<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, 1997
[_] 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)
<TABLE>
<S> <C>
Colorado 84-0917382
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6025 South Quebec, Suite 300, Englewood, Colorado 80111
- -------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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: $ 14,904,473
The aggregate market value of the voting stock held as of August 4, 1997 by non
affiliates of the issuer was $2,228,285. As of August 4, 1997, the issuer had
1,620,571 shares of its no par value Common Stock issued and outstanding.
<PAGE>
PART I
ITEM L. DESCRIPTION OF BUSINESS
-----------------------
BUSINESS DEVELOPMENT
Communications World International, Inc. ("Registrant", "Company" or
"CommWorld") was incorporated in 1983 under Colorado law and has its principal
executive offices at 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 57 franchises located in 27 states and 8 Company-
owned outlets at April 30, 1997. 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.
During the past four fiscal years, the Company has acquired certain franchises
and other companies as wholly owned subsidiaries. The acquisitions were
accomplished through the issuance of a combination of common stock, preferred
stock, notes payable and cash. The acquisitions have all been accounted for as
purchases and the excess of consideration paid over the fair value of net assets
acquired has been recorded as goodwill and is being amortized on a straight line
basis over ten years.
The subsidiary operations service the Southwest United States with offices in
Phoenix, Tucson, and Nogales, Arizona; the Northwest United States with an
office in Kirkland, Washington; the Baltimore and Washington D.C. area with
offices in Falls Church, Virginia and Baltimore, Maryland; the Colorado front
range area with offices in Englewood and Fort Collins, Colorado; and multi-
location customers through its national accounts subsidiary with an office in
Englewood, Colorado. The acquisitions of the Falls Church, Virginia, Baltimore,
Maryland and Tucson, Arizona operations were completed during the most recent
two fiscal years and are further described in the Notes to the consolidated
financial statements.
1
<PAGE>
The Company believes that there may be additional opportunities to acquire other
profitable interconnect 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
- -----------------
Pursuant to the terms of the Company's franchise program, a franchisee will pay
a one time, non-refundable, 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.
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.
2
<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
franchisee has the right to renew the initial term of the agreement for an
additional 10 years if, at the time of renewal, the franchisee is in good
standing and pays a successor franchisee fee in the amount of 10 percent of the
franchise fee then in effect.
Leasing 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.
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.
3
<PAGE>
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 franchisers to provide prospective
franchisees with a Uniform Franchise Offering Circular which sets forth detailed
information about the franchiser and the franchise program.
A number of states require a franchiser 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, 1997 and 1996, the Company had backlogs of unfilled franchisees'
orders of less than $50,000. As of August 4, 1997, the Company had
approximately 85 full-time employees involved in administration, sales,
accounting, warehousing, franchise relations, and subsidiary company
coordination.
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 $10,250 per month
pursuant to a lease which expires in June 1998.
4
<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 March 2000, (ii) 1,400 square feet of office and warehouse
space in Scottsdale, Arizona on a month-to-month basis for approximately $2,200
per month, (iii) 3,600 square feet of office and warehouse space in Seattle,
Washington for approximately $5,400 per month which expires in July 2001 and
(iv) 2,655 square feet of office and warehouse space in Falls Church, Virginia
on a month to month basis for approximately $2,500 per month.
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, 1997, no matter was submitted to a
vote of the Company's security holders.
5
<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." Warrants to purchase Common Stock were not
exercised and expired June 30, 1997. Set forth in the following table are high
and low bid quotations for each quarter in the fiscal years ended April 30, 1997
and 1996. The quotations represent inter-dealer quotations without retail
markups, markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
------------
<S> <C> <C>
Quarter Ended High Low
- ------------- ---- ---
July 31, 1995 $4.00 $2.25
October 31, 1995 3.13 1.13
January 31, 1996 2.00 1.13
April 30, 1996 1.50 .53
July 31, 1996 1.50 .78
October 31, 1996 1.25 .69
January 31, 1997 1.38 .69
April 30, 1997 1.18 .75
</TABLE>
There were approximately 230 holders of record of the Common Stock as of August
4, 1997.
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.
6
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
----------------------------------------------------------
Overview
- --------
The forward-looking statements herein are based on management's current
expectations. In light of the assumptions and uncertainties inherent in
forward-looking information, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the plans
of the Company will be realized or that the positive trends in financial results
will continue.
The focus of the Company in fiscal years 1997 and 1996 concentrated on operating
the Company-owned outlets. The revenues of direct equipment and related
services produced by these operations increased by $2,685,000 or 66% in fiscal
1996 and by $2,286,000 or 34% in fiscal 1997. The gross margins realized on
this portion of the Company's revenues were 44% in both fiscal years.
Management continues to look for opportunities to consolidate operations and
reduce general and administrative expenses related to the operations of the
subsidiaries.
In fiscal 1998, the Company will evaluate additional acquisitions of franchised
locations and other independent companies. Although preliminary discussions
take place on an ongoing basis, there are no definitive agreements in place at
the current time for additional acquisitions.
Liquidity and Capital Resources
- -------------------------------
The independent auditors' report on the Company's consolidated financial
statements as of April 30, 1996 and for the year then ended 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 suffered recurring losses from operations that raised
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements as of April 30, 1996 and for the year then
ended did not include any adjustments that might have resulted from the outcome
of this uncertainty. The ability of the Company to continue as a going concern
was dependent upon the realization of management's plans to increase revenue,
improve gross profit margins and contain general and administrative expenses.
There was no assurance that the Company would be able to successfully implement
its plans. Management did, however, improve the cash flow of the Company during
the year ended April 30, 1997 by increasing revenue, improving gross profit
margins and containing general and administrative expenses, in addition to
obtaining additional debt and equity financing.
The loss before provision for income taxes incurred for the year ended April 30,
1997 was offset by non-cash expenses of depreciation and amortization.
Increases in accounts receivable were funded primarily with comparable increases
in trade accounts payable. Increased borrowings under the Company's line of
credit were used to fund repayments on other notes payable.
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.
7
<PAGE>
Management has taken the following actions to improve its liquidity and
capitalization in the current and prior years:
(A) In October 1996, the Company renegotiated and renewed its accounts
receivable financing agreement with its lender. Pursuant to the new
agreement, the Company may be extended credit of up to $1,500,000
($1,000,000 in fiscal 1996) based upon its outstanding accounts receivable,
at an interest rate of 7.5% in excess of the prime rate (10% in excess
during fiscal 1996). The agreement is subject to termination upon 30 days
notice by either party. Advances under the line of credit are limited to 75%
of eligible receivables (70% in fiscal 1996), 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 $1,001,891 and $689,060 at April 30, 1997 and 1996,
respectively.
