial or remaining terms of one year or more are as follows:
Year ended April 30: $ 49,121
1997 25,369
1998 14,688
1999 14,688
2000 2,448
2001 ---------
Total minimum lease payments 106,314
Less executory costs 3,200
---------
Net minimum lease payments 103,114
Less interest 10,778
---------
Present value of net minimum
lease payments 92,336
Less current portion 29,736
---------
Non-current portion $ 62,600
=========
The following is a summary of property and equipment
under capital leases at April 30:
1996 1995
---- ----
Computer equipment $ 80,692 80,692
Vehicles 78,935 18,935
--------- -------
159,627 99,627
Accumulated amortization (55,946) (24,021)
--------- -------
$ 103,681 75,606
========= =======
Amortization of assets held under capital leases is included in depreciation
expense.
F-17
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(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 and issued 600,000 shares of the
Series A Preferred Stock to TAIS in consideration for cancellation of $600,000
of indebtedness owed by the Company to TAIS. In December 1992, the Company
redeemed 300,000 shares of the Convertible Preferred Stock outstanding for $1.00
per share plus accumulated and unpaid dividends of $4,537. In February 1994, the
remaining 300,000 shares of Series A Preferred Stock were converted into 135,084
shares of common stock.
Series B Preferred Stock
In connection with the Company's acquisition of Master Franchise, Inc. and
Communications World of Phoenix South, Inc. (see note 2), the Company authorized
100,000 shares of Series B Preferred Stock and issued 80,088 shares to Rolden
Heath, the sole shareholder of the acquirees. Shares of the Series B Preferred
Stock are convertible into common stock at the election of the holders of the
Series B Preferred Stock at a conversion price of $6.25 at any time until April
30, 1997. Dividends on the Series B Preferred Stock will be paid, when and as
declared by the Board of Directors, at the rate of $.08 per share per annum.
Dividends on the Series B Preferred Stock will be paid before any dividends on
shares of the Company's common stock are paid. Upon liquidation, dissolution or
winding up of the Company, the Series B 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 B
Preferred Stock at $1.00 per share plus accrued and unpaid dividends by giving
thirty days notice to the holders of the Series B Preferred Stock. At April 30,
1996, there were $12,814 in accumulated dividends.
Series C Preferred Stock
The Company authorized 430,000 shares of Series C Preferred Stock and issued
140,060 shares to David and Diane Lepsig, the sole shareholders of CommWorld of
Seattle North, Inc. (see note 2) and issued 181,484 shares to Russell Withers
and Ronald Haines, the sole shareholders of Digital Telecom Incorporated (see
note 2) and issued 17,500 shares to John E. Hanner and 22,500 shares to John C.
Hanner, the sole shareholders of Communications World of Columbia, Inc. (see
note 2) and issued 65,134 shares to Bennie Hester, the sole shareholder of Alpha
Communications & Technology, Inc. (see note 2). Shares of the Series C
Preferred Stock are convertible into common stock at the election of the holders
of
F-18
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Shareholders' Equity and Related Party Transactions (continued)
the Series C Preferred Stock at a conversion price of $6.75 at any time until
July 16, 1997. Dividends on the Series C Preferred Stock will be paid, when and
as declared by the Board of Directors, at the rate of $.08 per share per annum.
Dividends on the Series C Preferred Stock will be paid 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,
1996, there were $46,620 in accumulated dividends.
Series E Preferred Stock
In fiscal 1995, the Company received $611,994 in net proceeds from the sale of
125,000 units, with each unit consisting of two shares of Series E Preferred
Stock of the Company and ten redeemable Common Stock Purchase Warrants
("Warrants"). Ten Warrants entitle the holder thereof to purchase one share of
common stock. The Warrants are exercisable at $6.00 per share until June 30,
1997. The Company authorized 250,000 shares of Series E Preferred Stock.
Each share of Series E Preferred Stock was converted into one share of common
stock upon the effectiveness of a registration statement filed by the Company to
register the common stock underlying the Series E Preferred Stock (as well as
the Warrants and common stock underlying the Warrants). The registration
statement was declared effective June 14, 1995.
Common Stock Purchase Warrants
During the year ending April 30, 1993, the Company received $2,185,000 in gross
proceeds from the sale of 874,000 units, with each unit consisting of two shares
of common stock of the Company and one redeemable Common Stock Purchase Warrant
("Warrant"). Ten Warrants entitled the holder thereof to purchase, at any time
for a period of three years from the date of the Prospectus, one share of common
stock, at a price of $9.38. The Company may redeem the Warrants under certain
conditions. The Company sold to the underwriter for $100 a warrant to purchase
up to 80,000 units at a price of $3.00 per unit. Warrants to purchase 87,400
shares of the Company's common stock are currently outstanding. The expiration
date was December 11, 1995. In May 1994, the Company extended the expiration
date to June 30, 1997 and lowered the exercise price to $5.00 per share, if
exercised on or before December 31, 1995, and $6.00 per share if exercised after
December 31, 1995, but on or before June 30, 1997. The Company also sold
1,250,000 warrants to purchase 125,000 shares of common stock under the above
terms as part of a unit offering in 1994 (see "Series E Preferred Stock").
F-19
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
Other
The Company and H. David Hunt, the Company's founder, a former director, and a
previous principal shareholder entered into an agreement (the "Agreement") in
June 1992, pursuant to which the Company pays Mr. Hunt compensation for
consulting services. Pursuant to this Agreement, Mr. Hunt resigned as President
and Chairman of the Board of Directors of the Company in 1992 and contributed
20,000 shares of his common stock to the Company. In addition, Mr. Hunt (i)
agreed to serve as a consultant to the Company for a period of four years
commencing July 1, 1992 (the "Term"), (ii) during the Term, agreed not to
engage in competitive activities which are financially harmful to the Company in
the geographical areas in which the Company has conducted its business or
intends to conduct business, and (iii) assigned to the Company during the Term,
his remaining voting rights to shares owned or controlled by him, directly or
indirectly. However, in the event that Mr. Hunt sells these shares in the open
market during the Term, the voting rights assigned to the Company will be
released. After the Term, Mr. Hunt will be entitled to vote the shares owned
or controlled by him. Commencing July 1, 1992, the Company has paid Mr. Hunt
$5,000 per month and provides health insurance for Mr. Hunt pursuant to this
Agreement. Effective July 1, 1994, the terms of the Agreement were amended to
extend the Term to January 1997 and to reduce the monthly payments to $4,000 per
month. Effective January 1, 1996, the terms of the Agreement were amended to
extend the Term to June 30, 1998 and to reduce the monthly payments to $1,700
per month. If Mr. Hunt dies during the Term, the Company will pay $1,700 per
month to Mr. Hunt's legal representatives for the remainder of the Term.
In March 1995, Richard D. Olson, the Company's President, borrowed $25,000 from
the Company. The note is due November 15, 1996 with interest at 8% per annum.
(11) Benefit Plans
1994 Stock Option Plan
In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"), subject to
shareholder approval, pursuant to which options to purchase up to 257,000 shares
of common stock could be granted to employees of the Company. There are
currently outstanding options to purchase 23,500 shares of common stock at
$4.125 per share, options to purchase 25,000 shares of common stock at $2.75 per
share, options to purchase 25,000 shares of common stock at $1.56 per share, and
options to purchase 50,000 shares of common stock at $1.00 per share pursuant to
this Plan; all of which were granted at the market value on the date of grant.
The options have been granted subject to shareholder approval of the Plan and
become exercisable over a three-year period and must be exercised within five
years of the date of grant.
F-20
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(11) Benefit Plans (continued)
Stock Options - Consultant
Additionally, options are outstanding that were granted for services rendered by
consultants. The options were granted at or above market value on the date of
grant and are exercisable over a three-year period. Transactions for 1996 and
1995 were as follows:
Options outstanding at April 30, 1994 86,325
Canceled (5,000)
------
Options outstanding at April 30, 1995 81,325
Granted 75,000
Canceled (78,325)
------
Options outstanding at April 30, 1996 78,000
======
Option price range at April 30, 1996 $1.25 to $4.25
==============
The options to purchase 75,000 shares of common stock granted in fiscal year
1996 are subject to shareholder approval and none have been exercised as of
April 30, 1996.
Non-employee Directors Stock Option Plan
In accordance with a stock option plan adopted in February 1993, options to
purchase up to 20,000 common shares can be granted 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. No options have been
exercised as of April 30, 1996. Transactions for 1996 and 1995 were as follows:
Options outstanding at May 1, 1994 5,583
Granted 2,000
------
Options outstanding at April 30, 1995 7,583
Granted 2,000
------
Options outstanding at April 30, 1996 9,583
======
Available for grant at April 30, 1996 10,417
======
Option price range at April 30, 1996 $2.19 to $6.25
==============
F-21
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
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 1996 or 1995.
(12) Income Taxes
There was no income tax expense attributable to income from operations for the
years ended April 30, 1996 and 1995 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, 1996 and 1995 are as
follows:
1996 1995
---- ----
Net operating loss carryforwards $ 1,492,000 1,070,000
Accounts receivable, due to allowance for doubtful
accounts 51,000 28,000
Other (10,000) (59,000)
----------- ---------
Total gross deferred taxes 1,533,000 1,039,000
Valuation allowance (1,533,000) (1,039,000)
----------- ---------
Net deferred taxes $ - -
=========== =========
At April 30, 1996, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $4,100,000 which are available to offset
future federal and state taxable income. The carryforwards expire in years from
2006 through 2011. The annual use of portions of the net tax operating loss
carryforwards is limited under section 382 of the Internal Revenue Code of 1986,
as amended, due to changes in control resulting from issuance of the Company's
equity securities.
F-22
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(13) Liquidity
The Company has incurred operating losses for the years ended April 30, 1996 and
1995 and in prior periods. The Company's operating losses were financed
principally by the Company's major supplier. Management plans to improve its
cash flow by increasing revenue, both from national accounts and Company-owned
outlets, improving gross profit margins and containing general and
administrative expenses, in addition to attempting to obtain additional debt or
equity financing.
The Company believes that it has sufficient financial resources available to
meet its short-term working capital needs. The ability of the Company to
continue as a going concern is dependent upon the realization of management's
plans. There can be no assurance that the Company will be able to successfully
implement its plans and therefore finance its operations over the longer term.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-23
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
COMMUNICATIONS WORLD INTERNATIONAL, INC.,
COMMWORLD-NATIONAL CAPITOL AREA, INC.
COMMUNICATIONS WORLD OF COLUMBIA, INC.,
JOHN E. HANNER
AND JOHN C. HANNER
August 1, 1995
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered
into as of the 1st day of August, 1995, among Communications World
International, Inc., a Colorado corporation ("CWI"), CommWorld National Capitol
Area, Inc. a Virginia corporation, which is a wholly-owned subsidiary of CWI
("Acquisition"), Communications World of Columbia, Inc., a Maryland corporation
("CWC") and John E. Hanner and John C. Hanner, the sole shareholders of CWC
(collectively referred to as "Hanner"). CWI, Acquisition, CWC and Hanner are
sometimes referred to herein individually as a "Party" and collectively as the
"Parties".
WHEREAS, the Parties are desirous of effecting a merger of CWC with and
into Acquisition; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
(as hereinafter defined) shall qualify as a tax-free reorganization described in
Sections 368(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the parties expect that the merger of CWC with and into
Acquisition will further certain of their business objectives.
NOW, THEREFORE, CWI, Acquisition, CWC and Hanner adopt this plan of
reorganization and agree as follows:
Section 1. The Merger
1.1 The Merger. At the Effective Time (as hereinafter defined), CWC
----------
shall be merged with and into Acquisition (the "Merger"), and Acquisition shall
be the surviving corporation in the Merger, and the separate existences and
corporate organizations of CWC shall cease.
1.2 Articles of Incorporation. The Articles of Incorporation of
-------------------------
Acquisition in effect at and as of the Effective Time will remain the Articles
of Incorporation of Acquisition without any modification or amendment in the
Merger.
1.3 Bylaws. The Bylaws of Acquisition in effect at and as of the
------
Effective Time will remain the Bylaws of Acquisition without any modification or
amendment in the Merger.
1.4 Directors and Officers. Directors and officers of Acquisition at
----------------------
and as of the Effective Time shall be as set forth in Schedule 1.4.
<PAGE>
1.5 The Effective Time. Subject to the terms and provisions of this
------------------
Agreement, a certificate of merger (the "Certificate of Merger") shall be duly
prepared, executed and acknowledged by Acquisition and thereafter delivered to
the Secretary of State of the State of Virginia, for filing, as provided in the
Virginia Stock Corporation Act as soon as practicable after the Closing Date
(as hereinafter defined). The Merger shall become effective at the time (the
"Effective Time") CWC and Acquisition file the Certificate of Merger with the
Secretary of State of the State of Virginia or at such time thereafter as is
provided in the Certificate of Merger. The Merger shall have the effect set
forth in the Virginia Stock Corporation Act.
1.6 Effect of Merger. At and after the Effective Time, Acquisition
----------------
shall possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of CWC and Acquisition; and all and singular
rights, privileges, powers and franchises of CWC and Acquisition, and all
property, real, personal and mixed, and all debts due to CWC or Acquisition on
whatever account, as well as for stock subscriptions and all other things in
action or belonging CWC and Acquisition, shall be vested in Acquisition; and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of Acquisition as they
were of CWC and Acquisition; and the title to any real estate vested by deed or
otherwise, of CWC or Acquisition, shall not revert or be in any way impaired;
but all rights of creditors and all liens upon any property of CWC or
Acquisition shall be preserved unimpaired; and all debts, liabilities and duties
of CWC and Acquisition shall thenceforth attach to Acquisition, and may be
enforced against Acquisition to the same extent as if said debts and liabilities
had been incurred by it.
