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Filed by World Access, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Subject Companies: STAR Telecommunications, Inc. and
Communication TeleSystems International
d/b/a WorldxChange Communications
Form S-4 Registration Statement File No. 333-37750
TelDaFax AG
Form S-4 Registration Statement File No. 333-44864
The following is a transcript of a conference call of World Access, Inc.
held November 9, 2000 with the public. Certain portions of the transcript have
been redacted since the conversations did not relate to or were not in
connection with the pending merger transactions between World Access and each
of STAR Telecommunications, Inc., Communication TeleSystems International d/b/a
WorldxChange Communications, and TelDaFax AG.
Coordinator: Welcome to the third quarter earnings conference call. All
parties will be on listen only until the question and answer
session. This conference is being recorded at the request of
World Access. If anyone has any objections please disconnect
at this time. I would like to introduce your host, Michelle
Wolf, Vice President of Investor Relations. Ms. Wolf, you may
begin.
M. Wolf: Thank you all for joining us this afternoon for our third
quarter conference call. I need to read a couple of Safe
Harbor type statements before I turn the call over to our
chairman and CEO, Jack Phillips. This discussion may contain
financial projections or other forward looking statements made
pursuant to the Safe Harbor provisions of the Securities
Reform Act of 1995. Such statements about risks and
uncertainties may cause actual results to differ materially.
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These risks include the ultimate resolution of issues related
to consolidated accounting treatments in the world exchange
acquisition currently being addressed with the SEC; potential
inability to identify, complete and integrate acquisitions;
difficulties in expanding into new business activities; delays
in new service offerings; the potential termination of certain
service agreements or the inability to enter into additional
service agreements; and other risks described in the company's
SEC filings, including the company's annual report on Form
10-K for the year ended December 31, 1999 as amended, the
company's quarterly reports on Form 10-Q for the quarters
ended March 31, 2000 and June 30, 2000 as amended, and the
company's registration statements on Form S-3, including SEC
file member 333-79097, and S-4, SEC file numbers 333-37750 and
333-44864.
World Access and Star have filed a joint proxy statement/
prospectus and other relevant documents concerning the Star
merger and the World Exchange merger with the United States
SEC. Additionally, World Access has filed a proxy statement/
prospectus and other relevant documents concerning the
TelDaFax transactions with the SEC. WE URGE INVESTORS TO READ
THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT
DOCUMENTS FILED WITH THE SEC BECAUSE THEY CONTAIN IMPORTANT
INFORMATION.
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Investors will be able to obtain the documents free of charge
at the SEC's Web site, www.sec.gov. In addition, documents
filed with the SEC by World Access will be available free of
charge by writing to Investor Relations, World Access, Inc.,
945 E. Paces Ferry Road, Suite 2200, Atlanta, GA, 30326, or by
telephone request to 404-231-2025. Documents filed by Star can
be obtained by writing to Investor Relations, Star
Telecommunications, Inc., 223 East De La Guerra Street, Santa
Barbara, CA, 93101, or by telephone request at 805-899-1962.
The participants, as defined in Instruction 3 to Item 4 of
Schedule 14(A) in the solicitation of proxies from the World
Access stockholders for the approval of the merger include
World Access and Walter J. Burmeister, Kirby J. Campbell,
Brian Cipoletti, Stephen J. Clearman, John P. Imlay, Jr.,
Massimo Prelz Oltramonti, John D. Phillips, John P. Rigas,
Carl E. Sanders, Dru A. Sedwick, and Lawrence C. Tucker, each
a director of World Access. Please see World Access' Annual
Report on Form 10-K for the year ended December 31, 1999,
filed on March 30, 2000, for a description of the World Access
security holdings of each of the World Access directors.
I'd like to turn the call over to Jack.
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J. Phillips: Thank you for joining us this afternoon for our third quarter
earnings release. Joining me for this call is Brian Yokley,
our Chief Financial Officer; and Walt Burmeister, our
President.
Before we get started on the results we'd like to take a
minute to update you on our progress in bringing our pending
transaction Star/WorldxChange and TeleDafax through the SEC
review process, to shareholder votes and closure. To this, I'd
like to turn the call over to Brian Yokley.
B. Yokley: Thank you, Jack. We're able to report today that we are
finally nearing conclusion to the SEC's review of the S-4
filed in connection with the Star and WorldxChange mergers.
As you are aware, the S-4 and the one filed in the relation to
the TeleDafax acquisition are both very complex documents, due
to the nature of the multiple transactions.
