<PAGE> 1
As filed with the Securities and Exchange Commission on October 6, 1998
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WAXS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 3661 58-2398004
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
MARK A. GERGEL
945 E. PACES FERRY ROAD, SUITE 2240 945 E. PACES FERRY ROAD, SUITE 2240
ATLANTA, GEORGIA 30326 ATLANTA, GEORGIA 30326
(404) 231-2025 (404) 231-2025
(Name, address, including zip code, and telephone (Name, address, including zip code, and telephone
number, number,
area code, of Registrant's principal executive area code, of agent for service)
offices)
</TABLE>
---------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN E. FOX, ESQ. BRENT CHRISTENSEN, ESQ.
ROGERS & HARDIN LLP PARSONS, BEHLE & LATIMER
2700 INTERNATIONAL TOWER ONE UTAH CENTER
229 PEACHTREE STREET, N.E. 201 SOUTH MAIN STREET
ATLANTA, GEORGIA 30303 SUITE 1800
(404) 522-4700 SALT LAKE CITY, UTAH 84145-0898
(801) 532-1234
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as practicable after this registration statement becomes effective and
certain other conditions to the mergers proposed herein are satisfied.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED(1) REGISTERED(2) PER UNIT(3) OFFERING PRICE(3) FEE(4)
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share.............................. 27,000,000 shares $16.99 $458,831,250 $135,355
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</TABLE>
(1) This registration statement relates to securities of the Registrant issuable
to holders of capital stock of NACT Telecommunications, Inc., a Delaware
corporation ("NACT"), in the proposed merger of a wholly-owned subsidiary of
the Registrant with and into NACT (the "NACT Merger"), and to holders of
capital stock of World Access, Inc., a Delaware corporation ("World
Access"), in the proposed merger of a wholly-owned subsidiary of the
Registrant with and into World Access (the "World Access Merger").
(2) Based upon the number of shares of capital stock of NACT and World Access
presently outstanding or otherwise expected to be issued on or before the
closing of the mergers and entitled to receive the merger consideration
pursuant to the NACT Merger and the World Access Merger.
(3) Pursuant to Rules 457(f)(i) and 457(c) under the Securities Act of 1933, as
amended, and solely for purposes of calculating the registration fee, the
registration fee was computed on the basis of the average of the high and
low prices of the common stock of NACT on The Nasdaq National Market and the
average of the high and low prices of the common stock of World Access on
The Nasdaq National Market, in each case on October 5, 1998.
(4) The registration fee of $135,355 was calculated pursuant to 457(f) under the
Securities Act as follows: $295 per $1,000,000 (or fraction thereof) of the
proposed maximum aggregate offering price. A fee of $12,738 was paid on
April 28, 1998 pursuant to Section 14(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in connection with the filing of the
preliminary materials by World Access and NACT. Pursuant to 457(b) under the
Securities Act, the registration fee payable herewith has been reduced by
$12,738, the amount previously paid upon filing of such preliminary
materials. Accordingly, an additional fee of $122,617 is required to be paid
with the filing of this Registration Statement.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
NACT TELECOMMUNICATIONS, INC.
191 WEST 5200 NORTH
PROVO, UTAH 84604
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"NACT Special Meeting") of NACT Telecommunications, Inc. ("NACT") to be held at
NACT's principal offices located at 191 West 5200 North, Provo, Utah 84604 on
October 28, 1998, at 10:00 a.m., local time.
At the NACT Special Meeting you will be asked to consider and vote upon a
proposal (the "NACT Merger Proposal") to approve the Agreement and Plan of
Merger and Reorganization, dated as of February 24, 1998, as amended (as so
amended, the "NACT Merger Agreement"), among WAXS INC. ("Holdco"), a Delaware
corporation and a wholly-owned subsidiary of World Access, Inc., a Delaware
corporation ("World Access"), World Access, WAXS Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Holdco ("WAXS Merger Sub"), NACT
and NACT Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of Holdco ("NACT Merger Sub"). The NACT Merger Agreement provides, among other
things, for the following transactions:
(i) the merger of NACT Merger Sub with and into NACT (the "NACT
Merger"), in which each share of NACT common stock, $.01 par value per
share (the "NACT Common Stock"), outstanding immediately prior to the
effective time of the NACT Merger, other than shares of NACT Common Stock
held directly or indirectly by World Access or Holdco or in the treasury of
NACT, will be converted into the right to receive a number of shares of the
common stock, $.01 par value per share, of Holdco (the "Holdco Common
Stock") equal to the quotient of (x) $17.50 divided by (y) the average of
the daily closing price of the shares of common stock, $.01 par value per
share, of World Access (the "World Access Common Stock") as reported on The
Nasdaq National Market on each of the twenty consecutive trading days
ending with the third trading day immediately preceding the effective time
of the NACT Merger, subject to adjustment as described in the accompanying
Prospectus/Information Statement; and
(ii) the merger of WAXS Merger Sub with and into World Access (the
"World Access Merger" and, together with the NACT Merger, the "Mergers"),
in which each share of World Access Common Stock outstanding immediately
prior to the effective time of the World Access Merger, other than shares
held directly or indirectly by World Access, will be converted into one
share of Holdco Common Stock.
The transactions contemplated by the NACT Merger Agreement are referred to
herein as the "NACT Transaction." As a result of the NACT Transaction, each of
World Access and NACT will become a wholly-owned subsidiary of Holdco, which
shall be renamed "World Access, Inc." immediately following the consummation of
the Mergers.
World Access currently holds 5,468,712 shares of NACT Common Stock,
representing approximately 67.2% of the outstanding shares of NACT Common Stock
entitled to vote at the NACT Special Meeting, thereby assuring approval of the
NACT Merger Proposal.
The accompanying Prospectus/Information Statement explains in detail the
terms of the Mergers and the Holdco Common Stock to be issued in connection
therewith. ALTHOUGH YOU ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED NOT TO
SEND IN A PROXY, PLEASE READ THE ACCOMPANYING PROSPECTUS/INFORMATION STATEMENT
CAREFULLY.
THE BOARD OF DIRECTORS OF NACT HAS UNANIMOUSLY APPROVED AND ADOPTED THE
NACT MERGER AGREEMENT AND APPROVED THE NACT MERGER.
Sincerely,
A. Lindsay Wallace
President
October 7, 1998
<PAGE> 3
NACT TELECOMMUNICATIONS, INC.
191 WEST 5200 NORTH
PROVO, UTAH 84604
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 28, 1998
---------------------
WE ARE NOT ASKING FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
---------------------
To the Stockholders of NACT Telecommunications, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "NACT
Special Meeting") of NACT Telecommunications, Inc., a Delaware corporation
("NACT"), will be held at NACT's principal offices located at 191 West 5200
North, Provo, Utah 84604, on October 28, 1998, at 10:00 a.m., local time, for
the following purposes:
1. To consider and vote upon a proposal (the "NACT Merger Proposal")
to approve the Agreement and Plan of Merger and Reorganization, dated as of
February 24, 1998, as amended (as so amended, the "NACT Merger Agreement"),
among WAXS INC. ("Holdco"), a Delaware corporation and a wholly-owned
subsidiary of World Access, Inc., a Delaware corporation ("World Access"),
World Access, WAXS Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Holdco ("WAXS Merger Sub"), NACT and NACT
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Holdco ("NACT Merger Sub"). The NACT Merger Agreement provides, among other
things, for the following transactions:
(i) the merger of NACT Merger Sub with and into NACT (the "NACT
Merger"), in which each share of NACT common stock, $.01 par value per
share (the "NACT Common Stock"), outstanding immediately prior to the
effective time of the NACT Merger, other than shares of NACT Common
Stock held directly or indirectly by World Access or Holdco or in the
treasury of NACT, will be converted into the right to receive that
number of shares of the common stock, $.01 par value per share, of
Holdco (the "Holdco Common Stock") equal to the quotient of (x) $17.50
divided by (y) the average of the daily closing price of the shares of
common stock, $.01 par value per share, of World Access (the "World
Access Common Stock") as reported on The Nasdaq National Market on each
of the twenty consecutive trading days ending with the third trading day
immediately preceding the effective time of the NACT Merger, subject to
adjustment as described in the accompanying Prospectus/Information
Statement; and
(ii) the merger of WAXS Merger Sub with and into World Access (the
"World Access Merger" and, together with the NACT Merger, the
"Mergers"), in which each share of World Access Common Stock outstanding
immediately prior to the effective time of the World Access Merger,
other than shares held directly or indirectly by World Access, will be
converted into one share of Holdco Common Stock.
The transactions contemplated by the NACT Merger Agreement are referred to
herein as the "NACT Transaction." As a result of the NACT Transaction, each of
World Access and NACT will become a wholly-owned subsidiary of Holdco, which
shall be renamed "World Access, Inc." immediately following the consummation of
the Mergers.
2. To transact such other business as may properly come before the NACT
Special Meeting or any adjournments or postponements thereof.
The NACT Transaction is more fully described in the accompanying
Prospectus/Information Statement.
Only holders of record of NACT Common Stock on September 22, 1998 are
entitled to notice of and to vote at the NACT Special Meeting and any
adjournments or postponements thereof.
World Access currently holds 5,468,712 shares of NACT Common Stock,
representing approximately 67.2% of the outstanding shares of NACT Common Stock
entitled to vote at the NACT Special Meeting, thereby assuring approval of the
NACT Merger Proposal.
All stockholders are cordially invited to attend the NACT Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Eric F. Gurr
Secretary
October 7, 1998
<PAGE> 4
WAXS INC.
PROSPECTUS
---------------------
NACT TELECOMMUNICATIONS, INC.
INFORMATION STATEMENT
---------------------
This Prospectus/Information Statement is being furnished to stockholders of
NACT Telecommunications, Inc., a Delaware corporation ("NACT"), in connection
with a special meeting of stockholders (the "NACT Special Meeting") of NACT to
be held at NACT's principal offices located at 191 West 5200 North, Provo, Utah
84604, on October 28, 1998, at 10:00 a.m., local time, and at any adjournments
or postponements thereof, for the purposes set forth herein and in the
accompanying notice of special meeting of stockholders of NACT. STOCKHOLDERS OF
NACT ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED NOT TO SEND NACT A PROXY.
This Prospectus/Information Statement also constitutes a prospectus of WAXS,
INC., a Delaware corporation ("Holdco"), with respect to shares of common stock,
par value $.01 per share, of Holdco (the "Holdco Common Stock") to be issued to
the stockholders of World Access and NACT in connection with the Agreement and
Plan of Merger and Reorganization, dated as of February 24, 1998, as amended (as
so amended, the "NACT Merger Agreement"), among Holdco, a wholly-owned
subsidiary of World Access, Inc., a Delaware corporation ("World Access"), World
Access, WAXS Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Holdco ("WAXS Merger Sub"), NACT and NACT Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Holdco ("NACT Merger
Sub").
The NACT Merger Agreement provides, among other things, for the following
transactions:
(i) the merger of NACT Merger Sub with and into NACT (the "NACT
Merger"), in which each share of NACT common stock, $.01 par value per share
(the "NACT Common Stock"), outstanding immediately prior to the effective
time of the NACT Merger, other than shares of NACT Common Stock held
directly or indirectly by World Access or Holdco or in the treasury of NACT,
will be converted into the right to receive that number of shares of the
common stock, $.01 par value per share, of Holdco (the "Holdco Common
Stock") equal to the quotient of (x) $17.50 divided by (y) the average of
the daily closing price of the shares of common stock, $.01 par value per
share, of World Access (the "World Access Common Stock") as reported on The
Nasdaq National Market ("Nasdaq") on each of the twenty consecutive trading
days ending with the third trading day immediately preceding the effective
time of the NACT Merger (the "World Access Average Closing Price"), unless
the World Access Average Closing Price exceeds $25.52 per share, in which
event each such outstanding share of NACT Common Stock will be converted
into 0.6857 shares of Holdco Common Stock (as adjusted, if at all, the "NACT
Exchange Ratio"); provided, however, that if the World Access Average
Closing Price is less than $20.88 per share, then World Access may terminate
the NACT Merger Agreement; and
(ii) the merger of WAXS Merger Sub with and into World Access (the
"World Access Merger" and, together with the NACT Merger, the "Mergers"), in
which each share of World Access Common Stock outstanding immediately prior
to the effective time of the World Access Merger, other than shares held
directly or indirectly by World Access, will be converted into one share of
Holdco Common Stock.
The transactions contemplated by the NACT Merger Agreement are referred to
herein as the "NACT Transaction." As a result of the NACT Transaction, each of
World Access and NACT will become a wholly-owned subsidiary of Holdco, which
shall be renamed "World Access, Inc." immediately following consummation of the
Mergers.
The proposed NACT Merger is contingent upon, among other things, the
approval of the holders of the requisite number of shares of NACT Common Stock,
all as described in this Prospectus/Information Statement. The proposed NACT
Merger will be consummated as soon as practicable after such approvals are
obtained and the other conditions to the NACT Merger are satisfied or waived.
The consummation of the World Access Merger, which is not subject to the
approval of the World Access stockholders, is a condition to the NACT Merger.
World Access currently holds 5,468,712 shares of NACT Common Stock,
representing approximately 67.2% of the outstanding shares of NACT Common Stock
entitled to vote at the NACT Special Meeting, thereby assuring approval of the
NACT Merger Proposal.
Upon consummation of the Mergers, the current NACT stockholders (other than
World Access) will own approximately 7.4% of the then-outstanding shares of
Holdco Common Stock.
The Mergers are contingent upon the receipt of any required governmental
approvals and the satisfaction of certain customary conditions. The Mergers will
be consummated as soon as practicable after such approvals are obtained and the
other conditions are satisfied or waived.
On October 5, 1998, the last reported sale prices on Nasdaq of World Access
Common Stock and NACT Common Stock were $16 1/2 and $12 1/8, respectively. On
February 24, 1998, the last full trading day prior to the public announcement of
the execution of the NACT Merger Agreement, the last reported sale prices on
Nasdaq of World Access Common Stock and NACT Common Stock were $23 7/8 and
$16 5/8, respectively.
All information contained in this Prospectus/Information Statement relating
to Holdco, World Access, NACT Merger Sub and WAXS Merger Sub has been supplied
by World Access. All information contained in this Prospectus/Information
Statement relating to NACT has been supplied by NACT.
This Prospectus/Information Statement is first being mailed to stockholders
of NACT on or about October 7, 1998.
---------------------
STOCKHOLDERS OF NACT ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED NOT
TO SEND NACT A PROXY.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY NACT STOCKHOLDERS.
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS/INFORMATION STATEMENT
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus/Information Statement is October 7, 1998.
<PAGE> 5
AVAILABLE INFORMATION
World Access and NACT are each subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information filed with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained at prescribed rates by writing to the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, World
Access and NACT are each required to file electronic versions of such material
with the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") system. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Electronic
filings are publicly available on the Commission's World Wide Web site within 24
hours of acceptance. The address of such site is http://www.sec.gov. Please call
the Commission at 1-800-SEC-0330 for further information. The World Access
Common Stock and the NACT Common Stock are each listed on Nasdaq. Reports, proxy
and information statements and other information filed by World Access and NACT
with Nasdaq may also be inspected at the offices of the National Association
Securities Dealers, Inc., Market Listing Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
Holdco has filed with the Commission a registration statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities to be issued by Holdco to holders of NACT Common
Stock and World Access Common Stock. This Prospectus/Information Statement does
not contain all the information set forth in the Registration Statement, certain
portions of which have been omitted pursuant to the rules and regulations of the
Commission and to which portions reference is hereby made. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Prospectus/Information Statement
as to the contents of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Certain financial information relating to Telco Systems, Inc. ("Telco"),
which has been obtained from certain periodic reports filed by Telco with the
Commission pursuant to the applicable requirements of the Exchange Act, is
included herein by World Access to comply with certain accounting rules and
financial information requirements promulgated by the Commission. Although World
Access has entered into a definitive agreement with Telco, among certain
parties, pursuant to which a wholly owned subsidiary of World Access will merge
with and into Telco and World Access, upon such merger, will control Telco,
World Access does not presently control Telco.
Certain financial information relating to Cherry Communications, Inc.
(d/b/a Resurgens Communications Group) ("RCG") and Cherry Communications Limited
U.K. ("Cherry U.K." and, together with RCG, "Resurgens") has been obtained from
Resurgens and is included herein by World Access to comply with certain
accounting rules and financial information requirements promulgated by the
Commission. Although World Access has entered into definitive agreements to
acquire Resurgens pursuant to which each of RCG and Cherry U.K. will become a
wholly-owned subsidiary of World Access, World Access does not presently control
Resurgens.
ii
<PAGE> 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by World Access with the
Commission are incorporated by reference in this Prospectus/Information
Statement and are attached hereto as Appendices:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended by Amendment No. 1 thereto on Form 10-K/A filed on April
27, 1998 (File Number 0-19998);
2. Current Report on Form 8-K filed on February 13, 1998, as amended
by Amendment No. 1 thereto on Form 8-K/A filed on April 14, 1998, as
further amended by Amendment No. 2 thereto on Form 8-K/A filed on September
3, 1998 (relating to the acquisition of Advanced TechCom, Inc.);
3. Current Report on Form 8-K filed on February 20, 1998, as amended
by Amendment No. 1 thereto on Form 8-K/A filed on February 25, 1998
(relating to the acquisition of a majority stake in NACT);
4. Current Report on Form 8-K filed on February 20, 1998 (relating to
the execution of a letter of intent with Resurgens);
5. Current Report on Form 8-K filed on March 13, 1998 (relating to the
consummation of the acquisition of a majority interest in NACT);
6. Current Report on Form 8-K filed on April 23, 1998, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on April 24, 1998 (relating to
the resignation of one of World Access' directors);
7. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
as amended by Amendment No. 1 thereto on Form 10-Q/A filed on September 2,
1998;
8. Current Report on Form 8-K filed on May 18, 1998 (relating to the
execution of definitive agreements to acquire RCG and Cherry U.K.);
9. Current Report on Form 8-K filed on June 8, 1998 (relating to the
execution of a definitive agreement to acquire Telco);
10. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
11. Current Report on Form 8-K filed on July 20, 1998, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on September 4, 1998, as
further amended by Amendment No. 2 thereto on Form 8-K/A filed on September
25, 1998 (relating to the audited financial statements of RCG and Cherry
U.K.);
12. Current Report on Form 8-K filed on September 9, 1998, as amended
by Amendment No. 1 thereto on Form 8-K/A filed on September 25, 1998
(relating to the audited financial statements of Telco); and
13. The description of the World Access Common Stock in World Access'
Registration Statement on Form 8-A filed March 27, 1992.
---------------------
THIS PROSPECTUS/INFORMATION STATEMENT INCORPORATES BY REFERENCE DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (WITHOUT
EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE WITHOUT CHARGE UPON REQUEST. REQUESTS FOR WORLD ACCESS DOCUMENTS
SHOULD BE DIRECTED TO WORLD ACCESS, INC., 945 E. PACES FERRY ROAD, SUITE 2240,
ATLANTA, GEORGIA 30326 (TELEPHONE (404) 231-2025), ATTENTION: CHIEF FINANCIAL
OFFICER. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE NACT
SPECIAL MEETING, ANY REQUEST SHOULD BE MADE PRIOR TO OCTOBER 23, 1998.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS/INFORMATION STATEMENT IN CONNECTION WITH THE OFFERING AND THE
SOLICITATIONS MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
iii
<PAGE> 7
SENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY WORLD ACCESS,
NACT MERGER SUB, NACT, WAXS MERGER SUB OR HOLDCO. THIS PROSPECTUS/ INFORMATION
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM,
IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS/INFORMATION STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS
NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF ANY
OF WORLD ACCESS OR NACT SINCE THE DATE HEREOF.
---------------------
TRADEMARKS
This Prospectus/Information Statement contains trademarks of World Access
and NACT, as well as trademarks of other companies.
iv
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION....................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iii
TRADEMARKS.................................................. iv
TABLE OF CONTENTS........................................... v
SUMMARY..................................................... 1
The Companies............................................. 1
World Access' Interest in NACT............................ 2
The NACT Special Meeting.................................. 2
Recommendation of NACT's Board of Directors............... 3
Opinion of NACT's Financial Advisor....................... 3
The NACT Transaction...................................... 3
Recent World Access Developments.......................... 5
MARKETS AND MARKET PRICES................................... 7
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..... 9
World Access Selected Historical Financial Information.... 9
NACT Selected Historical Financial Information............ 11
Holdco Selected Pro Forma Financial Information........... 13
COMPARATIVE PER SHARE DATA.................................. 14
RISK FACTORS................................................ 16
THE NACT SPECIAL MEETING.................................... 22
THE NACT TRANSACTION........................................ 24
Purpose and Effects of the NACT Transaction............... 24
Background of the Mergers................................. 24
World Access' Reasons for the NACT Merger; Recommendation
of World Access' Board of Directors.................... 25
NACT's Reasons for the NACT Merger; Recommendation of
NACT's Board of Directors.............................. 26
Opinion of NACT's Financial Advisor....................... 27
Federal Income Tax Consequences........................... 31
Limitations on Resales by Affiliates...................... 33
Effect of NACT Transaction on Certain Outstanding World
Access Convertible Securities.......................... 33
Accounting Treatment...................................... 33
Interests of Certain Persons in the NACT Merger........... 33
Nasdaq Listing............................................ 34
Appraisal or Dissenters' Rights........................... 34
Exchange of Shares........................................ 34
THE NACT MERGER AGREEMENT................................... 36
The Mergers............................................... 36
Conversion of World Access Common Stock................... 36
Conversion of NACT Common Stock........................... 36
Treatment of Options and Warrants......................... 37
Representations and Warranties............................ 37
Certain Covenants......................................... 37
Termination of the NACT Merger Agreement.................. 38
Effects of Termination.................................... 38
BUSINESS OF HOLDCO.......................................... 39
</TABLE>
v
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT OF HOLDCO........................................ 39
Board of Directors........................................ 39
Compensation of Directors................................. 40
Executive Officers........................................ 40
Compensation of Executive Officers........................ 41
Proposed Changes to Management of Holdco.................. 41
PRINCIPAL STOCKHOLDERS...................................... 42
BUSINESS OF WORLD ACCESS.................................... 44
BUSINESS OF NACT............................................ 46
Industry Background....................................... 46
The NACT Solution......................................... 47
Products.................................................. 48
Services.................................................. 50
Customers................................................. 50
Sales and Marketing....................................... 51
Technical Support......................................... 51
Research and Development.................................. 52
Manufacturing and Quality Assurance....................... 53
Competition............................................... 53
Intellectual Property and Other Proprietary Rights........ 54
Employees................................................. 54
Properties................................................ 54
Certain Legal Proceedings................................. 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 56
Overview.................................................. 56
Fiscal 1997 Compared to Fiscal 1996....................... 57
Fiscal 1996 Compared to Fiscal 1995....................... 58
Three Months Ended December 31, 1997 Compared to Three
Months Ended December 31, 1996......................... 59
Six Months Ended June 30, 1998 and 1997................... 61
Liquidity and Capital Resources........................... 63
Year 2000 Compliance...................................... 63
OTHER INFORMATION REGARDING NACT............................ 64
Security Ownership of Certain Beneficial Owners and
Management of NACT..................................... 65
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................ 66
DESCRIPTION OF HOLDCO CAPITAL STOCK......................... 94
General................................................... 94
Holdco Common Stock....................................... 94
Preferred Stock........................................... 94
Delaware Business Combination Statute..................... 94
Liability of Directors.................................... 95
Transfer Agent............................................ 95
COMPARISON OF RIGHTS OF STOCKHOLDERS OF WORLD ACCESS AND
HOLDCO.................................................... 95
COMPARISON OF RIGHTS OF STOCKHOLDERS OF NACT AND HOLDCO..... 95
Classes and Series of Capital Stock....................... 96
Board of Directors........................................ 96
Amendment to Certificate of Incorporation and Bylaws...... 96
EXPERTS..................................................... 97
LEGAL MATTERS............................................... 97
INDEX TO NACT FINANCIAL STATEMENTS.......................... F-1
</TABLE>
vi
<PAGE> 10
<TABLE>
<S> <C>
APPENDIXES
APPENDIX A: Agreement and Plan of Merger and Reorganization
APPENDIX A-1: First Amendment to Agreement and Plan of Merger and
Reorganization
APPENDIX A-2: Second Amendment to Agreement and Plan of Merger and
Reorganization
APPENDIX B: Opinion of NationsBanc Montgomery Securities LLC Regarding
the Nact Merger
APPENDIX C: World Access, Inc. Annual Report on Form 10-K for the Year
Ended December 31, 1997, as Amended by Amendment No. 1
thereto on Form 10-K/A Filed on April 27,1998
APPENDIX D: World Access, Inc. Current Report on Form 8-K Filed on
February 13, 1998, as Amended by Amendment No. 1 thereto on
Form 8-K/A Filed on April 14, 1998, as further amended by
Amendment No. 2 thereto on Form 8-K/A filed on September 3,
1998
APPENDIX E: World Access, Inc. Current Report on Form 8-K Filed on
February 20, 1998, as Amended by Amendment No. 1 thereto on
Form 8-K/A Filed on February 25, 1998
APPENDIX F: World Access, Inc. Current Report on Form 8-K Filed on
February 20, 1998
APPENDIX G: World Access, Inc. Current Report on Form 8-K Filed on March
13, 1998
APPENDIX H: World Access, Inc. Current Report on Form 8-K Filed on April
23, 1998, as Amended by Amendment No. 1 thereto on Form
8-K/A Filed on April 24, 1998
APPENDIX I: World Access, Inc. Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1998, as amended by Amendment No. 1
thereto on Form 10-Q/A filed on September 2, 1998
APPENDIX J: World Access, Inc. Current Report on Form 8-K Filed on May
18, 1998
APPENDIX K: World Access, Inc. Current Report on Form 8-K Filed on June
8, 1998
APPENDIX L: World Access, Inc. Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998
APPENDIX M: World Access, Inc. Current Report on Form 8-K Filed on July
20, 1998, as amended by Amendment No. 1 thereto on Form
8-K/A filed on September 4, 1998, as further amended by
Amendment No. 2 thereto on Form 8-K/A filed on September 25,
1998
APPENDIX N: World Access, Inc. Current Report on Form 8-K Filed on
September 9, 1998, as amended by Amendment No. 1 thereto on
Form 8-K/A filed on September 25, 1998
APPENDIX O: World Access, Inc. Registration Statement on Form 8-A
</TABLE>
vii
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Information Statement. This summary is not, and is not intended
to be, a complete description of the matters covered in this
Prospectus/Information Statement and is subject to and qualified in its entirety
by reference to the more detailed information contained elsewhere in this
Prospectus/Information Statement, including the appendices hereto and the
documents incorporated herein by reference. Stockholders of NACT are urged to
read carefully the entire Prospectus/Information Statement, including the
appendices hereto and the documents incorporated by reference herein.
Other than statements of historical fact, statements contained in this
Prospectus/Information Statement, including statements as to the benefits
expected to be realized as a result of the NACT Merger and the World Access
Merger and as to future financial performance, and the analyses performed by the
financial advisors to NACT, constitute forward-looking statements. Holders of
NACT Common Stock and World Access Common Stock are cautioned not to place undue
reliance on the forward-looking statements contained in this
Prospectus/Information Statement, which speak only as of the date hereof.
Neither World Access nor NACT undertakes any obligation to publicly release the
results of any revisions to such forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. There are a number of important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements. Such factors include those set forth in this
Prospectus/Information Statement under "Risk Factors."
THE COMPANIES
World Access, Inc. World Access develops, manufactures and markets
wireline and wireless switching, transport and access products for the global
telecommunications markets. World Access' products allow telecommunications
service providers to build and upgrade their central office and outside plant
networks in order to provide a wide array of voice, data and video services to
their business and residential customers. World Access offers digital switches,
billing and network telemanagement systems, cellular base stations, fixed
wireless local loop systems, intelligent multiplexers, microwave and
millimeterwave radio systems and other telecommunications network products. The
products offered by World Access include those manufactured by World Access, as
well as those manufactured by other telecommunications equipment companies. To
support and complement its product sales, World Access also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services.
The principal executive offices of World Access are located at 945 E. Paces
Ferry Road, Suite 2240, Atlanta, Georgia 30326, and its telephone number at that
location is (404) 231-2025. As used in this Prospectus/Information Statement,
the term "World Access" refers to World Access, Inc. and its direct and indirect
subsidiaries, unless the context otherwise requires.
NACT Telecommunications, Inc. NACT provides advanced telecommunication
switching platforms with integrated applications software and network
telemanagement capabilities. NACT designs, develops and manufactures all
hardware and software elements necessary for a complete fully integrated,
turnkey telecommunications switching solution. Its customers do not require the
multiple suppliers of hardware and value added resellers of software that would
otherwise be necessary to provide a wide range of services and applications.
NACT's customers include national and international long distance carriers,
prepaid debit card and prepaid cellular network operators, international call
back/reorigination providers and other specialty telecommunications service
providers.
The principal executive offices of NACT are located at 191 West 5200 North,
Provo, Utah 84604, and its telephone number at that location is (801) 802-3000.
As used in this Prospectus/Information Statement, the term "NACT" refers to NACT
Telecommunications, Inc. and its subsidiaries, unless the context otherwise
requires.
WAXS INC. Holdco is currently a wholly-owned subsidiary of World Access
that does not conduct any substantial business activities. As a result of the
NACT Transaction, World Access and NACT will each
1
<PAGE> 12
become a wholly-owned subsidiary of Holdco. Accordingly, after consummation of
the Mergers, the business of Holdco will be the business currently conducted by
World Access and NACT.
The principal executive offices of Holdco are located at 945 E. Paces Ferry
Road, Suite 2240, Atlanta, Georgia 30326, and its telephone number at that
location is (404) 231-2025.
WORLD ACCESS' INTEREST IN NACT
On December 31, 1997, World Access entered into a Stock Purchase Agreement
(the "NACT Stock Purchase Agreement") with GST Telecommunications, Inc., a
federally chartered Canadian corporation ("GST"), and GST USA, Inc., a Delaware
corporation and a wholly-owned subsidiary of GST ("GST USA"), pursuant to which
World Access agreed to purchase (the "NACT Stock Purchase") from GST USA
5,113,712 shares of NACT Common Stock held by GST USA, representing
approximately 63.7% of the outstanding shares of NACT Common Stock for $17.50
per share payable in a combination of cash and shares of World Access Common
Stock. The NACT Stock Purchase was consummated on February 27, 1998 pursuant to
which World Access paid to GST USA cash in the amount of $59,662,956 and
delivered to GST USA 1,429,907 shares of World Access Common Stock.
Pursuant to the NACT Stock Purchase Agreement, W. Gordon Blankstein,
Stephen Irwin, Robert L. Olson and Clifford V. Sander resigned as directors of
NACT effective upon consummation of the NACT Stock Purchase, and Steven A. Odom
and Hensley E. West, who are directors and executive officers of World Access,
and Mark A. Gergel and Scott N. Madigan, who are executive officers of World
Access, were appointed as directors of NACT to fill the vacancies created by the
resignations of Messrs. Blankstein, Irwin, Olson and Sander.
Prior to entering into the NACT Stock Purchase Agreement, World Access
acquired 355,000 shares of NACT Common Stock in open-market transactions from
November 12, 1997 to December 9, 1997, as a result of which World Access
currently owns directly approximately 67.2% of the outstanding shares of NACT
Common Stock.
THE NACT SPECIAL MEETING
Date and Place of the Meeting. The special meeting of stockholders of NACT
(the "NACT Special Meeting") will be held at NACT's principal offices located at
191 West 5200 North, Provo, Utah 84604, on October 28, 1998, at 10:00 a.m.,
local time.
Stockholders Entitled to Vote. The record date for determination of
holders of NACT Common Stock entitled to vote at the NACT Special Meeting is
September 22, 1998 (the "NACT Record Date"). As of the close of business on the
NACT Record Date, 8,133,830 shares of NACT Common Stock were outstanding, held
by approximately 16 holders of record. Only holders of record of NACT Common
Stock as of the close of business on the NACT Record Date are entitled to notice
of and to vote at the NACT Special Meeting and any adjournments or postponements
thereof.
Purpose of the Meeting. The purpose of the NACT Special Meeting is (i) to
consider and vote upon the NACT Merger Proposal and (ii) to transact such other
business as may properly come before the NACT Special Meeting or any
adjournments or postponements thereof.
Vote Required. The approval of the NACT Merger Agreement and the NACT
Merger will require the affirmative vote of a majority of the outstanding shares
of NACT Common Stock. See "The NACT Special Meeting -- Voting; Vote Required."
Shares of NACT Common Stock that are voted "FOR," "AGAINST" or "WITHHELD"
at the NACT Special Meeting will be treated as being present at such meeting for
purposes of establishing a quorum and will also be treated as votes eligible to
be cast by the NACT Common Stock present in person at the NACT Special Meeting
and entitled to vote on the subject matter. Abstentions will be counted for
purposes of determining both the presence or absence of a quorum for the
transaction of business and the total number of votes cast with respect to a
particular matter. Broker non-votes will be counted for purposes of determining
the
2
<PAGE> 13
presence or absence of a quorum for the transaction of business but will not be
counted for purposes of determining the number of votes cast with respect to the
particular proposal on which the broker has expressly not voted. Abstentions and
broker non-votes will have the same effect as a vote against the approval of the
NACT Merger Agreement and the NACT Merger, which approval will require the
affirmative vote of a majority of the outstanding shares of NACT Common Stock.
Security Ownership by Certain Beneficial Owners and Management. As of the
close of business on the NACT Record Date, directors and executive officers of
NACT and their respective affiliates may be deemed to be the beneficial owners
of shares of NACT Common Stock representing approximately 67.2% of the
outstanding voting power of NACT. Each of the directors and executive officers
of NACT has indicated that such person intends to vote or direct the vote of all
the shares of NACT Common Stock over which such person has voting control in
favor of the NACT Merger Agreement and the NACT Merger. In addition, World
Access currently owns 5,468,712 shares of NACT Common Stock, representing
approximately 67.2% of the outstanding shares of NACT Common Stock. AS A RESULT,
WORLD ACCESS HAS THE RIGHT TO VOTE SUFFICIENT SHARES TO APPROVE THE NACT MERGER
AGREEMENT AND THE NACT MERGER AT THE NACT SPECIAL MEETING WITHOUT THE
AFFIRMATIVE VOTE OF ANY OTHER NACT STOCKHOLDER, THEREBY ASSURING THE APPROVAL OF
THE NACT MERGER AGREEMENT AND THE NACT MERGER.
STOCKHOLDERS OF NACT ARE NOT BEING ASKED FOR A PROXY AND ARE REQUESTED NOT
TO SEND A PROXY.
RECOMMENDATION OF NACT'S BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF NACT HAS UNANIMOUSLY APPROVED AND ADOPTED THE
NACT MERGER AGREEMENT AND APPROVED THE NACT MERGER AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF NACT VOTE FOR THE APPROVAL AND ADOPTION OF THE NACT
MERGER AGREEMENT AND APPROVAL OF THE NACT MERGER. See "The NACT
Transaction -- NACT's Reasons for the NACT Merger; Recommendation of NACT's
Board of Directors."
OPINION OF NACT'S FINANCIAL ADVISOR
In making its recommendation with respect to the NACT Merger, the board of
directors of NACT considered, among other things, the written opinion, dated as
of February 24, 1998, of NationsBanc Montgomery Securities LLC ("NationsBanc
Montgomery"), NACT's financial advisor, to the effect that, as of such date and
based upon and subject to the assumptions, limitations and qualifications set
forth in such opinion, the NACT Exchange Ratio was fair, from a financial point
of view, to the holders of NACT Common Stock. A copy of such opinion is attached
to this Prospectus/Information Statement as Appendix B. NationsBanc Montgomery's
opinion, which sets forth the assumptions made, procedures followed and matters
considered by NationsBanc Montgomery, as well as the scope of NationsBanc
Montgomery's review, should be read carefully in its entirety. See "The NACT
Merger -- Opinion of NACT's Financial Advisor."
THE NACT TRANSACTION
Purpose of the NACT Transaction. The purpose of the NACT Transaction is to
combine World Access and NACT.
Effect of the NACT Transaction Upon World Access. Upon consummation of the
Mergers, (i) WAXS Merger Sub will be merged into World Access, and (ii) each
outstanding share of World Access Common Stock, other than shares held directly
or indirectly by World Access, will be converted into one share of Holdco Common
Stock and, upon such conversion, will be canceled and retired and will cease to
exist. As a result of the NACT Transaction, World Access will become a wholly
owned subsidiary of Holdco.
Effect of the NACT Transaction Upon NACT. Upon consummation of the
Mergers, (i) NACT Merger Sub will be merged into NACT, (ii) each outstanding
share of NACT Common Stock, other than shares held directly or indirectly by
World Access or Holdco or in the treasury of NACT, will be converted into the
right to receive shares of Holdco Common Stock based upon the NACT Exchange
Ratio and, upon such
3
<PAGE> 14
conversion, will be canceled and retired and will cease to exist, (iii) all
shares of NACT Common Stock held directly or indirectly by World Access or
Holdco will remain outstanding and unaffected by the NACT Merger, and (iv) each
of the issued and outstanding shares of the capital stock of NACT Merger Sub
will be converted into one share of NACT Common Stock. As a result of the NACT
Transaction, NACT will become a wholly owned subsidiary of Holdco. Because the
value of the shares of Holdco Common Stock that holders of NACT Common Stock
will receive in the NACT Merger is fixed, subject to adjustment under certain
circumstances as described herein, and because the market price of World Access
Common Stock is subject to fluctuation, the number of shares of Holdco Common
Stock that holders of NACT Common Stock will receive in the NACT Merger may
increase or decrease prior to the NACT Effective Time (as hereinafter defined).
Holders of NACT Common Stock are advised to obtain current market quotations for
World Access Common Stock.
The following table sets forth the number of shares of Holdco Common Stock
into which each share of NACT Common Stock would be converted upon consummation
of the NACT Merger at each of the hypothetical World Access Average Closing
Prices set forth below.
<TABLE>
<CAPTION>
SHARES OF HOLDCO
COMMON STOCK PER
WORLD ACCESS SHARE OF NACT
AVERAGE CLOSING PRICE COMMON STOCK
- --------------------- -------------------
<S> <C>
$20.88................................................. .8381*
21.00................................................. .8333
22.00................................................. .7955
23.00................................................. .7609
24.00................................................. .7292
25.00................................................. .7000
25.52................................................. .6857**
</TABLE>
- ---------------
* If the World Access Average Closing Price is below $20.88 per share, then
World Access may terminate the NACT Merger Agreement. If World Access does
not elect to so terminate the NACT Merger Agreement, then the NACT Exchange
Ratio will be equal to the quotient of (x) $17.50 divided by (y) the World
Access Average Closing Price.
** If the World Access Average Closing Price is above $25.51 per share, then the
number of shares of Holdco Common Stock into which each share of NACT Common
Stock would be converted upon consummation of the NACT Merger would be fixed
at .6857.
Treatment of Options. Upon consummation of the Mergers, each
then-outstanding option to purchase shares of NACT Common Stock will be assumed
by Holdco and converted into an option to purchase shares of Holdco Common
Stock. Following the consummation of the NACT Merger, each such option will
continue to have, and will be subject to, the same terms and conditions as in
effect immediately prior to the consummation of the NACT Merger, except that
each such option will be exercisable for that number of shares of Holdco Common
Stock equal to the product of the number of shares of NACT Common Stock for
which such option was exercisable immediately prior to the consummation of the
NACT Merger multiplied by the NACT Exchange Ratio, and the exercise price per
share subject to such option will be equal to the aggregate exercise price of
such option immediately prior to the consummation of the NACT Merger divided by
the number of shares of Holdco Common Stock for which such option will be
exercisable immediately after the consummation of the NACT Merger. There were no
options to purchase NACT Common Stock outstanding as of October 5, 1998.
In addition, upon consummation of the World Access Merger, each option to
purchase shares of World Access Common Stock will be assumed by Holdco and
converted into an option to purchase shares of Holdco Common Stock on the same
terms and conditions as in effect immediately prior to the consummation of the
World Access Merger. See "The NACT Merger Agreement -- Treatment of Options and
Warrants."
Treatment of Convertible Debt and Warrants. Upon consummation of the World
Access Merger, Holdco will irrevocably and unconditionally guarantee all of
World Access' obligations with respect to the
4
<PAGE> 15
4.5% Convertible Subordinated Notes due 2002 of World Access currently
outstanding (the "World Access Notes") and the World Access Notes thereupon will
become convertible into shares of Holdco Common Stock at the rate of one share
of Holdco Common Stock for each share of World Access Common Stock into which
they were convertible immediately prior to the consummation of the World Access
Merger. See "The NACT Transaction -- Effect of NACT Transaction on Certain
Outstanding World Access Convertible Securities."
Upon consummation of the World Access Merger, each warrant to purchase
World Access Common Stock will become exercisable for Holdco Common Stock at the
same rate, for the same price and on the same terms as in effect immediately
prior to the consummation of the World Access Merger. See "The NACT Merger
Agreement -- Treatment of Options and Warrants."
Interests of Certain Persons. In considering the recommendations of the
NACT board of directors with respect to the NACT Merger, NACT stockholders
should be aware that certain directors and executive officers of NACT have
interests in the NACT Merger that may be in addition to the interests of other
holders of NACT Common Stock. See "The NACT Transaction -- Interests of Certain
Persons in the NACT Transaction."
Appraisal and Dissenters' Rights. Holders of NACT Common Stock are not
entitled to appraisal or dissenters' rights in connection with the NACT Merger.
See "The NACT Transaction -- Appraisal and Dissenters' Rights."
Federal Income Tax Consequences. It is a condition to the consummation of
the NACT Merger that NACT receive an opinion from Van Cott, Bagley, Cornwall &
McCarthy, counsel to NACT, reaffirming, as of the date of consummation of the
Mergers, the opinion described in this Prospectus/Information Statement to the
effect that the NACT Merger will be treated for U.S. Federal income tax purposes
as a transfer of property governed by Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, except as described below and
subject to the qualifications set forth under "The NACT Transaction -- Federal
Income Tax Consequences -- NACT Merger," it is the opinion of Van Cott, Bagley,
Cornwall & McCarthy that no gain or loss will be recognized pursuant to the NACT
Merger by (i) Holdco, (ii) NACT or (iii) a holder of NACT Common Stock whose
shares of NACT Common Stock are converted into the right to receive shares of
Holdco Common Stock. Notwithstanding the foregoing, a holder of NACT Common
Stock may recognize gain or loss by reason of cash received in lieu of
fractional shares or upon the proper exercise of dissenters' rights. See "The
NACT Transaction -- Federal Income Tax Consequences -- NACT Merger."
Accounting Treatment. The NACT Transaction will be accounted for by Holdco
under the purchase method of accounting for business combinations. See "The NACT
Transaction -- Accounting Treatment."
RECENT WORLD ACCESS DEVELOPMENTS
Resurgens Transaction. On May 12, 1998, World Access announced that it had
entered into (i) an Agreement and Plan of Merger and Reorganization (the
"Resurgens Merger Agreement") with Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("RCG"), which is currently operating as a
debtor in possession under Chapter 11 of the Bankruptcy Code, pursuant to which
Holdco has agreed to acquire RCG in a merger transaction (the "RCG Merger"); and
(ii) a Share Exchange Agreement and Plan of Reorganization (the "Exchange
Agreement") with the sole shareholder (the "Shareholder") of Cherry
Communications U.K. Limited ("Cherry U.K.") pursuant to which Holdco has agreed
to acquire Cherry U.K. in a share exchange transaction (the "Exchange"). RCG and
Cherry U.K. are sometimes collectively referred to herein as "Resurgens."
In connection with the RCG Merger, the creditors of RCG will receive an
aggregate of 9,375,000 shares of Holdco Common Stock. Of the shares of Holdco
Common Stock to be issued to the RCG creditors, two-thirds will be held in
escrow and will be released to the RCG creditors over the two and one-half years
following the consummation of the RCG Merger subject to the attainment of
certain performance criteria for the combined business of World Access and
Resurgens.
5
<PAGE> 16
In connection with the Exchange, the Shareholder will receive an aggregate
of 1,875,000 shares of Holdco Common Stock, of which one-third will be issued to
the Shareholder at closing and the remaining two-thirds will be issued and held
in escrow and will be released to the Shareholder over the two and one-half year
period following the consummation of the Exchange subject to the attainment of
certain performance criteria for the combined business of World Access and
Resurgens. The Exchange Agreement provides, however, that the number of shares
of Holdco Common Stock to be received by the Shareholder will be reduced to the
extent that Holdco is required to convert options to acquire shares of Cherry
U.K. capital stock, which options may only be granted with the permission of
Holdco, into options to acquire Holdco Common Stock.
Each of the RCG Merger and the Exchange is subject to the satisfaction of
certain conditions customary in similar transactions, including the approval of
the stockholders of Holdco and the consummation of the Holding Company
Reorganization. The consummation of the RCG Merger is a condition to the
consummation of the Exchange, and the Exchange is a condition to the
consummation of the RCG Merger. The RCG Merger and the Exchange are collectively
referred to herein as the "Resurgens Transaction."
Resurgens is a facilities-based provider of international network access,
commonly referred to in the industry as a carriers' carrier. Resurgens had
consolidated revenues of approximately $165.5 million for the year ended
December 31, 1997 and $10.4 million for the six months ended June 30, 1998 and
incurred a net loss of $171.7 million for the year ended December 31, 1997 and
$29.3 million for the six months ended June 30, 1998.
Holdco intends to submit the Resurgens Transaction to its stockholders for
approval promptly following the consummation of the NACT Transaction. Since the
NACT stockholders will not become stockholders of Holdco prior to the record
date for a meeting of Holdco's stockholders to consider the Resurgens
Transaction, the current NACT stockholders will not be entitled to vote upon the
Resurgens Transaction.
Upon the consummation of the Resurgens Transaction, the current NACT
stockholders will own approximately 5.1% of the outstanding shares of Holdco
Common Stock.
Telco Merger. On June 4, 1998, World Access announced that it had entered
into an Agreement and Plan of Merger and Reorganization (the "Telco Merger
Agreement") with Holdco, Tail Acquisition Corporation, a wholly-owned subsidiary
of Holdco ("Telco Merger Sub"), and Telco Systems, Inc. ("Telco") pursuant to
which, among other things, Telco Merger Sub has agreed to merge with and into
Telco (the "Telco Merger").
As a result of the Telco Merger, each outstanding share of Telco common
stock, $.01 par value per share ("Telco Common Stock"), will be converted into
the right to receive that number of shares of (i) World Access Common Stock or
(ii) if the NACT Transaction shall have been consummated on or before the time
of the Telco Merger, Holdco Common Stock (in either case, the "Telco Merger
Common Stock") equal to the quotient of $17.00 divided by the average daily
closing price of World Access Common Stock as reported on Nasdaq for each of the
twenty consecutive trading days ending on the second business day prior to the
date of the Telco Merger (the "Telco Average Closing Price"), provided that if
the Telco Average Closing Price is more than $36.00 per share, then each share
of Telco Common Stock will be converted into .4722 shares of Telco Merger Common
Stock and if the Telco Average Closing Price is less than $29.00 per share, then
each share of Telco Common Stock will be converted into .5862 shares of Telco
Merger Common Stock.
The consummation of the Telco Merger is subject to (i) the approval by the
respective stockholders of World Access (or Holdco, as the case may be) and
Telco, (ii) the approval by the stockholders of World Access or Holdco (as the
case may be) of an increase in the authorized shares of common stock of such
corporation, and (iii) the satisfaction or waiver of other customary conditions.
Telco is a manufacturer of broadband transmission products, network access
products and bandwidth optimization products for network services. It had net
sales of approximately $117.8 million for its fiscal year ended August 31, 1997
and $81.6 million for the nine months ended May 31, 1998 and incurred a net loss
of $1.1 million for the year ended August 31, 1997 and $2.9 million for the nine
months ended May 31, 1998.
6
<PAGE> 17
Holdco intends to submit the Telco Merger to its stockholders for approval
promptly following the consummation of the NACT Transaction. Since the NACT
stockholders will not become stockholders of Holdco prior to the record date for
a meeting of Holdco's stockholders to consider the Telco Merger, the current
NACT stockholders will not be entitled to vote upon the Telco Merger.
Upon the consummation of the Telco Merger, the current NACT stockholders
will own approximately 5.9% of the outstanding shares of Holdco Common Stock
(and 4.3% upon the consummation of both the Resurgens Transaction and the Telco
Merger).
MARKETS AND MARKET PRICES
The World Access Common Stock has been quoted on Nasdaq under the symbol
"WAXS" since June 25, 1996. From March 2, 1995 through June 24, 1996, the World
Access Common Stock was quoted on The Nasdaq SmallCap Market. The following
table shows the high and low sales prices for the World Access Common Stock as
reported by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1996
First Quarter............................................. $10 $ 7 1/2
Second Quarter............................................ 11 1/2 8
Third Quarter............................................. 10 1/8 7 1/2
Fourth Quarter............................................ 9 1/4 6 7/8
CALENDAR YEAR 1997
First Quarter............................................. 9 1/4 7 1/2
Second Quarter............................................ 23 7 5/8
Third Quarter............................................. 34 1/8 20
Fourth Quarter............................................ 33 3/4 17
CALENDAR YEAR 1998
First Quarter............................................. 33 1/2 22 1/2
Second Quarter............................................ 40 25 3/8
Third Quarter............................................. 30 1/2 19 1/8
Fourth Quarter (through October 5, 1998).................. 18 5/16 16 1/2
</TABLE>
World Access has not paid or declared any dividends on the World Access
Common Stock since its inception and anticipates that its future earnings will
be retained to finance the continuing development of its business. The payment
of any future dividends will be at the discretion of World Access' board of
directors and will depend upon, among other things, future earnings, the success
of World Access' business activities, regulatory and capital requirements, the
general financial condition of World Access and general business conditions.
World Access is restricted from paying dividends under its revolving credit
facility.
7
<PAGE> 18
The NACT Common Stock is quoted on Nasdaq under the under the symbol
"NACT." Prior to February 27, 1997, NACT Common Stock was not publicly traded.
The following table shows the high and low sales prices for the NACT Common
Stock as reported by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1997
First Quarter............................................. $ 9 1/2 $ 5 7/8
Second Quarter............................................ 10 3/8 4 3/4
Third Quarter............................................. 17 5/8 8 3/8
Fourth Quarter............................................ 17 3/4 9
CALENDAR YEAR 1998
First Quarter............................................. 22 3/4 15 1/4
Second Quarter............................................ 27 18
Third Quarter............................................. 21 1/2 14 1/4
Fourth Quarter (through October 5, 1998).................. 14 1/4 12 1/8
</TABLE>
The NACT Merger Agreement contemplates that Holdco Common Stock will be
quoted on Nasdaq. The payment of future dividends on Holdco Common Stock will be
a business decision to be made by the Holdco board of directors from time to
time based upon the results of operations and financial condition of Holdco and
such other factors as the Holdco board of directors considers relevant.
The following table sets forth the closing sale price per share of World
Access Common Stock and NACT Common Stock on Nasdaq on February 24, 1998, the
last full trading day prior to the public announcement of the execution of the
NACT Merger Agreement, and on October 5, 1998, the latest practicable trading
day prior to the printing of this Prospectus/Information Statement. The
following table also sets forth the equivalent market value of NACT Common Stock
as of each such date based on the NACT Exchange Ratio (assuming that the World
Access Average Closing Price is equal to the closing price per share of the
World Access Common Stock on Nasdaq on such dates).
<TABLE>
<CAPTION>
WORLD ACCESS NACT NACT
COMMON COMMON EQUIVALENT
DATE STOCK STOCK MARKET VALUE
- ---- ------------ ------- ------------
<S> <C> <C> <C>
February 24, 1998........................................... $23.875 $16.625 $17.50
October 5, 1998............................................. $ 16.50 $12.125 $17.50
</TABLE>
8
<PAGE> 19
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
WORLD ACCESS SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information of World Access set forth
below has been derived from and should be read in conjunction with the
consolidated financial statements and other financial information of World
Access contained in the World Access Annual Report on Form 10-K for the year
ended December 31, 1997, which is attached hereto as Appendix C and incorporated
herein by reference, and the World Access Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (the "World Access June 30 Form 10-Q"), which is
attached hereto as Appendix L and incorporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Sales of products.................................. $ 3,320 $ 2,776 $17,384 $34,411 $71,392 $ 34.914 $ 69,830
Service revenues................................... 12,441 12,507 12,754 16,589 21,593 9,353 13,408
------- ------- ------- ------- ------- -------- --------
Total sales...................................... 15,761 15,283 30,138 51,000 92,985 44,267 83,238
Cost of products sold.............................. 2,514 2,195 12,657 21,485 43,827 21,495 39,012
Cost of services................................... 10,642 11,112 11,118 14,520 17,018 8,089 12,189
------- ------- ------- ------- ------- -------- --------
Total cost of sales.............................. 13,156 13,307 23,775 36,005 60,845 29,584 51,201
------- ------- ------- ------- ------- -------- --------
Gross profit..................................... 2,605 1,976 6,363 14,995 32,140 14,683 32,037
Engineering and development........................ 503 581 577 892 1,862 745 2,582
Selling, general and administrative................ 2,949 2,658 3,125 6,211 9,000 4,352 7,936
Amortization of goodwill........................... 96 30 157 534 1,756 665 1,882
In-process research and development(2)............. -- -- -- -- -- -- 50,000
Special charges(3)................................. 725 -- 980 -- -- -- 3,240
------- ------- ------- ------- ------- -------- --------
Operating income (loss).......................... (1,668) (1,293) 1,524 7,358 19,522 8,921 (33,603)
Interest and other income.......................... 30 13 142 485 2,503 592 1,971
Interest and other expense......................... (422) (523) (494) (319) (1,355) (52) (3,031)
Other expense...................................... (60) (80) -- -- -- -- --
------- ------- ------- ------- ------- -------- --------
Income (loss) before income taxes and minority
interests...................................... (2,120) (1,883) 1,172 7,524 20,670 9,461 (34,663)
Income taxes(4).................................... -- -- -- 745 7,536 3,420 6,135
------- ------- ------- ------- ------- -------- --------
Income (loss) before minority interests.......... (2,120) (1,883) 1,172 6,779 13,134 6,041 (40,798)
Minority interests in earnings of subsidiary....... -- -- -- -- -- -- 1,533
------- ------- ------- ------- ------- -------- --------
Net income (loss)................................ $(2,120) $(1,883) $ 1,172 $ 6,779 $13,134 $ 6,041 $(42,331)
======= ======= ======= ======= ======= ======== ========
Net income (loss) per common share:
Basic............................................ $ (0.54) $ (0.41) $ 0.15 $ 0.52 $ 0.76 $ 0.37 $ (2.13)
======= ======= ======= ======= ======= ======== ========
Diluted.......................................... $ (0.54) $ (0.41) $ 0.12 $ 0.46 $ 0.70 $ 0.34 $ (2.13)
======= ======= ======= ======= ======= ======== ========
Weighted average shares outstanding(5):
Basic............................................ 3,765 4,631 7,859 13,044 17,242 16,478 19,895
======= ======= ======= ======= ======= ======== ========
Diluted.......................................... 3,765 4,631 9,083 14,530 18,708 17,918 19,895
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents(6)............................ $ 625 $ 753 $ 1,887 $22,480 $118,065 $21,595 $ 57,653
Working capital.................................... 1,783 2,267 10,222 37,961 153,750 39,002 112,465
Total assets....................................... 8,752 8,943 28,515 60,736 225,283 89,037 268,518
Short-term debt.................................... 83 212 5,385 -- 82 4,064 4,408
Long-term debt(6).................................. 5,388 4,328 3,750 -- 115,264 213 115,529
Stockholders' equity............................... 342 1,160 14,334 52,374 91,755 70,297 98,574
</TABLE>
9
<PAGE> 20
- ---------------
(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: 67.2% interest in NACT -- February 27,
1998; ATI -- January 29, 1998; Galaxy -- July 1, 1997; CIS -- January 1,
1997; Sunrise -- January 1, 1996; Westec -- October 2, 1995; and AIT -- May
17, 1995. On a pro forma unaudited basis, as if the acquisition of the 67.2%
interest in NACT and the acquisition of ATI had occurred as of January 1,
1997, World Access' total sales, net income and net income per diluted share
for the year ended December 31, 1997 and six months ended June 30, 1998
would have been approximately $136,517,000 and $86,399,000; $7,069,000 and
$6,428,000; and $0.34 and $0.29, respectively.
(2) Special charges in the first quarter of 1998 included $50.0 million for
in-process research and development related to the first quarter 1998
acquisitions of ATI and a 67.3% interest in NACT. See Note 2 to the
Consolidated Financial Statements in the World Access June 30 Form 10-Q. The
Company expects to record an additional in-process research and development
charge of approximately $22.0 million in the third quarter of 1998 in
connection with the acquisition of the remaining 32.8% of NACT.
(3) Special charges in the first six months of 1998 included $6.6 million for
costs related to the consolidation of several operations and the Company's
exit from the contract manufacturing business. The special charges included
$3,360,000 to cost of sales for obsolete and redundant inventories and
$3,240,000 for severance benefits, lease terminations, idle equipment and
other phase-down expenses related to the consolidation program. See Note 6
to the Consolidated Financial Statements in the World Access June 30 Form
10-Q. Special charges in 1995 resulted primarily from a write-down of test
equipment and related tooling used in World Access' analog repair
operations.
(4) World Access recorded no income tax expense during 1995 and 1996 due to net
losses realized and the availability of federal income tax net operating
loss carryforwards. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note K to the Consolidated
Financial Statements in the World Access Form 10-K.
(5) Weighted average shares outstanding exclude 1,204,000 and 995,000 shares of
World Access Common Stock for the six months ended June 30, 1998 and the
year ended December 31, 1997, respectively, that are held in escrow accounts
established in connection with certain acquisitions and a license agreement.
These shares were excluded because the conditions for release of such shares
had not yet been satisfied. See Notes A, B, and E to the Consolidated
Financial Statements in the World Access Form 10-K.
(6) In October 1997, World Access sold $115.0 million of convertible
subordinated notes. See Note G to the Consolidated Financial Statements in
the World Access Form 10-K.
10
<PAGE> 21
NACT SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information of NACT set forth below has
been derived from and should be read in conjunction with the consolidated
financial statements and other financial information of NACT contained elsewhere
herein.
<TABLE>
<CAPTION>
NINE THREE
MONTHS MONTHS SIX MONTHS ENDED
ENDED FISCAL YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
SEPT. 30, ------------------------------------ DEC. 31, -----------------
1993 1994 1995 1996 1997 1997(1) 1997 1998
--------- ------ ------- ------- ------- ----------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales........................... $2,422 $5,479 $ 7,604 $ 9,930 $21,982 $7,300 $10,812 $17,006
Network carrier sales................... -- -- 2,782 3,783 5,716 1,387 2,685 2,424
Wins sales.............................. -- -- 1,098 2,572 -- -- -- --
------ ------ ------- ------- ------- ------ ------- -------
Total revenues.......................... 2,422 5,479 11,484 16,285 27,698 8,687 13,497 19,430
Cost of goods sold:
Product................................. 788 1,845 2,645 3,942 7,141 2,158 3,229 5,141
Network carrier......................... -- -- 2,731 3,382 5,486 1,387 2,547 2,167
Wins sales.............................. -- -- 787 2,572 -- -- -- --
Amortization of acquired intangibles.... 15 185 443 362 362 170 181 340
------ ------ ------- ------- ------- ------ ------- -------
Total cost of goods sold................ 803 2,030 6,606 10,258 12,989 3,715 5,957 7,648
------ ------ ------- ------- ------- ------ ------- -------
Gross profit............................ 1,619 3,449 4,878 6,027 14,709 4,972 7,540 11,782
Operating expenses:
Research and development................ 275 677 1,183 1,352 2,385 799 1,356 1,495
Selling and marketing................... 178 457 925 954 2,505 767 1,391 1,740
General and administrative.............. 561 1,353 2,153 3,024 3,472 1,362 1,628 2,289
Amortization of acquired intangibles.... 20 257 520 573 573 143 286 286
------ ------ ------- ------- ------- ------ ------- -------
Total operating expenses................ 1,034 2,744 4,781 5,903 8,935 3,071 4,661 5,810
------ ------ ------- ------- ------- ------ ------- -------
Income from operations.................. 585 705 97 124 5,774 1,901 2,879 5,972
Other income, net......................... 31 81 189 148 517 223 274 401
------ ------ ------- ------- ------- ------ ------- -------
Income before income taxes.............. 616 786 286 272 6,291 2,124 3,153 6,373
Income taxes.............................. 157 293 206 78 2,476 850 1,261 2,549
------ ------ ------- ------- ------- ------ ------- -------
Net income.............................. $ 459 $ 493 $ 80 $ 194 $ 3,815 $1,274 $ 1,892 $ 3,824
====== ====== ======= ======= ======= ====== ======= =======
Net income per common share:
Basic..................................... $ 0.12 $ 0.08 $ 0.01 $ 0.03 $ 0.52 $ 0.16 $ 0.27 $ 0.47
====== ====== ======= ======= ======= ====== ======= =======
Diluted................................... $ 0.12 $ 0.08 $ 0.01 $ 0.03 $ 0.50 $ 0.15 $ 0.27 $ 0.46
------ ------ ------- ------- ------- ------ ------- -------
Weighted average shares outstanding:
Basic..................................... 3,847 5,998 6,114 6,114 7,602 8,122 6,923 8,130
====== ====== ======= ======= ======= ====== ======= =======
Diluted................................... 3,847 5,998 6,114 6,114 7,351 8,443 6,923 8,265
====== ====== ======= ======= ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT AT SEPTEMBER 30, AT AT JUNE 30,
SEPT. 30, ------------------------------------ DEC. 31, -----------------
1993 1994 1995 1996 1997 1997(1) 1997 1998
--------- ------ ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................................... $ 352 $1,186 $ 1,122 $ 694 $ 9,947 $5,252 $10,081 $11,264
Working capital............................... 3,131 3,280 4,145 4,245 21,189 23,195 22,509 25,965
Total assets.................................. 8,474 9,072 13,178 14,685 39,755 42,547 37,233 47,314
Long-term debt, net of current portion........ 387 -- 85 58 -- -- -- --
Total stockholders' equity.................... 6,094 6,969 9,630 10,210 33,004 34,436 31,931 38,280
</TABLE>
- ---------------
(1) NACT changed its year end from September 30 to December 31 effective January
1, 1998. Accordingly, selected financial data for the three month period
ended December 31, 1996 are provided for purposes of comparison to the three
month period ended December 31, 1997, presented above.
11
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
----------------
DEC. 31, 1996(1)
----------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.......................................... $4,780
Network carrier sales.................................. 1,610
------
Total revenues......................................... 6,390
Cost of goods sold:
Product................................................ 1,730
Network Carrier........................................ 1,558
Amortization of acquired intangibles................... 91
------
Total cost of goods sold............................... 3,379
------
Gross profit........................................... 3,011
Operating expenses:
Research and development............................... 423
Selling and marketing.................................. 357
General and administrative............................. 836
Amortization of acquired intangibles................... 143
------
Total operating expenses............................... 1,759
------
Income from operations................................. 1,252
Other income (net)........................................ 25
------
Income before income taxes............................. 1,277
Income taxes.............................................. 569
------
Net income............................................. $ 708
======
Net income per common share:
Basic..................................................... $ 0.12
======
Diluted................................................... $ 0.12
======
Weighted average shares outstanding:
Basic..................................................... 6,114
======
Diluted................................................... 6,114
======
</TABLE>
<TABLE>
<CAPTION>
AT
DEC. 31, 1996(1)
----------------
<S> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 552
Working capital........................................... 6,382
Total assets.............................................. 17,041
Long-term debt............................................ --
Total stockholders' equity................................ 11,416
</TABLE>
- ---------------
(1) NACT changed its year end from September 30 to December 31 effective January
1, 1998. Accordingly, selected financial data for the three month period
ended December 31, 1996 are provided for purposes of comparison to the three
month period ended December 31, 1997, presented above.
12
<PAGE> 23
HOLDCO SELECTED PRO FORMA FINANCIAL INFORMATION
The unaudited selected pro forma balance sheet data of Holdco as of June
30, 1998 set forth below give effect to the NACT Transaction and certain other
transactions that World Access has completed or which are pending, as if
consummated on such date. The unaudited selected pro forma statement of
operations data of Holdco for the year ended December 31, 1997 and the six
months ended June 30, 1998 set forth below give effect to the NACT Transaction
and certain transactions that World Access has completed or which are pending,
as if consummated at the beginning of 1997. The selected pro forma information
set forth below is qualified in its entirety by, and should be read in
conjunction with, the Unaudited Pro Forma Combined Financial Statements included
herein and the historical financial information of World Access, NACT, Resurgens
and Telco attached hereto or incorporated herein by reference.
The selected pro forma information is presented for informational purposes
only and is not necessarily indicative of the financial position or operating
results that would have occurred if the transactions given retroactive effect
therein had been consummated as of the dates indicated, nor is it necessarily
indicative of future financial conditions or operating results. See "Unaudited
Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Sales of products........................................... $ 222,444 $126,383
Service revenues............................................ 192,575 24,945
--------- --------
Total sales............................................... 415,019 151,328
Cost of products sold....................................... 144,910 77,052
Cost of services............................................ 270,498 40,437
--------- --------
Total cost of sales....................................... 415,408 117,489
--------- --------
Gross profit.............................................. (389) 33,839
Engineering and development................................. 23,833 11,136
Selling, general and administrative......................... 125,732 33,112
Amortization of goodwill.................................... 10,219 5,363
Special charges............................................. -- 3,240
--------- --------
Operating loss............................................ (160,173) (19,012)
Interest and other income................................... 4,635 2,298
Interest expense............................................ (18,283) (5,273)
--------- --------
Loss before income taxes.................................. (173,821) (21,987)
Income taxes................................................ -- --
--------- --------
Net loss.................................................. $(173,821) $(21,987)
========= ========
Net loss per common share(1):
Basic..................................................... $ (5.54) $ (0.67)
========= ========
Diluted................................................... $ (5.54) $ (0.67)
========= ========
Weighted average shares outstanding:
Basic..................................................... 31,380 32,724
========= ========
Diluted................................................... 31,380 32,724
========= ========
</TABLE>
- ---------------
(1) Represents basic and diluted earnings per share including shares of World
Access Common Stock issued in connection with the NACT Transaction and
certain transactions that World Access has completed or which are pending,
as if consummated at January 1, 1997, calculated in accordance with SFAS No.
128.
13
<PAGE> 24
<TABLE>
<CAPTION>
AT
JUNE 30, 1998
--------------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:
Current Assets
Cash and equivalents...................................... $ 63,891
Marketable securities..................................... 5,700
Accounts receivable....................................... 62,147
Inventories............................................... 53,182
Other current assets...................................... 20,859
---------
Total Current Assets.............................. 205,779
Property and equipment...................................... 83,912
Goodwill.................................................... 192,988
Acquired technology......................................... 60,800
Other assets................................................ 65,915
---------
Total Assets...................................... $ 609,394
=========
Current Liabilities
Short-term debt........................................... $ 7,950
Accounts payable.......................................... 47,175
Other accrued liabilities................................. 41,441
---------
Total Current Liabilities......................... 96,566
Long-term debt.............................................. 115,529
Noncurrent liabilities...................................... 58,205
---------
Total Liabilities................................. 270,300
---------
Stockholders' Equity
Common and preferred stock................................ 340
Capital in excess of par value............................ 469,485
Accumulated deficit....................................... (130,731)
---------
Total Stockholders' Equity........................ 339,094
---------
Total Liabilities and Stockholders' Equity........ $ 609,394
=========
</TABLE>
COMPARATIVE PER SHARE DATA
Set forth below are historical earnings per share and book value per share
data of (i) World Access; (ii) NACT; (iii) pro forma combined per share data of
Holdco; and (iv) equivalent pro forma common share data of NACT. No dividends
were paid by World Access or NACT during the periods presented below. The data
set forth below should be read in conjunction with the World Access and NACT
audited consolidated financial statements and unaudited interim consolidated
financial statements, including the notes thereto, which are attached hereto and
included elsewhere herein. The data should also be read in conjunction with the
unaudited pro forma consolidated condensed financial information included
elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
WORLD ACCESS -- HISTORICAL
Net income (loss) per share(a)
Basic.................................................. $0.76 $(2.13)
Diluted................................................ $0.70 $(2.13)
Book value per share(b)................................... $5.01 $ 4.77
</TABLE>
14
<PAGE> 25
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ --------------
<S> <C> <C>
NACT -- HISTORICAL
Net income per share(a)...................................
Basic.................................................. $0.52 $ 0.47
Diluted................................................ $0.50 $ 0.46
Book value per share(b)................................... $4.07 $ 4.71
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
HOLDCO -- PRO FORMA(C)
Net income (loss) per share...............................
Basic.................................................. $(5.54) $(0.67)
Diluted................................................ $(5.54) $(0.67)
Book value per share(d)................................... $ 9.95 $10.29
NACT PER COMMON SHARE EQUIVALENT -- PRO FORMA
Net loss per share(e).....................................
Basic.................................................. $(4.22) $(0.51)
Diluted................................................ $(4.22) $(0.51)
Book value per share(e)................................... $ 7.57 $ 7.83
</TABLE>
- ---------------
(a) Historical earnings per share data are presented in accordance with FAS No.
128.
(b) Calculated by dividing historical stockholders' equity by the number of
outstanding common shares. The outstanding common shares do not include
shares issuable upon exercise of stock options or conversion of outstanding
convertible securities.
(c) Gives effect to the Mergers, the Resurgens Transaction and the Telco Merger.
(d) Calculated by dividing pro forma stockholders' equity by the number of
outstanding shares of Holdco Common Stock expected to be outstanding as of
the consummation of the transaction, which number does not include shares
issuable upon the exercise of stock options or the conversion of outstanding
convertible securities.
(e) Calculated assuming that the World Access Average Closing Price equals
$23.00, which results in an NACT Exchange Ratio of .7609.
15
<PAGE> 26
RISK FACTORS
Holders of NACT Common Stock, in evaluating whether to approve the NACT
Merger and thereby become holders of Holdco Common Stock, should carefully
consider the following risk factors, in addition to the other information
included and incorporated by reference in this Prospectus/Information Statement.
Other than statements of historical fact, statements contained in this
Prospectus/Information Statement, including statements as to the benefits
expected to be realized as a result of the NACT Merger and the World Access
Merger and as to future financial performance, constitute forward-looking
statements. Holdco's actual results may differ significantly from the results
discussed in the forward-looking statements contained in this
Prospectus/Information Statement. Factors that might cause such a difference
include, but are not limited to, those discussed below. Holders of NACT Common
Stock are cautioned not to place undue reliance on the forward-looking
statements contained in this Prospectus/Information Statement, which speak only
as of the date hereof. Neither World Access nor NACT undertakes any obligation
to publicly release the results of any revisions to such forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ACQUISITION RISKS. An element of Holdco's strategy for the future is
expansion through the acquisition of companies that complement or expand its
existing businesses. As a result, Holdco will continue to evaluate potential
acquisition opportunities, some of which may be material in size or scope.
Acquisitions involve a number of special risks, including the time associated
with identifying and evaluating future acquisitions, the diversion of
management's attention to the integration of the operations and personnel of the
acquired companies, the integration of acquired products and services, possible
adverse short-term effects on Holdco's operating results, the realization of
acquired intangible assets and the loss of key employees of the acquired
companies. Holdco may issue equity securities and other forms of consideration
in connection with future acquisitions, which could cause dilution to Holdco's
then-existing stockholders. World Access does not currently have any commitments
or agreements with respect to any acquisitions other than the NACT Merger
Agreement, the RCG Merger Agreement, the Exchange Agreement and the Telco Merger
Agreement. See "Business of World Access." There can be no assurance that
suitable acquisition candidates will be found at prices acceptable to Holdco,
that Holdco will have adequate resources to consummate any acquisition, that
acquisitions can be consummated successfully, or that acquired businesses can be
operated profitably or integrated successfully into Holdco's operations.
INCREASED LEVERAGE. In connection with the sale of the World Access Notes,
World Access incurred approximately $115.0 million in additional indebtedness,
which increased the ratio of its long-term debt to its total capitalization from
0.3% at September 30, 1997 to 57.3% on a pro forma basis. The degree to which
World Access is leveraged could adversely affect its or Holdco's ability to
obtain additional financing for working capital, acquisitions or other purposes
and could make it more vulnerable to economic downturns and competitive
pressures. World Access' increased leverage could also adversely affect its or
Holdco's liquidity, as a substantial portion of available cash from operations
may have to be applied to meet debt service requirements and, in the event of a
cash shortfall, World Access or Holdco could be forced to reduce other
expenditures and forego potential acquisitions to be able to meet such
requirements.
HOLDING COMPANY RISKS. Holdco is expected to be a holding company. As a
holding company without significant income from operations, Holdco will be
dependent upon the income from its operating subsidiaries to meet its operating
expenses. If Holdco's operating subsidiaries are unable to pay dividends or
otherwise distribute amounts to Holdco sufficient to cover its operating
expenses, then Holdco may be subject to liquidity problems, even if, on a
consolidated basis, its operating subsidiaries are profitable.
MANAGEMENT OF GROWTH. World Access is currently experiencing a period of
rapid growth resulting from recent acquisitions and the expansion of its
operations, both of which have placed significant demands on its resources.
World Access' success in managing its growth will require it to continue to
improve its operational, financial and management information systems and to
motivate and effectively manage its employees. If World Access' or Holdco's
management is unable to manage such growth effectively, the quality of World
Access' or Holdco's products and services, its ability to retain key personnel
and its business, financial condition and results of operations could be
materially adversely affected.
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COMPETITION. The segments of the telecommunications industry in which
World Access and NACT operate are intensely competitive. Holdco's ability to
compete will be dependent upon several factors, including price, quality,
product features and timeliness of delivery. Many of World Access' and NACT's
competitors have significantly more extensive engineering, manufacturing,
marketing, financial and technical resources than World Access and NACT. In
addition, World Access currently competes with several of its major suppliers,
including Northern Telecom, with respect to the sale of certain of its products,
which may adversely affect its ability to continue to obtain such products from
these suppliers in the future.
World Access and NACT may face additional competition from the Regional
Bell Operating Companies ("RBOCs"), which have historically been prohibited from
manufacturing telecommunications equipment by the terms of the Modification of
Final Judgment entered into in connection with the divestiture of the RBOCs by
AT&T in 1984. The Telecommunications Act of 1996 contains provisions that permit
the RBOCs, subject to satisfying certain conditions designed to facilitate local
exchange competition, to manufacture telecommunications equipment. In light of
these provisions, it is possible that one or more of the RBOCs, some of which
are major customers of World Access, may decide to manufacture
telecommunications equipment or to form alliances with other manufacturers. Any
of these developments could result in increased competition for World Access and
NACT, which may have a material adverse effect on Holdco's business, financial
condition and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. World Access' and
NACT's quarterly operating results have varied significantly in the past and are
expected to do so in the future. As World Access and NACT increase the number of
telecommunications product offerings, their future quarterly operating results
may vary significantly depending on factors such as the timing and shipment of
significant orders, new product introductions by them and their competitors,
market acceptance of new and enhanced versions of World Access' and NACT's
products, changes in pricing policies by World Access and NACT and their
competitors, the availability of new technologies, the mix of distribution
channels through which World Access' and NACT's products are sold, the inability
to obtain sufficient supplies of sole or limited source components for World
Access' and NACT's products, gains or losses of significant customers, the
timing of customers' upgrade and expansion programs, changes in the level of
operating expenses, the timing of acquisitions, seasonality and general economic
conditions. In response to competitive pressures or new product introductions,
each of World Access and NACT may take certain pricing or marketing actions that
could materially and adversely affect their respective quarterly operating
results. Each of World Access' and NACT's expense levels are based, in part, on
their respective expectations as to future sales. If future sales levels are
below expectations, then World Access and NACT may be unable to adjust spending
sufficiently in a timely manner to compensate for the unexpected sales
shortfall. Accordingly, each of World Access and NACT believes that
period-to-period comparisons of its operating results should not be relied upon
as an indication of future performance. In addition, the operating results of
any quarterly period are not indicative of results to be expected for a full
fiscal year. In future quarters, Holdco's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Holdco Common Stock would likely be materially adversely affected.
COMPLIANCE WITH GOVERNMENT REGULATIONS AND EVOLVING INDUSTRY
STANDARDS. World Access' and NACT's products must meet a significant number of
voice and data communications regulations and standards, some of which are
evolving as new technologies are deployed. In the United States, these products
must comply with various regulations promulgated by the Federal Communications
Commission, as well as with standards established by Bell Communications
Research ("BellCore"). Internationally, these products must comply with
standards established by telecommunications authorities in various countries, as
well as with recommendations of the International Telecommunications Union. In
addition, telecommunications service providers require that equipment connected
to their networks comply with their own standards, which may vary from industry
standards. The failure of World Access' or NACT's products to comply, or delays
or costs in achieving compliance, with the various existing and evolving
regulations and industry standards could have a material adverse effect on
Holdco's business, financial condition and results of operations.
Holdco expects that government regulatory policies are likely to continue
to have a major impact on the pricing of both existing and new public network
services and, therefore, are expected to affect demand for such
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services and the telecommunications products that support such services. Tariff
rates, whether determined autonomously by telecommunications service providers
or in response to regulatory directives, may affect the cost effectiveness of
deploying public network services. Tariff policies are under continuous review
and are subject to change. User uncertainty regarding future policies may also
affect demand for telecommunications products, including World Access' and
NACT's products.
RAPID TECHNOLOGICAL DEVELOPMENT; NEW PRODUCTS; PRODUCT ERRORS. The market
for World Access' and NACT's products is generally characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions that can render existing products obsolete or unmarketable.
Holdco's success will depend to a substantial degree upon its ability to develop
and introduce in a timely fashion enhancements to its existing products and new
products that meet changing customer requirements and emerging industry
standards. The failure of Holdco to introduce new products and respond to
industry changes on a timely and cost effective basis could have a material
adverse affect on Holdco's business, financial condition and results of
operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and capital, as well as
the accurate anticipation of technological and market trends. Furthermore, the
introduction and marketing of new or enhanced products require World Access and
NACT to manage the transition from existing products in order to minimize
disruption in customer purchasing patterns. There can be no assurance that World
Access or NACT will be successful in developing and marketing, on a timely and
cost-effective basis, new products or product enhancements, that its new
products will adequately address the changing needs of the marketplace, or that
it will successfully manage the transition to new or enhanced products. There
also can be no assurance that World Access or NACT will be able to identify,
develop, manufacture or support new products successfully, that such new
products will gain market acceptance or that World Access or NACT will be able
to respond effectively to technological changes, emerging industry standards or
product announcements by competitors. In addition, World Access and NACT have on
occasion experienced delays in the introduction of product enhancements and new
products. There can be no assurance that in the future World Access and NACT
will be able to introduce product enhancements or new products on a timely and
cost effective basis. The rapid development of new technologies also increases
the risk that current or new competitors could develop products that would
reduce the competitiveness of World Access' or NACT's products. There can be no
assurance that products or technologies developed by others will not render
World Access' or NACT's products or technologies noncompetitive or obsolete.
Products as complex as those offered by World Access and NACT may contain
undetected errors or failures when first introduced or as new versions are
released, and such errors have occurred in these products in the past. There can
be no assurance that, despite testing by World Access and NACT and by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments. The occurrence of such errors could result
in the loss or delay in market acceptance of World Access' or NACT's products,
diversion of development resources, damage to World Access' and NACT's
reputation or increased service or warranty costs, any of which could have a
material adverse effect upon Holdco's business, financial condition and results
of operations.
Furthermore, from time to time, World Access and NACT may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycle of their existing product offerings. There can be no
assurance that announcements of product enhancements or new product offerings
will not cause customers to defer purchasing existing World Access or NACT
products or cause resellers to return products to World Access and NACT. Failure
to introduce new products or product enhancements effectively and on a timely
basis, customer delays in purchasing products in anticipation of new product
introductions and any inability of World Access or NACT to respond effectively
to technological changes, emerging industry standards or product announcements
by competitors could have a material adverse effect on Holdco's business,
operating results and financial condition.
DEPENDENCE ON SUPPLIERS. World Access and NACT purchase substantially all
of their components and other parts from suppliers on a purchase order basis and
do not maintain long-term supply arrangements. Most
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of the components used in World Access' and NACT's products and related services
are currently obtained from multiple sources. However, several components,
primarily custom hybrid integrated circuits, are available from a single source.
In addition, the operations of certain of World Access' subsidiaries depend on a
consistent supply of new or used switching products, add-on frames and related
circuit boards. Accordingly, there can be no assurance that World Access or NACT
will be able to continue to obtain sufficient quantities of products or key
components as required or that such products or key components, if obtained,
will be available to World Access and NACT on commercially favorable terms.
Failure to obtain products and key components on a timely and cost effective
basis could have a material adverse effect on Holdco's business, financial
condition and results of operations.
CUSTOMER CONCENTRATION. A small number of customers historically has
accounted for a significant percentage of World Access' and NACT's total sales.
For the six months ended June 30, 1998 and the year ended December 31, 1997, no
customer individually accounted for more than 10% of World Access' total sales
and World Access' top 10 customers accounted for 39.5% and 44.2% of total sales,
respectively. For the six months ended June 30, 1998 and the year ended
September 30, 1997, NACT's top 10 customers accounted for 44.7% and 55.7% of
total sales, respectively. JD Services, Inc. accounted for 11% of NACT's total
sales during the six months ended June 30, 1998, and no customer individually
accounted for more than 10% of NACT's total sales for the year ended September
30, 1997. World Access' and NACT's customers typically are not obligated
contractually to purchase any quantity of products or services in any particular
period. The loss of, or a material reduction in orders by, one or more of World
Access' or NACT's key customers could have a material adverse effect on Holdco's
business, financial condition and results of operations.
In addition, for the year ended August 31, 1997, NYNEX accounted for 33% of
Telco's total sales, and for the year ended December 31, 1997, PT-1
Communications Incorporated accounted for 21% of Resurgens' total sales. If the
Telco Merger or the Resurgens Transaction is consummated, then the loss of, or a
material reduction in orders by, such key customer of Telco or Resurgens (as the
case may be) could have a material adverse effect on Holdco's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. Each of World Access and NACT is highly
dependent on the services of several key executive officers and technical
employees, the loss of any of whom could have a material adverse effect on
Holdco's business, financial condition and results of operations. In addition,
each of World Access and NACT will need to hire additional skilled personnel to
support the continued growth of its business. The market for skilled personnel,
especially those with the technical abilities required by World Access and NACT,
is currently very competitive, and World Access and NACT must compete with much
larger companies with significantly greater resources to attract and retain such
personnel. There can be no assurance that World Access and NACT will be able to
retain its existing personnel or attract other qualified employees.