1.7 Conversion of CWC Stock. At and as of the Effective Time, by virtue
-----------------------
of the Merger and without any action on the part of Hanner, as the sole holders
of the shares of common stock of CWC, shall be entitled to receive in exchange
therefor an aggregate of 40,000 shares of $1.00 par value Series C Preferred
Stock of CWI (of which 17,500 shares shall be issued to John E. Hanner and
22,500 shares to John C. Hanner) and 10,000 shares of common stock, no par value
of CWI ("Common Stock") (of which 4,375 shares shall be issued to John E. Hanner
and 5,625 shares shall be issued to John C. Hanner), and promissory notes made
by CWI in the aggregate principal amount of $30,000 (the "Notes") (of which a
Note in the principal amount of $15,000 will be made payable to John E. Hanner
and a Note in the principal amount of $15,000 will be made payable to John C.
Hanner), subject to adjustment as set forth in Section 2.
1.8 Procedures for Conversion of Shares of CWC. At the Effective Time,
------------------------------------------
(a) CWI will cause its transfer agent, American Securities Transfer, Inc., to
issue stock certificates evidencing the shares of Series C Preferred Stock and
common stock of CWI in the name of the Hanner as of the Effective Time; (b) CWI
will deliver to Hanner the Notes; and (c) Hanner will
2
<PAGE>
deliver to CWI his certificates evidencing all of the outstanding capital stock
of CWC, together with duly endorsed stock powers.
Section 2. Closing
2.1 Closing. The closing of the Merger (the "Closing") shall be held at
-------
the offices of Communications World International, Inc., 6025 S. Quebec, Suite
300, Englewood, Colorado 80111 at 10:00 a.m. on August 30, 1995, or such other
date, time and place as the parties may mutually determine (the "Closing Date").
2.2 Actions at the Closing. At the Closing, (a) CWC and Hanner will
----------------------
deliver to CWI and Acquisition the various certificates, instruments, and
documents referred to in Section 5, (b) CWI and Acquisition will deliver to CWC
the various certificates, instruments, and documents referred to in Section 5,
(c) CWC and Acquisition will file with the Secretary of the State of Virginia a
certificate of merger, and (d) CWI will deliver Notes in the aggregate principal
amount of $30,000, and certificates evidencing the Series C Preferred Stock and
Common Stock of CWI issued in the Merger as provided in Section 1.8.
2.3 Adjustments at the Closing. The consideration to be paid to Hanner
--------------------------
in connection with the Merger has been calculated based upon the addition of
$38,000 to the aggregate net assets of CWC (determined in accordance with
generally accepted accounting principles as of May 1, 1995 (the "Net Assets"),
which Net Assets are estimated to be $72,000. As provided in Section 5, at the
Closing, CWC and Hanner will provide to CWI and Acquisition a revised schedule
of Net Assets, and the number of shares of Series C Preferred Stock to be issued
to Hanner shall be revised in accordance with this Section 2.3.
2.4 Adjustment after the Closing. In the event that CWI objects to the
----------------------------
calculation of Net Assets pursuant to Section 2.3, then no later than 90 days
after the Closing Date, CWI shall notify Hanner, in reasonable detail, of its
objections. In the event Hanner disputes the correctness of the objections of
CWI, Hanner shall notify CWI in writing within twenty days after receipt of the
objections from CWI and setting forth, in reasonable detail, the reasons for
Hanner's objections. If Hanner fails to deliver such notice within such time,
Hanner shall be deemed to have accepted CWI's calculation. CWI and Hanner shall
endeavor in good faith to resolve any disputed items within thirty days after
CWI's receipt of Hanner's notice of objections. If they are unable to do so,
CWI and Hanner each shall have the right to refer the dispute to the Denver,
Colorado office of KPMG Peat Marwick (the "Auditor") for resolution. The
determination by the Auditor of the adjustments, if any, which are necessary in
order that the calculation of the consideration paid to Hanner be made in
accordance with Section 2.3 shall be conclusive and binding on the Parties. The
fees of the Auditor incurred in resolving any such dispute shall be paid by the
Party referring the matter to the Auditor unless there is an adjustment
3
<PAGE>
greater than $10,000 in favor of the Party who referred the dispute to the
Auditor, in which event the other Party shall be responsible for the fees of the
Auditor. In the event an adjustment is necessary, the adjustment will be made in
shares of Series C Preferred Stock valued at $1 per share. CWI's utilization of
the procedures under this Section 2 for a determination of the Net Assets shall
not supersede, replace or waive any rights or remedies that CWI may have for
Hanner's breach of any of Hanner's representations, warranties or agreements or
for indemnification Hanner has otherwise made under this Agreement.
Section 3. Representations and Warranties of
CWI and Acquisition
CWI and Acquisition represent and warrant to CWC and Hanner as follows:
3.1 Corporate Status. Each of CWI and Acquisition are corporations
----------------
duly organized, validly existing, and in good standing under the laws of its
state of incorporation and is licensed or qualified as a foreign corporation in
all states in which the nature of its business or the character or ownership of
its properties makes such licensing or qualification necessary. Each of CWI and
Acquisition have all requisite power and authority, and all licenses,
franchises, permits and authorizations necessary to carry on their respective
businesses as currently conducted and to own, lease and operate their respective
assets, properties and businesses now owned and operated by it, except where the
failure to have such licenses, franchises, permits and authorizations would not
have a material adverse effect on its financial condition, results of
operations, assets, property, liabilities or business of CWI and Acquisition
taken as a whole. CWI and Acquisition have supplied CWC and Hanner with true,
complete and correct copies of their respective Articles of Incorporation and
Bylaws.
4
<PAGE>
3.2 Capitalization.
--------------
(a) As of the date hereof, the authorized capital stock of CWI
consists of 2,000,000 shares of Common Stock, no par value per
share, of which 1,524,163 shares are issued and outstanding, and
3,000,000 shares of preferred stock, par value $1.00 per share, of
which 401,633 shares are presently issued and outstanding. As of
the date hereof, the following shares of Common Stock are reserved
for issuance: (i) 10,275 shares for issuance pursuant to CWI's 1993
Stock Option Plan, (ii) 20,000 shares for issuance pursuant to CWI's
Non-Discretionary Stock Option Plan, (iii) subject to shareholder
approval of an increase in the authorized common stock of CWI and of
CWI's 1994 Stock Option Plan, 257,000 shares, (iv) 40,000 shares for
issuance upon the exercise of warrants issued to designees of the
underwriter of its 1992 public offering, (v) 212,400 shares for
issuance upon the exercise of warrants issued in CWI's 1992 public
offering and 1994 private offering, (vi) options to consultants to
purchase an aggregate of 151,325 shares, of which options to
purchase an aggregate of 70,000 shares are subject to shareholder
approval of an increase in the authorized common stock of CWI and
(vii) 60,452 shares for issuance upon conversion of preferred stock.
All issued and outstanding shares of capital stock of CWI are fully
paid and nonassessable and are not subject to any preemptive right.
(b) As of the date hereof, the authorized capital stock of
Acquisition consists of 1,000 shares of common stock, without par
value, of which 1,000 shares are issued and outstanding. All issued
and outstanding shares of Acquisition are fully paid and non-
assessable and are not subject to any preemptive right. There are
no outstanding warrants, options or other agreements to acquire
securities of Acquisition.
3.3 Authority. Each of CWI and Acquisition has full corporate power and
---------
authority to enter into this Agreement and to carry out its respective
obligations hereunder. The execution and delivery of this Agreement and
performance by each of CWI and Acquisition of their respective obligations
hereunder has been duly authorized by all requisite corporate action on the part
of each of CWI and Acquisition. This Agreement has been duly executed and
delivered by each of CWI and Acquisition and constitutes a valid and binding
obligation of each of CWI and Acquisition enforceable against each of CWI and
Acquisition in accordance with its terms except that (i) the enforcement of
certain rights and remedies created by this Agreement is subject to bankruptcy,
insolvency, reorganization and similar laws of general application affecting
the rights and remedies of creditors generally and (ii) the enforceability of
any particular provision of this Agreement under principles of equity or the
availability of equitable
5
<PAGE>
remedies, such as specific performance, injunctive relief, waiver or other
equitable remedies, is subject to the discretion of courts of competent
jurisdiction.
3.4 Consents. No consent, approval, qualification, order or
--------
authorization of, or filing with, any governmental authority, including any
court or other third party, is required in connection with the valid execution,
delivery or performance of this Agreement by CWI and Acquisition or the
consummation by CWI and Acquisition of the transactions contemplated hereby.
3.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, or result in the creation of or imposition of any
lien, charge or encumbrance upon any property or assets of CWI or Acquisition
pursuant to, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which CWI or Acquisition is a party or by which CWI or Acquisition
is bound or to any of CWI's or Acquisition's property, the certificate of
incorporation or bylaws of CWI or Acquisition, or any applicable law, rule,
regulation, judgment, order or decree of any court or governmental agency,
authority or body having jurisdiction over CWI or Acquisition or any of their
respective properties.
3.6 Subsidiaries and Affiliates. Except for Acquisition, CommWorld of
---------------------------
Phoenix, Inc., International Communications Acquisition Corp. of Washington, and
International Communications Acquisition Corp. of Colorado, CWI does not
directly or indirectly, own any interest in or control any other corporation,
partnership, limited liability company, joint venture, association or other form
of business organization. In addition, CWI intends to acquire through merger
Alpha Communications & Technology, Inc. All of the issued and outstanding
shares of common stock of Acquisition is owned directly by CWI free and clear of
any mortgage, pledge, lien or encumbrance.
3.7 Financial Statements. The consolidated financial statements of CWI
--------------------
furnished to CWC and Hanner consisting of a balance sheet as of April 30, 1995
and the consolidated statements of operations and cash flows for the two years
ended April 30, 1995, are in all material respects true and accurate statements
of the financial condition and the results of operations of CWI as of the dates
and for the periods involved, and such statements were prepared in accordance
with generally accepted accounting principles consistently applied. The
unaudited balance sheet of Acquisition at August 1, 1995 ("Acquisition's Balance
Sheet"), furnished to CWC and Hanner is true and accurate and prepared in
accordance with generally accepted accounting principles consistently applied.
3.8 Delivery of Reports. CWI has delivered to CWC and Hanner CWI's
-------------------
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1995, as filed
by CWI with the
6
<PAGE>
Securities and Exchange Commission. Notwithstanding any provision hereof to the
contrary, it is understood by CWC and Hanner that CWI is not representing or
warranting any statements in the Reports relating to future, anticipated, or
possible circumstances, occurrences, or developments.
3.9 CWI Stock. CWI has taken all necessary corporate action to issue
---------
the shares of the Common Stock and Series C Preferred Stock pursuant to the
terms of this Agreement. The shares of Common Stock and Series C Preferred
Stock issued pursuant to the terms of this Agreement will, when issued, be
validly issued, fully paid and nonassessable and no action taken by CWI will
confer upon any person any preemptive right of subscription or purchase in
respect thereof.
3.10 Disclosure. No representation or warranty by CWI or Acquisition
----------
contained in this Agreement or in any document, statement, or certificate
furnished, or to be furnished, to CWC and Hanner pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
an untrue statement of a material fact or omits or will omit to state a material
fact required to be stated or necessary to make the statements and facts
contained herein or therein, in light of the circumstances in which they were or
are made, not false or misleading.
Section 4. Representations and Warranties
of CWC and Hanner
CWC and Hanner represent and warrant to CWI and Acquisition as follows:
4.1 Corporate Status. CWC is a corporation duly organized, validly
----------------
existing, and in good standing under the laws of the State of Maryland and is
licensed or qualified as a foreign corporation in all states in which the nature
of its business or the character or ownership of its properties makes such
licensing or qualification necessary. CWC has all requisite corporate power and
authority, and all licenses, franchises, permits and authorizations necessary to
carry on its business as currently conducted and to own, lease and operate the
assets, properties and businesses now owned and operated by it, except where the
failure to have such licenses, franchises, permits and authorizations would not
have a material adverse effect on its financial condition, results of
operations, assets, property, liabilities or business. CWC has supplied CWI and
Acquisition with true, complete and correct copies of its Articles of
Incorporation and Bylaws.
4.2 Capitalization. The authorized capital stock of CWC consists of
--------------
2,000 shares of common stock, no par value per share, of which 2,000 shares are
issued and outstanding, fully paid, and nonassessable. All of the issued and
outstanding shares of CWC are owned by Hanner. There are no outstanding
warrants, options or other agreements to acquire securities of CWC.
7
<PAGE>
4.3 Authority. CWC has full corporate power and authority to enter into
---------
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and performance by CWC hereunder has been duly
authorized by all requisite corporate action on the part of CWC. This Agreement
has been duly executed and delivered by CWC and Hanner and constitutes a valid
and binding obligation of CWC and Hanner enforceable against CWC and Hanner in
accordance with its terms, except that (i) the enforcement of certain rights and
remedies created by this Agreement is subject to bankruptcy, insolvency,
reorganization and similar laws of general application affecting the rights and
remedies of creditors generally, and (ii) the enforceability of any particular
provision of this Agreement under principles of equity or the availability of
equitable remedies, such as specific performance, injunctive relief, waiver or
other equitable remedies, is subject to the discretion of courts of competent
jurisdiction. No shareholder of CWC has asserted the right to dissent from the
Merger.
4.4 Consents. Except as set forth in Schedule 4.4, no consent,
--------
approval, qualification, order or authorization of, or filing with, any
governmental authority, including any court or other third party, is required in
connection with the valid execution, delivery or performance of this Agreement
by CWC or Hanner or the consummation by CWC or Hanner of the transactions
contemplated hereby.
4.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, or result in the creation of or imposition of any
lien, charge or encumbrance upon any property or assets of CWC or Hanner
pursuant to, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which CWC or Hanner is a party or by which CWC or Hanner is bound
or to any of CWC's or Hanner's property, the Certificate of Incorporation or
Bylaws of CWC, or any applicable law, rule, regulation, judgment, order or
decree of any court or governmental agency, authority or body having
jurisdiction over CWC or Hanner or any of CWC's or Hanner's properties.