As you may have noted in our press release, we still have one
remaining issue to be resolved, which relates to when we begin
consolidating WorldxChange into our financial results. As we
have discussed previously, World Access assumed operational
control of WorldxChange on August 1st, pursuant to a
management service agreement and voting agreements executed by
certain shareholders of World Access and WorldxChange.
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We are presenting to you today financial results which
incorporate the operations of WorldxChange from that date,
which is consistent with the guidance we gave you in
September. We and our accountants, Ernst & Young, believe that
this is the appropriate accounting treatment. However, we are
presenting these results as pro forma results until we can get
these matters resolved with the SEC.
We feel strongly that the consolidation of WorldxChange as
of August 1st accurately reports the results of today's
operations. Ernst & Young is today meeting with the SEC to
discuss this issue. The ultimate outcome of the financial
presentation of third quarter results will not have any impact
on our future gross revenues, assets or operations. As you
will hear throughout this call, the operations and
administrative functions of the companies were substantially
integrated in the third quarter, and we are operating as one
company.
As we do not yet know how the SEC wishes for us to account for
the operation of WorldxChange from August 1st, the company's
actually results could differ materially from this pro forma
presentation. It is important to note, however, that if we
reported our results on a stand alone basis, which by the way
would be difficult considering that significant
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integration has already taken place, our reported earnings for
the third quarter would have been better than the pro forma
numbers we are presenting to you today.
The bottom line of all of this is that we expect to resolve
the administrative issue with the SEC shortly, and move to an
orderly closing of the three pending acquisitions. Since the
review process has now run to mid-November, we may be required
to update the proxy document with the third quarter results
for all our four companies. This may take a few weeks, which
could possibly delay the shareholder meetings and closings
from December to early January. We hope to avoid this delay,
but should in any event be in the position to announce the
shareholder meeting date shortly.
At this point I'd like to turn the call back to Jack.
J. Phillips: Thank you, Bryan. Let me assure you all that we at World
Access are very anxious to get all three of these transactions
closed, and will do everything we can to facilitate this
objective. Now let's go to the third quarter results.
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In the third quarter, we had pro forma revenues of $320.7
million, representing year over year growth of 146%, and a pro
forma EBITDA loss, excluding one time charges, of $8.9
million. Our pro forma balance sheet continues to be very
strong, with more than $436 million in cash and investments.
Also, despite the complex SEC review process, we did make
progress in our acquisition strategy in the third quarter. We
bought Apax shares in TeleDafax, giving us 33% of the
outstanding stock. Additionally, I recently joined TeleDafax's
board of directors, and we appointed World Access' treasurer,
Mike Mies, as Chief Financial Officer of TeleDafax. These
changes will help us prepare our companies for successful
integration, once we do clear the SEC.
We also made quite a bit of progress in our retail integration
in Europe during the quarter, combining numerous retail
offices, moving five countries into the proprietary billing
system for their retail operations, and beginning a marketing
program to move each separate retail brand over to the NETnet
brand.
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Now let me pass the call over to Bryan for a full run down on
the financials.
B. Yokley: Hopefully by now all of you have received our press release
that details the pro forma operating results of World Access
for the third quarter of 2000, and the company's strong
financial position as of September 30th. Again, consistent
with our guidance call in September, the pro forma third
quarter results include WorldxChange, consolidated from
August 1st through the end of the quarter.
I am please to report that during the quarter, World Access
realized pro forma revenues of $320.7 million, slightly ahead
of both our business plan and consensus analyst estimates. Pro
forma third quarter 2000 revenue increased by approximately
$190.5 million, or 146% from the third quarter of 1999, due
to both acquisitions and internal growth.
Breaking down our third quarter revenue further, of the $320.7
million realized, $249.4 million, or 78% of the total, was in
carrier customers, and $71.3 million or 22% of the total was
from retail customers. This compares to 89% from carriers and
11% from retail in the second quarter of year 2000. As we
indicated in September, you can already see the
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impact of our tighter credit policies on the wholesale
business, and the acceleration of our shift to greater retail
mix.
During the third quarter, European originated revenue
approximately was 41% of our pro forma total revenue. The
weakness of the euro continues to negatively impact our
European revenue. The euro is currently trading at 5% below
our fourth quarter budget rate. Pro forma for all pending
acquisitions, European-originated revenue is approaching 48%
of total revenues.
Pro forma EBITDA as presented here is normalized for one time
charges by adding back charges for restructuring, billing
integration, brand migration, and one time increase for
doubtful account reserves related to our tightened credit
policy. These one time charges, which we alerted you to in
September, totaled $72.9 million in the quarter. If you
normalize pro forma EBITDA loss for the quarter, it was $8.9
million, or $0.07 per diluted share, compared with our
guidance of a loss of $9.9 million, or $0.12 per share.