INTERNATIONAL SALES; REGULATORY STANDARDS; CURRENCY
EXCHANGE. International sales represented approximately 22.4% of World Access'
total sales for the six months ended June 30, 1998 and 11.3%, 1.7% and 5.0% of
total sales in the years ended December 31, 1997, 1996 and 1995, respectively.
International sales represented approximately 8.7% of NACT's total sales for the
six months ended June 30, 1998 and 14.3%, 25.0% and 15.0% of total sales in the
years ended September 30, 1997, 1996 and 1995, respectively. World Access
intends to increase its international sales efforts, which may require
significant management attention and financial resources. There can be no
assurance that World Access can increase its international sales. International
sales are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs or other barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, unstable political environments,
greater difficulty in accounts receivable collection and potentially adverse tax
consequences. Moreover, gains and losses on the conversion to U.S. dollars of
receivables and payables arising from international operations may contribute to
fluctuations in Holdco's results of operations, and fluctuations in exchange
rates could affect demand for World Access' products and services.
CERTAIN PENDING LITIGATION. On August 24, 1995, Aerotel, Ltd. and Aerotel
U.S.A., Inc. (collectively, "Aerotel") commenced an action against NACT and a
customer of NACT in the United States District
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Court, Southern District of New York, alleging that telephone systems
manufactured and sold by NACT incorporating prepaid debit card features infringe
upon Aerotel's patent which was issued in November 1987 (the "Aerotel Patent").
The initial complaint further alleged defamation and unfair competition as a
result of a communication disseminated by NACT to its customers and tortious
interference with prospective business relations, alleging that NACT induced
third parties to abandon licensing negotiations with Aerotel. Aerotel sought
injunctive relief, damages in an unspecified amount, damages of up to three
times the damages found for willful infringement of the Aerotel Patent and an
order requiring NACT to publish a written apology to Aerotel. NACT filed an
answer and counterclaim in which it denied infringement of the Aerotel Patent
and sought judgment that the Aerotel Patent is invalid and unenforceable and
that Aerotel has misused its patent in violation of antitrust laws. NACT has
denied that it has committed defamation, unfair competition and tortious
interference with prospective business relations. In August 1997, Aerotel
amended its complaint to include as defendants GST and GST USA, as well as Kyle
Love, the former President of NACT, and Dr. Thomas E. Sawyer, a director of GST
and NACT and the former Chairman and Chief Executive Officer of NACT. The
amended pleadings seek in excess of $18.7 million in damages and allege that GST
and GST USA have infringed the Aerotel patent, aided and abetted infringement by
others, including NACT, and participated in, and aided and abetted alleged
tortious conduct by, NACT. The defendants have served answers denying all
material allegations and intend to defend vigorously. On July 9, 1998, World
Access, GST and Aerotel entered into a Memorandum of Understanding with respect
to the settlement of this action, and the parties are negotiating the terms and
conditions of a final settlement agreement. World Access currently estimates
that its portion of the settlement costs, including legal fees, will be
approximately $3.3 million and will be paid through the issuance of shares of
World Access Common Stock. If a settlement does not occur, NACT's patent counsel
believes that NACT has valid defenses to the Aerotel claims (which, if upheld,
would be valid for all defendants), and the defendants intend to vigorously
defend. However, no assurances can be given as to the outcome of this action. An
unfavorable decision in this action could have a material adverse effect on
Holdco's business, financial condition and results of operations.
LIMITED PROTECTION OF PROPRIETARY RIGHTS. Each of World Access and NACT
relies on contractual rights, trade secrets, trademarks and copyrights to
establish and protect its proprietary rights in its products. Although World
Access presently holds several patents for certain of its existing products and
has several patent applications pending, NACT does not hold any patents for its
existing products and has no patent applications pending. The telecommunications
equipment industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement.
Neither World Access nor NACT has conducted a formal patent search relating
generally to the technology used in their products. In addition, since patent
applications in the United States are not publicly disclosed until the patent
issues and foreign patent applications generally are not publicly disclosed for
at least a portion of the time that they are pending, applications may have been
filed which, if issued as patents, would relate to the products of World Access
or NACT. In addition, software comprises a substantial portion of the technology
in the products of World Access and NACT. The scope of protection accorded to
patents covering software-related inventions is evolving and is subject to a
degree of uncertainty that may increase the risk and cost to World Access or
NACT if either one discovers the existence of third party patents related to its
software products or if such patents are asserted against them in the future.
Patents have been granted recently on fundamental technologies in software, and
patents may issue which relate to fundamental technologies incorporated into the
products of World Access or NACT.
Intellectual property disputes may be initiated by competitors against
World Access or NACT for tactical purposes to gain competitive advantage or
overcome competitive disadvantage, even if the merits of a specific dispute are
doubtful. In the future, World Access or NACT may be required to bring or defend
against litigation to enforce any patents issued or assigned to World Access or
NACT, to protect trademarks, trade secrets and other intellectual property
rights owned by World Access or NACT, to defend World Access or NACT against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. Regardless of the ultimate
outcome, any litigation could be costly and could divert management's attention,
which could have a material adverse effect on Holdco's business, financial
condition and results of operations. Adverse determinations in litigation could
result in the loss of World Access' or NACT's proprietary rights, subject World
Access or NACT to significant liabilities, require World Access or
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NACT to seek licenses from third parties or prevent World Access or NACT from
manufacturing or selling its products, any of which could have a material
adverse effect on Holdco's business, financial condition and results of
operations.
Although neither World Access nor NACT expects that its proprietary rights
in its products will prevent competitors from developing products functionally
similar to World Access' or NACT's, World Access and NACT believe many aspects
of their internally developed products are proprietary and intend to monitor
closely the products introduced by competitors for any infringement of their
proprietary rights.
As Holdco seeks to expand internationally, it will need to take steps to
protect its proprietary rights under foreign laws. Many of these laws are not as
well developed or do not afford the same degree of protection as United States
laws, and no assurance can be given that Holdco will not encounter difficulties
in protecting its proprietary rights outside the United States or will not
infringe the rights of others outside the United States.
POSSIBLE VOLATILITY OF STOCK PRICE. Holdco believes factors such as
announcements of new products or technological innovations by World Access, NACT
or third parties, as well as variations in Holdco's results of operations, the
gain or loss of significant customers, the timing of acquisitions of businesses
or technology licenses, legislative or regulatory changes, general trends in the
industry, market conditions, analysts' estimates and other events or factors may
cause the market price of the Holdco Common Stock to fluctuate significantly. In
addition, the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market price for many technology companies
and that have often been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of the Holdco Common Stock.
ANTI-TAKEOVER PROVISIONS. Certain provisions of Holdco's restated
Certificate of Incorporation (the "Holdco Certificate"), Holdco's Bylaws and the
Delaware General Corporation Laws ("DGCL") could, together or separately,
discourage potential acquisition proposals or delay or prevent a change in
control of Holdco. Those provisions include a classified board of directors, a
prohibition on written consents in lieu of meetings of the stockholders and the
authorization to issue up to 10,000,000 shares of preferred stock and up to
40,000,000 shares of Holdco Common Stock. (In connection with the Telco Merger,
Holdco's board of directors intends to propose that the number of authorized
shares of Holdco Common Stock be increased to 150,000,000.) Holdco's board of
directors has the power to issue any or all of these additional shares without
stockholder approval, and the preferred shares can be issued with such rights,
preferences and limitations as may be determined by the board of directors. The
rights of the holders of Holdco Common Stock will be subject to, and may be
adversely affected by, the commitments or contracts to issue any additional
shares of Holdco Common Stock (other than pursuant to outstanding stock options)
or any shares of preferred stock. Authorized and unissued preferred stock and
Holdco Common Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could delay, discourage,
hinder or preclude an unsolicited acquisition of Holdco, could make it less
likely that its stockholders receive a premium for their shares as a result of
any such attempt and could adversely affect the market price of, and the voting
and other rights of, the holders of outstanding shares of Holdco Common Stock.
As a Delaware corporation, Holdco is subject to Section 203 of the DGCL which,
in general, prevents an "interested stockholder" (defined generally as a person
owning 15% or more of the corporation's outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) for three years
following the date such person became an interested stockholder unless certain
conditions are satisfied. See "Description of Holdco Capital Stock."
YEAR 2000 ISSUE. As a result of certain computer programs being written
using two digits rather than four to define the applicable year, any of World
Access' computer systems that have date sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000 (the so-called "Year 2000
Issue"). This causes programs that perform arithmetic operations, comparisons or
date sorts to possibly generate erroneous results when the program is required
to process dates from both centuries. This could result in a system failure,
incorrect data and other business disruptions, including, among other things, a
temporary inability to procure materials, process transactions, send invoices
and service customers.
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World Access is in the process of evaluating its operating systems to
determine what modifications are necessary to make such systems compatible with
the year 2000 requirements. These systems include business information systems,
development tools and test beds, and manufacturing equipment and processes.
World Access has recently implemented a new business information system at
several of its locations that is certified to be year 2000 compliant by its
supplier. Independent tests by World Access have verified this compliance and
the system is expected to be deployed company-wide by mid-1999. World Access
plans on engaging an outside consulting firm in October 1998 to perform a
detailed year 2000 review of its development and manufacturing systems. The
costs to ensure compliance of these systems (including computer equipment,
software upgrades and assessment fees) by mid-1999 is currently estimated at
approximately $700,000.
In addition, World Access is in the process of developing a plan whereby it
will review the year 2000 readiness of its customers and suppliers. In doing so,
it will undertake appropriate internal reviews and will contact certain of its
significant customers to assess, to the extent possible, Year 2000 Issues
related to World Access' products. In that regard, World Access has identified
that certain of its products, including NACT's NTS 1000 Billing System, are not
year 2000 compliant. NACT is in the process of modifying the NTS 1000 Billing
System to overcome the two digit limitation. This modification of the NTS 1000
software is anticipated to be completed by the first calendar quarter in 1999 at
an estimated cost of $115,000. World Access is in the process of releasing new
versions of such products and making necessary modifications to existing
products to address the Year 2000 Issue. World Access expects that many of its
customers will upgrade to the new products. However, there can be no assurance
that World Access customers will upgrade to the new year 2000 compliant products
or that the modifications planned to the certain of the existing products will
be successful or completed in a timely manner. Although World Access believes
that it can address year 2000 readiness issues related to its products, there
may still be disruptions and or product failures that are unforeseen.
World Access also intends to request assurances from its major suppliers
that they are addressing the Year 2000 Issue and that the products and services
procured or used by World Access will function properly or be available without
interruption in the year 2000. A detailed questionnaire will be mailed to all
major suppliers in September 1998. Appropriate Year 2000 warranties will be
requested from key suppliers to World Access. Nevertheless, it will be
impossible to fully assess the potential consequences if service interruptions
occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, World
Access also intends to develop a business continuity plan by mid-1999 to
minimize the impact of such external events.
While World Access' efforts to address Year 2000 Issues will involve
additional costs and the time and effort of a number of employees, World Access
believes, based on currently available information, that it will be able to
properly manage its total year 2000 exposure. There can be no assurance,
however, that World Access will be successful in its effort or that the computer
systems of other companies on which World Access will rely will be timely
modified, or that a failure to modify such systems by another company, or
modifications that are incompatible with World Access' systems, would not have a
material adverse effect on Holdco's consolidated results of operations,
liquidity and capital resources.
THE NACT SPECIAL MEETING
General. This Prospectus/Information Statement is being furnished to
stockholders of NACT in connection with the NACT Special Meeting to be held at
NACT's principal offices located at 191 West 5200 North, Provo, Utah 84604, on
October 28, 1998, at 10:00 a.m., local time, and at any adjournments or
postponements thereof, for the purposes set forth herein and in the accompanying
notice of special meeting of stockholders of NACT.
Matters to Be Considered. At the NACT Special Meeting, stockholders of
record of NACT as of the close of business on the NACT Record Date will be asked
to consider and vote upon proposals (i) to approve and adopt the NACT Merger
Proposal and (ii) to transact such other business as may properly come before
the NACT Special Meeting or any adjournments or postponements thereof.
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Board of Directors' Recommendations. THE BOARD OF DIRECTORS OF NACT HAS
DETERMINED THAT THE NACT MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS OF NACT AND HAS THEREFORE UNANIMOUSLY APPROVED AND ADOPTED THE NACT
MERGER AGREEMENT AND APPROVED THE NACT MERGER AND UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF NACT VOTE FOR THE APPROVAL AND ADOPTION OF THE NACT MERGER
AGREEMENT AND APPROVAL OF THE NACT MERGER.
NACT Record Date. The board of directors of NACT has fixed September 22,
1998 as the record date for determination of holders of NACT Common Stock
entitled to notice of and to vote at the NACT Special Meeting. As of the close
of business on the NACT Record Date, 8,133,830 shares of NACT Common Stock were
outstanding, held by approximately 16 holders of record. Only holders of record
of NACT Common Stock as of the close of business on the NACT Record Date are
entitled to notice of and to vote at the NACT Special Meeting and any
adjournments or postponements thereof.
Voting; Vote Required. Each holder of record of NACT Common Stock on the
NACT Record Date is entitled to cast one vote for each share of NACT Common
Stock held thereby. A majority of the shares of NACT Common Stock entitled to
vote at the NACT Special Meeting will constitute a quorum for the transaction of
business at the NACT Special Meeting. The approval of the NACT Merger Agreement
and the NACT Merger will require the affirmative vote of a majority of the
outstanding shares of NACT Common Stock.
Shares of NACT Common Stock that are voted "FOR," "AGAINST" or "WITHHELD"
at the NACT Special Meeting will be treated as being present at such meeting for
purposes of establishing a quorum and will also be treated as votes eligible to
be cast by the NACT Common Stock present in person or represented by proxy at
the NACT Special Meeting and entitled to vote on the subject matter. Abstentions
will be counted for purposes of determining both the presence or absence of a
quorum for the transaction of business and the total number of votes cast with
respect to a particular matter. Broker non-votes will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
but will not be counted for purposes of determining the number of votes cast
with respect to the particular proposal on which the broker has expressly not
voted. Abstention and broker non-votes will have the same effect as a vote
against the approval of the NACT Merger Proposal which approval will require the
affirmative vote of a majority of the outstanding shares of NACT Common Stock.
Security Ownership by Certain Beneficial Owners and Management. As of the
close of business on the NACT Record Date, directors and executive officers of
NACT and their respective affiliates, including World Access, may be deemed to
be the beneficial owners of shares of NACT Common Stock representing
approximately 67.2% of the outstanding voting power of NACT. See "Other
Information Regarding NACT -- Equity Ownership of Principal Stockholders and
Management." Each of the directors and executive officers of NACT has indicated
that such person intends to vote or direct the vote of all the shares of NACT
Common Stock over which such person has voting control in favor of the NACT
Merger Agreement and the NACT Merger. In addition, World Access currently owns
5,468,712 shares of NACT Common Stock, representing approximately 67.2% of the
outstanding shares of NACT Common Stock. AS A RESULT, WORLD ACCESS HAS THE RIGHT
TO VOTE SUFFICIENT SHARES TO APPROVE THE NACT MERGER AGREEMENT AND THE NACT
MERGER AT THE NACT SPECIAL MEETING WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER
NACT STOCKHOLDER, THEREBY ASSURING THE APPROVAL OF THE NACT MERGER AGREEMENT AND
THE NACT MERGER.
---------------------
NACT STOCKHOLDERS ARE NOT BEING ASKED FOR A PROXY
AND ARE REQUESTED NOT TO SEND A PROXY.
---------------------
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THE NACT TRANSACTION
PURPOSE AND EFFECTS OF THE NACT TRANSACTION
The purpose of the NACT Transaction is to combine World Access and NACT. As
a result of the NACT Transaction, World Access and NACT will each become a
wholly owned subsidiary of Holdco. Holdco will derive the sole benefit of NACT's
net earnings and net book value, and former holders of NACT Common Stock will no
longer have any direct interest in NACT or be able to vote with respect to the
future affairs of NACT. Although former holders of NACT Common Stock will no
longer enjoy the possibility of a direct interest in any future appreciation in
their equity interest in NACT, after the NACT Transaction such former holders
will enjoy the future appreciation in their equity interest in Holdco, which
will include NACT.
Registration of the NACT Common Stock under the Exchange Act may be
terminated upon application of NACT to the Commission if the NACT Common Stock
is neither listed on a national securities exchange nor held by more than 300
holders of record. Following consummation of the Mergers, NACT will be a wholly
owned subsidiary of Holdco, and the NACT Common Stock will be removed from
Nasdaq and will no longer trade publicly. NACT expects that the NACT Common
Stock will continue to be included in Nasdaq until the consummation of the NACT
Transaction.
BACKGROUND OF THE MERGERS
As described above under "Summary -- World Access' Interest in NACT," in
February 1998, World Access purchased 5,113,712 shares of NACT Common Stock from
GST USA. In connection with its public announcement that it had agreed to
acquire a majority stake in NACT from GST USA, World Access announced on January
2, 1998 that it also intended to propose a merger with NACT pursuant to which
the shares of NACT Stock not owned by World Access (the "NACT Minority Shares")
would be exchanged for shares of World Access Common Stock.
Following this announcement, senior management of World Access discussed
the possibility of proposing a merger to acquire the NACT Minority Shares with
the senior management of NACT. On January 12, 1998, the board of directors of
NACT established a special committee (the "Special Committee") comprised of
Ronald S. Eliason and Thomas E. Sawyer, neither of whom is an employee of NACT
or has any direct or indirect interest in World Access, to review and consider
the desirability, from the perspective of the holders of the NACT Minority
Shares, of a merger between NACT and World Access. The Special Committee was
authorized to retain, at NACT's expense, such advisors and consultants as it
deemed appropriate.
On January 9, 1998, the Special Committee retained the law firm of Van
Cott, Bagley, Cornwall & McCarthy to advise the Special Committee. On January
13, 1998, the Special Committee retained NationsBanc Montgomery to provide the
Special Committee with financial advisory services with respect to any merger
proposal from World Access and to provide a written opinion as to the fairness,
from a financial point of view, of the consideration to be received by the
holders of NACT Minority Shares in connection therewith. On August 1, 1998, the
attorney representing the Special Committee terminated his affiliation with Van
Cott, Bagley, Cornwall & McCarthy and became affiliated with the firm of Parsons
Behle & Latimer.
On January 15, 1998, World Access proposed to the Special Committee a
business combination with NACT in which the NACT Minority Shares would be
exchanged for World Access Common Stock having a value of $17.50 per share,
subject to the negotiation of a mutually-satisfactory collar. In addition, the
initial proposal by World Access provided that the business combination would be
subject to (i) the Special Committee's recommendation to the NACT board of
directors to proceed with the transaction; (ii) the approval of the transaction
by the NACT board of directors; (iii) execution of a definitive agreement in
form and substance satisfactory to NACT and World Access; (iv) approval of the
transaction by the holders of a majority of the outstanding shares of NACT
common stock; and (v) consummation of the Stock Purchase Transaction.
On February 5, 1998, counsel to World Access distributed to the Special
Committee and its counsel a draft of the NACT Merger Agreement. Between February
5, 1998 and February 18, 1998, senior management
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of World Access and its counsel and the Special Committee and its counsel
negotiated the terms of the NACT Merger Agreement and the proposed NACT Merger.
During this period, World Access proposed a 10% "collar" on the proposed
exchange ratio, and on February 12, 1998, counsel to World Access circulated to
the Special Committee and its counsel a letter describing the proposed
adjustments to the exchange ratio based upon fluctuations in the trading price
of the World Access Common Stock if the parties adopted the 10% collar proposed
by World Access.
The Special Committee reviewed the proposed collar with its counsel and
NationsBanc Montgomery and further sought to negotiate and clarify the
adjustments to the exchange ratio as a result of the increase or decrease in the
trading price of the World Access Common Stock.
On February 18, 1998, senior management of World Access and its counsel met
with the Special Committee and its counsel in Provo, Utah to further negotiate
and discuss the terms of the NACT Merger Agreement and proposed NACT Merger. At
that meeting, World Access tentatively agreed to fix the price of the World
Access Common Stock from which the 10% collar would be determined (the "Base
Price") by discounting the closing price of the World Access Common Stock on
February 18, 1998 by approximately 7%, to approximately $26.00 per share.
On February 24, 1998, the Special Committee proposed that the Base Price be
lowered to $22.20 per share, the closing price of the World Access Common Stock
on February 24, 1998 less the same 7% discount discussed at the February 18
meeting (the "First Adjusted Base Price") due to the significant decline in the
trading price of the World Access Common Stock. World Access promptly advised
the Special Committee that the First Adjusted Base Price was unacceptable and
proposed that the Base Price be set at $24.00 per share (the "Second Adjusted
Base Price").
On February 24, 1998, the Special Committee advised World Access that the
Second Adjusted Base Price was unacceptable and proposed to set the Base Price
at $23.20 (the "Final Base Price"), which would ensure that the NACT Minority
Shares would be exchanged for shares of Holdco Common Stock with a value per
share no less favorable than the value per share received by GST USA in
connection with the NACT Stock Purchase and that holders of the NACT Minority
Shares would receive shares of Holdco Common Stock having a value of greater
than $17.50 per share if the World Access Average Closing Price were to exceed
$25.51 per share.
On February 24, 1998, the World Access board of directors agreed to the
Final Base Price and unanimously approved the NACT Merger Agreement and the
Mergers and authorized management of World Access to negotiate, execute and
deliver the NACT Merger Agreement. Immediately thereafter, NationsBanc
Montgomery delivered its fairness opinion to the Special Committee, the NACT
board of directors unanimously approved the NACT Merger Agreement and the NACT
Merger and the NACT Merger Agreement was executed.
In June 1998, the boards of directors of World Access, Holdco and NACT
unanimously approved the proposed amendment to the Merger Agreement, which
amendment had been recommended by counsel to World Access to clarify certain
provisions of the Merger Agreement.
WORLD ACCESS' REASONS FOR THE NACT MERGER; RECOMMENDATION OF WORLD ACCESS' BOARD
OF DIRECTORS
The board of directors of World Access has carefully considered the
advisability of the NACT Merger and believes that the terms of the NACT Merger
are fair to, and that the NACT Merger is in the best interests of, the
stockholders of World Access. THE BOARD OF DIRECTORS OF WORLD ACCESS HAS
UNANIMOUSLY APPROVED AND ADOPTED THE NACT MERGER AGREEMENT AND APPROVED THE NACT
MERGER.
In approving the NACT Merger Agreement and the NACT Merger, the board of
directors of World Access consulted with World Access management, as well as its
legal advisors, and also considered, among other things: (i) the business,
managerial expertise, business strategy, prospects and competitive position of
NACT and World Access; (ii) historical, current and projected financial
condition and results of operations of NACT (without giving effect to the NACT
Merger) and of Holdco (after giving effect to the Mergers); (iii) the
consideration to be paid to NACT stockholders and other terms of the NACT Merger
Agreement;
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(iv) after consummation of the NACT Merger, World Access will have significantly
increased flexibility to add expertise and resources to NACT and to use the
expertise and resources of NACT in World Access' other related operations; (v)
the NACT Merger will enable World Access to operate NACT without any possible
conflicts of interest created by the existence of a minority interest in NACT;
and (vi) the elimination of the cost of public ownership of NACT, including the
preparation and mailing of annual reports to NACT stockholders, the preparation
of periodic reports under the Exchange Act, solicitation of proxies for annual
meetings of stockholders, transfer agent fees, and other stockholder services
directly related to public ownership.
NACT'S REASONS FOR THE NACT MERGER; RECOMMENDATION OF NACT'S BOARD OF DIRECTORS
After receiving the recommendation of the Special Committee, the board of
directors of NACT carefully considered the advisability of the NACT Merger and
has concluded and believes that the terms of the NACT Merger Agreement are fair
to, and that the NACT Merger is in the best interests of, NACT and its
stockholders (other than World Access). THE BOARD OF DIRECTORS OF NACT HAS
UNANIMOUSLY APPROVED AND ADOPTED THE NACT MERGER AGREEMENT AND APPROVED THE NACT
MERGER AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF NACT VOTE FOR THE
APPROVAL AND ADOPTION OF THE NACT MERGER AGREEMENT AND APPROVAL OF THE NACT
MERGER.
In approving the NACT Merger Agreement and the NACT Merger, and in
recommending that NACT's stockholders approve the NACT Merger, the NACT board of
directors consulted with NACT management, as well as its financial and legal
advisors, and also considered, among other things: (i) the business, managerial
expertise, business strategy, prospects and competitive position of NACT and
World Access; (ii) historical, current and projected financial condition and
results of operations of NACT (without giving effect to the NACT Merger) and of
Holdco (after giving effect to the Mergers); (iii) the consideration to be paid
to NACT stockholders and other terms of the NACT Merger Agreement; (iv) the
financial presentation and opinion of NACT's financial advisor, described below
under "-- Opinion of NACT's Financial Advisor"; (v) the recommendation of the
Special Committee; (vi) the historical market prices and recent trading activity
of the NACT Common Stock and the fact that the NACT Merger will enable NACT's
stockholders to realize a significant premium over the prices at which the NACT
Common Stock may trade in a market unaffected by merger speculation; (vii) the
expectation that the market capitalization and public stock distribution of
Holdco will provide NACT's stockholders with increased liquidity; (viii) the
fact that NACT's stockholders will obtain tax-free treatment in connection with
the NACT Merger and will continue as stockholders of a larger, more diversified
combined company having greater market and financial strength; (ix) the fact
that the NACT Merger Agreement provides a "collar" limiting the effect of
changes in the price of World Access Common Stock on the value of the
consideration to be received by NACT's stockholder in the NACT Merger; and (x)
NACT's limited ability to engage in other transactions with respect to the NACT
Minority Shares in light of World Access' majority ownership of NACT.
The board of directors of NACT also considered a variety of inherent risks
and potentially negative factors in its deliberations concerning the NACT
Merger. In particular, the board of directors of NACT considered, among other
things, the following: (i) the irreversible nature of the decision and the
consequent loss of even its limited independence; (ii) the possible change in
certain existing NACT corporate policies and strategies following the NACT
Merger; (iii) the potential for post-merger dilution of Holdco's earnings per
share; and (iv) the other risks described above under "Risk Factors." In the
view of the board of directors of NACT, these considerations did not outweigh,
individually or collectively, the advantages of the NACT Merger to NACT. The
board of directors of NACT also took into account the fact that the NACT Merger
is not conditioned on the approval by the holders of at least a majority of the
NACT Minority Shares.
Due to the wide variety of factors considered in connection with the
evaluation of the NACT Merger, NACT's board of directors did not find it
practicable to evaluate, and did not quantify or otherwise attempt to assign
relative weights to, the specific factors considered in reaching its
determination. In addition, individual members of NACT's board of directors may
have given different weight to different factors.
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The NACT board of directors does not believe (i) that it is necessary to
obtain an updated fairness opinion to take into account the Resurgens
Transaction or the Telco Merger because the consideration to be received by the
NACT stockholders in connection with the NACT Merger is fixed at $17.50 per
share (subject to the collar) or (ii) that the Resurgens Transaction and the
Telco Merger affect the value of such fixed merger consideration. Moreover, NACT
has no right to terminate the Merger Agreement based on its obtaining or not
obtaining an updated fairness opinion. Accordingly, the NACT board of directors
does not believe that, under the circumstances, requesting an updated fairness
opinion would serve any useful purpose. In addition, the Special Committee was
not charged with the responsibility of monitoring the bases for its
recommendation to the NACT board of directors in the event of significant delays
in consummating the NACT Transaction.
NACT Board Recommendation. NACT's board of directors has approved the NACT
Merger Agreement and the NACT Merger and determined that the NACT Merger is fair
to, and in the best interests of, NACT and its stockholders (other than World
Access). After careful consideration, the board of directors of NACT unanimously
recommends that the stockholders of NACT vote in favor of the NACT Merger
Agreement and the NACT Merger.
OPINION OF NACT'S FINANCIAL ADVISOR
NACT engaged NationsBanc Montgomery to render a fairness opinion to the
Special Committee in connection with the NACT Merger pursuant to an engagement
letter dated January 13, 1998. NationsBanc Montgomery is a nationally recognized
investment banking firm and, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. NACT
selected NationsBanc Montgomery to render a fairness opinion on the basis of its
experience and expertise in transactions similar to the NACT Merger, its
reputation in the communications industry and its historical investment banking
relationship with NACT. The fairness opinion of NationsBanc Montgomery will not
be updated to take into consideration the Resurgens Transaction or the Telco
Merger.
At the February 24, 1998 meeting of the Special Committee, NationsBanc
Montgomery delivered its oral opinion, subsequently confirmed in writing as of
the same date, that the consideration to be received by the stockholders of NACT
in the NACT Merger was fair to such stockholders from a financial point of view,
as of the date of such opinion. NationsBanc Montgomery did not determine the
form or amount of consideration to be received by NACT's stockholders in the
NACT Merger. The amount of such consideration was agreed to as a result of
negotiations between NACT and World Access. No limitations were imposed by NACT
on NationsBanc Montgomery with respect to the investigations made or procedures
followed in rendering its opinion. NationsBanc Montgomery was not requested to,
nor did it, advise the Special Committee with respect to alternatives to the
NACT Merger or NACT's underlying decision to proceed with or effect the NACT
Merger.
THE FULL TEXT OF NATIONSBANC MONTGOMERY'S WRITTEN OPINION TO THE SPECIAL
COMMITTEE, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS OF REVIEW BY NATIONSBANC MONTGOMERY, IS ATTACHED HERETO AS APPENDIX
B AND IS INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN
ITS ENTIRETY. THE FOLLOWING SUMMARY OF NATIONSBANC MONTGOMERY'S OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
NATIONSBANC MONTGOMERY'S OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE ONLY AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY NACT STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. IN FURNISHING ITS OPINION,
NATIONSBANC MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT", AS USED IN THE SECURITIES ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER, OR THAT ITS OPINION IS A REPORT OR VALUATION WITHIN THE
MEANING OF SECTION 11 OF THE SECURITIES ACT, AND STATEMENTS TO SUCH EFFECT ARE
INCLUDED IN NATIONSBANC MONTGOMERY'S OPINION.
In connection with its opinion, NationsBanc Montgomery, among other things:
(i) reviewed certain publicly available financial and other data with respect to
NACT and World Access, including the
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consolidated financial statements for recent years and interim periods to
December 31, 1997 with respect to NACT and September 30, 1997 with respect to
World Access and certain other relevant financial and operating data relating to
NACT made available to NationsBanc Montgomery from published sources and from
the internal records of NACT; (ii) reviewed the financial terms and conditions
of the draft NACT Merger Agreement; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, NACT Stock
and World Access Stock; (iv) compared NACT from a financial point of view with
certain other companies in the voice switching and other enhanced voice
applications industries which NationsBanc Montgomery deemed to be relevant; (v)
compared World Access from a financial point of view with certain other
companies in the transmission and switching, wireline access and wireless access
industries; (vi) considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies in the voice
switching and other enhanced voice applications industries which NationsBanc
Montgomery deemed to be comparable, in whole or in part, to the NACT Merger;
(vii) considered the premiums paid in comparable public market acquisitions of
selected businesses within the technology industries; (viii) considered the
premiums paid in transactions involving acquisitions of the remaining
publicly-held minority interests by the majority interest holder; (ix) reviewed
and discussed with representatives of the management of NACT and World Access
certain information of a business and financial nature regarding NACT and World
Access furnished to NationsBanc Montgomery by them, including financial
forecasts and related assumptions of NACT; (x) made inquiries regarding and
discussed the NACT Merger and the draft NACT Merger Agreement and other matters
related thereto with NACT's counsel; and (xi) performed such other analyses and
examinations as NationsBanc Montgomery deemed appropriate.
In connection with its review, NationsBanc Montgomery did not assume any
obligation independently to verify the foregoing information and relied on such
information being accurate and complete in all material respects. With respect
to the financial forecasts for NACT provided to NationsBanc Montgomery by NACT's
management, upon its advice and with its consent, NationsBanc Montgomery assumed
for purposes of its opinion that the forecasts, including the assumptions
regarding synergies, were reasonably prepared on bases reflecting the best
available estimates and judgments of NACT's management at the time of
preparation as to the future financial performance of NACT and that they
provided a reasonable basis upon which NationsBanc Montgomery could form its
opinion. NationsBanc Montgomery also assumed that there were no material changes
in NACT's or World Access' assets, financial condition, results of operations,
business or prospects since the respective dates of their last financial
statements made available to NationsBanc Montgomery. NationsBanc Montgomery
assumed that the NACT Merger would be consummated in a manner that complies in
all respects with the applicable provisions of the Securities Act, the Exchange
Act and all other applicable federal and state statutes, rules and regulations.
In addition, NationsBanc Montgomery did not assume responsibility for making an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of NACT or World Access, nor was
NationsBanc Montgomery furnished with any such appraisals. NACT informed
NationsBanc Montgomery, and NationsBanc Montgomery assumed, that the NACT Merger
would be recorded as a purchase under generally accepted accounting principles.
Finally, NationsBanc Montgomery's opinion was based on economic, monetary and
market and other conditions as in effect on, and the information made available
to it as of, February 24, 1998. Accordingly, although subsequent developments
may affect NationsBanc Montgomery's opinion, NationsBanc Montgomery has not
assumed any obligation to update, revise or reaffirm its opinion.
The following is a summary of the material analyses and factors considered
by NationsBanc Montgomery in connection with its opinion to the Special
Committee dated February 24, 1998.
Comparable Company Analysis. NationsBanc Montgomery compared the value of
the consideration to be received by the stockholders of NACT in the NACT Merger
to certain financial and stock market information of publicly-traded companies
engaged in the voice switching and other enhanced voice applications industries
that NationsBanc Montgomery believed were comparable in certain respects to NACT
(the "Comparable Companies"). The Comparable Companies are comprised of ACE*COMM
Corporation, Aspect Telecommunications Corporation, Bright Voice Systems, Inc.,
Excel Switching Corporation, Premiere Technologies, Inc., Summa Four, Inc.,
Syntellect, Inc. and Tekelec and were chosen by NationsBanc
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Montgomery as companies that, based on publicly available data, possess general
business, operating and financial characteristics representative of companies in
the industry in which NACT operates, although NationsBanc Montgomery recognizes
that each of the Comparable Companies is distinguishable from NACT in certain
respects.
For each of the Comparable Companies and NACT, NationsBanc Montgomery
obtained certain publicly available financial, operating and stock market data,
including last twelve months ("LTM") revenue, projected calendar year 1998
revenue, projected calendar year 1998 earnings per share ("EPS"), recently
reported total debt and cash and cash equivalents, and closing stock price as of
February 20, 1998. Calendar year 1998 EPS estimates for the Comparable Companies
and NACT were based on analysts' estimates as reported by First Call, a market
research database.
NationsBanc Montgomery also compiled the "aggregate value" for each of the
Comparable Companies and for NACT implied in the NACT Merger. Aggregate value is
the total current equity value plus total debt less cash and cash equivalents.
Based on this data, NationsBanc Montgomery calculated the following ratios
for each of the Comparable Companies and for NACT implied in the NACT Merger:
aggregate value to LTM revenue; aggregate value to calendar year 1998 revenue;
and current stock price to projected 1998 earnings per share ("1998
price/earnings ratio").
The aggregate value to the LTM revenues for the Comparable Companies ranged
from 0.5x to 9.2x, compared to 4.4x for NACT implied in the NACT Merger. The
selected aggregate value to calendar year 1998 revenue for the Comparable
Companies ranged from 0.5x to 6.1x, compared to 3.2x for NACT implied in the
NACT Merger. The selected 1998 price/earnings ratio for the Comparable Companies
ranged from 21.2x to 44.0x, compared to 21.6x for NACT implied in the NACT
Merger.
Comparable Mergers and Acquisitions Analysis. NationsBanc Montgomery
reviewed certain financial data for 33 recently announced mergers and
acquisitions in the voice switching and other enhanced voice applications
industries that were deemed to be comparable to the NACT Merger (the "Comparable
Acquisitions"), the most comparable of which were Lucent Technologies, Inc.'s
acquisition of Octel Communications, Inc. and Comverse Technology, Inc.'s
acquisition of Boston Technology, Inc.
For each such transaction NationsBanc Montgomery calculated the ratio of
aggregate value to LTM revenues, the ratio of aggregate value to LTM earnings
before interest and taxes ("EBIT") and the ratio of equity value to LTM net
income. All multiples were based on publicly available information at the time
of announcement of the Comparable Acquisitions. The transactions yielded a
selected range of aggregate value to LTM revenue of 0.3x to 16.0x, compared to
4.4x for NACT implied in the NACT Merger. The transaction yielded a selected
range of aggregate values to LTM EBIT of 6.4x to 41.5x, compared to 20.5x for
NACT implied in the NACT Merger.
Premiums Paid in Technology Transactions Analysis. NationsBanc Montgomery
reviewed the premiums paid in selected transactions that were deemed to be
comparable to the NACT Merger involving technology companies in the past three
years.
In each of these transactions, NationsBanc Montgomery calculated the
premiums of the price paid by acquirors over the target company's stock price 30
days prior to public announcement of the transaction. These calculations yielded
a reasonable range of premiums paid based on the target company's stock price
four weeks prior to public announcement of the transaction of 0.0% to 60.0%.
NationsBanc Montgomery then calculated the premium to be paid in the NACT Merger
based on the value of $17.50 per NACT share to both NACT's stock price four
weeks prior to the public announcement of the NACT Stock Purchase Agreement and
NACT's stock price four weeks prior to the public announcement of the NACT
Merger. These calculations yielded premiums paid of 17.6% and 45.8%,
respectively.
Premiums Paid in the Acquisition of Minority Interests Analysis.
NationsBanc Montgomery reviewed the premiums paid in selected transactions that
were deemed to be comparable to the NACT Merger involving the acquisition of the
remaining minority interest by the majority shareholder in the past six years.
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In each of these transactions, NationsBanc Montgomery calculated the
premiums of the price paid by acquirors over the target company's stock price 30
days prior to public announcement of the transaction. These calculations yielded
a reasonable range of premiums paid based on the target company's stock price
four weeks prior to public announcement of the transaction of 0.0% to 40.0%.
NationsBanc Montgomery then calculated the premium to be paid in the NACT Merger
based on the value of $17.50 per NACT share to both NACT's stock price four
weeks prior to the public announcement of the NACT Stock Purchase Agreement and
NACT's stock price four weeks prior to the public announcement of the NACT
Merger. These calculations yielded premiums paid of 17.6% and 45.8%,
respectively.
Accretion/Dilution Analysis. NationsBanc Montgomery analyzed the impact of
the NACT Merger on World Access stockholders on a pro forma fully diluted EPS
basis for calendar years 1998. NationsBanc Montgomery used World Access internal
estimates for calendar year 1998 for NACT and World Access internal estimates
for calendar year 1998 for World Access and performed the analysis giving effect
to $3.96 million of synergies anticipated by the managements of World Access and
NACT to result from the NACT Merger for the ten months of combined results for
calendar year 1998. The analysis indicated that, for World Access stockholders,
the NACT Merger would be breakeven in calendar year 1998 with the realization of
the synergies. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Discounted Cash Flow Analysis. NationsBanc Montgomery performed a
discounted cash flow analysis on certain projected financial statements that
were provided to NationsBanc Montgomery by the management of NACT.
In performing this analysis, NationsBanc Montgomery calculated the
projected stand-alone unlevered after-tax cash flows for the fiscal years 1998
through 2002. NationsBanc Montgomery calculated NACT's terminal values in fiscal
year 2002 based on price/next twelve month earnings multiples ranging from 18.0x
to 22.0x. The unlevered after-tax cash flows and the terminal value were
discounted to the present using discount rates ranging from 22.5% to 27.5%. This
analysis yielded an equity value range for NACT of $15.04 to $21.64 per share.
Contribution Analysis. NationsBanc Montgomery performed a contribution
analysis for the calendar year 1998. NationsBanc Montgomery used NationsBanc
Montgomery estimates for calendar year 1998 for NACT and Prudential Securities
estimates for calendar year 1998 for World Access. Accordingly, NACT contributed
22.1% of the combined revenues, 21.6% of the combined operating income, and
20.6% of the combined net income, as compared to its 21.6% ownership of the
combined entity.
The summary set forth above does not purport to be a complete description
of the presentation by NationsBanc Montgomery to the Special Committee or the
analyses performed by NationsBanc Montgomery. The preparation of a fairness
opinion is not necessarily susceptible to partial analysis or summary
description. NationsBanc Montgomery believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses and of the factors considered, without considering all analyses and
factors, would create an incomplete view of the process underlying the analyses
set forth in its presentation to the Special Committee. In addition, NationsBanc
Montgomery may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be NationsBanc Montgomery's view
of the actual value of NACT. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given greater weight than any other analysis. In arriving at its opinion,
NationsBanc Montgomery did not ascribe a specific range of values to NACT, but
rather made its determination as to the fairness, from a financial point of
view, of the consideration to be received by the holders of NACT Common Stock in
the NACT Merger on the basis of the financial and comparative analyses described
above.
In performing its analyses, NationsBanc Montgomery made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of NACT. The
analyses performed by NationsBanc Montgomery are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such
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analyses. Such analyses were prepared solely as part of NationsBanc Montgomery's
analysis of the fairness of the transaction contemplated by the NACT Merger
Agreement to NACT's stockholders from a financial point of view and were
provided to the Special Committee in connection with the delivery of NationsBanc
Montgomery's opinion. The analyses do not purport to be appraisals or to reflect
the prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future.
NationsBanc Montgomery used in its analyses various projections of future
performance prepared by the management of NACT. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
Pursuant to the terms of NationsBanc Montgomery's engagement, NACT has
agreed to pay NationsBanc Montgomery a fee in cash equal to $250,000, all of
which became payable upon delivery of its opinion. In addition to the foregoing
fees, NACT has agreed to reimburse NationsBanc Montgomery for all reasonable
out-of-pocket costs and expenses (including counsel fees). Pursuant to a
separate letter agreement, NACT had agreed to indemnify NationsBanc Montgomery,
its affiliates, and their respective partners, directors, officers, agents,
consultants, employees and controlling persons against certain liabilities,
including liabilities under federal securities laws.
In the ordinary course of business, NationsBanc Montgomery actively trades
NACT Common Stock for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
NationsBanc Montgomery has also acted as an underwriter in connection with the
public offering of NACT Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
World Access Merger
The discussion set forth below (including the discussion under
"-- Treatment of Holdco, World Access and WAXS Merger Sub" and "-- Conversion of
World Access Common Stock into Holdco Common Stock") is the opinion of Rogers &
Hardin LLP as to the material Federal income tax consequences of the World
Access Merger. Such opinion is not binding on the IRS. The opinion is based upon
the provisions of the Code, applicable Treasury Regulations thereunder, judicial
decisions and current administrative rulings, any of which may be changed at any
time with retroactive effect. The opinion does not address all aspects of
Federal income taxation that may be important to particular taxpayers in light
of their personal investment circumstances or to taxpayers subject to special
treatment under the Federal income tax laws (including life insurance companies,
foreign persons, tax-exempt entities, holders who acquired their World Access
Common Stock pursuant to the exercise of employee stock options or otherwise as
compensation and persons who hold, directly or indirectly, 10% or more of World
Access Common Stock or any class of World Access Common Stock) and does not
address any aspect of state, local or foreign taxation. The opinion also assumes
that World Access Common Stock will be held as a capital asset at the time of
the consummation of the World Access Merger. No rulings have been or will be
requested from the IRS with respect to any of the matters discussed herein.
There can be no assurance that future legislation, regulations, administrative
rulings or court decisions would not alter the tax consequences set forth below.
Based upon representation letters, which will be reconfirmed prior to the
consummation of the Mergers, it is the opinion of Rogers & Hardin LLP that the
World Access Merger will be treated as a transfer of property to Holdco by the
holders of World Access Common Stock and governed by Section 351 of the Code.
The opinion is based on current law and assumes that the Mergers will be
consummated as described in this Prospectus/Information Statement and in
accordance with the NACT Merger Agreement and related agreements in their
current form. It is a condition to the obligation of World Access to consummate
the World Access Merger that it shall have received confirmation, dated the
Closing Date (as hereinafter defined), of the opinion contained in this
paragraph.
Treatment of Holdco, World Access and WAXS Merger Sub. No gain or loss
will be recognized by Holdco, World Access or WAXS Merger Sub as a result of the
World Access Merger.
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Conversion of World Access Common Stock into Holdco Common Stock. A holder
of World Access Common Stock whose shares of World Access Common Stock are
converted in the World Access Merger into shares of Holdco Common Stock will not
recognize gain or loss upon such conversion. The tax basis of the Holdco Common
Stock received by such holder will be equal to the tax basis of the World Access
Common Stock so converted, and the holding period of the Holdco Common Stock
will include the holding period of the World Access Common Stock so converted.
Reporting Requirements. Each holder of World Access Common Stock who
receives Holdco Common Stock in the World Access Merger will be required to
retain records and file with such holder's Federal income tax return a statement
setting forth certain facts relating to the World Access Merger.
NACT Merger
The discussion set forth below (including the discussion under
"-- Treatment of Holdco, NACT and NACT Merger Sub," "-- Conversion of NACT
Common Stock" and "-- Cash in Lieu of Fractional Shares") is the opinion of Van
Cott, Bagley, Cornwall & McCarthy as to the material Federal income tax
consequences of the NACT Merger. Such opinion is not binding on the IRS. The
opinion is based upon the provisions of the Code, applicable Treasury
Regulations thereunder, judicial decisions and current administrative rulings,
any of which may be changed at any time with retroactive effect. The opinion
does not address all aspects of Federal income taxation that may be important to
particular taxpayers in light of their personal investment circumstances or to
taxpayers subject to special treatment under the Federal income tax laws
(including life insurance companies, foreign persons, tax-exempt entities,
holders who acquired their NACT Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation and persons who hold,
directly or indirectly, 10% or more of NACT Common Stock) and does not address
any aspect of state, local or foreign taxation. The opinion also assumes that
NACT Common Stock will be held as a capital asset at the time of the
consummation of the NACT Merger. No rulings have been or will be requested from
the IRS with respect to any of the matters discussed herein. There can be no
assurance that future legislation, regulations, administrative rulings or court
decisions would not alter the tax consequences set forth below.
Based upon representation letters, which will be reconfirmed prior to the
consummation of the Mergers, it is the opinion of Van Cott, Bagley, Cornwall &
McCarthy that the NACT Merger will be treated as a transfer of property to
Holdco by the holders of NACT Common Stock governed by Section 351 of the Code.
The opinion is based on current law and assumes that the Mergers will be
consummated as described in this Prospectus/Information Statement and in
accordance with the NACT Merger Agreement and related agreements in their
current form. It is a condition to the obligation of NACT to consummate the NACT
Merger that it shall have received confirmation, dated the Closing Date, of the
opinion contained in this paragraph.
Treatment of Holdco, NACT and NACT Merger Sub. No gain or loss will be
recognized by Holdco, NACT or NACT Merger Sub as a result of the NACT Merger.
Conversion of NACT Common Stock into Holdco Common Stock. A holder of NACT
Common Stock whose shares of NACT Common Stock are converted in the NACT Merger
into the right to receive shares of Holdco Common Stock will not recognize gain
or loss upon such conversion, except to the extent cash is received in lieu of
fractional shares. See "-- Cash in Lieu of Fractional Shares" below. The
aggregate tax basis of the Holdco Common Stock received by such holder will be
equal to the aggregate tax basis of the NACT Common Stock so converted
(excluding any portion of the holder's basis allocated to fractional shares),
and the holding period of the Holdco Common Stock will include the holding
period of the NACT Common Stock so converted.
Cash in Lieu of Fractional Shares. A holder of NACT Common Stock who
receives cash in lieu of fractional shares of Holdco Common Stock will be
treated as having received such fractional shares pursuant to the NACT Merger
and then as having exchanged such fractional shares for cash in a redemption by
Holdco. Any gain or loss attributable to fractional shares will generally be
capital gain or loss. The amount of such gain or loss will be equal to the
difference between the ratable portion of the tax basis of the NACT Common Stock
converted in the NACT Merger that is allocated to such fractional shares and the
cash
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received in lieu thereof. Any such capital gain or loss will constitute
long-term capital gain or loss if such NACT Common Stock has been held by the
holder for more than one year at the time of the consummation of the NACT
Merger.
Reporting Requirements. Each holder of NACT Common Stock who receives
Holdco Common Stock in the NACT Merger will be required to retain records and
file with such holder's Federal income tax return a statement setting forth
certain facts relating to the NACT Merger.
LIMITATIONS ON RESALES BY AFFILIATES
All shares of Holdco Common Stock received by NACT stockholders in the NACT
Merger will be freely transferable, except that shares of Holdco Common Stock
received by persons who are deemed to be "affiliates" of NACT prior to the NACT
Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in the
case of such persons who become affiliates of Holdco) or otherwise in compliance
with (or pursuant to an exemption from) the registration requirements of the
Securities Act. Persons deemed to be "affiliates" of NACT are those individuals
or entities that control, are controlled by, or are under common control with,
such party and generally include executive officers and directors of such party
as well as certain principal stockholders of such party. Shares of Holdco Common
Stock received by persons who are deemed to be "affiliates" of World Access may
be resold by them only in transactions permitted by the resale provisions of
Rule 144 or otherwise in compliance with (or pursuant to an exemption from) the
registration requirements of the Securities Act.
EFFECT OF NACT TRANSACTION ON CERTAIN OUTSTANDING WORLD ACCESS CONVERTIBLE
SECURITIES
As of August 28, 1998, there was $115,000,000 aggregate principal amount at
maturity of the World Access Notes outstanding. The World Access Notes were
issued under an Indenture dated as of October 1, 1997 (the "World Access
Indenture") between World Access and First Union National Bank, as trustee. The
World Access Notes are convertible into shares of World Access Common Stock at a
conversion price of $37.03125 per share, subject to adjustment for certain
events. Upon consummation of the Mergers, Holdco will enter into a supplemental
indenture to the World Access Indenture pursuant to which Holdco will
irrevocably and unconditionally guarantee World Access' obligations with respect
to the World Access Notes and which will provide that thereafter, subject to the
terms and conditions set forth in the World Access Indenture, the World Access
Notes will be convertible into the number of shares of Holdco Common Stock which
a holder of World Access Notes would have received if such holder had converted
such World Access Notes immediately prior to the Mergers, subject to the
adjustment thereafter upon the happening of the same events that currently
result in an adjustment to the World Access Notes pursuant to the World Access
Indenture
ACCOUNTING TREATMENT
The NACT Transaction will be accounted for by Holdco under the purchase
method of accounting for business combinations. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements."
INTERESTS OF CERTAIN PERSONS IN THE NACT MERGER
In considering the recommendation of the NACT board of directors with
respect to the NACT Merger Agreement and the NACT Merger, holders of NACT Common
Stock should be aware that certain members of NACT's management and its board of
directors have interests in the NACT Merger that are in addition to the
interests of NACT's stockholders in general.
NACT Option Grants. In connection with entering into the NACT Stock
Purchase Agreement, on December 31, 1997, World Access entered into option
exchange agreements (the "Option Exchange Agreements") with the holders of
options to purchase an aggregate of 934,900 shares of NACT Common Stock (the
"Exchanged Options"), representing approximately 99.4% of all the
then-outstanding options to acquire NACT Common Stock. Pursuant to the Option
Exchange Agreements, upon consummation of the NACT Stock Purchase, each
Exchanged Option was assumed by World Access and now constitutes an option
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to acquire, on the same terms and conditions as were applicable under such
Exchanged Option, a number of shares of World Access Common Stock equal to the
product of (i) the number of shares of NACT Common Stock subject to such
Exchanged Option and (ii) 0.8390 at an exercise price per share equal to (A) the
aggregate exercise price for such shares of NACT Common Stock subject to such
Exchanged Option, divided by (B) the number of full shares of World Access
Common Stock deemed to be purchasable pursuant to such option; provided,
however, that none of Exchanged Options will be incentive stock options under
Section 422 of the Code or subject to any vesting requirements. As a result of
the NACT Transaction, the Exchange Options will become exercisable for shares of
Holdco Common Stock on a one-for-one basis.
Indemnification; Indemnification Agreements. Pursuant to the NACT Merger
Agreement, Holdco and World Access have agreed that all rights to
indemnification for acts or omissions occurring prior to the Effective Time of
the Mergers (as hereinafter defined) existing in favor of the current or former
directors or officers of NACT as provided in the NACT Certificate of
Incorporation and the NACT By-Laws shall survive the NACT Merger and shall
continue in full force and effect in accordance with their terms. Holdco has
agreed to cause to be maintained for a period of not less than six years from
the Effective Time of the Mergers NACT's directors' and officers' insurance and
indemnification policy in effect as of February 24, 1998, to the extent that it
provides coverage for events occurring prior to the Effective Time of the
Mergers, so long as the annual premium therefor would not be in excess of 125%
of the last annual premium paid prior to February 24, 1998 (the "Maximum
Premium"). If such policy expires, is terminated or canceled during such
six-year period, Holdco will use all reasonable efforts to cause to be obtained
as much of such insurance coverage as can be obtained for the remainder of such
six-year period for an annualized premium not in excess of the Maximum Premium.
NASDAQ LISTING
It is a condition to the consummation of the Mergers that the shares of
Holdco Common Stock to be issued in connection with the Mergers shall have been
approved for listing on Nasdaq, subject only to official notice of issuance.
APPRAISAL OR DISSENTERS' RIGHTS
Holders of NACT Common Stock are not entitled to appraisal or dissenters'
rights in connection with the NACT Merger.
EXCHANGE OF SHARES
At or prior to the NACT Effective Time, World Access will appoint, and will
retain for a period of at least six months after the NACT Effective Time, an
exchange agent (the "NACT Exchange Agent") to effect the exchange of shares of
NACT Common Stock for Holdco Common Stock in connection with the NACT Merger.
From time to time after the NACT Effective Time, World Access shall deposit or
cause to be deposited, certificates representing Holdco Common Stock for
conversion of shares of NACT Common Stock in accordance with the NACT Merger
Agreement.
Commencing immediately after the NACT Effective Time and until the
appointment of the NACT Exchange Agent is terminated, each holder of a
certificate or certificates theretofore evidencing shares of NACT Common Stock
may surrender the same to the NACT Exchange Agent, and, after the appointment of
the NACT Exchange Agent has been terminated, any such holder may surrender any
such certificate to Holdco. Such holder will be entitled upon such surrender to
receive in exchange therefor a certificate or certificates representing the
number of full shares of Holdco Common Stock into which the shares of NACT
Common Stock theretofore represented by the certificate or certificates so
surrendered have been converted pursuant to the NACT Merger, together with a
cash payment in lieu of fractional shares, if any, and all such shares of Holdco
Common Stock will be deemed to have been issued at the NACT Effective Time.
Until so surrendered and exchanged, each outstanding certificate which, prior to
the NACT Effective Time, represented issued and outstanding shares of NACT
Common Stock will be deemed for all corporate purposes of Holdco, other than the
payment of dividends and other distributions, if any, to evidence ownership of
the
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number of full shares of Holdco Common Stock into which the shares of NACT
Common Stock theretofore represented thereby have been converted at the NACT
Effective Time.
Until certificates representing shares of NACT Common Stock are
surrendered, no dividend or other distribution, if any, payable to the holders
of record of Holdco Common Stock as of any date subsequent to the NACT Effective
Time will be paid to the holder of such certificate. Upon the surrender of any
such certificate representing shares of NACT Common Stock, however, the record
holder of the certificate or certificates representing shares of Holdco Common
Stock issued in exchange therefor will receive from the NACT Exchange Agent or
from Holdco, as the case may be, payment of the amount of dividends and other
distributions, if any, which as of any date subsequent to the NACT Effective
Time and until such surrender will have become payable with respect to such
number of shares of Holdco Common Stock. No interest will be payable with
respect to the payment of any such presurrender dividends upon the surrender of
certificates theretofore representing shares of NACT Common Stock.
No fractional share certificates for Holdco Common Stock will be issued
upon the surrender for exchange of certificates evidencing shares of NACT Common
Stock. In lieu thereof, the NACT Exchange Agent or Holdco, as the case may be,
will pay each holder of NACT Common Stock an amount in cash calculated as
provided in the NACT Merger Agreement.
Risk of loss and title to certificates representing shares of NACT Common
Stock will pass only upon proper delivery of such certificates to the NACT
Exchange Agent.
World Access will deposit, or cause to be deposited, certificates
representing Holdco Common Stock for conversion of shares of NACT Common Stock
in accordance with the NACT Merger Agreement.
At the NACT Effective Time, the stock transfer books of NACT with respect
to shares of NACT Common Stock will each be closed, and there will be no further
registration of transfers of shares of NACT Common Stock thereafter on the
records of any such stock transfer books. In the event of a transfer of
ownership of shares of NACT Common Stock that is not registered in the stock
transfer records of NACT, at the NACT Effective Time, a certificate or
certificates representing the number of full shares of Holdco Common Stock into
which such shares of NACT Common Stock have been converted will be issued to the
transferee, together with a cash payment in lieu of fractional shares, if any,
and a cash payment in the amount of any presurrender dividends, if any, if the
certificate or certificates representing such shares of NACT Common Stock is or
are properly surrendered as described above, accompanied by all documents
required to evidence and effect such transfer and by evidence of payment of any
applicable stock transfer tax.
AT THE EFFECTIVE TIME OF THE MERGERS, EACH CERTIFICATE REPRESENTING
OUTSTANDING SHARES OF WORLD ACCESS COMMON STOCK WILL, WITHOUT ANY ACTION ON THE
PART OF THE HOLDER THEREOF, BE DEEMED TO REPRESENT AN EQUAL NUMBER OF SHARES OF
HOLDCO COMMON STOCK.
HOLDERS OF WORLD ACCESS COMMON STOCK SHOULD NOT SUBMIT CERTIFICATES
REPRESENTING THEIR SHARES OF WORLD ACCESS COMMON STOCK FOR EXCHANGE.
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THE NACT MERGER AGREEMENT
The following is a summary of the material provisions of the NACT Merger
Agreement, a copy of which is attached hereto as Appendix A and incorporated
herein by reference. The following summary is qualified in its entirety by
reference to the complete text of the NACT Merger Agreement.
THE MERGERS
Pursuant to the NACT Merger Agreement and on the terms and subject to the
conditions set forth therein, WAXS Merger Sub and NACT Merger Sub will be merged
into World Access and NACT, respectively. Following the Mergers, World Access
and NACT will each become a wholly owned subsidiary of Holdco.
Subject to the conditions set forth in the NACT Merger Agreement, the
closing of the Mergers (the "Closing") will take place on a date to be specified
by the parties, which shall be no later than the second business day after
satisfaction of the conditions described in the first paragraph under
"-- Conditions to the Mergers" below (the "Closing Date"). The Mergers will
become effective at the time specified in the certificates of merger filed with
the Secretary of State of the State of Delaware with respect to both the NACT
Merger and the World Access Merger. The time at which the NACT Merger becomes
effective is referred to as the "NACT Effective Time." The time at which the
Mergers become effective is referred to as the "Effective Time of the Mergers."
CONVERSION OF WORLD ACCESS COMMON STOCK
At the Effective Time of the Mergers, pursuant to the NACT Merger Agreement
(i) each issued and outstanding share of World Access Common Stock, other than
shares held directly or indirectly by World Access, will be converted into one
share of Holdco Common Stock, and upon such conversion all such shares of World
Access Common Stock will be canceled and retired and will cease to exist, and
(ii) all shares of World Access Common Stock held by World Access will be
canceled and retired and will cease to exist without payment of any
consideration therefor.
AT THE EFFECTIVE TIME OF THE MERGERS, EACH CERTIFICATE REPRESENTING
OUTSTANDING SHARES OF WORLD ACCESS COMMON STOCK WILL, WITHOUT ANY ACTION ON THE
PART OF THE HOLDER THEREOF, BE DEEMED TO REPRESENT AN EQUAL NUMBER OF SHARES OF
HOLDCO COMMON STOCK.
HOLDERS OF WORLD ACCESS COMMON STOCK SHOULD NOT SUBMIT CERTIFICATES
REPRESENTING THEIR SHARES OF WORLD ACCESS COMMON STOCK FOR EXCHANGE.
CONVERSION OF NACT COMMON STOCK
At the Effective Time of the Mergers, pursuant to the NACT Merger Agreement
(i) each issued and outstanding share of NACT Common Stock, other than shares
held directly or indirectly by World Access or Holdco or in the treasury of
NACT, will be converted into the right to receive shares of Holdco Common Stock
equal to the quotient of (x) $17.50 divided by (y) the World Access Average
Closing Price, unless the World Access Average Closing Price exceeds $25.52 per
share, in which event each outstanding share of NACT Common Stock will be
converted into 0.6857 shares of World Access Common Stock, and upon such
conversion all such shares of NACT Common Stock will be canceled and retired and
will cease to exist, and (ii) all shares of NACT Common Stock held by NACT will
be canceled and retired and will cease to exist without payment of any
consideration therefor. Notwithstanding the foregoing, if the World Access
Average Closing Price is less than $20.88 per share, then World Access may
terminate the NACT Merger Agreement. See "-- Termination of NACT Merger
Agreement."
HOLDERS OF NACT COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
SHARES OF NACT COMMON STOCK TO NACT. A LETTER OF TRANSMITTAL WILL BE MAILED
AFTER THE EFFECTIVE TIME OF THE MERGERS TO EACH PERSON WHO WAS A HOLDER OF
OUTSTANDING SHARES OF NACT COMMON STOCK IMMEDIATELY PRIOR
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TO THE EFFECTIVE TIME OF THE MERGERS. NACT STOCKHOLDERS SHOULD SEND CERTIFICATES
REPRESENTING NACT COMMON STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE,
AND IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED IN, THE LETTER OF TRANSMITTAL.
TREATMENT OF OPTIONS AND WARRANTS
At the Effective Time of the Mergers, pursuant to the NACT Merger
Agreement, each outstanding option or warrant to purchase World Access Common
Stock and each outstanding option to purchase NACT Common Stock will be assumed
by Holdco and converted into an option or warrant to purchase shares of Holdco
Common Stock. Following the Effective Time of the Mergers, each such option or
warrant will continue to have, and will be subject to, the same terms and
conditions as in effect immediately prior to the Effective Time of the Mergers,
except that each option to purchase shares of NACT Common Stock shall be
exercisable for that number of shares of Holdco Common Stock equal to the
product of the number of shares of NACT Common Stock for which such option was
exercisable immediately prior to the Effective Time of the Mergers multiplied by
the NACT Exchange Ratio, and the exercise price per share of such option will be
equal to the aggregate exercise price of such option immediately prior to the
Effective Time of the Mergers divided by the number of shares of Holdco Common
Stock for which such option will be exercisable immediately after the Effective
Time of the Mergers.
REPRESENTATIONS AND WARRANTIES
The NACT Merger Agreement contains customary representations and warranties
by both World Access and NACT as to, among other things, (i) due organization,
good standing and absence of violations of organizational documents; (ii)
ownership of subsidiaries and other investments; (iii) capital structure; (iv)
requisite corporate power and authority to enter into the NACT Merger Agreement
and to consummate the transactions contemplated by the NACT Merger Agreement;
(v) due authorization, execution and delivery of the NACT Merger Agreement; (vi)
validity and enforceability of the NACT Merger Agreement and the compliance of
the Mergers with charter documents, agreements and applicable laws; (vii)
required filings and approvals; (viii) the disclosure contained in documents
filed with the Commission and absence of certain undisclosed liabilities; (ix)
absence of certain material changes or events; (x) absence of certain
litigation; (xi) receipt of fairness opinion for NACT; and (xii) compliance with
laws.
CERTAIN COVENANTS
Conduct of Business Pending the Mergers. Pursuant to the NACT Merger
Agreement, NACT has agreed that, prior to the Effective Time of the Mergers,
NACT will carry on its business in the usual and ordinary course consistent with
past practice and will use its best efforts to preserve intact its business
relationships with third parties and to keep available the services of its
present officers and employees.
Indemnification and Insurance. Pursuant to the NACT Merger Agreement,
Holdco and World Access have agreed that all rights to indemnification for acts
or omissions occurring prior to the Effective Time of the Mergers existing in
favor of the current or former directors or officers of NACT as provided in the
NACT Certificate of Incorporation or the NACT Bylaws shall survive the NACT
Merger and shall continue in full force and effect in accordance with their
terms. Holdco has agreed to cause to be maintained, for a period of not less
than six years from the Effective Time of the Mergers, NACT's directors' and
officers' insurance and indemnification policy in effect as of February 24,
1998, to the extent that it provides coverage for events occurring prior to the
Effective Time of the Mergers, so long as the annual premium therefor would not
be in excess of the 125% of the last annual premium paid prior to February 24,
1998 (the "Maximum Premium"). If such policy expires, is terminated or canceled
during such six-year period, Holdco will use all reasonable efforts to cause to
be obtained as much of such insurance coverage as can be obtained for the
remainder of such six-year period for an annualized premium not in excess of the
Maximum Premium.
Access to Information. Pursuant to the NACT Merger Agreement, NACT has
agreed to afford to World Access and to its officers, employees, accountants,
counsel, financial advisors and other representatives
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reasonable access during normal business hours prior to the Effective Time of
the Mergers to all its properties, books, contracts, commitments, personnel and
records.
Certain Other Covenants. The NACT Merger Agreement also contains customary
covenants applicable to transactions like the Mergers, including covenants
relating to (i) consultation prior to the issuance of any press release or other
public statement, (ii) each party's obligation to pay its own fees and expenses,
(iii) the listing on Nasdaq of the shares of Holdco Common Stock to be issued in
the Mergers, (iv) execution and delivery of closing documentation and (v) use of
reasonable best efforts to cause each of the Mergers to qualify as a tax-free
incorporation transaction under Section 351 of the Code.
Conditions to the Mergers. The obligations of World Access and NACT to
consummate the Mergers are subject to certain conditions, including the
following: (i) the NACT Merger Proposal shall have been approved by the NACT
stockholders; (ii) the shares of Holdco Common Stock issuable pursuant to the
NACT Merger Agreement shall have been approved for trading on Nasdaq, subject to
official notice of issuance; (iii) no temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Mergers shall be in effect; (iv) the Registration Statement shall have
become effective under the Securities Act and shall not be the subject of any
stop order or proceedings seeking a stop order; and (v) all orders and approvals
of any governmental authorities required in connection with the consummation of
the transactions contemplated by the NACT Merger Agreement shall have been
obtained.
The obligation of World Access to consummate the NACT Merger is also
subject to certain additional conditions, including the following: (i) the
accuracy of the representations and warranties of NACT set forth in the NACT
Merger Agreement; (ii) NACT having performed in all material respects all
obligations required to be performed by NACT under the NACT Merger Agreement at
or prior to the Closing; (iii) receipt by World Access of a satisfactory opinion
of its tax counsel; and (iv) receipt of all necessary orders and permits
approving the transactions contemplated by the NACT Merger Agreement.
The obligation of NACT to consummate the NACT Merger is also subject to
additional conditions, including the following: (i) the accuracy of the
representations and warranties of Holdco, World Access, WAXS Merger Sub and NACT
Merger Sub set forth in the NACT Merger Agreement; (ii) Holdco, World Access,
WAXS Merger Sub and NACT Merger Sub having performed in all material respects
all their respective obligations required to be performed by them under the NACT
Merger Agreement at or prior to the Closing; (iii) receipt by NACT of a
satisfactory opinion of its tax counsel; and (iv) receipt of all necessary
orders and permits approving the transactions contemplated by the NACT Merger
Agreement.
TERMINATION OF THE NACT MERGER AGREEMENT
The NACT Merger Agreement may be terminated at any time prior to the
Effective Time of the Mergers pursuant to the mutual written consent of World
Access and NACT and, at the option of either World Access or NACT, under certain
circumstances, including the following (i) if at the NACT Meeting the NACT
Merger is not approved; (ii) if the Mergers shall not have been consummated on
or before December 31, 1998, unless the failure to consummate the Mergers is the
result of a willful and material breach of the NACT Merger Agreement by the
party seeking to terminate the NACT Merger Agreement; or (iii) if any court or
other governmental agency shall have issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise prohibiting the
Mergers, and such order, decree, ruling or other action shall have become final
and nonappealable.
The NACT Merger Agreement may also be terminated, at the option of World
Access, if the World Access Average Closing Price is less than $20.88.
EFFECTS OF TERMINATION
In the event of termination of the NACT Merger Agreement, the NACT Merger
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of World Access or NACT, except that each party will
be obligated to pay all expenses incurred by such party and, except as
specifically provided, will remain liable for any breach thereof.
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BUSINESS OF HOLDCO
Holdco is currently a wholly-owned subsidiary of World Access that does not
conduct any substantial business activities. As a result of the NACT
Transaction, World Access and NACT will each become a wholly-owned subsidiary of
Holdco. Accordingly, the business of Holdco will be the businesses currently
conducted by World Access and NACT. See "Business of World Access" and "Business
of NACT."
MANAGEMENT OF HOLDCO
BOARD OF DIRECTORS
The Holdco board of directors consists of the members of the World Access
board of directors and is divided into three classes. The directors in each
class serve staggered three-year terms expiring in 1998, 1999 and 2000,
respectively. There is currently one vacancy in the class with the term expiring
in 1999.
Set forth below is certain information, as of September 30, 1998,
concerning each of the directors of Holdco.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Stephen J. Clearman. Mr. Clearman (age 47) has served as a director of
World Access since 1988. Mr. Clearman co-founded Geocapital Partners. Since
1984, he has served as a general partner of four Geocapital venture capital
partnerships. Two of these partnerships (Geocapital Ventures and Geocapital II,
L.P.) were formerly principal stockholders of World Access. Mr. Clearman
currently serves as a director of Expert Software, Inc., MemberWorks
Incorporated, SeaMED Corporation and several private companies, all of which
principally provide computer software or information services.
Stephen E. Raville. Mr. Raville (age 50) has served as a director of World
Access since 1994. Mr. Raville has been Chairman of the Board and Chief
Executive Officer of Pointe Communications Corporation, an operator of
international communications networks, since October 1996. Mr. Raville is also
President and controlling shareholder of First Southeastern Corp., a private
investment company he formed in 1992. In 1983, Mr. Raville founded TA
Communications ("TA"), a long-distance telephone company, and served as its
President. In 1985, in conjunction with a merger between TA and Advanced
Telecommunications Corporation ("ATC"), he became Chairman and Chief Executive
Officer of ATC until the merger of ATC into WorldCom, Inc. ("WorldCom") in late
1992. He currently serves on the board of advisors of First Union National Bank
of Atlanta and the board of directors of Eltrax Systems, Inc. and several
private companies.
DIRECTOR WHOSE TERM EXPIRES IN 1999
Hensley E. West. Mr. West (age 53) joined World Access in January 1996 as
President and Chief Operating Officer and was elected a director in January
1996. From January 1994 to December 1995, he was Group Vice President for the
Access Systems Group of DSC Communications Corporation ("DSC"), a manufacturer
of digital switching, transmission and access telecommunications equipment.
During his nine year tenure with DSC, he held six sales and general management
positions, including Senior Vice President of North American Sales from July
1993 to December 1993, Vice President of Access Products Division from March
1992 to July 1993, Vice President of RBOC Sales from October 1991 to March 1992
and Vice President of Business Development from March 1990 to October 1991.
Prior to joining DSC, Mr. West held general, engineering and sales management
positions with California Microwave, Inc., ITT Telecommunications, Inc. and
Western Electric Co.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Steven A. Odom. Mr. Odom (age 45) joined the board of directors of World
Access in October 1994. In November 1994, he was appointed to the newly created
position of Chairman of the Board. In August 1995,
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he became Chairman and Chief Executive Officer of World Access. From 1983 to
1987, he founded and served as Chairman and Chief Executive Officer of Data
Contract Company, Inc. ("DCC"), a designer and manufacturer of intelligent data
PBX systems, pay telephones and diagnostic equipment. From 1987 to 1990, he was
Vice President for the Public Communications Division of Execution Information
Systems, Inc., a public company that acquired DCC in 1987. Mr. Odom formerly
served as a director for Telematic Products, Inc., a manufacturer of telephone
central office equipment, and Resurgens Communications Group, Inc. ("Old
Resurgens"), a provider of long distance operator services that later merged
with WorldCom.
John D. Phillips. Mr. Phillips (age 55) has served as a director of World
Access since 1994. In October 1997, Mr. Phillips was named Chairman and Chief
Executive Officer of Resurgens. He was President, Chief Executive Officer and a
director of Metromedia International Group, Inc. ("Metromedia"), a global media,
entertainment and communications company, from November 1995 until December
1996. Metromedia was formed in November 1995 through the merger of The Actava
Group, Inc. ("Actava"), Orion Pictures Corporation, MCEG Sterling Incorporated
and Metromedia International Telecommunications, Inc. Mr. Phillips served as
President, Chief Executive Officer and a director of Actava from April 1994
until November 1995. In May 1989, he became Chief Executive Officer of Old
Resurgens and served in this capacity until September 1993 when Old Resurgens
merged with Metromedia Communications Corporation and WorldCom.
For certain additional information concerning the directors of Holdco, see
the World Access Form 10-K, as amended, which is attached hereto as Appendix C
and incorporated herein by reference (the "World Access 10-K").
COMPENSATION OF DIRECTORS
In accordance with World Access' practice, it is expected that directors
who are all full-time employees of Holdco will receive no additional
compensation for their service as directors. Each non-employee director will
initially receive the same compensation for service on the Holdco board of
directors as received by non-employee directors on the World Access board of
directors.
For information concerning the compensation paid to non-employee directors
on the World Access board of directors, see the World Access 10-K.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to each person who is
an executive officer of Holdco, all of whom are the current executive officers
of World Access.
Steven A. Odom. Information regarding Mr. Odom is set forth above.
Hensley E. West. Information regarding Mr. West is set forth above.
Mark A. Gergel. Mr. Gergel (age 41) has served as Vice President and Chief
Financial Officer since he joined World Access in April 1992 and was appointed
Executive Vice President of World Access in January 1997. From 1983 to March
1992, Mr. Gergel held five positions of increasing responsibility with Federal-
Mogul Corporation, a publicly-held manufacturer and distributor of vehicle
parts, including International Accounting Manager, Assistant Corporate
Controller, Manager of Corporate Development and Director of Internal Audit.
Prior to joining Federal-Mogul, Mr. Gergel spent four years with the
international accounting firm of Ernst & Young. Mr. Gergel is a Certified Public
Accountant.
Scott N. Madigan. Mr. Madigan (age 40) joined World Access in March 1996
as Vice President of Business Development. Mr. Madigan spent the prior four
years with DSC as Vice President of Marketing for the Access System Group and
Vice President of Litespan International Operations and Wireless Access
Marketing. From 1987 to 1992, he held product and account management positions
with Northern Telecom, where he was responsible for identification, assessment
and development of new business opportunities for Northern Telecom's switching,
transport and access products. Prior to 1987, Mr. Madigan held engineering and
operations management positions with California Microwave, Inc. and ITT
Telecommunications, Inc.
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Hatch Graham. Mr. Graham (age 38) joined World Access in April 1997 as
President of the Transport and Access Systems Group. From 1995 to 1997, Mr.
Graham held executive management positions with TCSI Corporation, a leading
provider of digital Code Division Multiple Access and Time Division Multiple
Access cellular and PCS products. From 1987 to 1995, Mr. Graham held various
product development and executive management positions with Stanford Telecom
Corporation, including Vice President of the ASIC and Custom Products Division
and Corporate Vice President and General Manager of the Telecom Products Group.
Prior to 1987, Mr. Graham held engineering management positions with American
Microsystems, Inc. and Zoran Corporation.
For certain additional information concerning the executive officers of
Holdco, see the World Access 10-K.
COMPENSATION OF EXECUTIVE OFFICERS
Holdco has not yet paid any compensation to its Chief Executive Officer or
any other executive officer, and the form and amount of such compensation to be
paid to each such executive officer in any future period is expected to be
substantially similar to the form and amount of such compensation that World
Access would have paid to such executive officer in such period. Holdco will
assume the severance protection agreements that are currently in effect between
World Access and several of its executive officers.
For information concerning the compensation paid to the Chief Executive
Officer and the other four most highly compensated executive officers of World
Access for the 1997 fiscal year, see the World Access 10-K.
PROPOSED CHANGES TO MANAGEMENT OF HOLDCO
In connection with the Resurgens Transaction, Holdco intends to enter into
employment agreements with each of Messrs. Phillips, Odom, West and Gergel and
with W. Tod Chmar. Each agreement is expected to provide for (i) a two year term
which will be automatically renewed on an annual basis for an additional one
year term to maintain its two year term unless either party gives notice to the
other of its intention not to so renew at least 90 days' prior to the
termination of its anniversary, (ii) the payment of a specified base salary in
the discretion of Holdco's board of directors, (iii) the payment of an annual
bonus in the discretion of Holdco's board of directors and based on the
financial performance of Holdco and the individual performance of each
executive, (iv) a prohibition on the employee's disclosure of confidential
information for a period of two years following termination, (v) continuation of
each employee's salary and the benefits for 24 months, in the case of Messrs.
Phillips and Odom, or 12 months, in the case of Messrs. West, Gergel and Chmar,
following his termination by Holdco without cause or by him for good reason and
(vi) the acceleration of the vesting of outstanding options and warrants held by
such employee. The base salaries to be paid to Messrs. Phillips, Odom, West,
Gergel and Chmar have not yet been determined but will be approved by Holdco's
compensation committee concurrent with the consummation of the Resurgens
Transaction.
It is anticipated that, upon consummation of the Resurgens Transaction, Mr.
Phillips will be the Chairman of the Board of Holdco and Mr. Odom will be the
President and Chief Executive Officer of Holdco, Mr. West will be the President
and Chief Executive Officer of World Access, Mr. Gergel will be the Executive
Vice President and Chief Financial Officer of Holdco and Mr. Chmar will be an
Executive Vice President of Holdco.
The Telco Merger Agreement provides that the existing vacancy on the board
of directors of Holdco is to be filled upon consummation of the Telco Merger by
a person mutually acceptable to the boards of directors of Holdco and Telco.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of World Access Common Stock as of September 30, 1998, by (i) each
person known to World Access to be the beneficial owner of five percent or more
of the World Access Common Stock, (ii) each of the directors and executive
officers of World Access and (iii) the directors and executive officers of World
Access as a group. This table is based on information provided by World Access'
directors, executive officers and principal stockholders.
<TABLE>
<CAPTION>
SHARES UNDER
EXERCISABLE OPTIONS TOTAL SHARES PERCENTAGE
NAME SHARES OWNED(1) AND WARRANTS(2) BENEFICIALLY OWNED OWNED
- ---- --------------- ------------------- ------------------ ----------
<S> <C> <C> <C> <C>
FMR Corp.(3)......................... 2,327,945 -- 2,327,945 10.2%
Pilgrim Baxter & Associates,
Ltd.(4)............................ 1,843,640 -- 1,843,640 8.1
Hambrecht & Quist Group(5)........... 1,429,907 -- 1,429,907 6.3
Steven A. Odom+++(6)(7).............. 767,410 179,000 946,410 4.1
Stephen E. Raville+.................. 268,000 -- 268,000 1.2
Hensley E. West+++(7)................ 215,321 68,125 283,446 1.2
Stephen J. Clearman+(8).............. 172,210 62,000 234,210 1.0
Mark A. Gergel++(7).................. 57,953 115,000 172,953 *
John D. Phillips+.................... -- 117,340 117,340 *
Scott N. Madigan++(7)................ 2,143 47,500 49,643 *
Hatch Graham++....................... -- -- -- *
All directors and executive officers
as a group(8 persons).............. 1,483,037 588,965 2,072,002 8.9
</TABLE>
- ---------------
* Less than one percent
+ Director
++ Executive Officer
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act ("Rule 13d-3"). Unless otherwise noted, World Access
believes that all persons named in the table have sole voting and investment
power with respect to all shares of World Access Common Stock beneficially
owned by them.
(2) Includes shares which may be acquired by the exercise of stock options and
warrants granted by World Access and exercisable on or before November 30,
1998.
(3) Based upon its Schedule 13G filed May 10, 1988, Fidelity Management &
Research Company ("Fidelity"), 82 Devonshire Street, Boston, Massachusetts
02109, a wholly-owned subsidiary of FMR Corp. and an investment advisor
registered under section 203 of the Investment Advisers Act of 1940, as
amended, is the beneficial owner of shares of World Access Common Stock
listed above as a result of acting as investment adviser to various
investment companies registered under Section 8 of the Investment Company
Act of 1940, as amended. The amount listed above includes 641,345 shares of
World Access Common Stock issuable upon conversion of the 4.5% Convertible
Subordinated Notes of World Access held by Fidelity or its affiliates.
(4) Based upon its Schedule 13G filed on February 17, 1998, Pilgrim Baxter &
Associates, Ltd. ("Pilgrim Baxter") is an investment advisor registered
under section 203 of the Investment Advisors Act of 1940. Its principal
place of business is 825 Duportail Road, Wayne, Pennsylvania 19087. Of the
total shares of World Access Common Stock beneficially owned by it, Pilgrim
Baxter has sole power to vote or to direct the vote of only 1,601,340 shares
of World Access Common Stock.
(5) Based on its Schedule 13G filed on March 9, 1998, Hambrecht & Quist Group
("H&Q Group") may be deemed to own the shares of World Access Common Stock
owned by Hambrecht & Quist California ("H&Q California"), a wholly-owned
subsidiary of H&Q Group. H&Q Group's and H&Q California's principal place of
business is One Bush Street, San Francisco, California 94104.
(6) Includes 18,000 shares held in the aggregate by two minor children of Mr.
Odom.
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(7) Includes the following number of shares acquired through voluntary employee
contributions to World Access' Profit Sharing and Retirement Savings Plan
(the "401(k) Plan") and contributed to the 401(k) Plan by World Access under
a matching contribution feature offered to substantially all employees of
World Access: Mr. Odom-800 shares; Mr. West-621 shares; Mr. Gergel-2,828;
and Mr. Madigan-143 shares.
(8) Includes an aggregate of 126,000 shares owned by Geocapital II, L.P. and
Geocapital Ventures, of which Mr. Clearman may be deemed a beneficial owner
under Rule 13d-3 because he has shared investment and voting power.
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BUSINESS OF WORLD ACCESS
World Access develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. World Access' products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. World Access offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. The products offered by World
Access include those manufactured by World Access, as well as those manufactured
by other telecommunications equipment companies. To support and complement its
product sales, World Access also provides its customers with a broad range of
design, engineering, manufacturing, testing, installation, repair and other
value-added services.
The global telecommunications industry has undergone significant
transformation and growth in recent years due to domestic deregulation,
technological innovation and growth in international markets. In addition,
business and residential demand for voice, data and video telecommunications
services has increased the need for additional systems capacity and network
bandwidth to accommodate the provision of such services by telecommunications
providers. World Access believes that these market forces will intensify in the
foreseeable future and that an increased number of telecommunications service
providers, the availability of new services and strong international demand for
the deployment of basic telephone service will provide World Access with
extensive opportunities to sell its wireline and wireless switching, transport
and access products in the United States and in international markets.