4.6 Subsidiaries and Affiliates. CWC does not, directly or indirectly,
---------------------------
own any interest in or control any other corporation, partnership, limited
liability company, joint venture, association or other form of business
organization.
4.7 Financial Statements. The unaudited financial statements of CWC
--------------------
furnished to CWI and Acquisition consisting of balance sheets as of December 31,
1993 and December 31, 1994, and the related statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1993 and
December 31, 1994, and the unaudited balance sheets of CWC as of April 30, 1995
(the "Latest Balance Sheets") and the unaudited statement of income for the four
months then ended, are in all material respects true and accurate statements of
the
8
<PAGE>
financial condition and the results of operations of each of CWC as of the dates
and for the periods involved, and such statements were prepared in accordance
with generally accepted accounting principles consistently applied.
4.8 Net Assets; Title to Property. Set forth in Schedule 4.8 is a list
-----------------------------
of Net Assets, which is true and correct as of May 1, 1995. Except as otherwise
set forth in Schedule 4.8, each of CWC has good and valid title to all the
properties and assets, real and personal, reflected on the Latest Balance Sheets
and Schedule 4.8, owns these assets free and clear of all liens, claims, charges
or encumbrances of any kind or description other than (i) liens for the current
year's taxes not yet due and payable and (ii) liens securing the liabilities
shown on the Latest Balance Sheets, with respect to which no default exists.
The properties and assets reflected in the Latest Balance Sheets include all the
assets, rights and property utilized exclusively by CWC in the conduct of
business of CWC and all other assets, rights and property necessary for the
conduct of the business of CWC.
4.9 Condition of Assets. The properties and assets of CWC as listed on
-------------------
the Latest Balance Sheets and Schedule 4.8 are, and as of the Closing Date will
be, in good operating condition and suitable for continued use in the same
manner as heretofore used, ordinary wear and tear excepted. The equipment and
vehicles listed on the Latest Balance Sheets and Schedule 4.9 constitutes all
the equipment and vehicles that are necessary to continue effectively the
operation of the business of CWC as it is currently conducted.
4.10 Inventory and Supplies. All of the inventory and supplies listed on
----------------------
the Latest Balance Sheets and Schedule 4.8 have been purchased in the ordinary
course of business at or about market prices prevailing at the times of
purchase. All such inventories and supplies are of a quality and in quantities
saleable, or usable, as the case may be, in the ordinary course of the business
of CWC. The inventory is valued at the lower of cost or market price as
reflected in the books of account of CWC.
4.11 Product Warranties. To the best knowledge of CWC or Hanner there is
------------------
no significant design, manufacturing, or other defect in any product sold by CWC
which has resulted in the past, or could result in the future, in any required
recall, repair, replacement, credit or refund for which CWC would be
responsible.
4.12 Accounts Receivable. All accounts receivable listed on the Latest
-------------------
Balance Sheets and Schedule 4.8 are valid, legal and subsisting accounts,
enforceable in accordance with their respective terms and arising from bona fide
transactions in the ordinary course of business and are collectible in amounts
not less than the aggregate amount thereof carried on the Latest Balance Sheets
and Schedule 4.8, net of reserves. The collectibility of each account
receivable will not be impaired by any right of return, statute of limitation,
right of set-off, counterclaim or defense.
9
<PAGE>
4.13 Liability. Each liability shown on the Latest Balance Sheets and
---------
Schedule 4.8 represents a valid obligation of CWC incurred in the ordinary
course of business of CWC.
4.14 Intangible Rights. Schedule 4.14 contains an accurate and complete
-----------------
list of all material intangible rights utilized in connection with the business
of CWC. To the best knowledge of CWC and Hanner, these intangible rights are
being lawfully used in the business of CWC and may be so used without payment
to, or interference from, any party, and there has been no assignment, license
or other authorization given to any party to use any of these intangible rights.
To the best knowledge of CWC and Hanner, each of CWC has the right to use,
without payment to any third party, all proprietary rights used in its business.
CWC has not received any notice, nor do CWC or Hanner have any reason to
believe, that any of these intangible rights are being infringed upon by any
third party.
4.15 Employees. CWC has no contract or agreement with any labor union or
---------
other collective bargaining group and has not been involved in any strike, work
stoppage, lock out or unfair labor practice, as such term is defined in the
National Labor Relations Act, as amended, of any kind or nature. No employee of
CWC has petitioned for a collective bargaining representation election and no
union is currently attempting to organize any of the employees of CWC. To the
best knowledge of CWC and Hanner, CWC is in compliance in all material respects
with all federal and state laws governing employment, employment practices and
the terms and conditions of employment.
4.16 Contracts, Agreements, Leases and Commitments. Except for the
---------------------------------------------
contracts, agreements, leases and commitments listed on Schedule 4.16, CWC is
not a party to or bound by any material contract, agreement, lease or other
commitment. All of the contracts listed in Schedule 4.16 are in full force and
effect without amendment or modification, other than sales orders or purchase
orders entered into in the ordinary course of business. CWC is not in default
under any contract and has not received notice of any alleged default by it
under any contract which has not been waived under that contract. For purposes
of this Section 4.16 as it relates to material contracts, agreements, leases or
other commitments "material" shall mean any contract, agreement, lease or other
commitment entered into which is not in the ordinary course of business or, if
entered into in the ordinary course of business, which involves a payment,
commitment or entitlement in excess of $10,000.
4.17 Litigation. Except as set forth on Schedule 4.17, there are no
----------
actions, suits, proceedings or claims pending or, to the best knowledge of CWC
or Hanner, threatened against or affecting CWC or Hanner, its business or assets
or properties. There are no judgments, orders or decrees outstanding against CWC
or Hanner. CWC and Hanner has no knowledge of any pending or threatened
proceeding which would, in any manner, impair or curtail the operation of its
business in the manner currently operated and CWC and Hanner has no knowledge of
any
10
<PAGE>
other condition which would, in any manner, impair or curtail in any material
respect the conduct of the business of CWC in the manner currently operated.
4.18 Condemnation; Assessments; Defects. CWC has not received any notice
----------------------------------
of any condemnation action or special assessment being contemplated with respect
to its premises or any of its properties or any notice from any governmental
authority or insurance company of any defect or inadequacy in these premises or
properties or any part thereof.
4.19 Compliance with Law. CWC is in compliance, in all material
-------------------
respects, with all applicable laws, rules, regulations or requirements of any
governmental authority, federal, state or local, relating to its business,
including, without limitation, the impact of its business upon the environment,
and the continued operation of its business in the manner heretofore conducted
will not violate, in any material respect, any existing statute, rule,
regulation or order, federal, state or local except where such noncompliance
would not have a material adverse effect on the condition (financial or other),
business, property, prospects, net worth or results of operations of CWC.
Neither CWC nor its officers or directors has received notice of any such
violation with respect to its business and operations.
4.20 Taxes.
-----
(a) CWC has filed with the appropriate federal, state and local
governmental authorities all tax returns required to be filed with
respect to its business and properties and have paid all assessments
shown to be due and claimed to be due on all such tax returns.
(b) There are no additional assessments due or claimed to be due
with respect to such filed returns.
(c) Except as disclosed in Schedule 4.20, CWC has not executed or
filed any agreement extending the period for assessment or
collection of any tax nor is CWC a party to any action or proceeding
by any governmental authority for the assessment or collection of
taxes.
(d) All returns filed by CWC constitute complete and accurate
representations of the tax liabilities for such years and accurately
set forth all items (to the extent required to be included or
reflected in such returns) relevant to the future tax liabilities,
including the tax bases of the properties and assets.
(e) The financial statements of CWC fairly present the charges,
accruals, and reserves for taxes of CWC for all taxes payable by CWC
for any period prior to the Latest Balance Sheets for which no
return has yet been filed.
11
<PAGE>
(f) No examination of the tax returns of CWC is currently in
progress nor, to the best knowledge of CWC or Hanner, is any such
examination threatened.
(g) None of the returns of CWC has been reviewed or audited by
applicable federal, state, local, and foreign taxing authorities and
none of the returns have received clearances or other indications of
approval from applicable federal, state, local, and foreign taxing
authorities. To the best knowledge of CWC or Hanner, no issue or
issues have been raised in connection with any prior or pending
review or audit of said federal, state, local, or foreign returns
which may reasonably be expected to be raised in the future by such
taxing authorities in connection with the audit or review of the
returns of CWC.
For purposes of this Section the term "tax" (and with corresponding
meanings "taxes" and "taxable") shall include without limitation all federal,
provincial, state, local and foreign net income, profits, alternative add-on
minimum tax, gross income, value added, franchise, gross receipts, sales, use,
ad valorem, occupation, license, excise, payoff, stamp, premium, withholding,
real and personal property, and other taxes, and related or similar governmental
charges, tariffs, customs duties, assessments, together with any interest,
fines, and penalties or addition to tax imposed with respect to the foregoing.
4.21 Insurance. The assets, property and business of CWC are covered by
---------
insurance policies of the types customarily carried by businesses such as that
of CWC, which policies are in full force and effect with all premiums due
thereon paid or accrued. Such policies are adequate in amount, scope and
coverage to protect CWC against any material loss of assets or property or any
interruption in its operations customarily insured against. Schedule 4.21 sets
forth an accurate and complete list of each insurance policy owned or maintained
by CWC. Each of CWC has not received any notice of cancellation with respect to
any such policy, no claims are pending under any such policy and, to the best
knowledge of CWC and Hanner, there is no basis for any insurer thereunder to
terminate any such policy.
4.22 Books of Account and Records. The books of account of CWC fairly
----------------------------
reflect its income, expenses, assets and liabilities and have been maintained in
accordance with sound business practices. The customer and supplier records of
CWC are in all respects complete and correct and have been maintained in
accordance with sound business practices and in conformity with all applicable
government laws, rules and regulations.
4.23 Undisclosed Liabilities. Except as set forth on Schedule 4.23, to
-----------------------
the best knowledge of CWC and Hanner, CWC has no material liabilities of any
nature except to the extent reflected, or reserved against, in the Latest
Balance Sheets, whether accrued, absolute,
12
<PAGE>
contingent, or otherwise, including, without limitation, tax liabilities and
interest due or to become due or except for liabilities which would not have a
material adverse effect on the condition (financial or other), business,
property prospects, net worth or results of operations of CWC.
4.24 Real Property and Leaseholds. Schedule 4.24 attached hereto
----------------------------
contains a description of each lease of real property under which CWC is a
lessee, lessor, sublessee or sublessor. Each such lease is in full force and
effect.
4.25 Indebtedness to and from Officers, Directors, and Shareholders.
--------------------------------------------------------------
Except as set forth in Schedule 4.25, CWC is not indebted, directly or
indirectly, to any person who is an officer, director, or shareholder of CWC or
any affiliate of any such person in any amount whatsoever, other than for
salaries for services rendered or reimbursable business expenses, nor is any
such officer, director, shareholder, or affiliate indebted to CWC except for
advances made by CWC to employees of CWC in the ordinary course of business.
4.26 Disclosure. No representation or warranty by CWC and Hanner
----------
contained in this Agreement or in any document, statement, or certificate
furnished, or to be furnished, to CWI and Acquisition pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
an untrue statement of a material fact or omits or will omit to state a material
fact required to be stated or necessary to make the statements and facts
contained herein or therein, in light of the circumstances in which they were or
are made, not false or misleading.
4.27 Absence of Certain Changes. Except as contemplated by this
--------------------------
Agreement or disclosed in Schedule 4.27, since the Latest Balance Sheet, CWC has
not done or allowed to occur any of the following:
(a) operated its business other than in the ordinary course;
(b) cancelled or compromised any debt or claim other than (i)
immaterial adjustments or (ii) in the ordinary course of business;
(c) released, transferred or granted any rights;
(d) suffered any material adverse change in its financial
condition, properties or business or obtained knowledge of any
present or future business condition which could materially
adversely affect any of its assets, properties or business, or which
could prevent it from carrying on its business in substantially the
same manner as that in which it is being conducted;
13
<PAGE>
(e) suffered any material damage, destruction, or loss of or to its
property, whether or not covered by insurance;
(f) declared or paid any dividend or other distribution in respect
to the capital stock of CWC except for any direct or indirect
redemption, purchase, or other acquisition of any such stock;
(g) made, amended or cancelled any contract, agreement, lease,
order or other commitment (other than sales or purchase orders in
the ordinary course of business) or, except to the extent waived by
the other party thereto, failed to keep any of them in full force
and effect or to perform any of its obligations thereunder;
(h) increased the salary or wages of any director or officer in
excess of 5%;
(i) incurred any liabilities or obligations, whether absolute or
contingent, accrued or otherwise, other than ordinary operating
expenses which in the aggregate do not materially adversely affect
its business or financial condition;
(j) entered into any transaction, done any act or thing or suffered
any act or thing to be done which would result in any representation
or warranty of CWC contained in this Agreement becoming untrue
immediately after the consummation of such transaction;
(k) pledged or subjected to lien or to any other charge or
encumbrance any of its assets or properties other than in the
ordinary course of business;
(l) any amendment to any term of any security of CWC;
(m) any repurchase, redemption or other acquisition by CWC of any
outstanding shares of capital stock or other securities of, or other
ownership in, CWC;
(n) any change in any method of accounting or accounting practice by
CWC; or
(o) any strike, work stoppage, lockout or any other labor dispute.
4.28 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
Hanner in reliance upon Hanner's representation to CWI, which by Hanner's
execution of this Agreement,
14
<PAGE>
Hanner hereby confirms, that the Common Stock and Series C Preferred Stock to be
received by Hanner will be acquired for investment for Hanner's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that Hanner has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, Hanner further represents that Hanner does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Common Stock and Series C Preferred Stock. Hanner represents that he has full
power and authority to enter into this Agreement.