(B) 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 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 the president of the Company.
Effective April 30, 1997 TAIS agreed to treat the Note as a non-interest
bearing obligation from inception through April 30, 1997, resulting in a
discount of the note balance of approximately $103,000. The discount has
been treated as a reduction of cost of equipment and related service revenue
for the year ended April 30, 1997. Imputed interest in the amount of $96,471
was recognized on the Note during the year ended April 30, 1997.
There are currently no material commitments for capital expenditures.
8
<PAGE>
The Company believes that it has sufficient financial resources available to
meet its short-term working capital needs based on 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, 1997
- ---------------------------------
The Company reported net income of approximately $83,000 for the year ended
April 30, 1997 as compared to a net loss of approximately $1,180,000 for the
year ended April 30, 1996. Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the year ended April 30, 1997 was a positive $463,000
compared to a negative EBITDA of $486,000 for the year ended April 30, 1996.
The change in the net income (loss) of $1,263,000 and the increase in EBITDA of
$949,000 were largely due to increased revenues from the Company-owned outlets.
The gross profit realized on this revenue was $3,960,000 in fiscal 1997 or
$946,000 higher than fiscal 1996. The increased gross margin was partially
offset by an increase of $133,000 in selling expenses, an increase of $90,000 in
general and administrative expenses and an increase of $66,000 in interest
expense. Additionally, for the year ended April 30, 1997 the Company recognized
$385,000 of income tax credit related to its net operating loss carryforward.
Equipment and related service revenue from franchisees increased $124,000 or
2.3% during the year ended April 30, 1997. The gross margin percentage realized
on this revenue was 13.1% during the current fiscal year compared to 9.4% for
the previous fiscal year. The increased revenue and increased gross margin
percentage provided an increase of $214,000 in gross margin from this revenue
for the year ended April 30, 1997 compared to the previous year. Contributing
to the improved gross margin for the current year was the TAIS discount of
$103,000 related to their agreement and treatment of the Note as a non-interest
bearing obligation from inception, (December 22, 1995) through April 30, 1997.
Revenue from direct sales of equipment and services increased $2,286,000 during
the current fiscal year. The gross margin percentage realized on this revenue
was 44% for both fiscal year 1997 and 1996. The increased revenue for the year
ended April 30, 1997 resulted in increased gross margin of $946,000. The
Company continues to concentrate its efforts on improving the operations of the
Company-owned outlets and on increasing revenue in this area.
Initial franchise fees of $35,000 for the year ended April 30, 1997 were lower
than the previous year by $47,500. The Company is actively seeking qualified
companies to become new franchises but did not locate as many in the current
fiscal year as in the previous year.
Selling expenses in fiscal year 1997 of $912,000 were 6.1% of gross revenue
compared to selling expenses in fiscal year 1996 of $779,000 or 6.2% of gross
revenues. The increase in dollars of expense relate directly to the increases
in gross revenues.
9
<PAGE>
General and administrative expenses for fiscal year 1997 increased $90,000 or
2.5% from the prior fiscal year. This slight increase in expenses in this area
occurred while gross revenues increased 18.7%. Management continues to assess
these expenses and take action to reduce them, when necessary and appropriate.
For the Year Ended April 30, 1996
- ---------------------------------
The Company incurred a net loss of approximately $1,180,000 for the year ended
April 30, 1996 as compared to approximately $711,000 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.
Equipment and related service revenue from franchisees decreased $290,000 or 5%
during the year ended April 30, 1996. The decrease in gross margin related to
this decrease in sales was approximately $86,000.
Revenue from direct sales of equipment and services increased $2,686,000 during
the fiscal year ended April 30, 1996, 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.
Initial franchise fees of $82,500 for the year ended April 30, 1996 were
comparable to the $90,000 reported in the prior fiscal year.
General and administrative expenses increased $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.
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.
10
<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:
Name Position
- ---- --------
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 Operating Officer
Samuel D. Addoms - Age 57. 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 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. Mr. Addoms
received a B.A. degree from Wesleyan University in 1961.
Edwin B. Spievack - Age 65. 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.
11
<PAGE>
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.
Richard D. Olson - Age 43. 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 43. 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.
George Leonard - Age 47. 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.
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 written representations from reporting persons, 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, except that George L. Leonard
filed late the Form 3 disclosing his status as an officer of the Company
effective September 20, 1996 and the issuance to him of options to purchase
25,000 shares of Common Stock at $1.00 per share.
12
<PAGE>
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 $100,000, during the years
ended April 30, 1997 and 1996.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
------------------------------------- ---------------------- -------
Other
Annual Restricted All other
Name and Salary Compensa- Stock Options/ LTIP Compensa-
Principal Position (1) Year ($) Bonus tion (2) Awards SARs Payouts tion
====================== ==== ====== ===== ======== ====== ==== ======= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard D. Olson, CEO 1997 87,000 -0- -0- -0- -0- -0- -0-
Richard D. Olson, CEO 1996 72,000 -0- -0- -0- -0- -0- -0-
</TABLE>
(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. The Company made no contribution to the ESP in 1997 or 1996.
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 207,000 shares
of Common Stock could be granted to employees of the Company. There are
currently outstanding options to purchase 25,000 shares of Common Stock at $2.75
per share, options to purchase 10,000 shares of Common Stock at $1.125 per
share, and options to purchase 37,500 shares of Common Stock at $1.00 per share
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 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 11,583 shares of the
Company's Common Stock are currently outstanding and exercisable at prices
ranging from $.88 to $6.25 per share.
13
<PAGE>
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, 1997, both
Samuel D. Addoms and Edwin B. Spievack received options to purchase 1,000 shares
of Common Stock. The options are exercisable for five years from the date of
grant.
The Company does not pay directors for meetings attended. During the year ended
April 30, 1997, 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 August 4,
1997 and information as of August 4, 1997 with respect to the ownership of
equity by each director of the Company and by all officers and directors as a
group.