World Access markets and sells its products and services to over 200
telecommunications service providers. Its customers include all of the regional
Bell companies, including BellSouth, SBC Communications, Bell Atlantic and
NYNEX; other local exchange carriers such as Century Telephone, Alltel and
Puerto Rico Telephone; inter-exchange carriers such as Sprint and Cable &
Wireless; wireless service providers such as Cellular One, Comcast Cellular and
Price Cellular; and other service providers entering the telecommunications
industry such as competitive access providers, cable television companies and
private network operators.
From May 1995 to August 1997, World Access acquired five telecommunications
products businesses: AIT, Inc. ("AIT"), a full-service provider of Northern
Telecom switching systems, frames and related circuit boards; Westec
Communications, Inc. ("Westec"), a provider of microwave and millimeterwave
systems and services for voice, data and video applications; Sunrise Sierra,
Inc. ("Sunrise"), a developer and manufacturer of intelligent transport and
access products; Cellular Infrastructure Supply, Inc. ("CIS"), a provider of
equipment and related design, installation and technical support services to the
cellular and PCS markets; and Galaxy Personal Communications Services, Inc.
("Galaxy"), a provider of system design, implementation, optimization and other
value-added radio engineering and consulting services to PCS, cellular and other
wireless telecommunications service companies. These five acquisitions (the
"Acquisitions") broadened World Access' line of products, enhanced its product
development capabilities and strengthened its ability to provide complete
telecommunications network solutions to its customers.
World Access has realized significant improvements in its sales and
operating results since 1994 as a result of the Acquisitions and internal growth
initiatives. World Access' total sales increased by 97.2% in 1995, 69.2% in 1996
and 82.3% in 1997. Total sales for the first six months of 1998 increased by
41.5% over the last six months of 1997. As World Access increased its product
sales from 18.2% of total sales in 1994 to 76.8% of total sales in 1997, its
gross profit margin increased from 12.9% in 1994 to 21.1% in 1995, 29.4% in 1996
and 34.6% in 1997. As a percentage of total sales, World Access' operating
income (loss) increased from (8.5%) in 1994 to 5.0% in 1995, 14.4% in 1996 and
21.0% in 1997.
Although World Access has aggressively pursued acquisitions in recent
years, approximately 50% of its total sales growth since 1994 has come from
internal growth initiatives. World Access has had considerable success in
growing businesses subsequent to their acquisition, due in part to its ability
to provide working capital, an extensive base of telecommunications customers
and a broad range of support services.
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World Access' objective is to continue to broaden its offering of wireline
and wireless switching, transport and access products and expand its geographic
market coverage to become a preferred provider of telecommunications products
and related services. In order to achieve this objective, World Access plans to
continue its strategy of (i) acquiring switching, transport and access products
companies; (ii) developing proprietary products; (iii) pursuing opportunities to
license and manufacture telecommunications products; (iv) leveraging its
existing customer relationships and distribution base; (v) focusing on emerging
international markets; and (vi) leveraging World Access' manufacturing, test and
service capabilities.
On January 29, 1998, World Access acquired Advanced TechCom, Inc. ("ATI"),
a Wilmington, Massachusetts based designer and manufacturer of digital microwave
and millimeterwave radio systems for short and long haul voice, data and video
applications.
On May 12, 1998, World Access announced that it had entered into the
Resurgens Merger Agreement and the Exchange Agreement. Resurgens is a
facilities-based provider of international network access, commonly referred to
in the industry as a carriers' carrier. Resurgens had consolidated revenues of
approximately $165.5 million for the year ended December 31, 1997 and $10.4
million for the six months ended June 30, 1998 and incurred a net loss of $171.7
million for the year ended December 31, 1997 and $29.3 million for the six
months ended June 30, 1998.
On June 4, 1998, World Access announced that it had entered into the Telco
Merger Agreement. Telco is a manufacturer of broadband transmission products,
network access products and bandwidth optimization products for network
services. It had net sales of approximately $117.8 million for its fiscal year
ended August 31, 1997 and $81.6 million for the nine months ended May 31, 1998
and incurred a net loss of $1.1 million for the year ended August 31, 1997 and
$2.9 million for the nine months ended May 31, 1998.
World Access' principal executive offices are located at 945 East Paces
Ferry Road, Suite 2240, Atlanta, Georgia 30326. Its telephone number is (404)
231-2025.
Additional information concerning World Access is included in documents
previously filed by World Access with the Commission and which are attached
hereto as appendices and incorporated herein by reference. See "Available
Information" and "Incorporation of Certain Documents by Reference."
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BUSINESS OF NACT
NACT provides advanced telecommunication switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops and manufactures all hardware and software elements necessary
for a complete fully integrated, turnkey telecommunications switching solution.
Its customers do not require the multiple suppliers of hardware and value added
resellers of software that would otherwise be necessary to provide a wide range
of services and applications. NACT's customers include national and
international long distance carriers, prepaid debit card and prepaid cellular
network operators, international call back/reorigination providers and other
specialty telecommunications service providers.
NACT's products and services include the STX application switching
platform, the NTS telemanagement and billing system (the "NTS"), facilities
management services, and selling and servicing LCXs. The STX (the "STX") is an
integrated digital tandem switching system that currently supports up to 1,344
ports per switch and can be combined with two additional STXs to provide a total
capacity of 4,032 ports per system. The STX includes proprietary systems
software that enables standard applications such as 1+ and optional advanced
applications such as international call back/reorigination, prepaid debit card
and prepaid cellular. NACT has targeted the STX, with its enhanced features and
scaleable capacity, to an expanded group of customers, including independent
telephone companies, Competitive Access Providers ("CAPs")/ Competitive Local
Exchange Carriers ("CLECs"), shared tenant service providers, Fortune 1000
corporations and local telephone companies within and outside the United States.
The NTS performs call rating, accounting, switch management, invoicing and
traffic engineering for multiple switches that may either be NACT switches or a
number of other industry switches. In conjunction with the sale of a system,
NACT offers a facilities management service whereby NACT will operate and
maintain a customer's switch for a fee. In providing this service, NACT enables
its customers to direct their attention toward marketing their products rather
than initially focusing on the technical aspects of operating a switch.
On July 1, 1997 NACT completed the planned move of its corporate
headquarters and manufacturing facilities from Orem, Utah to Provo, Utah. The
new building was paid for from the proceeds of NACT's initial public offering
completed in March 1997. The new facility has increased NACT's manufacturing
capabilities by approximately 300%. NACT's former corporate headquarters and
manufacturing facility was being leased on a month-to-month basis.
In fiscal 1997, NACT opened new sales and technical support offices in
Florida, New York and the United Kingdom. NACT made its first international
sales of its STX and NTS products in the fiscal fourth quarter of 1997.
INDUSTRY BACKGROUND
Deregulation of long distance phone service in 1984 opened competition in
the telecommunications market to companies such as MCI Communications, Inc.
("MCI"), Sprint Corporation ("Sprint"), WorldCom and many smaller specialty
services providers. Today, there are over 450 long distance companies in the
United States according to the FCC. In addition to basic long distance calling
(1+), many of these companies are providing high value added, specialty long
distance products such as international call back/ reorigination, prepaid debit
card and prepaid cellular to differentiate their services from each other and to
generate higher margin revenue than basic long distance phone services can
provide.
International call back/reorigination. International call
back/reorigination companies provide least-cost long distance calling services
from one foreign country to another through the use of a switch located in the
United States that takes advantage of the lower rate per call charged in the
United States. NACT believes that as deregulation takes place in specific
countries, international call back/reorigination providers will be positioned
for additional opportunities to provide direct dial international calling by
virtue of their established customer base.
Prepaid debit cards/Prepaid cellular. Prepaid debit cards allow users to
make long distance calls from any touch tone phone based on a given number of
minutes that have been credited to the card. Prepaid debit card applications
include promotional campaigns, fund raising for charitable organizations and
budgeted out-
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of-town calling for travelling employees. In addition, prepaid debit cards allow
long distance companies to generate revenues from a base of customers who would
otherwise not have the opportunity to take advantage of long distance services
due to credit and other considerations. An emerging application in the prepaid
market is prepaid cellular, a service whereby cellular phone users can limit
their monthly dollar usage automatically in the same manner that a prepaid debit
card limits the time a user can call. NACT believes that the potential prepaid
cellular market is not currently being effectively addressed in the United
States. The potential market consists of a large number of potential users who
either are denied traditional cellular service due to lack of credit or need to
limit the usage of cellular service. Prepaid cellular offers a way to capture
revenue from these potential subscribers.
1+. One plus is a dialing method that enables equal access to telephone
networks by all service providers offering direct dial long distance, whether
inside or outside of a caller's own area code. This protocol also enables the
introduction of telephone exchanges with the same three digits as area codes.
The 1+ market is comprised of both large global companies, including MCI,
Sprint, AT&T and WorldCom and smaller, entrepreneurial long distance providers
that are either facilities based or switchless. Historically, these smaller
specialty services providers have competed exclusively based on price. However,
NACT believes that these companies are competing increasingly based on their
ability to provide enhanced services as well as on price.
As long distance service providers have increasingly offered enhanced
services to their customers, demand for these services has also increased in the
local exchange market. Competitors such as CAPs, CLECs, cellular and Personal
Communications Services Providers ("PCS"), specialized mobile radio companies
and, more recently, cable television providers have begun rapidly deploying
enhanced services and providing cost effective interfaces to long distance
carriers. In addition, the Telecommunications Act of 1996 allows CLECs to
compete with the incumbent Local Exchange Carrier ("LEC") (generally, the RBOC
or GTE) for basic local telephone service. Additionally, demand for enhanced
services is expected to increase internationally as new service opportunities
result from the combination of privatization of previously government-owned
telecommunications systems, competition created in these international markets
and the creation of services in developing countries with typically low
densities of telephones.
NACT believes that companies competing in this new environment require
switching platform systems that are flexible to meet the diverse requirements of
an expanding array of applications. These systems must be compatible with the
variety of transmission technologies utilized by telephone companies and must be
capable of processing multiple concurrent services. In order to provide enhanced
services to end users, a provider must purchase (i) one or more applications
switch platforms, (ii) software applications to run the switches and provide
system functionality and (iii) a billing system. Historically, an entrepreneur
interested in entering the international call back/reorigination, prepaid debit
card and prepaid cellular markets had to purchase each of these components from
a separate vendor. Customers who purchase components from different sources
must, either on their own or through the services of a consultant, configure the
disparate components and provide for the system's maintenance and upgrading.
This requires a significant expenditure of time and money, limits
interoperability and technology upgrading, and diverts company resources. NACT
believes that in today's market environment its customers require solutions that
allow quick, easy entry into the market, flexibility to add new services and
additional capacity, high reliability and low cost.
THE NACT SOLUTION
NACT provides its customers with a complete, integrated package consisting
of both the application platform hardware and the operations application
software necessary to provide a full array of intelligent network services. NACT
offers a switching solution that includes essentially all of the key elements
necessary to enable a customer to offer enhanced services, such as the
installation of the switch, the training of the customer for the use of the
switch, available applications, a billing system, consulting services, and
ongoing customer support. NACT believes that it is the only provider of a system
that integrates all of these components into one comprehensive package that
includes a broad range of applications, competitive pricing, interoperability
and scaleable port capacity. NACT sells its products to long distance carriers,
international call back/reorigination providers, prepaid debit card and prepaid
cellular network operators and other specialty telecommunications service
providers.
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NACT offers a turnkey system, integrated with customer support that can be
quickly implemented and upgraded to meet evolving market requirements. NACT
makes available to its customers a full array of technical and commercial
support on a 24-hour-a-day, seven-day-a-week basis. NACT also offers to manage
and operate a customer's application platform and provide competitively priced
network services. Further, NACT continually develops enhancements to its
software applications in an effort to enable its customers to utilize the latest
technologies and most efficient systems available. NACT strives to address its
customers' specific needs and regularly enhances its products to meet such
needs. NACT believes its products enable its customers to enter the marketplace
and expand their businesses with increased switching capacity and software
applications as the need arises.
PRODUCTS
NACT's product line consists of the STX Switching System, the NTS billing
system and the LCX switching platforms.
STX SWITCHING SYSTEM. NACT's STX Switching System consists of an
integrated application switching platform and a suite of applications software.
NACT sells an optional companion Master Control Unit ("MCU") to integrate and
service multiple STXs and to add redundancy to the network. NACT has targeted
the STX to an expanded group of customers, including larger enhanced long
distance providers, independent telephone companies, CAPs/CLECs, shared tenant
service providers, Fortune 1000 corporations and local telephone companies in
other countries. NACT believes that its STX switching platform meets or exceeds
the scaleability, performance, interoperability and reliability standards of
this expanded customer base. NACT believes that the STX offers value added
features and capacity at price points typically below those offered by its
competitors.
The STX application switching platform was designed as a hardware platform
for the enhanced service features that are delivered by NACT's own suite of
applications software. The STX platform consists of a digital tandem switch that
currently supports up to 1,344 ports per switch. It is a single chassis design
with dual disk drives or RAID mass storage, digital audiotape (DAT) or digital
linear tape (DLT) back-up, console and dual modems. The simplicity of its design
makes it a reliable hardware platform to which enhanced telecommunications
service features can easily be added by software. The STX platform has also been
designed so that users can easily replace boards by hotswapping them, a process
that does not require the user to shut down or temporarily disable the switching
system.
The STX applications switching platform has a cost-effective design
incorporating only three types of boards, CPU, T-1 and DSP, and a chassis with a
backplane that supports 2,048 time slots. The current CPU board is powered by a
33 MHz Motorola 68040 processor and contains 64 or 128 megabytes of RAM, a
SCSI-2 peripheral interface, two ARCnet LAN controllers (backplane and external
for communication with the MCU and other STX switches), eight RS-232 serial
ports and alarm LEDs and external relays. The T-1 board is powered by a Motorola
processor and has two megabytes of RAM, an ARCnet LAN controller, and eight T-1
interface controllers that handle 192 ports. The DSP board uses a Motorola
processor with eight megabytes of RAM, an ARCnet controller, three DSP
processors (96 or 120 channels of tone decoding or encoding) and a 64-channel
audio device for the playback of integrated audio messages or the temporary
recording of audio. Each DSP board may cache up to seven megabytes of
frequently-used audio phrases, regardless of language. All boards have been
designed with low-cost components.
The STX hardware platform can operate on a standalone basis with a port
capacity of 1,344. NACT's optional MCU can link up to three STXs, which can be
served by a common database for a total system capacity of 4,032 ports. The STX
is also designed to work seamlessly with NACT's NTS 1000 and future NTS 2000
billing systems.
NACT's suite of STX applications software consists of over one million
lines of code. This software supports major application features that are fully
integrated and interoperable. The major applications features include equal
access calling (1+), automated operator (0+), live operator service provider
support (0-), real-time validation of credit card and billing numbers, prepaid
debit cards, prepaid cellular, international call back, phone centers, real-time
rating, fraud minimization, external computer application programming
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interfaces, call re-origination, and integrated audio with twenty three
languages. Interoperability enables several applications packages to be used in
conjunction with each other. For example, a prepaid, international call back
call can be assisted by a live operator and rated as a prepaid,
operator-assisted, international call back call. Almost all features are
implemented in software, allowing unlimited capability for enhancement and
customization.
The Master Control Unit allows interconnectivity between multiple NACT STX
platforms and permits database information to become centralized by connecting
co-located NACT systems. Interconnectivity permits expanded carrier call
routing. With more ports available due to the MCU, the likelihood of a caller
receiving a "system busy" signal is essentially eliminated. Downtime of a single
switch has minimal caller impact when proper carrier management is used.
The STX architecture allows configurations from 24 to 1,344 ports in a
single chassis. The MCU allows up to three STX platforms to use a single, common
database and to appear as a single applications system of up to 4,032 ports with
common control of required features such as concurrency checking and fraud
minimization. This performance is achieved using the current Motorola 68040 CPU
board. With a new CPU board under development by NACT, incorporating a Motorola
68060 microprocessor, the STX and MCU systems will achieve the full capacity of
their architectures of 2,048 and 8,192 ports, respectively.
The STX applications platform with the Motorola 68040 CPU board can process
eight million call minutes per month in a 1,024 port nonblocked configuration.
The Motorola 68060 processor will increase capacity to 16 million call minutes
in a 2,048 port nonblocked configuration. By linking four STXs with the MCU,
capacity is expected to increase to 64 million call minutes per month using the
Motorola 68060 CPU board.
The STX applications platform has been developed to allow multiple
application packages to run simultaneously and in a seamless fashion. An example
would be a client wishing to use international call back/ reorigination, with
the assistance of an operator to place the call, and the cost of the call being
debited from the client's prepaid calling account. Virtually all features are
implemented in the software allowing unlimited capability for enhancement and
customization.
The STX applications platform is designed using digital components and is
capable of running on single or redundant power supplies. When multiple STX
platforms are placed under the control of an MCU, the failure of a single STX
platform is handled through carrier routing of calls into the remaining STX
systems. With the introduction of the redundant MCU feature, the failure of a
single STX will not compromise the routing of calls through the system.
NTS BILLING SYSTEM. The NTS 1000 is a call rating, accounting, switch
management, invoicing and traffic engineering system designed to process the
day-to-day operations of a small-to-medium sized long distance company. The NTS
1000 can collect calls from most major switching platforms, including the STX
and LCX application platforms, and can rate all types of call traffic and, using
a sophisticated rating engine, provides the owner with a highly flexible and
completely customized rating capability. The accounting system handles all of
the required information for managing a long distance customer base, including
configuration of authorization codes, ANIs, accounts receivable, and management
of delinquent accounts. A major feature of the NTS 1000 is its switch management
capability. When coupled with the STX and LCX application platforms, information
that has been entered into the NTS 1000 can be electronically transferred into
these systems, thereby minimizing data entry needs. This integrated
communication between the NTS 1000 and the LCX and STX also allows for automatic
disabling of authorization codes or ANIs when credit limits are exceeded. The
NTS 1000 also has complete international call back/reorigination and prepaid
debit card management support, as well as a complete invoicing package that
supports multiple invoice styles and options for summary reports. It has a
sophisticated traffic engineering reporting package that provides the ability to
generate over 20 types of reports with a user specified beginning and ending
time range.
The NTS 1000 system uses high performance Pentium Pro servers using RAID
and error correcting code (ECC) memory with the option of adding additional
processors. It uses SCO's latest Unix offering, 5.0.4, which supports multiple
processors and has full LAN support and enhanced Unix graphical user interface
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(GUI) system administration tools. The NTS 1000 uses Unify's relational database
management system (RDBMS) for storage of information and for screen entry and
reports. Access to the application can be either through a LAN using a terminal
emulation package on PCs or using terminals connected directly through RS-232
ports.
The NTS 2000 is NACT's next generation billing system. This system is a
state-of-the-art product incorporating leading edge technology and data
processing techniques. This new product integrates the popular features and
functionality of NACT's existing NTS 1000 billing system with the following
major enhancements: real time data processing, including call collection and
call rating; user friendly graphical user interface (GUI); open system
connectivity, which allows integration with other information systems; enhanced
security; and audit trails of user activity. This new system utilizes Informix's
industry standard On-Line Dynamic Server RDBMS, which provides for expanded
growth and also takes advantage of multiprocessor configurations. The new GUI
screens provide an advanced user interface, which dramatically increases user
productivity by consolidating operational, and management needs and providing an
environment that is user friendly and intuitive. The NTS 2000 has additional
functionality, including support of 20 digit authorization code numbers,
complete support of international rating, real time credit limit checks, and
real-time customer support management.
The NTS 2000 has been released to multiple customers on a beta test basis
during the first and second quarter of calendar 1998 and is projected to be
released for general sale during the first quarter of calendar 1999.
LCX SWITCHING SYSTEM. Prior to introducing the STX, NACT's principal
product was the LCX applications platform, which has a maximum capacity of 480
ports in a single cabinet configuration. While NACT continues to sell
refurbished LCXs and support users of LCXs, NACT does not plan to manufacture
additional LCXs or develop ongoing enhancements for the LCX. The versatility of
the LCX, which was designed to operate in an unattended environment, enables it
to provide, in an integrated fashion, the following applications: long distance;
pay phone or courtesy phone network management; international call back/
reorigination; and prepaid debit card. During the introduction of the STX, NACT
offered an option to customers of the LCX to return their LCX system in exchange
for a discount on their purchase of an STX system. NACT refurbished and resold
the returned LCX systems, which were attractive to customers with lower capacity
and feature requirements. The reliability of the LCX enabled the system to be
easily refurbished by general cleaning and functional testing procedures. The
system was then upgraded to the latest LCX configuration, including both
hardware and software, and made ready for shipment to customers.
SERVICES
NACT offers facilities management services to its customers who do not have
or plan to hire technical operators. This service allows the customer to
concentrate on marketing its products while NACT operates and maintains its
switch for a fee. NACT offers facilities management services to facilitate sales
of its switches. NACT also provides competitively priced domestic and
international network services to its customers, thereby facilitating their
smooth entry into the communications business. Through the aggregation of
customer traffic, NACT has negotiated favorable carrier rates from the major
interexchange carriers. Currently, the switch room that houses a customer's
equipment is located at NACT's headquarters in Provo, Utah.
CUSTOMERS
NACT's applications platforms and billing systems have been accepted in a
variety of segments of the telecommunications industry and serve a broad array
of domestic and international applications. To date, NACT estimates that it has
installed over 500 application switching and billing systems.
NACT's customers are diverse and represent many different aspects of the
telecommunications industry. These customers have implemented a wide variety of
features on the STX switching platform and NTS billing system, including prepaid
debit card, international call back, operator services, prepaid cellular and
other applications for specialty markets.
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SALES AND MARKETING
NACT primarily sells its products through a direct sales force located at
its headquarters and through remote sales offices in New York, Florida and
London. NACT's marketing strategy is to generate leads through attendance at
trade shows, advertising in industry periodicals and referrals from existing
customers. NACT convenes annual two-day round table discussions for its
customers. NACT invites its customers to meet in an environment of cooperation
and collaboration to discuss their experiences with NACT's products, providing
significant consideration for future NACT product development and enhancement.
NACT has established a sales presence in the United Kingdom and plans to
establish a sales presence in other countries it believes to be strategically
advantageous. NACT believes that a sales organization that understands and can
solve complex switching and network management and billing systems requirements
is necessary to sell its products to specialty telecommunications network
service providers and corporate end users. NACT intends to invest significantly
to enlarge its sales organization in order to expand its customer base.
NACT expects that its technical support organization and customer referrals
will continue to be an important factor in NACT's sales. In attempting to
broaden its customer base, NACT will be marketing its products and services to
larger telephony providers whose procurement processes are generally more
protracted and may be expected to require additional effort on NACT's part.
During the fourth quarter of fiscal 1997, NACT sold its first STX switching
and NTS billing systems outside the United States. NACT believes that there is
substantial opportunity for future growth in the international market,
particularly in the developing countries and in countries in which the
telecommunications industry is being deregulated. NACT intends to address these
opportunities by creating an international sales force and by marketing its
products through international partners directly involved in telecommunications
equipment sales.
TECHNICAL SUPPORT
NACT's technical support staff provides business consulting as well as
trouble-shooting services to its customers. NACT's customers operate in an
environment in which reliability and availability of technical support are
increasingly critical factors. Such value-added services have resulted in a
recurring stream of revenues for NACT.
NACT's technical support department installs and supports systems sold by
NACT and provides ongoing services that include training, business
consultations, trouble-shooting and upgrades. Since NACT sells a single
switching solution that includes essentially all of the key elements a customer
needs to offer enhanced services, a customer need not look beyond NACT, its
"single source," for its technical switching solutions.
The technical support department is involved with a customer as soon as a
sale has been finalized. A detailed pre-installation checklist is completed with
the customer prior to installation. A technical support engineer installs the
equipment at the customer's location, configures software for the specific
applications to be utilized and brings up the telephone circuits. Typically, a
system is operational shortly after it is delivered.
After the equipment is installed, NACT's technical support department works
with the customer to keep the equipment functioning reliably. Modem access to
all customer equipment enables NACT's technical support personnel to perform
diagnostics, trouble-shoot equipment, perform software upgrades, transmit
programs and configure hardware from a remote location. In addition, technical
support provides consulting services on network issues and additional
applications.
To quickly and efficiently resolve customer issues, the technical support
department uses an automated tracking system that contains the complete
installed customer database, software and hardware configuration, site
addresses, contacts and modem phone numbers. An incoming customer call is
monitored on this system, and the status of the resolution of the customer
problem and the mean-time to repair are updated and maintained for reporting
back to the customer. An incident escalation procedure ensures that all customer
problems receive appropriate visibility until a solution has been achieved. The
technical support department
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maintains 24-hour, 7-day-a-week emergency service coverage. NACT's equipment is
warranted for one year, after which the customer pays an annual fee for factory
support. Factory support includes toll free telephone support, as well as all
operating system software upgrades and free board repair. These upgrades allow
NACT's customers to take advantage of software enhancements offered by NACT.
NACT's main technical support operations are located at its headquarters.
NACT has also established technical support satellite offices in New York,
Florida and the United Kingdom. NACT plans to expand the department into several
key locations in conjunction with the opening of additional sales offices.
RESEARCH AND DEVELOPMENT
NACT's research and development efforts are focused on the development of
both new products (not based on existing core technologies) and the addition of
new features and capabilities to its existing suite of products. The research
and development department continually works to improve the quality of NACT's
products and to ensure that such products meet industry standards and government
regulations. In addition, NACT is working toward the successful development of
new products that will enable it to offer additional intelligence to a
customer's existing network. During the past 16 years, NACT's engineers have
introduced seven hardware platforms, 10 software applications, 20 international
language software packages and numerous enhancements to such products.
NACT is working to increase the port capacity of the STX and to improve and
supplement its enhanced services and its billing system platform. NACT is
incorporating the Motorola 68060 CPU board into the STX application platform to
enable the STX to support 2,048 ports per chassis or 8,192 ports per integrated
MCU system. With the Motorola 68060 processor, the STX is expected to process up
to 16 million call minutes per month in a 2,048 port nonblocked configuration or
can be combined with three additional STXs to provide up to 64 million call
minutes per month.
NACT is currently developing an improved billing system, the NTS 2000,
which is being designed for real time transaction processing and which will use
a graphical user interface and improved call reports and will allow for greater
customization of invoices, bills and reports. NACT expects that the NTS 2000
will be available for use with its applications platform switches in the third
quarter of calendar 1998 and will be available for use with non-NACT switches in
the future. The "server" side of the NTS 2000 will use one or more Pentium Pro
file-server systems with the SCO UNIX operating system and an Informix database
management system. The "client" side will use a PC computer with the Windows 95
operating system. All processing will be based upon real time transaction
processing.
The telecommunications equipment market is characterized by rapidly
changing technologies and frequent new product introductions. The rapid
development of new technologies increases the risk that current or new
competitors could develop products that would reduce the competitiveness of
NACT's products. NACT's success will depend to a substantial degree upon its
ability to respond to changes in technology and customer requirements. This will
require the timely selection, development and marketing of new products and
enhancements on a cost-effective basis. The development of new, technologically
advanced products is a complex and uncertain process, requiring high levels of
innovation. Further, the telecommunications industry is characterized by the
need to design products that meet industry standards for safety, emissions and
network interconnection. With new and emerging technologies, such standards are
often changing or unavailable. As a result, there is a potential for product
development delay due to the need for compliance with new or modified standards.
The introduction of new and enhanced products also requires that NACT manage
transitions from older products in order to minimize disruptions in customer
orders, avoid excess inventory of old products and ensure that adequate supplies
of new products can be delivered to meet customer orders.
As of September 30, 1998, 29 full-time employees were engaged in research
and development. NACT spent approximately $1,183,000, $1,352,000 and $2,385,000
on research and development during the fiscal years ended September 30, 1995,
1996 and 1997, respectively. NACT expects that it will continue to expend
significant resources for product research and development.
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MANUFACTURING AND QUALITY ASSURANCE
NACT's manufacturing operations consist primarily of material requirements
planning, material procurement and final assembly, test and quality control of
subassemblies and completed systems. NACT outsources its printed circuit board
assembly. NACT believes that by outsourcing its printed circuit board assembly,
NACT gains flexibility in the manufacturing process and achieves lower direct
labor and overhead costs. NACT currently conducts its manufacturing operations
in its new manufacturing facility in Provo, Utah in a space of approximately
10,000 square feet.
NACT utilizes an annual planning forecast, which is modified monthly, to
determine its material and outsourcing requirements. NACT orders materials with
differing lead times, generally 30 to 180 days in advance. NACT uses
"just-in-time" ordering of materials that are readily available to minimize
inventory carrying costs. NACT's systems are manufactured to a standard
configuration that allows for better production planning, lower direct labor and
overhead costs and shorter order-to-shipment times.
NACT tests its systems in accordance with NACT-designed quality control
specifications that are consistent with ISO 9000 requirements. ISO 9000 is an
international quality certification process, developed in the European Common
Market and adopted in the United States as the method by which companies can
demonstrate the functionality of their quality control system.
ISO 9000 certification is a three step process: writing a "quality manual"
in accordance with the ISO 9000 requirements; documenting the processes and
procedures used to design, build, sell and finance products; and being audited
by an official ISO 9000 registrar. NACT has completed the "quality manual," is
currently documenting the processes and procedures and has selected an ISO 9000
registrar to conduct the certification audit. In conjunction with ISO 9000
certification, NACT presently has an in-house quality inspection program where
it tests all products prior to shipment to ensure the highest standard of
quality.
NACT primarily uses standard parts and components for its products,
procured from multiple vendors. Certain integrated circuits, card cage chassis
and billing system database software are presently available only from a limited
source of supply. To date, NACT has been able to obtain adequate supplies of
these components in a timely manner.
COMPETITION
The market for switching equipment and network management and billing
systems is highly competitive, and NACT expects competition to increase in the
future. The market is subject to rapid technological change, regulatory
developments in the telecommunications industry and emerging industry standards.
NACT believes that the primary competitive factors in the market for switching
equipment and network telemanagement and billing systems are the development and
rapid introduction of new product features, price/performance, reliability and
quality of customer support. NACT believes that it competes across three
categories, PC Based Switch Platforms, Open Architecture (Programmable) Hardware
Platforms, and Application Switch Platforms.
A PC-based switch platform is a personal computer, usually with high
capacity, that contains generic telephony boards for interfacing with the public
network. A typical platform provides a single application such as debit card or
international call back/reorigination, which are software applications that can
be brought to market rapidly. Leading providers of these types of switches are
Communications Product Development, Inc., Integrated Telephoning Products, Inc.
and PCS Telecom, Inc. The users of this equipment generally tend to be start-up
operations that are concerned about initial equipment costs and that are
generally able to bring software solutions to the market rapidly. While these
users may feel that PC-based solutions are relatively low cost, as their
business grows, it becomes apparent that these systems are costly to expand on a
cost per port basis and offer few features that are standard with switch-based
platforms. Additionally, PC-based systems are not regarded as a viable solution
for larger users due to their reliability concerns.
A programmable hardware platform generally consists of proprietary switch
hardware, together with the necessary software to provide a programming
application interface (API) that allows other computers executing third-party
application software to control the calls within the switch hardware. Leading
providers of
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these types of switches are Summa Four, Inc., Excel, Inc. and Redcom
Laboratories, Inc. and the value-added software providers that support this type
of hardware, such as Magellan Network Systems, Inc., Boston Technology, Inc. and
Open Development Corporation. The users of this type of equipment tend to be
companies that have the ability and desire to write their own applications code
or are willing to purchase their applications code from a specialized third
party developer.
An application switching platform is an integrated hardware/software
switching system that contains software applications that perform basic 1+ and
operator assisted services over the public network. To provide intelligent
functionality, an adjunct switch must be connected to the application switch
platform. Leading providers of application switch platforms are Harris
Corporation and Siemens Stromberg Carlson. The major users are companies that
are established in their telephony business such as 1+ providers that now need
to expand their offerings to their customers to remain competitive in the
marketplace. Enhanced services are particularly attractive to these customers
and play a large part in their decision making process.
As NACT's business develops and it seeks to market its switches to a
broader customer base, NACT's competitors may include larger switch and
telecommunications equipment manufacturers such as Lucent Technologies Inc.,
Harris Corporation, Siemens AG, Alcatel Alsthom Compagnie, Generale
D'Electricite, Telefonaktiebolaget, L.M. Ericcson and Northern Telecom Ltd. Many
of NACT's current and potential competitors have substantially greater
technical, financial, manufacturing and marketing resources than NACT.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
NACT's success is dependent in part on intellectual property rights,
including information technology, some of which is proprietary to NACT. NACT
relies on a combination of copyright, trade secret and trademark law,
confidentiality procedures and other contractual restrictions to establish and
protect proprietary rights in its products and technologies. As part of these
confidentiality procedures, NACT generally enters into confidentiality and
non-disclosure agreements with its employees and limits access to and
distribution of its proprietary information. NACT has received federal trademark
applications for the marks STX and NTS 2000 and is currently conducting a review
of its products to determine for which products it will seek patent, trademark
or copyright registration protection. NACT currently licenses certain technology
from third parties and plans to do so in the future.
EMPLOYEES
As of September 30, 1998, NACT had 115 full-time employees, of whom 29 were
engaged in research and development, 19 in manufacturing and quality control, 11
in sales and marketing, 29 in technical support, 14 in operations and management
information systems, and 13 in administration and finance. None of NACT's
employees is represented by a collective bargaining agreement nor has NACT
experienced any work stoppage. NACT considers its relations with its employees
to be good.
PROPERTIES
NACT's headquarters and manufacturing facility, which is located in Provo,
Utah, is a newly-constructed building that NACT moved into on July 1, 1997. The
Utah facility was constructed for a cost of about $4.1 million and was paid for
from the proceeds of NACT's initial public offering.
NACT also has sales and technical support offices located in New York, New
Jersey, Florida and London, England. These offices are leased by NACT under
leases that expire at various dates through 1998. Annual lease payments of these
offices aggregate approximately $30,000.
With the exception of the office furnishings held under an operating lease,
NACT owns the equipment and furnishings located in all of its facilities.
NACT considers all of its properties, both owned and leased, together with
the related equipment and furnishings contained therein, to be well maintained,
in good operating condition and suitable for its present and foreseeable future
needs.
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CERTAIN LEGAL PROCEEDINGS
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, alleging that telephone
systems manufactured and sold by NACT incorporating prepaid debit card features
infringe upon Aerotel's patent which was issued in November 1987 (the "Aerotel
Patent"). The initial complaint further alleged defamation and unfair
competition as a result of a communication disseminated by NACT to its customers
and tortious interference with prospective business relations, alleging that
NACT induced third parties to abandon licensing negotiations with Aerotel.
Aerotel sought injunctive relief, damages in an unspecified amount, damages of
up to three times the damages found for willful infringement of the Aerotel
Patent and an order requiring NACT to publish a written apology to Aerotel. NACT
filed an answer and counterclaim in which it denied infringement of the Aerotel
Patent and sought judgment that the Aerotel Patent is invalid and unenforceable
and that Aerotel has misused its patent in violation of antitrust laws. NACT has
denied that it has committed defamation, unfair competition and tortious
interference with prospective business relations. In August 1997, Aerotel
amended its complaint to include as defendants GST and GST USA, as well as Kyle
Love, the former President of NACT, and Dr. Thomas E. Sawyer, a director of GST
and NACT and the former Chairman and Chief Executive Officer of NACT. The
amended pleadings seek in excess of $18.7 million in damages and allege that GST
and GST USA have infringed the Aerotel Patent, aided and abetted infringement by
others, including NACT, and participated in, and aided and abetted alleged
tortious conduct by, NACT. The defendants have served answers denying all
material allegations and intend to defend vigorously.
Under the terms of World Access' stock purchase agreement with GST, World
Access and GST have agreed to share evenly the costs of any judgment against
NACT as a result of the Aerotel litigation, including NACT's legal fees.
Subsequent to the NACT acquisition, World Access has been actively engaged in
settlement negotiations. On July 9, 1998, World Access, GST and Aerotel entered
into a Memorandum of Understanding to settle the Aerotel litigation, and the
parties are negotiating the terms and conditions of a final settlement
agreement. World Access currently estimates that its portion of the settlement
costs, including legal fees, will be approximately $3.3 million and will be paid
through the issuance of World Access Common Stock. If a settlement does not
occur, NACT's patent counsel believe that NACT has valid defenses to the Aerotel
claims (which, if upheld, would be valid for all defendants), and the defendants
intend to vigorously defend. However, no assurances can be given as to the
outcome of this action. An unfavorable decision in this action could have a
material adverse effect on Holdco's business, financial condition and results of
operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. During
the period from 1987 through 1989, NACT developed and began selling its LCX 120C
switch application product and NTS 1000 billing system. During the period from
1990 through 1995, NACT developed enhancements to the LCX, including T-1
capability, enhancement of its prepaid debit card services, automated operator,
international call back and call reorigination. During the same period, NACT
also developed the Master Control Unit. In May 1996, NACT completed development
of and began selling the STX, an integrated digital tandem switching system that
includes proprietary systems software that enables standard applications such as
1+ and optional advanced applications such as international call
back/reorigination, prepaid debit card and prepaid cellular.
NACT sells its products in the United States to enhanced telecommunications
network service providers through a direct sales force. During the fourth
quarter of fiscal 1997, NACT sold its first STX switching and NTS billing
systems outside the United States. NACT intends to continue to expand the
marketing of its products both domestically and internationally. Currently, NACT
also provides long distance network carrier service to facilities management
customers with operations primarily in Brazil and Eastern Europe.
In response to customer demand, in fiscal 1995, NACT began offering
facilities management and network carrier services. Facilities management
services enable a customer to concentrate on marketing its products while NACT
maintains such customer's switch(es) in NACT's facilities for a fee. Such
services can include network carrier usage in addition to the management of a
switch. NACT provides network carrier usage at competitively priced domestic and
international rates. Revenues associated with such facilities management
services, including network carrier usage, are presented in NACT's financial
statements as network carrier sales. The gross profit associated with such sales
are substantially lower than those associated with product sales. In addition,
given the small number of customers and the high volume of revenues generated
from an individual customer through network carrier sales, the loss or gain of
one or more customers could cause a significant fluctuation in NACT's quarterly
revenues.
In 1995, NACT formed Wins, Inc., a wholly-owned subsidiary, to provide
specialized long distance services (e.g., prepaid debit card and international
call back/reorigination) to potential switching system customers who wanted to
enter the specialized long distance service market before making a major capital
investment in switching equipment. NACT's financial statements for the fiscal
year ended September 30, 1995 include the accounts of NACT and Wins. On
September 30, 1995, NACT transferred ownership and operation of Wins to GST USA
in the form of a dividend accounted for at historical cost. From October 1, 1995
through September 30, 1996, NACT provided carrier services to GST USA for the
Wins operation. NACT ceased providing carrier services to Wins on September 30,
1996. Therefore, no revenue has been recognized by NACT from the Wins operation
after September 30, 1996.
GST USA acquired a 100% interest in NACT Common Stock through a series of
purchases of newly issued shares and shares owned by former stockholders of NACT
from September 1993 through September 30, 1995. GST USA accounted for the
acquisition using the purchase method of accounting. The excess of the purchase
price over the fair value of the assets acquired was accounted for by GST USA as
product support contracts, software development costs, and goodwill. In
accordance with the requirements of the Commission, NACT's financial statements
reflect these intangible assets on its balance sheet, with related amortization
recorded in cost of goods sold and other operating expense in the respective
years. Product support contracts and software development costs are being
amortized over a five-year straight-line period and goodwill is being amortized
over a 20-year straight-line period.
In the second quarter of fiscal 1997, NACT completed an initial public
offering of its common stock, pursuant to which NACT and its parent company,
GST, sold two million and one million shares, respectively, of NACT Common
Stock, resulting in net proceeds to NACT and GST of approximately $18.1 million
and
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$10.0 million, respectively. As a result of this initial public offering, GST's
interest in NACT was reduced to approximately 63%.
On September 30, 1997, GST announced that it had retained Hambrecht & Quist
LLC to explore alternatives for monetizing its 63% interest in NACT, including a
potential sale of some or all of GST's shares of NACT's capital stock to one or
more strategic investors. On December 31, 1997, GST and GST USA entered into the
NACT Stock Purchase Agreement with World Access, and on February 27, 1998, World
Access purchased from GST USA all of the shares of NACT Common Stock held by GST
USA. See "Summary -- World Access' Interest in NACT."
FISCAL 1997 COMPARED TO FISCAL 1996
RESULTS OF OPERATIONS
Total Revenues. Revenues increased by 70.1% from $16.3 million in fiscal
1996 to $27.7 million in fiscal 1997. Product sales increased by 121.4% from
$9.9 million in fiscal 1996 to $22.0 million in fiscal 1997 primarily due to
sales of the STX switching systems, which NACT began selling in May 1996.
Network carrier sales increased by 51.1% from $3.8 million in fiscal 1996 to
$5.7 million in fiscal 1997 due to increased carrier usage volumes from existing
network carrier customers. NACT generated $2.6 million in revenues from sales of
network carrier usage to Wins in 1996. On October 1, 1996, NACT discontinued
providing network carrier usage to Wins.
GROSS PROFIT
Product Sales. Gross profit on product sales increased 147.8% from $6.0
million in fiscal 1996 to $14.8 million in fiscal 1997 due to increases in sales
volumes and gross profit per unit from the sale of larger port capacity STX
switching systems. Gross profit on product sales as a percentage of product
sales increased from 60.3% in fiscal 1996 to 67.5% in fiscal 1997 primarily due
to sales of larger port capacity STX switching systems, which have higher gross
profit margins, in fiscal 1997 and due to lower margins on STX switching systems
in fiscal 1996 as a result of special pricing on its initial sales of STX
switching systems and the discounting of LCX systems prior to the release of the
STX system in May 1996.
Network Carrier Sales. Gross profit on network carrier sales decreased
42.6% from $0.4 million in fiscal 1996 to $0.2 million in fiscal 1997 due to a
decrease in the prices charged for international carrier traffic to NACT's
network carrier customers and due to the non-recognition of profit on network
carrier sales during the fourth quarter of fiscal 1997 to Overseas Telecom (a
network carrier customer).
Wins. In fiscal 1997, there were no sales to GST USA for the Wins
operations. In fiscal 1996, NACT provided network carrier services at cost to
GST USA for the Wins operations.
Overall. Gross profit increased 144.0% from $6.0 million in fiscal 1996 to
$14.7 million in fiscal 1997 primarily due to increases in sales volumes and
gross profit per unit from the sale of larger port capacity STX switching
systems. Gross profit as a percentage of net revenues increased from 37.0% in
fiscal 1996 to 53.1% in fiscal 1997 primarily due to sales of larger port
capacity STX switching systems, which have higher gross profit margins, in
fiscal 1997 and due to lower margins on STX switching systems in fiscal 1996 as
a result of special pricing on initial sales of STX switching systems and the
discounting of LCX systems prior to the release of the STX system in May 1996.
Research and Development. Research and development expenses increased by
76.4% from $1.4 million in fiscal 1996 to $2.4 million in fiscal 1997 primarily
due to the expansion of NACT's engineering staff and an increase in expenditures
for planning and implementation of several hardware and software research and
development projects designed to enhance the STX switching and NTS billing
systems. Capitalized software development costs were $0.4 million and $0.8
million in fiscal 1996 and 1997, respectively.
Selling and Marketing. Selling and marketing expenses increased by 162.7%
from $1.0 million in fiscal 1996 to $2.5 million in fiscal 1997 due to the
hiring of additional senior sales personnel, the opening of new
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<PAGE> 68
domestic sales offices, increased advertising and trade show expenditures, and
increased commissions paid to sales personnel as a result of the increase in
NACT's product sales.
General and Administrative. General and administrative expenses increased
14.8% from $3.0 million in fiscal 1996 to $3.5 million in fiscal 1997 primarily
due to the hiring of new personnel in NACT's technical support, training,
finance, and administrative departments to support NACT's increased sales,
shipments, and installations of STX switching and NTS billing systems. Also, in
fiscal 1997, additional expenses were incurred by NACT as a result of the
construction of and move into the Company's new headquarters/ manufacturing
facility on July 1, 1997.
Amortization of Acquired Intangibles. NACT has included amortization of
acquired intangibles as a component of both cost of sales and operating
expenses. These intangibles arose as a result of the acquisition of NACT by GST
USA. GST USA accounted for the acquisition using the purchase method of
accounting. The excess of the purchase price over the fair value of the assets
acquired was assigned by GST USA as product support contracts, software
development costs and goodwill and, in accordance with requirements of the
Commission, has been included in the balance sheet of NACT with related
amortization recorded in cost of goods sold and other operating expenses.
Product support contracts and software development costs are being amortized
over a five-year straight-line period and goodwill is being amortized over a
20-year straight-line period.
Other Income and Expense. Other income, net of $0.1 million in fiscal
1996, increased to $0.5 million in fiscal 1997 due to an increase in interest
income during fiscal 1997 resulting from investing the cash proceeds received
from the initial public offering completed in March of 1997.
Income Taxes. NACT recorded provisions for income taxes with effective
rates of 28.8% and 39.4% of income before taxes for fiscal 1996 and 1997,
respectively. The increase in the effective tax rate in 1997 is primarily a
result of increased profitability. Future effective tax rates are expected to be
in excess of statutory rates during the amortization period of the acquired
goodwill from GST USA because the goodwill is not deductible for tax purposes.
FISCAL 1996 COMPARED TO FISCAL 1995
RESULTS OF OPERATIONS
Total Revenues. Revenues increased by 41.8% from $11.5 million in fiscal
1995 to $16.3 million in fiscal 1996. Product sales increased by 30.6% from $7.6
million in fiscal 1995 to $9.9 million in fiscal 1996 primarily due to the
introduction of NACT's new STX switching system in May 1996. Network carrier
sales increased by 36.0% from $2.8 million in fiscal 1995 to $3.8 million in
fiscal 1996 due to increased carrier usage volumes from existing network carrier
customers. Wins generated $1.1 million in revenues in fiscal 1995. Revenues
generated from Wins network carrier sales in fiscal 1996 were $2.6 million.
GROSS PROFIT
Product Sales. Gross profit on product sales increased 20.8% from $5.0
million in fiscal 1995 to $6.0 million in fiscal 1996 due to an increase in
product sales resulting from the introduction of the STX in May 1996. Gross
profit on product sales as a percentage of product sales decreased from 65.2% in
fiscal 1995 to 60.3% in fiscal 1996 primarily due to lower margins resulting
from an emphasis on promoting the STX. Margins on initial STX sales were lower
due to special STX upgrade pricing provided to NACT's current customers through
June 1, 1996.
Network Carrier Sales. Gross profit on network carrier sales increased
from $0.1 million in fiscal 1995 to $0.4 million in fiscal 1996 due to increased
network carrier sales volume. Gross profit on network carrier sales as a
percentage of network carrier sales increased from 1.8% in fiscal 1995 to 10.6%
in fiscal 1996 due to increased volume discounts received from the underlying
carriers as a result of increased network carrier usage. NACT began its network
carrier operations in fiscal 1995.
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<PAGE> 69
Wins. Wins generated $0.3 million of gross profit in fiscal 1995 or 28.3%
of Wins sales. NACT transferred ownership and operations of Wins to GST USA on
October 1, 1995 and provided carrier services at cost to GST USA for the Wins
operations in fiscal 1996.
Overall. Gross profit increased 23.6% from $4.9 million in fiscal 1995 to
$6.0 million in fiscal 1996 due to an increase in both product and network
carrier sales volume. Gross profit as a percentage of net revenues decreased
from 42.5% in fiscal 1995 to 37.0% in fiscal 1996 primarily due to lower margins
resulting from an emphasis on the STX switching system and lower margins on
initial sales of the STX switching systems.
Research and Development. Research and development expenses increased by
14.3% from $1.2 million in fiscal 1995 to $1.4 million in fiscal 1996 primarily
due to the move to more rapidly develop the STX switching system and to maintain
ongoing research and development of NACT's existing hardware and software
product lines. NACT's capitalized software development costs were $0.2 million
and $0.4 million in fiscal 1995 and 1996, respectively.
Selling and Marketing. Selling and marketing expenses increased 3.1% from
$0.9 million in fiscal 1995 to $1.0 million in fiscal 1996 primarily due to
continued expansion of NACT's sales and marketing staff. Fiscal 1996 selling and
marketing expenses were offset by the transfer of certain salary and fringe
benefit expenses to general and administrative when the Director of Sales and
Marketing was promoted to Executive Vice President and then to President and
Chief Executive Officer.
General and Administrative. General and administrative expenses increased
by 40.5% from $2.2 million in fiscal 1995 to $3.0 million in fiscal 1996
primarily due to an increase in the provision for bad debt, continued expansion
of the manufacturing and technical support departments, the expansion of the
finance department and implementation of a company-wide quality assurance
program. The increase in the provision for bad debt was a result of increased
sales volume and the addition of a $310,000 reserve for accounts receivable due
from Overseas Telecom (a network carrier customer), which was transferred to a
note receivable.
Income Taxes. NACT recorded provisions for income taxes with effective
rates of 71.9% and 28.8% of income before taxes for fiscal 1995 and 1996,
respectively. The decrease in the effective tax rate is a result of additional
amortization of goodwill, which is not deductible for income tax purposes.
Future effective tax rates are expected to be in excess of statutory rates
during the amortization period of the acquired goodwill from GST USA because the
goodwill is not deductible for tax purposes.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
RESULTS OF OPERATIONS
Total Revenues. NACT's revenues increased 35.9% from $6.4 million for the
three months ended December 31, 1996 to $8.7 million in the equivalent 1997
quarter. Product sales, which include switching application systems, software
and factory support, increased 52.7% from $4.8 million for the three months
ended December 31, 1996 to $7.3 million in the equivalent 1997 quarter,
primarily due to sales of STX and NTS switching and billing systems into the
international market and sales of larger port capacity STX switches. Network
carrier sales decreased 13.9% from $1.6 million for the three months ended
December 31, 1996 to $1.4 million in the equivalent 1997 quarter primarily due
to decreased carrier usage volumes from existing network carrier customers.
GROSS PROFIT
Product Sales. NACT's gross profit increased 65.1% from $3.0 million for
the three months ended December 31, 1996 to $5.0 million in the equivalent 1997
quarter due to an increase in product sales resulting from sales of the higher
margin, larger port capacity STX switches. Gross profit on product sales as a
percent of product sales was 63.8% and 70.4% for the three months ended December
31, 1996 and 1997, respectively.
Network Carrier Sales. NACT's gross profit decreased 100.0% from $52,000
for the three months ended December 31, 1996 to $0 in the equivalent 1997
quarter primarily due to a decrease in network carrier sales and higher carrier
usage costs from NACT's long distance carriers. Gross profit on network carrier
sales
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as a percent of network carrier sales was 3.2% and 0.0% for the three months
ended December 31, 1996 and 1997, respectively.
Research and Development. NACT's research and development expenses
increased 88.9% from $423,000 for the three months ended December 31, 1996 to
$799,000 in the equivalent 1997 quarter. The increase is primarily due to an
increase in personnel and other expenditures for completion of several hardware
and software research and development projects designed to enhance the STX
switching platform and upgrade the NTS billing system to a new hardware and
software platform. Capitalized software development costs were approximately
$125,000 and $187,000 for the three months ended December 31, 1996 and 1997,
respectively.
Sales and Marketing. NACT's sales and marketing expenses increased 114.8%
from $357,000 for the three months ended December 31, 1996 to $767,000 in the
equivalent 1997 quarter primarily due to the hiring of additional sales
personnel, the opening of new domestic sales offices, increased advertising and
trade show expenditures, and increased commissions paid as a result of the
increase in product sales.
General and Administrative. NACT's general and administrative expenses
increased 62.9% from $836,000 for the three months ended December 31, 1996 to
$1,362,000 in the equivalent 1997 quarter primarily due to the hiring of new
finance, technical support, training and facilities management personnel to
support NACT's increased sales, shipments and installations of STX switching and
NTS billing systems, and the additional overhead expenses of NACT's new
headquarters/manufacturing facility which was completed on July 1, 1997.
Amortization of Acquired Intangibles. NACT has included amortization of
acquired intangibles as a component of both cost of sales and operating
expenses. These intangibles arose as a result of the acquisition of NACT by GST
USA through a series of purchases of newly issued shares and shares owned by
former stockholders of NACT. Such purchases occurred from September 1993 through
December 1994. GST USA accounted for the acquisition using the purchase method
of accounting. The excess of the purchase price over the fair value of the
assets acquired was assigned by GST USA as product support contracts, software
development costs and goodwill and, in accordance with requirements of the
Commission, has been included in the balance sheet of NACT with related
amortization recorded in cost of goods sold and other operating expenses.
Product support contracts and software development costs are being amortized
over a five year straight-line period and goodwill is being amortized over a 20
year straight-line period. In addition, NACT acquired the customer list of its
Eastern Europe network carrier customer in September 1997. This customer list
was recorded on NACT's books at the lower of fair market value or cost as an
intangible asset and is being amortized to cost of sales over a three year
period.
Income Taxes. NACT's effective tax rate for the three months ended
December 31, 1997 was 40.0%. This is higher than the respective statutory
federal and state tax rates due to amortization of goodwill. This higher
effective tax rate is expected to continue during the amortization period of the
acquired goodwill from GST USA.
Fluctuations in Quarterly Operating Results. Operating results have in the
past fluctuated and may in the future fluctuate due to factors such as the
timing of new product introductions by NACT and its competitors, delays in new
product introductions by NACT, market acceptance of new or enhanced versions of
NACT's products, changes in the product or customer mix, changes in the level of
operating expenses, competitive pricing pressures, the gain or loss of
significant customers, increased research and development and sales and
marketing expenses associated with new product introductions and economic
conditions in general and in NACT's industry. Due to the high unit price and
long lead times associated with revenues derived from equipment orders, NACT's
financial results may fluctuate significantly depending upon the time of the
actual shipment of such orders. All of the above factors are difficult for NACT
to forecast, and these or other factors can materially adversely affect NACT's
business, financial condition and results of operations for one quarter or a
series of quarters. NACT's expense levels are based in part on its expectations
regarding future sales and are fixed in the short term to a large extent.
Therefore, NACT may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in sales. Any significant decline in
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demand relative to NACT's expectations or any material delay of customer orders
could have a material adverse effect on NACT's business, financial condition and
results of operations.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS
Total Revenues. NACT's revenues increased 44.3% from $7.2 million for the
three months ended June 30, 1997 to $10.4 million in the equivalent 1998
quarter. Product sales, which includes switching application and billing
systems, software, consulting, and factory support, increased 68.7% from $5.7
million for the three months ended June 30, 1997 to $9.7 million in the
equivalent 1998 quarter primarily due to sales of larger port capacity STX
switches and NTS billing systems to new and existing customers and STX
application system upgrades to existing customers. Network carrier sales
decreased 51.2% from $1.5 million for the three months ended June 30, 1997 to
$0.7 million in the equivalent 1998 quarter primarily due to one customer moving
a substantial portion of network carrier traffic to another carrier.
NACT's revenues increased 44.0% from $13.5 million for the six months ended
June 30, 1997 to $19.4 million in the equivalent 1998 period. Product sales,
which includes switching application and billing systems, software, consulting,
and factory support, increased 57.3% from $10.8 million for the six months ended
June 30, 1997 to $17.0 million in the equivalent 1998 period. The increase
results primarily from sales of larger port capacity STX switches and NTS
billing systems to new and existing customers and STX application system
upgrades to existing customers. Network carrier sales decreased 9.7% from $2.7
million for the six months ended June 30, 1997 to $2.4 million in the equivalent
1998 period primarily due to one customer moving a substantial portion of
network carrier traffic to another carrier.
GROSS PROFIT
Product Sales. NACT's gross profit increased 61.8% from $4.3 million for
the three months ended June 30, 1997 to $6.9 million in the equivalent 1998
quarter due to an increase in product sales resulting from sales of the higher
margin, larger port capacity STX switches and lower manufacturing costs per
unit. Gross profit on product sales as a percent of product sales was 74.6% and
72.1% for the three months ended June 30, 1997 and 1998, respectively.
NACT's gross profit increased 56.3% from $7.5 million for the six months
ended June 30, 1997 to $11.8 million in the equivalent 1998 period due to an
increase in product sales resulting from sales of the higher margin, larger port
capacity STX switches and lower manufacturing costs per unit. Gross profit on
product sales as a percent of product sales was 70.1% and 69.8% for the six
months ended June 30, 1997 and 1998, respectively.
Network Carrier Sales. NACT's gross profit increased 20.5% from $78,000
for the three months ended June 30, 1997 to $94,000 in the equivalent 1998
quarter, primarily due to lower network carrier rates paid by NACT. Gross profit
on network carrier sales as a percent of network carrier sales was 5.3% and
13.1% for the three months ended June 30, 1997 and 1998, respectively.
NACT's gross profit increased 86.2% from $138,000 for the six months ended
June 30, 1997 to $257,000 in the equivalent 1998 period primarily due to lower
network carrier rates paid by NACT. Gross profit on network carrier sales as a
percent of network carrier sales was 5.1% and 10.6% for the six months ended
June 30, 1997 and 1998, respectively.
Research and Development. NACT's research and development expenses
increased 2.2% from $740,000 for the three months ended June 30, 1997 to
$756,000 in the equivalent 1998 quarter primarily due to an increase in
expenditures for planning, design, and completion of several hardware and
software research and development projects designed to enhance the STX switching
platform and introduce a new billing system. Capitalized software development
costs were $212,000 and $271,000 for the three months ended June 30, 1997 and
1998, respectively.
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NACT's research and development expenses increased 10.3% from $1.4 million
for the six months ended June 30, 1997 to $1.5 million in the equivalent 1998
period primarily due to an increase in personnel and other expenditures for
planning, design, and completion of several hardware and software research and
development projects. Capitalized software development costs were $629,000 and
$480,000 for the six months ended June 30, 1997 and 1998, respectively.
Sales and Marketing. NACT's sales and marketing expenses increased 8.6%
from $824,000 for the three months ended June 30, 1997 to $895,000 in the
equivalent 1998 quarter primarily due to increased advertising and trade show
expenditures, and increased commissions paid as a result of the increase in
product sales.
NACT's sales and marketing expenses increased 25.1% from $1.4 million for
the six months ended June 30, 1997 to $1.7 million in the equivalent 1998 period
primarily due to the hiring of additional senior sales personnel, international
marketing and selling efforts, increased advertising and trade show
expenditures, and increased commissions paid as a result of the increase in
product sales.
General and Administrative. NACT's general and administrative expenses
increased 16.4% from $891,000 for the three months ended June 30, 1997 to
$1,037,000 in the equivalent 1998 quarter primarily due to increased legal
expenses related to the patent infringement lawsuit.
NACT's general and administrative expenses increased 40.6% from $1.6
million for the six months ended June 30, 1997 to $2.3 million in the equivalent
1998 period primarily due to increased legal expenses related to the patent
infringement lawsuit, accounting, and investment banking expenses related to the
NACT Stock Purchase Agreement and the NACT Merger Agreement.
Amortization of Acquired Intangibles. NACT has included amortization of
acquired intangibles as a component of both cost of sales and operating
expenses. These intangibles arose as a result of the acquisition of NACT by GST
USA through a series of purchases of newly issued shares and shares owned by
former stockholders of NACT. Such purchases occurred from September 1993 through
December 1994. GST USA accounted for the acquisition using the purchase method
of accounting. The excess of the purchase price over the fair value of the
assets acquired, was assigned by GST USA as product support contracts, software
development costs and goodwill. In accordance with requirements of the SEC,
these amounts have been included in the balance sheets of NACT with related
amortization recorded in cost of goods sold and other operating expenses.
Product support contracts and software development costs are being amortized
over a five year straight-line period. Goodwill is being amortized over a 20
year straight-line period. In addition, NACT acquired the customer list of its
Eastern Europe network carrier customer in September 1997. This customer list
was recorded on NACT's books at the lower of fair market value or cost as an
intangible asset, and is being amortized to cost of sales over a three-year
period.
Income Taxes. NACT's effective tax rate for the six months ended June 30,
1998 was 40.0%. This is higher than the respective statutory federal and state
tax rates due to amortization of goodwill. This higher effective tax rate is
expected to continue during the amortization period of the acquired goodwill
from GST USA.
Fluctuations in quarterly operating results. Operating results have in the
past and may in the future fluctuate due to factors such as the timing of new
product introductions by NACT and its competitors, delays in new product
introductions by NACT, market acceptance of new or enhanced versions of NACT's
products, changes in the product or customer mix, changes in the level of
operating expenses, competitive pricing pressures, the gain or loss of
significant customers, increased research and development and sales and
marketing expenses associated with new product introductions and economic
conditions in general and in NACT's industry. Due to the high unit price and
long lead times associated with revenues derived from equipment orders, NACT's
financial results may fluctuate significantly depending upon the time of the
actual shipment of such orders. All of the above factors are difficult for NACT
to forecast, and these or other factors can materially adversely affect NACT's
business,financial condition and results of operations for one quarter or a
series of quarters. NACT's expense levels are based in part on its expectations
regarding future sales and are fixed in the short term to a large extent.
Therefore, NACT may be unable to adjust spending in a timely
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manner to compensate for any unexpected shortfall in sales. Any significant
decline in demand relative to NACT's expectations or any material delay of
customer orders could have a material adverse effect on NACT's business,
financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
NACT currently finances its operations, and normal reoccurring capital
expenditures through cash flow from operations and its current cash and
short-term investment balances. For the six months ended June 30, 1998,
operating activities provided cash of $3.2 million.
As of June 30, 1998, NACT had cash, cash equivalents and marketable
securities totaling $14.8 million an increase of $2.3 million from December 31,
1997 primarily due to an increase in cash flow from operations.
NACT maintains an unsecured bank line of credit expiring in February 1999
that provides borrowings up to $1.0 million at the bank's prime rate plus one
point. There were no outstanding draws under the line of credit as of June 30,
1998.
NACT acts as a guarantor on financing of some customer transactions
executed under repurchase agreements with two financial institutions. In
accordance with the terms of one of the repurchase agreements, NACT maintains a
$6.0 million unrestricted cash balance. As of June 30, 1998, NACT was
contingently liable under these repurchase agreements for approximately $7.6
million.
NACT believes that the June 30, 1998 cash and marketable securities
balances, anticipated cash flows from operations and its line of credit will
satisfy NACT's working capital and capital expenditure requirements for at least
the next twelve months. However, there can be no assurance that NACT will not be
required to seek additional capital sooner or, if so required, that adequate
capital will be available on terms acceptable to NACT, or at all.
YEAR 2000 COMPLIANCE
NACT currently sells the NTS 1000 billing system which will require
upgrading by the year 2000 due to its existing limitation of using only two
digits to identify the year in the date field. NACT is planning release of its
new billing system, the NTS 2000, by the first calendar quarter of 1999, which
overcomes the two digit limitation currently experienced on the NTS 1000.
Furthermore, NACT is in the process of modifying the NTS 1000 software to
overcome the two digit limitation. This modification of the NTS 1000 software is
anticipated to be completed by the first calendar quarter in 1999 at an
estimated cost of $115,000. NACT anticipates the majority of customers will
upgrade to the NTS 2000. No assurance can be made that any of NACT's customers
will upgrade to the NTS 2000 or that the modification to the NCT 1000 software
will be successful or competed on time. In the event that a significant number
of NACT's customers do not upgrade to the NTS 2000 or the NTS 1000 software
modification is not successful, NACT may incur expenses and potential loss of
ongoing service revenues.
In addition, NACT is in the process of evaluating its computer systems to
determine what modifications (if any) are necessary to make such systems
compatible with the year 2000 requirements. However, because many of NACT's
computer systems have been put into service within the last several years, NACT
does not expect any such modifications to have a material adverse effect on
NACT's financial position or results of operations. There can be no assurance,
however, that the computer systems of other companies on which NACT's systems
rely will be timely modified, or that a failure to modify such systems by
another company, or modifications that are incompatible with NACT's systems,
would not have a material adverse effect on NACT.
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OTHER INFORMATION REGARDING NACT
The executive officers, directors and key employees of NACT, their ages (as
of September 30, 1998) and present positions with NACT are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
A. Lindsay Wallace..................... 48 President, Chief Executive Officer and
Director
Eric F. Gurr........................... 39 Chief Financial Officer, Treasurer and
Secretary
Ronald S. Eliason...................... 63 Director
Mark A. Gergel......................... 41 Director
Scott N. Madigan....................... 40 Director
Steven A. Odom......................... 45 Director
Hensley E. West........................ 53 Director
Thomas E. Sawyer....................... 65 Director
Gary D. Brown.......................... 43 Vice President of Research and
Development
Geoffrey Shupe......................... 43 Vice President of Sales and Marketing
</TABLE>
A. Lindsay Wallace has been the President and a director of NACT since
January 1996 and Chief Executive Officer of NACT since April 1996. From January
1994 to January 1996, he was the Director of Sales and Marketing of NACT and was
the Executive Vice President of NACT from October 1995 to January 1996. From
1988 to December 1993, Mr. Wallace was a National Account Manager of Sprint and
opened the Sprint/Telnet data office in Salt Lake City, Utah. From 1984 to 1988,
he was President and Chief Executive Officer of Hybrid Micrographics, Inc.
Eric F. Gurr has been NACT's Vice President of Finance and Administration
and Chief Financial Officer since August 1995 and Treasurer and Secretary since
June 1989. Between June 1989 and August 1995, Mr. Gurr served as Controller and
Director of Administration and Finance. Mr. Gurr served as Chief Financial
Officer and Treasurer of Wins, now a subsidiary of GST USA, from January 1995 to
September 1996. From 1985 to 1989, Mr. Gurr served as a Senior Auditor for
Deseret Management Corporation, a diversified conglomerate. Mr. Gurr is a
Certified Public Accountant.
Ronald S. Eliason has been a director of NACT since March 1997. Mr. Eliason
has been the President and Chief Executive Officer of Campus Credit Union, a
financial institution based in Provo, Utah, since June 1991. He was the Vice
President -- Administration and Chief Financial Officer of Novell, Inc. from
August 1985 to April 1990.
Mark A. Gergel has served as a director of NACT since February 1998. See
"Management of Holdco -- Executive Officers" for certain biographical
information regarding Mr. Gergel.
Scott N. Madigan has served as a director of NACT since February 1998. See
"Management of Holdco -- Executive Officers" for certain biographical
information regarding Mr. Madigan.
Steven A. Odom has served as a director of NACT since February 1998. See
"Management of Holdco -- Board of Directors" for certain biographical
information regarding Mr. Odom.
Hensley E. West has served as a director of NACT since February 1998. See
"Management of Holdco -- Board of Directors" for certain biographical
information regarding Mr. West.
Thomas E. Sawyer has been a director of NACT since May 1997. Dr. Sawyer was
Chairman of the Board Emeritus of NACT from November 1996 to May 1997, a
director of NACT from 1982 to November 1996, the Chairman of the board of
directors of NACT from October 1985 to November 1996 and was Chief Executive
Officer of NACT from October 1988 to March 1996. In December 1993, he was
appointed Chief Technology Officer of GST and was appointed a director of GST in
August 1995. Dr. Sawyer has over 35 years of experience in information
technology industries and 23 years of experience in senior management of four
publicly-traded information technology firms.
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Gary D. Brown has been NACT's Vice President of Research and Development
since June 1996. Prior to being named Vice President, he had served as the
Director of Research and Development since July 1990. In these positions, he has
helped conceive and direct all development activities of NACT. From July 1985
until July 1990, Mr. Brown served as a Senior Software Engineer. Prior to
joining NACT in July 1985, Mr. Brown was a Lead Software Engineer for a
proprietary operating system at WICAT Systems, Inc. for over five years.
Geoffrey Shupe has been NACT's Vice President of Sales and Marketing since
October 1996. Mr. Shupe is responsible for sales development, marketing and
Technical Support. He joined NACT in January 1994 as Major Account Manager for
sales and became the Director of Sales and Marketing in January 1996. Mr. Shupe
was an account representative, Major Account Representative, and National
Account Manager for Sprint from February 1987 through December 1993.
The board of directors of NACT currently consists of seven members.
Currently all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Executive officers are elected by and serve at the discretion of the NACT board
of directors.
NACT's board of directors held two meetings during the year ended September
30, 1997. Each director attended at least 75% of the aggregate number of
meetings held by the board of directors and its committees during the time each
such director was a member of the board of directors or any committee of the
board of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF NACT
The following table sets forth information concerning ownership of NACT's
Common Stock outstanding as of August 31, 1998 by (i) each person known by NACT
to be the beneficial owner of more than five percent of NACT Common Stock, (ii)
each director of NACT, (iii) each of the executive officers of NACT and (iv) all
executive officers and directors of NACT as a group.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) PERCENT OF CLASS
- --------------------------------------- --------------------- ----------------
<S> <C> <C>
World Access, Inc.(3)....................................... 5,468,712 67.3%
Mark A. Gergel(4)........................................... 5,468,712 67.3
Scott N. Madigan(4)......................................... 5,468,712 67.3
Steven A. Odom(4)........................................... 5,468,712 67.3
Hensley E. West(4).......................................... 5,468,712 67.3
Thomas E. Sawyer............................................ 0 *
A. Lindsay Wallace.......................................... 0 *
Ronald S. Eliason........................................... 0 *
Eric F. Gurr................................................ 0 *
All directors and officers as a group (8 persons)........... 5,468,712 67.3
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, all addresses are c/o NACT Telecommunications,
Inc. 191 West 5200 North, Provo, Utah 84604.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3 and,
unless otherwise indicated, represents shares for which the beneficial owner
has sole voting and investment power. The percentage of class is calculated
in accordance with Rule 13d-3 and includes options or other rights to
subscribe which are exercisable within 60 days of September 30, 1998.
(3) The address of World Access is 945 E. Paces Ferry Road, Suite 2240, Atlanta,
Georgia 30326.
(4) Represents shares of NACT Common Stock held by World Access, of which
Messrs. Odom and West are executive officers and directors and Messrs.
Gergel and Madigan are executive officers.
65
<PAGE> 76
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Financial Statements of Holdco
give effect to the consummation of the Transaction and to the several
transactions that Holdco has completed or are currently contemplated. The
Unaudited Pro Forma Combined Statements of Operations give effect to: (1) the
ATI acquisition; (2) the NACT Stock Purchase; (3) the NACT Transaction; (4) the
Resurgens Transaction; and (5) the Telco Merger as if each of these acquisitions
had occurred on January 1, 1997. The Unaudited Pro Forma Combined Balance Sheet
gives effect to: the NACT Transaction, the Resurgens Transaction and the Telco
Merger as if they had been completed on June 30, 1998.
As Telco's fiscal year end, August 31, differs from World Access' fiscal
year-end by more than 93 days, Telco's results of operations for the period from
November 25, 1996 through November 30, 1997 were used in preparing the Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31, 1997.
Telco's results of operations for the six months from December 1, 1997 through
May 31, 1998 were used in preparing the Unaudited Pro Forma Combined Statement
of Operations for the six months ended June 30, 1998. Telco's unaudited June 30,
1998 balance sheet was utilized in preparing the Unaudited Pro Forma Combined
Balance Sheet as of June 30, 1998.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that the management of Holdco believes are
reasonable. Each of the acquisition transactions above has been accounted for
using the purchase method of accounting. The adjustments recorded in the
Unaudited Pro Forma Combined Financial Statements represent the preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not differ significantly from
the pro forma adjustments reflected in the Unaudited Pro Forma Combined
Financial Statements.
In connection with the consummation of the pending acquisition transaction,
Holdco expects to record charges representing the estimated portion of the
purchase price allocated to in-process research and development of $73.9 million
for the Telco acquisition. In addition, in the six month period ended June 30,
1998, Holdco recorded charges representing the estimated portion of the purchase
price allocated to in-process research and development of $44.6 million and $5.4
million for the NACT Stock Purchase and ATI acquisition, respectively, and
Holdco has assumed, for purposes of these pro forma combined financial
statements, that it will record $21.9 million in additional charges representing
the estimated purchase price allocated to in-process research and development in
connection with the NACT Transaction. Since these charges are directly related
to the acquisitions and will not recur, the Unaudited Pro Forma Combined
Statements of Operations have been prepared excluding these one-time
non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements also give effect to
Telco's January 1998 acquisition of substantially all of the assets of Jupiter
Technology, Inc. ("Jupiter"), a privately held company engaged in the
development of ATM and frame relay access equipment, as of January 1, 1997. The
purchase price of $6.2 million included approximately $5.1 million of in-process
research and development which was expensed by Telco at the time of such
acquisition. Jupiter's operations were not deemed material when compared to
Telco's historical financial statements and, therefore, were not included in the
Unaudited Pro Forma Combined Statements of Operations. The $5.1 million
in-process development charge recorded by Telco was non-recurring in nature and
excluded from the Unaudited Pro Forma Combined Statement of Operation.
The Unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of the financial position or the future results of operations or
results that might have been achieved if the foregoing acquisition transactions
had been consummated as of the indicated dates. The Unaudited Pro Forma Combined
Financial Statements should be read in conjunction with the historical
consolidated financial statements of Holdco, ATI, NACT and Telco, the historical
combined financial statements of Resurgens and the related notes thereto. See
"Incorporation of Certain Documents by Reference" and "Available Information".
66
<PAGE> 77
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDCO,
NACT MINORITY HOLDCO NACT AND
INTEREST AND NACT RESURGENS RESURGENS
HOLDCO ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED TELCO
-------- ------------- -------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290 $ 11,601
Marketable securities..................... 3,500 -- 3,500 -- -- 3,500 2,200
Accounts receivable....................... 41,819 -- 41,819 3,354 -- 45,173 16,974
Inventories............................... 34,473 -- 34,473 -- -- 34,473 23,209
Other current assets...................... 15,429 -- 15,429 4,476 -- 19,905 954
-------- -------- -------- -------- -------- -------- --------
Total Current Assets................ 152,874 -- 152,874 9,467 (7,000) 155,341 54,938
Property and equipment..................... 17,203 -- 17,203 52,126 9,000(C) 78,329 8,383
Goodwill................................... 74,378 9,617(A) 83,995 -- 71,251(C) 155,246 7,617
Acquired technology........................ 4,400(A) 4,400 -- -- 4,400 --
Other assets............................... 24,063 -- 24,063 152 18,300(C) 42,515 --
-------- -------- -------- -------- -------- -------- --------
Total Assets........................ $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831 $ 70,938
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950 $ --
Accounts payable.......................... 23,087 -- 23,087 19,731 -- 42,818 4,357
Other accrued liabilities................. 12,913 -- 12,913 7,243 2,000(C) 22,156 12,635
-------- -------- -------- -------- -------- -------- --------
Total Current Liabilities........... 40,408 -- 40,408 30,516 2,000 72,924 16,992
Long-term debt............................. 115,529 -- 115,529 -- -- 115,529 --
Noncurrent liabilities..................... 1,564 1,700(A) 3,264 29,050 -- 32,314 991
Minority interests......................... 12,443 (12,443)(A) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Liabilities................... 169,944 (10,743) 159,201 59,566 2,000 220,767 17,983
Stockholders' Equity
Common stock.............................. 219 20(A) 239 85 (85)(D) 275 110
36(C)
Capital in excess of par value............ 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620 79,017
91,694(C)
Accumulated deficit....................... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831) (26,172)
-------- -------- -------- -------- -------- -------- --------
Total Stockholders' Equity.......... 98,574 24,760 123,334 2,179 89,551 215,064 52,955
-------- -------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................. $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831 $ 70,938
======== ======== ======== ======== ======== ======== ========
<CAPTION>
HOLDCO,
NACT, RESURGENS
TELCO AND TELCO
ADJUSTMENTS COMBINED
----------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ -- $ 63,891
Marketable securities..................... -- 5,700
Accounts receivable....................... -- 62,147
Inventories............................... (4,500)(E) 53,182
Other current assets...................... -- 20,859
-------- ---------
Total Current Assets................ (4,500) 205,779
Property and equipment..................... (2,800)(E) 83,912
Goodwill................................... 30,125(E) 192,988
Acquired technology........................ 56,400(E) 60,800
Other assets............................... 23,400(E) 65,915
-------- ---------
Total Assets........................ $102,625 $ 609,394
======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Short-term debt........................... $ -- $ 7,950
Accounts payable.......................... -- 47,175
Other accrued liabilities................. 6,650(E) 41,441
-------- ---------
Total Current Liabilities........... 6,650 96,566
Long-term debt............................. -- 115,529
Noncurrent liabilities..................... 24,900(E) 58,205
Minority interests......................... -- --
-------- ---------
Total Liabilities................... 31,550 270,300
Stockholders' Equity
Common stock.............................. (110)(F) 340
65(E)
Capital in excess of par value............ (79,017)(F) 4 69,485
197,865(E)
Accumulated deficit....................... 26,172(F) (130,731)
(73,900)(G)
-------- ---------
Total Stockholders' Equity.......... 71,075 339,094
-------- ---------
Total Liabilities and Stockholders'
Equity............................. $102,625 $ 609,394
======== =========
</TABLE>
67
<PAGE> 78
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT HOLDCO,
MINORITY HOLDCO NACT AND
INTEREST AND NACT RESURGENS RESURGENS
HOLDCO ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
-------- ----------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents..... $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable securities.... 3,500 -- 3,500 -- -- 3,500
Accounts receivable...... 41,819 -- 41,819 3,354 -- 45,173
Inventories.............. 34,473 -- 34,473 -- -- 34,473
Other current assets..... 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current
Assets......... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and equipment..... 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill................... 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology........ 4,400(A) 4,400 -- -- 4,400
Other assets............... 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total Assets..... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable......... 23,087 -- 23,087 19,731 -- 42,818
Other accrued
liabilities........... 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current
Liabilities.... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt............. 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities..... 1,564 1,700(A) 3,264 29,050 32,314
Minority interests......... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities.... 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock............. 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of par
value................. 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit...... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity......... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total Liabilities
and
Stockholders'
Equity......... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
</TABLE>
68
<PAGE> 79
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT HOLDCO,
MINORITY HOLDCO AND NACT AND
INTEREST NACT TELCO TELCO
HOLDCO ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents....... $ 57,653 $ -- $ 57,653 $ 11,601 $ -- $ 69,254
Marketable securities...... 3,500 -- 3,500 2,200 -- 5,700
Accounts receivable........ 41,819 -- 41,819 16,974 -- 58,793
Inventories................ 34,473 -- 34,473 23,209 (4,500)(E) 53,182
Other current assets....... 15,429 -- 15,429 954 -- 16,383
-------- -------- -------- -------- -------- --------
Total Current
Assets............ 152,874 -- 152,874 54,938 (4,500) 203,312
Property and equipment....... 17,203 -- 17,203 8,383 (2,800)(E) 22,786
Goodwill..................... 74,378 9,617(A) 83,995 7,617 30,125(E) 121,737
Acquired technology.......... 4,400(A) 4,400 -- 56,400(E) 60,800
Other assets................. 24,063 -- 24,063 -- 23,400(E) 47,463
-------- -------- -------- -------- -------- --------
Total Assets........ $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............ $ 4,408 $ -- $ 4,408 $ -- $ -- $ 4,408
Accounts payable........... 23,087 -- 23,087 4,357 -- 27,444
Other accrued
liabilities.............. 12,913 -- 12,913 12,635 6,650(E) 32,198
-------- -------- -------- -------- -------- --------
Total Current
Liabilities....... 40,408 -- 40,408 16,992 6,650 64,050
Long-term debt............... 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities....... 1,564 1,700(A) 3,264 991 24,900(E) 29,155
Minority interests........... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities... 169,944 (10,743) 159,201 17,983 31,550 208,734
Stockholders' Equity
Common stock............... 219 20(A) 239 110 (110)(F) 304
65(E)
Capital in excess of par
value.................... 133,286 46,640(A) 179,926 79,017 (79,017)(F) 377,791
197,865(E)
Accumulated deficit........ (34,931) (21,900)(B) (56,831) (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- -------- -------- -------- --------
Total Stockholders'
Equity............ 98,574 24,760 123,334 52,955 71,075 247,364
-------- -------- -------- -------- -------- --------
Total Liabilities
and Stockholders'
Equity............ $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
</TABLE>
69
<PAGE> 80
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT
MINORITY HOLDCO AND
INTEREST NACT
HOLDCO ADJUSTMENTS COMBINED
-------- ------------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.................................. $ 57,653 $ -- $ 57,653
Marketable securities................................. 3,500 -- 3,500
Accounts receivable................................... 41,819 -- 41,819
Inventories........................................... 34,473 -- 34,473
Other current assets.................................. 15,429 -- 15,429
-------- -------- --------
Total Current Assets.......................... 152,874 -- 152,874
Property and equipment.................................. 17,203 -- 17,203
Goodwill................................................ 74,378 9,617(A) 83,995
Acquired technology..................................... 4,400(A) 4,400
Other assets............................................ 24,063 -- 24,063
-------- -------- --------
Total Assets.................................. $268,518 $ 14,017 $282,535
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....................................... $ 4,408 $ -- $ 4,408
Accounts payable...................................... 23,087 -- 23,087
Other accrued liabilities............................. 12,913 -- 12,913
-------- -------- --------
Total Current Liabilities..................... 40,408 -- 40,408
Long-term debt.......................................... 115,529 -- 115,529
Noncurrent liabilities.................................. 1,564 1,700(A) 3,264
Minority interests...................................... 12,443 (12,443)(A) --
-------- -------- --------
Total Liabilities............................. 169,944 (10,743) 159,201
Stockholders' Equity
Common stock.......................................... 219 20(A) 239
Capital in excess of par value........................ 133,286 46,640(A) 179,926
Accumulated deficit................................... (34,931) (21,900)(B) (56,831)
-------- -------- --------
Total Stockholders' Equity.................... 98,574 24,760 123,334
-------- -------- --------
Total Liabilities and Stockholders' Equity.... $268,518 $ 14,017 $282,535
======== ======== ========
</TABLE>
70
<PAGE> 81
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDCO AND
TELCO TELCO
HOLDCO TELCO ADJUSTMENTS COMBINED
-------- ------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents........................... $ 57,653 $11,601 $ -- $ 69,254
Marketable securities.......................... 3,500 2,200 -- 5,700
Accounts receivable............................ 41,819 16,974 -- 58,793
Inventories.................................... 34,473 23,209 (4,500)(E) 53,182
Other current assets........................... 15,429 954 -- 16,383
-------- ------- --------- ---------
Total Current Assets................... 152,874 54,938 (4,500) 203,312
Property and equipment........................... 17,203 8,383 (2,800)(E) 22,786
Goodwill......................................... 74,378 7,617 30,125(E) 112,120
Acquired technology.............................. 56,400(E) 56,400
Other assets..................................... 24,063 -- 23,400(E) 47,463
-------- ------- --------- ---------
Total Assets........................... $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt................................ $ 4,408 $ -- $ -- $ 4,408
Accounts payable............................... 23,087 4,357 -- 27,444
Other accrued liabilities...................... 12,913 12,635 6,650(E) 32,198
-------- ------- --------- ---------
Total Current Liabilities.............. 40,408 16,992 6,650 64,050
Long-term debt................................... 115,529 -- -- 115,529
Noncurrent liabilities........................... 1,564 991 24,900(E) 27,455
Minority interests............................... 12,443 -- -- 12,443
-------- ------- --------- ---------
Total Liabilities...................... 169,944 17,983 31,550 219,477
Stockholders' Equity
Common stock................................... 219 110 (110)(F) 284
65(E)
Capital in excess of par value................. 133,286 79,017 (79,017)(F) 331,151
197,865(E)
Accumulated deficit............................ (34,931) (26,172) 26,172(F) (108,831)
(73,900)(G)
-------- ------- --------- ---------
Total Stockholders' Equity............. 98,574 52,955 71,075 222,604
-------- ------- --------- ---------
Total Liabilities and Stockholders'
Equity............................... $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
</TABLE>
71
<PAGE> 82
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND
NACT NACT NACT
HOLDCO MAJORITY MAJORITY MINORITY
ATI AND ATI INTEREST INTEREST INTEREST
HOLDCO ATI ADJUSTMENTS COMBINED NACT ADJUSTMENTS COMBINED ADJUSTMENTS
-------- ------ ----------- -------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 69,830 $ 826 $ -- $ 70,656 $ 1,175 $ -- $71,831
Service revenues.......... 13,408 -- -- 13,408 1,160 -- 14,568 $ --
-------- ------ ------- -------- ------- -------- ------- -------
Total Sales.............. 83,238 826 -- 84,064 2,335 -- 86,399 --
Cost of products sold..... 39,012 631 -- 39,643 755 190(D) 40,588 90(H)
Cost of services.......... 12,189 -- -- 12,189 1,220 -- 13,409 --
-------- ------ ------- -------- ------- -------- ------- -------
Total Cost of Sales...... 51,201 631 -- 51,832 1,975 190 53,997 90
Gross Profit............. 32,037 195 -- 32,232 360 (190) 32,402 (90)
Engineering and
development.............. 2,582 241 -- 2,823 504 -- 3,327 --
Selling, general and
administrative........... 7,936 349 -- 8,285 1,369 -- 9,654 --
Amortization of
goodwill................. 1,882 -- 16(A) 1,898 39 360(E) 2,297 240(I)
-- -- -- -- --
In-process research and
development.............. 50,000 -- (5,400)(B) 44,600 -- (44,600)(F) -- --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240 --
-------- ------ ------- -------- ------- -------- ------- -------
Operating Income (Loss).. (33,603) (395) 5,384 (28,614) (1,552) 44,050 13,884 (330)
Interest and other
income................... 1,971 -- -- 1,971 -- -- 1,971 --
Interest and other
expense.................. (3,031) (18) -- (3,049) -- -- (3,049) --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Income Taxes and
Minority Interests..... (34,663) (413) 5,384 (29,692) (1,552) 44,050 12,806 (330)
Income taxes.............. 6,135 -- (140)(C) 5,995 (620) -- 5,375 --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Minority Interests..... (40,798) (413) 5,524 (35,687) (932) 44,050 7,431 (330)
Minority interests in
earnings of subsidiary... 1,533 -- -- 1,533 -- (305)(G) 1,228 (1,228)(J)
-------- ------ ------- -------- ------- -------- ------- -------
Net Income (Loss)........ $(42,331) $ (413) $ 5,524 $(37,220) $ (932) $ 44,355 $ 6,203 $ 898
======== ====== ======= ======== ======= ======== ======= =======
Net Income (Loss) Per
Common Share
Basic....................