4.29 Disclosure of Information. Hanner believes he has received all the
-------------------------
information he considers necessary or appropriate for deciding whether to
acquire the Common Stock and Series C Preferred Stock. Hanner further
represents that he has had an opportunity to ask questions and receive answers
from CWI regarding the terms and conditions of the Merger and regarding the
business, financial condition and operations of CWI.
4.30 Investment Experience. Hanner has invested in speculative
---------------------
securities and acknowledges that he is able to bear the economic risk of his
investment and has such knowledge and experience in financial or business
matters that he is capable of evaluating the merits and risks of an investment
in Common Stock and Series C Preferred Stock.
4.31 Restricted Securities. Hanner understands that the shares of Common
---------------------
Stock and Series C Preferred Stock which he will acquire pursuant to the Merger
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from CWI in a transaction not involving a
public offering and that under such laws and applicable regulations, such
securities are restricted from resale without registration under the Securities
Act of 1933 as amended. Hanner understands that the certificates evidencing the
Common Stock and Series C Preferred Stock will have imprinted on its face a
legend with respect to these restrictions. Hanner further understands that the
same restrictions will be applicable to any requests to convert the Series C
Preferred Stock into Common Stock subsequent to the Closing, and as a condition
to such conversion, Hanner will be required to reaffirm representations made in
Sections 4.28 through 4.31.
Section 5. Documents to be Delivered Before or on the
Closing Date
At the Closing, the following documents shall be delivered:
5.1 Certificate of Officers of CWI. CWC and Hanner shall have been
------------------------------
furnished with a certificate signed by the President and Secretary (or Assistant
Secretary) of CWI and
15
<PAGE>
Acquisition, dated as of the Closing Date, certifying that attached thereto are
true, correct and complete resolutions of the Board of Directors of CWI and
Acquisition authorizing the execution, delivery and performance of this
Agreement and the transactions contemplated therein, and that the persons who
have signed the Agreement on behalf of CWI and Acquisition are the incumbent
President and Secretary (or Assistant Secretary) of CWI and Acquisition.
5.2 Certificate of Officers of CWC. CWI and Acquisition shall have been
------------------------------
furnished with a certificate signed by the President and Secretary (or Assistant
Secretary) of each of CWC, dated as of the Closing Date, certifying that
attached thereto are true, correct and complete resolutions of the Board of
Directors and Shareholder of each of CWC authorizing the execution, delivery and
performance of this Agreement and the transactions contemplated therein, and
that the persons who have signed the Agreement on behalf of each of CWC are the
incumbent President and Secretary (or Assistant Secretary) of each of CWC.
5.3 Schedule of Assets. CWI and Acquisition shall have been furnished
------------------
with an updated schedule of Net Assets by CWC and Hanner, in form and substance
satisfactory to CWI and Acquisition.
5.4 Absence of Litigation. Each of CWI and Acquisition, and CWC and
---------------------
Hanner, shall certify to each other that, to the best of their knowledge, no
litigation, proceeding, governmental investigation, or governmental inquiry is
pending or threatened at the Closing Date in which it is sought or threatened to
restrain, enjoin, restrict, limit or prohibit (or to obtain substantial damages
as a result of) the consummation of the transactions contemplated by this
Agreement.
5.5 Employment Agreement. Acquisition and Hanner shall have entered
--------------------
into an Employment Agreement in the form of Exhibit 5.5.
5.6 Non-Compete Agreement. Acquisition and Hanner shall have entered
---------------------
into a Non-Compete Agreement in form of Exhibit 5.6.
Section 6. Indemnification
6.1 Indemnification by CWI and Acquisition. CWI and Acquisition hereby
--------------------------------------
agree to indemnify and hold harmless CWC and its officers, directors and
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) incurred by CWC and Hanner
due to, or which result from, any of the following to the extent that any such
losses, claims, damages, liabilities, cost and expenses exceed on a cumulative
basis $10,000:
16
<PAGE>
(a) Any misrepresentation, breach of warranty or nonfulfillment of
any of the covenants or agreements of CWI and Acquisition in this
Agreement, any Exhibit or Schedule to this Agreement or any other
documents furnished to CWC and Hanner hereunder.
(b) The omission to state any fact necessary to make the statements
contained in this Agreement, any Exhibit or Schedule to 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 CWI or Acquisition
and their operations.
6.2 Indemnification by Hanner. Hanner hereby agrees to indemnify and
-------------------------
hold harmless CWI and Acquisition and the officers, directors, employees and
agents of CWI and Acquisition, 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)
incurred by them or by any of them due to, or which result from, any of the
following to the extent that such losses, claims, damages, liabilities, costs
and expenses exceed on a cumulative basis, $10,000:
(a) Any misrepresentation, breach of warranty or nonfulfillment of
any of the covenants or agreements of CWC or Hanner in this
Agreement, any Exhibit or Schedule to this Agreement or any other
documents furnished to CWI or Acquisition hereunder.
(b) The omission to state any fact necessary to make the statements
contained in this Agreement, any Exhibit or Schedule to 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 CWC or its
operations, concerning Heath.
6.3 Notice of Claim. Should any party (the "Indemnified Party") suffer
---------------
any loss, damage or expense for which the other party (the "Indemnifying Party")
is obligated to indemnify and hold such Indemnified Party harmless pursuant to
this Section 6 of this Agreement, the following shall apply: promptly upon
receipt by the Indemnified Party of notice of any demand, assertion, claim,
action or proceeding, judicial or otherwise, with respect to any matter as to
which the Indemnifying Party is obligated to indemnify the Indemnified Party
under the provisions of this Agreement, the Indemnified Party shall give prompt
written notice thereof to the Indemnifying Party, together with a statement of
such information in respect of such matter as the Indemnified Party shall then
have and a statement advising that the Indemnifying Party must notify it within
10 days whether the Indemnifying Party will undertake the defense of
17
<PAGE>
such matter (the "Notice of Claim"). The Indemnifying Party shall not be
obligated to indemnify the Indemnified Party with respect to any matter
hereunder if the Indemnified Party has failed to use its best efforts to notify
the Indemnifying Party thereof in accordance with the provisions of this
Agreement in sufficient time to permit the Indemnifying Party and its counsel to
defend against such matter and to make a timely response thereto, including
without limitation, the preparation and assertion of an answer or other
responsive motion to a complaint, petition, notice or other legal, equitable or
administrative process relating to any such claim. Notice of the intention of
the Indemnifying Party to contest any such claim, and the identity of counsel
that the Indemnifying Party intends to employ to contest any such claim, shall
be given by the Indemnifying Party to the Indemnified Party within 10 days from
the date of mailing to the Indemnifying Party of notice by the Indemnified Party
of the assertion of any such claim. The Indemnified Party shall have the right
to approve the counsel named in the notice provided pursuant to the preceding
sentence, provided that such approval shall not be unreasonably withheld. The
Indemnified Party shall have the right to participate in such proceedings and to
be represented by attorneys of its own choosing; provided, however, such
representation shall be at the Indemnified Party's own expense if the
Indemnifying Party selects different counsel of its own choosing. If the
Indemnifying Party does not elect to contest any such claim, the Indemnifying
Party shall be bound by the results obtained with respect thereto by the
Indemnified Party, including any settlement of such claim.
6.4 Nature and Survival of Representations. All statements contained in
--------------------------------------
this Agreement and in the Schedules to this Agreement shall be deemed
representations and warranties by the applicable Party under this Agreement;
provided that with respect to any statement regarding any matter set forth in a
Schedule the statements shall be deemed representations and warranties only upon
the attachment of each Schedule to this Agreement, whether before or after the
execution of this Agreement. Each representation, warranty, indemnity and
agreement made by the Parties in this Agreement or pursuant to this Agreement
shall be true and accurate in all material respects as of the later to occur of
the execution of this Agreement or the date on which it is considered to have
been made according to the provisions of Section 2 of this Agreement, and the
obligations that they be accurate in all material respects as of that date, and
all obligations relating to indemnification under this Agreement, shall survive
the Closing for a period of two years thereafter. The obligation of any
Indemnifying Party to any Indemnified Party with respect to any matter that is
the subject of or arises in connection with a Notice of Claim sent on or before
the Indemnity Termination Date, defined as that date which is two years from
Closing, shall remain in full force and effect until the matter has been
resolved and paid in full. Except as otherwise provided in the preceding
sentence, no Party shall have any obligation to indemnify any other Party after
the Indemnity Termination Date.
6.5 Other Indemnification Provisions. The foregoing indemnification
--------------------------------
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of representation,
warranty or covenant.
18
<PAGE>
Section 7. General Provisions
7.1 Further Assurances. At any time, and from time to time, after the
------------------
Closing, each Party will execute such additional instruments and take such
action as may reasonably be required to evidence or effectuate the transactions
contemplated by this Agreement or for the performance by any Party of any of
their other respective obligations under this Agreement.
7.2 Amendment; Waiver. Except as otherwise expressly provided herein,
-----------------
this Agreement may be amended, modified, superseded, or cancelled, and any of
the terms, representations, warranties, covenants or conditions hereto may be
waived, only by a written instrument executed by the Parties hereto or, in the
case of a waiver, by the Party hereto waiving compliance.
7.3 Brokers. Each of the parties hereto represents and warrants that
-------
there are no claims for brokerage commissions or finders' fees in connection
with the transactions contemplated by this Agreement. Each of the parties
hereto will pay or discharge, and will indemnify and hold harmless the others
from and against, any and all claims for brokerage commissions or finders' fees
incurred by reason of any action taken by such indemnifying party.
7.4 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been given if delivered personally or sent
by registered or certified mail, return receipt requested, postage prepaid, as
follows:
(a) if to CWI or Acquisition to:
Richard D. Olson, President
Communications World International, Inc.
6025 So. Quebec St., Ste. 300
Englewood, Colorado 80111
(b) if to CWC to:
John C. Hanner
8640 M Guilford Road
Suite 347
Columbia, Maryland 21046
or to such other person or address as any Party hereto shall have specified by
notice in writing to the other Parties hereto.
19
<PAGE>
7.5 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the Parties and supersedes and cancels any other agreement,
representation, or communication, whether oral or written, between the Parties
hereto relating to the transactions contemplated herein or the subject matter
hereof. No representation, promise, or statement of intention has been made by
any Party hereto which is not embodied in this Agreement or the written
statements, certificates, exhibits, or other documents delivered pursuant hereto
or in connection with the transactions contemplated hereby, and no Party hereto
shall be bound by or liable for any alleged representation, promise, or
statement of intention not set forth herein or therein.
7.6 Headings. The section and subsection headings in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.7 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Colorado.
7.8 Expenses. Each of the Parties hereto shall be responsible for the
--------
fees and expenses of its counsel and other experts and all other expenses
incurred by it in connection with the preparation for, entering into, and
consummation of the transactions contemplated by this Agreement and all other
matters incident thereto.
7.9 Severability. The invalidity or unenforceability of any provision
------------
hereof shall not affect the validity or enforceability of any other provision
contained herein.
7.10 Assignment. This Agreement shall inure to the benefit of, and be
----------
binding upon, the Parties hereto and their successors and assigns; provided,
however, that any assignment by any Party of its rights under this Agreement
without the written consent of the other Parties shall be void.
7.11 Counterparts. This Agreement may be executed simultaneously in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement effective
as of the date first above written.
Communications World International,
Inc.
20
<PAGE>
By:____________________________
Richard D. Olson, President
ATTEST:
___________________________
Scott E. Harris, Secretary
CommWorld - National Capitol Area, Inc.
By:____________________________________
Richard D. Olson, President
ATTEST:
___________________________
Scott E. Harris, Secretary
Communications World of Columbia, Inc.
By:____________________________________
John E. Hanner, President
ATTEST:
__________________________
John C. Hanner, Secretary
_______________________________________
John E. Hanner, Individually
_______________________________________
John C. Hanner, Individually
21
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
COMMUNICATIONS WORLD INTERNATIONAL, INC.,
COMMWORLD-NATIONAL CAPITOL AREA, INC.
ALPHA COMMUNICATIONS & TECHNOLOGY, INC.
AND BENNIE R. HESTER
August 1, 1995
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered
into as of the 1st day of August, 1995, among Communications World
International, Inc., a Colorado corporation ("CWI"), CommWorld National Capitol
Area, Inc. a Virginia corporation, which is a wholly-owned subsidiary of CWI
("Acquisition"), Alpha Communications & Technology, Inc., a Virginia
corporation d.b.a CommWorld of Northern Virginia ("CWT") and Bennie R. Hester,
the sole shareholder of CWT ("Hester"). CWI, Acquisition, CWT and Hester are
sometimes referred to herein individually as a "Party" and collectively as the
"Parties".
WHEREAS, the Parties are desirous of effecting a merger of CWT with and
into Acquisition; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
(as hereinafter defined) shall qualify as a tax-free reorganization described in
Sections 368(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the parties expect that the merger of CWT with and into
Acquisition will further certain of their business objectives.
NOW, THEREFORE, CWI, Acquisition, CWT and Hester adopt this plan of
reorganization and agree as follows:
Section 1. The Merger
1.1 The Merger. At the Effective Time (as hereinafter defined), CWT
----------
shall be merged with and into Acquisition (the "Merger"), and Acquisition shall
be the surviving corporation in the Merger, and the separate existences and
corporate organizations of CWT shall cease.
1.2 Articles of Incorporation. The Articles of Incorporation of
-------------------------
Acquisition in effect at and as of the Effective Time will remain the Articles
of Incorporation of Acquisition without any modification or amendment in the
Merger.
1.3 Bylaws. The Bylaws of Acquisition in effect at and as of the
------
Effective Time will remain the Bylaws of Acquisition without any modification or
amendment in the Merger.
1.4 Directors and Officers. Directors and officers of Acquisition at
----------------------
and as of the Effective Time shall be as set forth in Schedule 1.4.