Certain Beneficial Owners
- ---------------------------
<TABLE>
<CAPTION>
Name & Address of Shares Beneficially
Beneficial Owner Title of Class Owned (1) Percent
---------------- -------------- --------- -------
<S> <C> <C> <C>
Samuel D. Addoms (2) Common Stock 7,000 0.4%
1900 Fairfax Street
Denver, CO 80220
Richard D. Olson (3) Common Stock 325,424 17.7%
10414 Strasburg Way
Parker, CO 80134
Edwin B. Spievack (2)
5116 Water Haven Lane
Plano, Texas 75093 Common Stock 4,583 .2%
Officers and Directors as
a Group (5 persons)(2) Common Stock 399,507 21.7%
</TABLE>
(1) Beneficial ownership results in each case from the possession of sole or
shared voting and investment power with respect to the shares.
14
<PAGE>
(2) 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.
(3) 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
--------------------------------------------------
As discussed in Item 6, 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 the 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 Communications
World International, Inc., CommWorld National Capitol Area,
Inc., Communications World of Columbia, Inc., John E. Hanner and
John C. Hanner filed as Exhibit 2(c) to the report on Form 10-
KSB for the year ended April 30, 1996 is incorporated herein by
this reference.
(d) Merger Agreement dated as of August 1, 1995 among Communications
World International, Inc., CommWorld National Capitol Area,
Inc., Alpha Communications & Technology, Inc. and Bennie R.
Hester filed as Exhibit 2(c) to the report on Form 10-KSB for
the year ended April 30, 1996 is incorporated herein by this
reference.
15
<PAGE>
(e) Asset Acquisition Agreement Between William R. Heath d.b.a.
CommWorld of Tucson and Communications World International,
Inc., filed as Exhibit 2 to the Report on Form 10-QSB for the
quarter ended October 31, 1996 is incorporated herein by
reference.
3. Articles of Incorporation and Bylaws.
(a) Articles of Incorporation, as amended, filed as Exhibit 3(a) to
the Registration Statement on Form SB-2 (File No. 33-87808) is
incorporated herein by this reference.
(b) Bylaws, as amended, filed as Exhibit 3.2 to the Registration
Statement on Form S-1 (File No. 33-53550) is incorporated herein
by this reference.
(c) Articles of Amendment to the Articles of Incorporation of
Communications World International, Inc. filed as Exhibits 2 and
3 to the Form 8-K dated October 16, 1997 is incorporated herein
by this reference.
4. Instruments defining the rights of holders, incl. indentures
Certificates of Designation establishing Series B, C and E Preferred
Stock filed with Amendments to Articles of Incorporation in 3(a) above.
Certificates of Designation establishing Series F and G Preferred Stock
filed with Amendments to the Articles of Incorporation in 3(c) 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.
(b) 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.
(c) 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.
(d) 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.
16
<PAGE>
(e) Non-Compete Agreement and Employment Agreement dated as of April
29, 1994, with 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.
(f) Non-Compete Agreements and Employment Agreements dated as of
July 15, 1994 with David Lepsig and Diane Lepsig, 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.
(g) 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.
(h) 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.
(i) Non-Compete Agreement and Employment Agreement dated as of
August 1, 1995, with Bennie R. Hester, filed as Exhibit 2(c) to
the Report on Form 10-KSB for the year ended April 30, 1996 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, filed as Exhibit (a)
to the Report on Form 10-QSB for the quarter ended January 31,
1996 is incorporated herein by this reference.
(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 8, 1997
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.
Dated: August 8, 1997 By: /s/ Richard D. Olson
------------------------------------
Richard D. Olson, President, Chief Executive
Officer and Director
Dated: August 8, 1997 By: /s/ Scott E. Harris
------------------------------------
Scott E. Harris, Executive Vice President,
Chief Financial Officer
Dated: August 8, 1997 By: /s/ George L. Leonard
------------------------------------
George L. Leonard, Executive Vice President,
Chief Operating Officer
Dated: August 8, 1997 By: /s/ Samuel D. Addoms
------------------------------------
Samuel D. Addoms, Director
Dated: August 8, 1997 By: /s/ Edwin Spievack
------------------------------------
Edwin Spievack, Director
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
COMMUNICATIONS WORLD INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheet of Communications
World International, Inc. and subsidiaries as of April 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Communications World
International, Inc. and subsidiaries as of April 30, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Levine, Hughes & Mithuen, Inc.
Denver, Colorado
July 24, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
COMMUNICATIONS WORLD INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheet of Communications
World International, Inc. and subsidiaries as of April 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The 1996 consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 14 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 14. 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
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 80,560 $ 103,748
Trade accounts and current portion of notes receivable, less allowances
for doubtful accounts of $218,093 in 1997 and $204,805 in 1996 (Note 4) 2,620,735 1,887,393
Inventories 947,551 807,884
Prepaid expenses 72,637 33,069
Deferred tax asset 100,240 -
---------- ----------
TOTAL CURRENT ASSETS 3,821,723 2,832,094
Property and equipment, net (Notes 5 and 9) 391,747 495,305
Deposits and other assets 39,474 27,689
Notes receivable (Note 4) 71,442 83,576
Intangible assets, net (Notes 2 and 8) 1,299,557 1,302,058
Deferred tax asset 284,760 -
---------- ----------
$ 5,908,703 $ 4,740,722
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 2,139,165 $ 1,240,319
Revolving line of credit (Note 3) 1,001,891 689,060
Current portion of notes payable, including amounts due to
related parties of $63,574 in 1997 and $83,688 in 1996
(Notes 2 and 6) 372,839 388,111
Accrued expenses, deposits and other liabilities 270,252 278,494
Current portion of capital lease obligations (Note 9) 25,419 29,736
----------- -----------
TOTAL CURRENT LIABILITIES 3,809,566 2,625,720
Capital lease obligations (Note 9) 29,598 62,600
Notes payable, including amounts due to related parties of
$106,705 in 1997 and $300,220 in 1996 (Notes 2 and 6) 900,402 1,485,028
----------- -----------
TOTAL LIABILITIES 4,739,566 4,173,348
Commitments and contingencies (Notes 9 and 10)
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 1997 and 1996 (Liquidation preference
of $99,309) 80,088 80,088
Series C (cumulative) - 426,679 shares issued and
outstanding in 1997 and 1996 (Liquidation preference of $507,433) 426,679 426,679