Diluted..................
Weighted Average Shares
Outstanding
Basic....................
Diluted..................
<CAPTION>
HOLDCO, HOLDCO,
HOLDCO, ATI, ATI, NACT,
ATI AND NACT AND RESURGENS
NACT RESURGENS RESURGENS TELCO AND TELCO
COMBINED RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 71,831 $ -- $ -- $ 71,831 $54,552 $ -- $ 126,383
Service revenues.......... 14,568 10,377 -- 24,945 -- -- 24,945
-------- -------- ------- -------- ------- ------- ---------
Total Sales.............. 86,399 10,377 -- 96,776 54,552 -- 151,328
Cost of products sold..... 40,678 -- -- 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services.......... 13,409 27,028 -- 40,437 -- 40,437
-------- -------- ------- -------- ------- ------- ---------
Total Cost of Sales...... 54,087 27,028 -- 81,115 32,969 3,405 117,489
Gross Profit............. 32,312 (16,651) -- 15,661 21,583 (3,405) 33,839
Engineering and
development.............. 3,327 -- -- 3,327 7,809 -- 11,136
Selling, general and
administrative........... 9,654 10,404 620(L) 20,678 11,974 460(R) 33,112
Amortization of
goodwill................. 2,537 -- 1,780(M) 4,317 406 (160)(S) 5,363
-- -- -- 800(T)
In-process research and
development.............. -- -- -- -- 5,135 (5,135)(U) --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240
-------- -------- ------- -------- ------- ------- ---------
Operating Income (Loss).. 13,554 (27,055) (2,400) (15,901) (3,741) 630 (19,012)
Interest and other
income................... 1,971 4 -- 1,975 323 -- 2,298
Interest and other
expense.................. (3,049) (2,224) -- (5,273) -- -- (5,273)
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Income Taxes and
Minority Interests..... 12,476 (29,275) (2,400) (19,199) (3,418) 630 (21,987)
Income taxes.............. 5,375 -- (5,375)(N) -- 100 (100)(V) --
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Minority Interests..... 7,101 (29,275) 2,975 (19,199) (3,518) 730 (21,987)
Minority interests in
earnings of subsidiary... -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- ---------
Net Income (Loss)........ $ 7,101 $(29,275) $ 2,975 $(19,199) $(3,518) $ 730 $ (21,987)
======== ======== ======= ======== ======= ======= =========
Net Income (Loss) Per
Common Share
Basic.................... $ (0.67)(X)
=========
Diluted.................. $ (0.67)(X)
=========
Weighted Average Shares
Outstanding
Basic.................... 32,724(X)
=========
Diluted.................. 32,724(X)
=========
</TABLE>
72
<PAGE> 83
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND NACT NACT HOLDCO
MAJORITY MINORITY AND HOLDCO, NACT
INTEREST INTEREST NACT RESURGENS AND RESURGENS
COMBINED ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
------------- ----------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products...................... $71,831 $ -- $71,831 $ -- $ -- $ 71,831
Service revenues....................... 14,568 -- 14,568 10,377 -- 24,945
------- ------- ------- -------- ------- --------
Total Sales.......................... 86,399 -- 86,399 10,377 -- 96,776
Cost of products sold.................. 40,588 90(H) 40,678 -- -- 40,678
Cost of services....................... 13,409 -- 13,409 27,028 -- 40,437
------- ------- ------- -------- ------- --------
Total Cost of Sales.................. 53,997 90 54,087 27,028 -- 81,115
Gross Profit......................... 32,402 (90) 32,312 (16,651) -- 15,661
Engineering and development............ 3,327 -- 3,327 -- -- 3,327
Selling, general and administrative.... 9,654 -- 9,654 10,404 620(L) 20,678
Amortization of goodwill............... 2,297 240(I) 2,537 -- 1,780(M) 4,317
Special charges........................ 3,240 -- 3,240 -- -- 3,240
------- ------- ------- -------- ------- --------
Operating Income (Loss).............. 13,884 (330) 13,554 (27,055) (2,400) (15,901)
Interest and other income.............. 1,971 -- 1,971 4 -- 1,975
Interest and other expense............. (3,049) -- (3,049) (2,224) -- (5,273)
------- ------- ------- -------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests................. 12,806 (330) 12,476 (29,275) (2,400) (19,199)
Income taxes........................... 5,375 -- 5,375 -- (5,375)(N) --
------- ------- ------- -------- ------- --------
Income (Loss) Before Minority
Interests.......................... 7,431 (330) 7,101 (29,275) 2,975 (19,199)
Minority interests in earnings of
subsidiary........................... 1,228 (1,228)(J) -- -- -- --
------- ------- ------- -------- ------- --------
Net Income (Loss).................... $ 6,203 $ 898 $ 7,101 $(29,275) $ 2,975 $(19,199)
======= ======= ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic................................ $ (0.73)(O)
========
Diluted.............................. $ (0.73)(O)
========
Weighted Average Shares Outstanding
Basic................................ 26,220(O)
========
Diluted.............................. 26,220(O)
========
</TABLE>
73
<PAGE> 84
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND
NACT NACT
MAJORITY MINORITY HOLDCO HOLDCO, NACT
INTEREST INTEREST AND NACT TELCO AND TELCO
COMBINED ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- ------------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products........................ $71,831 $ -- $71,831 $54,552 $ -- $126,383
Service revenues......................... 14,568 -- 14,568 -- -- 14,568
------- ------ ------- ------- ------- --------
Total Sales............................ 86,399 -- 86,399 54,552 -- 140,951
Cost of products sold.................... 40,588 90(H) 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services......................... 13,409 -- 13,409 -- 13,409
------- ------ ------- ------- ------- --------
Total Cost of Sales.................... 53,997 90 54,087 32,969 3,405 90,461
Gross Profit........................... 32,402 (90) 32,312 21,583 (3,405) 50,490
Engineering and development.............. 3,327 -- 3,327 7,809 -- 11,136
Selling, general and administrative...... 9,654 -- 9,654 11,974 460(R) 22,088
Amortization of goodwill................. 2,297 240(I) 2,537 406 (160)(S) 3,583
800(T)
In-process research and development...... -- -- -- 5,135 (5,135)(U) --
Special charges.......................... 3,240 -- 3,240 -- -- 3,240
------- ------ ------- ------- ------- --------
Operating Income (Loss)................ 13,884 (330) 13,554 (3,741) 630 10,443
Interest and other income................ 1,971 -- 1,971 323 -- 2,294
Interest expense......................... (3,049) -- (3,049) -- -- (3,049)
------- ------ ------- ------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests................... 12,806 (330) 12,476 (3,418) 630 9,688
Income taxes............................. 5,375 -- 5,375 100 (1,655)(W) 3,820
------- ------ ------- ------- ------- --------
Income (Loss) Before Minority
Interests............................ 7,431 (330) 7,101 (3,518) 2,285 5,868
Minority interests in earnings of
subsidiary............................. 1,228 (1,228)(J) -- -- -- --
------- ------ ------- ------- ------- --------
Net Income (Loss)...................... $ 6,203 $ 898 $ 7,101 $(3,518) $ 2,285 $ 5,868
======= ====== ======= ======= ======= ========
Net Income Per Common Share
Basic.................................. $ 0.20(X)
========
Diluted................................ $ 0.19(X)
========
Weighted Average Shares Outstanding
Basic.................................. 28,974(X)
========
Diluted................................ 30,655(X)
========
</TABLE>
74
<PAGE> 85
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND
NACT NACT
MAJORITY MINORITY HOLDCO AND
INTEREST INTEREST NACT
COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
Sales of products........................................ $71,831 $ -- $71,831
Service revenues......................................... 14,568 -- 14,568
------- ------- -------
Total Sales............................................ 86,399 -- 86,399
Cost of products sold.................................... 40,588 90(H) 40,678
Cost of services......................................... 13,409 -- 13,409
------- ------- -------
Total Cost of Sales.................................... 53,997 90 54,087
Gross Profit........................................... 32,402 (90) 32,312
Engineering and development.............................. 3,327 -- 3,327
Selling, general and administrative...................... 9,654 -- 9,654
Amortization of goodwill................................. 2,297 240(I) 2,537
Special charges.......................................... 3,240 -- 3,240
------- ------- -------
Operating Income....................................... 13,884 (330) 13,554
Interest and other income................................ 1,971 -- 1,971
Interest expense......................................... (3,049) -- (3,049)
------- ------- -------
Income Before Income Taxes and Minority Interests...... 12,806 (330) 12,476
Income taxes............................................. 5,375 -- 5,375
------- ------- -------
Income Before Minority Interests....................... 7,431 (330) 7,101
Minority interests in earnings of subsidiary............. 1,228 (1,228)(J) --
------- ------- -------
Net Income............................................. $ 6,203 $ 898 $ 7,101
======= ======= =======
Net Income Per Common Share
Basic.................................................. $ 0.32(K)
=======
Diluted................................................ $ 0.30(K)
=======
Weighted Average Shares Outstanding
Basic.................................................. 22,470(K)
=======
Diluted................................................ 23,969(K)
=======
</TABLE>
75
<PAGE> 86
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND
NACT MAJORITY HOLDCO AND
INTEREST TELCO TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products............................... $71,831 $54,552 $ -- $126,383
Service revenues................................ 14,568 -- -- 14,568
------- ------- ------- --------
Total Sales................................... 86,399 54,552 -- 140,951
Cost of products sold........................... 40,588 32,969 (120)(P) 76,962
3,525(Q)
Cost of services................................ 13,409 -- 13,409
------- ------- ------- --------
Total Cost of Sales........................... 53,997 32,969 3,405 90,371
Gross Profit.................................. 32,402 21,583 (3,405) 50,580
Engineering and development..................... 3,327 7,809 -- 11,136
Selling, general and administrative............. 9,654 11,974 460(R) 22,088
Amortization of goodwill........................ 2,297 406 (160)(S) 3,343
800(T)
In-process research and development............. -- 5,135 (5,135)(U) --
Special charges................................. 3,240 -- -- 3,240
------- ------- ------- --------
Operating Income.............................. 13,884 (3,741) 630 10,773
Interest and other income....................... 1,971 323 -- 2,294
Interest expense................................ (3,049) -- -- (3,049)
------- ------- ------- --------
Income Before Income Taxes and Minority
Interests.................................. 12,806 (3,418) 630 10,018
Income taxes.................................... 5,375 100 (1,655)(W) 3,820
------- ------- ------- --------
Income Before Minority Interests.............. 7,431 (3,518) 2,285 6,198
Minority interests in earnings of subsidiary.... 1,228 -- -- 1,228
------- ------- ------- --------
Net Income.................................... $ 6,203 $(3,518) $ 2,285 $ 4,970
======= ======= ======= ========
Net Income Per Common Share
Basic......................................... $ 0.18(X)
========
Diluted....................................... $ 0.17(X)
========
Weighted Average Shares Outstanding
Basic......................................... 26,947(X)
========
Diluted....................................... 28,627(X)
========
</TABLE>
76
<PAGE> 87
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
NACT ATI AND NACT
HOLDCO NACT MAJORITY MAJORITY
ATI AND ATI MAJORITY INTEREST INTEREST
HOLDCO ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED
------- -------- ----------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................... $71,392 $ 13,687 $ (150)(A) $ 84,929 $24,502 $ -- $109,431
Service revenues.................... 21,593 -- -- 21,593 5,493 -- 27,086
------- -------- ------- -------- ------- ------- --------
Total Sales........................ 92,985 13,687 (150) 106,522 29,995 -- 136,517
Cost of products sold............... 43,827 13,586 (70)(A) 57,343 7,569 370(D) 65,282
Cost of services.................... 17,018 -- -- 17,018 5,756 -- 22,774
------- -------- ------- -------- ------- ------- --------
Total Cost of Sales................ 60,845 13,586 (70) 74,361 13,325 370 88,056
Gross Profit....................... 32,140 101 (80) 32,161 16,670 (370) 48,461
Engineering and development......... 1,862 4,283 -- 6,145 2,761 -- 8,906
Selling, general and
administrative..................... 9,000 6,265 -- 15,265 6,913 -- 22,178
Amortization of goodwill............ 1,756 -- 200(B) 1,956 573 2,150(E) 4,679
------- -------- ------- -------- ------- ------- --------
Operating Income (Loss)............ 19,522 (10,447) (280) 8,795 6,423 (2,520) 12,698
Interest and other income........... 2,503 64 -- 2,567 734 -- 3,301
Interest and other expense.......... (1,355) -- -- (1,355) (19) -- (1,374)
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests........... 20,670 (10,383) (280) 10,007 7,138 (2,520) 14,625
Income taxes........................ 7,536 -- (3,800)(C) 3,736 2,757 -- 6,493
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Minority
Interests........................ 13,134 (10,383) 3,520 6,271 4,381 (2,520) 8,132
Minority Interests in Earnings of
Subsidiary......................... -- -- -- -- -- (1,433)(F) (1,433)
------- -------- ------- -------- ------- ------- --------
Net Income (Loss).................. $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,953) $ 6,699
======= ======== ======= ======== ======= ======= ========
Net Income (Loss) Per Common Share
Basic..............................
Diluted............................
Weighted Average Shares Outstanding
Basic..............................
Diluted............................
<CAPTION>
NACT HOLDCO, HOLDCO, ATI,
MINORITY ATI AND NACT AND
INTEREST NACT RESURGENS RESURGENS TELCO
ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS
----------- -------- --------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................... $ -- $109,431 $ -- $ -- $ 109,431 $113,013 $ --
Service revenues.................... -- 27,086 165,489 -- 192,575 -- --
------ -------- --------- ------- --------- -------- --------
Total Sales........................ -- 136,517 165,489 -- 302,006 113,013 --
Cost of products sold............... 180(G) 65,462 -- -- 65,462 72,638 (240)(O)
7,050(P)
Cost of services.................... -- 22,774 246,494 1,230(K) 270,498 -- --
------ -------- --------- ------- --------- -------- --------
Total Cost of Sales................ 180 88,236 246,494 1,230 335,960 72,638 6,810
Gross Profit....................... (180) 48,281 (81,005) (1,230) (33,954) 40,375 (6,810)
Engineering and development......... -- 8,906 -- -- 8,906 14,927 --
Selling, general and
administrative..................... -- 22,178 74,448 -- 96,626 28,181 925(Q)
Amortization of goodwill............ 480(H) 5,159 -- 3,560(L) 8,719 669 (669)(R)
1,500(S)
------ -------- --------- ------- --------- -------- --------
Operating Income (Loss)............ (660) 12,038 (155,453) (4,790) (148,205) (3,402) (8,566)
Interest and other income........... -- 3,301 642 -- 3,943 692 --
Interest and other expense.......... -- (1,374) (16,909) -- (18,283) -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Income Taxes
and Minority Interests........... (660) 13,965 (171,720) (4,790) (162,545) (2,710) (8,566)
Income taxes........................ -- 6,493 -- (6,493)(M) -- -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Minority
Interests........................ (660) 7,472 (171,720) 1,703 (162,545) (2,710) (8,566)
Minority Interests in Earnings of
Subsidiary......................... 1,433(I) -- -- -- -- -- --
------ -------- --------- ------- --------- -------- --------
Net Income (Loss).................. $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545) $ (2,710) $ (8,566)
====== ======== ========= ======= ========= ======== ========
Net Income (Loss) Per Common Share
Basic..............................
Diluted............................
Weighted Average Shares Outstanding
Basic..............................
Diluted............................
<CAPTION>
HOLDCO,
ATI, NACT,
RESURGENS
AND TELCO
COMBINED
-----------
<S> <C>
Sales of products................... $ 222,444
Service revenues.................... 192,575
---------
Total Sales........................ 415,019
Cost of products sold............... 144,910
Cost of services.................... 270,498
---------
Total Cost of Sales................ 415,408
Gross Profit....................... (389)
Engineering and development......... 23,833
Selling, general and
administrative..................... 125,732
Amortization of goodwill............ 10,219
---------
Operating Income (Loss)............ (160,173)
Interest and other income........... 4,635
Interest and other expense.......... (18,283)
---------
Income (Loss) Before Income Taxes
and Minority Interests........... (173,821)
Income taxes........................ --
---------
Income (Loss) Before Minority
Interests........................ (173,821)
Minority Interests in Earnings of
Subsidiary......................... --
---------
Net Income (Loss).................. $(173,821)
=========
Net Income (Loss) Per Common Share
Basic.............................. $ (5.54)(U)
=========
Diluted............................ $ (5.54)(U)
=========
Weighted Average Shares Outstanding
Basic.............................. 31,380(U)
=========
Diluted............................ 31,380(U)
=========
</TABLE>
77
<PAGE> 88
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND
NACT NACT HOLDCO,
MAJORITY MINORITY HOLDCO AND NACT AND
INTEREST INTEREST NACT RESURGENS RESURGENS
COMBINED ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
---------- ----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $109,431 $ -- $109,431 $ -- $ -- $ 109,431
Service revenues........................ 27,086 -- 27,086 165,489 -- 192,575
-------- ------ -------- --------- ------- ---------
Total Sales........................... 136,517 -- 136,517 165,489 -- 302,006
Cost of products sold................... 65,282 180(G) 65,462 -- -- 65,462
Cost of services........................ 22,774 -- 22,774 246,494 1,230(K) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales................... 88,056 180 88,236 246,494 1,230 335,960
Gross Profit.......................... 48,461 (180) 48,281 (81,005) (1,230) (33,954)
Engineering and development............. 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative..... 22,178 -- 22,178 74,448 -- 96,626
Purchased research and development...... -- -- -- -- -- --
Amortization of goodwill................ 4,679 480(H) 5,159 -- 3,560(L) 8,719
-------- ------ -------- --------- ------- ---------
Operating Income (Loss)............... 12,698 (660) 12,038 (155,453) (4,790) (148,205)
Interest and other income............... 3,301 -- 3,301 642 -- 3,943
Interest and other expense.............. (1,374) -- (1,374) (16,909) -- (18,283)
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Income Taxes and
Minority Interests.................. 14,625 (660) 13,965 (171,720) (4,790) (162,545)
Income taxes............................ 6,493 -- 6,493 -- (6,493)(M) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests........................... 8,132 (660) 7,472 (171,720) 1,703 (162,545)
Minority Interests in Earnings of
Subsidiary............................ (1,433) 1,433(I) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss)..................... $ 6,699 $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545)
======== ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................. $ (6.53)(N)
=========
Diluted............................... $ (6.53)(N)
=========
Weighted Average Shares Outstanding
Basic................................. 24,875(N)
=========
Diluted............................... 24,875(N)
=========
</TABLE>
78
<PAGE> 89
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND NACT NACT HOLDCO,
MAJORITY MINORITY HOLDCO AND NACT
INTEREST INTEREST NACT TELCO AND TELCO
COMBINED ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
------------ ----------- --------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products................ $109,431 $ -- $109,431 $113,013 $ -- $222,444
Service revenues................. 27,086 -- 27,086 -- -- 27,086
-------- ------ -------- -------- ------- --------
Total Sales.................... 136,517 -- 136,517 113,013 -- 249,530
Cost of products sold............ 65,282 180(G) 65,462 72,638 (240)(O) 144,910
7,050(P)
Cost of services................. 22,774 -- 22,774 -- -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales............ 88,056 180 88,236 72,638 6,810 167,684
Gross Profit................... 48,461 (180) 48,281 40,375 (6,810) 81,846
Engineering and development...... 8,906 -- 8,906 14,927 -- 23,833
Selling, general and
administrative................. 22,178 -- 22,178 28,181 925(Q) 51,284
Amortization of goodwill......... 4,679 480(H) 5,159 669 (669)(R) 6,659
1,500(S)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)........ 12,698 (660) 12,038 (3,402) (8,566) 70
Interest and other income........ 3,301 -- 3,301 692 -- 3,993
Interest and other expense....... (1,374) -- (1,374) -- -- (1,374)
-------- ------ -------- -------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests.................... 14,625 (660) 13,965 (2,710) (8,566) 2,689
Income taxes..................... 6,493 -- 6,493 -- (3,890)(T) 2,603
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests.................... 8,132 (660) 7,472 (2,710) (4,676) 86
Minority Interests in Earnings of
Subsidiary..................... (1,433) 1,433(I) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss).............. $ 6,699 $ 773 $ 7,472 $ (2,710) $(4,676) $ 86
======== ====== ======== ======== ======= ========
Net Income Per Common Share
Basic.......................... $ 0.00(U)
========
Diluted........................ $ 0.00(U)
========
Weighted Average Shares
Outstanding
Basic.......................... 27,630(U)
========
Diluted........................ 29,095(U)
========
</TABLE>
79
<PAGE> 90
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND NACT NACT
MAJORITY MINORITY HOLDCO AND
INTEREST INTEREST NACT
COMBINED ADJUSTMENTS COMBINED
------------ ----------- ----------
<S> <C> <C> <C>
Sales of products....................................... $109,431 $ -- $109,431
Service revenues........................................ 27,086 -- 27,086
-------- ----- --------
Total Sales........................................... 136,517 -- 136,517
Cost of products sold................................... 65,282 180(G) 65,462
Cost of services........................................ 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................... 88,056 180 88,236
Gross Profit.......................................... 48,461 (180) 48,281
Engineering and development............................. 8,906 -- 8,906
Selling, general and administrative..................... 22,178 -- 22,178
Purchased research and development...................... -- -- --
Amortization of goodwill................................ 4,679 480(H) 5,159
-------- ----- --------
Operating Income...................................... 12,698 (660) 12,038
Interest and other income............................... 3,301 -- 3,301
Interest and other expense.............................. (1,374) -- (1,374)
-------- ----- --------
Income Before Income Taxes and Minority Interests..... 14,625 (660) 13,965
Income taxes............................................ 6,493 -- 6,493
-------- ----- --------
Income Before Minority Interests...................... 8,132 (660) 7,472
Minority Interests in Earnings of Subsidiary............ (1,433) 1,433(I) --
-------- ----- --------
Net Income............................................ $ 6,699 $ 773 $ 7,472
======== ===== ========
Net Income Per Common Share
Basic................................................. $ 0.35(J)
========
Diluted............................................... $ 0.33(J)
========
Weighted Average Shares Outstanding
Basic................................................. 21,125(J)
========
Diluted............................................... 22,591(J)
========
</TABLE>
80
<PAGE> 91
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI AND NACT
MAJORITY HOLDCO AND
INTEREST TELCO TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------ -------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products..................... $109,431 $113,013 $ -- $222,444
Service revenues...................... 27,086 -- -- 27,086
-------- -------- ------- --------
Total Sales......................... 136,517 113,013 -- 249,530
Cost of products sold................. 65,282 72,638 (240)(O) 144,730
7,050(P)
Cost of services...................... 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales................. 88,056 72,638 6,810 167,504
Gross Profit........................ 48,461 40,375 (6,810) 82,026
Engineering and development........... 8,906 14,927 -- 23,833
Selling, general and administrative... 22,178 28,181 925(Q) 51,284
Amortization of goodwill.............. 4,679 669 (669)(R) 6,179
1,500(S)
-------- -------- ------- --------
Operating Income (Loss)............. 12,698 (3,402) (8,566) 730
Interest and other income............. 3,301 692 -- 3,993
Interest and other expense............ (1,374) -- -- (1,374)
-------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests........... 14,625 (2,710) (8,566) 3,349
Income taxes.......................... 6,493 -- (3,890)(T) 2,603
-------- -------- ------- --------
Income (Loss) Before Minority
Interests........................ 8,132 (2,710) (4,676) 746
Minority Interests in Earnings of
Subsidiary.......................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)................... $ 6,699 $ (2,710) $(4,676) $ (687)
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................... $ (0.03)(U)
========
Diluted............................. $ (0.03)(U)
========
Weighted Average Shares Outstanding
Basic............................... 25,602(U
========
Diluted............................. 25,602(U)
========
</TABLE>
81
<PAGE> 92
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
GENERAL HISTORICAL INFORMATION:
ACQUISITIONS OF ATI AND NACT
The ATI acquisition consummated on January 29, 1998 and the NACT Stock
Purchase consummated on February 27, 1998 have been accounted for under the
purchase method of accounting. The historical consolidated financial statements
of Holdco include the results of the operations of ATI and NACT from February 1,
1998 and March 1, 1998, respectively. The purchase price of ATI and the majority
interest in NACT was allocated to the fair values of the net assets acquired, to
in-process research and development projects and to goodwill. During the first
quarter of 1998, $5.4 million and $44.6 million of purchased in-process research
and development technologies related to the ATI acquisition and the NACT Stock
Purchase, respectively, was expensed in accordance with the applicable
accounting rules. See Note 2 to Consolidated Financial Statements in the World
Access June 30 Form 10-Q for further descriptions of these acquisitions.
AEROTEL LITIGATION
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT alleging that
telephone systems manufactured and sold by NACT incorporating prepaid debit card
features infringe upon Aerotel's patent which was issued in November 1987. See
Note 8 to Consolidated Financial Statements in the World Access June 30 Form
10-Q for further description of this litigation.
As part of the negotiations relating to the acquisition of NACT, World
Access and GST Telecommunications, Inc. agreed to share evenly any Aerotel
judgment against NACT, including NACT's legal fees. Subsequent to the NACT Stock
Purchase, World Access has been actively engaged in settlement negotiations. On
July 9, 1998, World Access, GST and Aerotel entered into a Memorandum of
Understanding to settle the Aerotel litigation. Including legal fees, World
Access now estimates its Aerotel settlement costs will be approximately $3.3
million. The settlement costs expected to be incurred by World Access have been
accounted for as additional NACT purchase price as of June 30, 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT
Overview. The nature of the efforts required to develop the purchased
in-process technology into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were
discounted back to their net present value. The resulting projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to such projects. These estimates were based on
several assumptions, including those summarized below for each respective
acquisition.
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed the sales and profitability
of Holdco may be adversely affected in future periods. Additionally, the value
of other intangible assets may become impaired.
NACT. NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained. Failure to attain technological
feasibility, especially given the high degree of customization required
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
for complete integration into the NACT solution, would have rendered partially
designed hardware and software useless for other applications. Incomplete design
of hardware and software coding would create a non-connective, inoperable
product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite. The purchased in-process technology acquired in the NACT
acquisition was comprised of nine projects related to switching systems. These
projects were scheduled to be released between February 1998 and December 1999.
Most major projects had several ongoing sub-projects (e.g., a hardware design
project and a software design project). These projects include planned additions
of new products, based on undeveloped technologies, to NACT's suite of STX and
NTS products. The projects also include the creation of products for new product
suites. The research and development projects were at various stages of
development. None of the in-process projects considered in the write-off had
attained technological feasibility. The in-process projects do not build on
existing core technology; such existing technologies were valued as a separate
asset.
NACT had thirteen projects (the nine switching projects noted above and the
related sub projects) in development at the time of acquisition. These projects
were at multiple stages along NACT's development timeline. Some projects were
beginning testing in NACT labs; others were at earlier stages of planning and
designing. Eleven projects were scheduled for release between February and
December of 1998. The remaining two projects were scheduled for staggered
release over 1998 and 1999. Revenue projections for the in-process technologies
reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the twelve-year projection at annual rates ranging from
52.7% to 7.2%, decreasing over the remaining years at annual rates ranging from
- -2.7% to -61.2% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $6.3 million to a high of $117.2 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base, synergies as a result of the NACT acquisition, and movement into
new markets. Projected revenues from in-process technology were assumed to peak
in 2002 and decline from 2003 through 2009 as other new products are expected to
enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 119.2% to a low of 11.0% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $1.7 million to $34
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $4.1 million in the
aggregate through the year 1999 ($3,249,000 in 1998 and $829,000 in 1999). The
expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
ATI. ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained. Failure to attain technological feasibility would have rendered
partially designed equipment useless for other applications. ATI's products are
designed for specific frequency bandwidths and, as such, are highly customized
to those bandwidths and the needs of customers wishing to operate in them.
Products only partially completed for certain bandwidths cannot be used in other
bandwidths.
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased-in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave/millimeter radio equipment. Each project
consists of multiple products. These projects were at multiple stages along
ATI's typical development timeline. Some projects were beginning testing in ATI
labs; others were at earlier stages of planning and designing. The majority of
the products were scheduled to be released during 1998 and 1999. Revenue
projections for the in-process technologies reflected the anticipated release
dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from -30.9% to -60.9% as other products are
released in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $10.1 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base, synergies as a result of the
ATI acquisition, and movement into new markets. Projected revenues from
in-process technology were assumed to peak in 2001 and decline from 2003 through
2004 as other new products are expected to enter the market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately a low of -$900,000 to
a high of $9.1 million within the term of the projections.
The discount rate used to value the existing technology of ATI was 23.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the costs to develop the in-process technology
acquired in the ATI acquisition will be approximately $24.3 million in the
aggregate through the year 2002 ($3.3 million, $7.2 million, $7.6 million, $5.1
million, and $1.1 million in 1998, 1999, 2000, 2001, and 2002, respectively).
The expected sources of funding were scheduled R&D expenses from the operating
budget of ATI provided by the operating assets and liabilities of ATI.
Telco. Telco develops and manufactures products focused on providing
integrated access for network services. Telco's products can be separated into
three categories: (1) broadband transmission products, (2) network access
products, and (3) bandwidth optimization products. Telco's products are deployed
at the edge of the service provider's networks to provide organizations with a
flexible, cost-effective means of transmitting voice, data, video and image
traffic over public or private networks.
At the time of acquisition, Telco had eight primary projects in development
relating to next-generation telecommunication and data network hardware. These
projects were at various stages in the development process. Some were about to
enter the testing phase of the initial hardware prototype, while others were
still in the early concept and design specification stages. These eight projects
were scheduled for commercial release at various points in time from December
1998 through late 1999/early 2000.
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
None of the in-process projects at Telco considered in the write-off are
expected to achieve technological feasibility before the consummation of World
Access' acquisition of Telco. Furthermore, if the projects are not completed as
planned, the in-process research and development will have no alternative use.
Failure of the in process technologies to achieve technological feasibility may
adversely affect the future profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 195% to a low of zero growth, reflecting both the
displacement of Telco's old products by these new products as well as the
expected growth in the overall market in which Telco's products compete.
Thereafter, revenues are projected to decline over the remaining projection
period at annual rates ranging from -14% to -42%, as the acquired in process
technologies become obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $28
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
of Telco (and subsequently World Access) was projected to grow over the first
five years of the projection period at annual rates ranging from a high of 142%
to a low of 20% with one intermediate year of marginally declining operating
income. Thereafter, the contribution to operating income was projected to
decline through the projection period. The acquired in-process technology's
contribution to operating income ranged from a loss of approximately $5 million
to a high of approximately $86 million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology, and
the risk associated with the financial assumptions with respect to the
projections used in the analysis.
85
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used to value the in-process technologies was 25.0%. This
discount rate was selected due to several incremental inherent risks. First the
actual useful economic life of such technologies may differ from the estimates
used in the analysis. Second, risks associated with the financial projections on
the specific products that comprise the acquired in-process research and
development. The third factor is the incomplete and unproven nature of the
technologies. Finally, future technological advances that are currently unknown
may negatively impact the economic and functional viability of the in-process
R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $16 million through 2001. Over the projection
period, management expects to spend an additional aggregate $46 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes, and identified
upgrades.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET:
NACT MINORITY INTEREST ADJUSTMENTS
(A) The acquisition of the minority interest of NACT will be accounted for
under the purchase method of accounting. In addition, in accordance with
generally accepted accounting principles, the portion of the purchase price
allocable to the in-process research and development projects of NACT will be
expensed at the consummation of the NACT Transaction. The amount of the one-time
non-recurring charge is expected to approximate $21.9 million. Since this charge
is directly related to the acquisition and will not recur, the Unaudited Pro
Forma Statements of Operations have been prepared excluding this charge. Holdco
has not determined the final allocation of the purchase price, and accordingly,
the amount ultimately determined may differ significantly from the amounts shown
below.
The unallocated excess of purchase price over the fair value of the net
assets acquired is determined as follows (in thousands):
Purchase price of approximately 32.7% minority interest in NACT:
<TABLE>
<S> <C>
Stock issued in exchange for NACT shares.................. $ 46,660
--------
Allocation:
Minority interest in subsidiaries......................... (12,443)
Adjust assets and liabilities.............................
In-process research and development costs(i)........... (21,900)
Acquired technology(ii)................................ (4,400)
Deferred tax liability(iii)............................ 1,700
--------
(37,043)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 9,617
========
</TABLE>
(i) The in-process research and development write-off of $21.9 million is
based on the valuation performed in connection with the NACT Stock Purchase. The
valuation report assigned a value of $66.5 million to the in-process research
and development projects as of the date of the NACT Stock Purchase, of which
67.3% or $44.6 million was expensed at the consummation of the NACT Stock
Purchase. Management estimates that an additional $21.9 million of in-process
research and development projects will be written-off in conjunction with the
consummation of the NACT Transaction. Holdco will obtain an updated valuation of
the in-process research and development projects as of the closing of the NACT
Transaction for use in determining the final purchase accounting for the NACT
Transaction.
(ii) Represents the purchase price assigned to the acquired technology of
NACT based upon the valuation performed in connection with the NACT Stock
Purchase.
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(iii) Establish a deferred tax liability related to the acquired
technology.
(B) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
RESURGENS PRO FORMA ADJUSTMENTS
(C) The Resurgens Transaction will be accounted for under the purchase
method of accounting. Holdco has not determined the final allocation of the
purchase price, and accordingly, the amount ultimately determined may differ
significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price:
Cash paid for claims(i)................................... $ 3,000
Purchase of switching equipment by World Access for use by
Resurgens prior to closing of the merger............... 4,000
Restricted stock issued to creditors(ii).................. $76,000
Restricted stock issued to Renaissance Partners(ii)....... 15,730
-------
Total stock....................................... 91,730
Fees and expenses related to the Resurgens Transaction.... 2,000
--------
Total purchase price.............................. 100,730
--------
Allocation:
Historical stockholders' equity, net of creditor
liabilities forgiven(iii).............................. (2,179)
Adjust assets and liabilities:
Adjust licenses to estimated fair market value(iv)..... (3,000)
Adjust network switching equipment to estimated fair
market value(iv)..................................... (5,000)
Record switching equipment purchased by World Access... (4,000)
Establish deferred tax asset(v)........................ (15,300)
--------
(29,479)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 71,251
========
</TABLE>
(i) Represents an estimate of $1.0 million to be paid to the creditors of
Resurgens under a cash settlement plan proposed by World Access and
approximately $2.0 million to be paid to governmental creditors.
(ii) The value assigned to the 3,750,000 restricted Holdco shares to be
issued to the creditors and Renaissance Partners at the closing date will be
$25.17, the seven trading days average closing price of Holdco common stock,
including the three days prior and the three days subsequent to May 12, 1998,
the date economic terms of the Resurgens Transaction were announced, less a 30%
discount attributable to the restrictive nature of the shares. Holdco consulted
with an independent financial advisor knowledgeable of the transaction in
determining the appropriate discount. Specific factors supporting the discount
are (1) the length of the restriction, (2) the number of shares subject to
restriction, and (3) the volatility of Holdco common stock [the closing price on
the announcement date was $37.06 and the closing price on August 28, 1998 was
$23.13, a 37.6% reduction]. Management of Holdco believes the discount rate to
be used in valuing these restricted shares is appropriate and reasonable.
In addition to the shares noted above, the creditors and Renaissance
Partners will also be issued 7,500,000 restricted Holdco shares at the closing
(the "Escrowed Shares"). These shares will be immediately
87
<PAGE> 98
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
placed into escrow and will be valued at par value only, or $75,000. As it
becomes probable that the conditions for release from escrow will be met, the
fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity, respectively.
Specifically, the Escrowed Shares will be released in the amounts and on
the dates specified below if the sum of the EBITDA for Resurgens for the
performance periods set forth below equals or exceeds the Target EBITDA for such
performance period as set forth below:
<TABLE>
<CAPTION>
ESCROWED SHARES
TO BE
PERFORMANCE PERIOD RELEASE DATE RELEASED TARGET EBITDA
------------------ ------------ --------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period")............ February 15, 1999 1,875,000 $7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period")............ February 15, 2000 2,812,500 $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)............. February 15, 2001 2,812,500 $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Exchange Closing Date is (a) on or
after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (b) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Exchange Closing occurs and shall terminate on (and including) the
last day of the sixth calendar month following the month in which the Exchange
Closing occurs, the release date shall be forty-five (45) days after the end of
such period and the Target EBITDA shall be equal to the sum of (i) $2,100,000
for each calendar month of 1998 included in the First Performance Period and
(ii) $2,400,000 for each calendar month of 1999 included in the First
Performance Period.
If, after the Exchange, the EBITDA of Resurgens is less than the Target
EBITDA required for the release of Escrowed Shares in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding anything described herein, the
Escrowed Shares shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
World Access Common Stock as reported by Nasdaq equals or exceeds $65.00 for any
five consecutive trading days during such calendar quarter, then 25% of all of
the shares of Escrowed Shares shall be released on February 15, 2000, provided
that if no Escrowed Shares are eligible for release during any such calendar
quarter, then such Escrowed Shares shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Holdco Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which such Escrowed Shares were not
eligible for release; (b) if the EBITDA of Resurgens for the Second Performance
Period equals or exceeds $52,775,000, then the Escrowed Shares related to the
Third Performance Period shall be released on February
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15, 2000; and (c) all of the Escrowed Shares shall be released upon a Change of
Control (as defined in the Exchange Agreement).
(iii) The combined historical accounts of Resurgens include pre-petition
creditor liabilities of $334.5 million, which are classified as "liabilities
subject to compromise," and borrowings under the WorldCom, Inc.
debtor-in-possession financing facility of $22.0 million as of June 30, 1998,
respectively. These liabilities will be satisfied in connection with the Plan of
Reorganization, which has been approved by the creditors committee and is
expected to be confirmed by the bankruptcy court in early September 1998. Upon
the confirmation of the Plan of Reorganization and the closing of the Resurgens
Transaction, the creditors will receive shares of RCG common stock in exchange
for the surrender of all of their claims against RCG. Immediately thereafter,
the creditors' shares of RCG will be cancelled and automatically converted into
the right to receive shares of Holdco Common Stock, a portion of which will be
received directly and a portion of which will be deposited into escrow pending
the satisfaction of certain conditions. All such shares of Holdco Common Stock
are subject to certain contractual restrictions.
The confirmation of the Plan of Reorganization is a condition precedent to
the closing of the Resurgens Transaction. Therefore, the combined historical
stockholders deficit of $354.4 million as of June 30, 1998 has been adjusted to
reflect a $352.6 million reduction for the liabilities subject to compromise and
the WorldCom, Inc. debtor-in-possession financing facility for purposes of the
unaudited pro forma combined balance sheet.
(iv) Estimates of fair market value of the licenses and the switching
equipment acquired have been made by management. These estimates are subject to
adjustment pending final valuations to be obtained from independent appraisers.
(v) At the time the Resurgens Transaction is consummated, Resurgens is
expected to have in excess of $125 million in net operating loss carryforwards
available to offset future federal taxable income. Based on its current
assessment of the forecasted operating results of Resurgens and other pertinent
factors, management expects at least 35% of these future tax benefits will be
realized. Accordingly, a deferred tax asset of $44 million, net of a 65%
valuation allowance of approximately $29 million, has been reflected in the Pro
Forma Combined Balance Sheet. The amount of the valuation allowance is subject
to future analysis and may be revised prior to the closing of the Resurgens
Transaction.
The pro forma loss of the combined entity is not indicative of the results
of operations that are expected to be achieved by the combined entity in the
future. The nature of Resurgens current operations are concentrated solely on
the international carriers' carrier business and an upgraded, efficient
operating network is now in place. Resurgens has a new, experienced management
team in place and has entered into several new contracts to increase its revenue
base, including a significant service contract with WorldCom Network Services,
Inc., a wholly owned subsidiary of WorldCom, Inc. Prior to the acquisition of
Resurgens, it is expected that Resurgens will be essentially debt free due to
its Chapter 11 bankruptcy proceedings. In addition, there are several closing
conditions that must be satisfied before the Resurgens Transaction is
consummated, including the achievement by Resurgens of monthly revenues of $25
million and related gross profit margin of greater than 5% for the calendar
month immediately preceding the closing date
(D) Eliminate existing stockholders' equity.
TELCO PRO FORMA ADJUSTMENTS
(E) The Telco Merger will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to the in-process
research and development projects of Telco will be expensed at the consummation
of the acquisition. The amount of the one-time non-recurring charge is expected
to approximate $73.9 million. Since this charge is directly related to the
acquisition and will not recur, the Unaudited Pro Forma Statements of Earnings
have
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HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
been prepared excluding this charge. Holdco has not determined the final
allocation of the purchase price, and accordingly, the amount ultimately
determined may differ significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares(i).............. $188,230
Fair market value of World Access options issued in
exchange for Telco options............................. 9,700
--------
Total stock and options........................... $ 197,930
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 201,680
---------
Allocation:
Historical stockholders' equity........................... (52,955)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements, excess quantities
related to reduced demand of certain legacy products
and those that are non-strategic as a result of the
merger to net realizable value....................... 4,500
Write-down to fair market value of certain redundant
equipment resulting from the merger.................. 1,500
Write-off of leaseholds associated with Telco's current
Norwood facility which is expected to be relocated... 1,300
Accrue involuntary employee termination benefits....... 1,500
Accrue lease termination provision related to Telco's
current Norwood facility............................. 1,400
Trademarks............................................. (7,400)
Establish deferred tax asset(ii)....................... (16,000)
Acquired technology(iii)............................... (56,400)
In-process research and development costs(iv).......... (73,900)
Deferred tax liabilities(v)............................ 24,900
---------
(171,555)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 30,125
=========
</TABLE>
(i) Based on the terms of the Telco Merger Agreement and the value of World
Access Common Stock as of August 28, 1998, Telco stockholders are currently
expected to receive approximately 6.5 million freely tradeable shares of Holdco
common stock at the time of the Telco Merger. The value assigned to these shares
will be $29.26 per share, the seven trading days average closing price of World
Access Common Stock which include the three trading days prior and the three
trading days subsequent to June 4, 1998, the date economic terms of the Telco
Merger were announced.
(ii) The net deferred tax asset of $16 million is comprised primarily of
gross temporary differences arising from the differences between book and tax
basis of certain assets and liabilities and for tax credits available to Telco
and Holdco. It is the opinion of management that these tax assets are likely to
be utilized by Telco or Holdco.
(iii) The value of the acquired technology of $56.4 million is based on a
preliminary valuation report prepared by an independent appraiser and represents
the value of Telco's current technology calculated using the income approach.
(iv) The amount of in-process research and development costs of $73.9
million is based on a preliminary valuation report prepared by an independent
appraiser, based on factors considered such as the number of projects in
process, the potential alternative future uses of those projects and estimated
future projected revenues from those projects. Holdco will obtain an updated
valuation of the in-process research and
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<PAGE> 101
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
development as of the closing of the Telco Merger for use in determining the
final purchase accounting for the Telco Merger.
(v) Establish deferred tax liabilities related to the identifiable
intangible assets.
(F) Eliminate existing stockholders' equity.
(G) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998:
ATI PRO FORMA ADJUSTMENTS
(A) Amortization of unallocated excess purchase price over net assets
acquired over 15 years relating to the one month period ended January 31, 1998
not included in the Holdco historical statement of earnings.
(B) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the ATI merger.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of the acquired technology relating to the majority
interest portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years relating to the two month period ended February 28, 1998
not included in the Holdco historical statement of earnings.
(F) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of the majority
interest in NACT.
(G) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(H) Amortization of the acquired technology relating to the minority
interest portion of NACT over 8 years.
(I) Amortization of unallocated excess purchase price over net assets
acquired related to the purchase of the remaining minority interest in NACT over
20 years.
(J) Reverse the minority interests in earnings of NACT.
(K) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of Holdco common stock issued in the merger
calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(L) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market values of the license agreements.
(M) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(N) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
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<PAGE> 102
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of Holdco common stock issued to Resurgens's
creditors and Renaissance Partners calculated in accordance with SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(P) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(Q) Amortization of acquired technology of Telco over 8 years.
(R) Amortization of trademarks of Telco over 8 years.
(S) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(T) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(U) Eliminate the non-recurring in-process research and development charge
recorded by Telco in connection with its acquisition of Jupiter on January 26,
1998. This write-off of in-process research and development does not directly
relate to the transaction between World Access and Telco, but does represent a
significant one-time charge that should be eliminated for purposes of presenting
pro forma financial information.
(V) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(W) To record a reduction in tax expense related to the reduction of the
deferred tax liability established in conjunction with the allocation of
purchase price to acquired technology and trademarks.
(X) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of Holdco common stock issued in the merger and
common stock equivalents related to stock options issued in exchange for Telco
options calculated in accordance with SFAS 128.
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997:
ATI PRO FORMA ADJUSTMENTS
(A) Eliminate inter-company sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of acquired technology relating to the majority interest
portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(F) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(G) Amortization of acquired technology relating to the minority interest
portion of NACT over 8 years.
(H) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(I) Reverse the minority interests in earnings of NACT.
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<PAGE> 103
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(J) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of Holdco common stock issued in the merger
calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(K) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market value of the license agreements.
(L) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(M) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(N) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of Holdco common stock issued to Resurgens's
creditors and Renaissance Partners calculated in accordance with SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(O) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(P) Amortization of acquired technology of Telco over 8 years.
(Q) Amortization of trademarks of Telco over 8 years.
(R) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(S) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(T) Adjust tax provision for the benefit of the Telco loss and pro forma
adjustments. This adjustment is not required when presented to give effect to
the Resurgens Transaction as the losses of Resurgens eliminates the provision
for income taxes in its entirety.
(U) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of Holdco common stock issued in the merger and
common stock equivalents related to stock options issued in exchange for Telco
options calculated in accordance with SFAS 128.
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<PAGE> 104
DESCRIPTION OF HOLDCO CAPITAL STOCK
GENERAL
Holdco is authorized to issue 40,000,000 shares of common stock, par value
$.01 per share (the "Holdco Common Stock"), and 10,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock").
HOLDCO COMMON STOCK
The holders of Holdco Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. There is no
cumulative voting with respect to the election of directors; accordingly,
holders of a majority of the outstanding shares of Holdco Common Stock can elect
all members of Holdco's board of directors, and holders of the remaining shares
by themselves cannot elect any member of the board of directors.
The holders of Holdco Common Stock are entitled to receive dividends when,
as and if declared by the board of directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of Holdco,
the holders of Holdco Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having preference
over the Holdco Common Stock. Holders of shares of Holdco Common Stock, as such,
have no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the Holdco Common Stock. All of the
outstanding shares of Holdco Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Holdco board of directors is authorized, without stockholder approval,
to issue from time to time up to 10,000,000 shares of Preferred Stock in one or
more series and, with respect to each series, to determine, subject to
limitations prescribed by law, any dividend rights and rates, any conversion or
exchange rights, any rights, terms and prices of redemption (including sinking
fund provisions), any liquidation preferences, any voting rights, and generally
any other rights, preferences, privileges, qualifications, limitations and
restrictions not in conflict with the Certificate of Incorporation. To date, no
series of Preferred Stock has been authorized or issued. Holdco has no present
plans to issue any shares of Preferred Stock.
The issuance of shares of Preferred Stock by action of the Holdco board of
directors could adversely affect the voting power, dividend rights and other
rights of holders of Holdco Common Stock. Issuance of shares of a series of
Preferred Stock also could, depending on the terms of such series, either impede
or facilitate the completion of a merger, tender offer or other takeover
attempt. Although the Holdco board of directors is required to make a
determination as to the best interests of Holdco's stockholders when issuing
shares of Preferred Stock, the board of directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in the best interests of Holdco
or in which stockholders might receive a premium for their Holdco Common Stock
over the then-prevailing market price. Although there are currently no plans to
issue shares of Preferred Stock or rights to purchase such shares, Holdco
believes that the availability of the Preferred Stock will provide it with
increased flexibility in structuring future financings and acquisitions and in
meeting other corporate needs that might arise. The authorized shares of
Preferred Stock are available for issuance without further action by Holdco's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which the Holdco Common Stock may then be listed.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation may not
engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction
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<PAGE> 105
which resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the date of determination, and (y) the affiliates and associates of any such
person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. Holdco has not elected
to be exempt from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage persons interested in acquiring Holdco to negotiate in
advance with its board of directors, since the stockholder approval requirement
would be avoided if a majority of the directors then in office approves either
the business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the management of Holdco. It is possible that such
provisions could make it more difficult to accomplish transactions which Holdco
stockholders may otherwise deem to be in their best interests.
LIABILITY OF DIRECTORS
The Holdco Certificate provides that a director of Holdco will not be
personally liable to Holdco or its stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the DGCL as amended from
time to time, for liability (i) for any breach of the director's duty of loyalty
to Holdco or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions, or (iv) for any transactions from which the director
derived an improper personal benefit. Neither the amendment nor repeal of such
provision will eliminate or reduce the effect of such provision in respect of
any matter occurring, or any cause of action, suit or claim, that, but for such
provision, would accrue or arise, prior to such amendment or repeal.
TRANSFER AGENT
The transfer agent for the Holdco Common Stock will be Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF WORLD ACCESS AND HOLDCO
Holdco and World Access are both organized under the laws of the State of
Delaware. The certificate of incorporation and bylaws of Holdco are the same in
every material respect to the certificate of incorporation and bylaws of World
Access.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF NACT AND HOLDCO
Both Holdco and NACT are incorporated in Delaware. As a result of the NACT
Merger, holders of NACT Stock will become stockholders of Holdco and the rights
of all such former NACT stockholders will be governed by the Holdco Certificate,
the Bylaws of Holdco (the "Holdco Bylaws") and the DGCL. The rights of the
holders of NACT Stock are presently governed by the certificate of incorporation
of NACT (the "NACT Certificate"), the Bylaws of NACT (the "NACT Bylaws") and the
DGCL. The following summary, which does not purport to be an exhaustive
statement of the general differences among the rights of the
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<PAGE> 106
stockholders of NACT and Holdco, sets forth a summary comparison of material
differences between the NACT and Holdco Certificates and between the NACT and
Holdco Bylaws. The information set forth below is qualified in its entirety by
reference to the full text of the NACT and Holdco Certificates and the NACT and
Holdco Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
Holdco. The Holdco Certificate authorizes the issuance of 40,000,000
shares of common stock, $.01 par value per share, and 10,000,000 shares of
preferred stock, $.01 par value per share ("Holdco Preferred Stock"). The Holdco
board of directors has the authority to issue the Holdco Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
for such series without any further vote or action by the Holdco stockholders.
NACT. The NACT Certificate authorizes the issuance of 25,000,000 shares of
common stock, $.10 par value per share, and 10,000,000 shares of Preferred
Stock, $.10 par value per share. As of the NACT Record Date, 8,133,830 shares of
NACT Common Stock and no shares of NACT Preferred Stock were outstanding. There
were no options outstanding to purchase shares of NACT Common Stock. The NACT
board of directors has the authority to issue the NACT Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions for
such series, without any further vote or action by the NACT stockholders.
BOARD OF DIRECTORS
Election. The NACT Certificate provides that the election of directors
need not be by written ballot unless the bylaws so provide, and the NACT Bylaws
do not so provide. No other significant prescriptions are listed. On the other
hand, the Holdco Certificate contains more detail concerning the make-up,
election and operation of the Holdco board of directors. For example, the Holdco
board of directors must consist of no fewer than three and not more than 12
members, as fixed by the most recent board of directors. The Holdco board of
directors currently consists of five directors, which will not change as a
result of the Mergers. Additionally, the Holdco board of directors is divided
into three classes; that is, it is a "staggered board," because only
approximately one-third of the board of directors is elected in any one year.
Finally, Holdco stockholders wishing to nominate directors at the annual meeting
where directors are elected must give notice to Holdco at least 120 days prior
to the meeting.
Liability and Indemnification. The NACT and Holdco Certificates both limit
the liability of directors to the fullest extent possible under the DGCL. The
Bylaws of NACT and the Holdco Certificate also indemnify directors to the
fullest extent possible under applicable law.
AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS
Both the NACT and Holdco Certificates provide that the board of directors
may amend the bylaws of the corporation. Under the DGCL, amending a
corporation's certificate of incorporation generally requires the approval of
the holders of a majority of the outstanding capital stock entitled to vote,
unless the certificate or bylaws provide otherwise. The NACT Certificate
requires the approval of 66 2/3% of the total voting power of all outstanding
shares of capital stock to alter, amend or repeal Articles Seventh, Tenth,
Eleventh and Twelfth (providing for removal of directors only for cause, the
taking of stockholder action only at a meeting, director exculpation and
amending the NACT Certificate). The Holdco Certificate, on the other hand,
requires the approval of 75% of the voting power of all outstanding shares of
capital stock entitled to vote in an election of directors, voting as a single
class, to alter, amend or repeal Article VII of the Certificate. Article VII of
the Holdco Certificate addresses the management of the corporation and sets
forth certain details concerning the operation of the board of directors, the
material aspects of which are discussed above.
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<PAGE> 107
EXPERTS
The consolidated financial statements of World Access, Inc. incorporated in
this Prospectus/Information Statement by reference to the Annual Report on Form
10-K for the year ended December 31, 1997, have been so incorporated in reliance
on the report of PricewaterhouseCoopers LLP, independent auditors, given on the
authority of said firm as experts in auditing and accounting.
The financial statements and schedule of NACT Telecommunications, Inc. as
of September 30, 1997 and 1996 and for each of the years in the three-year
period ended September 30, 1997, have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Advanced TechCom, Inc. ("ATI")
incorporated in this Prospectus/Information Statement by reference to the
Current Report on Form 8-K/A filed on April 14, 1998 have been so incorporated
in reliance on the report of Tedder, Grimsley & Company, P.A., independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of ATI as of December 31, 1996 and
1995 and for the years then ended, incorporated by reference from World Access,
Inc.'s Current Report on Form 8-K dated February 13, 1998, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report dated
February 26, 1997 (October 15, 1997 as to Notes 2 and 13, and the last paragraph
of Note 5) (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to certain subsequent events, including entering
into an agreement to subcontract certain of ATI's manufacturing, raising of
additional equity and the receipt of a commitment for additional financing)
which is also incorporated herein by reference, and have been so incorporated in
reliance upon the report of Deloitte & Touche LLP given upon their authority as
experts in accounting and auditing.
The combined financial statements of Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) and Cherry Communications U.K. Limited at
December 31, 1997 and for the year then ended, incorporated in this Prospectus
and Information Statement by reference to the Current Report on Form 8-K filed
by World Access on July 27, 1998, as amended by Amendment No. 1 thereto on Form
8-K/A filed by World Access on September 4, 1998, as amended by Amendment No. 2
thereto on Form 8-K/A filed by World Access on September 25, 1998, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph describing conditions that
raise substantial doubt about the company's ability to continue as a going
concern as described in note 2 to the combined financial statements), and are
incorporated in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The combined financial statements of Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) and Cherry Communications U.K. Limited at
December 31, 1996 and 1995 and for the years then ended, incorporated in this
Prospectus/Information Statement by reference to the Current Report on Form 8-K
filed by World Access on July 27, 1998, as amended by Amendment No. 1 thereto on
Form 8-K/A filed by World Access on September 4, 1998, as amended by Amendment
No. 2 thereto on Form 8-K/A filed by World Access on September 25, 1998 have
been audited by Grant Thornton LLP, independent auditors, as set forth in their
report thereon, and are incorporated in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Telco Systems, Inc. at August 31,
1997 and August 25, 1996, and for each of the three years in the period ended
August 31, 1997, appearing in the Current Report on Form 8-K filed by World
Access, Inc. on September 9, 1998, as amended by Amendment No. 1 thereto on Form
8-K/A filed by World Access Inc., on September 25, 1998, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report included
therein and incorporated herein by reference. Such financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Holdco Common Stock to be issued in connection with the
Mergers will be passed upon for Holdco by Rogers & Hardin LLP, Atlanta, Georgia.
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INDEX TO NACT FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Balance Sheets as of September 30, 1997 and 1996............ F-3
Statements of Income for the Years Ended September 30, 1997,
1996 and 1995............................................. F-4
Statements of Stockholder's Equity for the Years Ended
September 30, 1997, 1996 and 1995......................... F-5
Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995....................................... F-6,7
Notes to Financial Statements............................... F-8-19
Schedule II................................................. F-20
Balance Sheets as of June 30, 1998 and December 31, 1997
(unaudited)............................................... F-21
Statements of Income for the Three Months Ended December 31,
1997 and
1996 and the Six Months Ended June 30, 1998 and 1997
(unaudited)............................................... F-22
Statements of Cash Flows for the Three Months Ended December
31, 1997 and
1996 and the Six Months Ended June 30, 1998 and 1997
(unaudited)............................................... F-23
Statement of Stockholder's Equity as of June 30, 1998
(unaudited)............................................... F-24
Notes to Financial Statements............................... F-25
</TABLE>
F-1
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NACT Telecommunications, Inc.:
We have audited the accompanying balance sheets of NACT Telecommunications,
Inc. as listed in the accompanying index. In connection with our audits of the
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NACT Telecommunications,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 1997, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Salt Lake City, Utah
December 4, 1997
F-2
<PAGE> 110
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 11 and 12)............... $ 9,946,621 $ 694,359
Marketable investment securities (note 3)................. 3,247,296 250,000
Trade accounts receivable, less allowance for doubtful
accounts of $380,819 in 1997 and $100,000 in 1996...... 6,840,958 3,171,180
Notes receivable, less allowance for doubtful notes of
$250,000 in 1997 and $310,000 in 1996 (note 4)......... 3,252,170 561,396
Inventories (note 2)...................................... 2,780,467 2,406,399
Prepaid expenses and other................................ 197,659 16,338
Deferred tax assets (note 8).............................. 587,199 418,449
----------- -----------
Total current assets.............................. 26,852,370 7,518,121
----------- -----------
Property and equipment, net (note 5)........................ 5,783,157 717,804
Notes receivable, less current installments (note 4)........ 966,868 1,179,750
Inventories -- long term (note 2)........................... 225,000 --
Intangibles, net (notes 4 and 6)............................ 5,775,673 5,075,366
Other assets................................................ 152,043 193,709
----------- -----------
$39,755,111 $14,684,750
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,432,922 $ 2,251,800
Accrued expenses.......................................... 963,034 266,451
Income taxes payable (note 8)............................. 1,353,371 199,557
Deferred revenue.......................................... 466,859 350,439
Current installments of obligation under capital lease.... -- 21,848
Payable to GST USA........................................ 1,446,891 183,176
----------- -----------
Total current liabilities......................... 5,663,077 3,273,271
Obligation under capital lease, less current installments... -- 58,221
Deferred compensation (note 13)............................. 157,819 157,819
Deferred tax liabilities (note 8)........................... 929,984 985,508
----------- -----------
Total long-term liabilities....................... 1,087,803 1,201,548
----------- -----------
Commitments and contingencies (notes 9, 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued and outstanding in 1997 and 1996... -- --
Common stock, $.01 par value in 1997 and no par value in
1996. Authorized 25,000,000 and 10,000,000 shares in
1997 and 1996, respectively; issued and outstanding
8,113,712 shares in 1997 and 6,113,712 shares 1996..... 81,137 9,244,847
Additional paid-in-capital................................ 28,130,161 --
Retained earnings......................................... 4,780,760 965,255
Net unrealized gain (loss) on marketable investment
securities (note 3).................................... 12,173 (171)
----------- -----------
Total stockholders' equity........................ 33,004,231 10,209,931
----------- -----------
$39,755,111 $14,684,750
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 111
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales......................................... $21,981,854 $ 9,929,702 $ 7,604,071
Network carrier sales................................. 5,716,406 3,783,445 2,781,761
Wins (note 1(b))...................................... -- 2,571,731 1,097,950
----------- ----------- -----------
Total revenues................................ 27,698,260 16,284,878 11,483,782
----------- ----------- -----------
Cost of goods sold (note 6):
Products.............................................. 7,140,914 3,941,529 2,645,646
Network carrier usage (note 13)....................... 5,485,671 3,381,716 2,731,295
Wins (note 1(b))...................................... -- 2,571,731 786,699
Amortization of acquired intangibles.................. 362,424 362,428 442,734
----------- ----------- -----------
Total cost of goods sold...................... 12,989,009 10,257,404 6,606,374
----------- ----------- -----------
Gross profit.................................. 14,709,251 6,027,474 4,877,408
Operating expenses (note 6):
Research and development.............................. 2,385,243 1,352,138 1,183,422
Selling and marketing................................. 2,504,420 953,486 924,542
General and administrative............................ 3,472,069 3,024,361 2,152,898
Amortization of acquired intangibles.................. 573,060 573,058 519,780
----------- ----------- -----------
Total operating expenses...................... 8,934,792 5,903,043 4,780,642
----------- ----------- -----------
Income from operations........................ 5,774,459 124,431 96,766
----------- ----------- -----------
Other income (expense):
Interest income....................................... 543,410 127,043 155,949
Interest expense...................................... (30,456) (14,202) (1,514)
Miscellaneous income.................................. 4,439 34,670 34,635
----------- ----------- -----------
Total other income............................ 517,393 147,511 189,070
----------- ----------- -----------
Income before income taxes.............................. 6,291,852 271,942 285,836
Income taxes (note 8)................................... 2,476,347 78,184 205,517
----------- ----------- -----------
Net income.............................................. $ 3,815,505 $ 193,758 $ 80,319
=========== =========== ===========
Earnings per common and common equivalent share:
Primary............................................... $ 0.52 $ 0.03 $ 0.01
Fully diluted......................................... $ 0.50 $ 0.03 $ 0.01
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 112
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL MARKETABLE
---------------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ---------- ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994... 6,113,712 $6,277,572 $ -- $ 691,178 $ -- $ 6,968,750
Capital contribution by parent
company (note 1(l))............ -- 414,981 -- -- -- 414,981
Addition to capital arising from
push down accounting........... -- 2,162,384 -- -- -- 2,162,384
Net unrealized gain on marketable
investment securities.......... -- -- -- -- 3,605 3,605
Net income....................... -- -- -- 80,319 -- 80,319
--------- ---------- ----------- ---------- ------- -----------
Balances at September 30, 1995... 6,113,712 8,854,937 -- 771,497 3,605 9,630,039
Capital contribution by parent
company (note 1(l))............ -- 389,910 -- -- -- 389,910
Net unrealized loss on marketable
investment securities.......... -- -- -- -- (3,776) (3,776)
Net income....................... -- -- -- 193,758 -- 193,758
--------- ---------- ----------- ---------- ------- -----------
Balances at September 30, 1996... 6,113,712 9,244,847 -- 965,255 (171) 10,209,931
Capital contribution by parent
company (note 1(l))............ -- -- 899,799 -- -- 899,799
Issuance of common stock for
cash, net of expenses of
$1,933,348..................... 2,000,000 20,000 18,046,652 -- -- 18,066,652
Net unrealized gain on marketable
investment securities.......... -- -- -- -- 12,344 12,344
Reclass of common stock to
additional paid-in capital
resulting from establishing a
par value on common stock...... -- (9,183,710) 9,183,710 -- -- --
Net income....................... -- -- -- 3,815,505 -- 3,815,505
--------- ---------- ----------- ---------- ------- -----------
Balances at September 30, 1997... 8,113,712 $ 81,137 $28,130,161 $4,780,760 $12,173 $33,004,231
========= ========== =========== ========== ======= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 113
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 3,815,505 $ 193,758 $ 80,319
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 1,431,226 1,165,885 1,212,039
Provision for loss on accounts, notes receivable,
and recourse obligation.......................... 1,385,734 942,785 229,342
Loss (gain) on sale of marketable investment
securities and equipment......................... 45,699 (4,399) (34,635)
Capital contribution by parent company............. 899,799 389,910 414,981
Provision for loss on inventories.................. 111,000 -- --
Deferred taxes..................................... (224,274) (374,127) (271,762)
Decrease (increase) in operating assets:
Trade accounts and notes receivable.............. (8,374,533) (1,980,342) (2,266,741)
Inventories...................................... (920,068) (2,019,310) 19,873
Prepaid expenses................................. (181,321) 89,441 (94,484)
Other assets..................................... 41,666 58,360 (227,882)
Increase (decrease) in operating liabilities:
Accounts payable................................. (818,878) 888,670 1,210,516
Accrued expenses................................. 496,583 45,287 148,411
Income taxes payable............................. 1,153,814 60,578 (208,468)
Deferred revenue and deferred compensation....... 116,420 193,475 180,844
Payable to GST USA............................... 1,263,715 243,176 --
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 242,087 (106,853) 392,353
----------- ----------- -----------
Cash flows from investing activities:
Purchase of land, plant, and equipment................ (5,169,888) (304,614) (326,796)
Proceeds from sale of equipment....................... -- -- 34,635
Proceeds from sale of available-for-sale securities... 250,000 596,836 --
Purchase of available-for-sale securities............. (3,234,952) -- --
Capitalization of software development costs.......... (821,568) (419,154) (162,025)
Cash included in transfer of Wins to parent (note
1)................................................. -- (173,718) --
----------- ----------- -----------
Net cash used in investing activities......... (8,976,408) (300,650) (454,186)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 18,066,652 -- --
Principal payments on capital lease obligations....... (80,069) (19,868) (2,271)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 17,986,583 (19,868) (2,271)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... 9,252,262 (427,371) (64,104)
Cash and cash equivalents at beginning of year.......... 694,359 1,121,730 1,185,834
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 9,946,621 $ 694,359 $ 1,121,730
=========== =========== ===========
</TABLE>
F-6
<PAGE> 114
STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Reclass of common stock to additional paid-in capital
resulting from establishing a par value on common
stock................................................. $ 9,183,170 $ -- $ --
Disposition of fully depreciated asset.................. -- 132,270 --
Repossession of equipment in settlement of accounts and
notes receivable...................................... 76,922 45,000 128,936
Property purchased under capitalized leases............. -- -- 102,208
Transfer of inventory to property, plant, and
equipment............................................. 210,000 -- --
Intangibles capitalized as a result of push down........ -- -- 2,162,384
Disposition of equipment................................ -- 47,366 --
Sale of equipment to Wins on note receivable............ -- 60,000 --
Transfer of notes receivable to other assets (note 4)... 964,207 -- --
Change in net unrealized gain (loss) on marketable
investment securities................................. 12,344 (171) --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest.................. $ 30,457 $ 17,707 $ 1,145
Cash paid during the year for income taxes.............. 638,287 -- 263,735
SUPPLEMENTAL DISCLOSURE OF THE ASSETS AND LIABILITIES
TRANSFERRED TO GST (NOTE 1(B))
Cash.................................................... $ -- $ (173,718) $ --
Trade accounts receivable............................... -- (68,705) --
Prepaid expenses........................................ -- (751) --
Property and equipment, net............................. -- (46,020) --
Other assets............................................ -- (14,036) --
Accounts payable........................................ -- 150,898 --
Accrued expenses........................................ -- 152,332 --
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 115
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Description of Business
NACT Telecommunications, Inc. (the "Company") designs, develops and
manufactures advanced telecommunications switching platforms with integrated
applications software and network telemanagement capabilities. The Company's
customers include long distance carriers, prepaid debit (calling) card and
prepaid cellular network operators, international call back/reorigination
providers and other specialty telecommunications service providers.
From September 1993 through September 30, 1995, GST USA, Inc. ("GST USA")
acquired all of the issued and outstanding common stock of the Company. This
acquisition was accomplished through a series of purchases of newly issued
shares and the shares of principal stockholders of the Company. As a result of
these transactions, the Company became a wholly owned subsidiary of GST USA. GST
USA accounted for the acquisition using the purchase method of accounting. The
excess of the purchase price over the fair value of the assets acquired totaled
$6,912,322 and was assigned by GST USA as product support contracts, software
development costs, and goodwill. These amounts are included in the accompanying
balance sheet as intangible assets.
In February 1997, the Company closed an initial public offering (IPO) of
3,000,000 shares of common stock with 2,000,000 sold by the Company and
1,000,000 sold by GST USA. Upon completion of the offering, GST USA ownership
was reduced to approximately 63 percent of the outstanding common stock of the
Company and, as such, GST USA continues to control the Company. In connection
with the IPO, the Company established a par value of $.01 for common stock,
increased the number of common shares authorized to 25,000,000, and authorized
10,000,000, $.01 par value preferred shares.
On September 30, 1997, GST USA announced that it had retained Hambrecht and
Quist LLC to explore alternatives for monetizing its 63 percent interest in the
Company, including a potential sale of some or all of the Company's capital
stock to one or more strategic investors.
(b) Wasatch International Network Services
The 1995 financial statements include the accounts of the Company and its
wholly-owned subsidiary Wasatch International Network Services, Inc. ("Wins"),
which commenced operations in fiscal 1995 and had total assets, revenues, and
net loss of $316,455, $1,097,950 and $2,361, respectively, as of and for the
year ended September 30, 1995. All significant intercompany transactions and
balances were eliminated in consolidation. On October 1, 1995, the Company
transferred ownership and operations of Wins to GST USA in the form of a
dividend at historical cost. From October 1, 1995 through September 30, 1996,
the Company provided carrier services to GST USA for the Wins operation for
which it received $2,571,731. GST USA began providing its own carrier services
for Wins on October 1, 1996.
(c) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of three months or less to be cash
equivalents. Cash equivalents consist of money market accounts of $8,472,637 at
September 30, 1997 and $125,785 at September 30, 1996.
(d) Inventories
Raw materials are valued at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods are stated on the basis of
accumulated manufacturing costs, but not in excess of market (net realizable
F-8
<PAGE> 116
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value). Refurbished inventory is stated at the estimated selling price less
refurbishing costs, selling costs and a normal profit margin. Management
periodically reviews the selling price of the refurbished inventory and records
adjustments to the carrying value, if any, in the period in which they occur.
Long-term inventory consists of component parts held in order to provide
support on existing customer equipment beyond one year.
(e) Notes Receivable
Notes receivable are recorded at the principal amount outstanding, net of
an allowance for doubtful notes. The allowance is an amount that management
believes will be adequate to absorb possible losses based on evaluations of
collectibility and prior loss experience. The evaluation takes into
consideration such factors specific problem loans, past payment history, and
current and anticipated economic conditions that may affect the customers'
ability to pay.
While management uses available information to recognize losses on notes,
changing economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance.
(f) Impaired Notes
Management, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a note is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income thereafter.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes. Depreciation is based
upon the estimated useful lives of individual classes of assets. The estimated
useful lives of the individual classes of assets are as follows:
<TABLE>
<S> <C>
Building.................................................... 35 years
Furniture and equipment..................................... 7-10 years
Computer equipment.......................................... 3-7 years
Switch and testing equipment................................ 3-7 years
</TABLE>
(h) Intangibles
Intangibles include goodwill, software development costs, customer lists,
and product support contracts and are being amortized on a straight-line basis
over the estimated useful lives of the respective assets.
(i) Software Development Costs
Software development costs are capitalized upon the establishment of
technological feasibility of the product. Capitalization is discontinued when
the product is available for general release to customers. The Company
capitalized software development costs of $821,568, $419,154, and $162,025 in
1997, 1996, and 1995, respectively.
F-9
<PAGE> 117
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(j) Stock-Based Compensation
Effective October 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt
the fair value based method of accounting for stock options or similar equity
instruments. However, it also allows an entity to continue measuring
compensation cost for stock-based compensation using the intrinsic-value method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma footnote
disclosures required by SFAS 123.
(k) Revenue Recognition and Deferred Revenue
Revenue from product sales is recognized when the product is shipped and
the Company has no significant performance obligations. Revenue from network
carrier sales is recognized as the related service is provided. Deferred revenue
consists of warranty payments billed or received in advance and deposits related
to future product sales. Warranty payments are amortized over the period of the
warranty agreement which is typically one year.
(l) Income Taxes
Through February 26, 1997, the Company was a member of a controlled group
which elected for federal income tax purposes to file a consolidated tax return
with GST USA. In accordance with the tax sharing arrangement with GST USA, the
Company recorded the estimated income tax expense as if the Company filed a tax
return on a separate company basis using the asset and liability method. GST USA
agreed to make a capital contribution to the Company in an amount that
approximates the Company's current federal income tax expense through February
26, 1997 in lieu of an intercompany payment for such taxes. Pursuant to the tax
sharing arrangement between the Company and GST USA, the adjustment recorded to
reconcile the intercompany and equity accounts with regard to differences
between the estimated tax determined at year-end and the final tax amount are
recognized in income tax expense in the period determined.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and deferred
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and deferred 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.
After the IPO on February 26, 1997, GST USA's ownership was reduced to 63
percent. As a result, the entities no longer meet the affiliated group test
defined in Internal Revenue Code Section 1504(a) and the Company will file
stand-alone returns for periods subsequent to February 26, 1997.
(m) Marketable Investment Securities
The Company classifies all of its marketable investment securities as
available-for-sale which are recorded at fair market value. Unrealized holding
gains and losses are excluded from earnings and are reported, net of tax, as a
separate component of stockholders' equity until realized. A decline in the
market value of any available-for-sale security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost basis for the security. Dividend income is recognized when earned. Realized
gains and losses are included in earnings and are derived using the
specific-identification method for securities sold.
F-10
<PAGE> 118
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(n) Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed based on the
weighted-average number of common shares and as appropriate, dilutive common
stock equivalents outstanding during the period. Stock options are considered to
be common stock equivalents. The number of shares used to compute primary
earnings per common and common equivalent share were 7,350,623, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively. The number of shares
used to compute fully-diluted earnings per share reflect additional dilution
related to stock options and warrants using the market price at the end of the
period when higher than the average price for the period. The number of shares
used to compute fully-diluted earnings per share were 7,602,156, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively.
(o) Fair Value Disclosure
At September 30, 1997 and 1996, the book value of the Company's financial
instruments approximates fair value.
(p) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the 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 these estimates.
(2) Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,065,113 $ 377,734
Work-in-process............................................. 498,525 346,273
Finished goods.............................................. 302,829 317,392
Refurbished inventory held for sale......................... 914,000 1,365,000
---------- ----------
$2,780,467 $2,406,399
========== ==========
Inventory -- long-term...................................... $ 225,000 $ --
========== ==========
</TABLE>
F-11
<PAGE> 119
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) Marketable Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale securities by major
security type and class of security at September 30, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED FAIR
AMORTIZED COST HOLDING GAINS HOLDING LOSSES VALUE
-------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
At September 30, 1997:
U.S. government securities --
Maturing in one year or
less........................ $2,237,009 $10,287 $ -- $2,247,296
Certificate of
deposit -- Maturing in one
year or less................ 998,114 1,886 -- 1,000,000
---------- ------- ---- ----------
$3,235,123 $12,173 $ -- $3,247,296
========== ======= ==== ==========
At September 30, 1996:
U.S. government securities --
Maturing in one year or
less........................ $ 250,171 $ -- $171 $ 250,000
---------- ------- ---- ----------
$ 250,171 $ -- $171 $ 250,000
========== ======= ==== ==========
</TABLE>
(4) NOTES RECEIVABLE
Notes receivable at September 30, 1997 and 1996 include amounts due from
product sales of approximately $4,065,638 and $1,047,500, respectively. Interest
rates on the notes range from 9 percent to 14 percent with lives ranging from
six months to five years.
The Company's recorded investment in notes receivable for which an
impairment has been recognized was $137,032 and $928,210, and the related
allowance for doubtful accounts was $137,032 and $310,000 at September 30, 1997
and 1996, respectively. The average recorded investment in impaired notes
receivable during 1997 and 1996, was $532,261 and $548,331, respectively. There
was no interest income recognized on impaired notes receivable during 1997 and
1996.
The Company has sold carrier services to Overseas Telecom ("Overseas")
since 1994. Overseas is located in Brazil and provides international call
back/reorigination services to companies and individuals primarily in Brazil and
Eastern Europe. During the year ended September 30, 1996, Overseas became
delinquent on certain of its payments. In fiscal 1997, the Company entered into
a note receivable agreement with Overseas which provided for the repayment of
the noncurrent outstanding amount (approximately $0.93 million) bearing interest
at 12 percent. The note was secured primarily by Overseas' customer lists. In
the fourth quarter of fiscal 1997, the Company exercised its call privileges
under the note and took possession of the underlying collateral -- the customer
lists. There were two separate and distinct customer lists, one from Brazil and
one from Eastern Europe. The customer list related to the Brazilian operations
was sold to Intertoll Communications Network Corp. ("ICN"), an existing customer
of the Company with operations in Argentina and Brazil for $1,000,000 payable in
100 monthly payments of $10,000. The related payments have been discounted at 20
percent with the unpaid amount of approximately $485,000 classified as notes
receivable in the accompanying balance sheet as of September 30, 1997.
The customer list related to the Eastern European operations was recorded
on the Company's books at the lower of fair value or cost. Fair value was
estimated by an independent third party appraiser using generally accepted
valuation standards. Accordingly, a customer list of approximately $964,000 has
been recorded as an intangible asset and will be amortized over a three-year
period.
F-12
<PAGE> 120
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Land........................................................ $ 563,309 $ --
Building.................................................... 3,626,891 --
Furniture and equipment..................................... 279,908 212,525
Computer equipment.......................................... 784,521 440,827
Switch and testing equipment................................ 1,082,217 492,052
---------- ---------
6,336,846 1,145,404
Less accumulated depreciation and amortization.............. 553,689 427,600
---------- ---------
$5,783,157 $ 717,804
========== =========
</TABLE>
(6) INTANGIBLES
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZATION
1997 1996 PERIOD
---------- ---------- ------------
<S> <C> <C> <C>
Goodwill........................................... $2,863,766 $2,863,766 20 years
Software development costs......................... 3,305,127 2,483,559 3-5 years
Product support contracts.......................... 2,146,176 2,146,176 5 years
Customer list...................................... 964,207 -- 3 years
---------- ----------
9,279,276 7,493,501
Less amortization.................................. 3,503,603 2,418,135
---------- ----------
$5,775,673 $5,075,366
========== ==========
</TABLE>
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value of the asset to its undiscounted estimated future cash flows.
Amortization expense relating to these assets was $1,085,468, $978,813, and
$962,514 for 1997, 1996, and 1995, respectively. Of these amounts, $512,409,
$405,755, and $442,734, for 1997, 1996, and 1995, respectively, was recorded as
a component of cost of goods sold.
(7) STOCK OPTIONS
In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan") which was approved by the board of directors and GST USA. The Company has
reserved 1,250,000 shares for issuance under the 1996 Plan, of which options to
purchase 935,250 shares of common stock at an exercise price of $9.35 per share
were granted. All options granted during the year expire on November 25, 2001.
The Company may grant incentive stock options and nonqualified stock options to
employees, officers, directors, independent contractors, and consultants. The
exercise price of options must be greater than or equal to the estimated fair
market value of the stock at the date of grant. The board of directors or the
compensation committee thereof determines which eligible individuals are granted
options, terms of the options, exercise price, number of shares subject to the
option, vesting and exercisability. The 1996 Plan expires on November 25, 2006.