The pro forma gross profit margin realized in the quarter was
$48.4 million, or 15.1% of revenue, up from 10.9% of revenue
in the third
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quarter of 1999, and our prior guidance of approximately 15%.
The increase in margin on a year to year basis was due to
several factors, including increased European originated
traffic, and increased retail revenue.
The third quarter margins also represented a 220 basis point
improvement sequentially, compared with 12.9% gross margin in
the second quarter of 2000. Pro forma SG&A expenses in the
third quarter, excluding one time charges related to the
integration of the WorldxChange acquisition of $72.9 million,
were $57.3 million or 17.9% of total revenue, in line with our
business plan.
During the third quarter of 2000, our pro forma cash earnings
from continuing operations, excluding the impact of one time
restructuring charge, net of taxes, was ($0.17) per share,
which is $0.12 per share better than our original guidance.
Approximately $0.04 of this is due to a gain on sales of
securities. A final note on our P&L is that operating results
of NACT are reported under discontinued operations.
Quickly, turning to the balance sheet, our liquidity position
continues to be solid in the third quarter of 2000, with an
ending balance of $419 million
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in pro forma cash and investments, including $17 million in
restricted cash reserved for interest payments on senior
notes. This cash position, along with our low leverage, gives
us the financial strength necessary to aggressively pursue
available growth opportunities in Europe, and execute our long
term plans, while waiting out the current downturn in capital
markets. We view our balance sheet as a significant
competitive strength, and as a major attraction for merger and
acquisition candidates, particularly those that may be
under-capitalized.
As some of you are aware, the indenture for the 13.25% bonds
provides that our net cash proceeds from the sale of certain
assets be used to reduce debt. Accordingly, over the next
several months, we will be using the proceeds of the Telco
sale, approximately $160 million, to further reduce the
company's debt. We are currently analyzing how best to use
these proceeds, consistent with the terms of the trust
indenture.
As we have indicated in the past, our intention had been to
use all of the proceeds to tender for the bonds. This seemed
to be the best use of proceeds, due to the high coupon on the
notes, and the fact that the tender price was less than par,
due to the equity value. When we first announced the Telco
proceeds, our stock was trading in the 20's, and a tender
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price would have been something less than 95. We have recently
received suggestions from our financial advisors that, given
the current stock price, and the nature of some of the debt we
will be assuming in our acquisitions, we should consider using
some of the proceeds to retire senior debt in accordance with
the provisions of the indenture. We will be evaluating this
issue over the next few weeks.
With that, let me turn the call over to Walt Burmeister for
some color on the operations.
W. Burmeister: I'll begin with the carrier services operation, and end up
with the good stuff -- our European retail operations. As we
indicated in September, we scaled back our wholesale
operation, tightening our credit policy, and either
restricting capacity to, or turning down completely, customers
whose financial condition indicated possible problems in the
future. As a result, our revenues in the carrier services
division have declined from the second quarter, even with the
WorldxChange business added in for two months.
While this is a reduction in terms of total revenue, we
believe it's the right approach to the wholesale business in
this turbulent period. It is also
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consistent with our long term objective of focusing on revenue
from a European SME customer base. Moreover, we are convinced
that rationalization is already taking place in the wholesale
arena, and will result in fewer players and more rational
pricing. We had been able to raise pricing on a number of our
routes over the last month, although margins remain tight on
many others.
For the foreseeable future, we continue to expect wholesale
revenue to remain flat, with modest improvement in margin. The
carrier business has now been completely migrated onto our new
proprietary operating systems, which we are acquiring as part
of World Exchange. We had our first month of fully independent
carrier billing in September, meaning that the new system ran
without duplication from our old billing system.
On the retail side, we made considerable progress in the third
quarter. Much effort was put into consolidating and
integrating our retail operations, country by country
throughout Europe. For the first time, we're operating a
single retail organization, and reporting off of one
accounting system in each country. This is no small feat,
considering that earlier this year, we had as many as six
offices and eight different billing and accounting systems in
one country as a result of acquisitions.
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For retail billing, sales management, and customer service,
five countries have been migrated to the new system and are
fully functional. The remaining countries are expected to be
migrated to the new system by the end of the year. I can't
emphasize too strongly the importance of this integrated
customer management system, and the competitive advantage we
believe it gives us.