Series F (cumulative) - 357,818 shares issued and
outstanding in 1997 (Liquidation preference of $373,537) 357,818 -
Series G (cumulative) - 83,500 shares issued and
outstanding in 1997 (Liquidation preference of $87,380) 83,500 -
Common stock, no par value, 2,000,000 shares authorized;
and outstanding 1,620,571 shares in 1997 and 1,546,349 shares in 1996 4,224,512 4,141,012
Additional paid-in capital 447,009 452,884
Accumulated deficit (4,450,469) (4,533,289)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,169,137 567,374
----------- -----------
$ 5,908,703 $ 4,740,722
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Equipment and related service revenue $ 5,489,240 $ 5,365,658
Direct equipment and service sales 9,036,475 6,750,372
Royalty fees 213,960 200,722
Initial franchise fees 35,000 82,500
Leasing fees 62,205 91,092
Interest and other income 67,593 65,972
----------- -----------
14,904,473 12,556,316
----------- -----------
COSTS AND EXPENSES:
Cost of equipment and related service revenue 4,767,837 4,858,706
Cost of direct equipment and service sales 5,079,287 3,744,518
Selling 911,516 778,704
General and administrative 3,627,770 3,537,585
Interest expense and loan fees, including related party
interest of $20,813 in 1997 and $21,273 in 1996 345,226 279,268
Amortization of intangible assets 250,424 249,441
Provision for bad debts 224,593 287,830
----------- -----------
15,206,653 13,736,052
----------- -----------
Loss before provision for income taxes (302,180) (1,179,736)
Provision (credit) for income taxes (385,000) -
----------- -----------
Net Income (loss) 82,820 (1,179,736)
Cumulative dividends on preferred stock 60,140 38,438
----------- -----------
Income (loss) applicable to common stock $ 22,680 $(1,218,174)
=========== ===========
Weighted average number of shares outstanding 1,589,459 1,510,698
=========== ===========
Income (loss) per common share $ .01 $ (.81)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Note 10)
Preferred Stock
Series B, C, E, F & G Common Stock Additional Accumulated Shareholders'
---------------------------------------------------
Shares Amount Shares Amount Paid-in Capital Deficit Equity
------ ------ ------ ------ --------------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1995 651,633 $1,013,627 1,274,474 $3,441,518 $ 452,884 $(3,353,553) $ 1,554,476
Issuances of preferred stock 105,134 105,134 - - - - 105,134
Issuances of common stock - - 21,875 87,500 - - 87,500
Conversion of preferred
Stock to common stock (250,000) (611,994) 250,000 611,994 - - -
Net Loss - - - - - (1,179,736) (1,179,736)
-------- ---------- --------- ---------- --------------- ------------ -----------
Balances, April 30, 1996 506,767 $ 506,767 1,546,349 $4,141,012 $ 452,884 $(4,533,289) $ 567,374
Issuances of preferred stock 271,500 271,500 - - (5,875) - 265,625
Issuances of common stock - - 74,222 83,500 - - 83,500
Conversions of debt to
Preferred stock 169,818 169,818 - - - - 169,818
Net Income - - - - - 82,820 82,820
-------- ---------- --------- ---------- --------------- ------------ -----------
Balances, April 30, 1997 948,085 $ 948,085 1,620,571 $4,224,512 $ 447,009 $(4,450,469) $ 1,169,137
======== ========== ========= ========== =============== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 82,820 $(1,179,736)
Adjustments to reconcile to net cash provided by
(used in) operating activities, net of effect of acquisitions:
Depreciation and amortization 420,496 414,412
Provision for bad debts on accounts and notes
receivable 224,593 287,830
Changes in operating assets and liabilities:
Trade accounts and notes receivable (945,801) (170,093
Inventories (122,850) 133,549
Prepaid expenses (39,568) 130,227
Deferred taxes (385,000) -
Deposits and other assets (11,785) (7,391)
Trade accounts payable 898,846 774,684
Accrued expenses, deposits and other liabilities (8,242) (112,625)
--------- ----------
Net cash provided by operating activities 113,509 270,857
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF EFFECT
OF ACQUISITIONS:
Cash paid for acquisition - (15,958)
Capital expenditures (21,254) (68,647)
--------- ----------
Net cash used in investing activities (21,254) (84,605)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line-of-credit agreement 312,831 (2,171)
Payments of notes payable (430,080) (119,610)
Principal payments on capital lease obligations (37,319) (29,721)
Issuance of preferred stock, net of offering costs 39,125 -
--------- ----------
Net cash used in financing activities (115,443) (151,502)
--------- ----------
Net increase (decrease) in cash (23,188) 34,750
CASH AT BEGINNING OF THE YEAR 103,748 68,998
--------- -----------
CASH AT END OF THE YEAR $ 80,560 $ 103,748
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 248,755 $ 265,268
NON-CASH INVESTING ACTIVITIES:
Business acquisitions financed by:
Issuance of common stock 83,500 87,500
Issuance of preferred stock 226,500 105,134
Issuance of notes payable - 30,000
CONVERSION OF:
Notes payable to preferred stock 169,818 -
Trade accounts payable to note payable - 1,530,950
Preferred stock to common stock - 611,994
Inventory to rental property 23,783 -
Equipment acquisitions through capital lease obligations $ - $ 60,000
</TABLE>
The Company purchased 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>
<S> <C>
Fair value of assets acquired $ 277,228
Value of consideration paid for capital stock (247,430)
---------
Liabilities assumed $ 29,798
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The consolidated financial statements presented are those of Communications
World International, Inc. and its subsidiaries, CommWorld of Phoenix, Inc.,
CommWorld of Seattle, Inc., Digital Telecom, Inc. (d.b.a. CommWorld
NationWide) and CommWorld National Capitol Area, Inc. (collectively, the
"Company" or "CommWorld"). All significant intercompany balances and
transactions have been eliminated in consolidation.
ORGANIZATION AND NATURE OF OPERATIONS
CommWorld was incorporated under Colorado law in 1983 and has its principal
executive offices at 6025 South Quebec Street, Suite 300, Englewood,
Colorado 80111. CommWorld is engaged in the distribution of franchise
licenses within the telephone interconnect industry. The Company derives
income primarily from the sale of equipment and services to franchisees,
multi-location customers (national accounts), and through its Company-owned
outlets, leasing fees and rental of equipment, and initial franchise fees.
REVENUE RECOGNITION
Initial Franchise Fees
----------------------
Franchise fees are recognized upon execution of the franchise agreement as
all material services and conditions relating to the sale have been
substantially performed or satisfied. Direct costs associated with the
sale, including franchiser obligations, are expensed upon the recognition
of the related revenue.
Royalty Fees
------------
Royalty fees are cost mark-up fees charged to certain franchisees who
purchase equipment directly from suppliers with whom the Company has
purchasing contracts. The Company is notified by the supplier of the
purchases by the franchisees and the fees are charged to the franchisee and
recognized as income on a monthly basis.