F-13
<PAGE> 121
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997
----------------------
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------
<S> <C> <C>
Options outstanding at beginning of year.................... --
Plus options granted........................................ 935,250 $9.35
Less options exercised...................................... --
--------
Options outstanding at end of year.......................... 935,250 9.35
========
Options exercisable at end of year.......................... 289,688 9.35
Weighted-average fair value of options granted during the
year...................................................... $3.03
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- -------------- ----------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$9.35 935,250 4.15 $9.35 289,688 $9.35
</TABLE>
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net earnings and
earnings per share would have been changed to the following pro forma amount:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Net income.................................................. As reported $3,815,505
Pro Forma 2,784,147
Primary earnings per share.................................. As reported $ 0.52
Pro Forma 0.38
Fully-diluted earnings per share............................ As reported $ 0.50
Pro Forma 0.37
</TABLE>
Pro forma net earnings reflects only options granted in fiscal 1997.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net earnings as shown above may
not be representative of the effects on reported net earnings for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1997: risk-free interest rate of 6.0
percent; expected dividend yield of 0 percent; expected life of 3.4 years; and
expected volatility of 82 percent.
F-14
<PAGE> 122
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Year ended September 30, 1997:
U.S. federal..................................... $2,336,145 $(194,210) $2,141,935
State............................................ 364,476 (30,064) 334,412
---------- --------- ----------
$2,700,621 $(224,274) $2,476,347
========== ========= ==========
Year ended September 30, 1996:
U.S. federal..................................... $ 389,910 $(322,207) $ 67,703
State............................................ 60,358 (49,877) 10,481
---------- --------- ----------
$ 450,268 $(372,084) $ 78,184
========== ========= ==========
Year ended September 30, 1995:
U.S. federal..................................... $ 414,981 $(237,014) $ 177,967
State............................................ 64,239 (36,689) 27,550
---------- --------- ----------
$ 479,220 $(273,703) $ 205,517
========== ========= ==========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax expense........................ $2,139,230 $92,460 $ 97,184
Increase (reduction) in income taxes resulting from:
Amortization of goodwill............................. 48,899 48,899 48,899
State and local income taxes, net of federal income
tax benefit....................................... 222,862 2,297 18,183
Meals and entertainment.............................. 5,796 3,631 4,060
Adjustment of tax provision to actual(1)............. -- (70,040) 36,214
Other, net........................................... 59,560 937 977
---------- ------- --------
$2,476,347 $78,184 $205,517
========== ======= ========
</TABLE>
- ---------------
(1) Represents management's adjustment to the Company's income tax liability
based on a current assessment of its related obligations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996, are presented below:
F-15
<PAGE> 123
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net current deferred tax assets:
Accounts and notes receivable principally due to allowance
for doubtful accounts.................................. $ 309,895 $ 152,930
Unearned product warranty................................. 125,422 47,074
Accrued vacation payable.................................. 55,386 37,327
Unearned sales deposits................................... -- 83,640
Inventory principally due to uniform capitalization and
reserves............................................... 96,496 97,478
--------- ---------
Total gross deferred tax assets................... 587,199 418,449
--------- ---------
Net long-term deferred tax liabilities:
Deferred compensation..................................... 58,866 58,866
Plant and equipment, principally due to differences in
depreciation and capitalized interest.................. (77,155) (87,588)
Capitalized software...................................... (450,716) (200,619)
Push down intangibles..................................... (460,979) (756,269)
Unrealized (gain) loss on investments..................... -- 102
--------- ---------
Total gross deferred tax liabilities.............. (929,984) (985,508)
--------- ---------
Net deferred tax liability........................ $(342,785) $(567,059)
========= =========
</TABLE>
Management believes that existing taxable temporary differences will more
likely than not reverse within the applicable carryforward periods to allow
future realization of existing deferred tax assets.
(9) LEASES
The Company has operating leases for office furnishings, various office
equipment and two sales offices. Future minimum lease payments as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1998................................................... $194,378
1999................................................... 180,240
2000................................................... 180,240
2001................................................... 180,240
2002................................................... 160,454
--------
Total minimum lease payments...................... $895,552
========
</TABLE>
These leases generally require the Company to pay all executory costs such
as maintenance and insurance. Rental expenses for all operating leases for 1997,
1996, and 1995, were $123,462, $100,299, and $116,944, respectively.
(10) PROFIT SHARING PLANS
The Company sponsors a defined contribution 401(k) plan (the "Plan") for
employees who have completed one year of service and attained the age of 21.
Participants may defer up to 15 percent of eligible compensation. The Company,
at its discretion, may match 50 percent of participant contributions up to 7.5
percent of participant compensation. Employer contributions made to the Plan
were $88,361, $59,881, and $51,863, for the years ended September 30, 1997,
1996, and 1995, respectively.
F-16
<PAGE> 124
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Through September 30, 1996, the Company established a discretionary profit
sharing program for full time employees who had completed one full year of
employment. Under the plan, 10 percent of the increase in profits based on the
Company's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the discretion
of the board of directors. Contributions to the program were $132,450 and
$171,483 for the years ended September 30, 1996 and 1995, respectively. The
program was terminated on September 30, 1996.
(11) MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND NETWORK CARRIER SALES
Sales to individual customers exceeding 10 percent of total revenues or
total trade accounts and notes receivable as of and for the years ended
September 30, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REVENUES
---------------------
CUSTOMER 1997 1996 1995
- -------- ----- ----- -----
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 8% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 16%
Intertoll Communications Network Corp....................... 9 12% 8
Overseas Telecom............................................ 5 13 7
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NOTES AND
ACCOUNTS RECEIVABLE
---------------------
CUSTOMER 1997 1996 1995
- -------- ----- ----- -----
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 15% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 7%
Intertoll Communications Network Corp....................... 4 6% 7
Overseas Telecom............................................ 3 22 7
</TABLE>
The Company's customers consist of business entities geographically
dispersed primarily throughout the United States. However, the Company also
sells products and/or services to customers in the United Kingdom, Bosnia,
Serbia, Bulgaria, Saudi Arabia, and Brazil. The Company maintains a security
interest in the telecommunications systems it sells until the related account
balances are paid in full.
The Company had deposits with financial institutions in excess of the
federally insured amount of $100,000 in the amount of $9,691,380 and $467,737
for the years ended September 30, 1997 and 1996, respectively.
Network carrier sales originating from countries outside the United States
aggregated approximately $3,180,000 and $2,105,000 for the years ended September
30, 1997 and 1996, respectively. These sales are payable in U.S. dollars.
(12) COMMITMENTS AND CONTINGENCIES
The Company acted as a guarantor for financing transactions executed under
repurchase agreements with a financial institution for $3,482,182 and $1,035,032
at September 30, 1997 and 1996, respectively. This results from the financial
institution providing lease financing to the Company's customers to enable them
to purchase product from the Company. At September 30, 1997, the Company had
established a reserve of $200,000 for its estimated obligation under the
recourse provisions and maintains a security interest in the equipment financed
under the repurchase agreement. No such reserve was recorded as of September 30,
1996. In addition to other covenants, the repurchase agreement requires the
Company to maintain an unrestricted
F-17
<PAGE> 125
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cash account of $6,000,000. The Company has also established a $750,000
revolving line of credit with this same financial institution. No balances were
outstanding under this line of credit at September 30, 1997.
On October 1, 1996, the Company entered into employment agreements with
various employees which specify the individual's salary, benefits, and
restrictions. All agreements expire on September 30, 2001.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc., (collectively,
"Aerotel") filed a patent infringement suit against the Company alleging that
telephone systems manufactured and sold by the Company incorporating prepaid
calling features infringe upon a patent which was issued to Aerotel in November
1987. The complaint further alleges defamation and unfair competition by the
Company and seeks various damages. Aerotel seeks injunctive relief, damages of
$18.7 million for willful infringement of its patent and an order requiring the
Company to publish a written apology to Aerotel. The Company has filed an Answer
and Counterclaim denying patent infringement, defamation or unfair competition
and seeking judgment that the Aerotel patent is invalid and that Aerotel has
misused its patent in violation of antitrust laws. Based on information
currently available, an estimate of potential loss cannot be made. However,
management is of the opinion that there will be no material impact of the
Company's financial position, results of operations or liquidity as a result of
this suit. Accordingly, no provision for loss has been provided in the
accompanying financial statements. An unfavorable decision could have a material
adverse effect on the business, financial condition, and results of operations
of the Company.
In addition to the above, the Company has various legal claims and other
contingent matters, incurred in the normal course of business. Although the
final outcome of such matters cannot be predicted, the Company believes the
ultimate disposition of these matters will not have a material adverse effect on
the Company's financial condition, liquidity, or results of operations.
As of September 30, 1997, the Company had capital expenditure purchase
commitments outstanding of approximately $900,000.
(13) RELATED PARTY TRANSACTIONS
In June 1997, and under contract with the Company, GST Realco, Inc. ("GST
Realco"), a subsidiary of GST USA, completed construction of a 40,000 square
foot office building in Provo, Utah. The Company purchased the land and a
portion of the building construction from GST Realco for $563,309 and
$1,293,072, respectively, and currently occupies the property as its corporate
and manufacturing facility.
During the year ended September 30, 1996, GST USA borrowed $250,000 from
the Company on short-term notes bearing interest at 11 percent. The note was
repaid by September 30, 1996. The Company recorded interest income of $2,602
relating to this note during the year ended September 30, 1996. There were no
borrowings during fiscal 1997.
Also, during the years ended September 30, 1997 and 1996, respectively, the
Company sold $32,788 and $356,000 of application platform switching products and
$0 and $2,571,731 of wholesale carrier usage to GST USA or subsidiaries and
purchased $4,466,907 and $361,000 of wholesale carrier usage from GST USA.
From April 1996 through May 1997 a member of the Company's board was
compensated by GST USA for services rendered to GST USA and its subsidiaries.
The Company has entered into a Deferred Compensation Trust Agreement (the
Trust) with the chairman of the Company whereby the Company funded the trust in
the amount of $144,000. The principal and related interest thereon are payable
to the chairman based on a defined payment schedule. The Company, at its sole
discretion, may at any time make additional contributions to the Trust. The
Trust is subject to claims of the Company's creditors in the event of the
Company's insolvency.
F-18
<PAGE> 126
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 establishes a different method of computing earnings per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic
earnings per share and diluted earnings per share. Basic and diluted earnings
per share are expected to be comparable to the currently presented earnings per
share. SFAS 128 is effective for the consolidated financial statements for
interim and annual periods ending after December 15, 1997. Accordingly, the
Company plans to adopt SFAS 128 in the first quarter of its 1998 fiscal year and
at that time all historical earnings per share data presented will be restated
to conform with the provisions of SFAS 128.
In 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information. These statements which are effective for periods beginning
after December 15, 1997, expand or modify disclosures and accordingly, will have
no impact on the Company's reported financial position, results of operations or
cash flows.
F-19
<PAGE> 127
SCHEDULE II
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS WRITE OFFS
BEGINNING OF CHARGED TO AGAINST BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR BAD DEBTS ALLOWANCE END OF YEAR
- ------------------------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended September 30, 1997....................... $100,000 $872,427 $591,608 $380,819
======== ======== ======== ========
Year ended September 30, 1996....................... $116,410 $672,785 $689,195 $100,000
======== ======== ======== ========
Year ended September 30, 1995....................... $ -- $189,342 $ 72,932 $116,410
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS WRITE OFFS
BEGINNING OF CHARGED TO AGAINST BALANCE AT
ALLOWANCE FOR DOUBTFUL NOTES YEAR BAD DEBTS ALLOWANCE END OF YEAR
- ---------------------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended September 30, 1997....................... $310,000 $313,307 $373,307 $250,000
======== ======== ======== ========
Year ended September 30, 1996....................... $ 40,000 $270,000 $ -- $310,000
======== ======== ======== ========
Year ended September 30, 1995....................... $ -- $ 40,000 $ -- $ 40,000
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGES
BEGINNING OF AND AGAINST BALANCE AT
RECOURSE OBLIGATION RESERVE YEAR ADJUSTMENTS ALLOWANCE END OF YEAR
- --------------------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended September 30, 1997....................... $ -- $200,000 $ -- $200,000
======== ======== ======== ========
</TABLE>
F-20
<PAGE> 128
NACT TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 11,264 $ 5,252
Marketable securities..................................... 3,500 7,246
Accounts receivable, less allowance for doubtful accounts
of $411 in June and $631 in December................... 10,541 9,496
Notes receivable, less allowance for doubtful accounts of
$461 in June and $295 in December...................... 3,609 4,055
Intercompany receivable................................... 1,057 --
Inventories............................................... 2,586 2,814
Prepaid expenses and other assets......................... 436 216
Deferred tax asset -- current............................. 699 817
-------- --------
Total current assets.............................. 33,692 29,896
Fixed Assets:
Property, plant, and equipment............................ 7,291 6,577
Less: Accumulated depreciation............................ (1,037) (698)
-------- --------
Net fixed assets.................................. 6,254 5,879
Notes receivable -- long term............................... 1,627 785
Inventory -- long term...................................... 225 225
Intangibles................................................. 5,372 5,598
Other Assets................................................ 144 164
-------- --------
Total Assets...................................... $ 47,314 $ 42,547
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 3,252 $ 1,889
Accrued expenses.......................................... 1,143 1,206
Current corporate tax lability............................ 2,670 1,073
Deferred Revenue.......................................... 662 790
Inter company payable..................................... -- 1,743
-------- --------
Total current liabilities......................... 7,727 6,701
Long Term Liabilities:
Deferred compensation liability........................... 132 158
Deferred tax liability.................................... 1,175 1,252
-------- --------
Total long-term liabilities....................... 1,307 1,410
Stockholders' Equity:
Common stock, $.01 par value.............................. 81 81
Additional paid-in-capital................................ 28,318 28,271
Retained earnings......................................... 9,879 6,055
Unrealized appreciation on marketable securities.......... 2 29
-------- --------
Total stockholders' equity........................ 38,280 34,436
-------- --------
Total liabilities and stockholders' equity........ $ 47,314 $ 42,547
======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 129
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1998 1997
------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT
SHARE DATA) PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product sales................................... $7,300 $4,780 $17,006 $10,812
Network carrier sales........................... 1,387 1,610 2,424 2,685
------ ------ ------- -------
Total revenues.......................... 8,687 6,390 19,430 13,497
Cost of goods sold:
Products........................................ 2,158 1,730 5,141 3,229
Network carrier usage........................... 1,387 1,558 2,167 2,547
Authorization of acquired intangibles........... 170 91 340 181
------ ------ ------- -------
Total cost of goods sold................ 3,715 3,379 7,648 5,957
------ ------ ------- -------
Gross profit............................ 4,972 3,011 11,782 7,540
Operating expenses:
Research and development........................ 799 423 1,495 1,356
Sales and marketing............................. 767 357 1,750 1,391
General and administrative...................... 1,362 836 2,289 1,628
Amortization of acquired intangibles............ 143 143 286 286
------ ------ ------- -------
Total operating expenses................ 3,071 1,759 5,810 4,661
------ ------ ------- -------
Income from operations.................. 1,901 1,252 5,972 2,879
Other income, net................................. 223 25 401 274
------ ------ ------- -------
Income before income taxes.............. 2,124 1,277 6,373 3,153
Income taxes...................................... 850 569 2,549 1,261
------ ------ ------- -------
Net income.............................. $1,274 $ 708 $ 3,824 1,892
====== ====== ======= =======
Weighted average common and common equivalent
shares outstanding:
Basic........................................... 8,122 6,114 8,130 6,923
Diluted......................................... 8,443 6,114 8,265 6,923
Earnings per share:
Basic........................................... $ 0.16 $ 0.12 $ 0.47 $ 0.27
Diluted......................................... $ 0.15 $ 0.12 $ 0.46 $ 0.27
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 130
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1997 1996 1998 1997
-------- -------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,274 $ 708 $ 3,824 $ 1,892
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization........................ 498 322 1,045 508
Provision for loss on accounts and notes
receivable......................................... 382 218 348 194
Provision for loss on inventory...................... 228 -- 228 --
Capital contribution by parent company............... -- 497 -- --
Deferred taxes....................................... 91 (10) 41 10
Decrease (increase) in operating assets:
Trade accounts and notes receivable................ (3,658) (2,717) (2,076) (4,380)
Inventories........................................ (262) (205) (1) 216
Prepaid expenses and other assets.................. (19) (167) (200) 52
Increase (decrease) in operating liabilities:
Accounts payable................................... 456 (1,088) 1,364 (133)
Accrued expenses................................... 243 54 (63) 675
Income taxes payable............................... (280) 71 1,596 881
Intercompany payable............................... 296 2,110 (2,800) (1,136)
Deferred revenue and deferred compensation......... 324 4 (154) (367)
------- ------- ------- -------
Net cash provided by (used in) operating
activities.................................... (427) (203) 3,152 (1,788)
------- ------- ------- -------
Cash flows from investing activities:
Purchase of land, property, plant and equipment......... (240) (63) (426) (4,428)
Proceeds from sale of marketable securities............. 1,121 250 6,219 --
Purchase of marketable securities....................... (5,103) -- (2,500) (2,240)
Capitalization of software development costs............ (187) (125) (480) (629)
------- ------- ------- -------
Net cash provided by (used in)
investing activities.......................... (4,409) 62 2,813 (7,297)
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 141 -- 47 18,624
Principle payments of capital lease obligations......... -- (1) -- (11)
------- ------- ------- -------
Net cash provided by (used in)
financing activities.......................... 141 (1) 47 18,613
------- ------- ------- -------
Net (decrease) increase in cash........................... (4,695) (142) 6,012 9,528
Cash at beginning of period............................... 9,947 694 5,252 552
------- ------- ------- -------
Cash at end of period..................................... $ 5,252 $ 552 $11,264 $10,080
======= ======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the period:
Interest........................................ $ 0 $ 2 $ 0 $ 21
Income taxes.................................... 1,038 0 911 97
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 131
NACT TELECOMMUNICATIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL MARKETABLE
--------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------ ------ ---------- -------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1997........... 8,114 81 28,130 4,781 12 33,004
Issuance of common stock for cash, net of
expenses............................... 20 188 144
Net unrealized gain on marketable
investment securities.................. (10) (10)
Net income............................... 5,098 2,503
----- -- ------ ----- --- ------
Balances at June 30, 1998................ 8,134 81 28,318 9,879 2 38,280
===== == ====== ===== === ======
</TABLE>
F-24
<PAGE> 132
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by NACT
Telecommunications, Inc. ("NACT" or the "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such SEC rules and regulations. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's September 30, 1997
audited financial statements filed as part of the Company's Annual Report on
Form 10K with the SEC in December 1997. In the opinion of management, the
condensed financial statements included herein reflect all adjustments necessary
to present fairly the financial position of the Company as of June 30, 1998 and
December 31, 1997, and the results of its operations and cash flows for the
three month and six month periods ended June 30, 1998 and 1997. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No., 128, Earnings per Share (SFAS
128). SFAS 128 became effective for financial statements with interim and annual
periods ending after December 15, 1997. Accordingly, the Company adopted SFAS
128 for the quarter ended December 31, 1997. SFAS 128 establishes a different
method of computing earnings per common share than was previously required under
the provisions of Accounting Principles Board Opinion No. 15. SFAS 128 requires
the presentation of basic and diluted earnings per common share. Basic earnings
per common share is the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted earnings
per common share is the amount of earnings for the period available to each
share of common stock outstanding during the reporting period and to each share
that would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period. The earnings per
common share as previously reported has been restated for all periods presented
to adopt the provisions of SFAS 128.
3. STOCK PLAN
In connection with entering into a stock purchase agreement with the
Company (the "NACT Stock Purchase Agreement"), on January 2, 1998 relating to
the purchase by World Access, Inc. ("WAI") of approximately 63% of Company's
outstanding common stock ("NACT Stock Purchase"), WAI entered into option
exchange agreements (the "Option Exchange Agreements") with the holders of
options to purchase an aggregate of 1,034,032 shares of NACT Common Stock (the
"Exchanged Options") representing approximately 99% of all the then-outstanding
options to acquire NACT Common Stock. Pursuant to the Option Exchange
Agreements, upon consummation of the NACT Stock Purchase, each Exchanged Option
was assumed by WAI and now constitutes an option to acquire, on the same terms
and conditions as were applicable under such Exchanged Option, a number of
shares of WAI Common Stock equal to (i) the product of the number of shares of
NACT Common Stock subject to such Exchanged Option (ii) multiplied by 0.8390
with an exercise price per share equal to (i) the aggregate exercise price for
such shares of NACT Common Stock deemed to be purchasable pursuant to such
option; provided, however that none of Exchanged Options will be incentive stock
options under Section 422 of the Code and all such options are now
F-25
<PAGE> 133
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exercisable. As a result of the consummation of the NACT Stock Purchase
Agreement on February 27, 1998, these options will become exercisable for shares
of WAI Common Stock on a one-for-one basis.
4. INVENTORIES
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials............................................... $1,578 $1,577
Work-in-process............................................. 576 587
Finished goods.............................................. 432 189
Refurbished inventory held for sale......................... 0 461
------ ------
$2,586 $2,814
====== ======
Inventory -- long term...................................... $ 225 $ 225
====== ======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Furniture and equipment..................................... $ 314 $ 311
Computer equipment.......................................... 1,014 900
Switch and testing equipment................................ 1,748 1,165
Land........................................................ 563 563
Building.................................................... 3,652 3,638
------ ------
7,291 6,577
Less accumulated depreciation and amortization.............. 1,037 698
====== ======
$6,254 $5,879
====== ======
</TABLE>
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. SFAS
130 establishes for reporting and display of comprehensive income and its
components in financial statements. The components of the Company's
comprehensive income are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Net income.................................................. $3,824 $1,892
Change in unrealized gain on marketable securities.......... (27) 0
------ ------
Comprehensive income........................................ $3,797 $1,892
====== ======
</TABLE>
F-26
<PAGE> 134
APPENDIX A
<PAGE> 135
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
WAXS INC.,
WORLD ACCESS, INC.,
WAXS ACQUISITION CORP.,
NACT TELECOMMUNICATIONS, INC.
AND
NACT ACQUISITION CORP.
------------------------------------------------------------------------
DATED: FEBRUARY 24, 1998
------------------------------------------------------------------------
<PAGE> 136
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1. THE MERGERS....................................................... A-1
SECTION 1.1. The Mergers................................................. A-2
SECTION 1.2. The Effective Time and the Closing Date..................... A-2
SECTION 1.3. Effect of the Mergers....................................... A-2
SECTION 1.4. Charter and Bylaws.......................................... A-2
SECTION 1.5. Directors and Officers...................................... A-2
ARTICLE 2. CONVERSION OF STOCK............................................... A-2
SECTION 2.1. Conversion of Sub-1 Stock and World Access Stock............ A-2
SECTION 2.2. Conversion of Sub-2 Stock and NACT Stock.................... A-3
SECTION 2.3. Fractional Shares........................................... A-3
SECTION 2.4. Exchange Ratio for World Access Options and World Access
Warrants.................................................... A-3
SECTION 2.5. Exchange Ratio for NACT Options............................. A-4
ARTICLE 3. PAYMENT OF THE MERGER CONSIDERATION............................... A-4
SECTION 3.1. Payment of the World Access Consideration and the NACT
Consideration............................................... A-4
SECTION 3.2. Lost Certificates........................................... A-5
SECTION 3.3. Payment to Another Person................................... A-5
SECTION 3.4. Right to Receive the Merger Consideration Only.............. A-5
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF NACT............................ A-5
SECTION 4.1. Corporate Organization...................................... A-5
SECTION 4.2. Capitalization.............................................. A-6
SECTION 4.3. Authority Relative to this Agreement........................ A-6
SECTION 4.4. No Violation................................................ A-6
SECTION 4.5. Compliance with Laws........................................ A-7
SECTION 4.6. Litigation.................................................. A-7
SECTION 4.7. Financial Statements and Reports............................ A-7
SECTION 4.8. Absence of Certain Changes or Events........................ A-8
SECTION 4.9. No Undisclosed Material Liabilities......................... A-8
SECTION 4.10. No Default.................................................. A-8
SECTION 4.11. Finders' and Bankers' Fees.................................. A-8
SECTION 4.12. Fairness Opinion............................................ A-8
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS.................... A-9
SECTION 5.1. Corporate Organization...................................... A-9
SECTION 5.2. Capitalization.............................................. A-9
SECTION 5.3. Authority Relative to this Agreement........................ A-9
SECTION 5.4. No Violation................................................ A-9
SECTION 5.5. Compliance with Laws........................................ A-10
SECTION 5.6. Litigation.................................................. A-10
SECTION 5.7. Financial Statements and Reports............................ A-11
SECTION 5.8. Absence of Certain Changes or Events........................ A-11
SECTION 5.9. No Undisclosed Material Liabilities......................... A-11
SECTION 5.10. No Default.................................................. A-12
SECTION 5.11. Finders' and Bankers' Fees.................................. A-12
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF HOLDCO, SUB-1 AND SUB-2.........
A-12
SECTION 6.1. Organization, Qualification, and Corporate Power............ A-12
SECTION 6.2. Capitalization.............................................. A-12
SECTION 6.3. Authority Relative to this Agreement........................ A-12
</TABLE>
A-i
<PAGE> 137
<TABLE>
<S> <C> <C>
ARTICLE 7. CERTAIN COVENANTS AND AGREEMENTS.................................. A-13
SECTION 7.1. Conduct of Business by NACT................................. A-13
SECTION 7.2. Regulatory Matters.......................................... A-13
SECTION 7.3. Stockholder Matters......................................... A-13
SECTION 7.4. Access to Information....................................... A-14
SECTION 7.5. Notices of Certain Events................................... A-14
SECTION 7.6. Indemnification............................................. A-14
SECTION 7.7. Best Efforts................................................ A-14
SECTION 7.8. Public Announcements........................................ A-15
SECTION 7.9. Further Assurances.......................................... A-15
SECTION 7.10. Listing of Holdco Stock..................................... A-15
SECTION 7.11. Affiliates.................................................. A-15
SECTION 7.12. Tax Treatment............................................... A-15
ARTICLE 8. CONDITIONS TO THE MERGERS......................................... A-15
SECTION 8.1. Conditions to the Obligations of Each Party................. A-15
SECTION 8.2. Additional Conditions to the Obligations of Holdco, World
Access, Sub-1 and Sub-2..................................... A-16
SECTION 8.3. Additional Conditions to the Obligations of NACT............ A-16
ARTICLE 9. TERMINATION....................................................... A-17
SECTION 9.1. Termination................................................. A-17
SECTION 9.2. Effect of Termination....................................... A-17
ARTICLE 10. MISCELLANEOUS.................................................... A-17
SECTION 10.1. Definitions................................................. A-17
SECTION 10.2. Notices..................................................... A-18
SECTION 10.3. No Survival of Representations and Warranties............... A-19
SECTION 10.4. Amendments; No Waivers...................................... A-19
SECTION 10.5. Fees and Expenses........................................... A-19
SECTION 10.6. Successors and Assigns...................................... A-19
SECTION 10.7. Governing Law............................................... A-19
SECTION 10.8. Severability................................................ A-19
SECTION 10.9. Interpretations............................................. A-19
SECTION 10.10. Counterparts; Effectiveness................................. A-19
SECTION 10.11. Construction................................................ A-19
</TABLE>
EXHIBIT A Affiliate Agreement
A-ii
<PAGE> 138
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (as amended,
supplemented or otherwise modified from time to time, the "Agreement"), dated as
of the 24th day of February, 1998, is entered into by and among WAXS INC., a
Delaware corporation and a direct wholly-owned subsidiary of World Access, Inc.
("Holdco"), WORLD ACCESS, INC., a Delaware corporation ("World Access"), WAXS
ACQUISITION CORP., a Delaware corporation and a direct wholly-owned subsidiary
of Holdco ("Sub-1"), NACT TELECOMMUNICATIONS, INC., a Delaware corporation
("NACT"), and NACT ACQUISITION CORP., a Delaware corporation and a direct
wholly-owned subsidiary of Holdco ("Sub-2").
WHEREAS, World Access currently owns 355,000 shares of common stock, $.01
par value per share, of NACT (the "NACT Stock") and has agreed to purchase an
additional 5,113,712 shares of NACT Stock from GST USA, Inc. (the "GST Stock
Purchase"), which shares together represent approximately 67.3% of the total
NACT Stock currently issued and outstanding;
WHEREAS, Sub-1, upon the terms and subject to the conditions of this
Agreement, will be merged with and into World Access (the "World Access
Merger");
WHEREAS, Sub-2, upon the terms and subject to the conditions of this
Agreement, will be merged with and into NACT (the "NACT Merger" and, together
with the World Access Merger, the "Mergers);
WHEREAS, the respective boards of directors of World Access and Sub-1 deem
it in the best interests of World Access and Sub-1, respectively, and of their
respective stockholders that the World Access Merger be consummated;
WHEREAS, a special committee of the Board of Directors of NACT (the "NACT
Board") appointed on January 12, 1998 and comprised entirely of directors who
are neither members of management of NACT nor affiliated with World Access or
any Affiliate of World Access (other than NACT) (the "Special Committee") has
unanimously determined that the NACT Merger is fair to and in the best interests
of the stockholders of NACT other than World Access (the "Public Stockholders")
and has unanimously approved this Agreement and unanimously recommends its
approval and adoption by the NACT Board and by the stockholders of NACT;
WHEREAS, the NACT Board, based in part on the recommendation of the Special
Committee, has determined that the NACT Merger is fair to and in the best
interests of the Public Stockholders and has resolved to approve and adopt this
Agreement and the transactions contemplated hereby and, subject to the following
terms and conditions, to recommend the approval and adoption of this Agreement
and the NACT Merger by the stockholders of NACT;
WHEREAS, the respective boards of directors of all of the Parties have
unanimously approved this Agreement, and the board of directors of NACT has
directed that this Agreement be submitted to its stockholders for approval and
adoption;
WHEREAS, Holdco, as the sole stockholder of Sub-1, Sub-2, has unanimously
approved this Agreement prior to its execution;
WHEREAS, Holdco, as the sole stockholder of Sub-1 and Sub-2, will deliver,
or cause to be delivered, to the stockholders of World Access and NACT the
consideration to be paid pursuant to the World Access Merger and the NACT
Merger, respectively, in accordance with the terms of this Agreement;
WHEREAS, World Access and NACT desire to make certain representations,
warranties, covenants and agreements in connection with the Mergers;
WHEREAS, for Federal income tax purposes it is intended that the Mergers
qualify as exchanges under Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, certain capitalized terms used herein shall have the meaning set
forth in Section 10.1 hereof.
A-1
<PAGE> 139
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the warranties and covenants herein
contained, the Parties agree as follows:
ARTICLE 1.
THE MERGERS
SECTION 1.1. The Mergers. On the terms and subject to the conditions
contained in this Agreement, the Mergers will be consummated. World Access shall
be the corporation surviving the World Access Merger (the "World Access
Surviving Corporation"). NACT shall be the corporation surviving the NACT Merger
(the "NACT Surviving Corporation").
SECTION 1.2. The Effective Time and the Closing Date. As soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article 8 hereof, the Parties shall file certificates of merger (the
"Certificates of Merger") executed in accordance with the relevant provisions of
the Delaware General Corporation Law (the "DGCL") and shall make all other
filings, recordings or publications required by the DGCL in connection with the
Mergers. Each Merger shall become effective at the time specified in its related
Certificate of Merger, which specified time shall be the same in each
Certificate of Merger (the "Effective Time"). Upon the terms and subject to the
conditions hereof, unless otherwise agreed upon by the Parties, the closing of
the transactions contemplated by this Agreement (the "Closing") shall take place
at the offices of Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah,
commencing at 10:00 a.m. local time, as soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 8 hereof, but in
no event later than two business days thereafter (the date of such being
referred to herein as the "Closing Date"), unless otherwise agreed to by the
Parties.
SECTION 1.3. Effect of the Mergers. At the Effective Time, the World
Access Merger and the NACT Merger shall have the effects set forth in the DGCL.
SECTION 1.4. Charter and Bylaws. At the Effective Time: (i) with respect
to the World Access Merger, the certificate of incorporation and bylaws of
Sub-1, as in effect on the date hereof and otherwise amended prior to the
Effective Time, shall be the certificate of incorporation and bylaws of the
World Access Surviving Corporation until further amended as provided therein and
in accordance with applicable Law; (ii) with respect to the NACT Merger, the
certificate of incorporation and bylaws of Sub-2, as in effect on the date
hereof and otherwise amended prior to the Effective Time, shall be the
certificate of incorporation and bylaws of the NACT Surviving Corporation until
further amended as provided therein and in accordance with applicable Law; and
(iii) the certificate of incorporation of Holdco as in effect immediately prior
to the Effective Time shall be amended at the Effective Time so that Article I
thereof reads in its entirety as follows: "The name of the Corporation is "World
Access, Inc." and, as so amended, such certificate of incorporation shall be the
certificate of incorporation of Holdco until further amended as provided therein
and in accordance with applicable Law.
SECTION 1.5. Directors and Officers. From and after the Effective
Time,the directors and officers of each of World Access and NACT shall be the
directors and officers of each of World Access Surviving Corporation and NACT
Surviving Corporation, respectively.
ARTICLE 2.
CONVERSION OF STOCK
SECTION 2.1. Conversion of Sub-1 Stock and World Access Stock. Subject to
the terms and conditions of this Agreement, as of the Effective Time and by
virtue of the World Access Merger and without any further action on the part of
the holder of any Sub-1 Stock or World Access Stock:
(a) all shares of World Access Stock which are held by World Access as
treasury stock shall be canceled and retired, and no consideration shall be
paid or delivered in exchange therefor;
A-2
<PAGE> 140
(b) each share of World Access Stock outstanding immediately prior to
the Effective Time shall be canceled and converted solely into the right to
receive and be exchangeable for one share of common stock, $.01 par value
per share (the "Holdco Stock"), of Holdco (the "World Access
Consideration"); and
(c) each share of Sub-1 Stock issued and outstanding immediately prior
to the Effective Time shall be converted solely into one fully paid and
nonassessable share of common stock, par value $.01 per share, of the World
Access Surviving Corporation.
SECTION 2.2. Conversion of Sub-2 Stock and NACT Stock. Subject to the
terms and conditions of this Agreement, as of the Effective Time and by virtue
of the NACT Merger and without any further action on the part of the holder of
any Sub-2 Stock or NACT Stock:
(a) all shares of NACT Stock which are held by NACT as treasury stock
shall be canceled and retired, and no consideration shall be paid or
delivered in exchange therefor;
(b) subject to Section 2.3 hereof, each share of NACT Stock
outstanding immediately prior to the Effective Time shall be canceled and
converted solely into the right to receive and become exchangeable for that
number of shares of Holdco Stock equal to the quotient of (x) $17.50
divided by (y) the Closing Date Market Price (the "Exchange Ratio");
provided, however, that (i) if the Closing Date Market Price is less than
$20.88, then World Access may terminate this Agreement by delivering notice
of termination to NACT in the manner contemplated by Section 10.2 hereof,
and (ii) if the Closing Date Market Price is more than $25.52, then the
Exchange Ratio shall be equal to 0.6857 (the number of shares of Holdco
Stock into which each share of NACT Stock shall be convertible pursuant to
this Section 2.2(b) is hereinafter referred to as the "NACT
Consideration"); and
(c) each share of Sub-2 Stock issued and outstanding immediately prior
to the Effective Time shall be converted solely into one fully paid and
nonassessable share of common stock, par value $.01 per share, of the NACT
Surviving Corporation.
SECTION 2.3. Fractional Shares. No scrip or fractional shares of Holdco
Stock shall be issued pursuant to the NACT Merger, and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder of Holdco. In lieu thereof, if any holder of NACT Stock would have
otherwise been entitled to a fractional share of Holdco Stock hereunder, then
such holder shall be entitled, after the later of the Effective Time or the
surrender of such holder's stock certificates that represent such shares of NACT
Stock to receive from Holdco cash (without interest) in an amount equal to the
product of such fractional part of a share of Holdco Stock multiplied by the
Closing Date Market Price.
SECTION 2.4. Exchange Ratio for World Access Options and World Access
Warrants.
2.4.1. As of the Effective Time, each outstanding option ("World Access
Option") and warrant ("World Access Warrant") to purchase World Access Common
Stock shall be assumed by Holdco and converted into an option or warrant, as the
case may be, to purchase shares of Holdco Common Stock, as provided below.
Following the Effective Time, each World Access Option shall continue to have,
and shall be subject to, the same terms and conditions set forth in the
applicable option plan or warrant plan (the "World Access Plans") pursuant to
which such World Access Option or World Access Warrant was granted, except that
each such World Access Option or World Access Warrant shall be exercisable for
the same number of shares of Holdco Common Stock as the number of shares of
World Access Common Stock for which such World Access Option or World Access
Warrant was exercisable immediately prior to the Effective Time.
2.4.2. As of the Effective Time, Holdco shall enter into an assumption
agreement with respect to each World Access Option and each World Access
Warrant, which shall provide for Holdco's assumption of the obligations of World
Access under the applicable World Access Plan. Prior to the Effective Time,
World Access shall make such amendments, if any, to the World Access Plans as
shall be necessary to permit such assumption in accordance with this Section
2.4.2.
2.4.3. It is the intention of the Parties that, to the extent that any
World Access Option constitutes an "incentive stock option" (within the meaning
of Section 422 of the Code) immediately prior to the Effective
A-3
<PAGE> 141
Time, such World Access Option shall continue to qualify as an incentive stock
option to the maximum extent permitted by Section 422 of the Code, and that the
assumption of the World Access Option provided by this Section 2.4 shall satisfy
the conditions of Section 424(a) of the Code.
SECTION 2.5. Exchange Ratio for NACT Options.
2.5.1. As of the Effective Time, each option ("NACT Option") to purchase
NACT Common Stock then outstanding shall be assumed by Holdco and converted into
an option to purchase shares of Holdco Common Stock, as provided below.
Following the Effective Time, each NACT Option shall continue to have, and shall
be subject to, the same terms and conditions set forth in the applicable option
plan (the "NACT Plans") pursuant to which such NACT Option was granted, except
that (i) each such NACT Option shall be exercisable for that number of shares of
Holdco Stock equal to the product of (x) the number of shares of NACT Stock for
which such NACT Option was exercisable immediately prior to the Effective Time
and (y) the Exchange Ratio, rounded in the case of any NACT Option other than
any incentive stock option, up and, in the case of any incentive stock option,
down to the nearest whole share, if necessary, and (ii) the exercise price per
share of such NACT Option shall be equal to the aggregate exercise price of such
NACT Option immediately prior to the Effective Time divided by the number of
shares of Holdco Stock for which such NACT Option shall be exercisable as
determined in accordance with the preceding clause (i), rounded up to the next
highest cent, if necessary.
2.5.2. As of the Effective Time, Holdco shall enter into an assumption
agreement with respect to each NACT Option, which shall provide for Holdco's
assumption of the obligations of NACT under the applicable NACT Plan. Prior to
the Effective Time, NACT shall make such amendments, if any, to the NACT Plans
as shall be necessary to permit such assumption in accordance with this Section
2.5.2.
2.5.3. It is the intention of the Parties that, to the extent that any
NACT Option constitutes an "incentive stock option" (within the meaning of
Section 422 of the Code) immediately prior to the Effective Time, such NACT
Option shall continue to qualify as an incentive stock option to the maximum
extent permitted by Section 422 of the Code, and that the assumption of the NACT
Option provided by this Section 2.5 shall satisfy the conditions of Section
424(a) of the Code.
ARTICLE 3.
PAYMENT OF THE MERGER CONSIDERATION
SECTION 3.1. Payment of the World Access Consideration and the NACT
Consideration.
3.1.1. At or prior to the Effective Time, Holdco shall appoint an agent
reasonably satisfactory to World Access and NACT (the "Exchange Agent") for the
purpose of exchanging certificates representing outstanding shares of World
Access Stock and NACT Stock as provided herein. As of the Effective Time, Holdco
will deposit with the Exchange Agent, in trust for the benefit of holders of
shares of World Access Stock and NACT Stock, certificates representing the
shares of Holdco Stock issuable pursuant to Section 2.1 hereof. Holdco agrees to
make available to the Exchange Agent, from time to time as needed, cash
sufficient to pay cash in lieu of fractional shares pursuant to Section 2.3
hereof.
3.1.2. As promptly as practicable after the Effective Time, the Exchange
Agent shall send or cause to be sent to each former holder of record of shares
of World Access Stock and NACT Stock transmittal materials (the "Letter of
Transmittal") for use in exchanging their certificates formerly representing
World Access Stock and NACT Stock for the Merger Consideration provided for in
this Agreement. The Letter of Transmittal will contain instructions with respect
to the surrender of certificates representing World Access Stock and NACT Stock
and the receipt of the Merger Consideration contemplated by this Agreement and
will require each holder of World Access Stock and NACT Stock to transfer good
and marketable title to such World Access Stock and NACT Stock to Holdco, free
and clear of all Liens. Upon receipt of properly completed Letters of
Transmittal, the Exchange Agent shall pay the appropriate Merger Consideration
to the stockholders of World Access and NACT, as appropriate. The Exchange Agent
shall, as promptly as practicable after the Effective Time, send or cause to be
sent to each former holder of record of World Access
A-4
<PAGE> 142
Stock and NACT Stock a Letter of Transmittal and, upon the proper execution and
return of such Letter of Transmittal to the Exchange Agent, the appropriate
Merger Consideration shall be promptly paid.
3.1.3. At the Effective Time, the stock transfer books of World Access and
NACT shall be closed as to holders of World Access Stock and NACT Stock
immediately prior to the Effective Time, and no transfer of World Access Stock
and NACT Stock by any such holder shall thereafter be made or recognized and
each outstanding certificate formerly representing World Access Stock and NACT
Stock shall, without any action on the part of any holder thereof, no longer
represent World Access Stock and NACT Stock. If, after the Effective Time,
certificates are properly presented to the Exchange Agent, such certificates
shall be exchanged for the Merger Consideration contemplated by this Agreement
into which the World Access Stock and NACT Stock represented thereby were
converted in the Mergers.
SECTION 3.2. Lost Certificates. In the event that any holder of World
Access Stock and NACT Stock is unable to deliver the certificate which
represents such holder's World Access Stock or NACT Stock, Holdco, in the
absence of actual notice that any World Access Stock or NACT Stock theretofore
represented by any such certificate has been acquired by a bona fide purchaser,
may, in its sole discretion, deliver to such holder the Merger Consideration
contemplated by this Agreement to which such holder is entitled in accordance
with the provisions of this Agreement upon the presentation of all of the
following:
(a) an affidavit or other evidence to the reasonable satisfaction of
Holdco that any such certificate has been lost, wrongfully taken or
destroyed;
(b) such security or indemnity as may be reasonably requested by
Holdco to indemnify and hold Holdco harmless; and
(c) evidence to the satisfaction of Holdco that such holder is the
owner of World Access Stock or NACT Stock theretofore represented by each
certificate claimed by such holder to be lost, wrongfully taken or
destroyed and that such holder is the Person who would be entitled to
present each such certificate for exchange pursuant to this Agreement.
SECTION 3.3. Payment to Another Person. In the event that the delivery of
any Merger Consideration contemplated by this Agreement is to be made to a
Person other than the Person in whose name any certificate representing World
Access Stock or NACT Stock surrendered is registered, such certificate so
surrendered shall be properly endorsed (or accompanied by an appropriate
instrument of transfer), with the signature(s) appropriately guaranteed, and
otherwise in proper form for transfer, and the Person requesting such delivery
shall pay any transfer or other taxes required by reason of the delivery to a
Person other than the registered holder of such certificate surrendered or
establish to the satisfaction of Holdco that such tax has been paid or is not
applicable.
SECTION 3.4. Right to Receive the Merger Consideration Only. Until
surrendered in accordance with the provisions of this Article 3, each
certificate representing World Access Stock and NACT Stock shall represent for
all purposes the right to receive the appropriate Merger Consideration
contemplated by this Agreement and shall not represent the right to receive any
other consideration.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF NACT
NACT represents and warrants to World Access that, except as set forth in
the Disclosure Schedule delivered by NACT to World Access prior hereto (the
"NACT Disclosure Schedule"), which shall identify exceptions by specific Section
references:
SECTION 4.1. Corporate Organization. NACT has been duly organized and is
validly existing and in good standing under the Laws of the jurisdiction of its
organization, has all requisite power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than
A-5
<PAGE> 143
where failure to be so qualified or licensed, individually or in the aggregate,
would not have an NACT Material Adverse Effect. NACT is not in violation of any
provision of its certificate of incorporation or bylaws or other organizational
documents, as the case may be. NACT has no subsidiaries or equity investments in
any other Person.
SECTION 4.2. Capitalization. As of the date of this Agreement, the
authorized capital stock of NACT consists in its entirety of 25,000,000 shares
of NACT Stock and 10,000,000 shares of preferred stock, $.01 par value per share
("NACT Preferred Stock"). As of the date of this Agreement, (i) 8,129,096 shares
of NACT Stock are issued and outstanding, (ii) no shares of NACT Preferred Stock
are outstanding, and (iii) options to acquire 1,039,065 shares of NACT Stock are
outstanding under the NACT Plans. All of the outstanding shares of capital stock
of NACT have been duly authorized, validly issued and are fully paid and
nonassessable and are not subject to preemptive rights created by statute,
charter or bylaws or any agreement to which NACT is a Party or by which NACT is
bound. Except as set forth in this Section 4.2, there are no options, warrants
or other rights (including registration rights), agreements, arrangements or
commitments of any character to which NACT is a Party relating to the issued or
unissued capital stock of, or other interest in, NACT or obligating NACT to
grant, issue or sell any shares of capital stock of, or other interest in, NACT
by sale, lease, license or otherwise.
SECTION 4.3. Authority Relative to this Agreement. NACT has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated on its
part hereby to be consummated by NACT. The execution and delivery of this
Agreement by NACT and the consummation of the transactions contemplated on its
part hereby have been duly authorized by all necessary corporate action, and,
other than the approval of NACT's stockholders as provided in Section 7.3
hereof, no other corporate proceedings on the part of NACT are necessary to
authorize the consummation of the transactions contemplated on its part hereby.
This Agreement has been duly executed and delivered by NACT and, assuming the
due authorization, execution and delivery hereof by the other Parties,
constitutes the legal, valid and binding obligation of NACT, enforceable against
NACT in accordance with its terms, except to the extent that such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or other Law
affecting the enforcement of creditors' rights generally or by general equity
principles.
SECTION 4.4. No Violation. The execution and delivery of this Agreement
by NACT do not, the performance by NACT of its obligations hereunder will not,
and the consummation by NACT of the transactions contemplated to be performed by
it hereby will not, (i) violate or conflict with any provision of any Law in
effect on the date of this Agreement and applicable to NACT or by which any of
its properties or assets is bound or to which any of its properties or assets is
subject, (ii) require NACT to obtain any consent, waiver, approval, license or
authorization or permit of, or make any filing with, or notification to, any
Governmental Authority, based on any Law, rule, regulation or other requirement
of any Governmental Authority in effect and of the date of this Agreement (other
than (a) filings or authorizations required in connection or in compliance with
the provisions of the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
DGCL and (b) any other filings and approvals expressly contemplated by this
Agreement), (iii) require the consent, waiver, approval, license or
authorization of any Person (other than any Governmental Authority), (iv)
violate, conflict with or result in a breach of or the acceleration of any
obligation under, or constitute a default (or an event which with notice or the
lapse of time or both would become a default) under, or give to others any
rights of, or result in any, termination, amendment, acceleration or
cancellation of, or loss of any benefit or creation of a right of first refusal,
or require any payment under, or result in the creation of a lien or other
encumbrance on any of the properties or assets of NACT pursuant to or under any
provision of any indenture, mortgage, note, bond, lien, lease, license,
agreement, contract, order, judgment, ordinance, NACT Permit (as herein defined)
or other instrument or obligation to which NACT is a Party or by which NACT or
any of its properties is bound or to which any of its properties is subject, or
(v) conflict with or violate the certificate of incorporation or bylaws, in each
case as amended or restated, of NACT, except for any such conflicts or
violations described in clause (i) or breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment obligations or
liens or encumbrances described in clause (iv) that would not have an
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NACT Material Adverse Effect and except where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications would not, either individually or in the aggregate, prevent NACT
from performing any of its obligations under this Agreement and would not have
an NACT Material Adverse Effect.
SECTION 4.5. Compliance with Laws.
4.5.1. As of the date of this Agreement, NACT holds all licenses,
franchises, grants, permits, easements, variances, exemptions, consents,
certificates, identification numbers, approvals, orders, and other
authorizations (collectively, "NACT Permits") necessary to own, lease and
operate its properties and to carry on its business as it is now being conducted
and is in compliance with all NACT Permits and all Laws governing its business,
except where the failure to hold such NACT Permits or to so comply, individually
or in the aggregate, would not have an NACT Material Adverse Effect.
4.5.2. No action or proceeding is pending or, to NACT's knowledge,
threatened that may result in the suspension, revocation or termination of any
NACT Permit, the issuance of any cease-and-desist order, or the imposition of
any administrative or judicial sanction, and NACT has not received any notice
from any Governmental Authority in respect of the suspension, revocation or
termination of any NACT Permit, or any notice of any intention to conduct any
investigation or institute any proceeding, in any such case where such
suspension, revocation, termination, order, sanction, investigation or
proceeding would result, individually or in the aggregate, in an NACT Material
Adverse Effect.
SECTION 4.6. Litigation. As of the date of this Agreement, except as may
be disclosed in the NACT 10-K (as herein defined) or in reports filed by NACT on
Forms 10-Q or 8-K for periods subsequent to the period covered by the NACT 10-K,
in each case filed prior to the date hereof (such reports and filings, including
the NACT 10-K, collectively, the "NACT Current Reports"), there is no claim,
litigation, suit, arbitration, mediation, action, proceeding, unfair labor
practice complaint or grievance pending or, to NACT's knowledge, investigation
of any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to NACT's knowledge, threatened in writing
against NACT or with respect to any property or asset of NACT, except for
claims, litigations, suits, arbitrations, mediations, actions, proceedings,
complaints, grievances or investigations which, individually or in the
aggregate, would not have an NACT Material Adverse Effect. Neither NACT nor any
property or asset of NACT is subject to any continuing order, judgment,
settlement agreement, injunction, consent decree or other similar written
agreement with or, to NACT's knowledge, continuing investigation by, any
Governmental Authority, or any judgment, order, writ, injunction, consent decree
or award of any Governmental Authority or arbitrator, including cease-and-
desist or other orders, except for such matters which would not have an NACT
Material Adverse Effect.
SECTION 4.7. Financial Statements and Reports. NACT has made available to
World Access true and complete copies (in each case, as amended) of (i) its
Annual Report on Form 10-K for the year ended September 30, 1997 (the "NACT
10-K"), as filed with the Securities and Exchange Commission (the "Commission"),
and (ii) all other reports, statements and registration statements (including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed by it with
the Commission. The reports, statements and registration statements referred to
in the immediately preceding sentence (including any financial statements or
schedules or other information included or incorporated by reference therein)
are referred to in this Agreement as the "NACT SEC Filings." As of the
respective times such documents were filed or, as applicable, were effective,
the NACT SEC Filings complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except for such noncompliance which,
individually or in the aggregate, would not have an NACT Material Adverse
Effect, and did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of NACT included in the NACT SEC
Filings comply as to form in all material respect with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto, were prepared in accordance with GAAP (as in effect from time
to time) during the periods involved (except as may be indicated therein or in
the notes thereto or, in the case of the unaudited interim financial statements,
as
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permitted by Form 10-Q of the Commission) and present fairly the financial
position, results of operations and cash flows of NACT as of the dates and for
the periods indicated, except (i) in the case of unaudited interim financial
statements, to normal recurring year-end adjustments and any other adjustments
described therein and (ii) any pro forma financial information contained therein
is not necessarily indicative of the financial position of NACT as of the
respective dates thereof and the results of operations and cash flows for the
periods indicated.
SECTION 4.8. Absence of Certain Changes or Events. Other than as
disclosed in the NACT Current Reports, or otherwise disclosed in this Agreement,
since September 30, 1997 and through the date hereof, the business of NACT has
been conducted in the ordinary course, and there has not been (i) any NACT
Material Adverse Effect; (ii) any material indebtedness incurred by NACT for
money borrowed; (iii) any material transaction or commitment, except in the
ordinary course of business or as contemplated by this Agreement, entered into
by NACT; (iv) any damage, destruction or loss, whether covered by insurance or
not, which, individually or in the aggregate, would have an NACT Material
Adverse Effect; (v) any material change by NACT in accounting principles or
methods except insofar as may be required by a change in GAAP; (vi) any material
revaluation by NACT of any asset (including any writing down of the value of
inventory or writing off of notes or accounts receivable); (vii) any mortgage or
pledge of any of the assets or properties of NACT or the subjection of any of
the assets or properties of NACT to any material liens, charges, encumbrances,
imperfections of title, security interest, options or rights or claims of others
with respect thereto other than in the ordinary course consistent with past
practice; or (viii) any assumption or guarantee by NACT of the indebtedness of
any Person other than in the ordinary course consistent with past practice.
SECTION 4.9. No Undisclosed Material Liabilities. Except as disclosed in
the NACT Current Reports, NACT has not incurred any liabilities of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, that, individually or in the aggregate, would have a Material Adverse
Effect other than (i) liabilities incurred in the ordinary course consistent
with past practice since September 30, 1997, (ii) liabilities that have been
repaid, discharged or otherwise extinguished and (iii) liabilities under or
contemplated by this Agreement.
SECTION 4.10. No Default. NACT is not in default or violation (and no
event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (i)
its certificate of incorporation or bylaws, (ii) indenture, mortgage, note,
bond, lien, lease, license, agreement, contract, order, judgment, ordinance,
NACT Permit or other instrument or obligation to which NACT is a Party or by
which NACT or any of its assets or properties is bound or subject to, or (iii)
any order, writ, injunction, decree or Law applicable to NACT, except in the
case of clauses (ii) and (iii) above for defaults or violations that would not
have an NACT Material Adverse Effect.
SECTION 4.11. Finders' and Bankers' Fees. Except for NationsBanc
Montgomery Securities LLC ("Montgomery Securities"), a copy of whose engagement
agreement has been provided to World Access, there is no investment banker,
broker, finder, or other intermediary which has been retained by or is
authorized to act on behalf of NACT or the Special Committee who might be
entitled to any fee or commission from NACT or any of its Affiliates upon
consummation of the transactions contemplated by this Agreement.
SECTION 4.12. Fairness Opinion. NACT has received the opinion of
Montgomery Securities to the effect that, as of the date hereof, the
consideration to be received by NACT's stockholders in the NACT Merger is fair
to the Public Stockholders from a financial point of view.
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ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS
World Access represents and warrants to NACT that, except as set forth in
the Disclosure Schedule delivered by World Access to NACT prior hereto (the
"World Access Disclosure Schedule"), which shall identify exceptions by specific
Section references:
SECTION 5.1. Corporate Organization. Each of World Access and its
Subsidiaries (the "World Access Subsidiaries") has been duly organized and is
validly existing and in good standing under the Laws of the jurisdiction of its
organization, has all requisite power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than where failure to be so qualified or licensed, individually or in the
aggregate, would not have a World Access Material Adverse Effect. Neither World
Access nor any World Access Subsidiary is in violation of any provision of its
charter or bylaws or other organizational documents, as the case may be.
SECTION 5.2. Capitalization. As of the date of this Agreement, the
authorized capital stock of World Access consists in its entirety of 40,000,000
shares of World Access Stock and 10,000,000 shares of preferred stock, $.01 par
value per share (the "World Access Preferred Stock"). As of the date of this
Agreement, (i) 19,754,046 shares of World Access Common Stock are issued and
outstanding, (ii) no shares of Preferred Stock are outstanding, and (iii)
options and warrants to acquire 4,218,401 shares of World Access Common Stock
are outstanding under the World Access Plans. All of the outstanding shares of
capital stock of each of the World Access Subsidiaries are owned beneficially
and of record by World Access or a World Access Subsidiary free and clear of all
liens, charges, encumbrances, options, rights of first refusal or limitations or
agreements regarding voting rights of any nature. All of the outstanding shares
of capital stock of World Access and each of the World Access Subsidiaries have
been duly authorized, validly issued and are fully paid and nonassessable and
are not subject to preemptive rights created by statute, their respective
charter or bylaws or any agreement to which any such entity is a Party or by
which any such entity is bound. Except as set forth in this Section 5.2, there
are no options, warrants or other rights (including registration rights),
agreements, arrangements or commitments of any character to which World Access
or any World Access Subsidiary is a Party relating to the issued or unissued
capital stock, or other interest in, of World Access or any World Access
Subsidiary or obligating World Access or any World Access Subsidiary to grant,
issue or sell any shares of capital stock of, or other equity interests in,
World Access or any World Access Subsidiary, by sale, lease, license or
otherwise.
SECTION 5.3. Authority Relative to this Agreement. World Access has all
requisite corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated on its part hereby to be consummated by World Access. The execution
and delivery of this Agreement by World Access and the consummation of the
transactions contemplated on its part hereby have been duly authorized by all
necessary corporate action, and no other corporate proceedings on the part of
World Access are necessary to authorize the consummation of the transactions
contemplated on its part hereby. This Agreement has been duly executed and
delivered by World Access and, assuming the due authorization, execution and
delivery hereof by the other Parties, constitutes the legal, valid and binding
obligation of World Access, enforceable against World Access in accordance with
its terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other Law affecting the
enforcement of creditors' rights generally or by general equity principles.
SECTION 5.4. No Violation. The execution and delivery of this Agreement
by World Access do not, the performance by World Access of its obligations
hereunder will not, and the consummation by World Access of the transactions
contemplated to be performed by it hereby will not, (i) violate or conflict with
any provision of any Law in effect on the date of this Agreement and applicable
to World Access or any World Access Subsidiary or by which any of their
respective properties or assets is bound or to which any of their respective
properties or assets is subject, (ii) require World Access or any World Access
Subsidiary to obtain any consent, waiver, approval, license or authorization or
permit of, or make any filing with, or notification to,
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any Governmental Authority, based on any Law, rule, regulation or other
requirement of any Governmental Authority in effect and of the date of this
Agreement (other than (a) filings or authorizations required in connection or in
compliance with the provisions of the Securities Act, the Exchange Act and the
DGCL and (b) any other filings and approvals expressly contemplated by this
Agreement), (iii) require the consent, waiver, approval, license or
authorization of any Person (other than any Governmental Authority), (iv)
violate, conflict with or result in a breach of or the acceleration of any
obligation under, or constitute a default (or an event which with notice or the
lapse of time or both would become a default) under, or give to others any
rights of, or result in any, termination, amendment, acceleration or
cancellation of, or loss of any benefit or creation of a right of first refusal,
or require any payment under, or result in the creation of a lien or other
encumbrance on any of the properties or assets of World Access or any World
Access Subsidiary pursuant to or under any provision of any indenture, mortgage,
note, bond, lien, lease, license, agreement, contract, order, judgment,
ordinance, World Access Permit (as herein defined) or other instrument or
obligation to which World Access or any World Access Subsidiary is a Party or by
which World Access or any World Access Subsidiary or any of their respective
properties is bound or to which any of their respective properties is subject,
or (v) conflict with or violate the certificate of incorporation or bylaws, or
the equivalent organizational documents, in each case as amended or restated, of
World Access or any of World Access Subsidiary, except for any such conflicts or
violations described in clause (i) or breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment obligations or
liens or encumbrances described in clause (iv) that would not have a World
Access Material Adverse Effect and except where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications would not, either individually or in the aggregate, prevent World
Access from performing any of its obligations under this Agreement and would not
have a World Access Material Adverse Effect.
SECTION 5.5. Compliance with Laws.
5.5.1. As of the date of this Agreement, each of World Access and the World
Access Subsidiaries holds all licenses, franchises, grants, permits, easements,
variances, exemptions, consents, certificates, identification numbers,
approvals, orders, and other authorizations (collectively, "World Access
Permits") necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted and is in compliance with all World Access
Permits and all Laws governing its business, except where the failure to hold
such World Access Permits or to so comply, individually or in the aggregate,
would not have a World Access Material Adverse Effect.
5.5.2. No action or proceeding is pending or, to World Access's knowledge,
threatened that may result in the suspension, revocation or termination of any
World Access Permit, the issuance of any cease-and-desist order, or the
imposition of any administrative or judicial sanction, and neither World Access
nor any World Access Subsidiary has received any notice from any Governmental
Authority in respect of the suspension, revocation or termination of any World
Access Permit, or any notice of any intention to conduct any investigation or
institute any proceeding, in any such case where such suspension, revocation,
termination, order, sanction, investigation or proceeding would result,
individually or in the aggregate, in a World Access Material Adverse Effect.
SECTION 5.6. Litigation. As of the date of this Agreement, except as may
be disclosed in the World Access 10-K (as herein defined) or in reports filed by
World Access on Forms 10-Q or 8-K for periods subsequent to the period covered
by the World Access 10-K, in each case filed prior to the date hereof (such
reports and filings, including the World Access 10-K, collectively, the "World
Access Current Reports"), there is no claim, litigation, suit, arbitration,
mediation, action, proceeding, unfair labor practice complaint or grievance
pending or, to World Access's knowledge, investigation of any kind, at law or in
equity (including actions or proceedings seeking injunctive relief), pending or,
to World Access's knowledge, threatened in writing against World Access or any
World Access Subsidiary or with respect to any property or asset of any of them,
except for claims, litigations, suits, arbitrations, mediations, actions,
proceedings, complaints, grievances or investigations which, individually or in
the aggregate, would not have a World Access Material Adverse Effect. Neither
World Access nor any World Access Subsidiary nor any property or asset of any of
them is subject to any continuing order, judgment, settlement agreement,
injunction, consent decree or other similar written agreement with or, to World
Access's knowledge, continuing investigation by, any Governmental
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Authority, or any judgment, order, writ, injunction, consent decree or award of
any Governmental Authority or arbitrator, including cease-and-desist or other
orders, except for such matters which would not have a World Access Material
Adverse Effect.
SECTION 5.7. Financial Statements and Reports. World Access has made
available to NACT true and complete copies (in each case, as amended) of (i) its
Annual Report on Form 10-K for the year ended December 31, 1996 (the "World
Access 10-K"), as filed with the Commission, and (ii) all other reports,
statements and registration statements (including Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K) filed by it with the Commission subsequent to
December 31, 1996. The reports, statements and registration statements referred
to in the immediately preceding sentence (including any financial statements or
schedules or other information included or incorporated by reference therein)
are referred to in this Agreement as the "World Access SEC Filings." As of the
respective times such documents were filed or, as applicable, were effective,
the World Access SEC Filings complied in all material respects with all
applicable requirements of the Securities Act and the Exchange Act and the rules
and regulations promulgated thereunder, except for such noncompliance which,
individually or in the aggregate, would not have a World Access Material Adverse
Effect, and did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The consolidated financial statements of World Access included
in the World Access SEC Filings comply as to form in all material respect with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto, were prepared in accordance with GAAP
(as in effect from time to time) during the periods involved (except as may be
indicated therein or in the notes thereto or, in the case of the unaudited
interim financial statements, as permitted by Form 10-Q of the Commission) and
present fairly the consolidated financial position, consolidated results of
operations and consolidated cash flows of World Access and the World Access
Subsidiaries as of the dates and for the periods indicated, except (i) in the
case of unaudited interim consolidated financial statements, to normal recurring
year-end adjustments and any other adjustments described therein and (ii) any
pro forma financial information contained therein is not necessarily indicative
of the consolidated financial position of World Access and the World Access
Subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated. No World Access Subsidiary
is required to file any form, report or other document with the Commission.
SECTION 5.8. Absence of Certain Changes or Events. Other than as
disclosed in the World Access Current Reports, or otherwise disclosed in this
Agreement, since September 30, 1997 and through the date hereof, the business of
World Access and of each World Access Subsidiary has been conducted in the
ordinary course, and there has not been (i) any World Access Material Adverse
Effect; (ii) any material indebtedness incurred by World Access or any World
Access Subsidiary for money borrowed; (iii) any material transaction or
commitment, except in the ordinary course of business or as contemplated by this
Agreement, entered into by World Access or any World Access Subsidiary; (iv) any
damage, destruction or loss, whether covered by insurance or not, which,
individually or in the aggregate, would have a World Access Material Adverse
Effect; (v) any material change by World Access in accounting principles or
methods except insofar as may be required by a change in GAAP; (vi) any material
revaluation by World Access or any World Access Subsidiary of any asset
(including any writing down of the value of inventory or writing off of notes or
accounts receivable); (vii) any mortgage or pledge of any of the assets or
properties of World Access or any World Access Subsidiary or the subjection of
any of the assets or properties of World Access or any World Access Subsidiary
to any material liens, charges, encumbrances, imperfections of title, security
interest, options or rights or claims of others with respect thereto other than
in the ordinary course consistent with past practice; or (viii) any assumption
or guarantee by World Access or a World Access Subsidiary of the indebtedness of
any Person other than in the ordinary course consistent with past practice.
SECTION 5.9. No Undisclosed Material Liabilities. Except as disclosed in
the World Access Current Reports, neither World Access nor any World Access
Subsidiary has incurred any liabilities of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that, individually
or in the aggregate, would have a World Access Material Adverse Effect other
than (i) liabilities incurred in the ordinary course consistent with past
practice since September 30, 1997, (ii) liabilities that have
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been repaid, discharged or otherwise extinguished and (iii) liabilities under or
contemplated by this Agreement.
SECTION 5.10. No Default. Neither World Access nor any World Access
Subsidiary is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation) of
any term, condition or provision of (i) its certificate of incorporation or
bylaws or other organizational document, (ii) indenture, mortgage, note, bond,
lien, lease, license, agreement, contract, order, judgment, ordinance, World
Access Permit or other instrument or obligation to which World Access or any
World Access Subsidiary is a Party or by which World Access or any World Access
Subsidiary or any of their respective properties or assets is bound or subject
to, or (iii) any order, writ, injunction, decree or Law applicable to World
Access or any World Access Subsidiary, except in the case of clauses (ii) and
(iii) above for defaults or violations that would not have a World Access
Material Adverse Effect.
SECTION 5.11. Finders' and Bankers' Fees. Except as set forth in Section
4.11 hereof, there is no investment banker, broker, finder, or other
intermediary which has been retained by or is authorized to act on behalf of
World Access or any World Access Subsidiary who might be entitled to any fee or
commission from World Access or any of its Affiliates upon consummation of the
transactions contemplated by this Agreement.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF HOLDCO, SUB-1 AND SUB-2
In order to induce World Access and NACT to enter into this Agreement,
Holdco and its subsidiaries, Sub-1 and Sub-2 (collectively, the "Holdco Subs"),
jointly and severally, represent and warrant to World Access and NACT as
follows:
SECTION 6.1. Organization, Qualification, and Corporate Power. Each of
Holdco and the Holdco Subs is a corporation duly organized, validly existing,
and in good standing under the Laws of the jurisdiction of its incorporation.
Each of Holdco and the Holdco Subs is duly authorized and qualified to conduct
business and is in good standing under the Laws of each jurisdiction where such
qualification is required, except where the lack of such qualification would not
have a material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of Holdco and the Holdco Subs. Each
of Holdco and the Holdco Subs has full corporate power and authority to carry on
the businesses in which it is engaged and to own, lease, use and operate the
properties owned, leased used and operated by it.
SECTION 6.2. Capitalization. The entire authorized capital stock of
Holdco consists in its entirety of 40,000,000 shares of Holdco Stock and
10,000,000 shares of preferred stock, $.01 par value per share (the "Holdco
Preferred Stock"). As of the date of this Agreement, (i) 1,000 shares of Holdco
Stock are issued and outstanding and (ii) no shares of Holdco Preferred Stock
are outstanding. No shares of Holdco Stock are held in treasury. All of the
issued and outstanding shares of Holdco Stock have been duly authorized and are
validly issued, fully paid, and nonassessable. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments (except for this
Agreement) that could require Holdco or any of the Holdco Subs to issue, sell,
or otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Holdco and the Holdco Subs.
Holdco and the Holdco Subs have no outstanding bonds, debentures, notes or
similar obligations the holders of which have the right to vote generally with
holders of Holdco Stock.
SECTION 6.3. Authority Relative to this Agreement. Each of Holdco and the
Holdco Subs has all requisite corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated on its part hereby to be consummated by it. The
execution and delivery of this Agreement by each of Holdco and the Holdco Subs
and the consummation of the transactions contemplated on its part hereby have
been duly authorized by all necessary corporate action, and no other corporate
proceedings on the part of Holdco or either of the Holdco Subs are necessary to
authorize the consummation of the transactions contemplated on its part hereby.
This Agreement has been duly executed and delivered by Holdco and the Holdco
Subs and, assuming the due authorization, execution
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and delivery hereof by the other Parties, constitutes the legal, valid and
binding obligations of Holdco and the Holdco Subs, enforceable against each of
them in accordance with its terms, except to the extent that such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or other Law
affecting the enforcement of creditors' rights generally or by general equity
principles.
ARTICLE 7.
CERTAIN COVENANTS AND AGREEMENTS
SECTION 7.1. Conduct of Business by NACT. From the date of this Agreement
until the Effective Time, NACT shall conduct its business in the ordinary course
consistent with past practice and (except for acts in connection with the NACT
Merger) shall use its best efforts to preserve intact its business relationships
with third parties and to keep available the services of its present officers
and employees.
SECTION 7.2. Regulatory Matters.
7.2.1. As promptly as practicable after the execution of this Agreement,
Holdco, NACT and World Access shall jointly prepare and file with the Commission
a Registration Statement on Form S-4 relating to the shares of Holdco Stock to
be issued in the Mergers (the "Registration Statement) in which a definitive
proxy statement/prospectus to be furnished to the stockholders of NACT (the
"Proxy Statement") will be included as a part. Each of Holdco, World Access and
NACT shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and NACT shall thereafter mail or deliver the Proxy Statement to
its stockholders. Holdco shall also use all reasonable efforts to obtain all
necessary state securities Law or "blue sky" permits and approvals required to
carry out the transactions contemplated by this Agreement, and NACT shall
furnish all information concerning NACT and the holders of NACT Stock as may be
reasonably requested in connection with any such action. Holdco, World Access
and NACT agree to cooperate in making any preliminary filings of the Proxy
Statement with the Commission, as promptly as practicable, pursuant to Rule
14a-6 under the Exchange Act.
7.2.2. The Parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities which are necessary or advisable to
consummate the transactions contemplated by this Agreement (including the
Mergers) and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such Governmental Authorities.
World Access and NACT shall have the right to review in advance, and, to the
extent practicable, each will consult the other on, in each case subject to
applicable Laws relating to the exchange of information, all the information
relating to World Access or NACT, as the case may be, which appear in any filing
made with, or written materials submitted to, any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the Parties hereto shall
act reasonably and as promptly as practicable. The Parties agree that they will
consult with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each Party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated herein.
7.2.3. Holdco, World Access and NACT shall, upon request, furnish each
other with all information concerning themselves, their subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Proxy Statement, the Registration Statement
or any other statement, filing, notice or application made by or on behalf of
Holdco, World Access, NACT or any of their respective subsidiaries to any
Governmental Authority in connection with the Mergers and the other transactions
contemplated by this Agreement.
SECTION 7.3. Stockholder Matters. NACT shall call and hold a meeting of
its stockholders as promptly as practicable after the date hereof for the
purpose of voting upon the approval of this Agreement and the NACT Merger and
upon such other matters as may be properly considered at such meeting. NACT
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shall use all reasonable efforts to solicit from its stockholders proxies in
favor of the approval of this Agreement and the NACT Merger and shall take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by the DGCL to obtain such approval. NACT shall take all
other action necessary or, in the opinion of the other Parties hereto, advisable
to promptly and expeditiously secure any vote or consent of its stockholders
required by applicable Law and its certificate of incorporation and bylaws to
effect the NACT Merger.
SECTION 7.4. Access to Information. From the date of this Agreement until
the Effective Time, NACT will give World Access, its counsel, financial
advisors, auditors, and other authorized representatives full access to the
offices, properties, books and records of NACT, will furnish to World Access,
its counsel, financial advisors, auditors, and other authorized representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct NACT's employees, counsel, financial
advisors, and auditors to cooperate with World Access in its investigation of
the business of NACT, provided that no investigation pursuant to this Section
shall affect any representation or warranty given by NACT to World Access
hereunder.
SECTION 7.5. Notices of Certain Events.
7.5.1. NACT shall promptly notify World Access of:
(a) any notice or other communication received by NACT from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement; and
(b) any notice or other communication received by NACT from any
Governmental Authority in connection with the transactions contemplated by
this Agreement.
7.5.2. World Access shall promptly notify NACT of:
(a) any notice or other communication received by World Access from
any Person alleging that the consent of such Person is or may be required
in connection with the transactions contemplated by this Agreement; and
(b) any notice or other communication received by World Access from
any Governmental Authority in connection with the transactions contemplated
by this Agreement.
SECTION 7.6. Indemnification. Holdco and World Access agree that all
rights to indemnification for acts or omissions occurring prior to the Effective
Time existing as of the date of this Agreement, in favor of the current or
former directors or officers of NACT as provided in its Certificate of
Incorporation or Bylaws shall survive the NACT Merger and shall continue in full
force and effect in accordance with their terms from the Effective Time until
the expiration of the applicable statute of limitations with respect to any
claims against such current or former directors of officers of NACT arising out
of such acts or omissions. Holdco shall cause to be maintained for a period of
not less than six years from the Effective Time NACT's directors' and officers'
insurance and indemnification policy in effect as of the date of this Agreement
to the extent that it provides coverage for events occurring prior to the
Effective Time (the "D&O Insurance") for all persons who are directors and
officers of NACT who are covered persons under NACT's D&O insurance policies in
effect on the date of this Agreement, so long as the annual premium therefor
would not be in excess of 125% of the last annual premium paid prior to the date
of this Agreement (the "Maximum Premium"). If the existing D&O Insurance
expires, is terminated or is canceled during such six-year period, then Holdco
shall use all reasonable efforts to cause to be obtained as much D&O Insurance
as can be obtained for the remainder of such period for an annualized premium
not in excess of the Maximum Premium on terms and conditions no less
advantageous to the covered Persons than the existing D&O Insurance.
SECTION 7.7. Best Efforts. Subject to the terms and conditions of this
Agreement, each Party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Law to consummate the transactions contemplated by
this Agreement.
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SECTION 7.8. Public Announcements. World Access and NACT will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement and the contemplated transactions and, except as
may be required by applicable Law or any agreement with NASDAQ, will not issue
any such press release or make any such public statement prior to such
consultation.
SECTION 7.9. Further Assurances. After the Effective Time, the officers
and directors of the NACT Surviving Corporation will be authorized to execute
and deliver in the name and on behalf of NACT and Sub-2 any deeds, bills of
sale, assignments, agreements, certificates, other documents, or assurances and
to take and do in the name and on behalf of NACT and Sub-2 any other actions and
things they may deem desirable to vest, perfect, or confirm of record or
otherwise in the NACT Surviving Corporation, any and all right, title, and
interest in, to, and under any of the rights, properties, or assets of NACT
acquired or to be acquired by the NACT Surviving Corporation as a result of, or
in connection with, the NACT Merger.
SECTION 7.10. Listing of Holdco Stock. World Access shall use its best
efforts to cause the shares of Holdco Stock to be issued pursuant to this
Agreement to be listed on NASDAQ.
SECTION 7.11. Affiliates. Prior to the Closing Date, each of NACT and
World Access shall deliver to Holdco a letter identifying all Persons who are,
at the time this Agreement is submitted for approval to the NACT stockholders,
Affiliates of NACT or World Access, as the case may be, for purposes of Rule 145
under the Securities Act. Each of NACT and World Access shall use its best
efforts to cause each such Person to deliver to Holdco on or prior to the
Closing Date a written agreement substantially in the form of attached hereto as
Exhibit A.
SECTION 7.12. Tax Treatment. Each of Holdco, World Access and NACT shall
use its reasonable best efforts to cause the Mergers to qualify as exchanges
governed by Section 351 of the Code and to obtain the opinions of counsel
referred to in Sections 8.2(e) and 8.3(e) hereof.
ARTICLE 8.
CONDITIONS TO THE MERGERS
SECTION 8.1. Conditions to the Obligations of Each Party. The obligations
of each Party to consummate the Mergers are subject to the satisfaction at or
before the Effective Time of the following conditions, any or all of which may
be waived, in whole or in part, by each of the Parties intended to benefit
therefrom, to the extent permitted by applicable Law:
(a) this Agreement and the transactions contemplated hereby shall have
been approved in the manner required by applicable Law by the holders of
the NACT Stock;
(b) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and Holdco shall have received all state
securities or "blue sky" authorizations necessary to issue the Holdco Stock
issuable pursuant and to this Agreement;
(c) no Governmental Authority shall have enacted, issued, promulgated,
enforced, or entered any Law or Order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the
Mergers illegal or otherwise prohibiting consummation of the Mergers;
(d) all actions by or in respect of or filings with any Governmental
Authority required to permit the consummation of the Mergers shall have
been obtained, other than the filing of the requisite Certificate of Merger
with the Secretary of State of the State of Delaware;
(e) the shares of Holdco Stock issuable pursuant to this Agreement
shall have been approved for listing on NASDAQ; and
(f) the GST Stock Purchase shall have been consummated.
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SECTION 8.2. Additional Conditions to the Obligations of Holdco, World
Access, Sub-1 and Sub-2. The obligations of Holdco, World Access, Sub-1 and
Sub-2 to consummate the Mergers are also subject to the satisfaction at or prior
to the Effective Time of the following further conditions, any or all of which
may be waived, in whole or in part, by each of the Parties intended to benefit
therefrom, to the extent permitted by applicable Law:
(a) NACT shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of NACT contained in
this Agreement and in any certificate delivered by NACT pursuant hereto
shall be true and correct in all material respects, at and as of the
Effective Time as if made at and as of such time, except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, and World
Access shall have received a certificate signed by the chief executive
officer and the principal financial officer of NACT to the foregoing
effect;
(b) no NACT Material Adverse Effect shall have occurred;
(c) World Access shall have received or be satisfied that it will
receive all consents and approvals contemplated by Section 4.4 of the NACT
Disclosure Schedule and any other consents of third parties necessary in
connection with the consummation of the NACT Merger if the failure to
obtain any such consent or consents would have an NACT Material Adverse
Effect;
(d) World Access shall have received all documents it may reasonably
request relating to the authority of NACT to enter into this Agreement, all
in form and substance reasonably satisfactory to World Access; and
(e) World Access shall have received from its counsel, Rogers & Hardin
LLP, an opinion based upon reasonably requested representation letters and
dated as of the Effective Time, to the effect that the World Access Merger
will be treated as a transfer of property to Holdco by holders of World
Access Stock governed by Section 351 of the Code.
SECTION 8.3. Additional Conditions to the Obligations of NACT. The
obligations of NACT to consummate the NACT Merger are also subject to the
satisfaction at or prior to the Effective Time of the following further
conditions, any or all of which may be waived, in whole or in part, by NACT to
the extent permitted by applicable Law:
(a) Holdco, World Access, Sub-1 and Sub-2 shall have performed in all
material respects all of their respective obligations required to be
performed by them at or prior to the Effective Time, the representations
and warranties of Holdco, World Access, Sub-1 and Sub-2 contained in this
Agreement and in any certificate delivered by them pursuant hereto shall be
true and correct in all material respects at and as of the Effective Time
as if made at and as of such time, except that those representations and
warranties which address matters only as of a particular date shall remain
true and correct as of such date, and NACT shall have received a
certificate signed by the chief executive officer and chief financial
officer of World Access to the foregoing effect;
(b) no World Access Material Adverse Effect should have occurred;
(c) NACT shall have received or be satisfied that it will receive all
consents and approvals contemplated by Section 5.4 of the World Access
Disclosure Schedule and any other consents of third parties necessary in
connection with the consummation of the World Access Merger if the failure
to obtain any such consent or consents would have a World Access Material
Adverse Effect;
(d) NACT shall have received all documents it may reasonably request
relating to the authority of Holdco, World Access Sub-1 and Sub-2 to enter
into this Agreement, all in form and substance reasonably satisfactory to
NACT; and
(e) NACT shall have received from its counsel, Van Cott, Bagley,
Cornwall & McCarthy, an opinion based upon reasonably requested
representation letters and dated as of the Effective Time, to the
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effect that the NACT Merger will be treated as a transfer of property to
Holdco by holders of NACT Stock governed by Section 351 of the Code.
ARTICLE 9.
TERMINATION
SECTION 9.1. Termination. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of NACT):
(a) by mutual written consent of NACT and World Access;
(b) by either NACT or World Access, if the Mergers have not been
consummated by August 1, 1998, unless the failure to consummate the Mergers
is the result of a willful and material breach of this Agreement by the
Party seeking to terminate this Agreement;
(c) by either NACT or World Access, if there shall be any Law that
makes consummation of the Mergers illegal or otherwise prohibited or if any
Order enjoining World Access or NACT from consummating the Mergers is
entered and such Order shall become final and nonappealable;
(d) by either NACT or World Access, if this Agreement and the NACT
Merger shall fail to be approved and adopted by the stockholders of NACT at
a duly called meeting of its stockholders called for such purpose as set
forth in Section 7.3 hereof; or
(e) by World Access in accordance with Section 2.2(b) hereof.
SECTION 9.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.1 hereof, then this Agreement shall become void and of no
effect with no liability on the part of any Party, except that the agreements
contained in Section 10.5 shall survive the termination hereof; provided
however, that, except as otherwise specifically provided, nothing herein shall
relieve any Party of liability for any breach of this Agreement.
ARTICLE 10.
MISCELLANEOUS
SECTION 10.1. Definitions. As used in this Agreement, the following terms
have the following respective meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"AFFILIATE" means, with respect to a Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such given Person.
"CLOSING DATE MARKET PRICE" means the average of the daily closing
price of World Access Stock as reported on NASDAQ on each of the twenty
consecutive trading days ending with the third trading day immediately
preceding the Effective Time.
"GAAP" means United States generally accepted accounting principles
consistently applied.
"GOVERNMENTAL AUTHORITY" means any federal, state, county, local,
foreign, or other governmental or public agency, instrumentality,
commission, authority, board, or body, and any court, arbitrator, mediator,
or tribunal.
"LAW" means any code, law, ordinance, regulation, rule, or statute of
any Governmental Authority.
"LIEN" means any security interest, lien, mortgage, deed to secure
debt, deed of trust, pledge, charge, conditional sale, or other title
retention agreement, or other encumbrance of any kind.
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"MERGER CONSIDERATION" means the World Access Consideration and the
NACT Consideration.
"NACT MATERIAL ADVERSE EFFECT" means any matter that would reasonably
be expected to affect materially and adversely the business, condition
(financial or otherwise), or results of operations of NACT.
"NASDAQ" means The NASDAQ National Market.
"ORDER" means any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, administrative agency, or other Governmental Authority.
"PARTY" means any of Holdco, NACT, World Access, Sub-1 or Sub-2.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust, a limited liability company or any other entity or
organization, including a government or political subdivision, or any
agency or instrumentality thereof.
"SUB-1 STOCK" means all of the authorized capital stock of Sub-1.
"SUB-2 STOCK" means all of the authorized capital stock of Sub-2.