<PAGE>
1.5 The Effective Time. Subject to the terms and provisions of this
------------------
Agreement, a certificate of merger (the "Certificate of Merger") shall be duly
prepared, executed and acknowledged by Acquisition and thereafter delivered to
the Secretary of State of the State of Virginia, for filing, as provided in the
Virginia Stock Corporation Act as soon as practicable after the Closing Date
(as hereinafter defined). The Merger shall become effective at the time (the
"Effective Time") CWT and Acquisition file the Certificate of Merger with the
Secretary of State of the State of Virginia or at such time thereafter as is
provided in the Certificate of Merger. The Merger shall have the effect set
forth in the Virginia Stock Corporation Act.
1.6 Effect of Merger. At and after the Effective Time, Acquisition
----------------
shall possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of CWT and Acquisition; and all and singular
rights, privileges, powers and franchises of CWT and Acquisition, and all
property, real, personal and mixed, and all debts due to CWT or Acquisition on
whatever account, as well as for stock subscriptions and all other things in
action or belonging CWT and Acquisition, shall be vested in Acquisition; and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of Acquisition as they
were of CWT and Acquisition; and the title to any real estate vested by deed or
otherwise, of CWT or Acquisition, shall not revert or be in any way impaired;
but all rights of creditors and all liens upon any property of CWT or
Acquisition shall be preserved unimpaired; and all debts, liabilities and duties
of CWT and Acquisition shall thenceforth attach to Acquisition, and may be
enforced against Acquisition to the same extent as if said debts and liabilities
had been incurred by it.
1.7 Conversion of CWT Stock. At and as of the Effective Time, by virtue
-----------------------
of the Merger and without any action on the part of Hester, as the sole holder
of the shares of common stock of CWT, shall be entitled to receive in exchange
therefor an aggregate of $5,000 (represented by a CWI check), 35,134 shares of
$1.00 par value Series C Preferred Stock of CWI and 11,875 shares of common
stock, no par value of CWI ("Common Stock"), subject to adjustment as set forth
in Section 2.
1.8 Procedures for Conversion of Shares of CWT. At the Effective Time,
------------------------------------------
(a) CWI will deliver to Hester a CWI check; (b) CWI will cause its transfer
agent, American Securities Transfer, Inc., to issue stock certificates
evidencing the shares of Series C Preferred Stock and common stock of CWI in the
name of the Hester as of the Effective Time; and (c) Hester will deliver to CWI
his certificates evidencing all of the outstanding capital stock of CWT,
together with duly endorsed stock powers.
2
<PAGE>
Section 2. Closing
2.1 Closing. The closing of the Merger (the "Closing") shall be held at
-------
the offices of Communications World International, Inc. at 9:00 a.m. on August
30, 1995, or such other date, time and place as the parties may mutually
determine (the "Closing Date").
2.2 Actions at the Closing. At the Closing, (a) CWT and Hester will
----------------------
deliver to CWI and Acquisition the various certificates, instruments, and
documents referred to in Section 5, (b) CWI and Acquisition will deliver to CWT
the various certificates, instruments, and documents referred to in Section 5,
(c) CWT and Acquisition will file with the Secretary of the State of Virginia a
certificate of merger, and (d) CWI will deliver a check in the amount of $5,000
and certificates evidencing the Series C Preferred Stock and Common Stock of CWI
issued in the Merger as provided in Section 1.8.
2.3 Adjustments at the Closing. The consideration to be paid to Hester
--------------------------
in connection with the Merger has been calculated based upon the addition of
$10,000 to the aggregate net assets of CWT (determined in accordance with
generally accepted accounting principles as of August 1, 1995 (the "Net
Assets"), which Net Assets are estimated to be $77,634. As provided in Section
5, at the Closing, CWT and Hester will provide to CWI and Acquisition a revised
schedule of Net Assets, and the number of shares of Series C Preferred Stock to
be issued to Hester shall be revised in accordance with this Section 2.3.
2.4 Adjustment after the Closing. In the event that CWI objects to the
----------------------------
calculation of Net Assets pursuant to Section 2.3, then no later than 90 days
after the Closing Date, CWI shall notify Hester, in reasonable detail, of its
objections. In the event Hester disputes the correctness of the objections of
CWI, Hester shall notify CWI in writing within twenty days after receipt of the
objections from CWI and setting forth, in reasonable detail, the reasons for
Hester's objections. If Hester fails to deliver such notice within such time,
Hester shall be deemed to have accepted CWI's calculation. CWI and Hester shall
endeavor in good faith to resolve any disputed items within thirty days after
CWI's receipt of Hester's notice of objections. If they are unable to do so,
CWI and Hester each shall have the right to refer the dispute to the Denver,
Colorado office of KPMG Peat Marwick (the "Auditor") for resolution. The
determination by the Auditor of the adjustments, if any, which are necessary in
order that the calculation of the consideration paid to Hester be made in
accordance with Section 2.3 shall be conclusive and binding on the Parties. The
fees of the Auditor incurred in resolving any such dispute shall be paid by the
Party referring the matter to the Auditor unless there is an adjustment greater
than $10,000 in favor of the Party who referred the dispute to the Auditor, in
which event the other Party shall be responsible for the fees of the Auditor.
In the event an adjustment is necessary, the adjustment will be made in shares
of Series C Preferred Stock valued at $1 per share. CWI's utilization of the
procedures under this Section 2 for a determination of the Net Assets shall not
supersede, replace or waive any rights or remedies that CWI may have for
3
<PAGE>
Hester's breach of any of Hester's representations, warranties or agreements or
for indemnification Hester has otherwise made under this Agreement.
Section 3. Representations and Warranties of
CWI and Acquisition
CWI and Acquisition represent and warrant to CWT and Hester as follows:
3.1 Corporate Status. Each of CWI and Acquisition are corporations
----------------
duly organized, validly existing, and in good standing under the laws of its
state of incorporation and is licensed or qualified as a foreign corporation in
all states in which the nature of its business or the character or ownership of
its properties makes such licensing or qualification necessary. Each of CWI and
Acquisition have all requisite power and authority, and all licenses,
franchises, permits and authorizations necessary to carry on their respective
businesses as currently conducted and to own, lease and operate their respective
assets, properties and businesses now owned and operated by it, except where the
failure to have such licenses, franchises, permits and authorizations would not
have a material adverse effect on its financial condition, results of
operations, assets, property, liabilities or business of CWI and Acquisition
taken as a whole. CWI and Acquisition have supplied CWT and Hester with true,
complete and correct copies of their respective Articles of Incorporation and
Bylaws.
4
<PAGE>
3.2 Capitalization.
--------------
(a) As of the date hereof, the authorized capital stock of CWI
consists of 2,000,000 shares of Common Stock, no par value per
share, of which 1,524,163 shares are issued and outstanding, and
3,000,000 shares of preferred stock, par value $1.00 per share, of
which 401,633 shares are presently issued and outstanding. As of
the date hereof, the following shares of Common Stock are reserved
for issuance: (i) 10,275 shares for issuance pursuant to CWI's 1993
Stock Option Plan, (ii) 20,000 shares for issuance pursuant to CWI's
Non-Discretionary Stock Option Plan, (iii) subject to shareholder
approval of an increase in the authorized common stock of CWI and of
CWI's 1994 Stock Option Plan, 257,000 shares, (iv) 40,000 shares for
issuance upon the exercise of warrants issued to designees of the
underwriter of its 1992 public offering, (v) 212,400 shares for
issuance upon the exercise of warrants issued in CWI's 1992 public
offering and 1994 private offering, (vi) options to consultants to
purchase an aggregate of 151,325 shares, of which options to
purchase an aggregate of 70,000 shares are subject to shareholder
approval of an increase in the authorized common stock of CWI and
(vii) 60,452 shares for issuance upon conversion of preferred stock.
All issued and outstanding shares of capital stock of CWI are fully
paid and nonassessable and are not subject to any preemptive right.
(b) As of the date hereof, the authorized capital stock of
Acquisition consists of 1,000 shares of common stock, without par
value, of which 1,000 shares are issued and outstanding. All issued
and outstanding shares of Acquisition are fully paid and non-
assessable and are not subject to any preemptive right. There are
no outstanding warrants, options or other agreements to acquire
securities of Acquisition.
3.3 Authority. Each of CWI and Acquisition has full corporate power and
---------
authority to enter into this Agreement and to carry out its respective
obligations hereunder. The execution and delivery of this Agreement and
performance by each of CWI and Acquisition of their respective obligations
hereunder has been duly authorized by all requisite corporate action on the part
of each of CWI and Acquisition. This Agreement has been duly executed and
delivered by each of CWI and Acquisition and constitutes a valid and binding
obligation of each of CWI and Acquisition enforceable against each of CWI and
Acquisition in accordance with its terms except that (i) the enforcement of
certain rights and remedies created by this Agreement is subject to bankruptcy,
insolvency, reorganization and similar laws of general application affecting
the rights and remedies of creditors generally and (ii) the enforceability of
any particular provision of this Agreement under principles of equity or the
availability of equitable remedies, such as specific performance, injunctive
relief, waiver or other equitable remedies, is subject to the discretion of
courts of competent jurisdiction.
5
<PAGE>
3.4 Consents. No consent, approval, qualification, order or
--------
authorization of, or filing with, any governmental authority, including any
court or other third party, is required in connection with the valid execution,
delivery or performance of this Agreement by CWI and Acquisition or the
consummation by CWI and Acquisition of the transactions contemplated hereby.
3.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, or result in the creation of or imposition of any
lien, charge or encumbrance upon any property or assets of CWI or Acquisition
pursuant to, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which CWI or Acquisition is a party or by which CWI or Acquisition
is bound or to any of CWI's or Acquisition's property, the certificate of
incorporation or bylaws of CWI or Acquisition, or any applicable law, rule,
regulation, judgment, order or decree of any court or governmental agency,
authority or body having jurisdiction over CWI or Acquisition or any of their
respective properties.
3.6 Subsidiaries and Affiliates. Except for Acquisition, CommWorld of
---------------------------
Phoenix, Inc., International Communications Acquisition Corp. of Washington, and
International Communications Acquisition Corp. of Colorado, CWI does not
directly or indirectly, own any interest in or control any other corporation,
partnership, limited liability company, joint venture, association or other form
of business organization. All of the issued and outstanding shares of common
stock of Acquisition is owned directly by CWI free and clear of any mortgage,
pledge, lien or encumbrance.
3.7 Financial Statements. The consolidated financial statements of CWI
--------------------
furnished to CWT and Hester consisting of a balance sheet as of April 30, 1995
and the consolidated statements of operations and cash flows for the two years
ended April 30, 1995, are in all material respects true and accurate statements
of the financial condition and the results of operations of CWI as of the dates
and for the periods involved, and such statements were prepared in accordance
with generally accepted accounting principles consistently applied. The
unaudited balance sheet of Acquisition at August 1, 1995 ("Acquisition's Balance
Sheet"), furnished to CWT and Hester is true and accurate and prepared in
accordance with generally accepted accounting principles consistently applied.
3.8 Delivery of Reports. CWI has delivered to CWT and Hester CWI's
-------------------
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1995, as filed
by CWI with the Securities and Exchange Commission. Notwithstanding any
provision hereof to the contrary, it is understood by CWT and Hester that CWI is
not representing or warranting any statements in the Reports relating to future,
anticipated, or possible circumstances, occurrences, or developments.
6
<PAGE>
3.9 CWI Stock. CWI has taken all necessary corporate action to issue
---------
the shares of the Common Stock and Series C Preferred Stock pursuant to the
terms of this Agreement. The shares of Common Stock and Series C Preferred
Stock issued pursuant to the terms of this Agreement will, when issued, be
validly issued, fully paid and nonassessable and no action taken by CWI will
confer upon any person any preemptive right of subscription or purchase in
respect thereof.
3.10 Disclosure. No representation or warranty by CWI or Acquisition
----------
contained in this Agreement or in any document, statement, or certificate
furnished, or to be furnished, to CWT and Hester pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
an untrue statement of a material fact or omits or will omit to state a material
fact required to be stated or necessary to make the statements and facts
contained herein or therein, in light of the circumstances in which they were or
are made, not false or misleading.
Section 4. Representations and Warranties
of CWT and Hester
CWT and Hester represent and warrant to CWI and Acquisition as follows:
4.1 Corporate Status. CWT is a corporation duly organized, validly
----------------
existing, and in good standing under the laws of the State of Virginia and is
licensed or qualified as a foreign corporation in all states in which the nature
of its business or the character or ownership of its properties makes such
licensing or qualification necessary. CWT has all requisite corporate power and
authority, and all licenses, franchises, permits and authorizations necessary to
carry on its business as currently conducted and to own, lease and operate the
assets, properties and businesses now owned and operated by it, except where the
failure to have such licenses, franchises, permits and authorizations would not
have a material adverse effect on its financial condition, results of
operations, assets, property, liabilities or business. CWT has supplied CWI and
Acquisition with true, complete and correct copies of its Articles of
Incorporation and Bylaws.
4.2 Capitalization. The authorized capital stock of CWT consists of
--------------
5,000 shares of common stock, $1.00 par value per share, of which 100 shares are
issued and outstanding, fully paid, and nonassessable. All of the issued and
outstanding shares of CWT are owned by Hester. There are no outstanding
warrants, options or other agreements to acquire securities of CWT.
4.3 Authority. CWT has full corporate power and authority to enter into
---------
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and performance by CWT hereunder has been duly
authorized by all requisite corporate action on the part of CWT. This Agreement
has been duly executed and delivered by
7
<PAGE>
CWT and Hester and constitutes a valid and binding obligation of CWT and Hester
enforceable against CWT and Hester in accordance with its terms, except that (i)
the enforcement of certain rights and remedies created by this Agreement is
subject to bankruptcy, insolvency, reorganization and similar laws of general
application affecting the rights and remedies of creditors generally, and (ii)
the enforceability of any particular provision of this Agreement under
principles of equity or the availability of equitable remedies, such as specific
performance, injunctive relief, waiver or other equitable remedies, is subject
to the discretion of courts of competent jurisdiction. No shareholder of CWT has
asserted the right to dissent from the Merger.