Equipment and Related Service Revenue
-------------------------------------
Revenue from equipment 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.
F-9
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. If there is an indication the carrying amount may not be
recoverable, the Company estimates the future cash flows expected to result
from the operation of the applicable Company-owned outlet and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
intangible asset, the Company recognizes an impairment loss by reducing the
unamortized cost of the intangible asset to its estimated fair value.
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.
F-10
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company amortizes its investment in franchises reacquired to the extent
of the annual pre-tax operating income (if any) of the reacquired franchise
and may recognize additional amortization to reduce the investment to its
net realizable value as estimated by Company management.
Reacquired franchises also include the cost of master franchise territories
reacquired. Reacquired master franchise territories are amortized when
individual franchises in the related territories are sold. The maximum
amortization period for reacquired franchises is five years from the date
of reacquisition. There were no franchises reacquired in fiscal years 1997
or 1996.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed using the weighted average
number of common shares outstanding during each period. Common stock
equivalents are not material and do not affect the income per share. Common
stock equivalents are not included in the calculation of loss per share 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.
FINANCIAL INSTRUMENTS
The Company periodically maintains cash balances at a commercial bank in
excess of the Federal Deposit Insurance Corporation Insurance limit of
$100,000.
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the presentation used in the 1997 consolidated
financial statements.
(2) BUSINESS ACQUISITIONS
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. 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 were
converted into Series F Preferred Stock in September 1996. Each of the
shareholders 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. 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.
F-11
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(2) BUSINESS ACQUISITIONS (CONTINUED)
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.
During September 1996, the Company acquired the assets of its franchise in
Tucson, Arizona, CommWorld of Tucson (CWT). The operations of CWT will be
continued as part of the operations of the Company's wholly owned
subsidiary, CommWorld of Phoenix, Inc. The Company acquired inventory of
approximately $41,000 and fixed assets with a net book value of
approximately $21,000. The Company issued 74,222 shares of common stock,
valued at the market price of the common stock of $1.125 per share, 83,500
shares of Series G Preferred Stock valued at $1.00 per share, and 143,000
shares of Series F Preferred Stock valued at $1.00 per share.
The acquisition of CWT was accounted for as a purchase and, accordingly,
the purchase price was allocated to the assets acquired based on their
estimated fair values as of the date of the merger. The excess of the
consideration paid over the fair value of net assets acquired of
approximately $248,000 was recorded as goodwill and is being amortized on a
straight line basis over ten years.
The operations of Columbia, Alpha and CWT for the periods prior to
acquisition would not have had a material effect on net sales or net income
(loss) of the consolidated operations on a pro forma basis.
(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 $1,500,000 subject to certain collateral
limitations. Interest at the rate of prime plus 7.5% per annum is due
monthly. The revolving line of credit is collateralized by substantially
all of the assets of the Company. At April 30, 1997 and 1996 the Company
had outstanding borrowings on the line of credit of $1,001,891 and
$689,060, respectively.
(4) NOTES RECEIVABLE
Occasionally, amounts due on open account from various franchisees were
converted to promissory notes bearing interest at rates ranging from 8.5%
to 12% per annum, payable in installment periods ranging from 12 to 36
months, and secured by the franchisee's business assets. In prior years,
the Company sold various Company-owned outlets (see Note 7) with a portion
of such sales financed with promissory notes.
F-12
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) NOTES RECEIVABLE (CONTINUED)
The Company also may finance payments of initial franchise fees with
promissory notes for up to four months. Notes receivable consist of the
following at April 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment sales $ 52,190 $ 121,013
Company-owned outlet sales 108,987 134,987
Franchise fees 12,667 33,333
President - CommWorld 25,000 25,000
---------- ----------
198,844 314,333
Less current portion 127,402 230,757
---------- ----------
Non-current portion $ 71,442 $ 83,576
========== ==========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at April 30:
<TABLE>
<CAPTION>
Estimated
useful life 1997 1996
----------- ---- ----
<S> <C> <C> <C>
Furniture, fixtures and equipment 3-5 $ 928,648 $ 885,868
Rental property 5 33,830 10,047
Vehicles 5 103,393 103,393
Leasehold improvements and other 5 5,039 5,039
---------- ----------
1,070,910 1,004,347
Less accumulated depreciation and
amortization 679,163 509,042
---------- ----------
Property and equipment, net $ 391,747 $ 495,305
========== ==========
</TABLE>
F-13
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(6) NOTES PAYABLE
Notes payable consist of the following at April 30:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Installment note payable to Toshiba
America Information Systems, Inc. (TAIS) $1,086,986 $1,456,735
Notes payable to sellers of acquired companies
(see Note 11) 170,279 355,606
Note payable for the purchase of a video production unit -
16% interest, payable monthly and maturing in March
1998 14,128 28,302
Installment note payable to one of the Company's law firms,
12% interest, payable on demand - 26,743
Note payable to a bank, secured by a vehicle, 9.5%
interest, payable monthly and maturing in February
1998 1,848 5,753
---------- ----------
1,273,241 1,873,139
Less current portion 372,839 388,111
---------- ----------
Non-current portion $ 900,402 $1,485,028
========== ==========
</TABLE>
Effective December 22, 1995, the Company entered into an agreement with
TAIS, its major supplier and unsecured creditor, to transfer $1,530,950 of
accounts and note payable to a long-term obligation (the "Note") and to
increase the current credit facility by $400,000. Under the terms of the
Note, the Company is required to make 60 equal installments of $29,598,
including interest at 6% per annum, commencing in February 1996.
Additionally, the Company is required to make principal prepayments of at
least $10,000 per month if the monthly net operating cash flow of the
Company, defined as pre-tax income plus depreciation and amortization,
exceeds $75,000 for three consecutive months. Thereafter, 60% of each
additional $5,000 of monthly net operating cash flow in excess of $75,000
must be paid. The Company is also required to use a 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 Note contains the personal guarantee of
the Company's president.
Effective April 30, 1997 TAIS agreed to treat the Note as a non-interest
bearing obligation from inception through April 30, 1997, resulting in a
discount of the note balance of approximately $103,000. The discount has
been treated as a reduction of cost of equipment and related service
revenue for the year ended April 30, 1997. Imputed interest in the amount
of $96,471 was recognized on the Note during the year ended April 30, 1997.