"SUBSIDIARY" or "SUBSIDIARIES" of any Person means any corporation,
partnership, joint venture or other legal entity of which such other Person
(either alone or through or together with any other subsidiary) owns,
directly or indirectly, 50% or more of the stock or other equity interests
the holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity.
"WORLD ACCESS MATERIAL ADVERSE EFFECT" means any matter that would
reasonably be expected to affect materially and adversely the business,
condition (financial or otherwise), or results of operations of World
Access and its Subsidiaries taken as a whole.
"WORLD ACCESS STOCK" means all of the authorized common stock, $.01
par value per share, of World Access.
SECTION 10.2. Notices. Unless otherwise specifically provided herein, any
notice, demand, request, or other communication herein requested or permitted to
be given shall be in writing and may be personally served, sent by overnight
courier service, or sent by facsimile with a confirming copy sent by United
States first-class mail, each with any postage or delivery charge prepaid. For
the purposes hereof, the addresses of the Parties (until notice of a change is
delivered as provided in this Section) shall be as follows:
If to NACT:
NACT Telecommunications, Inc.
191 West 5200 North
Provo, Utah 84604
Attention: Chief Executive Officer
Facsimile: (801) 802-3010
If to World Access, Holdco, Sub-1 or Sub-2:
World Access, Inc.
945 E. Paces Ferry Road, Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
Facsimile: (404) 365-9847
Any notice provided hereunder shall be deemed to have been given on the
date delivered in person, or on the next business day after deposit with an
overnight courier service, or on the date received by facsimile transmission.
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SECTION 10.3. No Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate delivered
shall not survive the Effective Time or the termination of this Agreement.
SECTION 10.4. Amendments; No Waivers.
10.4.1. Any provision of this Agreement may be amended or waived prior to
the Effective Time if, and only if, such amendment or waiver is in writing and
signed by all Parties hereto, or in the case of a waiver, by the Party against
whom the waiver is to be effective; and provided, further, that after the
adoption of this Agreement by the stockholders of NACT, no such amendment or
waiver shall, without the further approval of such stockholders, alter or change
(i) the Merger Consideration or (ii) any of the terms or conditions of this
Agreement if such alteration or change would adversely affect the Public
Stockholders.
10.4.2. No failure or delay by any Party in exercising any right, power, or
privilege hereunder shall operate as a waiver nor shall any single or partial
exercise preclude any other or further exercise or the exercise of any other
right, power or privilege. The rights and remedies of the Parties shall be
cumulative and not exclusive of any rights or remedies provided by Law.
SECTION 10.5. Fees and Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the Party incurring such cost or
expense.
SECTION 10.6. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the Parties and their
respective successors and assigns, provided that no Party may assign, delegate,
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other Parties hereto except that Sub-1 or Sub-2 may
transfer or assign, in whole or from time to time in part, to one or more of its
Affiliates, its rights under this Agreement, but any such transfer or assignment
will not relieve Sub-1 or Sub-2, as the case may be, of any of its obligations
under this Agreement or prejudice the rights of any Person to receive the
appropriate Merger Consideration contemplated by this Agreement. This Agreement
shall not be construed so as to confer any right or benefit upon any Person
other than the Parties to this Agreement and their respective successors and
assigns.
SECTION 10.7. Governing Law. Regardless of the place or places where this
Agreement may be executed, delivered or consummated, this Agreement shall be
governed by and construed in accordance with the Laws of the State of Delaware,
without regard to any applicable conflicts of Laws.
SECTION 10.8. Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, then the provision shall be
interpreted to be only so broad as is enforceable.
SECTION 10.9. Interpretations. Neither this Agreement nor any uncertainty
or ambiguity shall be construed or resolved against any Party, whether under any
rule of construction or otherwise. No Party to this Agreement shall be
considered the drafter. The Parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all Parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all the
Parties.
SECTION 10.10. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures were upon the same instrument. This Agreement shall
become effective when each Party has received a counterpart signed by all of the
other Parties.
SECTION 10.11. Construction. When a reference is made in this Agreement
to a Section or Exhibit, such reference shall be to a Section of, or an Exhibit
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. The words
"include," "includes" and "including", as
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used in this Agreement, shall be deemed to be followed by the phrase "without
limitation." Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "herein," "hereof"
and "hereunder" and words of similar import as used herein refer to this
Agreement in its entirety and not to any part hereof unless the context shall
otherwise require.
IN WITNESS WHEREOF, the Parties has caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the day and year first above written.
WAXS INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its:
------------------------------------
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its:
------------------------------------
WAXS ACQUISITION CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its:
------------------------------------
NACT TELECOMMUNICATIONS, INC.
By: /s/ A. LINDSAY WALLACE
------------------------------------
Its:
------------------------------------
NACT ACQUISITION CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its:
------------------------------------
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EXHIBIT A
AFFILIATE AGREEMENT
WAXS Inc.
945 E. Paces Ferry Road, Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
Gentlemen:
The undersigned is a stockholder of ("Target"),
a corporation organized under the laws of the State of Delaware, and will become
a stockholder of WAXS Inc. ("Holdco") pursuant to the transactions described in
the Agreement and Plan of Merger and Reorganization, dated as of February ,
1988 (the "Agreement"), by and among Target, Holdco and certain affiliated
parties. Under the terms of the Agreement, a subsidiary of Holdco will be merged
with and into Target (the "Merger"), with Target becoming a wholly-owned
subsidiary of Holdco, and the shares of the $.01 par value common stock of
Target ("Target Common Stock") will be converted into and exchanged for shares
of the $.01 par value common stock of Holdco ("Holdco Common Stock"). This
Affiliate Agreement represents an agreement between the undersigned and Holdco
regarding certain rights and obligations of the undersigned in connection with
the shares of Holdco Common Stock to be received by the undersigned as a result
of the Merger.
In consideration of the Merger and the mutual covenants contained herein,
the undersigned and Holdco hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that as
to Target the undersigned is an "affiliate" under Rule 145(c) as defined in
Rule 405 of the Rules and Regulations of the Securities and Exchange
Commission ("SEC") promulgated under the Securities Act of 1933, as amended
("1933 Act"), and the undersigned anticipates that the undersigned will be
such an "affiliate" at the time of the Merger.
2. Covenants and Warranties of Undersigned. The undersigned
represents, warrants and agrees that:
(a) The Holdco Common Stock received by the undersigned as a result
of the Merger will be taken for the undersigned's own account and not
for others, directly or indirectly, in whole or in part.
(b) Holdco has informed the undersigned that any distribution by
the undersigned of Holdco Common Stock has not been registered under the
1933 Act and that shares of Holdco Common Stock received pursuant to the
Merger can only be sold by the undersigned (i) following registration
under the 1933 Act, or (ii) in conformity with the volume and other
requirements of Rule 145(d) promulgated by the SEC as the same now exist
or may hereafter be amended, or (iii) to the extent some other exemption
from registration under the 1933 Act might be available. The undersigned
understands that Holdco is under no obligation to file a registration
statement with the SEC covering the disposition of the undersigned's
shares of Holdco Common Stock.
3. Restrictions on Transfer.
(a) The undersigned understands and agrees that stop transfer
instructions with respect to the shares of Holdco Common Stock received
by the undersigned pursuant to the Merger will be given to Holdco's
Transfer Agent and that there will be placed on the certificates for
such shares, or shares issued in substitution thereof, a legend stating
in substance:
"The shares represented by this certificate may not be sold,
transferred or otherwise disposed of except or unless (i) covered by
an effective registration statement under the Securities Act of 1933,
as amended, (ii) in accordance with (x) Rule 145(d) (in the case of
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shares issued to an individual who is not an affiliate of the issuer)
or (y) Rule 144 (in the case of shares issued to an individual who is
an affiliate of the issuer) of the Rules and Regulations of such Act,
or (iii) in accordance with a legal opinion satisfactory to counsel
for the issuer that such sale or transfer is otherwise exempt from
the registration requirements of such Act."
(b) Such legend will also be placed on any certificate representing
Holdco securities issued subsequent to the original issuance of the
Holdco Common Stock pursuant to the Merger as a result of any stock
dividend, stock split, or other recapitalization as long as the Holdco
Common Stock issued to the undersigned pursuant to the Merger has not
been transferred in such manner to justify the removal of the legend
therefrom. If the provisions of Rules 144 and 145 are amended to
eliminate restrictions applicable to the Holdco Common Stock received by
the undersigned pursuant to the Merger, or at the expiration of the
restrictive period set forth in Rule 145(d), Holdco, upon the request of
the undersigned, will cause the certificates representing the shares of
Holdco Common Stock issued to the undersigned in connection with the
Merger to be reissued free of any legend relating to the restrictions
set forth in Rules 144 and 145(d) upon receipt by Holdco of an opinion
of its counsel to the effect that such legend may be removed.
4. Understanding of Restrictions on Dispositions. The undersigned has
carefully read the Agreement and this Affiliate Agreement and discussed
their requirements and impact upon the undersigned's ability to sell,
transfer, or otherwise dispose of the shares of Holdco Common Stock
received by the undersigned in connection with the Merger, to the extent
the undersigned believes necessary, with counsel for the undersigned or for
Target.
5. Filing of Reports by Holdco. Holdco agrees, for a period of two
years after the effective date of the Merger, to file on a timely basis all
reports required to be filed by it pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), so that the public
information provisions of Rule 145(d) promulgated by the SEC, as the same
are presently in effect, will be available to the undersigned in the event
the undersigned desires to transfer any shares of Holdco Common Stock
issued to the undersigned pursuant to the Merger.
6. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of Holdco Common Stock received by the
undersigned in connection with the Merger at any time during the
restrictive period set forth in Rule 145(d), the undersigned will provide
the necessary representation letter to the Transfer Agent for Holdco Common
Stock, together with such additional information as the Transfer Agent may
reasonably request. If Holdco's counsel concludes that such proposed sale
or transfer complies with the requirements of Rule 145(d), Holdco shall
cause such counsel, at Holdco's expense, to provide such opinions as may be
necessary to Holdco's Transfer Agent so that the undersigned may complete
the proposed sale or transfer.
7. Acknowledgments. The undersigned recognizes and agrees that the
foregoing provisions also apply with respect to Target Common Stock held
by, and Holdco Common Stock issued in connection with the Merger to, (a)
the undersigned's spouse, (b) any relative of the undersigned or of the
undersigned's spouse who has the same home as the undersigned, (c) any
trust or estate in which the undersigned, the undersigned's spouse, and any
such relative collectively own at least a 10% beneficial interest or of
which any of the foregoing serves as trustee, executor or in any similar
capacity, and (d) any corporation or other organization in which the
undersigned, the undersigned's spouse and any such relative collectively
own at least 10% of any class of equity securities or of the equity
interest. The undersigned further recognizes that, in the event that the
undersigned is a director or executive officer of Holdco or becomes a
director or executive officer of Holdco upon consummation of the Merger,
then, among other things, any sale of Holdco Common Stock by the
undersigned within a period of less than six months following the effective
time of the Merger may subject the undersigned to liability pursuant to
Section 16(b) of the 1934 Act.
8. Miscellaneous. This Affiliate Agreement is the complete agreement
between Holdco and the undersigned concerning the subject matter hereof.
Any notice required to be sent to any party hereunder shall be sent by
registered or certified mail, return receipt requested, using the addresses
set forth herein
A-22
<PAGE> 160
or such other address as shall be furnished in writing by the parties. This
Affiliate Agreement shall be governed by the laws of the State of Delaware.
This Affiliate Agreement is executed as of the day of ,
1998.
Very truly yours,
--------------------------------------
Signature
--------------------------------------
Print Name
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Address
--------------------------------------
Telephone No.
AGREED TO AND ACCEPTED as of
1998
- --------------------------------,
WAXS INC.
By:
----------------------------------
Its:
----------------------------------
A-23
<PAGE> 161
APPENDIX A-1
<PAGE> 162
APPENDIX A-1
FIRST AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS FIRST AMENDMENT (the "Amendment") to the Agreement and Plan of Merger
and Reorganization (the "Merger Agreement;" capitalized terms used but not
defined herein shall have the meanings ascribed to them therein), dated as of
the 24th day of February, 1998, by and among WAXS INC., a Delaware corporation
and a direct wholly-owned subsidiary of World Access, Inc. ("Holdco"), WORLD
ACCESS, INC., a Delaware corporation ("World Access"), WAXS ACQUISITION CORP., a
Delaware corporation and a direct wholly-owned subsidiary of Holdco ("Sub-1"),
NACT TELECOMMUNICATIONS, INC., a Delaware corporation ("NACT"), and NACT
ACQUISITION CORP., a Delaware corporation and a direct wholly-owned subsidiary
of Holdco ("Sub-2"), is made as of the 30th day of June, 1998 by and among
Holdco, World Access, Sub-1, Sub-2 and NACT.
WITNESSETH:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendments to Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Section 1.4 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"SECTION 1.4 Charter and Bylaws. At the Effective Time: (i) with
respect to the World Access Merger, the certificate of incorporation and
bylaws of World Access shall be amended at the Effective Time as set
forth on Schedules 1.4(a) and (b), respectively, and, as so amended,
shall be the certificate of incorporation and bylaws of the World Access
Surviving Corporation until further amended as provided therein and in
accordance with applicable Law; and (ii) with respect to the NACT
Merger, the certificate of incorporation and bylaws of Sub-2, as in
effect on the date hereof and otherwise amended prior to the Effective
Time, shall be the certificate of incorporation and bylaws of the NACT
Surviving Corporation until further amended as provided therein and in
accordance with applicable Law. The certificate of incorporation of
Holdco as in effect immediately prior to the Effective Time shall be
amended immediately following the Effective Time so that Article I
thereof reads in its entirety as follows: "The name of the Corporation
is "World Access, Inc." and, as so amended, such certificate of
incorporation shall be the certificate of incorporation of Holdco until
further amended as provided therein and in accordance with applicable
Law."
(b) Section 2.2(b) of the Merger Agreement is hereby amended and
restated in its entirety as follows:
"(b) subject to Section 2.3 hereof, each share of NACT Stock
outstanding immediately prior to the Effective Time (other than shares
of NACT Common Stock held by World Access which shall remain outstanding
and unaffected by the NACT Merger) shall be canceled and converted
solely into the right to receive and become exchangeable for that number
of shares of Holdco Stock equal to the quotient of (x) $17.50 divided by
(y) the Closing Date Market Price (the "Exchange Ratio"); provided,
however, that (i) if the Closing Date Market Price is less than $20.88,
then World Access may terminate this Agreement by delivering notice of
termination to NACT in the manner contemplated by Section 10.2 hereof,
and (ii) if the Closing Date Market Price is more than $25.52, then the
Exchange Ratio shall be equal to 0.6857 (the number of shares of Holdco
Stock into which each share of NACT Stock shall be convertible pursuant
to this Section 2.2(b) is hereinafter referred to as the "NACT
Consideration"); and"
A-1-1
<PAGE> 163
(c) Article 2 of the Merger Agreement is hereby amended by adding the
following Section 2.6 immediately following Section 2.5 thereof:
"SECTION 2.6 Conversion of Holdco Common Stock. At the Effective
Time, each share of Holdco Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the
right to receive cash equal to the fair market thereof as agreed upon by
World Access and Holdco."
(d) Section 9.1(b) of the Merger Agreement is hereby amended by
changing the date of August 1, 1998 set forth therein to October 1, 1998.
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Amendment are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Amendment.
SECTION 4. Counterparts. This Amendment may be executed simultaneously in
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties has caused this Amendment to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the day and year above written.
WAXS INC.
By: /s/ M. A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
WORLD ACCESS, INC.
By: /s/ M. A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
WAXS ACQUISITION CORP.
By: /s/ M. A. GERGEL
------------------------------------
Its: VP & TREASURER
------------------------------------
NACT TELECOMMUNICATIONS, INC.
By: /s/ P. LINDSAY WALLACE
------------------------------------
Its:
------------------------------------
NACT ACQUISITION CORP.
By: /s/ M. A. GERGEL
------------------------------------
Its: VP & TREASURER
------------------------------------
A-1-2
<PAGE> 164
APPENDIX A-2
<PAGE> 165
APPENDIX A-2
SECOND AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS SECOND AMENDMENT (the "Amendment") to the Agreement and Plan of Merger
and Reorganization, dated as of the 24th day of February, 1998, as amended by
the First Amendment thereto dated as of June 30, 1998 (as so amended, the
"Merger Agreement;" capitalized terms used but not defined herein shall have the
meanings ascribed to them therein), by and among WAXS INC., a Delaware
corporation and a direct wholly-owned subsidiary of World Access, Inc.
("Holdco"), WORLD ACCESS, INC., a Delaware corporation ("World Access"), WAXS
ACQUISITION CORP., a Delaware corporation and a direct wholly-owned subsidiary
of Holdco ("Sub-1"), NACT TELECOMMUNICATIONS, INC., a Delaware corporation
("NACT"), and NACT ACQUISITION CORP., a Delaware corporation and a direct
wholly-owned subsidiary of Holdco ("Sub-2"), is made as of the 18th day of
September, 1998, by and among Holdco, World Access, Sub-1, Sub-2 and NACT.
W I T N E S S E T H:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendment to Merger Agreement. Section 9.1(b) of the Merger
Agreement is hereby amended by changing the date of October 1, 1998 set forth
therein to December 31, 1998.
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Amendment are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Amendment.
SECTION 4. Counterparts. This Amendment may be executed simultaneously in
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
A-2-1
<PAGE> 166
IN WITNESS WHEREOF, the Parties has caused this Amendment to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the day and year above written.
WAXS INC.
By: /s/ M.A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
WORLD ACCESS, INC.
By: /s/ M.A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
WAXS ACQUISITION CORP.
By: /s/ M.A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
NACT TELECOMMUNICATIONS, INC.
By: /s/ ERIC F. GURR
------------------------------------
Its: Chief Financial Officer
------------------------------------
NACT ACQUISITION CORP.
By: /s/ M.A. GERGEL
------------------------------------
Its: EVP & CFO
------------------------------------
A-2-2
<PAGE> 167
APPENDIX B
<PAGE> 168
APPENDIX B
February 24, 1998
Independent Committee of the Board of Directors
NACT Telecommunications, Inc.
191 West 5200 North
Provo, UT 84604
Gentlemen:
We understand NACT Telecommunications, Inc., a Delaware corporation
("Seller"), and World Access, Inc., a Delaware corporation ("Buyer"), propose to
enter into an Agreement and Plan of Merger and Reorganization, dated February
24, 1998, a draft of which has been provided to us by management of Seller (the
"Merger Agreement"), pursuant to which a wholly-owned subsidiary of Buyer will
be merged with and into Seller, which will be the surviving entity (the
"Merger"). Pursuant to the Merger, as more fully described in the Merger
Agreement and as further described to us by management of Seller, we understand
that each outstanding share of the common stock, $.01 par value per share
("Seller Common Stock"), of Seller not owned by Buyer will be converted into and
exchangeable for shares of the common stock, $.01 par value per share ("Buyer
Common Stock"), of Buyer having a value of $17.50 per share based on the Closing
Date Market Price as defined in the Merger Agreement, subject to a collar
described in Section 2.2(b) of the Merger Agreement (the "Consideration"). We
understand that immediately prior to the Merger Buyer will own approximately
67.3% of the outstanding shares of Seller Common Stock. The terms and conditions
of the Merger are set forth in more detail in the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the stockholders of Seller (other than Buyer)
pursuant to the Merger is fair to such stockholders from a financial point of
view, as of the date hereof. As you are aware, we were not retained to nor did
we advise Seller with respect to alternatives to the Merger or Seller's
underlying decision to proceed with or effect the Merger. Further, we were not
requested to nor did we solicit or assist Seller in soliciting indications of
interest from third parties for all or any part of Seller.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to Seller and Buyer,
including the consolidated financial statements for recent years and interim
periods to December 31, 1997 with respect to Seller and to September 30, 1997
with respect to Buyer, and certain other relevant financial and operating data
relating to Seller and Buyer made available to us from published sources and
from the internal records of Seller and Buyer; (ii) reviewed the financial terms
and conditions of the draft Merger Agreement; (iii) reviewed certain publicly
available information concerning the trading of, and the trading market for,
Seller Common Stock and Buyer Common Stock; (iv) compared Seller from a
financial point of view with certain other companies in the voice switching and
other enhanced voice applications industries which we deemed to be relevant; (v)
compared Buyer from a financial point of view with certain other companies in
the transmission and switching, wireline access and wireless access industries
which we deemed to be relevant; (vi) considered the financial terms, to the
extent publicly available, of selected recent business combinations of companies
in the voice switching and other enhanced voice applications industries which we
deemed to be comparable, in whole or in part, to the Merger; (vii) considered
the premiums paid in comparable public market acquisitions of selected
businesses within the technology industry; (viii) considered the premiums paid
in acquisitions of the remaining publicly-held minority interests by the
majority interest holder; (ix) reviewed and discussed with representatives of
the management of Seller and Buyer certain information of a business and
financial nature regarding Seller and Buyer, furnished to us by them, including
financial forecasts and related assumptions of Seller and Buyer; (x) made
inquiries regarding and discussed the Merger and the draft Merger Agreement and
other matters related thereto with Seller's and Buyer's counsel; and (xi)
performed such other analyses and examinations as we have deemed appropriate.
B-1
<PAGE> 169
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller and Buyer provided to us by their respective managements,
upon their advice and with your consent we have assumed for purposes of our
opinion that the forecasts (including the assumptions regarding operating
synergies) have been reasonably prepared on bases reflecting the best available
estimates and judgments of their respective managements at the time of
preparation as to the future financial performance of Seller and Buyer and that
they provide a reasonable basis upon which we can form our opinion. We have also
assumed that there have been no material changes in Seller's or Buyer's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements made available to us. We
have relied on advice of counsel and independent accountants to Seller as to all
legal and financial reporting matters with respect to the Merger and the Merger
Agreement. We have assumed that the Merger will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934 and
all other applicable federal and state statutes, rules and regulations. In
addition, we have not assumed responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of Seller or Buyer, nor have we been furnished with
any such appraisals. You have informed us, and we have assumed, that the Merger
will be recorded as a purchase under generally accepted accounting principles.
Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise or reaffirm this
opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Seller of any of
the conditions to its obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of Seller and Buyer for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have also acted as an underwriter in connection with
offerings of securities of Seller.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the stockholders of
Seller (other than Buyer) pursuant to the Merger is fair to such stockholders
from a financial point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the Buyer
Common Stock may trade at any future time. The Consideration to be received by
the shareholders of Seller pursuant to the Merger is based upon an exchange
ratio determined on the basis of the market price for Buyer's common stock prior
to the closing subject to a collar, and, accordingly, the market value of the
Consideration may vary significantly.
This opinion is directed to the Independent Committee of the Board of
Directors of Seller in its consideration of the Merger and is not a
recommendation to any stockholder as to how such stockholder should vote with
respect to the Merger. Further, this opinion addresses only the financial
fairness of the Consideration to be received by stockholders of Seller and does
not address the relative merits of the Merger and any alternatives to the
Merger, Seller's underlying decision to proceed with or affect the Merger or any
other aspect of the Merger. This opinion may not be used or referred to by
Seller, or quoted or disclosed to any person in any manner, without our prior
written consent, which consent is hereby given to the inclusion of this opinion
in any proxy statement or prospectus filed with the Securities and Exchange
Commission in connection with the Merger. In furnishing this opinion, we do not
admit that we are experts within the meaning of the term "experts" as used in
the Securities Act and the rules and regulations promulgated thereunder, nor do
we admit that this opinion constitutes a report or valuation within the meaning
of Section 11 of the Securities Act.
Very truly yours,
NATIONSBANC MONTGOMERY
SECURITIES LLC
B-2
<PAGE> 170
APPENDIX C
<PAGE> 171
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
AS AMENDED ON APRIL 27, 1998
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 0-19998
WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
<TABLE>
<S> <C>
945 EAST PACES FERRY ROAD, SUITE 2240
ATLANTA, GA 30326
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (404) 231-2025
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendments to
this Form 10-K. [ ]
As of April 13, 1998 there were 21,500,280 shares of Common Stock
outstanding. The aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant as of April 13, 1998, as based on the average
closing bid and ask prices, was approximately $605,240,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
are incorporated into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 172
WORLD ACCESS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I
Item 1 Business.................................................... C-1
Item 2 Properties.................................................. C-9
Item 3 Legal Proceedings........................................... C-9
Item 4 Submission of Matters to a Vote of Security Holders......... C-10
Item 4.5 Executive Officers of the Registrant........................ C-10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... C-11
Item 6 Selected Financial Data..................................... C-12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... C-13
Item 7A Quantitative and Qualitative Disclosures about Market
Risks....................................................... C-23
Item 8 Financial Statements........................................ C-24
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... C-48
PART III
Item 10 Directors and Executive Officers of the Registrant.......... C-48
Item 11 Executive Compensation...................................... C-49
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. C-54
Item 13 Certain Relationships and Related Transactions.............. C-55
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... C-56
</TABLE>
C-i
<PAGE> 173
FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate. Factors that could cause actual results to differ
from the results discussed in the forward-looking statements include, but are
not limited to, the Company's dependence on recently introduced products and
products under development, successful integration of new acquisitions,
competition and the impact of technological change on the Company's products. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The Company's products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. The Company offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. The products offered by the
Company include those manufactured by the Company as well as those manufactured
by other telecommunications equipment companies. To support and complement its
product sales, the Company also provides its customers with a broad range of
design, engineering, manufacturing, testing, installation, repair and other
value-added services.
INDUSTRY BACKGROUND
The global telecommunications industry has undergone significant
transformation and growth in recent years due to continued domestic
deregulation, technological innovation and growth in international markets. In
addition, business and residential demand for voice, data and video services has
increased the need for additional systems capacity and network bandwidth to
accommodate the provision of such services by telecommunications providers. The
Company believes that these market forces will intensify in the foreseeable
future and that an increased number of telecommunications service providers, the
availability of new services and strong international demand for the deployment
of basic telephone service will provide the Company with extensive opportunities
to sell its wireline and wireless switching, transport and access products in
the United States and in international markets.
Domestic Deregulation. The number of telecommunications service providers
continues to increase as a result of the federal and state deregulation of the
United States telecommunications industry. Changes in federal and state
regulations have created the opportunity for a number of new network operators
to enter the market and have fostered competition between both new and
established network operators. The Telecommunications Act of 1996 permits local
and long distance telecommunications companies, cable television companies and
electric utility companies, subject to certain conditions designed to facilitate
local exchange competition, to compete with each other to provide local and long
distance telephony, data and video services. This Act has also contributed to an
increasing number of mergers and acquisitions among large telecommunications
service providers. As a result, certain providers have changed key network
technology already in place to optimize efficiency and network compatibility.
C-1
<PAGE> 174
To accommodate the demand for enhanced wireless services, the Federal
Communications Commission (the "FCC") auctioned additional spectrum licenses for
wireless communications in recent years, potentially increasing the number of
operators competing in each metropolitan statistical area from two to eight. In
addition, the FCC has announced plans to auction additional spectrum in the
future. Changes in FCC and certain state public utility commission regulations
governing interconnections have created opportunities for the Regional Bell
Operating Companies ("RBOCS") and other local exchange carriers to provide
services in markets and geographic regions in which they traditionally have been
prohibited. In addition, such changes have allowed local exchange carriers,
inter-exchange carriers, competitive access providers, cable television
companies and other telecommunications service providers to enter these same
markets and regions. The Company believes that the Telecommunications Act of
1996, together with FCC and other government initiatives, will increase the
demand for telecommunications systems and services as network operators respond
to the changing competitive environment by constructing new or enhancing
existing networks and increasing the available bandwidth to meet customer demand
for voice, data and video services.
Technological Innovation. In recent years, there have been a number of
significant developments relating to telecommunications technology, including
the continuing miniaturization of large scale integrated circuits, the
development of lower cost, higher capacity memory devices and microprocessors
and new network protocols such as spread spectrum Code Division Multiple Access
("CDMA"), which are now available to offer improved performance and increased
security. These developments have lowered the cost of delivering multifunctional
services combining voice, data and video. In addition, new low cost, modular,
software-driven products (so-called "intelligent" products) can be readily
upgraded to provide additional revenue generating features such as call waiting,
call forwarding and caller-ID without having to undertake costly hardware
replacement. Moreover, the increasing use of wireless systems and technology
permits the more rapid deployment of telecommunications systems at lower costs
than traditional wireline networks.
These technological advances make it possible for products to facilitate
the delivery of telecommunications services and create new network configuration
options. For example, Integrated Services Digital Network ("ISDN") service
allows for the dynamic allocation of bandwidth between, and simultaneous
transmission of, any combination of voice, data and video, and individual call
set-up permits users to easily designate and change the service configuration.
Other new advanced technologies include Asymmetrical Digital Subscriber Line
("ADSL"), a communications technology which permits the transmission of
information at rates up to 50 megabits per second over existing copper wires,
and High-Speed Digital Subscriber Line ("HDSL"), a communications technology
which permits the digital transmission of information over longer distances
without adding signal regenerator equipment. These new technologies create
additional demands for switching systems, intelligent multiplexers and digital
loop carriers. In addition, cable television companies are beginning to expand
beyond one-way broadcast to provide interactive services using high-speed cable
modems and have announced plans to provide telephony and high speed data
services.
Growth in International Markets. The Company believes that international
markets represent significant opportunities for growth, particularly in Latin
America, the Caribbean Basin and other developing areas. According to industry
sources, a small percentage of businesses and residences throughout Latin
America have basic telephone service. In addition, advances in radio and antenna
technology make it feasible to provide basic communications access with wireline
quality without the construction cost and obstacles associated with establishing
a wireline grid, thereby further encouraging the deployment of
telecommunications networks in developing countries. The governments of a number
of developed and developing countries have privatized their state-owned
telecommunications service providers and have granted licenses to new network
operators to compete with them. In most instances, as part of the privatization,
these governments have imposed service requirements on all network operators,
resulting in an acceleration of capital expenditures on new or expanded network
systems.
PRODUCTS AND SERVICES
The Company offers wireline and wireless switching, transport and access
products for the global telecommunications marketplace. These products allow
telecommunications service providers to build and upgrade their networks to
provide a wide range of voice, data and video services to business and
residential
C-2
<PAGE> 175
customers. To date, a significant portion of the products sold by the Company
has been Northern Telecom switching products and reengineered cellular base
stations and related mobile network equipment. Through acquisitions, technology
license agreements and internal development, the Company expects to manufacture
an increasing proportion of its products in the future.
Switching Products. The Company markets digital telephone switching
products that are used for local, tandem, toll and cellular applications. The
switches offered by the Company have line capacities ranging from 100 to 120,000
subscribers and 30 to 60,000 inter-exchange trunks. Switching products
historically offered by the Company have been primarily developed and
manufactured by other telecommunications equipment companies, including Northern
Telecom and Lucent Technologies. These products include complete switching
systems as well as add-on frames, line cards and modified circuit boards for
either newly constructed networks or upgrades to existing networks.
Pursuant to a long-term technology license agreement, the Company
manufactures and markets the Compact Digital Exchange Switch ("CDX"), a
microprocessor-based, modular, digital central office switch. The CDX utilizes
extensive large scale integrated circuit technology to provide advanced
telephony services such as call waiting, call forwarding and conference calling,
and requires reduced power and floorspace compared with alternative products.
The current switch serves applications up to 5,000 subscriber lines and is
designed to be expandable to over 60,000 lines through future software
enhancements. The CDX is targeted for use in the international marketplace due
to its compatibility with international standards, "plug and play" installation
features and tolerance of a wide range of environmental conditions.
With the Company's acquisition of a majority stake in NACT
Telecommunications, Inc. ("NACT") in the first quarter of 1998 (see "Note N to
the Consolidated Financial Statements"), the Company has significantly expanded
its offering of proprietary, advanced technology switching products and software
applications.
NACT's STX Switching System ("STX") consists of an integrated application
switching platform and a suite of applications software. The Company sells an
optional companion Master Control Unit ("MCU") to integrate and service multiple
STXs and to add redundancy to the network. The Company believes that the STX
offers value added features and capacity at price points typically below those
offered by its competitors. The STX hardware platform can operate on a
standalone basis with a port capacity of 1,344. An optional MCU can link up to
three STXs, which can be served by a common database for a total system capacity
of 4,032 ports. The STX is also designed to work seamlessly with NACT's NTS 1000
billing system.
NACT's suite of STX applications software consists of over one million
lines of code. This software supports major application features that are fully
integrated and interoperable. The major applications features include: equal
access calling (1+), automated operator (0+), live operator service provider
support (0-), real-time validation of credit card and billing numbers, prepaid
debit cards, prepaid cellular, international call back, phone centers, real-time
rating, fraud minimization, external computer application programming
interfaces, call reorigination, and integrated audio with twenty two languages.
Interoperability enables several applications packages to be used in conjunction
with each other. Almost all features are implemented in software, allowing
unlimited capability for enhancement and customization.
The NTS 1000 Billing System ("NTS 1000") is a call rating, accounting,
switch management, invoicing and traffic engineering system designed to process
the day-to-day operations of a small-to-medium sized long distance company. The
NTS 1000 can collect calls from most major switching platforms, including the
STX, and can rate all types of call traffic and, using a sophisticated rating
engine, provide the owner with a highly flexible and completely customized
rating capability. The accounting system handles all of the required information
for managing a long distance customer base including configuration of
authorization codes, accounts receivable, and management of delinquent accounts.
A major feature of the NTS 1000 is its switch management capability. When
coupled with the STX, information that has been entered into the NTS 1000 can be
electronically transferred into the STX, thereby minimizing data entry needs.
The NTS 1000 also has complete international call back/reorigination and prepaid
debit card management support, as well as a complete invoicing package that
supports multiple invoice styles and options for summary reports. It has a
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sophisticated traffic engineering reporting package that provides the ability to
generate over 20 types of reports with a user specified beginning and ending
time range.
Current users of the Company's switching products are primarily local
exchange carriers, inter-exchange carriers, competitive access providers,
private network operators and other telecommunications service providers. The
Company intends to expand its United States customer base for switching products
and to actively market the CDX to public and private network providers in Latin
America and other international markets.
Transport Products. The Company develops, manufactures and markets a
variety of wireline and wireless transport products, which are used for
high-capacity connectivity between points within a communications network. These
products are primarily digital and provide for the movement of any combination
of voice, data and video traffic across wireline or wireless media. The
Company's transport products include intelligent multiplexers (devices which
combine or aggregate several channels or linkages carrying voice or data signals
into a higher speed link), protection switching equipment (which protect voice
and data links against failure by rerouting circuits to maintain continuity),
mini-repeater housings (enclosures used to protect electronic repeaters from the
elements), asynchronous and fractional data cards, microwave and millimeterwave
radio equipment and sophisticated high speed modems used to carry voice and data
in wireline or wireless networks.
The Company's T-1 multiplexers include features such as local and remote
loopbacks, built-in bit error rate detection, line code selection and built-in
performance monitoring. The Company has recently developed and is currently
testing an E-1 multiplexer designed for the international markets. This new
proprietary product can combine 60 channels of voice and data into a single E-1
circuit.
With the Company's acquisition of Advanced TechCom, Inc. ("ATI") in the
first quarter of 1998 (see "Note N to the Consolidated Financial Statements"),
the Company has significantly expanded its offering of proprietary, advanced
technology wireless voice, data and/or video transport products.
ATI develops, manufacturers and markets a complete family of high
performance, technologically advanced digital radios for point-to-point
transmission of data and voice for short and long haul applications. The
majority of ATI's historical sales have been to customers operating outside the
United States. ATI's product lines are offered in a wide range of data rates and
frequency bands, including 1.5 GHz to 38 GHz and DS1/E1 to DS3/E3.
Current users of the Company's transport products are primarily an RBOC and
private network users. The Company intends to expand its current customer base
for transport products by broadening the features of its current products,
increasing its marketing efforts in the United States and developing new
products for the emerging international markets.
Access Products. The Company offers access products for the local loop
(i.e., that portion of the public telecommunications network which extends from
the service provider's switch to the individual home or business end-user). With
the acquisition of Cellular Infrastructure Supply, Inc. ("CIS") in the first
quarter of 1997, the Company also offers its customers cellular base stations
and related mobile network equipment. Although substantially all of the
equipment sold by CIS is manufactured by other telecommunications equipment
companies, CIS provides a full range of highly technical, value-added services
such as deinstallation, system design, equipment tuning and installation.
In the first quarter of 1997, the Company released a new internally
developed access product, the WX-5501 Remote POTS/Remote Universal Voice Grade
("RPOT/RUVG") line card. The WX-5501 is compatible with the Lucent Technologies
SLC(R) Series 5 subscriber loop carrier system, which is widely deployed in
telephone networks across the United States.
In the second quarter of 1997, the Company introduced its Wireless Local
Loop 2000 ("WLL-2000"), a fixed wireless point-to-multipoint system offering
toll quality telephone service to subscribers in urban and suburban areas and
remote communities. To take advantage of existing market opportunities, the
Company reached an agreement in 1997 with another telecommunications equipment
company to private label its point-
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to-multipoint radio system and exclusively market it within certain Latin
American countries. The current WLL-2000 integrates the Company's CDX and the
private label radio. The integrated switch provides customers with the ability
to switch local calls at the WLL-2000 base station, thus providing superior
service and reducing expensive back-haul costs to a central office. The CDX and
WLL-2000 for the first time provide the Company with an integrated family of
proprietary switching and wireless access products for the international market.
In 1997, the Company also executed a technology licensing agreement that
grants the Company the perpetual right to incorporate spread spectrum CDMA-based
wireless technology into the Company's products sold throughout the world. Under
the terms of the agreement, the Company also has the rights to use the
technology covered by seven patents, all of which address digital data signals
and wireless communication systems. The Company currently intends to use this
technology as the platform for several new products.
As a result of the acquisition of Comtech Sunrise, Inc. ("Sunrise") in
1996, the Company manufactures and markets a digital loop carrier (which permits
network operators to provide more reliable, basic and enhanced services at a
lower cost) and DS-3 telemetry equipment (used primarily by the military for
range communications applications to multiplex telemetry, digital video, T-1,
LAN, WAN and other signals into a DS-3 signal transmitting at 45 megabits per
second). The Company has recently developed and is currently testing a
commercial version of its DS-3 product, the Ultra-45. This advanced multiplexer
provides a solution for current and future telecommunications applications
requiring simultaneous delivery of high speed data, video, LAN, voice and
telemetry services.
Current users of the Company's access products are primarily local exchange
carriers, inter-exchange carriers, competitive access providers, cable
television companies and the United States military. The Company intends to
expand its current customer base for access products by broadening the features
of its current products, increasing its marketing efforts in the United States
and developing new products for emerging international markets.
Related Services. The Company offers a full range of complementary design,
manufacturing, installation, testing and repair services. The Company also
offers its customers ongoing systems maintenance and monitoring services,
including asset management services, which allow customers to reduce their
investment in spare and surplus plug-in circuit boards by relying on the
Company's inventories and management information systems. By providing these
services, the Company believes it is better able to offer its customers more
comprehensive telecommunications solutions.
The Company repairs a broad range of switching and transmission plug-in
circuit boards originally manufactured by other telecommunications equipment
companies. The Company's wireless equipment repair business consists principally
of the repair and upgrade of amplitude modulation equipment typically used by
cable television companies. The Company's engineers also provide customers with
a full range of support services for wireless transmission equipment, including
system design, site survey, path calculations, installation and maintenance.
In the third quarter of 1997, the Company completed its acquisition of
Galaxy Personal Communications Services, Inc. ("Galaxy"), a provider of system
design, implementation, optimization and other value-added radio engineering and
consulting services to PCS, cellular and other wireless telecommunications
service companies. The background and experience of Galaxy's management and
staff of RF engineers will be utilized to support the Company's customers as
they build new, or upgrade existing, telecommunications networks throughout the
world.
Other Products and Services. The Company's other products and services
include the refurbishment and upgrade of AT&T pay telephones to like-new
condition and the sale of related pay telephone products, such as stainless
steel custom logo vault doors, handsets and dial assemblies. To date,
substantially all of these refurbishment services and product sales have been
provided to four RBOCs.
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SALES AND MARKETING
As of April 13, 1998, the Company's domestic sales and marketing group
consisted of 51 sales professionals and assistants who are divided into
individual sales and marketing teams for each of the Company's product lines and
related services. Each team is responsible for obtaining a thorough technical
knowledge of its products or services, soliciting new customers and maintaining
relationships with existing customers. Each team is supervised at the corporate
level by the Company's Executive Vice President of Business Development, who
coordinates the sales and marketing of multi-product line sales and is
responsible for advertising, trade show appearances and other Company-wide
marketing efforts. In connection with the acquisitions completed during the last
few years, the Company has acquired product sales professionals who have brought
technical product knowledge and long-term customer relationships to the Company.
In 1996, the Company formed a dedicated international sales and marketing
group to pursue the sale of all of the Company's products and services outside
of the United States. With the acquisition of ATI, the Company's international
sales and marketing group has increased substantially. As of April 13, 1998,
this group consisted of 11 sales professionals and assistants. The Company has
an established network of independent agents and representatives covering the
Caribbean Basin and Latin America. These agents and representatives, whose
compensation consists primarily of commissions based on sales, actively promote
and market the Company's products and services and receive bid tenders issued
within their territory.
During 1997, the Company's international sales increased to approximately
11.3% of total Company sales as compared to 2.0% in 1996. The Company intends to
continue to focus significant sales and marketing efforts on emerging
international markets.
CUSTOMERS
The Company sells its products and services to over 200 telecommunication
service providers, including the RBOCs, other local exchange carriers,
inter-exchange carriers, wireless service providers, competitive access
providers, cable television companies and other telecommunications service
providers. The following table sets forth a representative list of the Company's
major customers and end-users.
<TABLE>
<CAPTION>
SWITCHING PRODUCTS TRANSPORT PRODUCTS ACCESS PRODUCTS SERVICES
------------------ ------------------ --------------- --------
<S> <C> <C> <C>
Ameritech ADC Telecom Ameritech Alltel
Cable & Wireless Lockheed-Martin Bell Atlantic Bell Atlantic
Frontier Communications Optel BellSouth BellSouth
NYNEX Pacific Bell Cellular One Century Telephone
Puerto Rico Telephone Comcast Cellular GTE
SBC Communications SNET Puerto Rico Telephone
Sprint Price Cellular SBC Communications
Teleglobe International US West
</TABLE>
For the year ended December 31, 1997, no customer of the Company
individually accounted for 10.0% of the Company's total sales. The Company's top
10 customers accounted for 44.2% of total sales. For the year ended December 31,
1996, Cable & Wireless accounted for 10.9% of the Company's total sales, and the
Company's top 10 customers accounted for 54.2% of total sales. The Company's
customers typically are not obligated contractually to purchase any quantity of
products or services in any particular period.
MANUFACTURING, ASSEMBLY AND TEST
The Company provides a broad range of electronic manufacturing, assembly
and test services to support its product sales. The majority of these support
services have been historically performed at the Company's Orlando, Florida
facility, where state-of-the-art manufacturing and test equipment is maintained.
Historically, this equipment has been used primarily to perform contract
manufacturing services for third parties, primarily to large technology
companies that require a high level of professional materials management,
quality "turn-key" manufacturing and complete electronic and functional product
testing. During 1997, the Company began
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utilizing the Company's manufacturing capacity to build new Company products as
well as servicing third party contract manufacturing customers.
As a result of the recent growth in sales of the Company's internally
developed products, including additional products from the acquisitions of NACT
and ATI, the Company is opening a new manufacturing facility in Alpharetta,
Georgia. The new Alpharetta manufacturing facility is expected to be fully
operational by the end of the second quarter of 1998. It is anticipated that the
existing Orlando facility will be closed during the second quarter as the
Company will no longer service third party contract manufacturing business.
The Company's new Alpharetta manufacturing operation will possess
state-of-the-art surface mount manufacturing and automated testing equipment.
This equipment includes a surface mount assembly line, including advanced
"pick-and-place" equipment and a 3-D vision screen printer. This equipment is
currently operating at less than 50% of the line's capacity. The Company has
also recently acquired new board test systems that provide for high performance,
automated testing of analog, digital, mixed signal and memory devices resident
on printed circuit boards. When combined with the Company's existing testing
equipment, the new equipment gives the Company an extensive software library and
technical capacity to test integrated circuits, capacitors, resistors and
related electronic components, and ensures the quality of electronic products
manufactured.
In addition to the relocation of its manufacturing facility, the Company is
also taking additional actions during the first half of 1998 to streamline
operations, improve efficiency and better service its customers. In the second
quarter of 1998, four facilities in Lakeland, Florida and the existing circuit
board repair operations in Orlando, Florida will move to a new facility in
Orlando. The Company's AIT operations, which include the testing of Northern
Telecom switching equipment and verification of the configuration and
integration of add-on frames and custom systems, and the Company's circuit board
repair business will be conducted in the new Orlando facility under one
management team.
At ATI's facility in Wilmington, Massachusetts, the Company utilizes
sophisticated RF test and tuning equipment to manufacture and service it
microwave radio systems. In the second quarter of 1998, the Company will
relocate its Westec operations from Scottsdale, Arizona to Wilmington to improve
operating efficiencies and reduce administrative costs.
NACT currently conducts its manufacturing operations consisting primarily
of final assembly, test and quality control of subassemblies and completed
systems, in its new manufacturing facility in Provo, Utah.
The Company has an experienced Director of Quality who, along with a staff
of quality assurance professionals, oversees the quality of the Company's
products and services. The Company's Orlando and Wilmington operations are ISO
9002 and ISO 9001 certified, respectively. The Company expects its Alpharetta
and Provo operations to become ISO certified by the end of 1998. ISO 9000 is an
international quality certification process, developed in the European Common
Market and adopted in the United States as the method by which companies can
demonstrate the functionality of their quality control system.
In connection with its manufacturing and test services, the Company
generally provides warranties on its products and services ranging from three
months to five years. A one to two year warranty is typically provided on
switching, transport and access products.
The Company believes that it currently has the equipment, personnel and
experience necessary to efficiently manufacture high quality telecommunications
products in-house. This should assist the Company in controlling the costs,
quality and delivery of its products and allow the Company to bring new products
to market on a timely basis.
SUPPLIERS
Products manufactured by the Company typically require the procurement of
printed circuit boards, electronic components, cable assemblies, fabricated
metal, plastic parts and other materials, of which electronic components are the
most costly. The Company purchases electronic components from numerous sources,
including original manufacturers and parts distributors.
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The Company purchases substantially all of its components and other parts
from suppliers on a purchase order basis and does not maintain long-term supply
arrangements. Most of the components used in the Company's products and related
services are available from multiple sources. However, several components,
primarily custom hybrid integrated circuits, are currently obtained from a
single source. To date, the Company has been able to obtain adequate supplies of
these components. The Company's inability in the future to obtain sufficient
quantities of limited-source components, or to develop alternative sources
therefor, could result in delays in product delivery and increased component
cost, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although the Company manufactures its own switching products, a significant
portion of the switching products sold to date by the Company has been new or
used Northern Telecom switching systems, add-on frames and circuit boards, and
reengineered mobile network equipment. The major sources for such products are
deinstallations by primary users, asset recovery operations of telephone
companies, auctions by Northern Telecom and other original equipment
manufacturers, repossessions by leasing companies and formal distribution or
consignment agreements. The Company currently has formal consignment agreements
with Ameritech, SNET and Century Telephone, pursuant to which the Company
inventories Northern Telecom, Lucent Technologies and other circuit boards for
resale by the Company.
ENGINEERING AND DEVELOPMENT
Historically, the Company's engineering, development and technical support
efforts have focused on the repair of switching, transport and access products
and on electronic manufacturing processes. The Company has significant
experience in developing automated test systems, diagnostic programs and repair
procedures for electronic circuitry typically found within telecommunications
switching equipment. The Company's engineers have also used their expertise and
experience to create new revenue sources for the Company by developing upgrades
and enhancements to existing products, including those developed and
manufactured by other telecommunications equipment companies.
During 1997, the Company's engineering efforts have become more focused on
developing new switching, transport and access products and enhancing the
features and capabilities of current products. The acquisitions of NACT and ATI
have enhanced the Company's engineering and development capabilities of
switching and transport products with the addition of approximately 46
development engineers. The Company's engineers have significant experience in
switching systems configurations, transmission and access applications and
wireless technology such as spread spectrum CDMA, radio path calculations, field
performance measurement and frequency licensing. The Company expects that, as it
continues to manufacture and sell more sophisticated telecommunications
equipment, it will continue to make further significant investments in research
and product development.
As of April 13, 1998, the Company's engineering and development group
consisted of 121 persons, including 42 RF engineers added through the Galaxy
acquisition, 60 in product development, and 19 in repair service development,
systems integration and manufacturing process and operations support. These
employees are organized into teams corresponding to the Company's product lines,
and each team is responsible for providing technical support to the Company's
customers and for developing and enhancing products. The Company's internal
engineering resources permit the Company to continually reduce the production
cost and improve the functionality of its products.
COMPETITION
The segments of the telecommunications industry in which the Company
operates are intensely competitive. The Company's ability to compete is
dependent upon several factors, including price, quality, product features and
timeliness of delivery. Many of the Company's competitors have significantly
more extensive engineering, manufacturing, marketing, financial and technical
resources than the Company. In addition, the Company currently competes with
several of its major suppliers, including Northern Telecom, with respect to the
sale of certain of its products, which may adversely affect its ability to
continue to obtain such products from these suppliers in the future.
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In the sale of switching, transport and access products, the Company
competes with companies such as Northern Telecom and Lucent Technologies. The
Company believes it competes favorably against these companies by providing high
quality products, comprehensive support services, competitive prices and
shortened product delivery times. As the Company increases its international
sales efforts, it also expects to compete with other established
telecommunications equipment companies such as Ericsson, Fujitsu, Siemens and
Alcatel Network Systems.
EMPLOYEES
As of April 13, 1998, the Company had 510 full-time employees, including
121 in engineering and development, 24 in technical service and support, 62 in
sales and marketing, 139 in manufacturing, warehousing and quality assurance, 92
in repair and refurbishment and 72 in general management, finance,
administration and other support services. From time to time, the Company also
uses part-time employees in its manufacturing operations to accommodate changes
in production levels. None of the Company's employees is represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Atlanta, Georgia, where it
occupies approximately 2,000 square feet under a lease expiring in October 1998.
The Company leases certain office, manufacturing and warehouse facilities under
operating leases which expire at various dates during the next five years. The
following provides a summary of the significant operating facilities currently
leased or owned by the Company.
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRES
- -------- -------------- -------------
<S> <C> <C>
Orlando, Florida............................................ 72,000 April 2002
Wilmington, Massachusetts................................... 64,000 November 2000
Dallas, Texas............................................... 54,000 February 2003
Provo, Utah................................................. 40,000 Owned facility
Alpharetta, Georgia......................................... 39,000 December 2001
South Bend, Indiana......................................... 22,000 July 2002
Other warehouses and offices................................ 30,000 Various
-------
Total............................................. 321,000
=======
</TABLE>
The Company's existing facilities are adequate for its current operations,
and the Company believes that convenient, additional facilities are readily
available should the business need arise.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
relating to claims arising in the ordinary course of its business. Other than
the Aerotel litigation discussed below, neither the Company nor any of its
subsidiaries is party to any such legal proceeding, the outcome of which,
individually or in the aggregate, is expected to have a material adverse effect
on the Company's financial condition or results of operations.
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A. Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, alleging that telephone
systems manufactured and sold by NACT incorporating prepaid debit card features
infringe upon Aerotel's patent which was issued in November 1987 (the "Aerotel
Patent"). The initial complaint further alleged defamation and unfair
competition as a result of a special report disseminated by NACT to its
customers and tortious interference with prospective business relations,
alleging that NACT induced third parties to abandon licensing negotiations with
Aerotel. Aerotel sought injunctive relief, damages in an unspecified amount,
damages of up to three times the damages found for willful infringement of the
Aerotel Patent and an order requiring NACT to publish a written apology to
Aerotel. NACT filed an answer and Counterclaim in which it denied infringement
of the Aerotel Patent and sought judgement that the
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Aerotel patent is invalid and unenforceable and that Aerotel has misused its
patent in violation of antitrust laws. NACT has denied that it has committed
defamation, unfair competition and tortuous interference with prospective
business relations. On May 3, 1996, NACT served its motion for summary
judgement. The court has indicated it will deny such motion, although the actual
ruling has not yet been received. In August 1997, Aerotel amended its complaint
to include as defendants GST Telecommunications, Inc. ("GST"), GST USA, Inc.
("GST USA") and two former executive officers of NACT. The amended pleadings
seek in excess of $18.7 million in damages and allege that GST and GST USA have
infringed the Aerotel Patent, aided and abetted infringement by others,
including NACT, and participated in, and aided and abetted alleged tortious
conduct by NACT. GST, GST USA and the two former officers have served answers
denying all material allegations and intend to defend themselves vigorously.
Pretrial discovery has commenced and is scheduled to be completed in 1998. The
case is not expected to be tried until late 1998 at the earliest.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST have agreed to share evenly the costs of any judgement against
NACT as a result of the Aerotel litigation, including NACT's legal fees. The
Company believes that NACT has valid defenses to the Aerotel claims. An
unfavorable decision in this action, however, could have a material adverse
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
security holders through the solicitation of proxies or otherwise.
ITEM 4.5 EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information, as of April 13, 1998, concerning
the Company's executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven A. Odom............................ 44 Chairman and Chief Executive Officer
Hensley E. West........................... 53 President, Chief Operating Officer and Director
Mark A. Gergel............................ 40 Executive Vice President and Chief Financial Officer
Scott N. Madigan.......................... 40 Executive Vice President of Business Development
Hatch Graham.............................. 37 President, Transport and Access Systems Group
</TABLE>
Steven A. Odom. Mr. Odom joined the Company's Board in October 1994. In
November 1994, he was appointed to the newly created position of Chairman of the
Board. In August 1995, he became Chairman and Chief Executive Officer of the
Company. From 1983 to 1987, he founded and served as Chairman and Chief
Executive Officer of Data Contract Company, Inc. ("DCC"), a designer and
manufacturer of intelligent data PBX systems, pay telephones and diagnostic
equipment. From 1987 to 1990, he was Vice President for the Public
Communications Division of Executone Information Systems, Inc., a public company
that acquired DCC in 1987. Mr. Odom formerly served as a director for Telematic
Products, Inc., a manufacturer of telephone central office equipment and
Resurgens Communications Group, Inc. ("Resurgens"), a provider of long distance
operator services that later merged with LDDS Communications, Inc., now known as
WorldCom, Inc. ("WorldCom").
Hensley E. West. Mr. West joined the Company in January 1996 as President
and Chief Operating Officer and was also elected a director in January 1996.
From January 1994 to December 1995, he was Group Vice President for the Access
Systems Group of DSC Communications Corporation ("DSC"), a manufacturer of
digital switching, transmission and access telecommunications equipment. During
his nine year tenure with DSC, he held six sales and general management
positions, including Senior Vice President of North American Sales from July
1993 to December 1993, Vice President of Access Products Division from March
1992 to July 1993, Vice President of RBOC Sales from October 1991 to March 1992
and Vice President of Business Development from March 1990 to October 1991.
Prior to joining DSC, Mr. West held general, engineering and sales management
positions with California Microwave, Inc., ITT Telecommunications, Inc. and
Western Electric Co.
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Mark A. Gergel. Mr. Gergel joined the Company in April 1992 as Vice
President and Chief Financial Officer. In December 1996, he was named an
Executive Vice President of the Company. From 1983 to March 1992, Mr. Gergel
held five positions of increasing responsibility with Federal-Mogul Corporation,
a publicly-held manufacturer and distributor of vehicle parts, including
International Accounting Manager, Assistant Corporate Controller, Manager of
Corporate Development and Director of Internal Audit. Prior to joining
Federal-Mogul, Mr. Gergel spent four years with the international accounting
firm of Ernst & Young. Mr. Gergel is a Certified Public Accountant.
Scott N. Madigan. Mr. Madigan joined the Company in March 1996 as Vice
President of Business Development. In June 1997, he was named an Executive Vice
President of the Company. Mr. Madigan spent the prior four years with DSC as
Vice President of Marketing for the Access System Group and Vice President of
Litespan International Operations and Wireless Access Marketing. From 1987 to
1992, he held product and account management positions with Northern Telecom,
where he was responsible for identification, assessment and development of new
business opportunities for Northern Telecom's switching, transport and access
products. Prior to 1987, Mr. Madigan held engineering and operations management
positions with California Microwave, Inc. and ITT Telecommunications, Inc.
Hatch Graham. Mr. Graham joined the Company in April, 1997 as President of
the Transport and Access Systems Group. From 1995 to 1997, Mr. Graham held
executive management positions with TCSI Corporation, a leading provider of
digital Code Division Multiple Access and Time Division Multiple Access cellular
and PCS products. From 1987 to 1995, Mr. Graham held various product development
and executive management positions with Stanford Telecom Corporation, including
Vice President of the ASIC and Custom Products Division and Corporate Vice
President and General Manager of the Telecom Products Group. Prior to 1987, Mr.
Graham held engineering management positions with American Microsystems, Inc.
and Zoran Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock has traded on the Nasdaq National Market under
the symbol "WAXS" since June 25, 1996. From March 2, 1995 through June 24, 1996,
the Company's common stock was quoted on the Nasdaq SmallCap Market. The
quarterly price ranges for the Company's common stock as reported by Nasdaq are
as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
---- --- ------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $ 9 1/4 $ 7 1/2 $ 8
Second Quarter............................................ 23 7 5/8 20 1/2
Third Quarter............................................. 34 1/8 20 32 1/2
Fourth Quarter............................................ 33 3/4 17 23 7/8
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................. $10 $ 7 1/2 $ 8
Second Quarter............................................ 11 1/2 8 9 1/2
Third Quarter............................................. 10 1/8 7 1/2 8 1/2
Fourth Quarter............................................ 9 1/4 6 7/8 8
</TABLE>
As of April 13, 1998, there were 306 holders of record of the Company's
common stock. This number does not include beneficial owners of the Company's
common stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
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DIVIDEND POLICY
The Company has not paid or declared any cash dividends on its common stock
and currently intends to retain all future earnings to fund operations and the
continued development of its business. In addition, the Company's credit
facility contains restrictions limiting the ability of the Company to pay cash
dividends. Any future determination to declare and pay cash dividends will be at
the discretion of the Board of Directors and will be dependent on the Company's
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Sales of products............................... $ 71,392 $34,411 $17,384 $ 2,776 $ 3,320
Service revenues................................ 21,593 16,589 12,754 12,507 12,441
-------- ------- ------- ------- -------
Total sales........................... 92,985 51,000 30,138 15,283 15,761
Gross profit.................................... 32,140 14,995 6,363 1,976 2,605
Operating income (loss) from continuing
operations.................................... 19,522 7,358 1,524 (1,293) (1,668)
Income (loss) from continuing operations before
income taxes.................................. 20,670 7,524 1,172 (1,883) (2,120)
Net income (loss)(2)............................ 13,134 6,779 1,172 (1,883) (2,120)
Net income (loss) from continuing operations per
share(3)...................................... $ .70 $ .46 $ .12 $ (.41) $ (.54)
Weighted average shares outstanding(3).......... 18,708 14,530 9,083 4,631 3,765
BALANCE SHEET DATA(4):
Cash and equivalents............................ $118,065 $22,480 $ 1,887 $ 753 $ 625
Working capital................................. 153,750 37,961 10,222 2,267 1,783
Total assets.................................... 225,283 60,736 28,515 8,943 8,752
Long-term debt.................................. 115,264 -- 3,750 4,328 5,388
Total liabilities............................... 133,528 8,362 14,181 7,783 8,410
Stockholders' equity............................ 91,755 52,374 14,334 1,160 342
</TABLE>
- ---------------
(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: Galaxy -- July 1, 1997; CIS -- January 1,
1997; Sunrise -- January 1, 1996; Westec -- October 2, 1995; and AIT -- May
17, 1995. On a pro forma unaudited basis, as if the acquisition of CIS had
occurred as of January 1, 1996, total sales, net income and net income per
diluted share for the year ended December 31, 1996 would have been
approximately $63,810,000, $8,520,000 and $0.57, respectively. The results
of operations for Galaxy during 1996 and the first six months of 1997 were
not material and therefore are not included in the pro forma disclosure.
(2) The Company recorded no income tax expense during 1993 to 1995 due to net
losses realized and the availability of federal income tax net operating
loss carryforwards. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note K to the Consolidated
Financial Statements.
(3) Net income (loss) per share and weighted average shares outstanding are
presented on a diluted basis. The calculations exclude 995,000, 401,000 and
896,000 shares of common stock for the years ended December 31, 1997, 1996
and 1995, respectively, that are held in escrow accounts. See Notes A, B,
and E to the Consolidated Financial Statements.
(4) In October 1997, the Company sold $115.0 million of convertible subordinated
notes. See Note G to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The products offered by the Company include those manufactured by the
Company as well as those manufactured by other telecommunications equipment
manufacturers. To support and complement its product sales, the Company also
provides its customers with a broad range of design, engineering, manufacturing,
testing, installation, repair and other value-added services.
During 1995 and 1996, the Company completed strategic and financial
restructuring programs to strengthen its management team, reposition the Company
as a provider of telecommunications products, improve its financial condition,
reduce its operating costs and position the Company for future growth. These
programs were undertaken following the significant losses incurred by the
Company in the early 1990s, primarily due to a discontinued smart pay telephone
business, and to take advantage of the significant growth opportunities within
the Company's existing customer base and related markets. In November 1994, the
Company began to rebuild its management team and change its strategic focus. The
Company strengthened its management team by appointing a new Chief Executive
Officer and by recruiting and hiring a new President and Chief Operating
Officer, Executive Vice President of Business Development and experienced
product development and manufacturing professionals. These individuals, together
with other key managers recruited into the Company, have brought significant
experience in manufacturing and marketing telecommunications equipment to the
Company.
The Company acquired three businesses in 1995 and 1996 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, Inc. ("AIT"), a full service provider of
Northern Telecom switching systems, add-on frames and related circuit boards;
effective October 1995, the Company acquired Westec Communications, Inc.
("Westec"), a provider of wireless products and services primarily to the cable
television industry; and effective January 1996, the Company acquired Sunrise, a
developer and manufacturer of intelligent transport and access products.
In January 1997, the Company acquired CIS, a provider of mobile network
equipment and related design, installation and technical support services to
cellular, PCS and other wireless service providers. In August 1997, the Company
acquired Galaxy, an RF engineering firm that provide system design,
implementation, optimization and other value-added radio engineering and
consulting services to the same wireless service markets. The markets served by
CIS and Galaxy complement the Company's traditional telephone service provider
and private network operator markets.
In the first quarter of 1998, the Company acquired ATI, a manufacturer of
digital point-to-point microwave radio systems for short and long haul
applications and a majority stake in NACT, a provider of advanced
telecommunications switching platforms with integrated applications software.
These acquisitions were in line with the Company's strategy to broaden its
offering of proprietary telecommunications equipment and services and position
the Company to engineer, install and support "turnkey" telecommunications
network solutions.
In March 1998, the Company entered into an agreement with a private network
operator based in El Salvador to supply, install and interconnect the
telecommunications equipment necessary to establish and support up to 60,000 new
lines of residential telephone service over the next two years. This agreement
has a potential value to the Company in excess of $20 million. To meet the
Customer's primary network requirements, the Company will utilize the CDX
switch, NTS billing system (NACT), point-to-point microwave radios (ATI) and RF
engineering services (Galaxy).
The Company realized significant improvements in its sales and operating
results since 1994 as a result of the acquisitions and internal growth
initiatives. The Company's total sales increased by 82.3% in 1997, 69.2% in 1996
and 97.2% in 1995. As the Company increased its product sales from 18.2% of
total sales in 1994 to 76.8% of total sales in 1997, its gross profit margin
increased from 12.9% in 1994 to 21.1% in 1995, 29.4% in 1996 and 34.6% in 1997.
As a percentage of total sales, the Company's operating income (loss) increased
from
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(8.5%) in 1994 to 5.0% in 1995, 14.4% in 1996 and 21.0% in 1997. The Company
will continue to seek further improvements in gross profit margin over time as
product offerings include more internally developed, acquired and licensed
products containing proprietary technology.
Although the Company has aggressively pursued acquisitions in recent years,
over 60 percent of the Company's sales growth during 1995 to 1997 has come from
internal growth initiatives. The Company has had considerable success in growing
businesses post acquisition, most notably AIT and CIS, as a result of its
ability to provide working capital, an extensive base of telecommunications
customers and a broad range of support services.
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity
offering, stock warrant and option exercises, and a five-year $10.0 million
credit facility. The Company has used this capital for acquisitions and to
support the working capital requirements associated with the Company's growth.
The Company's working capital and stockholders' equity have increased from $2.3
million and $1.2 million, respectively, at December 31, 1994 to $153.8 million
and $91.8 million, respectively, at December 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of total sales represented by each line item in the Company's
consolidated statements of operations, except other data, which is expressed as
a percentage of the applicable revenue type:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales of products......................................... 76.8% 67.5% 57.7%
Service revenues.......................................... 23.2 32.5 42.3
----- ----- -----
Total sales....................................... 100.0 100.0 100.0
Cost of products sold..................................... 47.1 42.1 42.0
Cost of services.......................................... 18.3 28.5 36.9
----- ----- -----
Total cost of sales............................... 65.4 70.6 78.9
----- ----- -----
Gross profit...................................... 34.6 29.4 21.1
Engineering and development............................... 2.0 1.7 1.9
Selling, general and administrative....................... 9.7 12.2 10.4
Amortization of goodwill.................................. 1.9 1.1 0.5
Special charges........................................... -- -- 3.3
----- ----- -----
Operating income.................................. 21.0 14.4 5.0
Interest and other income................................. 2.7 1.0 0.5
Interest expense.......................................... (1.5) (0.6) (1.6)
----- ----- -----
Income before income taxes........................ 22.2 14.8 3.9
Income taxes.............................................. 8.1 1.5 --
----- ----- -----
Net income........................................ 14.1% 13.3% 3.9%
===== ===== =====
OTHER DATA:
Gross Margin:
Products............................................... 38.6% 37.6% 27.2%
Services............................................... 21.2 12.5 12.8
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Total sales increased $42.0 million, or 82.3%, to $93.0 million in
1997 from $51.0 million in 1996. Product sales increased to 76.8% of total sales
in 1997 from 67.5% in 1996.
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Product sales increased $37.0 million, or 107.5%, to $71.4 million in 1997
from $34.4 million in 1996. The increase related to $26.2 million of mobile
network equipment sold by CIS, which was acquired effective January 1, 1997, an
additional $6.4 million of switching products sold by AIT and approximately $6.9
million in sales of the Company's new international products, the CDX and
WLL-2000. Product sales for 1996 included approximately $4.8 million in one-time
sales of a distributed product.
Service revenues increased $5.0 million, or 30.2%, to $21.6 million in 1997
from $16.6 million in 1996. The increase related to $2.0 million of engineering
services performed by Galaxy, which was acquired effective July 1, 1997, and an
additional $5.2 million in pay telephone refurbishment revenues. This increase
was partially offset by a decline in electronic manufacturing revenues resulting
from a strategic decision to begin utilizing the Company's manufacturing
capacity for new Company products rather than servicing external contract
manufacturing customers.
Gross Profit. Gross profit increased $17.1 million, or 114.3%, to $32.1
million in 1997 from $15.0 million in 1996. Gross profit margin increased to
34.6% in 1997 from 29.4% in 1996. The improved performance resulted from
economies of scale associated with the 82.3% increase in total sales and the
change in sales mix to products, which generally carry a higher gross profit
margin than service revenues.
Gross profit margin on products sold increased to 38.6% in 1997 from 37.6%
in 1996. The improved margins related to the $26.2 million of CIS sales and
sales of the CDX, all of which generally carry margins in excess of 40.0%. The
Company's switching products experienced declines in gross margin during 1997
primarily related to margin pressure on sales of Northern Telecom add-on frames
and related circuit boards.
Gross profit margin on service revenues increased to 21.2% in 1997 from
12.5% in 1996. The improvement was due to the addition of Galaxy consulting
revenues and improved margins on pay telephone refurbishment revenues.
Engineering and Development. Engineering and development expenses
increased $970,000, or 108.7%, to $1.9 million in 1997 from $892,000 in 1996.
The increase in expenses was attributable to the formation of a corporate
product development group during the third quarter of 1996 and the continued
expansion of the development group during 1997. Engineering and development
expenses increased to 2.0% of total sales in 1997 from 1.7% of total sales in
1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 44.9%, to $9.0 million in
1997 from $6.2 million in 1996. The increase related primarily to expenses
associated with the operations of CIS and Galaxy, which were acquired effective
January 1, 1997 and July 1, 1997, respectively, and the Company's establishment
of a dedicated international sales and marketing group and corporate business
development function in March 1996. In addition, the Company recorded
approximately $960,000 of incentive compensation expense in 1997 as compared to
a provision of approximately $300,000 in 1996. As a percentage of total sales,
selling, general and administrative expenses decreased to 9.7% in 1997 from
12.2% in 1996.
Amortization of Goodwill. Amortization of goodwill increased $1.2 million
to $1.8 million in 1997 from $534,000 in 1996, primarily as a result of goodwill
recorded in connection with the AIT, CIS and Galaxy acquisitions.
Operating Income. Operating income increased $12.2 million, or 165.3%, to
$19.5 million in 1997 from $7.4 million in 1996. Operating income margin
increased to 21.0% in 1997 from 14.4% in 1996.
Interest and Other Income. Interest and other income increased $2.0
million to $2.5 million in 1997 from $484,000 in 1996 due to a significant
increase in cash balances of the Company, resulting primarily from the sale of
$115.0 million convertible subordinated notes in October 1997 and proceeds
received from a $26.2 million secondary public equity offering completed in
October 1996.
Interest and Other Expense. Interest expense increased $1.0 million to
$1.4 million in 1997 from $320,000 in 1996. The increase is primarily due to the
sale of $115.0 million convertible subordinated notes in October 1997 which bear
interest at 4.5%.
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Income Taxes. The Company's effective income tax rate increased to 36.5%
in 1997 from 9.9% in 1996. The Company's 1996 effective rate was favorably
impacted by the recognition of a $4.1 million deferred tax asset during the year
to reflect the benefits of the Company's remaining net operating loss
carryforward.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Total sales increased $20.9 million, or 69.2%, to $51.0 million in
1996 from $30.1 million in 1995. Product sales increased to 67.5% of total sales
in 1996 from 57.7% in 1995.
Product sales increased $17.0 million, or 97.9%, to $34.4 million in 1996
from $17.4 million in 1995. The increase related primarily to an additional
$16.1 million of switching products sold by AIT, which was acquired as of May
1995, and $3.6 million of transport and access products sold by Westec and
Sunrise, which were acquired as of October 1995 and January 1996, respectively.
The increases noted above were partially offset by a decrease in the sales of
pay telephone parts in 1996 due to a large one-time order received in 1995.
Service revenues increased $3.8 million, or 30.0%, to $16.6 million in 1996
from $12.8 million in 1995. The increase related to $1.2 million of Westec
repair revenues following its acquisition, $1.7 million of increased circuit
board repair revenues generated by the introduction of new repair services and a
new repair agent contract executed with Century Telephone in July 1995, and
increased contract manufacturing revenues of approximately $1.4 million.
Gross Profit. Gross profit increased $8.6 million, or 135.7%, to $15.0
million in 1996 from $6.4 million in 1995. Gross profit margin increased to
29.4% in 1996 from 21.1% in 1995. The improved performance resulted from
economies of scale associated with the 69.2% increase in total sales and the
change in sales mix to products, which generally carry a higher gross profit
margin than service revenues.
Gross profit margin on products sold increased to 37.6% in 1996 from 27.2%
in 1995. Excluding the sale of distributed products, gross profit margin for
products sold in 1996 and 1995 was 41.9% and 33.4%, respectively. The improved
margin performance for non-distributed products related primarily to the $16.1
million, or 207.2%, increase in switching products sold by AIT and $2.8 million
of transport and access products sold by Sunrise.
Gross profit margin on service revenues decreased to 12.5% in 1996 from
12.8% in 1995. The Company's gross profit margin for service revenues is subject
to wide fluctuations depending on the sales mix (i.e., circuit board repair and
pay telephone refurbishment have targeted gross profit margins significantly
higher than those of electronic manufacturing services). In addition, circuit
board repair margins declined during 1995 due to increased out-sourced repair
revenues associated with new "one-stop" repair agent programs.
Engineering and Development. Engineering and development expenses
increased $315,000, or 54.6%, to $892,000 in 1996 from $577,000 in 1995. The
increase in expenses was attributable to the research and product development
activities acquired in connection with the Sunrise acquisition and the formation
of a product development group during the third quarter of 1996. As a result of
the 69.2% increase in total sales, engineering and development expenses
decreased to 1.7% of total sales in 1996 from 1.9% of total sales in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.1 million, or 98.7%, to $6.2 million in
1996 from $3.1 million in 1995. The increase related primarily to operating
expenses associated with the Acquisitions, additional salary and related costs
for the Company's Chairman (who received no salary during 1995) and its new
President, and the Company's establishment of a dedicated international sales
and marketing group and corporate business development function in the first
quarter of 1996. As a percentage of total sales, selling, general and
administrative expenses increased to 12.2% in 1996 from 10.4% in 1995.
Amortization of Goodwill. Amortization of goodwill increased $377,000 to
$534,000 in 1996 from $157,000 in 1995 as a result of the goodwill acquired in
connection with the Acquisitions.
Operating Income. Operating income increased $5.8 million to $7.4 million
in 1996 from $1.5 million in 1995. As a percentage of total sales, operating
income increased to 14.4% in 1996 from 5.0% in 1995.
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Interest and Other Income. Interest and other income increased $341,000 to
$484,000 in 1996 from $143,000 in 1995 due to an increase in invested cash
balances during 1996, resulting primarily from proceeds received from the $26.2
million secondary public equity offering completed in October.
Interest Expense. Interest expense decreased $175,000 to $319,000 in 1996
from $494,000 in 1995. The decrease resulted primarily from a decrease in
average debt outstanding in 1996. In October 1996, the Company paid off a $3.9
million term loan with its bank using proceeds received from the secondary
public offering. A reduction in the interest rate on the Company's bank debt due
to the lender's reinstatement of a LIBOR-based interest rate option in July 1995
and an additional one percentage point reduction obtained with the Company's new
bank agreement in March 1996 also contributed to the decrease in interest
expense.
Income Taxes. The Company's effective income tax rate was 9.9% in 1996.
The Company's 1996 effective rate was significantly impacted by the recognition
of a $4.1 million deferred tax asset during the year to reflect the benefits of
the Company's remaining net operating loss carryforward. No income tax expense
was recorded in 1995 due to the partial recognition of benefits associated with
the Company's net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of December 31, 1997, the Company had
$118.1 million of cash and equivalents and $10.0 million in borrowings available
under its credit line to support its current working capital requirements and
strategic growth initiatives.
Operating Activities. Cash used by operating activities was $2.0 million
in 1997 as compared to cash provided by operations of $2.0 million in 1996. The
increased use of cash in 1997 resulted from the Company's need to finance
increased accounts receivable and inventories to support its growth.
Accounts receivable increased $10.6 million, or 109.9%, to $20.3 million at
December 31, 1997 from $9.7 million at December 31, 1996. This was due to the
acquisitions of CIS and Galaxy and increased sales activity at the Company
(fourth quarter 1997 sales were $21.3 million as compared to fourth quarter 1996
sales of $14.6 million). Average days sales outstanding at December 31, 1997
were approximately 81 days as compared to 50 days at December 31, 1996.
Inventories increased $11.8 million, or 110.4%, to $22.4 million at
December 31, 1997 from $10.7 million at December 31, 1996. This increase was due
to the acquisition of CIS, a planned build-up of AIT inventories to support the
increased demand for its switching products and inventories required to support
the roll out of the Company's new products, including the CDX switch, the
WLL-2000 system and the WX-5501 line card.
In addition, the Company shipped approximately $3.8 million of equipment to
Resurgens Communications Group ("Resurgens") in December 1997. On February 12,
1998 the Company executed a letter of intent to acquire Resurgens and therefore
did not record the shipment as a sale. Upon completion of the acquisition of
Resurgens, the equipment will be treated as an investment in Resurgens at the
Company's cost value.
Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, manufacturing and test equipment and computer
networking equipment was $17.9 million and $1.8 million for 1997 and 1996,
respectively.
Between May 1995 and July 1997, the Company completed the acquisitions of
AIT, Westec, Sunrise, CIS and Galaxy (the "Acquisitions"), which were designed
to bring new wireline and wireless switching, transport and access products and
technology into the Company. All of the Acquisitions were relatively similar in
structure in that the former owners received initial consideration consisting of
a combination of common stock and cash, as well as contingent consideration tied
to the future profitability of the ongoing business. The majority of the
contingent consideration may be paid, at the option of the Company, in the form
of Company
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common stock valued at its then-current market price. At the time it becomes
highly probable that contingent consideration will be earned, the fair market
value is measured and recorded on the Company's balance sheet as additional
goodwill and stockholders' equity. See Note B to the Consolidated Financial
Statements.
Through December 31, 1997, the Company has paid approximately $8.5 million
in cash consideration in connection with the Acquisitions, including $3.5
million for the CIS acquisition in early 1997, $1.2 million for the Galaxy
acquisition in July 1997 and $3.8 million for the AIT acquisition. The impact of
these payments on the Company's cash position has been partially offset by the
addition of $1.5 million in cash held by Sunrise and Galaxy on the effective
dates of acquisition.
In addition to the $3.5 million in cash paid and 440,874 shares of common
stock issued up front to the CIS stockholders, the stockholders of CIS were
issued 845,010 restricted shares of common stock. These shares were immediately
placed into escrow and, together with $6.5 million in additional purchase price,
will be released and paid to the stockholders of CIS contingent upon the
realization of certain predefined levels of pre-tax income from CIS's operations
during three one-year periods beginning January 1, 1997.
The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was January 1, 1997 to December 31, 1997.
In reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 317,427 escrowed shares
were accounted for as if released and $3.5 million in contingent cash payments
were accounted for as if paid as of April 30, 1997. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$6.5 million at April 30, 1997. These shares were released and payment was made
to the former stockholders of CIS on February 15, 1998.
In addition to the $1.2 million in cash and 262,203 shares of common stock
issued up front, the former Galaxy stockholders were issued 131,101 restricted
shares of the Company's common stock. These shares were immediately placed into
escrow, and along with $3.5 million in additional consideration (the "Galaxy
Additional Consideration"), will be released and paid to the former stockholders
of Galaxy contingent upon the realization of redefined levels of pre-tax income
from Galaxy's operations during four measurement periods between July 1, 1997
and December 31, 2000.
The first measurement period for purposes of releasing escrowed shares and
paying Galaxy Additional Consideration was July 1, 1997 to December 31, 1997. In
reviewing Galaxy's pre-tax income performance as of December 31, 1997, the
Company determined that conditions for release and payment for this first period
were met. Accordingly, 15,215 escrowed shares were accounted for as if released
and $400,000 in additional consideration (in the form of 14,901 shares of
Company common stock) were accounted for as if paid as of December 31, 1997. The
net effect of this accounting was to increase goodwill and stockholders' equity
by approximately $535,000 at December 31, 1997. These shares were released and
payment was made to the former stockholders of Galaxy on February 15, 1998.
In the fourth quarter of 1997, the Company began its three phase
acquisition of NACT. During November and December 1997, the Company purchased
355,000 shares of NACT common stock in the open market for approximately $5.0
million. See Note A to the Consolidated Financial Statements.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST, USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 63% of the outstanding shares of NACT common stock (the "NACT
Stock Acquisition"). On February 27, 1998 the NACT Stock Acquisition was
completed with GST USA receiving $59.7 million in cash and 1,429,907 restricted
shares of the Company's common stock. These shares had an initial fair value of
approximately $23.0 million.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. Pursuant to the terms of
the merger agreement, each share of NACT common stock will be converted into
shares of Company common stock having a value of $17.50 per share based on the
average of the daily closing price of Company common stock on the NASDAQ
National Market for a pre-defined period
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prior to the closing (the "Closing Price"), provided that if the Closing Price
is more than $25.52, then each share of NACT common stock will be converted into
0.6857 shares of Company common stock. If the Closing Price is less than $20.88,
then the Company may elect to terminate the agreement. See Note N to the
Consolidated Financial Statements.
On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and 418,054
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $8.0 million.
In addition to the 418,054 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be released to the stockholders of
ATI contingent upon the realization of predefined levels of pre-tax net income
from ATI's operations during calendar years 1998 and 1999. See Note N to the
Consolidated Financial Statements.
In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.4 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.
During 1997 and 1996, the Company invested $3.6 million and $1.2 million,
respectively, in capital expenditures. These expenditures were primarily for new
manufacturing and test equipment, computer network and related communications
equipment designed to upgrade the Company's management information systems and
facilitate the integration of the Acquisitions, and facility improvements
required in connection with the Company's growth.
In July 1996, the Company entered into a long-term technology license
agreement with International Communications Technologies, Inc. ("ICT") and Eagle
Telephonics, Inc. ("Eagle") to manufacture, market and sell the CDX, a new
modular, digital central office switch originally developed by Eagle. As
consideration for this license, the Company paid Eagle $250,000 in cash and
provided it with $450,000 of manufacturing services. In addition, the Company
agreed to pay ICT certain royalties based on future sales of the switch by the
Company.
In December 1996, the Company executed a technology licensing agreement
with TCSI Corporation ("TCSI") that grants the Company the perpetual rights to
incorporate TCSI's spread spectrum CDMA wireless technology into the Company's
products sold throughout the world. Under the terms of the agreement, the
Company also has the rights to use the technology covered by seven TCSI patents,
all of which address digital data signals and wireless communication systems. As
total consideration for this license, TCSI was paid $50,000 in cash and issued
25,000 shares of restricted common stock. These shares had an initial fair value
of approximately $150,000. In addition to the 25,000 shares noted above, the
Company issued 25,000 shares of restricted common stock to TCSI. These shares
were immediately placed in escrow and will be released to TCSI upon the earlier
of the first commercial use of the technology by the Company or the expiration
of the two year period from the date the license was executed.
Financing Activities. Cash provided from financing activities was $115.4
million and $20.4 million for 1997 and 1996, respectively.
On October 1, 1997, the Company sold $100.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year, commencing in April 1, 1998. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all existing and senior indebtedness. The Company received $97.0 million from
the sale of the Notes, after the initial purchasers' discount fees of $3.0
million.
C-19
<PAGE> 192
In addition to the Notes sold on October 1, 1997, the Company granted the
initial purchasers an option to purchase up to an additional $15.0 million in
Notes to cover over-allotments. On October 28, 1997, the initial purchasers
exercised the over-allotment option in full and the Company received an
additional $14.6 million, after the application of the initial purchasers'
discount fees of $450,000.