During the third quarter, World Access began migrating the
branding of all retail telecom activities in Europe under the
NETnet brand. We will continue to use the Facilicom brand for
our carrier business, both in the US and in Europe. We have
integrated our networks and eliminated duplicate operating
centers by closing the network operating centers in
Washington, DC and Malmo, Sweden. We are now running the
combined network out of our San Diego and London NOCs. These
facilities, which work closely together, currently manage 47
switches in 17 countries around the world.
We have also eliminated excess network capacity, and are in
the process of redeploying network assets to minimize capital
expenditures going forward. We have recently deployed advanced
network monitoring equipment to detect low ASRs, looping and
other network problems,
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before they're seen and reported by our customers, thus
improving customer satisfaction.
Carrier customer service has been combined and centralized in
San Diego. Retail customer service is handled in each country
because of differences in language and local business
practices. We have realized savings in this operation by
combining multiple retail customer service centers in some
countries into a single unit per country.
Finally, we have made considerable head count reductions.
Since the beginning of 2000, on a pro forma basis, with
WorldxChange and Netnet we have cut in excess of 350 full time
equivalents. We expect to make further substantial reductions
before the end of this year.
In summary, during the third quarter, we consolidated our
networks and operations, and put the back room systems in
place that will enable us to efficiently manage growth and
profitability going forward. Let me now turn back to Jack.
J. Phillips: In our last quarterly earnings call, I talked a lot about the
panic in the stock market where telecom stocks are concerned.
I also expressed some hope
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that investors would begin to differentiate among long
distance players, and recognize superior business plans and
strong balance sheets, something that I felt sure would
benefit World Access. Unfortunately, that hasn't happened, and
the panic seems to have deepened.
It's not my intention to dwell heavily on the stock price
today, but I do want to remind investors that not all telecom
companies are alike. Let's stop for a minute and look at what
the market seems to be saying about telecom. We think
investors have expressed four key concerns about the current
telecom environment.
First, for over a year now, investors have been wary of the
wholesale long distance business, and with good reason, since
the environment has been fractured and competitive. We are, I
believe, in the midst of a healing shakeout in wholesale. It
will never be the focus of our efforts, but we believe it will
continue to be an effective tool for filling networks and
increasing the profitable utilization of network assets.
Our future growth, current and future acquisitions, and
strategic focus, is on European retail activities. We expect
carrier revenues to rapidly become a much smaller portion of
our overall business.
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Second, investors had been increasingly skeptical in the last
couple of quarters about consumer long distance here in the
US, where price competition has been tough, churn high, and
customer acquisition and retention increasingly costly. With
WorldxChange, we will inherit some US consumer business, but
it will be a fairly small portion of our revenue base, and is
not a focus for future growth. We will treat the US consumer
business as a cash cow, harvesting cash and foregoing
investment.
Third, a number of our peers have highlighted thin margins and
tough price competition in this segment, and focused on large
business customers. Our strategy is focused on European small
and medium sized business customers, for exactly that reason.
In the large customer base, the customer has all the power,
and competition is extremely tough. In the SME base, we're
competing primarily with the old European PTTs for the small
business customers, and while it can still be competitive, it
remains one of the highest margin retail segments.
Finally, investors had been concerned for some time now with
the poor quality of some telecom balance sheets. We said it
before and we're saying it once again: we believe we have one
of the strongest balance sheets in the group, with $436
million in pro forma cash and investments.
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We're fully funded, and we believe our existing asset base
will carry us through the current capital market crisis, and
provide the foundation for our future growth.
Moreover, the tight capital markets have produced a very
favorable environment for consolidation activity. Many of you
are worried that our stock price might inhibit our ability to
do transactions. Quite the opposite. We are currently working
on several large transactions, which, if completed
successfully, should put us on track to deliver our 2001
growth projections with ease.
We are not finding any shortage of good acquisition candidates
to work with. Quite simply, we do not believe that our stock
price reflects the realities of our solid business plan and
the capabilities of our management team. There is a difference
between World Access and many of its peers.
Realistically, however, we don't expect the panic to end any
time soon. But we do expect to continue running our business
the same way we always have, staying focused on our strategy,
restraining cost, and conserving cash, and doing all of the
blocking and tackling that allows us to integrate businesses
successfully. All of this is business as usual for
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World Access' management, which has operated in challenging
environments successfully in the past, and has considerable
experience with tight capital markets and competitive
operating environments.
Over the last year, many companies in our sector have tried to
escape the rigors of the capital markets and competitive
telecom by reinventing themselves as the flavor of the day.