4.4 Consents. Except as set forth in Schedule 4.4, no consent,
--------
approval, qualification, order or authorization of, or filing with, any
governmental authority, including any court or other third party, is required in
connection with the valid execution, delivery or performance of this Agreement
by CWT or Hester or the consummation by CWT or Hester of the transactions
contemplated hereby.
4.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, or result in the creation of or imposition of any
lien, charge or encumbrance upon any property or assets of CWT or Hester
pursuant to, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which CWT or Hester is a party or by which CWT or Hester is bound
or to any of CWT's or Hester's property, the Certificate of Incorporation or
Bylaws of CWT, or any applicable law, rule, regulation, judgment, order or
decree of any court or governmental agency, authority or body having
jurisdiction over CWT or Hester or any of CWT's or Hester's properties.
4.6 Subsidiaries and Affiliates. CWT does not, directly or indirectly,
---------------------------
own any interest in or control any other corporation, partnership, limited
liability company, joint venture, association or other form of business
organization.
4.7 Financial Statements. The unaudited financial statements of CWT
--------------------
furnished to CWI and Acquisition consisting of balance sheets as of December 31,
1993 and December 31, 1994, and the related statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1993 and
December 31, 1994, and the unaudited balance sheets of CWT as of July 31, 1995
(the "Latest Balance Sheets") and the unaudited statement of income for the
seven months then ended, are in all material respects true and accurate
statements of the financial condition and the results of operations of each of
CWT as of the dates and for the periods involved, and such statements were
prepared in accordance with generally accepted accounting principles
consistently applied.
4.8 Net Assets; Title to Property. Set forth in Schedule 4.8 is a list
-----------------------------
of Net Assets, which is true and correct as of August 1, 1995. Except as
otherwise set forth in Schedule 4.8,
8
<PAGE>
each of CWT has good and valid title to all the properties and assets, real and
personal, reflected on the Latest Balance Sheets and Schedule 4.8, owns these
assets free and clear of all liens, claims, charges or encumbrances of any kind
or description other than (i) liens for the current year's taxes not yet due and
payable and (ii) liens securing the liabilities shown on the Latest Balance
Sheets, with respect to which no default exists. The properties and assets
reflected in the Latest Balance Sheets include all the assets, rights and
property utilized exclusively by CWT in the conduct of business of CWT and all
other assets, rights and property necessary for the conduct of the business of
CWT.
4.9 Condition of Assets. The properties and assets of CWT as listed on
-------------------
the Latest Balance Sheets and Schedule 4.8 are, and as of the Closing Date will
be, in good operating condition and suitable for continued use in the same
manner as heretofore used, ordinary wear and tear excepted. The equipment and
vehicles listed on the Latest Balance Sheets and Schedule 4.9 constitutes all
the equipment and vehicles that are necessary to continue effectively the
operation of the business of CWT as it is currently conducted.
4.10 Inventory and Supplies. All of the inventory and supplies listed on
----------------------
the Latest Balance Sheets and Schedule 4.8 have been purchased in the ordinary
course of business at or about market prices prevailing at the times of
purchase. All such inventories and supplies are of a quality and in quantities
saleable, or usable, as the case may be, in the ordinary course of the business
of CWT. The inventory is valued at the lower of cost or market price as
reflected in the books of account of CWT.
4.11 Product Warranties. To the best knowledge of CWT or Hester there is
------------------
no significant design, manufacturing, or other defect in any product sold by CWT
which has resulted in the past, or could result in the future, in any required
recall, repair, replacement, credit or refund for which CWT would be
responsible.
4.12 Accounts Receivable. All accounts receivable listed on the Latest
-------------------
Balance Sheets and Schedule 4.8 are valid, legal and subsisting accounts,
enforceable in accordance with their respective terms and arising from bona fide
transactions in the ordinary course of business and are collectible in amounts
not less than the aggregate amount thereof carried on the Latest Balance Sheets
and Schedule 4.8, net of reserves. The collectibility of each account
receivable will not be impaired by any right of return, statute of limitation,
right of set-off, counterclaim or defense.
4.13 Liability. Each liability shown on the Latest Balance Sheets and
---------
Schedule 4.8 represents a valid obligation of CWT incurred in the ordinary
course of business of CWT.
4.14 Intangible Rights. Schedule 4.14 contains an accurate and complete
-----------------
list of all material intangible rights utilized in connection with the business
of CWT. To the best knowledge of CWT and Hester, these intangible rights are
being lawfully used in the business of
9
<PAGE>
CWT and may be so used without payment to, or interference from, any party, and
there has been no assignment, license or other authorization given to any party
to use any of these intangible rights. To the best knowledge of CWT and Hester,
each of CWT has the right to use, without payment to any third party, all
proprietary rights used in its business. CWT has not received any notice, nor do
CWT or Hester have any reason to believe, that any of these intangible rights
are being infringed upon by any third party.
4.15 Employees. CWT has no contract or agreement with any labor union or
---------
other collective bargaining group and has not been involved in any strike, work
stoppage, lock out or unfair labor practice, as such term is defined in the
National Labor Relations Act, as amended, of any kind or nature. No employee of
CWT has petitioned for a collective bargaining representation election and no
union is currently attempting to organize any of the employees of CWT. To the
best knowledge of CWT and Hester, CWT is in compliance in all material respects
with all federal and state laws governing employment, employment practices and
the terms and conditions of employment.
4.16 Contracts, Agreements, Leases and Commitments. Except for the
---------------------------------------------
contracts, agreements, leases and commitments listed on Schedule 4.16, CWT is
not a party to or bound by any material contract, agreement, lease or other
commitment. All of the contracts listed in Schedule 4.16 are in full force and
effect without amendment or modification, other than sales orders or purchase
orders entered into in the ordinary course of business. CWT is not in default
under any contract and has not received notice of any alleged default by it
under any contract which has not been waived under that contract. For purposes
of this Section 4.16 as it relates to material contracts, agreements, leases or
other commitments "material" shall mean any contract, agreement, lease or other
commitment entered into which is not in the ordinary course of business or, if
entered into in the ordinary course of business, which involves a payment,
commitment or entitlement in excess of $10,000.
4.17 Litigation. Except as set forth on Schedule 4.17, there are no
----------
actions, suits, proceedings or claims pending or, to the best knowledge of CWT
or Hester, threatened against or affecting CWT or Hester, its business or assets
or properties. There are no judgments, orders or decrees outstanding against CWT
or Hester. CWT and Hester has no knowledge of any pending or threatened
proceeding which would, in any manner, impair or curtail the operation of its
business in the manner currently operated and CWT and Hester has no knowledge of
any other condition which would, in any manner, impair or curtail in any
material respect the conduct of the business of CWT in the manner currently
operated.
4.18 Condemnation; Assessments; Defects. CWT has not received any notice
----------------------------------
of any condemnation action or special assessment being contemplated with respect
to its premises or any of its properties or any notice from any governmental
authority or insurance company of any defect or inadequacy in these premises or
properties or any part thereof.
10
<PAGE>
4.19 Compliance with Law. CWT is in compliance, in all material
-------------------
respects, with all applicable laws, rules, regulations or requirements of any
governmental authority, federal, state or local, relating to its business,
including, without limitation, the impact of its business upon the environment,
and the continued operation of its business in the manner heretofore conducted
will not violate, in any material respect, any existing statute, rule,
regulation or order, federal, state or local except where such noncompliance
would not have a material adverse effect on the condition (financial or other),
business, property, prospects, net worth or results of operations of CWT.
Neither CWT nor its officers or directors has received notice of any such
violation with respect to its business and operations.
4.20 Taxes.
-----
(a) CWT has filed with the appropriate federal, state and local
governmental authorities all tax returns required to be filed with
respect to its business and properties and have paid all assessments
shown to be due and claimed to be due on all such tax returns.
(b) There are no additional assessments due or claimed to be due
with respect to such filed returns.
(c) Except as disclosed in Schedule 4.20, CWT has not executed or
filed any agreement extending the period for assessment or
collection of any tax nor is CWT a party to any action or proceeding
by any governmental authority for the assessment or collection of
taxes.
(d) All returns filed by CWT constitute complete and accurate
representations of the tax liabilities for such years and accurately
set forth all items (to the extent required to be included or
reflected in such returns) relevant to the future tax liabilities,
including the tax bases of the properties and assets.
(e) The financial statements of CWT fairly present the charges,
accruals, and reserves for taxes of CWT for all taxes payable by CWT
for any period prior to the Latest Balance Sheets for which no
return has yet been filed.
(f) No examination of the tax returns of CWT is currently in
progress nor, to the best knowledge of CWT or Hester, is any such
examination threatened.
(g) None of the returns of CWT has been reviewed or audited by
applicable federal, state, local, and foreign taxing authorities and
none of the returns have received clearances or other indications of
approval from applicable federal, state, local, and foreign taxing
authorities. To the best knowledge of CWT or Hester, no issue or
issues have been raised in
11
<PAGE>
connection with any prior or pending review or audit of said
federal, state, local, or foreign returns which may reasonably be
expected to be raised in the future by such taxing authorities in
connection with the audit or review of the returns of CWT.
For purposes of this Section the term "tax" (and with corresponding
meanings "taxes" and "taxable") shall include without limitation all federal,
provincial, state, local and foreign net income, profits, alternative add-on
minimum tax, gross income, value added, franchise, gross receipts, sales, use,
ad valorem, occupation, license, excise, payoff, stamp, premium, withholding,
real and personal property, and other taxes, and related or similar governmental
charges, tariffs, customs duties, assessments, together with any interest,
fines, and penalties or addition to tax imposed with respect to the foregoing.
4.21 Insurance. The assets, property and business of CWT are covered by
---------
insurance policies of the types customarily carried by businesses such as that
of CWT, which policies are in full force and effect with all premiums due
thereon paid or accrued. Such policies are adequate in amount, scope and
coverage to protect CWT against any material loss of assets or property or any
interruption in its operations customarily insured against. Schedule 4.21 sets
forth an accurate and complete list of each insurance policy owned or maintained
by CWT. Each of CWT has not received any notice of cancellation with respect to
any such policy, no claims are pending under any such policy and, to the best
knowledge of CWT and Hester, there is no basis for any insurer thereunder to
terminate any such policy.
4.22 Books of Account and Records. The books of account of CWT fairly
----------------------------
reflect its income, expenses, assets and liabilities and have been maintained in
accordance with sound business practices. The customer and supplier records of
CWT are in all respects complete and correct and have been maintained in
accordance with sound business practices and in conformity with all applicable
government laws, rules and regulations.
4.23 Undisclosed Liabilities. Except as set forth on Schedule 4.23, to
-----------------------
the best knowledge of CWT and Hester, CWT has no material liabilities of any
nature except to the extent reflected, or reserved against, in the Latest
Balance Sheets, whether accrued, absolute, contingent, or otherwise, including,
without limitation, tax liabilities and interest due or to become due or except
for liabilities which would not have a material adverse effect on the condition
(financial or other), business, property prospects, net worth or results of
operations of CWT.
4.24 Real Property and Leaseholds. Schedule 4.24 attached hereto
----------------------------
contains a description of each lease of real property under which CWT is a
lessee, lessor, sublessee or sublessor. Each such lease is in full force and
effect.
12
<PAGE>
4.25 Indebtedness to and from Officers, Directors, and Shareholders.
--------------------------------------------------------------
Except as set forth in Schedule 4.25, CWT is not indebted, directly or
indirectly, to any person who is an officer, director, or shareholder of CWT or
any affiliate of any such person in any amount whatsoever, other than for
salaries for services rendered or reimbursable business expenses, nor is any
such officer, director, shareholder, or affiliate indebted to CWT except for
advances made by CWT to employees of CWT in the ordinary course of business.
4.26 Disclosure. No representation or warranty by CWT and Hester
----------
contained in this Agreement or in any document, statement, or certificate
furnished, or to be furnished, to CWI and Acquisition pursuant hereto, or in
connection with the transactions contemplated hereby, contains or will contain
an untrue statement of a material fact or omits or will omit to state a material
fact required to be stated or necessary to make the statements and facts
contained herein or therein, in light of the circumstances in which they were or
are made, not false or misleading.
4.27 Absence of Certain Changes. Except as contemplated by this
--------------------------
Agreement or disclosed in Schedule 4.27, since the Latest Balance Sheets, CWT
has not done or allowed to occur any of the following:
(a) operated its business other than in the ordinary course;
(b) cancelled or compromised any debt or claim other than (i)
immaterial adjustments or (ii) in the ordinary course of business;
(c) released, transferred or granted any rights;
(d) suffered any material adverse change in its financial
condition, properties or business or obtained knowledge of any
present or future business condition which could materially
adversely affect any of its assets, properties or business, or which
could prevent it from carrying on its business in substantially the
same manner as that in which it is being conducted;
(e) suffered any material damage, destruction, or loss of or to its
property, whether or not covered by insurance;
(f) declared or paid any dividend or other distribution in respect
to the capital stock of CWT except for any direct or indirect
redemption, purchase, or other acquisition of any such stock;
(g) made, amended or cancelled any contract, agreement, lease,
order or other commitment (other than sales or purchase orders in
the ordinary course of business) or, except to the extent waived by
the other party thereto, failed to
13
<PAGE>
keep any of them in full force and effect or to perform any of
its obligations thereunder;
(h) increased the salary or wages of any director or officer in
excess of 5%;
(i) incurred any liabilities or obligations, whether absolute or
contingent, accrued or otherwise, other than ordinary operating
expenses which in the aggregate do not materially adversely affect
its business or financial condition;
(j) entered into any transaction, done any act or thing or suffered
any act or thing to be done which would result in any representation
or warranty of CWT contained in this Agreement becoming untrue
immediately after the consummation of such transaction;
(k) pledged or subjected to lien or to any other charge or
encumbrance any of its assets or properties other than in the
ordinary course of business;
(l) any amendment to any term of any security of CWT;
(m) any repurchase, redemption or other acquisition by CWT of any
outstanding shares of capital stock or other securities of, or other
ownership in, CWT;
(n) any change in any method of accounting or accounting practice by
CWT; or
(o) any strike, work stoppage, lockout or any other labor dispute.