The total discount fees of $3,450,000, along with approximately $550,000 of
legal, accounting, printing and other expenses (the "Debt issuance costs") are
being amortized to expense over the five year term of the Notes. Debt issuance
costs of approximately $3.8 million, net of amortization, are included in Other
assets on the Company's December 31, 1997 balance sheet.
In October 1996, the Company received net cash proceeds of approximately
$25.3 million from the sale of 3,487,500 shares of common stock in a public
offering at a price of $8.00 per share. In October 1996, the Company used
approximately $3.9 million of the net proceeds to repay all amounts borrowed
under its bank term loan. In connection with the repayment of the amounts
borrowed under the term loan, the Company's primary lender increased the amount
available to the Company under its revolving line of credit from $6.0 million to
$10.0 million.
Borrowings under the Company's $10.0 million line of credit are secured by
a first lien on substantially all the assets of the Company. The bank agreement,
which expires in March 2001, contains standard lending covenants, including
financial ratios, restrictions on dividends and limitations on additional debt
and the disposition of Company assets. Interest is paid at the rate of prime
plus 1 1/4% or LIBOR plus 2 1/2%, at the option of the Company. As of December
31, 1997, there were no amounts outstanding under the Company's line of credit.
In October 1995, the Company raised approximately $6.5 million through the
exercise of previously-issued warrants and non-qualified options to purchase
shares of common stock. The vast majority of these securities related to
warrants issued in connection with private equity offerings and bank financing
agreements. In exercising their warrants or options, investors had the option of
paying cash or executing an 8% interest-bearing note made payable to the
Company. Approximately $2.4 million of the total proceeds was paid in cash and
$4.1 million through notes, which were paid in full in the first quarter of
1996. There are currently no significant warrants or options outstanding to
purchase common stock except those issued to the Company's directors and
employees. See Note I to Consolidated Financial Statements.
During 1997, the Company received approximately $11.3 million in cash,
including related federal income tax benefits of approximately $6.7 million,
from the exercises of incentive and non-qualified stock options and warrants by
the Company's directors and employees.
Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company has realized
a federal income tax benefit of approximately $6.7 million for 1997. Although
this tax benefit does not have any effect on the Company's provision for income
tax expense for 1997, it represents a significant cash benefit to the Company.
This tax benefit is accounted for as a decrease in current income taxes payable
and an increase in capital in excess of par value.
As of December 31, 1997, the Company has capital loss carryforwards of
approximately $1.2 million expiring in 1998.
C-20
<PAGE> 193
Salary Incentive Program. In December 1996, the Company implemented a
voluntary salary reduction program designed to improve the Company's cash flow
during 1997, further align the objectives of the Company's management and
salaried employees with those of the Company's stockholders and potentially
provide the Company with significant future tax deductions. Under the program,
72 exempt salaried employees agreed to forego approximately $826,000 of their
1997 compensation in exchange for 413,019 non-qualified options to purchase
shares of Company common stock at $8.00 per share, its then-current market value
(i.e., one stock option for every $2.00 of compensation). The vesting was tied
to the Company meeting specific operational objectives in 1997, including
pre-defined levels of internal sales growth, ISO 9002 certification and specific
cash management objectives, as well as the installation of certain upgraded
information systems. As of December 31, 1997, these options had become fully
vested.
Under the 1997 program, employees could participate to a maximum level of
50% of their 1997 salaries. The Company's Chairman, President and Chief
Financial Officer each elected to forego 50% of their salary under this program.
This program also provided that if certain levels of pre-tax income were
achieved for 1997, a partial or full repayment of salaries would be made.
Compensation expense related to this program of approximately $250,000, or 30%
of the salaries deferred, was recorded in 1997.
Summary. The Company's improved operating performance and completion of
the sale of $115.0 million of Notes has significantly enhanced its financial
strength and improved its liquidity. As of the date of this Report, the Company
has approximately $60.0 million of cash, no bank debt and a $10.0 million
revolving line of credit available. The Company believes that existing cash
balances, available borrowings under the Company's line of credit and cash
projected to be generated from operations will provide the Company with
sufficient capital resources to support its current working capital requirements
and business plans for at least the next 12 months.
C-21
<PAGE> 194
QUARTERLY OPERATING RESULTS
The following table presents unaudited quarterly operating results for each
of the Company's last eight quarters. This information has been prepared by the
Company on a basis consistent with the Company's audited consolidated financial
statements and includes all adjustments, consisting only of normal recurring
accruals, that the Company considers necessary for a fair presentation in
accordance with GAAP. Such quarterly results are not necessarily indicative of
future operating results. This information should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Report.
The following includes the results of operations for businesses acquired
from their respective dates of acquisition as follows: CIS as of January 1, 1997
and Galaxy as of July 1, 1997. Net income per share is presented on a diluted
basis.
Sales of switching, transport and access products are subject to the timing
of customer upgrade and new installation programs and, as a result, may
contribute to significant fluctuations in the Company's future quarterly sales.
The Company's operating income performance is also subject to significant
quarterly fluctuations based on the mix of product sales and service revenues.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $ 8,354 $ 7,682 $ 8,125 $10,250 $15,470 $19,444 $21,185 $15,293
Service revenues................. 4,039 3,881 4,294 4,375 4,781 4,572 6,268 5,971
------- ------- ------- ------- ------- ------- ------- -------
Total sales............. 12,393 11,563 12,419 14,625 20,251 24,016 27,453 21,264
Cost of products sold............ 6,215 4,597 4,810 5,863 9,970 11,525 12,316 10,016
Cost of services................. 3,403 3,541 3,591 3,985 4,083 4,006 4,742 4,186
------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales..... 9,618 8,138 8,401 9,848 14,053 15,531 17,058 14,202
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 2,775 3,425 4,018 4,777 6,198 8,485 10,395 7,062
Engineering and development...... 177 193 243 280 316 429 605 512
Selling, general and
administrative................. 1,277 1,430 1,679 1,824 1,918 2,435 2,508 2,139
Amortization of goodwill......... 111 111 142 170 284 380 546 546
Operating income............... 1,210 1,691 1,954 2,503 3,680 5,241 6,736 3,865
Interest and other income........ 103 55 24 303 367 225 227 1,688
Interest expense................. (103) (104) (101) (11) (29) (24) (26) (1,280)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes..... 1,210 1,642 1,877 2,795 4,018 5,442 6,937 4,273
Income taxes..................... -- 224 234 287 1,406 2,014 2,566 1,550
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,210 $ 1,418 $ 1,643 $ 2,508 $ 2,612 $ 3,428 $ 4,371 $ 2,723
======= ======= ======= ======= ======= ======= ======= =======
Net income per common
share................. $ 0.09 $ 0.10 $ 0.12 $ 0.15 $ 0.15 $ 0.18 $ 0.22 $ 0.14
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
C-22
<PAGE> 195
The following table sets forth the above unaudited quarterly financial
information as a percentage of total sales:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products..................... 67.4% 66.4% 65.4% 70.1% 76.4% 81.0% 77.2% 71.9%
Service revenues...................... 32.6 33.6 34.6 29.9 23.6 19.0 22.8 28.1
----- ----- ----- ----- ----- ----- ----- -----
Total sales.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of products sold................. 50.1 39.8 38.7 40.1 49.2 48.0 44.8 47.1
Cost of services...................... 27.5 30.6 29.0 27.2 20.2 16.7 17.3 19.7
----- ----- ----- ----- ----- ----- ----- -----
Total cost of sales.......... 77.6 70.4 67.7 67.3 69.4 64.7 62.1 66.8
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 22.4 29.6 32.3 32.7 30.6 35.3 37.9 33.2
Engineering and development........... 1.4 1.7 2.0 1.9 1.6 1.8 2.2 2.4
Selling, general and administrative... 10.3 12.3 13.5 12.5 9.4 10.1 9.2 10.0
Amortization of goodwill.............. 0.9 1.0 1.1 1.2 1.4 1.6 2.0 2.6
----- ----- ----- ----- ----- ----- ----- -----
Operating income............. 9.8 14.6 15.7 17.1 18.2 21.8 24.5 18.2
Interest and other income............. 0.8 0.5 0.2 2.1 1.6 0.9 0.8 7.9
Interest expense...................... (0.8) (0.9) (0.8) (0.1) -- -- (0.1) (6.0)
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes... 9.8 14.2 15.1 19.1 19.8 22.7 25.2 20.1
Income taxes.......................... -- 1.9 1.9 2.0 6.9 8.4 9.3 7.3
----- ----- ----- ----- ----- ----- ----- -----
Net income................... 9.8% 12.3% 13.2% 17.1% 12.9% 14.3% 15.9% 12.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and disclosure of
comprehensive income and its components. This statement will be effective for
the year ended December 31, 1998. Management believes this statement will not
have a material impact on the Company's financial statements.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
systems that have date sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company is in the process of evaluating its computer systems to
determine what modifications (if any) are necessary to make such systems
compatible with the year 2000 requirements. However, because many of the
Company's computer systems have been put into service within the last several
years, the Company does not expect any such modifications to have a material
adverse effect on the Company's consolidated financial position or results of
operations. There can be no assurance, however, that the computer systems of
other companies on which the Company's systems rely will be timely modified, or
that a failure to modify such systems by another company, or modifications that
are incompatible with the Company's systems, would not have a material adverse
effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable
C-23
<PAGE> 196
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Certified Public Accountants.......... C-25
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... C-26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... C-27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995...... C-28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... C-29
Notes to Consolidated Financial Statements.................. C-30
</TABLE>
C-24
<PAGE> 197
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of World Access, Inc.,
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 55 present fairly, in all material
respects, the financial position of World Access, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Atlanta, Georgia
March 5, 1998
C-25
<PAGE> 198
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents...................................... $118,065,045 $22,480,082
Accounts receivable....................................... 20,263,971 9,651,884
Inventories............................................... 22,426,918 10,657,412
Other current assets...................................... 10,923,723 3,533,615
------------ -----------
Total Current Assets.............................. 171,679,657 46,322,993
Property and equipment...................................... 5,704,585 2,657,661
Investment in affiliate..................................... 5,002,000... --
Goodwill.................................................... 31,660,201 9,526,140
Other assets................................................ 11,236,298 2,229,172
------------ -----------
Total Assets...................................... $225,282,741 $60,735,966
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 81,739 $ --
Accounts payable.......................................... 9,339,588 3,756,722
Accrued payroll and benefits.............................. 2,589,461 1,605,840
Purchase price payable.................................... 3,700,000... --
Other accrued liabilities................................. 2,219,237 2,999,187
------------ -----------
Total Current Liabilities......................... 17,930,025 8,361,749
Other liabilities........................................... 333,802 --
Long-term debt.............................................. 115,263,984 --
------------ -----------
Total Liabilities................................. 133,527,811 8,361,749
------------ -----------
Stockholders' Equity
Common stock, $.01 par value, 40,000,000 shares
authorized, 19,306,235 and 16,328,513 issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 193,062 163,285
Capital in excess of par value............................ 84,162,478 58,517,279
Note receivable from affiliate............................ -- (571,634)
Retained earnings (deficit)............................... 7,399,390 (5,734,713)
------------ -----------
Total Stockholders' Equity........................ 91,754,930 52,374,217
------------ -----------
Total Liabilities and Stockholders' Equity........ $225,282,741 $60,735,966
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-26
<PAGE> 199
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales of products....................................... $71,391,688 $34,411,079 $17,383,904
Service revenues........................................ 21,592,794 16,589,123 12,754,585
----------- ----------- -----------
Total Sales................................... 92,984,482 51,000,202 30,138,489
Cost of products sold................................... 43,827,123 21,485,696 12,657,218
Cost of services........................................ 17,017,674 14,519,917 11,118,411
----------- ----------- -----------
Total Cost of Sales........................... 60,844,797 36,005,613 23,775,629
----------- ----------- -----------
Gross Profit.................................. 32,139,685 14,994,589 6,362,860
Engineering and development............................. 1,861,734 891,959 577,299
Selling, general and administrative..................... 8,999,931 6,210,324 3,124,559
Amortization of goodwill................................ 1,755,798 533,919 157,394
Special charges......................................... -- -- 980,000
----------- ----------- -----------
Operating Income.............................. 19,522,222 7,358,387 1,523,608
Interest and other income............................... 2,503,318 484,211 142,632
Interest expense........................................ (1,355,437) (318,987) (493,797)
----------- ----------- -----------
Income Before Income Taxes.................... 20,670,103 7,523,611 1,172,443
Income taxes............................................ 7,536,000 745,069 --
----------- ----------- -----------
Net Income.................................... $13,134,103 $ 6,778,542 $ 1,172,443
=========== =========== ===========
Net Income Per Common Share:
Basic................................................. $ .76 $ .52 $ .15
=========== =========== ===========
Diluted............................................... $ .70 $ .46 $ .12
=========== =========== ===========
Weighted Average Shares Outstanding:
Basic................................................. 17,242,405 13,044,432 7,858,954
=========== =========== ===========
Diluted............................................... 18,707,781 14,529,994 9,083,260
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-27
<PAGE> 200
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN NOTE RETAINED
COMMON EXCESS OF RECEIVABLE EARNINGS
STOCK PAR VALUE FROM AFFILIATE (DEFICIT) TOTAL
-------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995............ $ 69,182 $14,776,433 $ -- $(13,685,698) $ 1,159,917
Net income............................ 1,172,443 1,172,443
Issuance of 2,583,988 shares for stock
warrants and options................ 25,840 6,703,561 6,729,401
Issuance of 1,181,770 shares in
private placement, net of
expenses............................ 11,818 2,857,607 2,869,425
Issuance of 1,351,603 shares for AIT
acquisition......................... 13,516 2,259,902 2,273,418
Issuance of 517,050 shares for Westec
acquisition......................... 5,171 1,023,279 1,028,450
Note receivable from affiliate, net... (919,836) (919,836)
Issuance of 5,596 shares for matching
contribution to 401K plan........... 56 20,761 20,817
-------- ----------- --------- ------------ -----------
Balance at December 31, 1995.......... 125,583 27,641,543 (919,836) (12,513,255) 14,334,035
Net income............................ 6,778,542 6,778,542
Issuance of 3,487,500 shares in
secondary public offering, net of
expenses............................ 34,875 25,296,375 25,331,250
Issuance of 655,364 shares for Sunrise
acquisition......................... 6,553 2,990,383 2,996,936
Release of 318,654 shares from escrow
for AIT acquisition................. 2,042,373 2,042,373
Repayment of loan by affiliate, net... 348,202 348,202
Issuance of 50,000 shares for
technology license.................. 500 137,020 137,520
Issuance of 246,906 shares for stock
options and warrants................ 2,469 377,629 380,098
Retirement of 672,419 escrowed shares
from 1991 initial public offering... (6,724) 6,724 --
Issuance of 2,883 shares for matching
contribution to 401K plan........... 29 25,232 25,261
-------- ----------- --------- ------------ -----------
Balance at December 31, 1996.......... 163,285 58,517,279 (571,634) (5,734,713) 52,374,217
Net income............................ 13,134,103 13,134,103
Issuance of 1,285,884 shares for CIS
acquisition......................... 12,859 5,601,560 5,614,419
Issuance of 408,205 shares for Galaxy
acquisition......................... 4,082 4,768,893 4,772,975
Release of 159,327 shares from escrow
for AIT acquisition................. 892,231 892,231
Issuance of 121,182 shares for AIT
acquisition......................... 1,212 2,168,788 2,170,000
Release of 50,000 shares from escrow
for Westec acquisition.............. 835,625 835,625
Repayment of loan by affiliate........ 571,634 571,634
Issuance of 1,155,360 shares for stock
options and warrants................ 11,553 4,594,299 4,605,852
Tax benefit from exercises of stock
options and warrants................ 6,675,000 6,675,000
Issuance of 7,091 shares for matching
contribution to 401K plan........... 71 108,803 108,874
-------- ----------- --------- ------------ -----------
Balance at December 31, 1997.......... $193,062 $84,162,478 $ -- $ 7,399,390 $91,754,930
======== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-28
<PAGE> 201
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 13,134,103 $ 6,778,542 $ 1,172,443
Adjustments to reconcile net income to net cash from
(used by) operating activities:
Depreciation and amortization........................ 3,096,356 1,420,052 894,484
Income tax benefit from stock warrants and options... 6,675,000 -- --
Provision for inventory reserves..................... 772,867 197,409 162,345
Provision for bad debts.............................. 171,574 167,612 7,568
Stock contributed to 401K plan....................... 108,874 34,861 19,317
Special charges...................................... -- -- 823,714
Changes in operating assets and liabilities, net of
effects from businesses acquired:
Accounts receivable............................... (8,796,812) (258,167) (6,809,851)
Inventories....................................... (12,147,373) (5,988,385) (1,627,479)
Accounts payable.................................. 4,313,371 (46,669) 177,090
Other assets and liabilities...................... (9,290,063) (310,306) (1,264,163)
------------ ----------- -----------
Net Cash From (Used By) Operating
Activities................................. (1,962,103) 1,994,949 (6,444,532)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses............................. (5,945,724) (436,791) (649,769)
Investment in affiliate................................ (5,002,000) -- --
Repayments by (loans to) affiliates.................... (3,319,534) 348,202 (1,502,336)
Expenditures for property and equipment................ (3,590,978) (1,176,018) (279,571)
Technology licenses.................................... (21,298) (528,050) --
------------ ----------- -----------
Net Cash Used By Investing Activities........ (17,879,534) (1,792,657) (2,431,676)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt............................. 111,909,015 -- --
Net proceeds from secondary public offering............ -- 25,331,250 --
Net proceeds from private equity offerings............. -- -- 2,835,000
Proceeds from exercise of stock warrants and options... 4,605,852 4,251,487 2,961,207
Short-term debt borrowings (repayments)................ (588,715) (5,510,220) 4,338,556
Long-term debt repayments.............................. -- (3,625,000) (125,000)
Debt issuance costs.................................... (499,552) (56,546) --
------------ ----------- -----------
Net Cash From Financing Activities........... 115,426,600 20,390,971 10,009,763
------------ ----------- -----------
Increase in Cash and Equivalents............. 95,584,963 20,593,263 1,133,555
Cash and Equivalents at Beginning of
Period..................................... 22,480,082 1,886,819 753,264
------------ ----------- -----------
Cash and Equivalents at End of Period........ $118,065,045 $22,480,082 $ 1,886,819
============ =========== ===========
Supplemental Schedule of Noncash Financing and
Investing Activities:
Issuance of common stock for businesses acquired....... $ 14,285,250 $ 5,039,309 $ 3,301,868
Issuance of common stock for stockholder notes......... 3,828,194
Reduction in note receivable from affiliate to
recognize contingent purchase price earned........... 582,500 582,500
Conversion of accounts receivable to investment in
technology license................................... 241,919
Issuance of common stock for technology license........ 137,520
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-29
<PAGE> 202
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: GENERAL
NATURE OF BUSINESS
World Access, Inc. and its wholly-owned subsidiaries (the "Company")
operate in one business segment as a provider of systems, products and services
to the global telecommunications marketplace. The Company develops, manufactures
and markets wireline and wireless switching, transport and access products
primarily for the United States, Caribbean Basin and Latin American
telecommunications markets. The Company's products allow telecommunications
service providers to build and upgrade their central office and outside plant
networks in order to provide a wide array of voice, data and video services to
their business and residential customers. The Company offers digital switches,
cellular base stations, fixed wireless local loop systems, intelligent
multiplexers, microwave and millimeterwave radio systems and other
telecommunications network equipment. The products offered by the Company
include those manufactured by the Company as well as those manufactured by other
telecommunications equipment companies. To support and complement its product
sales, the Company also provides its customers with a broad range of design,
engineering, manufacturing, testing, installation, repair and other value-added
services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries from their effective dates of acquisition (see
"Note B"). All material intercompany accounts and transactions are eliminated in
consolidation.
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.
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of the respective
balance sheet dates. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein.
The fair values of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate the carrying values due to their short-term
nature. The fair values of long-term debt are estimated based on current market
rates and instruments with the same risk and maturities and approximate the
carrying value.
REVENUE RECOGNITION
In general, revenues are recognized when the Company's products are shipped
or services are rendered. Occasionally, the Company will enter into long-term
contracts which require percentage of completion accounting treatment.
During 1997, the Company recognized approximately $5.3 million of revenues
under the percentage of completion method. Of this amount, approximately $2.5
million represents costs and estimated earnings in excess of billings and is
included in Other current assets on the Company's December 31, 1997 balance
sheet.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT CUSTOMERS
A portion of the Company's total sales have been derived from significant
customers. During 1997, no customer individually accounted for 10.0% of the
Company's total sales. During 1996, one customer accounted for 10.9% of total
sales. During 1995, two customers individually accounted for 22.7% and 15.1% of
total sales.
CASH AND EQUIVALENTS
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful accounts
of $237,000, $265,000, and $208,000 at December 31, 1997, 1996, and 1995,
respectively.
INVESTMENT IN AFFILIATE
During November and December 1997, the Company purchased 355,000 shares of
NACT Telecommunications, Inc. ("NACT") common stock in the open market for
approximately $5.0 million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA"), a
wholly owned subsidiary of GST, to acquire 5,113,712 shares of NACT common stock
owned by GST USA. On February 27, 1998, the Company completed this purchase
increasing its ownership of NACT to approximately 67.3%. On February 24, 1998,
the Company executed a definitive merger agreement with NACT to acquire the
remaining 32.7% of NACT common shares (see "Note N").
EARNINGS PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. Potential common stock shares of
1,465,376, 1,485,562 and 1,224,306 as of December 31, 1997, 1996 and 1995,
respectively, have been included in computing diluted earnings per share. A
total of 994,736, 401,267 and 895,744 shares of common stock for the years ended
December 31, 1997, 1996 and 1995, respectively, held in escrow from certain
acquisitions (see "Note B"), the Company's initial public offering (see "Note
H") and the TCSI license agreement (see "Note E"), were excluded from the
earnings per share calculations because the conditions for release of shares
from escrow had not been satisfied.
RECLASSIFICATIONS
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the current presentation.
NOTE B: ACQUISITIONS
AIT ACQUISITION
On May 17, 1995, the Company entered into an agreement to acquire AIT, Inc.
("AIT"), a Lakeland, Florida based provider of new and used Northern Telecom
switching systems and related circuit boards to the telecommunications industry.
On July 11, 1995, the transaction was completed in its final form whereby AIT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was merged with and into Restor-AIT, Inc., a wholly-owned subsidiary of the
Company (the "AIT Merger"). In connection with the AIT Merger, the sole
stockholder of AIT received 685,970 restricted shares of the Company's common
stock. These shares had an initial fair value of approximately $1.7 million.
In July 1995, the Company loaned the sole stockholder of AIT $1.3 million
in cash in connection with a $2,330,000 interest bearing promissory note
executed as an integral part of the merger agreement between the two companies.
An additional $1,030,000 was to be loaned to the stockholder as specific
accounts receivable, notes receivable and inventories on AIT's May 17, 1995
balance sheet were collected and/or realized by the Company. As of December 31,
1996, the Company had loaned an aggregate of $2,319,134 to the stockholder. The
principal balance of the note as of December 31, 1996 was $571,634, which was
fully collateralized by shares of the Company's common stock pledged by the sole
stockholder. As a result of this pledge agreement, the note receivable from the
stockholder was accounted for as a reduction of stockholders' equity. As of
December 31, 1997, the amounts due from the stockholder were paid in full.
In addition to the 685,970 shares noted above, the sole stockholder of AIT
was issued 637,308 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $2,330,000 in potential cash
payments, were to be released to the sole stockholder over a two year period
ending August 15, 1997 contingent upon the realization of predefined levels of
gross profit from AIT's operations during this same period. To the extent cash
consideration was paid, the sole stockholder was immediately required to repay
the equivalent amount of borrowings outstanding under the promissory note
described above.
Upon issuance, the 637,308 escrowed shares were valued by the Company at
par value only, or $6,373. As it became probable that the conditions for release
from escrow would be met, the fair market value of the shares as measured at
that time, along with any contingent cash payment earned, were recorded as
additional goodwill and stockholders' equity, respectively.
As of December 31, 1997, the Company had released all 637,308 shares from
escrow and paid additional cash consideration of $2,330,000 based on AIT's gross
profit performance. Based on AIT's pre-tax income performance, an additional
$3.1 million in purchase price was paid to the sole stockholder in August 1997
in the form of 121,182 restricted shares of the Company's common stock. The net
effect of the above has been to increase goodwill and stockholder's equity by
approximately $8.0 million as of December 31, 1997.
As part of a final purchase price settlement agreement entered into in
August 1997, the sole stockholder of AIT pledged 280,509 shares of the Company's
common stock to the Company to effectively guarantee the collectibility of
certain AIT accounts receivable. During the fourth quarter of 1997 and the first
quarter of 1998, these accounts receivable were paid in full through cash
proceeds from the sale of these pledged shares.
The acquisition of AIT has been accounted for using the purchase method of
accounting. Accordingly, the results of AIT's operations have been included in
the accompanying consolidated financial statements from May 17, 1995, the
effective date of acquisition. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values as of the
date of acquisition. The excess of purchase price over the fair value of net
assets acquired, approximately $11.6 million, has been recorded as goodwill and
is being amortized over a 15 year period.
WESTEC ACQUISITION
On October 2, 1995, the Company entered into an agreement to acquire Westec
Communications, Inc. ("Westec"), a Scottsdale, Arizona based provider of
wireless systems and repair services to the cable television and
telecommunications industries. On October 31, 1995, the transaction was
completed in its final form whereby Westec was merged with and into
Restor-Westec, Inc., a wholly-owned subsidiary of the Company (the "Westec
Merger"). Restor-Westec, Inc. subsequently changed its name to Westec
Communications, Inc. In connection with the Westec Merger, the sole stockholder
of Westec received $550,000 and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
272,050 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $900,000.
As part of the Westec Merger agreement, the sole stockholder of Westec may
also receive $1.0 million in additional purchase price (the "Westec Additional
Consideration") contingent upon the realization of predefined levels of pre-tax
income from Westec's operations during five calendar years beginning in 1996.
This additional consideration may be paid, at the option of the Company, in the
form of cash or restricted shares of the Company's common stock valued at the
then current market prices. If earned, the Westec Additional Consideration will
be capitalized as additional goodwill and stockholders' equity, respectively.
In connection with the Westec Merger, the Company entered into a
Compensation Agreement with Sherman Capital Group L.L.C. ("Sherman"), a merchant
banking firm that had a pre-existing letter of intent to acquire Westec.
Pursuant to the Compensation Agreement, Sherman received $100,000 and 45,000
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $150,000. The compensation paid to Sherman has been
accounted for as part of the purchase price of Westec. In addition, 200,000
restricted shares of the Company's common stock were placed in escrow and may be
released to Sherman in installments over a four year period on February 15 of
each year beginning on February 15, 1997, contingent upon the realization of
predefined levels of pre-tax income from Westec's operations. Upon issuance, the
200,000 escrowed shares were valued by the Company at par value only, or $2,000.
As it becomes probable that the conditions for release from escrow will be met,
the fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity.
The first measurement period for purposes of releasing escrowed shares and
paying Westec Additional Consideration was January 1, 1996 to December 31, 1996.
Westec's pre-tax income for the first measurement period failed to meet the
performance criterion required to earn any additional consideration. In
reviewing Westec's pre-tax performance for the second performance period,
January 1, 1997 to December 31, 1997, the Company determined that the earn-out
performance criterion was met. Accordingly, 50,000 escrowed shares were
accounted for as if released to Sherman and $200,000 of Westec Additional
Consideration was accounted for as if paid to the sole stockholder of Westec as
of December 31, 1997. The net effect of this accounting was to increase goodwill
and stockholders equity by approximately $1.0 million and $800,000,
respectively. The escrowed shares were released and Westec Additional
Consideration was paid on February 15, 1998.
The acquisition of Westec has been accounted for using the purchase method
of accounting. Accordingly, the results of Westec's operations have been
included in the accompanying consolidated financial statements from October 2,
1995, the effective date of acquisition. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
of the date of acquisition. The excess of purchase price over the fair value of
net assets acquired, currently estimated at approximately $2.4 million, has been
recorded as goodwill and is being amortized over a 15 year period.
SUNRISE ACQUISITION
In February 1996, the Company entered into an agreement to acquire Comtech
Sunrise, Inc. ("Sunrise"), a Livermore, California based manufacturer of
multiplexers, digital loop carriers and other intelligent transport and access
products. On June 18, 1996, after a mandatory registration process was completed
in the State of California, the transaction was completed in its final form
whereby Sunrise was merged with and into Restor-Comtech, Inc., a wholly-owned
subsidiary of the Company (the "Sunrise Merger"). Restor-Comtech, Inc.
subsequently changed its name to Sunrise Sierra, Inc. In connection with the
Sunrise Merger, the stockholders of Sunrise received approximately $100,000 in
cash and 385,481 shares of the Company's common stock. These shares had an
initial fair value of approximately $2.3 million.
In addition to the 385,481 shares noted above, the stockholders of Sunrise
were issued 211,765 restricted shares of the Company's common stock. These
shares were immediately placed into escrow, and along with
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.8 million in additional purchase price (the "Sunrise Additional
Consideration"), will be released to the stockholders of Sunrise contingent upon
the realization of predefined levels of pre-tax income from Sunrise's operations
during three one-year periods beginning January 1, 1996. The Sunrise Additional
Consideration may be paid, at the option of the Company, in the form of cash or
restricted shares of the Company's common stock valued at the then current
market prices.
Upon issuance, the 211,765 escrowed shares were valued by the Company at
par value only, or $2,118. As it becomes probable that the conditions for
release from escrow will be met, the fair market value of the shares as measured
at that time, along with any Sunrise Additional Consideration earned, will be
recorded as additional goodwill and stockholders' equity, respectively.
The first measurement period for purposes of releasing escrowed shares and
paying Sunrise Additional Consideration was January 1, 1996 to December 31,
1996. In reviewing Sunrise's pre-tax income performance, the Company determined
that the earn-out performance criterion was met. Accordingly, 58,823 escrowed
shares were accounted for as if released and $500,000 of Sunrise Additional
Consideration was accounted for as if paid (in the form of 58,118 restricted
shares of Company common stock) as of December 31, 1996. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$700,000. The escrowed shares were released and additional shares were issued on
February 15, 1997. The second measurement period was January 1, 1997 to December
31, 1997. Sunrise's pre-tax income failed to meet the performance criterion
required to earn any additional consideration for that period.
The acquisition of Sunrise has been accounted for using the purchase method
of accounting. Accordingly, the results of Sunrise's operations have been
included in the accompanying consolidated financial statements from January 1,
1996, the effective date of acquisition as defined in the definitive agreement
and plan of merger. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of
acquisition. The excess of purchase price over the fair value of net assets
acquired, currently estimated at approximately $2.3 million, has been recorded
as goodwill and is being amortized over a 15 year period.
CIS ACQUISITION
On March 11, 1997, the Company entered into an agreement to acquire
Cellular Infrastructure Supply, Inc. ("CIS"), a Burr Ridge, Illinois based
provider of new and/or upgraded equipment and related design, installation and
technical support services to cellular, PCS and other wireless service
providers. On March 27, 1997, the transaction was completed in its final form
whereby CIS was merged with and into CIS Acquisition Corp., a wholly-owned
subsidiary of the Company (the "CIS Merger"). CIS Acquisition Corp. subsequently
changed its name to Cellular Infrastructure Supply, Inc. In connection with the
CIS Merger, the three stockholders of CIS received $3.5 million in cash and
440,874 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $2.6 million.
In addition to the 440,874 shares noted above, the stockholders of CIS were
issued 845,010 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $6.5 million in additional
purchase price (the "CIS Additional Consideration"), will be released and paid
to the stockholders of CIS contingent upon the realization of predefined levels
of pre-tax income from CIS's operations during three one-year periods beginning
January 1, 1997.
Upon issuance, the 845,010 escrowed shares were valued by the Company at
par value only, or $8,450. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any CIS Additional Consideration earned, will be recorded as additional goodwill
and stockholders' equity, respectively.
The first measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1997 to December 31, 1997. In
reviewing CIS's pre-tax income performance as
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of April 30, 1997, the Company determined that it was highly probable that the
conditions for release and payment for the first period would be met.
Accordingly, 317,427 escrowed shares were accounted for as if released and $3.5
million of CIS Additional Consideration was accounted for as if paid as of April
30, 1997. The net effect of this accounting was to increase goodwill and
stockholders' equity by approximately $6.5 million and $3.0 million,
respectively, as of April 30, 1997. These escrowed shares were released and CIS
Additional Consideration was paid to the former stockholders of CIS on February
15, 1998. The $3.5 million of CIS Additional Consideration earned is included in
Purchase price payable on the Company's December 31, 1997 balance sheet.
The acquisition of CIS has been accounted for using the purchase method of
accounting. Accordingly, the results of CIS's operations have been included in
the accompanying consolidated financial statements from January 1, 1997, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $12.5 million, has been recorded as goodwill and is
being amortized over a 15 year period.
GALAXY ACQUISITION
On July 29, 1997, the Company entered into a letter of intent to acquire
Galaxy Personal Communications Services, Inc. ("Galaxy"), a Norcross, Georgia
based provider of system design, implementation, optimization and other
value-added radio engineering and consulting services to PCS, cellular and other
wireless telecommunications service providers. On August 26, 1997, the
transaction was completed in its final form whereby Galaxy was merged with and
into Galaxy Acquisition Corp., a wholly-owned subsidiary of the Company (the
"Galaxy Merger"). Galaxy Acquisition Corp. subsequently changed its name to
Galaxy Personal Communications Services, Inc. In connection with the Galaxy
Merger, the former stockholders of Galaxy received approximately $1.2 million in
cash and 262,203 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $4.2 million.
In addition to the 262,203 shares noted above, the former Galaxy
stockholders were issued 131,101 restricted shares of the Company's common
stock. These shares were immediately placed into escrow, and along with $3.5
million in additional consideration (the "Galaxy Additional Consideration"),
will be released and paid to the former stockholders of Galaxy contingent upon
the realization of predefined levels of pre-tax income from Galaxy's operations
during four measurement periods between July 1, 1997 and December 31, 2000. The
Galaxy Additional Consideration may be paid, at the option of the Company, in
the form of cash or restricted shares of the Company's common stock valued at
the then current market prices.
Upon issuance, the 131,101 escrowed shares were valued by the Company at
par value only, or $1,311. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any Galaxy Additional Consideration earned, will be recorded as additional
goodwill and stockholders' equity, respectively.
The first measurement period for purposes of releasing escrowed shares and
paying Galaxy Additional Consideration was July 1, 1997 to December 31, 1997. In
reviewing Galaxy's pre-tax income performance, the Company determined that the
earn-out performance criterion was met. Accordingly, 15,215 escrowed shares were
accounted for as if released and $400,000 of Galaxy Additional Consideration (in
the form of 14,901 restricted shares of Company common stock) were accounted for
as if paid as of December 31, 1997. The net effect of this accounting was to
increase goodwill and stockholders' equity by approximately $500,000 as of
December 31, 1997. These escrowed shares were released and additional shares
were issued to the former stockholders of Galaxy on February 15, 1998.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of Galaxy has been accounted for using the purchase method
of accounting. Accordingly, the results of Galaxy's operations have been
included in the accompanying consolidated financial statements from July 1,
1997, the effective date of acquisition as defined in the definitive agreement
and plan of merger. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of
acquisition. The excess of purchase price over the fair value of net assets
acquired, currently estimated at approximately $5.1 million, has been recorded
as goodwill and is being amortized over a 15 year period.
PRO FORMA RESULTS OF OPERATIONS
On a pro forma, unaudited basis, as if the acquisitions of AIT, Westec and
Sunrise had occurred as of January 1, 1995, total sales, operating income, net
income and diluted net income per common share for the year ended December 31,
1995 would have been approximately $38,100,000, $2,200,000, $1,800,000 and
$0.17, respectively.
On a pro forma, unaudited basis, as if the acquisition of CIS had occurred
as of January 1, 1996, total sales, operating income, net income and net income
per diluted common share for the year ended December 31, 1996 would have been
approximately $63,810,000, $10,680,000, $8,520,000, and $0.57, respectively. The
results of operations for Galaxy during 1996 and the first six months of 1997
were not material and therefore are not included in the pro forma disclosure.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
dates indicated.
NOTE C: INVENTORIES
Inventories are stated at the lower of cost or market as determined
primarily on a first-in, first-out basis. To address potentially obsolete and
slow moving inventories and related market valuation adjustments, the Company
charged to operations for the years ended December 31, 1997, 1996 and 1995
approximately $773,000, $197,000 and $162,000, respectively.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Switching systems, frames and related circuit boards........ $13,445,770 $ 6,902,886
Electronic components....................................... 4,879,213 2,539,497
Pay telephone parts......................................... 1,332,835 494,315
Work in progress............................................ 1,744,368 437,926
Other finished goods........................................ 1,024,732 282,788
----------- -----------
$22,426,918 $10,657,412
=========== ===========
</TABLE>
The switching systems, frames and related circuit board inventory at
December 31, 1997 includes approximately $3.8 million of consigned inventory
held at Resurgens Communications Group (see "Note M").
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D: PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation as
computed using the straight-line method. Leasehold improvements are depreciated
over their remaining estimated lease term. Estimated lives for other depreciable
assets range from three to eight years. Depreciation expense for the years ended
December 31, 1997, 1996 and 1995 was $1,040,000, $829,000 and $690,000,
respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Leasehold improvements...................................... $ 915,258 $ 686,683
Manufacturing assembly and test equipment................... 9,865,060 6,463,996
Office furniture and equipment.............................. 1,739,870 1,328,730
Vehicles.................................................... 129,498 84,975
----------- -----------
12,649,686 8,564,384
Accumulated depreciation.................................... (6,945,101) (5,906,723)
----------- -----------
$ 5,704,585 $ 2,657,661
=========== ===========
</TABLE>
The Company leases various facilities and equipment under operating leases.
As of December 31, 1997, future minimum payments under noncancelable operating
leases with initial or remaining terms of more than one year are approximately:
1998 -- $750,000, 1999 -- $545,000, 2000 -- $322,000; 2001 -- $300,000; and
2002 -- $58,000.
Total rental expense under operating leases for the years ended December
31, 1997, 1996 and 1995 was approximately $1,732,000, $1,327,000 and $670,000,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by the Company.
NOTE E: TECHNOLOGY LICENSES
In March 1996, the Company entered into a memorandum of understanding with
International Communication Technologies, Inc. ("ICT") and Eagle Telephonics,
Inc. ("Eagle") to manufacture, market and sell a new modular, digital central
office switch developed by Eagle. In July 1996, a long-term technology licensing
agreement was executed by all three parties. As consideration for this license,
the Company paid Eagle $250,000 in cash and provided it $450,000 of
manufacturing services. The license fees paid Eagle will be amortized to expense
in connection with the first 300,000 lines of phone service provided for within
the switches sold by the Company, i.e. approximately $2.50 per line. In addition
to the up-front consideration, the Company agreed to pay ICT certain royalties
based on future sales of the switch by the Company. During 1997, the Company
expensed license fees and royalties of approximately $200,000 in connection with
lines sold during the year. In connection with this license and the up-front
consideration paid, the Company received 1.2 million restricted shares of Eagle
common stock. The fair value of these shares was not material as of December 31,
1997.
In December 1996, the Company executed a technology licensing agreement
with TCSI Corporation ("TCSI") that grants the Company the perpetual rights to
incorporate TCSI's spread spectrum Code Division Multiple Access ("CDMA") based
wireless technology into the Company's products sold throughout the world. Under
the terms of the agreement, the Company also has the rights to use the
technology covered by seven TCSI patents, all of which address digital data
signals and wireless communication systems. As total consideration for this
license, TCSI was paid $50,000 in cash and 25,000 shares of restricted Company
common stock. These shares had an initial fair value of approximately $150,000.
In addition to the 25,000 shares noted above, TCSI was issued 25,000 shares of
restricted common stock. These shares were immediately placed into escrow and
will be released to TCSI upon the earlier of the first commercial use of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the technology by the Company or the expiration of the two year period from the
date the license was executed. As of December 31, 1997, no escrowed shares had
been released to TCSI.
NOTE F: GOODWILL
Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CIS......................................................... $12,485,239 $ --
AIT......................................................... 11,557,917 6,403,187
Galaxy...................................................... 5,089,265 --
Westec...................................................... 2,364,660 1,329,035
Sunrise..................................................... 2,284,500 2,159,500
Other....................................................... 384,902 384,902
----------- -----------
34,166,483 10,276,624
Accumulated amortization.................................... (2,506,282) (750,484)
----------- -----------
$31,660,201 $ 9,526,140
=========== ===========
</TABLE>
Goodwill is being amortized on a straight-line basis over a 15 year period.
The Company reviews the net carrying value of goodwill on a regular basis, and
if deemed necessary, charges are recorded against current operations for any
impairment in the value of these assets. No significant impairment charges have
been recorded to date. Goodwill is removed from the books when fully amortized.
NOTE G: DEBT
SUMMARY
The Company had no debt outstanding as of December 31, 1996. Debt as of
December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Convertible subordinated notes.............................. $115,000,000
Capital lease obligations and other debt.................... 345,723
------------
Total debt........................................ 115,345,723
Amount due within one year.................................. (81,739)
------------
Long -- term debt................................. $115,263,984
============
</TABLE>
Interest paid for the years ended December 31, 1997, 1996 and 1995 was
$57,000, $352,000 and $507,000, respectively.
CONVERTIBLE SUBORDINATED NOTES
On October 1, 1997, the Company sold $100.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year, commencing on April 1, 1998. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all existing and senior indebtedness. The Company received $97.0 million from
the sale of the Notes, after the application of the initial purchasers' discount
fees of $3.0 million.
C-38
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the Notes sold on October 1, 1997, the Company granted the
initial purchasers an option to purchase up to an additional $15.0 million in
Notes to cover over-allotments. On October 28, 1997, the initial purchasers
exercised the over-allotment option in full and the Company received an
additional $14,550,000, after the application of the initial purchasers'
discount fees of $450,000.
The discount fees and legal, accounting, printing and other expenses (the
"Debt issuance costs") related to the Notes offering amounted to approximately
$4.0 million, and are being amortized to expense over the five year term of the
Notes. During 1997, the Company recognized approximately $200,000 of debt
issuance cost amortization related to the Notes. Debt issuance costs of
approximately $3.8 million are included in Other assets on the Company's
December 31, 1997 balance sheet.
BANK DEBT
In December 1996, the Company's agreement with a large European bank was
amended to increase its revolving line of credit to $10 million. Borrowings
under the line are secured by a first lien on substantially all the assets of
the Company. The bank agreement, which expires in March 2001, contains standard
lending covenants including financial ratios, restrictions on dividends and
limitations on additional debt and the disposition of Company assets. Interest
is paid at the rate of prime plus 1 1/4% or LIBOR plus 2 1/2%, at the option of
the Company.
Prior to 1996, the Company's principal source of debt financing since May
1992 has been with this European bank. In connection with operating losses
experienced by the Company, restructuring programs implemented by the Company
and violations of financial covenants established by the bank, the bank
agreement was amended several times during 1992 through 1994 to defer principal
payments and restructure financial covenants. In consideration for the original
credit facility and the significant concessions provided during this period, the
bank received warrants to purchase 360,000 shares of the Company's common stock
at its then current market price of $1.25 per share.
In July 1995, the Company received a new $2 million revolving line of
credit from the bank. In consideration for the line of credit and a reduced
interest rate, the Company paid the bank a $30,000 origination fee and issued
the bank warrants to purchase 100,000 shares of the Company's common stock at
its then current market price of $3.82 per share on or prior to October 31,
1999. In October 1995, the bank paid the Company $832,000 to exercise all
460,000 warrants (see "Note I").
In October 1996, in connection with a secondary public equity offering
completed by the Company, the Company paid the bank $3.9 million to pay off the
outstanding principal balance on its term loan.
NOTE H: STOCKHOLDERS' EQUITY
During September and October 1996, 3,487,500 shares of Company common stock
were sold in a secondary public offering at a price of $8.00 per share. The
Company received $26,156,250 from this offering, net of underwriting discounts.
The Company incurred additional expenses of approximately $825,000 in connection
with this offering.
During June and July 1995, 1,168,000 restricted shares of the Company's
common stock were sold in a private placement for a gross consideration of
$2,920,000, or its then current market price of $2.50 per share. Participants in
the offering also received warrants to purchase a total of 1,168,000 of
additional shares of restricted common stock at $3.50 per share on or prior to
June 30, 2000. Approximately $275,000 of the offering was purchased by the
directors and management of the Company. In October 1995, stockholders paid the
Company approximately $4.1 million to exercise all warrants issued as a result
of the private offering (see "Note I").
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Company's initial public offering in August 1991,
all of the existing holders of the Company's common stock placed in escrow an
aggregate of 672,419 shares of the Company's common stock. As of August 12,
1996, the termination date of the escrow agreement, the conditions for release
of the shares had not been met. Accordingly, the 672,419 escrowed shares of
Company common stock were returned to the Company and became authorized but
unissued shares.
NOTE I: STOCK WARRANTS AND OPTIONS
STOCK WARRANTS
In connection with various financial transactions completed by the Company
during 1992 to 1995, equity investors (see "Note H"), debtors (see "Note G") and
certain consultants were issued warrants to purchase shares of the Company's
common stock in the future. All of these warrants had exercise prices that were
set at or above the then current market price of the Company's common stock at
the respective dates of grant.
In October 1995, the Company raised approximately $6.5 million of new
capital through the exercise of previously issued warrants and non-qualified
options to purchase 2,433,853 shares of the Company's common stock. Of the $6.5
million raised, approximately $1.6 million was invested by the directors,
management and the principal lender of the Company. In exercising their warrants
or options, investors had the option of paying cash or executing an 8% interest
bearing note payable to the Company. Approximately $2.4 million of the total
proceeds was paid in cash and $4.1 million through notes. The notes were paid in
full by March 29, 1996.
As of December 31, 1997, there were no warrants outstanding to purchase
Company common stock except for the Director warrant plans discussed below.
DIRECTOR WARRANT PLANS
In December 1994, in an effort to attract and retain experienced executives
to serve as outside directors for the Company, the Company's Board of Directors
adopted an Outside Directors' Warrant Plan (the "Plan").
In December 1994, three new outside directors of the Company were awarded a
total of 450,000 warrants. Each director received 150,000 warrants and each
warrant entitles the director to purchase one share of the Company's common
stock on or prior to December 15, 1999 per the following terms:
<TABLE>
<CAPTION>
EXERCISE
WARRANTS PRICE VESTING
- -------- -------- -------
<S> <C> <C>
50,000................................................... $1.50 December 15, 1995
50,000................................................... 2.25 December 15, 1995
50,000................................................... 4.00 December 15, 1996
</TABLE>
Concurrent with the above initial grant, a fourth outside director of the
Company was awarded 126,000 warrants. The terms of this grant were exactly as
those described above except the number of warrants at the $1.50 exercise price
was set at 26,000 instead of 50,000.
During 1997, outside directors paid the Company approximately $900,000 to
exercise 358,660 warrants. As of December 31, 1997, 217,340 warrants are
exercisable by the Company's outside directors under the Plan.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1994, the Company's Board of Directors awarded Steven A. Odom,
who joined the Board in October 1994 and became Chairman in November 1994, an
initial grant of 450,000 warrants under the Plan. Each warrant entitles Mr. Odom
to purchase one share of the Company's common stock on or prior to December 15,
1999 per the following terms:
<TABLE>
<CAPTION>
EXERCISE
WARRANTS PRICE VESTING
- -------- -------- -------
<S> <C> <C>
150,000.................................................. $1.50 December 15, 1995
150,000.................................................. 2.25 December 15, 1995
150,000.................................................. 4.00 December 15, 1996
</TABLE>
In August 1997, Mr. Odom paid the Company $225,000 to exercise 150,000
warrants at $1.50. As of December 31, 1997, 300,000 warrants are exercisable by
Mr. Odom under the Plan.
In December 1994, the Board also adopted the Directors Warrant Incentive
Plan, pursuant to which the Board, beginning in 1997, may grant to each director
on an annual basis warrants to purchase up to 50,000 shares of Company common
stock at an exercise price per share equal to no less than 110% of the fair
market value of the common stock at the date of grant. Warrants may only be
issued under this plan if the Company's common stock has appreciated by a
compounded annual average rate of in excess of 35% for the four years preceding
the year of grant. In March 1997, the four outside directors of the Company were
each granted warrants to purchase 50,000 shares of Company common stock at $9.21
per share. These warrants became fully vested on December 31, 1997.
The vesting of all warrants awarded pursuant to the plans above will be
subject to the director to whom such warrants have been granted attending at
least 75% of the meetings of the Board of Directors for the year in which such
warrants are scheduled to vest. Notwithstanding this limitation, the warrants to
be awarded pursuant to the plans will become immediately exercisable (i) if the
Company is to be consolidated with or acquired by another entity in a merger,
(ii) upon the sale of substantially all of the Company's assets or the sale of
at least 90% of the outstanding common stock of the Company to a third party,
(iii) upon the merger or consolidation of the Company with or into any other
corporation or the merger or consolidation of any corporation with or into the
Company (in which consolidation or merger the shareholders of the Company
receive distributions of cash or securities as a result thereof), or (iv) upon
the liquidation or dissolution of the Company.
STOCK OPTION PLANS
In 1991, the Company's stockholders adopted the 1991 Stock Option Plan (the
"1991 Plan"). The 1991 Plan, as amended, provided for the granting of up to
3,500,000 options. As of December 31, 1997, no options were available for future
grant under the 1991 Plan.
In December 1997, the Company's Board of Directors authorized the adoption
of the 1998 Incentive Compensation Plan (the "1998 Plan"). The 1998 Plan, which
is subject to shareholder approval, provides for the granting of up to 5,000,000
options. As of December 31, 1997, there were 4,025,000 options available for
future grant under the 1998 Plan.
These plans allow the Board of Directors to grant non-qualified and
incentive stock options to purchase the Company's common stock at an exercise
price not less than fair market value as of the grant date. Options issued under
these plans typically vest over a four year period. Options awarded under the
1991 Plan and the 1998 Plan are subject to the same vesting acceleration
provisions described above under the Director warrant plans.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity relating to both plans:
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF OPTIONS PRICE
---------- -------
<S> <C> <C>
Balance at January 1, 1995.................................. 765,857 $1.70
Options granted............................................. 1,246,327 5.62
Options exercised........................................... (167,400) 1.86
Options lapsed or canceled.................................. (162,955) 1.93
---------
Balance at December 31, 1995................................ 1,681,829 4.57
Options granted............................................. 883,269 8.03
Options exercised........................................... (170,030) 1.47
Options lapsed or canceled.................................. (67,940) 5.38
---------
Balance at December 31, 1996................................ 2,327,128 6.08
Options granted............................................. 1,955,500 16.95
Options exercised........................................... (647,700) 5.77
Options lapsed or canceled.................................. (80,440) 7.23
---------
Balance at December 31, 1997................................ 3,554,488 12.14
=========
Exercisable at December 31, 1997............................ 1,101,800 7.64
=========
</TABLE>
The options outstanding at December 31, 1997 have been segregated into four
price ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
WEIGHTED-OPTIONS WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE PRICES
- ---------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$ 1.25-2.25............................. 78,863 1.9 $ 1.88
3.78-3.97............................. 414,500 2.7 3.79
7.00-9.75............................. 1,624,125 3.7 8.01
19.00-25.25............................ 1,437,000 5.0 19.78
</TABLE>
In December 1995, the Company offered a voluntary salary reduction program
for 1996 that resulted in the grant of 424,627 non-qualified stock options at
the then current market price of $7.00 per share. Salaried employees voluntarily
agreed to reduce their salaries by $849,254, i.e. $2 in exchange for each stock
option granted. The options vested based upon the attainment of specific
financial and operational objectives during the year. As of December 31, 1996,
these options had become fully vested.
In December 1996, the Company offered a similar voluntary salary reduction
program for 1997 that resulted in the grant of 413,019 non-qualified options at
the then current market price of $8.00 per share. Salaried employees voluntarily
agreed to reduce their salaries by $826,038, i.e. $2 in exchange of each stock
option granted. The options vested based upon the Company achieving key
operational objectives during the year including 25% internal sales growth,
improved inventory turnover and specific enhancements to the Company's quality
and information systems designed to facilitate growth. As of December 31, 1997,
these options had become fully vested.
An additional element of the 1996 and 1997 voluntary salary reduction
programs provided for the potential repayment of salaries if certain pre-tax
income amounts are realized by the Company. Full repayment was earned and
recorded to expense in 1996 and a 30% partial repayment was earned and recorded
to expense in 1997.
In August 1995, the Company granted its new President and Chief Operating
Officer 400,000 options at $3.78 per share, the market price of the Company's
common stock on the date his offer of employment was accepted. These options
vest 25% on each of the first four anniversaries from the initial date of
employment.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, the Company granted its Chairman and Chief Executive
Officer and its Vice President and Chief Financial Officer 200,000 and 50,000
options, respectively, at the then market price of $7.00 per share. The 200,000
options vested 50% on the first two anniversaries from the date of grant. The
50,000 options vested 25% immediately and the remaining 25% on each of the next
three anniversaries from the date of grant.
In December 1997, the Company made an initial grant of 975,000 options
under the 1998 Plan to its Chairman and Chief Executive Officer (400,000
options), President and Chief Operating Officer (300,000 options), Executive
Vice President and Chief Financial Officer (200,000 options) and Executive Vice
President of Business Development (25,000 options). These options, which are
subject to stockholder approval, vest 25% on each of the first four
anniversaries from the date of grant and are exercisable at $19.00 per share,
the market price at the date of grant. The date the stockholders approve the
1998 Plan will become the measurement date for purposes of computing
compensation expense, if any. If the stock price as of the measurement date
exceeds $19.00, then the total compensation impact will be the difference
between stock price at the measurement date and $19.00. The Company will record
that expense ratably over a period of four years.
PRO FORMA RESULTS OF OPERATIONS
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its employee
stock options. Therefore, no compensation cost has been recognized related to
stock options. If the company had elected to account for its stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net Income
As reported..................................... $13,134,103 $6,778,542 $1,172,443
Pro forma....................................... 11,380,000 6,100,000 980,000
Basic EPS
As reported..................................... 0.76 0.52 0.15
Pro forma....................................... 0.66 0.47 0.12
Diluted EPS
As reported..................................... 0.70 0.46 0.12
Pro forma....................................... 0.61 0.42 0.11
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Since the Company's employee stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option has been estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend Yield.............................................. n/a n/a n/a
Expected volatility......................................... 44 50 50
Risk-free interest rate..................................... 5.5 5.1 6.0
Expected life of stock options (in years)................... 4.5 3.0 4.0
</TABLE>
NOTE J: RETIREMENT SAVINGS PLAN
The Company has a retirement savings 401(k) plan that covers substantially
all employees. The plan provides for the employees to voluntarily contribute a
portion of their compensation on a tax deferred basis and allows for the Company
to make discretionary matching contributions as determined by the Board of
Directors. For the years ended December 31, 1997, 1996 and 1995, the Company
contributed approximately $109,000, $42,000 and $19,000, respectively, in the
form of Company common stock to the Plan. In 1997, Company contributions were
based on a 50% match to employee contributions, up to the first six percent
contributed.
NOTE K: INCOME TAXES
The Company uses the asset and liability approach for financial accounting
and reporting for income taxes. Certain expenses are reported for financial
accounting purposes in different periods than for income tax purposes. These
temporary differences arise primarily from depreciation, bad debt reserves,
inventory valuation and various reserves.
The provision for income taxes for the years ended December 31, 1997 and
1996 was computed in accordance with SFAS No. 109, "Accounting for Income Taxes"
and consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Current income taxes
Federal................................................... $5,362,500 $1,009,003
State..................................................... 613,000 189,188
---------- ----------
5,975,500 1,198,191
---------- ----------
Deferred income taxes
Federal................................................... 1,400,500 (405,425)
State..................................................... 160,000 (47,697)
---------- ----------
1,560,500 (453,122)
---------- ----------
Total income taxes................................ $7,536,000 $ 745,069
========== ==========
</TABLE>
As of December 31, 1997, the Company has capital loss carryforwards of
approximately $1.2 million expiring in 1998.
As a result of the exercises of non-qualified stock options and warrants by
the Company's directors and employees during 1997, the Company has realized a
federal income tax benefit of approximately $6.7 million. This tax benefit has
been accounted for as a decrease in current income taxes payable and an increase
in capital in excess of par value.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes. The sources
and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate................... $7,210,000 35.0% $2,558,028 34.0%
Effect of:
State tax, net of federal benefit............. 825,000 4.0 373,041 5.0
Nondeductible purchase adjustments............ 575,000 2.8 190,000 2.5
Reduction in valuation allowance, utilization
of net operating loss carryforwards and
reduction of reserves...................... (1,074,000) (5.3) (2,376,000) (31.6)
---------- ---- ---------- -----
Income tax expense............................ $7,536,000 36.5% $ 745,069 9.9%
========== ==== ========== =====
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets
Accrued liabilities....................................... $ 978,594 $ 793,809
Net operating loss carryforwards.......................... -- 1,519,658
Capital loss carryforwards................................ 493,071 480,428
Other..................................................... 455,001 314,646
---------- ----------
1,926,666 3,108,541
Deferred tax liabilities
Depreciation/amortization................................. (496,147) (406,481)
Other..................................................... (182,367) --
Valuation allowance......................................... (493,071) (480,428)
---------- ----------
Net deferred tax assets..................................... $ 755,081 $2,221,632
========== ==========
</TABLE>
The valuation allowance relates to capital losses whose use is limited to
capital gains the Company would record. These losses will expire during 1998,
and currently there are no foreseeable events which would allow for the
utilization of the losses.
NOTE L: SPECIAL CHARGES
In the second quarter of 1995, the Company recorded a one-time special
charge of $980,000 for the following items:
<TABLE>
<CAPTION>
<S> <C>
Write-down of test equipment and related tooling............ $675,000
Consolidation of repair operations.......................... 95,000
Retirement benefits and relocation costs.................... 150,000
Other....................................................... 60,000
--------
$980,000
========
</TABLE>
As a result of the significant decline in analog circuit board repair
revenues experienced by the Company in recent years, the shift in strategic
focus to new digital repair services and programs offered by the Company in
1995, the acquisition of AIT and other market considerations, the Company
elected to consolidate certain operations and significantly write-down the net
book value of certain assets related to repair operations. These assets
primarily represent test equipment, tooling, dies and diagnostic programs for
the repair of analog
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<PAGE> 218
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
telecommunications equipment. All of these assets were capitalized in 1988 to
1990 in connection with acquisitions made by the Company.
NOTE M: RELATED PARTY TRANSACTIONS
In October 1997, John D. Phillips, a director of the Company, entered into
a series of agreements whereby, among other things, he became the new Chairman
and Chief Executive Officer of Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("Resurgens"), a facilities-based provider of
international network access commonly referred to as a carriers' carrier.
Resurgens was shortly thereafter placed into bankruptcy under Chapter 11 of the
United States Bankruptcy Code. WorldCom, Inc. ("WorldCom"), a major customer and
vendor of Resurgens, has subsequently agreed to provide Resurgens up to $28
million in financing in the form of a debtor in possession facility and other
credits.
During the fourth quarter of 1997, the Company shipped switching equipment
to Resurgens. The cost of this equipment was approximately $3.8 million. On
February 12, 1998, the Company executed a letter of intent to acquire Resurgens.
The equipment shipped to Resurgens is included in the Company's inventory at
December 31, 1997 (see "Note C").
The Resurgens acquisition is subject to, among other things, the
satisfactory completion by the Company of its due diligence investigation of
Resurgens, the preparation and execution of a definitive merger agreement, the
receipt of the requisite corporate and regulatory approvals and the confirmation
of Resurgens' Plan of Reorganization.
NOTE N: SUBSEQUENT EVENTS
ATI ACQUISITION
On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for short and
long haul voice, data and/or video applications. On January 29, 1998, the
transaction was completed in its final form whereby ATI was merged with and into
CIS, a wholly-owned subsidiary of the Company (the "ATI Merger"). In connection
with the ATI Merger, the stockholders of ATI received approximately $300,000 in
cash and 418,054 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $8.0 million.
In addition to the 418,054 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be released to the stockholders of
ATI contingent upon the realization of predefined levels of pre-tax net income
from ATI's operations during calendar years 1998 and 1999.
In December 1997, the Company loaned ATI approximately $4.5 million. The
note receivable from ATI is included in Other assets on the Company's balance
sheet at December 31, 1997.
NACT ACQUISITION
In the fourth quarter of 1997, the Company began a three phase acquisition
of NACT. NACT, based in Provo Utah, is a leading single-source provider of
advanced telecommunications switching platforms with integrated telephony
software applications and network telemanagement capabilities.
During November and December 1997, the Company purchased 355,000 shares of
NACT common stock in the open market for approximately $5.0 million (see "Note
A").
On December 31, 1997, the Company entered into a stock purchase agreement
with GST and GST USA to acquire 5,113,712 shares of NACT common stock owned by
GST USA, representing approximately 63% of
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the outstanding shares of NACT (the "Acquisition"). On February 27, 1998, the
Acquisition was completed with GST USA receiving $59.7 million in cash and
1,429,907 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $23.0 million.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA. Pursuant to the terms of the
merger agreement, each share of NACT common stock will be converted into shares
of Company common stock having a value of $17.50 per share based on the average
of the daily closing price of Company common stock on the Nasdaq National Market
for a pre-defined period prior to the closing (the "Closing Price"), provided
that if the Closing Price is more than $25.52, then each share of NACT common
stock will be converted into 0.6857 shares of Company common stock. If the
Closing Price is less than $20.88, then the Company may elect to terminate the
agreement. The merger is subject to, among other things, the approval of the
NACT stockholders and the satisfaction of certain other customary conditions.
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A. Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, alleging that telephone
systems manufactured and sold by NACT incorporating prepaid debit card features
infringe upon Aerotel's patent which was issued in November 1987 (the "Aerotel
Patent"). Aerotel sought injunctive relief, damages in an unspecified amount,
damages of up to three times damages found for willful infringement of the
Aerotel Patent and an order requiring NACT to publish a written apology to
Aerotel. NACT filed an answer and Counterclaim in which it denied infringement
of the Aerotel Patent and sought judgement that the Aerotel patent is invalid
and unenforceable and that Aerotel has misused its patent in violation of
antitrust laws. NACT has denied that it has committed defamation, unfair
competition and tortious interference with prospective business relations. In
August 1997, Aerotel amended its complaint to include as defendants GST, GST
USA, and two former executive officers of NACT. The amended pleadings seek in
excess of $18.7 million in damages and allege that GST and GST USA have
infringed the Aerotel patent, aided and abetted infringement by others,
including NACT, and participated in, and aided and abetted alleged tortious
conduct by NACT. GST, GST USA and the two former executive officers of NACT have
served answers denying all material allegations and intend to defend vigorously.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST have agreed to share evenly the costs of any judgement against
NACT as a result of the Aerotel litigation, including NACT's legal fees. The
Company believes that NACT has valid defenses to the Aerotel claims. An
unfavorable decision in this action could have a material adverse effect on the
Company's financial position.
RESURGENS PENDING ACQUISITION
On February 12, 1998, the Company executed a letter of intent to acquire
Resurgens (see "Note M").
PRO FORMA RESULTS OF OPERATIONS
On a pro forma, unaudited basis, as if the acquisitions of ATI and NACT had
occurred as of January 1, 1996, total sales, operating income, net income (loss)
and diluted net income (loss) per common share for the years ended December 31,
1997 and 1996 would have been approximately $136,520,000 and $80,360,000;
$13,608,000 and $13,000; $6,919,000 and $(629,000); and $0.37 and $(0.04),
respectively.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
date indicated.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no such changes and disagreements with its accountants
during the period covered by this Report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Board of Directors of the Company is divided into three classes. The
directors in each class serve staggered three-year terms expiring in 1998, 1999
and 2000, respectively. The number of directors has been fixed at six, and there
is currently one vacancy in the class with the term expiring in 1999. William P.
O'Reilly, who served as a director of the Company since 1994, resigned effective
as of April 22, 1998.
Set forth below is certain information, as of April 20, 1998, concerning
each of the directors of the Company.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Stephen J. Clearman. Mr. Clearman (age 47) has served as a director of the
Company since 1988. Mr. Clearman co-founded Geocapital Partners. Since 1984, he
has served as a general partner of four Geocapital venture capital partnerships.
Two of these partnerships (Geocapital Ventures and Geocapital II, L.P.) were
formerly principal stockholders of the Company. Mr. Clearman currently serves as
a director of Expert Software, Inc., MemberWorks Incorporated, SeaMED
Corporation and several private companies, all of which principally provide
computer software and/or information services.
Stephen E. Raville. Mr. Raville (age 50) has served as a director of the
Company since 1994. Mr. Raville has been Chairman of the Board and Chief
Executive Officer of Charter Communications International, Inc. ("Charter"), an
operator of international communications networks, since October 1996. Mr.
Raville is also President and controlling shareholder of First Southeastern
Corp., a private investment company he formed in 1992. In 1983, Mr. Raville
founded TA Communications ("TA"), a long-distance telephone company, and served
as its President. In 1985, in conjunction with a merger between TA and Advanced
Telecommunications Corporation ("ATC"), he became Chairman and Chief Executive
Officer of ATC until the merger of ATC into WorldCom, Inc. ("WorldCom") in late
1992. He currently serves on the board of advisors of First Union National Bank
of Atlanta and the board of directors of Eltrax Systems, Inc. and several
private companies.
DIRECTOR WHOSE TERM EXPIRES IN 1999
Hensley E. West. Mr. West (age 53) joined the Company in January 1996 as
President and Chief Operating Officer and was also elected a director in January
1996. From January 1994 to December 1995, he was Group Vice President for the
Access Systems Group of DSC Communications Corporation ("DSC"), a manufacturer
of digital switching, transmission and access telecommunications equipment.
During his nine year tenure with DSC, he held six sales and general management
positions, including Senior Vice President of North American Sales from July
1993 to December 1993, Vice President of Access Products Division from March
1992 to July 1993, Vice President of RBOC Sales from October 1991 to March 1992
and Vice President of Business Development from March 1990 to October 1991.
Prior to joining DSC, Mr. West held general, engineering and sales management
positions with California Microwave, Inc., ITT Telecommunications, Inc. and
Western Electric Co.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Steven A. Odom. Mr. Odom (age 44) joined the Company's Board of Directors
in October 1994. In November 1994, he was appointed to the newly created
position of Chairman of the Board. In August 1995,
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he became Chairman and Chief Executive Officer of the Company. From 1983 to
1987, he founded and served as Chairman and Chief Executive Officer of Data
Contract Company, Inc. ("DCC"), a designer and manufacturer of intelligent data
PBX systems, pay telephones and diagnostic equipment. From 1987 to 1990, he was
Vice President for the Public Communications Division of Execution Information
Systems, Inc., a public company that acquired DCC in 1987. Mr. Odom formerly
served as a director for Telematic Products, Inc., a manufacturer of telephone
central office equipment and Resurgens Communications Group, Inc. ("Resurgens"),
a provider of long distance operator services that later merged with LDDS
Communications, Inc., now known as WorldCom.
John D. Phillips. Mr. Phillips (age 55) has served as a director of the
Company since 1994. In October 1997, Mr. Phillips was named Chairman and Chief
Executive Officer of Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) (see "Certain Relationships and Related Transactions"). He
was President, Chief Executive Officer and a director of Metromedia
International Group, Inc. ("Metromedia"), a global media, entertainment and
communications company, from November 1995 until December 1996. Metromedia was
formed in November 1995 through the merger of The Actava Group, Inc. ("Actava"),
Orion Pictures Corporation, MCEG Sterling Incorporated and Metromedia
International Telecommunications, Inc. Mr. Phillips served as President, Chief
Executive Officer and a director of Actava from April 1994 until November 1995.
In May 1989, he became Chief Executive Officer of Resurgens and served in this
capacity until September 1993 when Resurgens merged with Metromedia
Communications Corporation and WorldCom.
EXECUTIVE OFFICERS
The information with respect to the Company's executive officers is set
forth in Item 4.5 of Part I of this Report.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers, and
persons who own beneficially more than ten percent of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of such securities of the Company.
Directors, executive officers and greater than ten-percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) reports they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required, all Section 16(a) filing requirements applicable to its directors,
executive officers and greater than ten-percent beneficial owners were complied
with during the 1997 fiscal year, except that Mr. Raville did not report his
acquisition of a warrant to acquire 50,000 shares of common stock in March 1997
until he filed his Form 4 in March 1998.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive no cash compensation from the
Company for their service as directors. Their compensation is in the form of
stock warrants as discussed below. The directors are reimbursed for
out-of-pocket travel and related expenses incurred in connection with their
attendance at meetings of the Board or its committees and at other Company
events to which they are invited.
In December 1994, in an effort to attract and retain experienced executives
to serve as outside directors for the Company, the Board adopted the World
Access, Inc. Outside Directors' Warrant Plan (the "Warrant Plan"). The
stockholders of the Company approved the Warrant Plan at the 1995 Annual Meeting
of Stockholders.
The purposes of the Warrant Plan are to attract and retain the best
available personnel for service as directors of the Company, to provide
additional incentive to the persons serving as directors of the Company,
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to align director and stockholder long-term interests and to encourage continued
service on the Board. Warrants may be granted under the Warrant Plan only to
directors of the Company who are neither employees of the Company nor of any of
its affiliates. The aggregate number of shares of Company common stock
authorized to be issued pursuant to the Warrant Plan is 1,200,000, subject to
adjustment in certain instances as described below. The Warrant Plan provides
that each eligible non-employee director elected to serve as a director of the
Company on or after October 1, 1994 may be granted, in the discretion of the
Board, warrants to purchase no more than 450,000 shares of Company common stock
in the aggregate. The initial exercise price of the warrants will be not less
than the fair market value of the common stock subject to the warrant on the
date of grant.
In December 1994, three new outside directors of the Company, Messrs.
O'Reilly, Phillips and Raville, each received warrants entitling him to purchase
150,000 shares of common stock on or prior to December 15, 1999. These warrants,
now fully vested, are exercisable at a price of $1.50 per share with respect to
50,000 shares, $2.25 per share with respect to 50,000 shares and $4.00 per share
with respect to 50,000 shares. At the time these warrants were granted, the fair
market value of the common stock was $1.25 per share. During 1997, Mr. O'Reilly
and Mr. Phillips exercised 150,000 and 50,000 warrants, respectively, and Mr.
Phillips donated 32,660 warrants to charitable organizations.
Concurrent with the above initial grant, Mr. Clearman, the fourth outside
director of the Company, was awarded warrants to purchase 126,000 shares of
common stock. The terms of this grant were identical to those described above
except the number of shares exercisable at the $1.50 exercise price was set at
26,000 instead of 50,000. During 1997, Mr. Clearman exercised all of these
warrants.
In December 1994, the Board awarded Steven A. Odom, who joined the Board in
October 1994 and became Chairman in November 1994, warrants under the Warrant
Plan to purchase 450,000 shares of common stock. The warrants, now fully vested,
entitle Mr. Odom to purchase 450,000 shares of common stock on or prior to
December 15, 1999 at an exercise price of $1.50 per share with respect to
150,000 shares, $2.25 per share with respect to 150,000 shares and $4.00 per
share with respect to 150,000 shares. During 1997, Mr. Odom exercised 150,000 of
these warrants.
In December 1994, the Board also adopted the Directors' Warrant Incentive
Plan (the "Incentive Plan") pursuant to which the Board may grant, beginning in
February 1997, to each non-employee director on an annual basis warrants to
purchase up to 50,000 shares of Company common stock at an exercise price per
share equal to no less than 110% of the fair market value of the common stock at
the date of grant. No warrants may be granted under the Incentive Plan in a
given year unless the Company's common stock has appreciated by a compounded
annual average rate of return in excess of 35% for the four year period
preceding the year of grant. The aggregate number of shares of common stock
authorized to be issued pursuant to the Incentive Plan is 600,000 subject to
adjustment in certain instances as described below.
Warrants granted under the Warrant Plan and the Incentive Plan become
exercisable in one or more installments, as the Board may determine, six months
and one day after the date of the grant and expire on the fifth anniversary
following the date of grant, provided that if the Director has not attended at
least 75% of the meetings of the Board for the year in which an installment
first becomes exercisable, then such installment may not be exercised.
On March 26, 1997, the Board granted the four outside Directors of the
Company warrants to each purchase 50,000 shares of common stock with an exercise
price of $9.21. These warrants became fully vested and exercisable on December
31, 1997.
Notwithstanding the foregoing, the Warrant Plan and the Incentive Plan
provide that warrants awarded pursuant to these plans will become immediately
exercisable (i) if the Company is to be consolidated with or acquired by another
entity in a merger, (ii) upon the sale of substantially all of the Company's
assets or the sale of at least 90% of the outstanding Company common stock to a
third party, (iii) upon the merger or consolidation of the Company with or into
any other corporation or the merger or consolidation of any corporation with or
into the Company (in which consolidation or merger the stockholders of the
Company
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receive distributions of cash or securities as a result thereof), or (iv) upon
the liquidation or dissolution of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation awarded
or paid by the Company for services rendered during each of the years in the
three year period ended December 31, 1997 to its Chief Executive Officer and
other executive officers whose compensation exceeded $100,000 ("Named
Executives").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS(1)-(6) ALL OTHER
-------------------- SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(7)-(9)
- --------------------------- ---- --------- -------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Steven A. Odom..................... 1997 $143,000 $165,000 424,000 $ 4,273
Chairman and Chief 1996 200,000 100,000 105,000 --
Executive Officer 1995 -- -- 250,000 --
Hensley E. West.................... 1997 125,125 142,500 320,000 10,100
President and Chief 1996 175,000 87,500 91,875 35,000
Operating Officer 1995 -- -- 443,750 --
Mark A. Gergel..................... 1997 97,500 115,000 216,000 28,013
Executive Vice President 1996 110,000 110,000 37,500 780
and Chief Financial Officer 1995 90,000 35,000 74,000 495
Scott N. Madigan................... 1997 96,000 57,500 35,000 1,638
Executive Vice President 1996 81,500 30,000 110,000 20,000
of Business Development 1995 -- -- -- --
Hatch Graham....................... 1997 110,000 33,000 150,000 --
President, Transport and 1996 -- -- -- --
Access Systems Group 1995 -- -- -- --
</TABLE>
- ---------------
(1) Long-Term Compensation Awards for 1997 include non-qualified stock options
granted in December 1997 from the Company's 1998 Incentive Compensation
Plan. The securities underlying options for 1997 under this grant include:
Mr. Odom -- 400,000 shares; Mr. West -- 300,000 shares; Mr. Gergel --
200,000 shares; and Mr. Madigan -- 25,000 shares. These options, which are
subject to stockholder approval, vest 25% on each of the first four
anniversaries from the date of grant and are exercisable at $19.00 per
share, the market price as of the date of grant.
(2) In connection with voluntary salary reduction/incentive programs in 1996 and
1995, which were offered to all salaried employees of the Company, the Named
Executives elected to forego salary in exchange for options to purchase
shares of Common Stock at the then current market prices of $8.00 and $7.00
per share, respectively. The securities underlying options for 1996 for this
program include: Mr. Odom -- 55,000 shares; Mr. West -- 48,125 shares; Mr.
Gergel -- 37,500 shares; and Mr. Madigan -- 10,000 shares. The securities
underlying options for 1995 for this program include: Mr. Odom -- 50,000
shares; Mr. West -- 43,750 shares; Mr. Gergel -- 24,000 shares; and Mr.
Madigan -- 10,000 shares. Stock options issued in connection with these
programs are fully vested.
(3) Mr. Odom joined the Company's Board of Directors in October 1994 and was
elected Chairman in November 1994. He was appointed Chairman and Chief
Executive Officer in August 1995. Mr. Odom elected to not receive a salary
in 1995. In December 1995, he was awarded non-qualified stock options to
acquire 200,000 shares of common stock at $7.00 per share, the then current
market price. These options vested 50% on each of the first two
anniversaries from the date of grant.
(4) Mr. West joined the Company in January 1996 as its new President and Chief
Operating Officer. In August 1995, in connection with his acceptance of the
Company's offer of employment, he was awarded non-qualified stock options to
acquire 400,000 shares of common stock at $3.78 per share, the then
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current market price. These options vest 25% on each of the first four
anniversaries from his effective date of employment.
(5) Mr. Madigan joined the Company in March 1996 as its new Vice President of
Business Development. He was awarded non-qualified stock options to acquire
80,000 shares of common stock at $7.81 per share, the then current market
price. These options vest 25% on each of the first four anniversaries from
the date of grant.
(6) Mr. Graham joined the Company in March 1997 as its new President, Transport
and Access Systems Group. He was awarded non-qualified stock options to
acquire 150,000 shares of common stock at $8.06 per share, the then current
market price. These options vest 25% on each of the first four anniversaries
from the date of grant.
(7) During 1997, Mr. Gergel was paid a flat sum allowance of $25,000 and during
1996, Mr. West and Mr. Madigan were paid flat sum allowances of $35,000 and
$20,000, respectively, for the relocation of their households to Atlanta,
Georgia.
(8) During 1997, Mr. West was paid $7,000 for life insurance benefits provided
to him by the Company.
(9) Except as noted above, All Other Compensation represents matching
contributions by the Company under its 401(k) Plan.
1997 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning the value of director
warrants and employee options exercised by the Named Executives during 1997 and
the value at December 31, 1997 of unexercised warrants and options held by each
such officer. The value of unexercised warrants and options reflects the
increase in market value of Company common stock from the date of grant through
December 31, 1997, when the closing price was $23.88 per share.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY(2)
WARRANTS AND WARRANTS AND
NUMBER OF OPTIONS OPTIONS AT
SHARES AT 12-31-97 12-31-97
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- --------------- ----------------------
<S> <C> <C> <C> <C>
Steven A. Odom(3)............... 150,000 $3,816,000 679,000/400,000 $12,208,625/$1,950,000
Hensley E. West................. 87,500 1,613,500 168,125/600,000 2,870,984/7,491,000
Mark A. Gergel.................. 60,250 1,331,069 128,875/223,875 2,021,297/1,442,047
Scott N. Madigan................ 17,500 279,170 25,000/102,500 398,680/1,343,238
Hatch Graham.................... -- -- --/150,000 --/2,372,250
</TABLE>
- ---------------
(1) The "value realized" represents the difference between the exercise price of
the shares and the market price of the shares on the date the warrants and
options were exercised. The value realized was determined without
considering any taxes which may have been owed.
(2) "In-the-Money" warrants and options have an exercise price less than $23.88
per share, the closing price of common stock as of December 31, 1997.
(3) Includes securities underlying warrants issued to Mr. Odom pursuant to the
Warrant Plan.
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<PAGE> 225
STOCK OPTION GRANT TABLE
The following table sets forth information regarding the grant of stock
options to the Named Executives during the year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE($) AT ASSUMED
--------------------------------------------------------------- ANNUAL RATES OF STOCK
% TOTAL PRICE APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE OPTION TERM(3)
UNDERLYING OPTIONS EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME GRANTED(1) IN FISCAL YEAR SHARE(2) DATE 5% 10%
- ---- -------------------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven A. Odom....... 400,000 20.5% $19.00 12/29/02 $4,588,000 $7,780,000
24,000 1.2 19.00 12/29/02 275,280 466,800
Hensley E. West...... 300,000 15.3 19.00 12/29/02 3,441,000 5,835,000
20,000 1.0 19.00 12/29/02 229,400 389,000
Mark A. Gergel....... 200,000 10.2 19.00 12/29/02 2,294,000 3,890,000
16,000 0.8 19.00 12/29/02 183,520 311,200
Scott N. Madigan..... 25,000 1.3 19.00 12/29/02 286,750 486,250
10,000 0.5 9.75 04/30/02 207,200 287,000
Hatch Graham......... 150,000 7.7 8.06 03/26/02 3,361,500 4,558,500
</TABLE>
- ---------------
(1) Individual grants in 1997 include the following non-qualified stock options
issued in connection with the Company's 1998 Incentive Compensation Plan:
Mr. Odom -- 400,000; Mr. West -- 300,000; Mr. Gergel -- 200,000; and Mr.
Madigan -- 25,000. See "Summary Compensation Table, note (1)" for terms of
these options granted. The remainder of Mr. Odom's, Mr. West's and Mr.
Gergel's options were granted in December 1997 and vested immediately. Mr.
Madigan's remaining options and Mr. Graham's options vest at 25% each on the
first four anniversaries from the date of grant.
(2) The average exercise price represents the fair market value of the shares at
dates of grant.
(3) The 5% and 10% appreciation rates are set forth in the Securities and
Exchange Commission rules and no representation is made that the Company's
common stock will appreciate at these assumed rates or at all.
SEVERANCE PROTECTION AGREEMENTS
The Company entered into a Severance Protection Agreement with each of
Messrs. Odom, West and Gergel (each an "Executive") as of November 1, 1997 (the
"Severance Agreements"). Each Severance Agreement is effective for an initial
term of two years and is automatically renewed for additional consecutive
one-year terms unless timely notice of non-renewal is given by either the
Company or the Executive. Generally, each Severance Agreement provides that if
the Executive's employment is terminated within 12 months after a "change of
control" (as defined in the Severance Agreement) (i) by the Company other than
for "cause" (as defined in the Severence Agreement), or (ii) by the Executive
for "good reason" (as defined in the Severance Agreement), the Executive is
entitled to a lump sum payment equal to the sum of (a) accrued and unpaid
salary, expenses, vacation pay and bonuses, (b) two times the Executive's base
salary and bonus and (c) the excess of the actuarial equivalent of retirement
benefits to which the Executive would be entitled under the Company's
supplemental and other retirement plans had the Executive remained in the employ
of the Company for an additional two years of credited service over the actual
actuarial equivalent benefits to which the Executive is entitled under such
plans. In addition, upon any such termination the Company is obligated to
continue, at its expense, for a 24 month period the medical, disability and life
insurance benefits enjoyed by the Executive prior to termination and to provide
the Executive with outplacement services, reasonable office space and
secretarial assistance, and the restrictions on outstanding stock options and
similar incentive awards lapse and such options and awards become immediately
vested and exercisable to the extent that they would have been vested and
exercisable within two years of the date of the Executive's termination.
Payments under the Severance Agreements are subject to limitations to the extent
they would be subject to an excise tax imposed under the Internal Revenue Code
of 1986, as amended (the "Code"), or would not be deductible by the Company.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is comprised of Stephen J. Clearman.
William P. O'Reilly was also a member of the Compensation Committee until his
resignation effective as of April 22, 1998. There are no Compensation Committee
Interlocks.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of Company common stock as of April 20, 1998, by (i) each person known
to the Company to be the beneficial owner of five percent or more of the common
stock, (ii) each of the directors and executive officers of the Company and
(iii) the directors and executive officers of the Company as a group. This table
is based on information provided by the Company's directors, executive officers
and principal stockholders.