F-14
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(6) NOTES PAYABLE (CONTINUED)
The fair value of the note payable to TAIS is estimated based on the amount
of future cash flows discounted using the Company's current borrowing rate
for loans of comparable maturity. At April 30, 1997 and 1996, the estimated
fair value of the TAIS note was approximately $790,000 and $982,000,
respectively.
The scheduled maturities of notes payable, by fiscal year, are, $372,839 in
1998, $382,423 in 1999, $370,964 in 2000, and $147,015 in 2001.
(7) FRANCHISED AND COMPANY-OWNED OUTLETS
The following table provides data on franchised outlets and Company-owned
outlets:
<TABLE>
<CAPTION>
Franchised Company-owned
outlets outlets
------- -------
<S> <C> <C>
May 1, 1995 63 6
-----------
Sold 7 -
Terminated (3) (1)
Acquired franchises (2) 2
- -
April 30, 1996 65 7
--------------
Sold 3 -
Terminated (10) -
Acquired franchises (1) 1
- -
April 30, 1997 57 8
------------- == =
</TABLE>
(8) INTANGIBLE ASSETS
Intangible assets consist of the following at April 30:
<TABLE>
<CAPTION>
Amortization
period 1997 1996
------ ---- ----
<S> <C> <C> <C>
Goodwill 10 years $1,496,395 $1,248,111
Franchises reacquired 5 years 315,567 307,580
Non-compete agreements 2-5 years 184,500 184,500
---------- ----------
1,996,462 1,740,191
Less accumulated amortization 696,905 438,133
---------- ----------
Intangible assets, net $1,299,557 $1,302,058
========== ==========
</TABLE>
F-15
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(9) COMMITMENTS
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:
<TABLE>
<CAPTION>
Year ended April 30:
<S> <C>
1998 $ 333,293
1999 155,662
2000 90,905
2001 56,832
2002 18,944
--------
$ 655,636
========
</TABLE>
Aggregate rental expense under operating leases was $359,243 and $339,237
for the years ended April 30, 1997 and 1996, respectively.
CAPITAL LEASES
The Company leases computer equipment and vehicles under capital leases. At
April 30, 1997, scheduled future minimum payments under capital leases with
initial or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year ended April 30:
<S> <C>
1998 $ 25,369
1999 14,688
2000 14,688
2001 2,448
-------
Total minimum lease payments 57,193
Less executory costs 762
-------
Net minimum lease payments 56,431
Less interest 1,414
-------
Present value of net minimum
lease payments 55,017
Less current portion 25,419
-------
Non-current portion $ 29,598
=======
</TABLE>
F-16
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(9) COMMITMENTS (CONTINUED)
The following is a summary of property and equipment under capital leases
at April 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Computer equipment $ 80,692 $ 80,692
Vehicles 78,935 78,935
-------- --------
159,627 159,627
Accumulated amortization (87,871) (55,946)
-------- --------
$ 71,756 $103,681
======== ========
</TABLE>
Amortization of assets held under capital leases is included in
depreciation expense.
EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements (the "Agreements") with
several individuals in connection with various business acquisitions
originating during fiscal years 1994 to 1997. Generally, the terms of these
Agreements provide for a three year term of employment and a fixed minimum
amount of annual compensation and bonus-performance incentives. Total
compensation paid under these Agreements during fiscal years ended April 30
1997 and 1996 was $459,390 and $421,820, respectively.
The future minimum payments required under these Agreements at April 30,
1997 are as follows:
<TABLE>
<CAPTION>
Year Ended April 30:
<S> <C>
1998 $199,500
1999 91,000
2000 31,250
--------
$321,750
========
</TABLE>
(10) SHAREHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS
SERIES A PREFERRED STOCK
In October 1992, the Company authorized the establishment and designation
of 1,000,000 shares of Series A Preferred Stock. There were no Series A
Preferred Stock shares issued and outstanding at April 30, 1997 and 1996.
F-17
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(10) SHAREHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS (CONTINUED)
SERIES B PREFERRED STOCK
In connection with the Company's acquisition of Master Franchise, Inc. and
Communications World of Phoenix South, Inc. in April 1994, the Company
authorized 100,000 shares of Series B Preferred Stock and issued 80,088
shares to the sole shareholder of the acquirees. Shares of the Series B
Preferred Stock were convertible into common stock at the election of the
holders. The conversion rights were not exercised and expired April 30,
1997. Dividends on the Series B Preferred Stock are paid, when declared by
the Board of Directors, at the rate of $.08 per share per annum before any
dividends on shares of the Company's common stock are paid. Upon
liquidation, dissolution or winding up of the Company, the Series 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, 1997 there were
$19,221 in accumulated dividends.
SERIES C PREFERRED STOCK
The Company authorized 430,000 shares of Series C Preferred Stock and
issued 140,060 shares to the shareholders of CommWorld of Seattle North,
Inc., and issued 181,484 shares to the shareholders of Digital Telecom
Incorporated, and issued 40,000 shares to the shareholders of
Communications World of Columbia, Inc., and issued 65,134 shares to the
sole shareholder of Alpha Communications & Technology, Inc. Shares of the
Series C Preferred Stock were convertible into common stock at the election
of the holders. Effective July 16, 1997 the conversion rights expired.
Dividends on the Series C Preferred Stock are paid when declared by the
Board of Directors, at the rate of $.08 per share per annum before any
dividends on shares of the Company's common stock are paid. Upon
liquidation, dissolution or winding up of the Company, the Series C
Preferred Stock shall have a preference of $1.00 per share plus accumulated
and unpaid dividends, payable from the proceeds of sale or distribution of
the Company's assets prior to any distribution to the holders of common
stock. The Company may redeem the Series C Preferred Stock at $1.00 per
share plus accrued and unpaid dividends by giving thirty days notice to the
holders of the Series C Preferred Stock. At April 30, 1997, there were
$80,754 in accumulated dividends.
SERIES E PREFERRED STOCK
In fiscal 1995, the Company authorized 250,000 shares of Series E Preferred
Stock, and 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
and ten redeemable Common Stock Purchase Warrants ("Warrants"). Ten
Warrants entitled the holder to purchase one share of common stock at $6.00
per share. The Warrants were not exercised and expired June 30, 1997.
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.
F-18
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(10) SHAREHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS (CONTINUED)
SERIES F PREFERRED STOCK
The Company authorized 1,100,000 shares of Series F Preferred Stock. Shares
of the Series F Preferred Stock are convertible into Common Stock at the
election of the holders at a conversion price equal to 50% of the current
market price determined by the 30 day average price prior to conversion.