4.28 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
Hester in reliance upon Hester's representation to CWI, which by Hester's
execution of this Agreement, Hester hereby confirms, that the Common Stock and
Series C Preferred Stock to be received by Hester will be acquired for
investment for Hester's own account, not as a nominee or agent, and not with a
view to the resale or distribution of any part thereof, and that Hester has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, Hester further represents
that Hester does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of the Common Stock and Series C Preferred
Stock. Hester represents that he has full power and authority to enter into
this Agreement.
14
<PAGE>
4.29 Disclosure of Information. Hester believes he has received all the
-------------------------
information he considers necessary or appropriate for deciding whether to
acquire the Common Stock and Series C Preferred Stock. Hester further
represents that he has had an opportunity to ask questions and receive answers
from CWI regarding the terms and conditions of the Merger and regarding the
business, financial condition and operations of CWI.
4.30 Investment Experience. Hester has invested in speculative
---------------------
securities and acknowledges that he is able to bear the economic risk of his
investment and has such knowledge and experience in financial or business
matters that he is capable of evaluating the merits and risks of an investment
in Common Stock and Series C Preferred Stock.
4.31 Restricted Securities. Hester understands that the shares of Common
---------------------
Stock and Series C Preferred Stock which he will acquire pursuant to the Merger
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from CWI in a transaction not involving a
public offering and that under such laws and applicable regulations, such
securities are restricted from resale without registration under the Securities
Act of 1933 as amended. Hester understands that the certificates evidencing the
Common Stock and Series C Preferred Stock will have imprinted on its face a
legend with respect to these restrictions. Hester further understands that the
same restrictions will be applicable to any requests to convert the Series C
Preferred Stock into Common Stock subsequent to the Closing, and as a condition
to such conversion, Hester will be required to reaffirm representations made in
Sections 4.28 through 4.31.
Section 5. Documents to be Delivered Before or on the
Closing Date
At the Closing, the following documents shall be delivered:
5.1 Certificate of Officers of CWI. CWT and Hester shall have been
------------------------------
furnished with a certificate signed by the President and Secretary (or Assistant
Secretary) of CWI and Acquisition, dated as of the Closing Date, certifying that
attached thereto are true, correct and complete resolutions of the Board of
Directors of CWI and Acquisition authorizing the execution, delivery and
performance of this Agreement and the transactions contemplated therein, and
that the persons who have signed the Agreement on behalf of CWI and Acquisition
are the incumbent President and Secretary (or Assistant Secretary) of CWI and
Acquisition.
5.2 Certificate of Officers of CWT. CWI and Acquisition shall have been
------------------------------
furnished with a certificate signed by the President and Secretary (or Assistant
Secretary) of each of CWT, dated as of the Closing Date, certifying that
attached thereto are true, correct and complete resolutions of the Board of
Directors and Shareholder of each of CWT authorizing the execution, delivery and
performance of this Agreement and the transactions contemplated
15
<PAGE>
therein, and that the persons who have signed the Agreement on behalf of each of
CWT are the incumbent President and Secretary (or Assistant Secretary) of each
of CWT.
5.3 Schedule of Assets. CWI and Acquisition shall have been furnished
------------------
with an updated schedule of Net Assets by CWT and Hester, in form and substance
satisfactory to CWI and Acquisition.
5.4 Absence of Litigation. Each of CWI and Acquisition, and CWT and
---------------------
Hester, shall certify to each other that, to the best of their knowledge, no
litigation, proceeding, governmental investigation, or governmental inquiry is
pending or threatened at the Closing Date in which it is sought or threatened to
restrain, enjoin, restrict, limit or prohibit (or to obtain substantial damages
as a result of) the consummation of the transactions contemplated by this
Agreement.
5.5 Employment Agreement. Acquisition and Hester shall have entered
--------------------
into an Employment Agreement in the form of Exhibit 5.5.
5.6 Non-Compete Agreement. Acquisition and Hester shall have entered
---------------------
into a Non-Compete Agreement in form of Exhibit 5.6.
Section 6. Indemnification
6.1 Indemnification by CWI and Acquisition. CWI and Acquisition hereby
--------------------------------------
agree to indemnify and hold harmless CWT and its officers, directors and
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) incurred by CWT and Hester
due to, or which result from, any of the following to the extent that any such
losses, claims, damages, liabilities, cost and expenses exceed on a cumulative
basis $10,000:
(a) Any misrepresentation, breach of warranty or nonfulfillment of
any of the covenants or agreements of CWI and Acquisition in this
Agreement, any Exhibit or Schedule to this Agreement or any other
documents furnished to CWT and Hester hereunder.
(b) The omission to state any fact necessary to make the statements
contained in this Agreement, any Exhibit or Schedule to 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 CWI or Acquisition
and their operations.
16
<PAGE>
6.2 Indemnification by Hester. Hester hereby agrees to indemnify and
-------------------------
hold harmless CWI and Acquisition and the officers, directors, employees and
agents of CWI and Acquisition, 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)
incurred by them or by any of them due to, or which result from, any of the
following to the extent that such losses, claims, damages, liabilities, costs
and expenses exceed on a cumulative basis, $10,000:
(a) Any misrepresentation, breach of warranty or nonfulfillment of
any of the covenants or agreements of CWT or Hester in this
Agreement, any Exhibit or Schedule to this Agreement or any other
documents furnished to CWI or Acquisition hereunder.
(b) The omission to state any fact necessary to make the statements
contained in this Agreement, any Exhibit or Schedule to 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 CWT or its
operations, concerning Heath.
6.3 Notice of Claim. Should any party (the "Indemnified Party") suffer
---------------
any loss, damage or expense for which the other party (the "Indemnifying Party")
is obligated to indemnify and hold such Indemnified Party harmless pursuant to
this Section 6 of this Agreement, the following shall apply: promptly upon
receipt by the Indemnified Party of notice of any demand, assertion, claim,
action or proceeding, judicial or otherwise, with respect to any matter as to
which the Indemnifying Party is obligated to indemnify the Indemnified Party
under the provisions of this Agreement, the Indemnified Party shall give prompt
written notice thereof to the Indemnifying Party, together with a statement of
such information in respect of such matter as the Indemnified Party shall then
have and a statement advising that the Indemnifying Party must notify it within
10 days whether the Indemnifying Party will undertake the defense of such matter
(the "Notice of Claim"). The Indemnifying Party shall not be obligated to
indemnify the Indemnified Party with respect to any matter hereunder if the
Indemnified Party has failed to use its best efforts to notify the Indemnifying
Party thereof in accordance with the provisions of this Agreement in sufficient
time to permit the Indemnifying Party and its counsel to defend against such
matter and to make a timely response thereto, including without limitation, the
preparation and assertion of an answer or other responsive motion to a
complaint, petition, notice or other legal, equitable or administrative process
relating to any such claim. Notice of the intention of the Indemnifying Party
to contest any such claim, and the identity of counsel that the Indemnifying
Party intends to employ to contest any such claim, shall be given by the
Indemnifying Party to the Indemnified Party within 10 days from the date of
mailing to the Indemnifying Party of notice by the Indemnified Party of the
assertion of any such claim. The Indemnified Party shall have the right to
approve the counsel named in the notice provided pursuant to the preceding
sentence, provided that such approval shall not be unreasonably
17
<PAGE>
withheld. The Indemnified Party shall have the right to participate in such
proceedings and to be represented by attorneys of its own choosing; provided,
however, such representation shall be at the Indemnified Party's own expense if
the Indemnifying Party selects different counsel of its own choosing. If the
Indemnifying Party does not elect to contest any such claim, the Indemnifying
Party shall be bound by the results obtained with respect thereto by the
Indemnified Party, including any settlement of such claim.
6.4 Nature and Survival of Representations. All statements contained in
--------------------------------------
this Agreement and in the Schedules to this Agreement shall be deemed
representations and warranties by the applicable Party under this Agreement;
provided that with respect to any statement regarding any matter set forth in a
Schedule the statements shall be deemed representations and warranties only upon
the attachment of each Schedule to this Agreement, whether before or after the
execution of this Agreement. Each representation, warranty, indemnity and
agreement made by the Parties in this Agreement or pursuant to this Agreement
shall be true and accurate in all material respects as of the later to occur of
the execution of this Agreement or the date on which it is considered to have
been made according to the provisions of Section 2 of this Agreement, and the
obligations that they be accurate in all material respects as of that date, and
all obligations relating to indemnification under this Agreement, shall survive
the Closing for a period of two years thereafter. The obligation of any
Indemnifying Party to any Indemnified Party with respect to any matter that is
the subject of or arises in connection with a Notice of Claim sent on or before
the Indemnity Termination Date, defined as that date which is two years from
Closing, shall remain in full force and effect until the matter has been
resolved and paid in full. Except as otherwise provided in the preceding
sentence, no Party shall have any obligation to indemnify any other Party after
the Indemnity Termination Date.
6.5 Other Indemnification Provisions. The foregoing indemnification
--------------------------------
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of representation,
warranty or covenant.
Section 7. General Provisions
7.1 Further Assurances. At any time, and from time to time, after the
------------------
Closing, each Party will execute such additional instruments and take such
action as may reasonably be required to evidence or effectuate the transactions
contemplated by this Agreement or for the performance by any Party of any of
their other respective obligations under this Agreement.
7.2 Amendment; Waiver. Except as otherwise expressly provided herein,
-----------------
this Agreement may be amended, modified, superseded, or cancelled, and any of
the terms, representations, warranties, covenants or conditions hereto may be
waived, only by a written instrument executed by the Parties hereto or, in the
case of a waiver, by the Party hereto waiving compliance.
18
<PAGE>
7.3 Brokers. Each of the parties hereto represents and warrants that
-------
there are no claims for brokerage commissions or finders' fees in connection
with the transactions contemplated by this Agreement. Each of the parties
hereto will pay or discharge, and will indemnify and hold harmless the others
from and against, any and all claims for brokerage commissions or finders' fees
incurred by reason of any action taken by such indemnifying party.
7.4 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed to have been given if delivered personally or sent
by registered or certified mail, return receipt requested, postage prepaid, as
follows:
(a) if to CWI or Acquisition to:
Richard D. Olson, President
Communications World International, Inc.
6025 So. Quebec St., Ste. 300
Englewood, Colorado 80111
(b) if to CWT or Hester:
Bennie R. Hester
6201 Leesburg Pike, Suite 307
Falls Church, Virginia 22044
or to such other person or address as any Party hereto shall have specified by
notice in writing to the other Parties hereto.
7.5 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the Parties and supersedes and cancels any other agreement,
representation, or communication, whether oral or written, between the Parties
hereto relating to the transactions contemplated herein or the subject matter
hereof. No representation, promise, or statement of intention has been made by
any Party hereto which is not embodied in this Agreement or the written
statements, certificates, exhibits, or other documents delivered pursuant hereto
or in connection with the transactions contemplated hereby, and no Party hereto
shall be bound by or liable for any alleged representation, promise, or
statement of intention not set forth herein or therein.
7.6 Headings. The section and subsection headings in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.7 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Colorado.
19
<PAGE>
7.8 Expenses. Each of the Parties hereto shall be responsible for the
--------
fees and expenses of its counsel and other experts and all other expenses
incurred by it in connection with the preparation for, entering into, and
consummation of the transactions contemplated by this Agreement and all other
matters incident thereto.
7.9 Severability. The invalidity or unenforceability of any provision
------------
hereof shall not affect the validity or enforceability of any other provision
contained herein.
7.10 Assignment. This Agreement shall inure to the benefit of, and be
----------
binding upon, the Parties hereto and their successors and assigns; provided,
however, that any assignment by any Party of its rights under this Agreement
without the written consent of the other Parties shall be void.
7.11 Counterparts. This Agreement may be executed simultaneously in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement effective
as of the date first above written.
Communications World International,
Inc.
By:________________________________
Richard D. Olson, President
ATTEST:
___________________________
Scott E. Harris, Secretary
CommWorld - National Capitol Area, Inc.
By:____________________________________
Richard D. Olson, President
20
<PAGE>
ATTEST:
___________________________
Scott E. Harris, Secretary
Alpha Communications & Technology, Inc.
By:____________________________________
Bennie R. Hester, President
ATTEST:
____________________________
Bennie R. Hester, Secretary
_______________________________
Bennie R. Hester, Individually
21
<PAGE>
EXHIBIT
AGREEMENT TO RESTRUCTURE DEBT
This Agreement to Restructure Debt ("Agreement"), effective December 22,1995, is
made by and between Toshiba America Information Systems, Inc., 9740 Irvine
Boulevard, P.O. Box 19724, Irvine, California 92713-9724, a California
Corporation ("TAIS"), and Communications World International, Inc., 6025 South
Quebec Street, Suite 300, Englewood, Colorado 80111, a Colorado Corporation
("CWI"), and Richard D. Olson, 10414 Strasburg Way, Parker, Colorado 80134, an
individual ("Olson").