Big business accounts, high end data, Internet anything. But
that's really missing the point. The business is what the
customer wants. We have focused on this from the beginning. It
drives every aspect of our business plan. We believe it is the
only real source of value out there. It's not about data or
Internet or any other fancy service or network device. It's
just about the customer, and delivering services that the
customer wants.
Moreover, the customer is what we want. We believe strongly
that the primary source of shareholder value for telecom
companies is, and will continue to be, customers. To that end,
we will continue to create value by building a strong base of
European SME customers, a sales organization to grow that
customer base, and the back office infrastructure to support
it.
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At the end of the day, we expect that $3 to $5 billion in
revenue, focused on the European SME market, will be
enormously valuable in the next round of industry
consolidation.
With that, I'd like to open this up for questions.
Coordinator: Thank you. Our first question comes from Paul Saferstein from
Morgan Stanley.
[redacted]
P. Saferstein: Secondly, maybe you could step us through, assuming the
closing of these transactions, where the product portfolio is,
what is up and running, and what other types of product
developments are underway and when we can expect that to be
commercially available.
[redacted]
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W. Burmeister: Paul, as you know, we're focused on the small and medium
business customer in Europe, and our policy is not to spend
time and money developing new products. So what we're doing
is, we're looking at that market segment. We're determining
what that market segment requires. And then through
acquisitions, we're getting the products and services that
satisfy that market segment.
Most notably, the most recent large acquisition that will
close very shortly, Teledefax in Germany, brings to us a
mobile reseller capability in Germany, which we also have in
several other countries in Europe. It
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brings to us Internet access, it brings to us Internet
products that can be delivered into the small business market.
So that's our focus for the time being.
Voice services, both national long distance and international
long distance; Internet access; wireless resale, and basic
Internet products for the medium and small business customer,
but we are not going to be spending a lot of time developing
new products on our own.
J. Phillips: I would also say that some of the companies that we're looking
companies, the geographical focus is Europe, as Walt said. But
to us, we want the customer, and sometimes that means focusing
on companies that have very strong distribution channels. Walt
mentioned TeleDafax. We do thing they have a very strong
distribution channel. They have one of the strongest agent
channels that we've seen anywhere. We plan on really enhancing
and feeding that channel.
Part of what we've done European wide is, the four legs that
we stand on, we think, in distribution are agent sales, direct
sales, telemarketing and direct mail. Those are the four main
channels that we're able to reach out and touch this SME
customer base, our profile customer. So we're
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looking for those strong distribution channels, and we're also
looking for reasonably strong distribution channels that we
can enhance, using our state of the art systems, which include
agent reporting that gives them real time daily commissions,
order processing, and these types of things that really
motivate agent bases to produce and perform much better than
they have been historically because they get better access to
information for motivational purposes.
[redacted]
P. Saferstein: Is there a time frame in terms of taking the German products,
such as the resale and Internet access?
W. Burmeister: Well, these are things we already do to one extent or another
in some of the other European countries. There are some
products that have been developed for the small business
customers. These are e-commerce type products that we're
rolling out now in Germany with TeleDafax. We'll see how
successful they are, and if they're successful, we'll adapt
them for
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other markets. But generally, there will probably be about a
one or two quarter lag from trialing it in one market and then
rolling it into another market.
[redacted]
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G. Casergot: In the third quarter, what impact did the euro have? Can you
talk about the euro impact on your financial results as you
translate, and what might one expect for next year?
J. Phillips: Obviously, the euro is just recently recovered somewhat, but
it's down and it's affecting everyone over there.
B. Yokley: From a translation perspective, it really has no impact. The
impact has really been more on the revenue side. Net income,
we had no impact. Our cost and revenues are matched up in each
country, kind of a natural hedge. So it doesn't affect net
income. It does decline revenues, but we have an offset in the
cost side.
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G. Casergot: How much did it impact revenue in the third quarter at the top
line. Was it 5%, or 10%?
B. Yokley: Relative to the guidance we had given, there is no impact,
because we had pretty much factored in about the same average
as what it worked out to. If you look at the current trading
level of the euro, however, it's about 5% below the third
quarter average, and consequently 5% below what we've used for
our budgeting going forward. But unless there's some recovery,
we could see an impact going forward.
J. Phillips: Do we know what the actual number was?
B. Yokley: There was no impact in Q3 relative to our guidance.
J. Phillips: But obviously, we don't bring that money back, so we pay
everything over there and leave it over there, but it's a
revenue impact.
[redacted]
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Coordinator: At this time there are no further questions.
J. Phillips: Then we thank you for your indulgence this afternoon, and we
will be back to you for our next conference call at the end of
the fourth quarter. Thank you very much.