The shares of Series F Preferred Stock will automatically be converted into
fully-paid and non-assessable shares of Common Stock upon the effective
date of a registration statement covering the Common Stock. Dividends on
the Series F Preferred Stock are paid when declared by the Board of
Directors, at the rate of $.08 per share per annum before any dividends on
shares of the Company's common stock are paid. Upon liquidation,
dissolution or winding up of the Company, the Series F Preferred Stock has
a preference of $1.00 per share plus accumulated and unpaid dividends,
payable from the proceeds of sale or distribution of the Company's assets
prior to any distribution to the holders of common stock. At April 30,
1997, there were $15,719 in accumulated dividends.
The Company issued 143,000 shares of Series F Preferred Stock in connection
with the acquisition of the assets of its franchise, CommWorld of Tucson
(see Note 2). The Company also issued 45,000 shares of Series F Preferred
Stock, realizing net proceeds of $39,150, in connection with a private
offering of the shares. The Company issued 169,818 shares in connection
with the conversion of certain notes payable into equity (See Note 11).
SERIES G PREFERRED STOCK
The Company authorized and issued 83,500 shares of Series G Preferred Stock
to an individual in connection with the acquisition of the assets of
CommWorld of Tucson (see Note 2). Shares of the Series G Preferred Stock
are convertible into common stock at the election of the holders at a
conversion price of $1.625. Dividends on the Series G Preferred Stock are
paid when declared by the Board of Directors, at the rate of $.08 per share
per annum before any dividends on shares of the Company's common stock are
paid. Upon liquidation, dissolution or winding up of the Company, the
Series G 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 G Preferred
Stock at $1.00 per share plus accrued and unpaid dividends by giving thirty
days notice to the holders of the Series G Preferred Stock. At April 30,
1997 there were $3,880 in accumulated dividends.
F-19
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following schedule summarizes the preferred stock activity for Series
B, C, E, F and G for fiscal years ended April 30, 1997 and 1996:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES E SERIES F SERIES G
---------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 30, 1995 80,088 $80,088 321,545 $321,545 250,000 $ 611,994 - $ - - $ -
Issuances of preferred Stock 105,134 105,134 - - - - - -
Conversions of preferred
Stock to common stock - - - - (250,000) (611,994) - - - -
------- ------- -------- -------- -------- ---------- ------- ------- ------ -------
Balances, April 30, 1996 80,088 $80,088 426,679 $426,679 - - - $ - - -
Issuances of preferred Stock - - - - - - 188,000 188,000 83,500 83,500
Conversion of debt to
preferred stock - - - - - - 169,818 169,818 - -
Balances, April 30, 1997 80,088 $80,088 426,679 $426,679 - $ - 357,818 $357,818 83,500 $83,500
======= ======= ======== ======== ======== ========= ======= ======= ====== ======
<CAPTION>
TOTAL PREFERRED STOCK
---------------------
Shares Amount
------ ------
<C> <C>
Balances, April 30, 1995 651,633 $1,013,627
Issuances of preferred Stock 105,134 105,134
Conversions of preferred
Stock to common stock (250,000) (611,994)
-------- ----------
Balances, April 30, 1996 506,767 $ 506,767
Issuances of preferred Stock 271,500 271,500
Conversion of debt to
preferred stock 169,818 169,818
Balances, April 30, 1997 948,085 $ 948,085
======== ==========
</TABLE>
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
sold to the underwriter for $100 a warrant to purchase up to 80,000 units
at a price of $3.00 per unit. These warrants were not exercised and expired
June 30, 1997. During the year ended April 30, 1997, the Company issued
warrants to purchase 5,850 shares of Common Stock at a price of $1.00 per
share. These warrants expire December 31, 1997.
(11) CONVERSION OF DEBT TO EQUITY
In September 1996, certain notes payable in the amount of $169,818 were
converted into 169,818 shares of Series F Preferred Stock. These notes,
which were issued in connection with acquisitions of certain operating
subsidiaries, were converted on a dollar for dollar basis into shares of
Series F Preferred Stock valued at $1 per share. The note holders are also
holders of Series B and Series C Preferred Stock.
(12) BENEFIT PLANS
STOCK OPTIONS
During 1994, the Company, with the approval of its board of directors,
adopted the 1994 Stock Option Plan (the "Plan") which is subject to
shareholder approval. The Plan provides for the reservation of 207,000
shares of the Company's common stock. Pursuant to the terms of the Plan,
options may be granted to persons who are employees of the Company and any
subsidiary thereof.
F-20
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(12) BENEFIT PLANS (CONTINUED)
Generally, the options are non-transferable and cannot be exercised for a
period of six (6) months from the date granted. Furthermore, options are
granted at fair market value on the date of grant and expire up to ten
years from that date. At April 30, 1997 the Company had 72,500 options
granted pursuant to the Plan to purchase common stock at prices ranging
from $1.00 to $2.75 per share with expirations occurring between August 3,
1998 and October 1, 1999. During fiscal years 1997 and 1996, no stock
options were exercised.
Additionally, in accordance with a stock option plan adopted in February
1993, the Company's board of directors authorized the issuance of options
to purchase up to 20,000 common shares to non-employee directors of the
Company. Options are granted at the market value on the date of grant. The
options granted become exercisable over a three-year period and must be
exercised within five years from the date of grant. At April 30, 1997, the
Company had 11,583 options granted to purchase common stock at prices
ranging from $.88 to $6.25 per share, with expirations occurring between
February 1, 1998 and November 1, 2001. During fiscal years 1997 and 1996,
no stock options were exercised.
Furthermore, the board of directors has granted options to certain
individuals that were not issued pursuant to any plan. At April 30, 1997,
the company had 132,500 options outstanding to purchase common stock at
prices ranging from $1.00 to $3.25 per share, with expirations occurring
between August 3, 1998 and September 20, 1999. During fiscal year 1997 and
1996, no stock options were exercised.
The following is a summary of the status of options granted:
<TABLE>
<CAPTION>
Number Aggregate Weighted Average
of Shares Exercise Price Exercise Price
---------- --------------- ----------------
<S> <C> <C> <C>
Balances, April 30, 1995 142,408 $ 573,203 $4.03
Options granted 147,000 374,001 2.54
Options canceled (78,325) (403,300) 5.15
------- --------- -----
Balances, April 30, 1996 211,083 543,904 2.58
Options granted 62,000 63,000 1.02
Options canceled (56,500) (135,938) 2.41
------- --------- -----
Balances, April 30, 1997 216,583 $ 470,966 $2.17
======= ========= =====
</TABLE>
The weighted average fair value of options granted during fiscal years 1997
and 1996 was $1.25 and $1.66 per share, respectively.