WHEREAS, CWI is indebted to TAIS pursuant to a certain Installment Note, dated
July 26, 1995, in the original principal amount of Two Hundred Eighteen Thousand
One Hundred Ninety Five Dollars ($218,195), with a current balance of One
Hundred Forty Four Thousand One Hundred Forty Six Dollars ($144,146)
("Installment Note"); and,
WHEREAS, as of the date hereof, CWI is indebted to TAIS in the amount of One
Million Three Hundred Eighty Six Thousand Eight Hundred Four Dollars
($1,386,804) on open book account number 0001900 ("Open Book Account"); and,
WHEREAS, the Installment Note and the Open Book Account are hereinafter
referred to collectively as the "Debt"; and,
WHEREAS, CWI has requested TAIS, and TAIS agrees, to restructure the terms of
repayment of the Debt; and,
WHEREAS, Olson agrees to personally guarantee repayment of the Debt;
NOW, THEREFORE, IN CONSIDERATION of the mutual promises and covenants
contained herein, the parties hereby agree as follows:
1. The Installment Note is hereby canceled and the Open Book Account is hereby
closed at the amount showing on the books and records of TAIS as of the close of
business on the date of this Agreement, provided that (a) CWI shall execute the
Promissory Note attached hereto as Exhibit "A" evidencing a new obligation to
pay TAIS the combined balance owed to TAIS under the Installment Note and the
Open Book Account ("Combined Balance"), and (b) Olson shall execute the Personal
Guaranty attached hereto as Exhibit "B" obligating himself to be personally
liable for repayment of the Combined Balance and the new open book account,
described in Paragraph 2 below, in the event of a default by CWI.
2. TAIS shall extend additional credit to CWI on open book account in an amount
not to exceed Four Hundred Thousand Dollars ($400,000), provided that such new
open book account shall bear a different account number than the Open Book
Account, and further provided that CWI shall make timely payment of such new
open book account in accordance with the terms of the TAIS invoice.
3. CWI shall provide TAIS the following information and documents:
a) Unaudited monthly financial statements, not later than the 24th day of each
month covering the preceding month;
b) Unaudited quarterly financial statements, not later than the 50th day after
the end of the fiscal quarter;
c) Copies of all reports filed by CWI with the United States Securities and
Exchange Commission, not later than three days after the date of filing;
<PAGE>
d) a twelve (12) month rolling forecast of operating results not less than on a
fiscal quarterly basis;
e) a detailed status of accounts receivable of CWI, as such reports are
delivered to CWI's bank lender; and,
f) advance notification of anticipated increases in general and administrative
expenses in excess of ten percent (10%) of general and administrative expense
forecasts.
4) Upon notice to members of the Board of Directors of CWI of any meeting of the
Board of Directors, CWI shall provide notice of such meeting to TAIS, and TAIS
shall be entitled to designate one observer who may, but shall not be obligated
to, attend meetings of the Board of Directors of CWI. Such person shall not be
deemed to be a member of the Board of Directors. TAIS' initial designee shall be
Mr. Reginald Geary. Mr. Geary shall be invited to attend all meetings, but will
not be entitled to vote as a member of the Board, nor will he be permitted to
participate in discussions which affect relationships between CWI and TAIS. Mr.
Geary shall not receive compensation or reimbursement from CWI for attending any
meetings of the Board, or for his review of information regarding CWI.
5) CWI is subject to the reporting requirements of the Securities Exchange Act
of 1934 and its common stock is traded publicly. In this regard, TAIS recognizes
that applicable federal securities laws impose significant restrictions
concerning the use or disclosure of certain non-public information in general
and in buying or selling, or discussing with others the possibility of buying or
selling CWI's stock by persons who have access to material information
concerning CWI which is not generally available to members of the public.
Information which may be provided to TAIS pursuant to this Agreement, or to Mr.
Geary or TAIS' other designee, at meetings of CWI's Board of Directors, may be
considered material non-public information that constitute "inside information"
under the federal securities laws. By virtue of TAIS' access to this
information, TAIS, Mr. Geary, and TAIS' other representatives will be subject to
these restrictions. TAIS agrees that it will not, and that it will insure that
Mr. Geary and other persons having access to such non-public information through
TAIS will not, buy or sell CWI's stock or discuss with others any material non-
public information concerning CWI or the possibility or advisability of buying
or selling CWI's stock, at any time that TAIS and/or its representatives possess
material non-public information concerning CWI.
6) CWI shall permit TAIS' Director of Western Area Sales, or designee, to visit
CWI on a monthly basis to review sales and sales support activities. TAIS may,
from time to time, provide additional sales and sales training support to CWI.
CWI shall cooperate with TAIS in utilization of the aforementioned support.
7) Any notice shall be in writing and shall be effective the date actually
received, three days from the date of mailing by U.S. Postal Service with return
receipt requested, or on the date of delivery set forth on the receipt if the
notice is sent by expedited delivery service. Any party may change its address
by notice to the other party.
8) This Agreement shall be deemed performed in, and governed in accordance with
the laws of, the State of California, excluding therefrom its conflicts of laws
provisions. Each party hereby submits to the jurisdiction of any court of
competent jurisdiction within the County of Orange, State of California. In the
event of any litigation arising out of the interpretation or enforcement of this
Agreement, then the prevailing party shall be entitled to an award of attorney
fees and costs.
9) Each Corporation and the person signing on the behalf of the Corporation
hereby represent and warrant that the person signing on behalf of the
Corporation is authorized to bind the Corporation.
<PAGE>
IN WITNESS THEREOF, the parties have executed this Agreement as of the date
first set forth above.
TOSHIBA AMERICA INFORMATION SYSTEMS, INC.
By: /s/ Denise Hards
__________________________________________
Title: VP Treasurer
__________________________________________
COMMUNICATIONS WORLD INTERNATIONAL, INC.
By: /s/ Richard D. Olson
__________________________________________
Title: President/CEO
__________________________________________
/s/ Richard D. Olson
__________________________________________
MR. RICHARD D. OLSON, INDIVIDUALLY
<PAGE>
EXHIBIT
PROMISSORY NOTE
$1,530,950 December 22, 1995
FOR VALUE RECEIVED, Communications World International, Inc., a Colorado
Corporation ("CWI"), with its principal place of business located at 6025 South
Quebec Street, Suite 300, Englewood, Colorado 80111, promises to pay Toshiba
America Information Systems, Inc. ("TAIS") at 9740 Irvine Boulevard, Irvine,
California 92718, the principal sum of $1,530,950, together with simple interest
on the principal balance of this Promissory Note (the "Note") outstanding from
time to time at the rate of six percent per annum.
Principal and interest shall be paid in 60 equal monthly installments of
$29,597.55 each, commencing on February 12, 1996 and continuing on the same day
of each successive month thereafter, with a final payment of all unpaid
principal and interest on January 12, 2001.
In addition to the installment payments above, CWI shall be required to make
prepayments of principal in a minimum amount of $10,000 on the 12th day of any
month after which CWI's net operating cash flows (which shall mean pre-tax net
income plus depreciation and amortization) have exceeded $75,000 in each of the
three immediately preceding months. In the event a $10,000 prepayment is due in
a monthly installment, CWI thereafter shall also be required to make a
prepayment of principal equal to 60% of each incremental $5,000 of net operating
cash flow in excess of $75,000 for each applicable month. Provided that, if the
calculation for any monthly period(s) is not then available, the prepayment
obligation shall be deferred until the next regular monthly installment becomes
due.
CWI shall also be required to make prepayments of principal if CWI makes an
offering of its stock or a debt security and receives cash proceeds, net of
expenses incurred in the offering, in excess of $350,000. The amount of the
prepayment shall be the sum of 40% of the net proceeds between $350,000 and
$1,000,000, 50% of the net proceeds between $1,000,001 and $2,000,000, 60% of
the net proceeds between $2,000,001 and $3,000,000, and 100% of the net proceeds
in excess of $3,000,000, but not more than the then unpaid principal balance of
this Note.
In the event of a default in the payment of principal or interest when due on
this Note and such default remains uncured after fifteen days' written notice
thereof to CWI, then at the option of TAIS all or any part of the accrued
interest or principal remaining unpaid on this Note shall become due and
payable. The failure to assert such right in any one instance shall not be
deemed a waiver of this provision.
In the event that it becomes necessary for TAIS to retain an attorney to
collect the accrued interest and unpaid principal due on this Note, TAIS shall
be entitled to a reasonable attorney's fee and costs.
This note shall be governed by and construed according to the laws of the
state of California.
Communications World International, Inc.
By: /s/ Richard D. Olson
--------------------
Richard D. Olson, President
<PAGE>
EXHIBIT
PERSONAL GUARANTY
-----------------
This Personal Guaranty ("Guaranty"), effective December 22, 1995, is made by and
between Toshiba America Information Systems, Inc., 9740 Irvine Boulevard, P.O.
Box 19724, Irvine, California 92713-9724, a California Corporation ("TAIS"), and
Richard D. Olson, 10414 Strasburg Way, Parker, Colorado 80134, ("Guarantor").
WHEREAS, Guarantor is the President and major stock holder of Communications
World International, Inc., a Colorado Corporation ("CWI"); and,
WHEREAS, CWI is indebted to TAIS in the amount of One Million Five Hundred
Thirty Thousand Nine Hundred Fifty Dollars ($1,530,950) for products delivered
by TAIS to CWI ("Debt"); and,
WHEREAS, CWI and Guarantor requested TAIS to restructure the Debt; and,
WHEREAS, TAIS, CWI and Guarantor entered into an Agreement to Restructure
Debt, and a Promissory Note, effective, December 22, 1995 ("Agreement to
Restructure Debt" "Promissory Note"); and,
WHEREAS, as a condition for restructuring the Debt, Guarantor agreed to be
personally liable for repayment of the Debt in the event of default by CWI;
NOW, THEREFORE, IN CONSIDERATION of mutual promises and covenants contained
herein, and other good and valuable consideration, the parties hereby agree as
follows:
Guarantor irrevocably and unconditionally guarantees to TAIS the payment when
due, whether by acceleration or otherwise, of the amount of the Debt herein and
as reflected in the Agreement to Restructure Debt and the Promissory Note
executed by CWI, together with interest thereon as provided in the Promissory
Note, or the maximum amount allowed by law, whichever is less, plus reasonable
attorney's fees, costs and expenses of collection incurred by TAIS due to the
default of either CWI or Guarantor. Guarantor acknowledges CWI's present debt
owed to TAIS in the amount of the Debt herein as his own. He further
acknowledges that the terms of the Agreement to Restructure Debt and Promissory
Note executed by CWI are incorporated herein by reference. It is expressly
agreed that TAIS will take reasonable steps to collect the Debt from CWI before
it proceeds against Guarantor hereunder.
This Guaranty shall not be terminated upon the death or incapacity of Guarantor.
This Guaranty shall continue at all times and shall remain in full force and
effect, except that the Guarantor may revoke this Guaranty upon written notice
by registered mail to TAIS; provided, that revocation shall not affect any
transaction initiated prior to the effective date or revocation nor in any way
affect Guarantor's liability for any indebtedness or liability contracted prior
thereto. Revocation by any other Guarantor of CWI shall not affect Guarantor's
liability whatsoever.
Guarantor hereby consents that from time to time, without notice to or further
consent from him the performance or observance by CWI of any obligation may be
waived, or the time of performance thereof extended, by TAIS. TAIS may make any
agreement with CWI, or with any other party, for the operation of the affairs of
CWI or for the acceleration, extension, subordination, payment, compounding,
renewal, modification, or amendment of the Agreement to Restructure Debt, the
Promissory Note or any security thereof. Any such present or future agreement
CWI, or such other party or person may be renewed, amended or modified in whole
or in part, or any collateral therefor may be exchanged, surrendered, sold,
assigned, transferred as TAIS may determine, and any of the acts mentioned in
any such agreement may be done all without affecting Guarantor's liability.
<PAGE>
Guarantor hereby waives notice of acceptance of this Guaranty or execution,
renewal or alteration of any agreements between TAIS and CWI, presentment of any
instrument, demand for payment, protest and notice of default or protest
thereof, or of any exchange, sale, surrender or other handling or disposition of
any such collateral; and the Guaranty herein expressed shall not in any way be
impaired or affected by the omission of TAIS or anyone else to make such
presentment, demand, or protest, or to give notice of any kind.
Any indebtedness of CWI, now or hereafter owed by CWI to Guarantor is hereby
subordinate to the indebtedness now or hereafter owing by CWI to TAIS.
For purposes of this Guaranty the Debt shall be deemed to mature upon the filing
by or against CWI of any petition under the United States Bankruptcy Code 11
U.S.C., Section 101 et seq. or under any similar state statutory provision,
which is not dismissed within 60 days of such filing.
This Guaranty, consisting of two (2) pages, constitutes the entire understanding
between TAIS and Guarantor, and shall in all respects be interpreted, enforced
and governed by the laws of the State of California, excluding therefrom its
conflict of laws provisions, the Guaranty shall be deemed made in the Sate of
California and each party hereby submits to the jurisdiction of any court of
competent jurisdiction within the State. Any dispute arising out of this
Guaranty shall be heard by a judge alone without a jury and venue of any such
dispute shall be in the County of Orange and the State of California. TAIS and
Guarantor further agree and acknowledge that should any portion of this Guaranty
be deemed unenforceable by a court of competent jurisdiction, the unenforceable
provision shall be deemed severable from, and shall not affect, the remained of
this Guaranty.
The undersigned acknowledges that he is entering into this Guaranty freely and
voluntarily, with a full understanding of its terms.
IN WITNESS WHEREOF, this Guaranty has been duly executed on the date first
written above.
By: /s/ Richard D. Olson
-----------------------
RICHARD D. OLSON
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<CASH> 103,748
<SECURITIES> 0
<RECEIVABLES> 1,887,393
<ALLOWANCES> 0
<INVENTORY> 807,884
<CURRENT-ASSETS> 2,832,094
<PP&E> 495,305
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,740,722
<CURRENT-LIABILITIES> 2,625,720
<BONDS> 62,600
0
506,767
<COMMON> 4,141,012
<OTHER-SE> (4,080,405)
<TOTAL-LIABILITY-AND-EQUITY> 4,740,722
<SALES> 12,116,030
<TOTAL-REVENUES> 12,556,316
<CGS> 8,596,110
<TOTAL-COSTS> 8,603,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 287,830
<INTEREST-EXPENSE> 279,268
<INCOME-PRETAX> (1,179,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,179,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,179,736)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
</TABLE>