F-21
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(12) BENEFIT PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-
Based Compensation. Accordingly, no compensation cost has been recognized.
Had compensation cost for these option plans been determined based on the
fair value at the grant date for options granted in 1997 and 1996,
consistent with the provisions of SFAS 123, the Company's net income (loss)
and net income (loss) per share applicable to common stock for 1997 and
1996 would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income (loss) applicable to
common stock - as reported $22,680 $(1,218,174)
Net income (loss) applicable to
common stock - pro forma 17,040 (1,270,186)
Income (loss) per common share - as
reported .01 (.81)
Income (loss) per common share -
pro forma $ .01 $ (.84)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Risk-fee interest 5.0% - 6.0%
Expected life 3 years
Expected volatility 30%
Expected dividend $0
</TABLE>
The following table summarizes the stock options outstanding at April
30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Weighted Average Number Weighted Average
Exercise Prices Outstanding Exercise Price Exercisable Exercise Price
- --------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
$ 0.88 - 1.69 91,000 $1.11 6,000 $1.38
2.25 - 2.75 70,000 2.57 - -
3.13 - 3.25 50,000 3.19 - -
5.13 - 6.25 5,583 5.52 5,583 5.52
------- ---------
$ 0.88 - 6.25 216,583 $2.17 11,583 $3.38
======= =========
</TABLE>
401(K) PLAN
On August 1, 1985, the Company established an Employees' Savings Plan (ESP)
for all full-time employees who have at least twelve months of continuous
service and who have attained the age of twenty-one. The Company may make
matching contributions of up to 50% of the participant's contribution (made
via salary reduction arrangements) as described in the ESP. In addition,
the Company may also make an annual contribution from its profits. The
Company made no contributions to the ESP in 1997 or 1996.
F-22
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(13) INCOME TAXES
There was no income tax expense attributable to income from operations for
the years ended April 30, 1997 and 1996 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, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 1,731,000 $ 1,492,000
Allowance for doubtful accounts 78,000 51,000
Allowance for obsolete inventory 24,000 -
Amortization of goodwill 60,000 11,000
Other (21,000) (21,000)
----------- -----------
Total gross deferred taxes 1,872,000 1,533,000
Valuation allowance (1,487,000) (1,533,000)
----------- -----------
Net deferred taxes $ 385,000 $ -
=========== ===========
</TABLE>
At April 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $4,450,000 which are available
to offset future federal and state taxable income. The carryforwards expire
in years from 2006 through 2012. 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.
(14) LIQUIDITY
The Company has incurred operating losses for the years ended April 30,
1997 and 1996 and in prior periods. The Company's operating loss for the
year ended April 30, 1996 was financed principally by the Company's major
supplier. The operating loss for the year ended April 30, 1997 was offset
by non-cash expenses of depreciation and amortization. The recurring losses
that the Company had incurred for the year ended April 30, 1996 and in
previous periods raised substantial doubt about its ability to continue as
a going concern. The consolidated financial statements as of April 30, 1996
and for the year then ended did not include any adjustments that might have
resulted from the outcome of this uncertainty. The ability of the Company
to continue as a going concern was dependent upon the realization of
management's plans to increase revenue, improve profit margins and contain
general and administrative expenses. Management improved its cash flow
during the year ended April 30, 1997 by increasing revenue, both from
national accounts and Company-owned outlets, improving gross profit margins
and containing general and administrative expenses, in addition to
obtaining additional debt and equity financing.
F-23
<PAGE>
COMMUNICATIONS WORLD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(14) LIQUIDITY (CONTINUED)
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.
(15) CERTAIN RISKS AND CONCENTRATIONS
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 57 franchises located in 27
states and 8 Company-owned outlets at April 30, 1997.
The Company sells its products and services primarily to franchisees,
multi-location customers, and to customers of Company-owned outlets,
generally without requiring any collateral. The Company maintains adequate
allowances for potential credit losses and performs ongoing credit
evaluations.
The Company's products are concentrated in the telephone interconnect
industry, which is highly competitive and rapidly changing. Significant
technological changes in the industry could affect operating results
adversely. The Company's inventories include spare parts and components
that may be specialized in nature and subject to technological
obsolescence. While the Company has programs to minimize the required
inventories on hand and considers technological obsolescence in estimating
required allowances to reduce recorded amounts to market values, such
estimates could change in the future.
(16) SUBSEQUENT EVENT
On May 20, 1997, the Company entered into an investment banking agreement
(the Agreement) with M.H. Meyerson & Co., Inc. (Meyerson). Under the terms
of the Agreement, Meyerson will provide investment banking services for the
Company, on a best efforts basis, including assistance with mergers and
acquisitions, internal capital structuring and the placement of new debt
and equity issues for a period of up to five years commencing from the date
of the Agreement. In consideration of the services to be performed, the
Company granted Meyerson warrants to purchase 175,000 shares of common
stock at a price of $1.20 per share. Subject to vesting and approval of the
Company's shareholders of an increase in the number of authorized shares,
the warrants may be exercised at any time from May 20, 1997 to and
including May 20, 2002. These warrants vest and become irrevocable as
follows: 75,000 warrants on May 29, 1997, 50,000 warrants on November 17,
1997, and 50,000 warrants on May 19, 1998. The warrants carry piggyback
registration rights.
F-24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 80,560
<SECURITIES> 0
<RECEIVABLES> 2,620,375
<ALLOWANCES> 0
<INVENTORY> 947,551
<CURRENT-ASSETS> 3,821,723
<PP&E> 391,747
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,908,703
<CURRENT-LIABILITIES> 3,809,566
<BONDS> 29,598
0
948,085
<COMMON> 4,224,512
<OTHER-SE> (4,003,460)
<TOTAL-LIABILITY-AND-EQUITY> 5,908,703
<SALES> 14,525,715
<TOTAL-REVENUES> 14,904,473
<CGS> 9,847,124
<TOTAL-COSTS> 9,847,124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 224,593
<INTEREST-EXPENSE> 345,226
<INCOME-PRETAX> (302,180)
<INCOME-TAX> (385,000)
<INCOME-CONTINUING> 82,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,820
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