<TABLE>
<CAPTION>
SHARES UNDER
EXERCISABLE OPTIONS TOTAL SHARES PERCENTAGE
NAME SHARES OWNED(1) AND WARRANTS(2) BENEFICIALLY OWNED OWNED
- ---- --------------- ------------------- ------------------ ----------
<S> <C> <C> <C> <C>
Pilgrim Baxter & Associates,
Ltd.(3)............................ 1,843,640 -- 1,843,640 8.6%
Hambrecht & Quist Group(4)........... 1,429,907 -- 1,429,907 6.7
Steven A. Odom+ ++(5)(6)............. 267,410 679,000 946,410 4.3
Stephen E. Raville+.................. 318,000 -- 318,000 1.5
William P. O'Reilly+................. 257,000 50,000 307,000 1.4
Stephen J. Clearman+(7).............. 172,210 62,000 234,210 1.1
Hensley E. West+ ++(6)............... 16,621 268,125 284,746 1.3
Mark A. Gergel++(6).................. 76,953 115,000 191,953 *
John D. Phillips+.................... -- 117,340 117,340 *
Scott N. Madigan++................... 2,143 47,500 49,643 *
Hatch Graham++....................... -- 37,500 37,500 *
All directors and executive officers
as a group (9 persons)............. 1,110,337 1,376,465 2,486,802 10.9
</TABLE>
- ---------------
* Less than one percent
+ Director
++ Executive Officer
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3"). Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially
owned by them.
(2) Includes shares which may be acquired by the exercise of stock options and
warrants granted by the Company and exercisable on or before June 20,
1998.
(3) Based upon a Schedule 13G filed on February 17, 1998, Pilgrim Baxter &
Associates, Ltd. ("Pilgrim Baxter") is an investment advisor registered
under section 203 of the Investment Advisors Act of 1940. Its principal
place of business is 825 Duportail Road, Wayne, Pennsylvania 19087. Of the
total shares of common stock beneficially owned by it, Pilgrim Baxter has
sole power to vote or to direct the vote of only 1,601,340 shares.
(4) Based on a Schedule 13G filed on March 9, 1998, Hambrecht & Quist Group
("H&Q Group") may be deemed to own the shares of common stock owned by
Hambrecht & Quist California ("H&Q California"), a wholly-owned subsidiary
of H&Q Group. H&Q Group's and H&Q California's principal place of business
is One Bush Street, San Francisco, California 94104.
(5) Includes 18,000 shares held in the aggregate by two minor children of Mr.
Odom.
(6) Includes the following number of shares acquired through voluntary
employee contributions to the Company's Profit Sharing and Retirement
Savings Plan (the "401(k) Plan") and contributed to the 401(k) Plan by the
Company under a matching contribution feature offered to substantially all
employees of the Company: Mr. Odom -- 800 shares; Mr. West -- 621 shares;
Mr. Gergel -- 2,828 shares and Mr. Madigan -- 143 shares.
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<PAGE> 227
<TABLE>
<C> <S>
(7) Includes an aggregate of 126,000 shares owned by Geocapital
II, L.P. and Geocapital Ventures, of which Mr. Clearman may
be deemed a beneficial owner under Rule 13d-3 of the
Exchange Act because he has shared investment and voting
power.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, John D. Phillips, a director of the Company, entered into
a series of agreements whereby, among other things, he became the new Chairman
and Chief Executive Officer of Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("Resurgens"), a facilities-based provider of
international network access commonly referred to as a carriers' carrier.
Resurgens was shortly thereafter placed into bankruptcy under Chapter 11 of the
United States Bankruptcy Code. WorldCom, Inc. ("WorldCom"), a major customer and
vendor of Resurgens, has subsequently agreed to provide Resurgens up to $28
million in financing in the form of a debtor in possession facility and other
credits.
During the fourth quarter of 1997, the Company shipped switching equipment
to Resurgens. The cost of this equipment was approximately $3.8 million. On
February 12, 1998, the Company executed a letter of intent to acquire Resurgens.
The equipment shipped to Resurgens is included in the Company's inventory at
December 31, 1997 (see Note C to the Company's Consolidated Financial
Statements).
The Resurgens acquisition is subject to, among other things, the
satisfactory completion by the Company of its due diligence investigation of
Resurgens, the preparation and execution of a definitive merger agreement, the
receipt of the requisite corporate and regulatory approvals and the confirmation
of Resurgens' Plan of Reorganization.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
The index to the financial statements included in this Report within
Item 8 (page 25) is incorporated herein by reference.
(2) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
-------- ------
<S> <C> <C>
VIII Valuation and Qualifying Accounts 56
</TABLE>
(3) Exhibits -- See Item 14 (c) below
(B) REPORTS ON FORM 8-K
On October 8, 1997, the Company filed a Report on Form 8-K, announcing
that on October 1, 1997 the sale of $100.0 million aggregate principal
amount of convertible subordinated notes was completed.
(c) The exhibits filed herewith and incorporated by reference herein are
set forth on the Exhibit Index on page 58 hereof. Included in those exhibits are
the following Executive Compensation Plans and Arrangements:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1 -- 1991 Stock Option Plan
10.2 -- Amendment to 1991 Stock Option Plan
10.4 -- Second Amendment to 1991 Stock Option Plan
10.6 -- Third Amendment to 1991 Stock Option Plan
10.11 -- Outside Directors' Warrant Plan
10.12 -- Directors' Warrant Incentive Plan
10.17 -- Fourth Amendment to 1991 Stock Option Plan
10.18 -- Fifth Amendment to 1991 Stock Option Plan
10.19 -- Amendment One to Outside Directors' Warrant Plan
10.20 -- Amendment One to Directors' Warrant Incentive Plan
10.21 -- Amendment Two to Outside Directors' Warrant Plan
10.22 -- Amendment Two to Directors' Warrant Incentive Plan
10.23 -- Sixth Amendment to 1991 Stock Option Plan
10.24 -- Severance Protection Agreement -- Steven A. Odom
10.25 -- Severance Protection Agreement -- Hensley E. West
10.26 -- Severance Protection Agreement -- Mark A. Gergel
</TABLE>
C-56
<PAGE> 229
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Deducted from asset account
Allowance for doubtful
accounts....................... $265,000 $171,574 $35,000(B) $(234,574)(A) $237,000
Year Ended December 31, 1996:
Deducted from asset account
Allowance for doubtful
accounts....................... $207,960 $167,612 $30,000(B) $(140,572)(A) $265,000
Year Ended December 31, 1995:
Deducted from asset account
Allowance for doubtful
accounts....................... $230,911 $ 7,568 $25,000(B) $ (55,519)(A) $207,960
</TABLE>
- ---------------
(A) Write-off of uncollectible amounts.
(B) Reserves established from businesses acquired.
C-57
<PAGE> 230
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed, on
its behalf by the undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Steven A. Odom
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated as of April 14, 1998
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 Company
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN A. ODOM Chairman and Chief Executive April 14, 1998
- ----------------------------------------------------- Officer (Principal Executive
Steven A. Odom Officer)
/s/ HENSLEY E. WEST Director, President and Chief April 14, 1998
- ----------------------------------------------------- Operating Officer
Hensley E. West
/s/ MARK A. GERGEL Executive Vice President and April 14, 1998
- ----------------------------------------------------- Chief Financial Officer
Mark A. Gergel (Principal Financial Officer)
/s/ MARTIN D. KIDDER Vice President, Controller and April 14, 1998
- ----------------------------------------------------- Secretary (Principal
Martin D. Kidder Accounting Officer)
/s/ STEPHEN J. CLEARMAN Director April 14, 1998
- -----------------------------------------------------
Stephen J. Clearman
/s/ WILLIAM P. O'REILLY Director April 14, 1998
- -----------------------------------------------------
William P. O'Reilly
/s/ JOHN D. PHILLIPS Director April 14, 1998
- -----------------------------------------------------
John D. Phillips
/s/ STEPHEN E. RAVILLE Director April 14, 1998
- -----------------------------------------------------
Stephen E. Raville
</TABLE>
C-58
<PAGE> 231
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
3.1 -- Restated Certificate of Incorporation of the Registrant and
Amendment to Restated Certificate of Incorporation
incorporated herein by reference to the Registrant's
Registration Statement on Form S-18, Registration No.
33-41255-1, Exhibits 2 and 2.1, respectively, and Second
Amendment to Restated Certificate of Incorporation
incorporated herein by reference to Form 10-K for the fiscal
year ended December 31, 1992 Exhibit 3.2, and Third
Amendment to Restated Certificate of Incorporation
incorporated herein by reference to the Registrant's
registration statement on Form S-2, Amendment No. 2, filed
on February 14, 1995, No. 33-87026, Exhibit 4.1-1 and
Amendments to Restated Certificate of Incorporation, filed
herewith.
3.2 -- Amended and Restated Bylaws of the Registrant.
4.1 -- Indenture dated as of October 1, 1997 by and between World
Access, Inc. and First Union Bank, as trustee (incorporated
by reference to exhibit 4.1 to the Registrant's Form 8-K,
filed October 8, 1997).
10.1 -- World Access, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-18, filed on
July 25, 1991, No. 33-41255-A).
10.2 -- Amendment to World Access, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-K for the year ended December 31, 1993,
filed March 31, 1994).
10.3 -- Lease Agreement dated August 27, 1992, by and between Batac
Corporation and World Access, Inc. (incorporated by
reference to Exhibit 10.9 to the Registrant's Form 10-K for
the year ended December 31, 1993, filed March 31, 1994).
10.4 -- Second Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Registrants' Form 10-K for
the year ended December 31, 1993, filed March 31, 1994).
10.5 -- Registration Rights Agreement dated December 28, 1994, by
and between Creditanstalt-Bankverein and World Access, Inc.
(incorporated by reference to Exhibit 10.24 to the
Registrants Form S-2, Amendment No. 2, filed on February 14,
1995, No 33-87026).
10.6 -- Third Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.26 to the Registrant's Form S-2,
Amendment No. 2, filed on February 14, 1995, No. 33-87026.
10.7 -- Master Lease Agreement dated March 2, 1995, by and between
Copelco Capital, Inc. and World Access, Inc. (Incorporated
by reference to Exhibit 10.27 to the Registrant's Form 10-K
for the year ended December 31, 1994, filed on March 30,
1995).
10.8 -- Second Amended and Restated Loan and Security Agreement
dated July 18, 1995, by and between Creditanstalt-Bankverein
and World Access, Inc. (incorporated by reference to Exhibit
10.35 to the Registrant's Form 10-K for the year ended
December 31, 1995, filed April 10, 1996).
10.9 -- First Amendment to Second Amended and Restated Loan and
Security Agreement dated December 28, 1995, by and between
Creditanstalt-Bankverein and World Access, Inc.
(incorporated by reference to Exhibit 10.37 to the
Registrant's Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.10 -- Second Amendment to Second Amended and Restated Loan and
Security Agreement dated March 29, 1996, by and between
Creditanstalt-Bankverein and World Access, Inc.
(incorporated by reference to Exhibit 10.38 to the
Registrant's Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.11 -- World Access, Inc. Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.40 to the
Registrant's Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
</TABLE>
C-59
<PAGE> 232
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
10.12 -- World Access, Inc. Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.41 to the
Registrant's Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.13 -- Merger Agreement dated April 22, 1996, by and between World
Access, Inc., Restor-Comtech, Inc., Michael Joe, Michael
Ramlogan, Dan Lubarsky and Comtech Sunrise, Inc.
(incorporated by reference to Exhibit 2 to the Registrant's
Form 8-K, filed June 19, 1996).
10.14 -- Employment Agreement dated June 18, 1996, by and between
Michael R. Joe and Restor-Comtech, Inc. (incorporated by
reference to Exhibit 6.2h to the Registrant's Form 8-K,
filed June 18, 1996).
10.15 -- Escrow Agreement dated June 18, 1996, by and between World
Access, Inc., Restor-Comtech, Inc., Cauthen and Feldman, P.A
and the former shareholders of Comtech-Sunrise, Inc.
(incorporated by reference to Exhibit 2.1b to the
Registrant's Form 8-K, filed June 19, 1996).
10.16 -- Third Amendment to Second Amended and Restated Loan and
Security Agreement dated December 19, 1996, by and between
World Access, Inc. and Creditanstalt-Bankverein.
10.17 -- Fourth Amendment to 1991 Stock Option Plan (incorporated by
reference to exhibit 10.32 to the Registrant's Form 10-K for
the year ended December 31, 1996, filed April 11, 1997).
10.18 -- Fifth Amendment to 1991 Stock Option Plan (incorporated by
reference to exhibit 10.33 to the Registrant's Form 10-K for
the year ended December 31, 1996, filed April 11, 1997).
10.19 -- Amendment One to Outside Directors' Warrant Plan
(incorporated by reference to exhibit 10.34 to the
Registrant's Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.20 -- Amendment One to Directors' Warrant Incentive Plan
(incorporated by reference to exhibit 10.35 to the
Registrant's Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.21 -- Amendment Two to Outside Directors' Warrant Plan.
10.22 -- Amendment Two to Directors' Warrant Incentive Plan.
10.23 -- Sixth Amendment to 1991 Stock Option Plan.
10.24 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Steven A. Odom.
10.25 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Hensley E. West.
10.26 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Mark A. Gergel.
10.27 -- License Agreement dated July 1, 1996, by and between
International Communication Technologies, Inc., World
Access, Inc. and Eagle Telephonics, Inc (incorporated by
reference to exhibit 10.36 to the Registrant's Form 10-K for
the year ended December 31, 1996, filed April 11, 1997).
10.28 -- Agreement and Plan of Merger between and among World Access,
Inc. and CIS Acquisition Corp. and Thomas R. Canham; Brian
A. Schuchman; and John T. Simon and Cellular Infrastructure
Supply, Inc. (with exhibits thereto) (incorporated by
reference to Exhibit Z to the Registrant's Form 8-K, filed
April 10, 1997).
10.29 -- Purchase Agreement dated as of September 26, 1997 by and
between World Access, Inc., BT Alex Brown Incorporated and
Prudential Securities Incorporated (incorporated by
reference to exhibit 10.1 to the Registrant's Form 8-K,
filed October 8, 1997).
10.30 -- Registration Rights Agreement dated October 1, 1997 by and
between World Access, Inc., BT Alex Brown Incorporated and
Prudential Securities Incorporated (incorporated by
reference to exhibit 10.2 to the Registrant's Form 8-K,
filed October 8, 1997).
</TABLE>
C-60
<PAGE> 233
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
10.31 -- Agreement and Plan of Merger by and among World Access,
Inc.,Cellular Infrastructure Supply, Inc., Advanced Techcom
Inc. and Ernest H. Lin dated as of December 24, 1997
(incorporated by reference to exhibit 2.1 to the
Registrant's From 8-K, filed February 13, 1998).
10.32 -- Stock Purchase Agreement among World Access, Inc., GST USA,
Inc., and GST Telecommunications, Inc. dated December 31,
1997, with exhibits thereto (incorporated by reference to
exhibit 2.1 to the Registrant's Form 8-K, filed February 24,
1998).
10.33 -- Agreement and Plan of Merger and Reorganization by and among
WAXS, Inc., World Access, Inc., WAXS Acquisition Corp, NACT
Telecommunications, Inc. and NACT Acquisition Corp. dated
February 24,1998 (incorporated by reference to exhibit 2.2
to the Registrant's Form 8-K, filed March 13, 1998).
10.34 -- Letter of Intent between World Access, Inc. and Cherry
Communications Incorporated (d/b/a Resurgens Communications
Group) dated February 12, 1998 (incorporated by reference to
exhibit 99.1 to the Registrant's Form 8-K, filed February
20, 1998).
22.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Price Waterhouse L.L.P.
27.1 -- Financial Data Schedule
</TABLE>
C-61
<PAGE> 234
APPENDIX D
<PAGE> 235
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
JANUARY 29, 1998
---------------------
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or other (Commission File Number) (IRS Employer
jurisdiction of incorporation) Identification Number)
945 E. PACES FERRY ROAD, 30326
SUITE 2240, ATLANTA, GEORGIA (Zip Code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 236
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 29, 1998, World Access, Inc. ("World Access"), a Delaware
corporation, consummated the merger (the "Merger") of Advanced TechCom, Inc.
("ATI"), a Delaware corporation, with and into Cellular Infrastructure Supply,
Inc., a Delaware corporation and a wholly-owned subsidiary of World Access
("CIS"), pursuant to that certain Agreement and Plan of Merger dated as of
December 24, 1997 by and between World Access, ATI, CIS and Ernest H. Lin (the
"Merger Agreement").
Pursuant to the Merger Agreement, (i) the issued and outstanding shares of
ATI's Series A Convertible Preferred Stock, $.10 par value per share (the
"Preferred Stock"), were converted into the right to receive (the "Merger Stock
Consideration") an aggregate of 418,100 restricted shares of the common stock,
$.01 par value per share, of World Access (the "World Access Common Stock");
(ii) holders of the issued and outstanding shares of common stock, $.10 par
value per share, of ATI (the "ATI Common Stock") were given a choice to (a)
convert their ATI Common Stock into Preferred Stock on a one-for-one basis and
thereupon receive the Merger Stock Consideration to the same extent as holders
of the Preferred Stock or (b) receive $.01 in cash for each share of ATI Common
Stock not converted (the "Common Stock Consideration"); and (iii), except for
Dr. Lin, who will receive cash and shares of World Access Common Stock in
exchange for his options to purchase ATI Common Stock ("ATI Options"), each
holder of ATI Options that were vested as of December 31, 1997 will be paid in
cash the difference, if any, between $1.00 and the exercise price of such ATI
Option multiplied by the number of shares of ATI Common Stock subject to such
ATI Option (the "Option Consideration," and together with the Merger Stock
Consideration and the Common Stock Consideration, the "Merger Consideration").
In connection with the Merger, Dr. Lin entered into an employment agreement with
CIS, a copy of which is filed herewith as Exhibit 10.1.
In addition, the persons entitled to receive the Merger Stock Consideration
will be entitled to receive up to an aggregate of 209,050 additional restricted
shares of World Access Common Stock payable in installments upon the achievement
by the ATI Division of CIS of certain profitability levels during 1998 and 1999
(the "Contingent Stock Consideration"). Pursuant to the Merger Agreement and
that certain Escrow Agreement (the "Escrow Agreement") entered into at the
closing of the Merger, the Contingent Stock Consideration will be issued and
held in escrow pending its release.
The description contained herein of the Merger Agreement and the Escrow
Agreement is qualified in its entirety by reference to the Merger Agreement and
the Escrow Agreement, which are filed herewith as Exhibits 2.1 and 10.2.
The Merger Consideration and the Contingent Stock Consideration were
determined as a result of negotiations between World Access and ATI and the
Merger was approved by the boards of directors of World Access, CIS and ATI and
the stockholders of ATI. Prior to the Merger, neither World Access nor any of
its affiliates, directors or officers, nor any associate of any such director or
officer, had any relationship with ATI or Dr. Lin, except that World Access
purchased approximately $150,000 of equipment from ATI in 1997 in the ordinary
course of business.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this Report are
the consolidated financial statements of ATI for the years ended December 31,
1996 and 1995. Such financial statements have been audited by the independent
accounting firm of Deloitte & Touche, LLP, whose opinion thereon is also
included herein.
D-1
<PAGE> 237
ADVANCED TECHCOM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
Years Ended December 31, 1996 and 1995
and Independent Auditors' Report
D-2
<PAGE> 238
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Advanced TechCom, Inc.
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of Advanced
TechCom, Inc. and Subsidiary (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Advanced TechCom, Inc. and
Subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, subsequent
to year end the Company entered into an agreement to subcontract certain of its
manufacturing, raised additional equity, and received a commitment for
additional financing.
/s/ Deloitte & Touche LLP
February 26, 1997
(October 15, 1997 as to Notes 2 and 13,
and the last paragraph of Note 5)
D-3
<PAGE> 239
ADVANCED TECHCOM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 306,443 $ 271,458
Accounts Receivable....................................... 3,588,097 2,777,070
Inventory................................................. 5,843,716 7,203,140
Prepaid expenses and other................................ 147,605 141,886
Deferred income taxes..................................... -- 104,456
----------- -----------
Total current assets.............................. 9,885,861 10,498,010
PROPERTY AND EQUIPMENT -- Net..................... 1,006,124 1,020,113
----------- -----------
TOTAL ASSETS...................................... $10,891,985 $11,518,123
----------- -----------
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Notes Payable............................................. $ 1,690,000 $ 4,023,000
Current portion of long-term debt......................... 356,598 316,290
Accounts Payable.......................................... 2,630,770 1,681,619
Accrued Salaries and commissions.......................... 545,252 662,387
Accrued Expenses.......................................... 734,101 517,393
Customer deposits......................................... 389,439 685,885
----------- -----------
Total current liabilities......................... 6,346,160 7,886,574
----------- -----------
LONG TERM DEBT -- Net of current portion.......... 421,503 650,509
----------- -----------
STOCKHOLDERS EQUITY:
Preferred stock, $.10 per share par value -- 20,000,000
shares authorized; issued and outstanding -- 10,097,103
shares in 1996......................................... 1,009,710 --
Common stock, $.10 per share par value -- 25,000,000
shares authorized; issued and outstanding -- 343,989
and 8,032,248 shares in 1996 and 1995, respectively.... 34,399 803,223
Additional paid-in capital................................ 10,107,727 3,167,580
Accumulated deficit....................................... (6,730,514) (572,763)
----------- -----------
Less:
Stock subscription value.................................. (273,000) (357,000)
Deferred compensation..................................... (24,000) (60,000)
----------- -----------
Total stockholders' equity........................ 4,124,322 2,981,040
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $10,891,985 $11,518,123
----------- -----------
</TABLE>
See notes to consolidated financial statements.
D-4
<PAGE> 240
ADVANCED TECHCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET SALES................................................... $15,713,507 $18,297,699
COST OF GOODS SOLD.......................................... 11,993,587 10,698,605
----------- -----------
GROSS PROFIT................................................ 3,719,920 7,599,094
OPERATING EXPENSES:
Research and development.................................. 4,785,393 3,350,540
Selling, general and administrative....................... 4,606,697 3,866,043
----------- -----------
Total operating expenses.......................... 9,392,090 7,216,583
----------- -----------
(LOSS) INCOME FROM OPERATIONS............................... (5,672,170) 382,511
OTHER INCOME (EXPENSE)
Interest, net............................................. (339,527) (324,175)
Other..................................................... (98,598) (12,946)
----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES........................... (6,110,295) 45,390
PROVISION FOR INCOME TAXES.................................. 47,456 --
NET (LOSS) INCOME................................. $(6,157,751) $ 45,390
----------- -----------
</TABLE>
See notes to consolidated financial statements.
D-5
<PAGE> 241
ADVANCED TECHCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
NO PAR $.10 PAR VALUE $.10 PAR VALUE
COMMON STOCK COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- ---------------------- ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995...... 6,706,479 $2,045,803 -- $ -- -- $ -- $ --
Exercise of stock options... 525,000 350,000 -- -- -- -- --
Issuance of stock........... 3,750 -- -- -- -- -- --
Exchange of no par common
stock for $.10 par value
common stock.............. (7,235,229) (2,395,803) 7,235,229 723,522 -- -- 1,672,281
Sale of common stock........ -- -- 750,000 75,000 -- -- 1,425,000
Stock issued for services... -- -- 47,019 4,701 -- -- 70,299
Accrued interest on stock
subscription.............. -- -- -- -- -- -- --
Dividends paid.............. -- -- -- -- -- -- --
Net income............ -- -- -- -- -- -- --
BALANCE DECEMBER 31, 1995.... 8,032,248 803,223 -- -- 3,167,580
Exercise of stock options... -- -- 262,500 26,250 -- -- 148,750
Sale of common stock........ -- -- 953,430 95,344 -- -- 3,082,756
Stock issued for services... -- -- 73,014 7,302 -- -- 87,631
Exchange of $.10 par value
common stock for $.10 par
value Series A preferred
stock..................... -- -- (8,977,203) (897,720) 8,977,203 897,720 --
Sale of Series A preferred
stock..................... -- -- -- -- 1,119,900 111,990 3,621,010
Receipt of stock
subscription.............. -- -- -- -- -- -- --
Accrued interest on stock
subscription.............. -- -- -- -- -- -- --
Forgiveness of interest on
stock subscription loan... -- -- -- -- -- -- --
Net loss.............. -- -- -- -- -- -- --
BALANCE DECEMBER 31, 1996.... -- -- 343,989 $ 34,399 $10,097,103 $1,009,710 $10,107,727
---------- ---------- ---------- --------- ----------- ---------- -----------
<CAPTION>
STOCK
ACCUMULATED SUBSCRIPTION DEFERRED
DEFICIT RECEIVABLE COMP. TOTAL
----------- ------------ -------- ----------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1995...... $ (404,542) $ -- $ -- $1,641,261
Exercise of stock options... -- (350,000) -- --
Issuance of stock........... -- -- -- --
Exchange of no par common
stock for $.10 par value
common stock.............. -- -- -- --
Sale of common stock........ -- -- -- 1,500,000
Stock issued for services... -- -- (60,000) 15,000
Accrued interest on stock
subscription.............. -- (7,000) -- (7,000)
Dividends paid.............. (213,611) -- -- (213,611)
Net income............ 45,390 -- -- 45,390
BALANCE DECEMBER 31, 1995.... (572,763) (357,000) (60,000) 2,981,040
Exercise of stock options... -- -- -- 175,000
Sale of common stock........ -- -- -- 3,178,100
Stock issued for services... -- -- 36,000 130,933
Exchange of $.10 par value
common stock for $.10 par
value Series A preferred
stock..................... -- -- -- --
Sale of Series A preferred
stock..................... -- -- -- 3,733,000
Receipt of stock
subscription.............. -- 77,000 -- 77,000
Accrued interest on stock
subscription.............. -- (24,582) -- (24,582)
Forgiveness of interest on
stock subscription loan... -- 31,582 -- 31,582
Net loss.............. (6,157,751) -- -- (6,157,751)
BALANCE DECEMBER 31, 1996.... $(6,730,514) $(273,000) $(24,000) $4,124,322
----------- --------- -------- ----------
</TABLE>
See notes to consolidated financial statements.
D-6
<PAGE> 242
ADVANCED TECHCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................... $(6,157,751) $ 45,390
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................. 600,413 424,334
Deferred income taxes..................................... 104,456 (104,456)
Other..................................................... 137,933 20,946
Change in assets and liabilities:
Accounts receivable....................................... (811,027) 498,280
Inventory................................................. 1,359,424 (3,975,477)
Prepaid expenses and other................................ (5,719) (94,815)
Accounts payable.......................................... 949,151 50,059
Accrued expenses.......................................... 99,573 578,183
Customer deposits......................................... (296,446) 209,289
----------- -----------
Net cash used in operating activities............. (4,019,993) (2,348,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment......................... (418,379) (920,358)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line of credit.............. (2,528,000) 1,809,000
Proceeds from notes payable................................. 195,000 750,000
Principal payments on long-term notes payable............... (281,659) (269,036)
Principal payments on capital leases........................ (75,084) (38,039)
Proceeds from exercise of stock option plans................ 175,000 --
Proceeds from sale of stock................................. 6,911,100 1,500,000
Proceeds from payment of stock subscription receivable...... 77,000 --
Dividends paid.............................................. -- (213,611)
----------- -----------
Net cash provided by financing activities......... 4,473,357 3,538,314
NET INCREASE IN CASH........................................ 34,985 269,689
CASH, BEGINNING OF YEAR..................................... 271,458 1,769
----------- -----------
CASH, END OF YEAR........................................... $ 306,443 $ 271,458
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 336,906 $ 324,316
----------- -----------
Cash paid (refunded) for income taxes..................... $ (90,116) $ 174,456
----------- -----------
SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITY:
Capital lease obligations................................. $ 168,045 $ --
----------- -----------
Stock issued for notes receivable......................... $ -- $ 350,000
----------- -----------
Increase in notes receivable for accrued interest......... $ 24,582 $ 7,000
----------- -----------
</TABLE>
See notes to consolidated financial statements.
D-7
<PAGE> 243
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Advanced TechCom, Inc. and Subsidiary (the "Company") designs,
develops and manufactures a series of high-performance digital
microwave/millimeter wave radio equipment, operating in frequencies of 1.5 GHZ
to 38 GHZ utilized in the telecommunications industry.
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned foreign
sales corporation, Advanced TechCom (Barbados), Inc. All material intercompany
transactions and balances have been eliminated.
Stock Split. In November 1996, the Board of Directors declared a
three-for-one split of the Company's common and preferred stock effected in the
form of stock dividends. Shares will be distributed to all stockholders of
record. All share and per share data have been adjusted to reflect the split.
Revenue Recognition. The Company recognizes revenue from the sales of
products when the products are shipped. Sales to overseas customers generally
require letters of credit before the products are shipped.
Allowance for Doubtful Accounts. An allowance for doubtful accounts is
provided when accounts are considered uncollectible. No such allowances were
considered necessary at December 31, 1996 and 1995.
Inventory. Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the assets. Estimated
useful lives of assets are as follows:
<TABLE>
<S> <C>
Machinery and equipment and other....................... 3-5 years
Furniture and fixtures.................................. 3-7 years
Leasehold improvements.................................. Shorter of lease term
or useful life
</TABLE>
Financial Instruments. The carrying values of cash, accounts receivable,
accounts payable, borrowings under the Company's credit line and debt
approximate fair value due to the short-term nature of these instruments.
Income Taxes. The Company is taxed as a C Corporation. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Deferred income taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Research and Development. Research and development costs are expensed when
incurred.
Warranty Reserve. The Company sells the majority of its products with a
two-year repair or replacement warranty. The accompanying consolidated financial
statements for 1996 and 1995 include an accrual of approximately $403,000 and
$150,000, respectively, for estimated warranty claims based on the Company's
experience of actual claims and anticipated future claims.
Employee Stock. Based Compensation -- The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion ("APB") No. 25. as
allowed under Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation," to account for all of its employee
stock-based compensation plans.
Customers and Concentration of Credit Risk. The Company's products are
sold both directly to customers and through distributors. The Company's
customers consist of domestic and international wireless
D-8
<PAGE> 244
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and cellular companies, telephone companies, utilities and government and
educational institutions. Approximately 93% of the Company's net sales are
derived from international customers. A major international systems integrator,
who resells worldwide, accounted for approximately 20% of the Company's 1996 net
sales and approximately 54% of the accounts receivable balance at December 31,
1996. A second customer accounted for approximately 14% of the accounts
receivable balance at December 31, 1996.
Use of Estimates. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
and disclosure of certain assets and liabilities at the balance sheet date.
Actual results may differ from such estimates.
Reclassifications. Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
Adoption of New Accounting Pronouncements. Effective January 1, 1996, the
Company adopted, prospectively, SFAS No. 121, "Accounting for Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have a significant effect on
the Company's consolidated financial position or results of operations for the
year ended December 31, 1996.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." As permitted by SFAS No. 123 the Company has
continued to account for its stock-based transactions to employees in accordance
with APB No. 25, "Accounting for Stock Issued to Employees." As required by SFAS
No. 123 for stock option grants to nonemployees, the Company follows the
provisions of SFAS No. 123, calculates compensation expense using a fair value
based method and amortizes compensation expense over the vesting period. During
the year ended December 31, 1996, the Company did not grant any options to
purchase shares of common stock to nonemployees.
2. FUNDING OF OPERATIONS
As shown in the consolidated financial statements, for the year ended
December 31, 1996, the Company incurred a net loss of $6,157,751 and had
negative cash flow from operations of $4,019,993. The Company's 1996 loss and
working capital needs were principally funded by proceeds from various private
placement equity offerings completed throughout the year.
Since December 31, 1996, the Company has continued to incur losses.
However, it has negotiated a line of credit for borrowings of up to $2.5 million
and raised approximately $3.0 million through the issuance of preferred stock.
Moreover, the Company has entered into a joint venture agreement to subcontract
the manufacturing of certain of its products and, upon the successful
refinancing of the Company's existing bank line of credit or financing with a
new bank, the agreement will also provide up to $2.0 million of additional
financing. On October 15, 1997, the Company received a commitment letter for
bank financing of $750,000. The Company is also now selling its compact product
line in the 38 GHZ and 23 GHZ frequencies, thus improving its existing product
line offerings and plans to raise additional equity financing in 1997.
Management believes these factors will provide sufficient working capital for
the remainder of 1997 and into 1998.
D-9
<PAGE> 245
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORY
Inventory consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials......................................... $4,685,490 $5,841,531
Work in process..................................... 845,613 1,170,597
Finished goods...................................... 312,613 191,012
---------- ----------
Total....................................... $5,843,716 $7,203,140
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Machinery and equipment and other..................... $1,322,067 $ 927,700
Office furniture and equipment........................ 836,117 644,060
---------- ----------
2,158,184 1,571,760
Less Accumulated Depreciation......................... (1,152,060) (551,647)
---------- ----------
Property and equipment, net........................... $1,006,124 $1,020,113
========== ==========
</TABLE>
At December 31, 1996, the capitalized cost of property and equipment under
capital leases was $251,416 and related accumulated depreciation was $104,831.
Property and equipment under capital leases and related accumulated
depreciation for the year ended December 31, 1995 was not material.
5. NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revolving bank line of credit............................... $1,245,000 $3,773,000
Note payable-stockholder, due on demand, interest payable
monthly at 12%............................................ 195,000 --
Note payable-to a community development finance corporation
with interest payable monthly at a rate of 10%,
collateralized by a second lien on substantially all of
the Company's assets, and personally guaranteed by the
principal stockholder of the Company...................... 125,000 125,000
Note payable-to a community development organization with
interest payable monthly at a rate of 10%, collateralized
by a second lien on substantially all of the Company's
assets, and personally guaranteed by the principal
stockholder of the Company................................ 125,000 125,000
---------- ----------
$1,690,000 $4,023,000
---------- ----------
</TABLE>
The Company had a revolving bank line-of-credit agreement which expired in
May 1996. Since the expiration of the agreement, borrowings under the line were
based on eligible accounts receivable and inventory up to a maximum of
$1,245,000. At December 31, 1996, the Company had outstanding bank letters of
credit totaling $172,657, of which $32,657 reduces borrowing availability under
the line of credit. The line is payable on demand and bears interest at the
bank's prime rate plus 1/2% (8.75% at December 31, 1996). The line is
collateralized by substantially all of the Company's assets and is personally
guaranteed by the principal
D-10
<PAGE> 246
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholder of the Company. The agreement contains certain covenants which,
among other things, require minimum levels of consolidated tangible net worth,
the maintenance of certain financial ratios, and a minimum collateral base of
inventory and accounts receivable. At December 31, 1996, the Company was not in
compliance with certain provisions of the loan agreement related to the minimum
debt coverage ratio requirement.
On March 13, 1997, the Company's bank line-of-credit agreement was amended.
The amended agreement provides for available borrowings under the line based on
eligible accounts receivable up to a maximum of $2,500,000, reduced by
outstanding letters of credit issued by the Company. The line is payable on
demand and bears interest at the bank's prime lending rate plus 1/2%. The line
is collateralized by substantially all of the Company's assets and is personally
guaranteed by the principal stockholder of the Company. The agreement contains
certain covenants which, among other things, require minimum levels of
consolidated tangible net worth, the maintenance of certain financial ratios,
and a minimum collateral base of inventory and accounts receivable. As of
October 15, 1997, approximately $2,200,000 was outstanding under the line and
the Company was in default on certain covenant requirements. The Company is
currently discussing refinancing of the line (see Note 2).
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable-bank-payable in monthly installments through
January 1998 with interest at prime plus 1/2% (8.75% at
December 31, 1996) the note is collateralized by a second
lien on substantially all Company assets.................. $106,528 $204,855
Note payable-finance company-payable in monthly installments
through July 1997 with interest computed at rates ranging
from 10.24%-10.37%; collateralized by certain equipment... 143,795 50,834
Note payable-bank-payable in installments through October
1998 with interest computed at prime plus 1/2% (8.75% at
December 31, 1996); collateralized by a second lien on
substantially all Company assets.......................... 152,778 236,111
Note payable-to a business development
corporation -- payable in installments through August 2000
with interest computed at prime plus 2 1/4% (10.5% at
December 31, 1996); collateralized by a second lien on
substantially all Company assets and personally guaranteed
by the principal stockholder.............................. 375,000 474,999
-------- --------
778,101 966,799
Less current portion........................................ (356,598) (316,290)
-------- --------
Long-term debt.............................................. $421,503 $650,509
======== ========
</TABLE>
Maturities on long-term debt as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997........................................................ $356,598
1998........................................................ 227,082
1999........................................................ 119,421
2000........................................................ 75,000
--------
$778,101
--------
</TABLE>
D-11
<PAGE> 247
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the Company's provision for income taxes as are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Currently payable taxes before application of credits and
benefit of Foreign Sales Corporation
Federal................................................... $ -- $151,460
State..................................................... 18,746 65,320
State Manufacturing investment and research and
development credits.................................... (18,746) (65,320)
Federal research and development credits.................. -- (42,004)
Benefit of Foreign Sales Corporation...................... -- (5,000)
Federal benefit of net operating loss carryback........... (57,000) --
-------- --------
Net currently payable (refundable) tax.................... (57,000) 104,456
Deferred tax expense...................................... 104,456 (104,456)
-------- --------
Total............................................. $ 47,456 $ --
======== ========
</TABLE>
A reconciliation between reported income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Taxes at statutory federal rates............................ $(2,066,762) $ 15,433
1996 taxable loss for which no tax asset was recorded....... 2,066,762 --
State taxes, net of federal tax benefit..................... (299,858) --
Federal and state tax credit carryforwards.................. (368,090) (129,081)
Federal tax credit utilized................................. -- (42,004)
Valuation allowance for deferred tax assets................. 596,236 --
Change in valuation allowance............................... 104,456 175,447
Other....................................................... 14,712 (19,795)
----------- ---------
Net tax expense............................................. $ 47,456 $ --
----------- ---------
</TABLE>
The Company's deferred taxes at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
State research and development credits...................... $ 387,981 $203,127
Federal research and development credits.................... 202,104 40,705
State investment tax credits................................ 21,837 --
Inventory................................................... 247,661 70,285
Warranty.................................................... 162,229 60,405
Accruals.................................................... 156,303 133,024
Other....................................................... -- 1,991
Depreciation................................................ 45,595 --
Tax benefit from exercise of stock options.................. 120,810 --
Operating loss carryforwards................................ 1,925,881 --
----------- --------
3,270,401 509,537
Valuation Allowance......................................... (3,270,401) (405,081)
----------- --------
Net deferred taxes................................ $ -- $104,456
----------- --------
</TABLE>
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes in
different periods and future tax benefits of federal and
D-12
<PAGE> 248
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
state tax credits. At December 31, 1995, deferred tax assets totaling $509,537,
with a related valuation allowance of $405,081, or net deferred tax assets of
$104,456, were recorded based upon management's assessment at that time that
taxable income would more likely than not be sufficient to utilize fully the net
deferred tax asset. At December 31, 1996, based on operating results and
management's reassessment of future taxable income, the Company established a
valuation allowance to reduce the carrying value of net deferred tax assets to
zero.
At December 31, 1996, the Company had available unused federal research and
development credits of approximately $202,000 which expire in the years 2010 and
2011, state research and development credits of approximately $388,000, of which
approximately $7,300 are unlimited and the remainder expire at various dates
beginning in 2006 through 2011 and an investment tax credit of $21,837. Net
operating loss carryforwards totaled approximately $5,080,000 at December 31,
1996.
8. STOCKHOLDERS' EQUITY
On November 7, 1996, the Company amended the Company's Certificate of
Incorporation to increase the authorized preferred stock to 20,000,000 shares
with par value of $.10 per share; 15,000,000 shares designated as Series A
convertible preferred stock ("Series A preferred stock") and 5,000,000 shares as
undesignated preferred stock (see "Stock Split" in Note 1).
The preferred stock has voting rights similar to common stock and equal to
the number of whole shares of common into which the preferred is convertible.
The preferred stock also has preference on liquidation over common stock and on
the payment of dividends. The Series A preferred stock shall be convertible,
without the payment of any additional consideration by the holder, at any time
at the option of the holder, at a conversion rate, subject to adjustment, of one
share of common for each share of preferred. Each share of Series A preferred
stock shall automatically be converted into common stock at the then effective
applicable conversion rate upon the closing of a public offering with gross
proceeds of not less than $15 million or upon the affirmative vote of the
majority of the preferred stockholders.
Concurrent with the increase in the number of authorized shares of
preferred stock, common stockholders were granted the option of converting their
shares into Series A preferred stock on a one-for-one basis.
In addition, additional shares of Series A convertible preferred stock
totaling 965,430 were issued for no additional consideration to those persons
who purchased common stock in April and May 1996 at a price of $20 per share in
order that their purchase price, after taking into account the stock split, be
adjusted to $3 1/3 per share.
9. STOCK PLANS
Performance Share Plan. The Company had a performance share plan which was
intended as an incentive to certain key employees and directors who contribute
to the success of the Company's business. Under the terms of the plan,
performance shares were granted to individuals at the discretion of the
Company's Board of Directors (the "Board"), subject to various vesting
schedules. Performance shares exercised during 1995 totaled 6,980. Shares
forfeited under the plan totaled 17,809 for 1995.
In August 1995, the Board voted to terminate the performance share plan and
authorized the Company's president, in consultation with the Compensation
Committee, to offer stock options in exchange for performance shares held by the
holders thereof.
Stock Options. During 1995, the Company adopted the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan initially permitted the grant of options to
purchase up to 1,200,000 shares of the Company's common stock at a price at
least equal to the fair market value of the stock, determined by the Board, on
the date of grant for incentive stock options and at prices determined by the
Board in its sole discretion for
D-13
<PAGE> 249
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonqualified options. On September 6, 1996, the Board and stockholders approved
an increase in the shares available for grants to 1,650,000.
During the fourth quarter of 1996, the Company repriced all options to
reflect the then fair market value of the Company's common stock. The repricing
provided each option holder the right to exchange their existing stock options
for new incentive stock options (the "new options") to purchase an identical
number of shares of common stock at an exercise price of $.26 per share. The new
options vest according to the original vesting schedule but with a six-month
delay, or in 16 equal quarterly installments beginning three months before the
original vesting date. The options are exercisable for 10 years from the
original date of grant.
At December 31, 1996, there were 828,137 options available for grant under
the 1995 Plan. Prior to the adoption of the 1995 Plan, the Company issued stock
options to certain individuals which were exercisable on varying dates at prices
ranging from $.67 to $2.57 per share.
Stock Exchanged for Services. During 1995, the Company issued 47,019
shares of common stock in exchange for current and future services. Of the
47,019 shares issued, 36,000 were issued to a director for services to be
provided through 1997. The right to the 36,000 shares is subject to a two-year
vesting schedule through 1997. The value of the services provided amounting to
$15,000 and $36,000 for 1996 and 1995, respectively, has been charged to
operations. During 1996, an additional 73,014 shares of common stock were issued
in exchange for current services. The value of the shares totaling $94,933 was
expensed in 1996.
A summary of all stock option activity for the years ended December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
Outstanding at January 1, 1995.............................. 943,500 $0.67-$2.57
Options granted in exchange for performance shares.......... 175,476 $ 2.00
Options granted............................................. 454,458 $ .33-$2.20
Options terminated.......................................... (159,000) $2.00-$2.57
Options exercised........................................... (525,000) $ 0.67
-------- -----------
Outstanding at December 31, 1995............................ 889,434 $0.33-$2.20
-------- -----------
Options granted............................................. 298,803 $0.26-$2.20
Options terminated.......................................... (103,876) $0.33-$2.20
Options exercised........................................... (262,500) $ 0.67
Options cancelled upon exchange............................. (865,161) $0.67-$2.57
Options issued upon exchange................................ 865,161 $ 0.26
-------- -----------
Outstanding at December 31, 1996............................ 821,861 $ 0.26
-------- -----------
Options exercisable at December 31, 1995.................... 650,568 $0.33-$2.20
-------- -----------
Options exercisable at December 31, 1996.................... 448,377 $ 0.26
-------- -----------
</TABLE>
The weighted average grant date fair value for options granted in 1996 and
1995 was $.31 and $.67, respectively.
During 1995, the Company's principal stockholder exercised options to
purchase 525,000 shares of common stock by issuing a note to the Company in the
amount of $350,000 (the "Note"). The Note is due on August 24, 2000 and bears
interest, payable annually, at 8% per annum commencing August 24, 1996. Accrued
interest on the Note as of December 31, 1996 totaling $31,582 has been forgiven.
D-14
<PAGE> 250
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information regarding stock options
outstanding at December 31, 1996 under the Stock Option Plans as described
above:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
NUMBER OF RANGE OF AVERAGE AVERAGE NUMBER PRICE FOR
OPTIONS EXERCISE EXERCISE REMAINING CURRENTLY CURRENTLY
OUTSTANDING PRICE PRICE LIFE EXERCISABLE EXERCISABLE
----------- -------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
821,861............................... $0.26 $0.26 7.6 years 448,377 $0.26
</TABLE>
Pro Forma Disclosures. As described in Note 1, the Company applies the
intrinsic value method of APB No. 25 and related Interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net loss for the years
ended December 31, 1996 and 1995 would have been $6,260,157 and $25,215,
respectively.
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1996 and 1995 was
estimated on the date of grant using the Black-Scholes option pricing model. Key
assumptions used to apply this pricing model are as follows:
<TABLE>
<CAPTION>
1996 1995
------- ---------
<S> <C> <C>
Risk-free interest rate..................................... 6.50% 6.50%
Expected life of option grants.............................. 5 years 4.9 years
</TABLE>
The pro forma disclosures, as required by SFAS No. 123, only include the
effects of options granted in 1996 and 1995.
10. EMPLOYEE BENEFIT PLAN
In 1994, the Company established a 401(k) retirement plan for substantially
all employees. Employees eligible to participate in the plan must be age 21. The
Company does not contribute to the plan.
11. LEASES
The Company leases its present facilities in Wilmington, Massachusetts,
under a five-year lease expiring in November 2000. Future minimum lease payments
under noncancelable operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
- ----------- ----------
<S> <C>
1997...................................................... $ 320,000
1998...................................................... 351,996
1999...................................................... 368,000
2000...................................................... 384,000
----------
Total............................................. $1,423,996
==========
</TABLE>
The Company is also responsible for real estate taxes and other operating
expenses associated with the property lease. Rent expense under all operating
leases for the years ended December 31, 1996 and 1995 was approximately $586,000
and $246,000, respectively.
D-15
<PAGE> 251
ADVANCED TECHCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED-PARTY TRANSACTIONS
The Company purchases computers and other networking equipment from a
computer distributor whose principal shareholder is a director of the Company.
Purchases of equipment totaled $77,758 and $186,163 for 1996 and 1995,
respectively. As of December 31, 1996, there are no amounts payable to the
distributor.
Interest expense on the note payable to stockholder (see Note 5) was $8,112
for the year ended December 31, 1996.
13. SUBSEQUENT EVENT
Subsequent to year end, the Company was named as a defendant in a suit
filed by a successor to a former vendor. The vendor claims it is owed $1,000,000
from the Company and has asserted breach of contract and other claims. The
Company's recorded liability at December 31, 1996 was approximately $450,000.
The Company and the vendor have agreed to stay the litigation while they engage
in settlement negotiations. The ultimate outcome of this claim cannot be
predicted, however, management estimates that the Company's possible loss that
may be incurred will not exceed the amounts recorded.
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
AUDITORS' REPORT
As discussed in notes 2 and 5, as of October 15, 1997 the Company had
approximately $2,200,000 outstanding and was in default on certain covenant
requirements under its bank line of credit. Moreover, the Company was discussing
the refinancing of this line in connection with a joint venture agreement
entered into to subcontract the manufacturing of certain of its products and had
received a commitment letter for bank financing of $750,000. The commitment
letter expired on December 15, 1997 and on December 29, 1997 the Company signed
a definitive agreement to be acquired by World Access, Inc. In connection with
the acquisition the Company also entered into an agreement to terminate the
joint venture agreement referred to above. In December 1997, World Access paid
the Company's outstanding bank debt and began funding its operations. The
acquisition of the Company, by World Access, was consummated on January 29,
1998.
(b) Pro Forma Financial Information. The acquisition of ATI has been
accounted for using the purchase method of accounting. In connection with such
acquisition, World Access recorded a charge of approximately $4.0 million,
representing the portion of the purchase price for ATI allocated to in-process
research and development. The following unaudited pro forma consolidated balance
sheet as of September 30, 1997 reflects the acquisition of ATI as if it had been
completed on September 30, 1997. The following unaudited pro forma consolidated
statement of operations for the year ended December 31, 1996 and the nine months
ended September 30, 1997 reflect the acquisition of ATI as if it had been
completed as of January 1, 1996.
The pro forma data does not purport to be indicative of the results which
would actually have been reported if the acquisition had occurred on such dates
or which may be reported in the future. The pro forma data should be read in
conjunction with the historical consolidated financial statements of the
Company, the historical consolidated financial statements of ATI and the related
notes thereto.
D-16
<PAGE> 252
WORLD ACCESS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
WORLD ACCESS ATI ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents............................ $ 15,807 $ 187 $ (298)(A) $ 15,696
Accounts receivable............................. 22,446 1,887 (75)(A) 24,258
Inventories..................................... 18,899 7,057 (2,050)(A) 23,906
Other current assets............................ 7,050 82 -- 7,132
-------- ------- --------- --------
Total Current Assets.................. 64,202 9,213 (2,423) 70,992
Property and equipment.......................... 4,287 1,066 -- 5,353
Intangible assets............................... 29,370 -- 1,320(A) 30,690
Technology licenses............................. 904 -- -- 904
Debt issuance costs............................. 641 -- -- 641
Other assets.................................... 2,035 10 3,325(A) 5,370
-------- ------- --------- --------
Total Assets.......................... $101,439 $10,289 $ 2,222 $113,950
-------- ------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt................................. $ 66 $ 3,097 $ -- $ 3,163
Accounts payable................................ 6,902 2,931 -- 9,833
Accrued payroll and benefits.................... 3,073 -- -- 3,073
CIS purchase price payable...................... 3,500 -- -- 3,500
Other accrued liabilities....................... 1,550 2,175 200(A) 3,925
-------- ------- --------- --------
Total Current Liabilities............. 15,091 8,203 200 23,494
Long-term debt.................................. 301 340 -- 641
-------- ------- --------- --------
Total Liabilities..................... 15,392 8,543 200 24,135
-------- ------- --------- --------
Stockholders' Equity Common and preferred
stock......................................... 192 2,558 (2,558)(B) 196
4(A)
Capital in excess of par value.................. 81,178 11,340 (11,340)(B) 88,892
7,714(A)
Retained earnings (deficit)..................... 4,677 (12,152) 12,152(B) 727
(3,950)(C)
---------
Total Stockholders' Equity............ 86,047 1,746 2,022 89,815
-------- ------- --------- --------
Total Liabilities and Stockholders'
Equity.............................. $101,439 $10,289 $ 2,222 $113,950
-------- ------- --------- --------
</TABLE>
- ---------------
(A) The Merger will be accounted for under the purchase method of accounting.
In addition, in accordance with generally accepted accounting principles,
the portion of the purchase price allocable to research and development
projects of ATI was expensed at the consummation of the Merger on January
29, 1998. The amount of this one-time non-recurring charge was
approximately $4.0 million. Since this charge was directly related to the
acquisition and will not recur, the pro forma financial statements have
been prepared excluding the change. The Company has not yet determined the
final allocation of the purchase price, and accordingly, the amounts shown
below may differ from the amounts ultimately recorded.
D-17
<PAGE> 253
The unallocated excess of purchase price over net assets acquired is
determined as follows (amounts in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash purchase of ATI shares................................. 32
Cash in lieu of fractional shares........................... 1
Cash paid for options....................................... 265
------
Total cash........................................ 298
Restricted stock issued in exchange for ATI shares.......... 7,593
Restricted stock issued in exchange for
options................................................... 125
------
Total restricted stock............................ 7,718
Fees and expenses related to the Merger..................... 200
------
Total purchase price.............................. 8,216
------
Less:
Historical stockholders' equity............................. (1,746)
Adjust assets and liabilities:
Inventories................................................. 2,050
Accounts receivable......................................... 75
In process R&D costs........................................ (3,950)
Deferred income taxes....................................... (3,325)
------
(6,896)
------
Unallocated excess of purchase price over net assets
acquired.................................................. 1,320
------
</TABLE>
(B) Eliminate existing stockholders' equity.
(C) Represents retained earnings adjustment for non-recurring charge related to
write-off of in-process R&D expenses acquired in the merger.
D-18
<PAGE> 254
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
WORLD ACCESS ATI ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products................................. $56,099 $10,975 $ (150)(A) $66,924
Service revenues.................................. 15,622 -- -- 15,622
------- ------- -------- -------
Total Sales............................. 71,721 10,975 (150) 82,546
Cost of products sold............................. 33,811 8,396 (70)(A) 42,137
Cost of services.................................. 12,832 -- -- 12,832
------- ------- -------- -------
Total Cost of Sales..................... 46,643 8,396 (70) 54,969
------- ------- -------- -------
Gross Profit...................................... 25,078 2,579 (80) 27,577
Engineering and development....................... 1,350 3,346 -- 4,696
Selling, general and administrative............... 6,860 4,421 -- 11,281
Amortization of goodwill.......................... 1,210 -- 66(B) 1,276
------- ------- -------- -------
Operating Income.................................. 15,658 (5,188) (146) 10,324
Interest and other income......................... 835 -- -- 835
Interest and other expense........................ (95) (233) -- (328)
------- ------- -------- -------
Income Before Income Taxes........................ 16,398 (5,421) (146) 10,831
Income taxes...................................... 5,986 -- (1,870)(C) 4,116
------- ------- -------- -------
Net Income.............................. $10,412 $(5,421) $ 1,724 $ 6,715
------- ------- -------- -------
Net Income Per Common Share:............ $ .55 $ .34(D)
------- -------
Weighted Average Shares Outstanding:.............. 19,076 19,501(D)
------- -------
</TABLE>
- ---------------
(A) Eliminate intercompany sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets acquired
over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and pro
forma adjustments.
(D) Represents fully diluted earnings per share, including shares of Company
common stock issued to the shareholders of ATI.
D-19
<PAGE> 255
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
WORLD ACCESS ATI ADJUSTMENTS COMBINED
------------ ------- ------------ ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products................................ $34,411 $15,713 $ (66)(A) $50,058
Service revenues................................. 16,589 -- -- 16,589
------- ------- ----- -------
Total Sales............................ 51,000 15,713 (66) 66,647
Cost of products sold............................ 21,485 11,994 (35)(A) 33,444
Cost of services................................. 14,520 -- -- 14,520
------- ------- ----- -------
Total Cost of Sales.................... 36,005 11,994 (35) 47,964
------- ------- ----- -------
Gross Profit..................................... 14,995 3,719 (31) 18,683
Engineering and development...................... 892 4,785 -- 5,677
Selling, general and administrative.............. 6,211 4,607 -- 10,818
Amortization of goodwill......................... 534 -- 88(B) 622
------- ------- ----- -------
Operating Income................................. 7,358 (5,673) (119) 1,566
Interest and other income........................ 485 -- -- 485
Interest and other expense....................... (319) (438) -- (757)
------- ------- ----- -------
Income Before Income Taxes....................... 7,524 (6,111) (199) 1,294
Income taxes..................................... 745 47 (642)(C) 150
------- ------- ----- -------
Net Income............................. $ 6,779 $(6,158) $ 523 $ 1,444
------- ------- ----- -------
Net Income Per Common Share:........... $ .46 $ .10(D)
------- -------
Weighted Average Shares Outstanding:............. 14,424 14,849(D)
------- -------
</TABLE>
- ---------------
(A) Eliminate intercompany sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets acquired
over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and pro
forma adjustments.
(D) Represents fully diluted earnings per share, including shares of Company
common stock issued to the shareholders of ATI.
D-20
<PAGE> 256
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of February 13, 1998
D-21
<PAGE> 257
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
WORLD ACCESS, INC.
AND
CELLULAR INFRASTRUCTURE SUPPLY, INC.
AND
ERNEST H. LIN
AND
ADVANCED TECHCOM, INC.
AS OF DECEMBER 24, 1997
D-22
<PAGE> 258
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1. THE MERGER......................................................... D-26
SECTION 1.1. Surviving Corporation....................................... D-26
SECTION 1.2. Certificate of Incorporation................................ D-26
SECTION 1.3. Bylaws...................................................... D-26
SECTION 1.4. Directors................................................... D-26
SECTION 1.5. Officers.................................................... D-26
SECTION 1.6. Effective Time.............................................. D-26
ARTICLE 2. CONVERSION OF SHARES............................................... D-27
SECTION 2.1. ATI Capital Stock........................................... D-27
SECTION 2.2. Fractional Shares........................................... D-28
SECTION 2.3. Exchange of ATI Stock....................................... D-28
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ATI.............................. D-29
SECTION 3.1. Organization................................................ D-29
SECTION 3.2. Authorization............................................... D-29
SECTION 3.3. Absence of Restrictions and Conflicts....................... D-29
SECTION 3.4. Capitalization; Ownership of ATI Capital Stock.............. D-30
SECTION 3.5. Financial Statements........................................ D-30
SECTION 3.6. Absence of Certain Changes.................................. D-31
SECTION 3.7. Legal Proceedings........................................... D-31
SECTION 3.8. Compliance with Law......................................... D-31
SECTION 3.9. ATI Material Contracts...................................... D-32
SECTION 3.10. ATI Customer Contract....................................... D-32
SECTION 3.11. Tax Returns; Taxes.......................................... D-33
SECTION 3.12. Officers, Directors and Employees........................... D-33
SECTION 3.13. ATI Employee Benefit Plans.................................. D-33
SECTION 3.14. Labor Relations............................................. D-36
SECTION 3.15. Insurance................................................... D-36
SECTION 3.16. Title to Properties and Related Matters..................... D-36
SECTION 3.17. Environmental Matters....................................... D-36
SECTION 3.18. Patents, Trademarks, Trade Names............................ D-37
SECTION 3.19. Transactions with Affiliates................................ D-37
SECTION 3.20. Brokers, Finders and Investment Bankers..................... D-37
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF PARENT........................... D-38
SECTION 4.1. Organization................................................ D-38
SECTION 4.2. Authorization............................................... D-38
SECTION 4.3. Absence of Restrictions and Conflicts....................... D-38
SECTION 4.4. Capitalization of Parent and Ownership of Merger Sub........ D-38
SECTION 4.5. Financial Statements........................................ D-39
SECTION 4.6. Absence of Certain Changes.................................. D-39
SECTION 4.7. Legal Proceedings........................................... D-40
SECTION 4.8. Compliance with Law......................................... D-40
SECTION 4.9. Tax Returns; Taxes.......................................... D-40
SECTION 4.10. Parent SEC Reports.......................................... D-40
SECTION 4.11. Transactions with Affiliates................................ D-40
</TABLE>
D-23
<PAGE> 259
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 5. CERTAIN COVENANTS AND AGREEMENTS................................... D-41
SECTION 5.1. Conduct of Business by ATI.................................. D-41
SECTION 5.2. Inspection and Access to Information........................ D-42
SECTION 5.3. No Solicitation; Acquisition Proposals...................... D-42
SECTION 5.4. Reasonable Efforts; Further Assurances; Cooperation......... D-43
SECTION 5.5. Public Announcements........................................ D-44
SECTION 5.6. Supplements to Disclosure Letters........................... D-44
SECTION 5.7. Continuation of Business.................................... D-44
SECTION 5.8. Stockholder Matters......................................... D-44
SECTION 5.9. Indemnification Against Certain Liabilities................. D-44
ARTICLE 6. OTHER MATTERS...................................................... D-45
SECTION 6.1. Conditions to Each Party's Obligations...................... D-45
SECTION 6.2. Conditions to Obligations of Parent and Merger Sub.......... D-45
SECTION 6.3. Conditions to Obligations of ATI............................ D-47
ARTICLE 7. CLOSING............................................................ D-48
ARTICLE 8. TERMINATION........................................................ D-48
SECTION 8.1. Termination and Abandonment................................. D-48
SECTION 8.2. Specific Performance and Other Remedies..................... D-49
SECTION 8.3. Effect of Termination....................................... D-49
ARTICLE 9. INDEMNIFICATION.................................................... D-49
SECTION 9.1. Definitions................................................. D-49
SECTION 9.2. Agreement of ATI Indemnitors to Indemnify................... D-50
SECTION 9.3. Agreement of Parent Indemnitors to Indemnify................ D-50
SECTION 9.4. Procedures for Indemnification.............................. D-50
SECTION 9.5. Third Party Claims.......................................... D-51
SECTION 9.6. Rights and Remedies Exclusive............................... D-52
SECTION 9.7. Survival.................................................... D-52
SECTION 9.8. Time Limitations............................................ D-52
SECTION 9.9. Limitations as to Amount Payable by ATI Indemnitors......... D-53
SECTION 9.10. Limitations as to Amount Payable by Parent and Surviving D-53
Corporation.................................................
SECTION 9.11. Subrogation................................................. D-53
SECTION 9.12. Appointment of ATI Indemnitors Representative............... D-53
SECTION 9.13. Payment..................................................... D-54
ARTICLE 10. MISCELLANEOUS PROVISIONS.......................................... D-54
SECTION 10.1. Notices..................................................... D-54
SECTION 10.2. Disclosure Letters and Exhibits............................. D-55
SECTION 10.3. Assignment; Successors in Interest.......................... D-55
SECTION 10.4. Number; Gender.............................................. D-55
SECTION 10.5. Captions.................................................... D-55
SECTION 10.6. Controlling Law; Jurisdiction; Integration; Amendment....... D-55
SECTION 10.7. Knowledge................................................... D-55
SECTION 10.8. Severability................................................ D-55
SECTION 10.9. Counterparts................................................ D-55
SECTION 10.10. Enforcement of Certain Rights............................... D-55
SECTION 10.11. Waiver...................................................... D-55
SECTION 10.12. Fees and Expenses........................................... D-56
</TABLE>
D-24
<PAGE> 260
EXHIBITS
<TABLE>
<S> <C>
Exhibit 2.1(b) Escrow Agreement
Exhibit 6.2(h) Employment Agreement
Exhibit 6.2(i) Non-Competition Agreement
Exhibit 6.2(o) Registration Rights Agreement
Exhibit 6.2(m) List of Certain Stockholders
</TABLE>
D-25
<PAGE> 261
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 24, 1997 (the
"Agreement"), by and among WORLD ACCESS, INC., a Delaware corporation
("Parent"), CELLULAR INFRASTRUCTURE SUPPLY, INC., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), ADVANCED TECHCOM, INC., a
Delaware corporation ("ATI"), and ERNEST H. LIN, an individual resident of the
Commonwealth of Massachusetts (the "Signing Stockholder").
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and ATI
each have approved this Agreement and the merger (the "Merger") of ATI with and
into Merger Sub upon the terms and conditions contained herein and in accordance
with the General Corporation Law of the State of Delaware ("DGCL"); and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to set forth certain
conditions thereto.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE 1.
THE MERGER
SECTION 1.1. Surviving Corporation. Subject to the provisions of this
Agreement and the DGCL, at the Effective Time (as hereinafter defined), ATI
shall be merged with and into Merger Sub and the separate corporate existence of
ATI shall cease. Merger Sub shall be the surviving corporation in the Merger
(hereinafter sometimes called the "Surviving Corporation") and shall continue
its corporate existence under the laws of the State of Delaware. The Merger
shall have the effect set forth in Section 259 of the DGCL, which, among other
things, shall result in the Surviving Corporation assuming the liabilities of
ATI by operation of merger.
SECTION 1.2. Certificate of Incorporation. The Certificate of
Incorporation of Merger Sub shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter duly amended in accordance with its terms
and the DGCL.
SECTION 1.3. Bylaws. The Bylaws of Merger Sub shall be the Bylaws of the
Surviving Corporation until thereafter duly amended in accordance with their
terms and the DGCL.
SECTION 1.4. Directors. The directors of the Surviving Corporation shall
consist of the directors of Merger Sub immediately prior to the Effective Time
and the Signing Stockholder shall be elected as a director of the Surviving
Corporation at the Effective Time, and all such directors shall hold office from
the Effective Time until their respective successors are duly elected and
qualified.
SECTION 1.5. Officers. The officers of the Surviving Corporation shall
consist of the officers of Merger Sub immediately prior to the Effective Time,
such officers to hold office from the Effective Time until their respective
successors are duly elected and qualified.
SECTION 1.6. Effective Time. The parties hereto shall cause a Certificate
of Merger meeting the requirements of the DGCL (the "Certificate of Merger") to
be properly executed and filed on the Closing Date (as hereinafter defined) with
the Secretary of State of the State of Delaware. The Merger shall become
effective as of the date of the filing of the properly executed Certificate of
Merger. The date and time when the Merger becomes effective is herein referred
to as the effective time (the "Effective Time").
D-26
<PAGE> 262
ARTICLE 2.
CONVERSION OF SHARES
SECTION 2.1. ATI Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of any holder thereof:
(a) Subject to Section 2.2, (i) all of the shares of the Series A
Convertible Preferred Stock, $.10 par value per share, of ATI ("ATI Stock")
issued and outstanding immediately prior to the Effective Time (other than
shares of ATI Stock held in treasury or shares of ATI Stock held by Parent)
shall be converted into the right to receive the following (the "Merger
Consideration"): (A) a number of shares of Parent common stock, $.01 par
value per share (the "Parent Common Stock"), equal to (x) $10,000,000 less
the expenses of the ATI Stockholders (as hereinafter defined) incurred in
connection with the Merger in excess of $50,000 divided by (y) the Average
Closing Price (as hereinafter defined) (the "Parent Shares"), which Parent
Shares will be issued to the holders of ATI Stock (each a "Stockholder"
and, collectively, the "Stockholders") in the manner contemplated by
Section 2.3; and (B) a number of shares of Parent Common Stock equal to
$5,000,000 divided by the Average Closing Price, which shares of Parent
Common Stock will be deposited and held in escrow pursuant to Section
2.1(b) below (the "Escrow Shares"); and (ii) all of the shares of the
Common Stock, $.10 par value per share, of ATI (the "ATI Common Stock")
issued and outstanding immediately prior to the Effective Time (other than
shares of ATI Common Stock held in treasury or shares of ATI Common Stock
held by Parent) shall be converted into the right to receive $.01 per
share. At the Closing, each Stockholder shall be entitled to that portion
of the aggregate Merger Consideration as it relates to the proportion of
the aggregate liquidation preference of such Stockholder's ATI Stock
relative to the aggregate liquidation preference of the ATI Stock, and each
holder of ATI Common Stock (each an "ATI Common Stockholder" and,
collectively, the "ATI Common Stockholders" and, together with the
Stockholders, the "ATI Stockholders") shall be entitled to a cash payment
equal to the aggregate number of shares of ATI Common Stock held by him
multiplied by $.01. For purposes hereof, "Average Closing Price" shall mean
the arithmetic average of the daily closing price per share, rounded to
four decimal places, of the Parent Common Stock as reported on the Nasdaq
National Market for each of the trading days in the period commencing on
(and including) October 27, 1997 and ending on the trading day that occurs
two trading days prior to (and not including) the Closing Date (as
hereinafter defined).
(b) The Escrow Shares shall be deposited with the Escrow Agent (as
hereinafter defined) within five (5) business days of the Closing to be
held and distributed pursuant to the terms of an Escrow Agreement by and
between Parent, Merger Sub, the Stockholders and Cauthen & Feldman, as the
escrow agent (the "Escrow Agent"), substantially in the form attached
hereto as Exhibit 2.1(b) (the "Escrow Agreement").
(c) Each share of common stock, par value $.01 per share, of Merger
Sub that is issued and outstanding immediately prior to the Effective Time
shall remain outstanding and shall be unchanged after the Merger, all of
which shares have been issued to Parent and constitute the only outstanding
shares of capital stock of the Surviving Corporation.
(d) Each share of the ATI Stock or ATI Common Stock issued and
outstanding immediately prior to the Effective Time that is then held in
the treasury of ATI shall be canceled and retired and all rights in respect
thereof shall cease to exist, without any conversion thereof or payment of
any consideration therefor.
(e) Each warrant, stock option or other right, if any, to purchase
shares of ATI Stock or ATI Common Stock issued and outstanding immediately
prior to the Effective Time shall be canceled (whether or not such warrant,
option or other right is then exercisable), and the holder of each stock
option issued under ATI's 1995 Stock Option Plan, as amended, shall be
entitled to a cash payment from the Parent in an amount equal to the
product of (i) $1.00 less the exercise price for the option held by such
holder, multiplied by (ii) the maximum number of shares of ATI Common Stock
such Holder would be entitled to receive upon exercise of such option if so
exercised on December 31, 1997; provided,
D-27
<PAGE> 263
however, that any payment to be made to the Signing Stockholder as a result
of this Section 2.1(e) shall be made by Parent by delivering cash in the
amount of one-half of such payment and shares of Parent Common Stock having
an aggregate value (valued at the Average Closing Price) equal to one-half
of such payment.
SECTION 2.2. Fractional Shares. No scrip or fractional shares of Parent
Common Stock shall be issued in the Merger. In lieu thereof, if a Stockholder
would otherwise have been entitled to a fractional share of Parent Common Stock
hereunder, then such Stockholder shall be entitled, after the later of (a) the
Effective Time or (b) the surrender of his certificate(s) that represent such
shares of ATI Stock, to receive from Parent an amount in cash in lieu of such
fractional share, based on a value per share of Parent Common Stock equal to the
Average Closing Price.
SECTION 2.3. Exchange of ATI Stock.
(a) Exchange. From and after the Effective Time, upon exchange of a
certificate or certificates which immediately prior thereto represents
outstanding shares of ATI Stock, a Stockholder shall be entitled to
receive, upon surrender to Parent of such certificate or certificates duly
endorsed in blank, one or more certificates as requested by such
Stockholder (properly issued, executed and countersigned, as appropriate)
representing that number of whole shares of Parent Common Stock to which
such Stockholder shall have become entitled pursuant to the provisions of
Section 2.1(a)(i)(A) and a check representing the aggregate cash
consideration to which such Stockholder shall have become entitled as to
any fractional share, and upon exchange of a certificate or certificates
which immediately prior thereto represents shares of ATI Common Stock, an
ATI Common Stockholder shall be entitled to receive, upon surrender to
Parent of such certificate or certificates duly endorsed in blank, a check
representing the aggregate cash consideration to which such ATI Common
Stockholder shall have become entitled pursuant to Section 2.1(a)(ii)
above, and all of the certificate or certificates so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the cash
payable upon the surrender of any certificate. No portion of the
consideration to be received pursuant to Sections 2.1 and 2.2 upon exchange
of a certificate (whether a certificate representing shares of Parent
Common Stock or by check representing any cash payable hereunder) may be
issued or paid to a person other than the person in whose name the
certificate surrendered in exchange therefor is registered. From the
Effective Time until surrender in accordance with the provisions of this
Section 2.3, each certificate shall represent for all purposes only the
right to receive the consideration provided in Sections 2.1 and 2.2. All
payments in respect of shares of ATI Stock or ATI Common Stock that are
made in accordance with the terms hereof shall be deemed to have been made
in full satisfaction of all rights pertaining to such securities.
(b) Lost Certificates. In the case of any lost, mislaid, stolen or
destroyed certificate, the ATI Stockholder may be required, as a condition
precedent to delivery to the Stockholder of the consideration described in
Sections 2.1 and 2.2, to deliver to Parent a satisfactory indemnity
agreement as Parent may direct as indemnity against any claim that may be
made against Parent or the Surviving Corporation with respect to the
certificate alleged to have been lost, mislaid, stolen or destroyed.
(c) No Transfers After Effective Time. After the Effective Time,
there shall be no transfers on the stock transfer books of the Surviving
Corporation of the shares of ATI Stock or ATI Common Stock that were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing the ATI Stock or the ATI Common
Stock are presented to the Surviving Corporation for transfer, they shall
be canceled and exchanged for the consideration described in Sections 2.1
and 2.2.
(d) Unclaimed Shares or Cash. Any shares of Parent Common Stock or
cash due former stockholders of ATI pursuant to Sections 2.1 and 2.2 hereof
that remains unclaimed by such former stockholders for six months after the
Effective Time shall be held by Parent, and any former holder of ATI Stock
or ATI Common Stock who has not theretofore complied with Section 2.3 (a)
and (b) shall thereafter look only to Parent for issuance of the number of
shares of Parent Common Stock and other consideration to which such holder
has become entitled pursuant to the provisions of Sections 2.1 and 2.2;
provided, however, that neither Parent nor any party hereto shall be liable
to a former holder of shares of
D-28
<PAGE> 264
ATI Stock or ATI Common Stock for any amount required to be paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF ATI
With such exceptions, if any, as may be set forth in a letter (the "ATI
Disclosure Letter") to be delivered by ATI to Parent on or before December 31,
1997, ATI hereby represents and warrants to Parent as follows:
SECTION 3.1. Organization. Each of ATI and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its respective properties and to carry on
its business as now being conducted. Each of ATI and its subsidiaries is duly
qualified to transact business, and is in good standing, as a foreign
corporation or branch of a foreign corporation in each jurisdiction where the
character of its activities requires such qualification, except where the
failure to so qualify would not have a material adverse effect on its assets,
liabilities, results of operations, financial condition or business of ATI and
its subsidiaries taken as a whole. Each of ATI and its subsidiaries has
heretofore made available to Parent accurate and complete copies of its
Certificate of Incorporation and Bylaws, as currently in effect, and has made
available to Parent its respective minute books and stock records. The ATI
Disclosure Letter contains a true and correct list of the jurisdictions in which
ATI and its subsidiaries are qualified to do business as a foreign corporation
or branch of a foreign corporation.
SECTION 3.2. Authorization. ATI and the Signing Stockholder each have
full power and authority to execute and deliver this Agreement and to perform
their respective obligations hereunder and to consummate the Merger and the
other transactions contemplated hereby. Subject to the approval of the ATI
Stockholders, the execution and delivery of this Agreement by ATI and the
performance by ATI of its obligations hereunder and the consummation of the
Merger and the other transactions provided for herein have been duly and validly
authorized by all necessary corporate action on its part. The Board of Directors
of ATI has approved the execution, delivery and performance of this Agreement
and the consummation of the Merger and the other transactions contemplated
hereby. Subject to the receipt of the approval of the ATI Stockholders, this
Agreement has been duly executed and delivered by ATI and the Signing
Stockholder, and constitutes the valid and binding agreement of ATI and the
Signing Stockholder, enforceable against each of them in accordance with its
terms, subject to applicable bankruptcy, insolvency and other similar laws
affecting the enforceability of creditors' rights generally, general equitable
principles and the discretion of courts in granting equitable remedies.
SECTION 3.3. Absence of Restrictions and Conflicts. The execution,
delivery and performance of this Agreement, the consummation of the Merger and
the other transactions contemplated by this Agreement and the fulfillment of and
compliance with the terms and conditions of this Agreement do not and will not,
with the passing of time or the giving of notice or both, violate or conflict
with, constitute a breach of or default under, result in the loss of any
material benefit under, or permit the acceleration of any obligation under, (i)
any term or provision of the Certificate of Incorporation or Bylaws of ATI or
its subsidiaries, (ii) to the best knowledge of ATI, any ATI Material Contract
(as hereinafter defined), (iii) to the best knowledge of ATI, any judgment,
decree or order of any court or governmental authority or agency to which ATI,
its subsidiaries or the Signing Stockholder is a party or by which ATI, its
subsidiaries or such person or any of their respective properties is bound, or
(iv) to the best knowledge of ATI, any statute, law, regulation or rule
applicable to ATI, so as to have in the case of subsections (ii) through (iv)
above, a material adverse effect on the assets, liabilities, results of
operations, financial condition, business of ATI and its subsidiaries taken as a
whole. Except for the filing and recordation of the Certificate of Merger, no
consent, approval, order or authorization of, or registration, declaration or
filing with, any governmental agency or public or regulatory unit, agency, body
or authority with respect to ATI, its subsidiaries or the Signing Stockholder is
required in connection with the execution, delivery or performance of this
Agreement by ATI or such person or the consummation of the transactions
contemplated by this Agreement by ATI, the failure to obtain which would
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have a material adverse effect upon the assets, liabilities, results of
operations, financial condition, business of ATI and its subsidiaries taken as a
whole.
SECTION 3.4. Capitalization; Ownership of ATI Capital Stock.
(a) Capitalization. The authorized capital stock of ATI consists of
(i) 25,000,000 shares of ATI Common Stock, of which, as of the date hereof,
354,766 shares are issued and outstanding and 1,200,000 shares are reserved
for issuance, upon exercise of outstanding options to purchase such stock,
and (ii) 20,000,000 shares of preferred stock, par value $.10 per share, of
which 15,000,000 shares have been designated as the ATI Stock, of which, as
of the date hereof, 11,243,219.03 shares are issued and outstanding. Each
share of capital stock of ATI which is outstanding as of the date hereof is
duly authorized, validly issued, fully paid and nonassessable and free of
preemptive rights. Except as indicated in Section 3.4(a) or except as set
forth in the Disclosure Letter, there are no shares of capital stock of ATI
outstanding, and there are no subscriptions, options, convertible
securities, calls, rights, warrants or other agreements, claims or
commitments of any nature whatsoever obligating ATI or any of its
subsidiaries to issue, transfer, deliver or sell, or cause to be issued,
transferred, delivered or sold, additional shares of the capital stock or
other securities of ATI or obligating ATI or any of its subsidiaries to
grant, extend or enter into any such agreement or commitment.
(b) Ownership. The ATI Stockholders are the record and beneficial
owners of all shares of ATI Stock or ATI Common Stock to be exchanged
pursuant to Section 2.3 and their relative share ownership is set forth in
the Disclosure Letter, and, at the Closing, the ATI Stockholders will own
all such shares free and clear of any liens, claims, options, charges,
encumbrances or rights of others.
(c) Capital Stock of ATI Subsidiaries. The ATI Disclosure Letter sets
forth a true, correct and complete list of all its subsidiaries, the
jurisdiction in which each is incorporated or organized, and all shares of
capital stock or other ownership interests authorized, issued and
outstanding of each such subsidiary. The outstanding shares of capital
stock or other equity interests of each such subsidiary have been duly
authorized and are validly issued, fully paid and nonassessable. All shares
of capital stock or other equity interests of each such subsidiary owned by
ATI or any of its subsidiaries are set forth in the ATI Disclosure Letter
and are owned by ATI, either directly or indirectly, free and clear of all
liens, claims, options, charges, encumbrances or rights of others.
SECTION 3.5. Financial Statements. ATI has made available to Parent the
audited consolidated balance sheets of ATI and its subsidiaries as of December
31, 1994, 1995 and 1996, and the related statements of operations, stockholders'
equity and cash flows for the fiscal years then ended, including the notes
thereto, and the unaudited consolidated balance sheet of ATI and its
subsidiaries as of November 30, 1997 and the related statement of operations,
stockholders' equity and cash flow for the eleven-month period then ended,
including the notes thereto. All of the foregoing financial statements are
hereinafter collectively referred to as the "ATI Financial Statements", and the
balance sheet as of November 30, 1997 is hereinafter referred to as the "1997
Balance Sheet". The ATI Financial Statements are complete and correct, have been
prepared from, and are in accordance with, the books and records of ATI and
present fairly the financial position and results of operations of ATI and its
subsidiaries as of the dates and for the periods indicated, in each case in
conformity with generally accepted accounting principles, consistently applied.
As of the Closing Date, ATI shall have no liability or obligation of any nature
whatsoever, whether accrued, absolute, contingent or otherwise, other than (x)
current liabilities and obligations which are recurring in nature, (y)
liabilities and obligations reflected and adequately provided for on the 1997
Balance Sheet and (z) liabilities and obligations arising in the ordinary course
of business of ATI and its subsidiaries, or in connection with the transactions
contemplated hereby, since the date of the 1997 Balance Sheet. The ATI
Disclosure Letter sets forth a true and complete list of all loss contingencies
(within the meaning of Statement of Financial Accounting Standards No. 5) of ATI
exceeding $30,000 in the case of any single loss contingency or $100,000 in the
case of all loss contingencies.
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SECTION 3.6. Absence of Certain Changes.
(a) Certain Financial Matters; Property; Dividends. Since the date of
the 1997 Balance Sheet, there has not been (i) any material adverse change
in the assets, liabilities, results of operations, financial condition or
business of ATI and its subsidiaries taken as a whole, (ii) any damage,
destruction, loss or casualty to property or assets of ATI or its
subsidiaries, whether or not covered by insurance, which property or assets
are material to its operations or business, (iii) any declaration, setting
aside or payment of any dividend or distribution (whether in cash, stock or
property) in respect of the capital stock of ATI, or any redemption or
other acquisition by ATI of any of the capital stock of ATI or any split,
combination or reclassification of shares of capital stock declared or made
by ATI, or (iv) any agreement to do any of the foregoing.
(b) Other Changes. Since the date of the 1997 Balance Sheet, there
have not been (i) any material losses suffered other than in the ordinary
course of business, (ii) any material assets mortgaged, pledged or made
subject to any lien, charge or other encumbrance, (iii) any material
liability or obligation (absolute, accrued or contingent) incurred or any
material bad debt, contingency or other reserve increase suffered, except,
in each such case, in the ordinary course of business and consistent with
past practice, (iv) any material claims, liabilities or obligations
(absolute, accrued or contingent) paid, discharged or satisfied, other than
the payment, discharge or satisfaction, in the ordinary course of business
and consistent with past practice, of claims, liabilities and obligations
reflected or reserved against in the ATI Financial Statements or incurred
in the ordinary course of business and consistent with past practice since
the date of the ATI Financial Statements, (v) any material guarantees,
checks, notes or accounts receivable written off as uncollectible, except
write-offs in the ordinary course of business and consistent with past
practice, (vi) any write down of the value of any asset or investment on
ATI's books or records, except for depreciation and amortization taken in
the ordinary course of business and consistent with past practice, (vii)
any cancellation of any material debts or waiver of any material claims or
rights of substantial value, or sale, transfer or other disposition of any
material properties or assets (real, personal or mixed, tangible or
intangible) of substantial value, except, in each such case, in
transactions in the ordinary course of business and consistent with past
practice and which in any event do not exceed $10,000 in the aggregate,
(viii) any single capital expenditure or commitment in excess of $10,000
for additions to property or equipment, or aggregate capital expenditures
and commitments in excess of $20,000 for additions to property or
equipment, (ix) any material transactions entered into other than in the
ordinary course of business, (x) any agreements to do any of the foregoing,
or (xi) any other events, developments or conditions of any character that
have had or are reasonably likely to have a material adverse effect on the
assets, liabilities, results of operations, financial condition or business
of ATI and its subsidiaries taken as a whole.
SECTION 3.7. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending or, to the best knowledge of ATI,
threatened against, relating to or involving ATI or any of its subsidiaries (or
any of their respective officers or directors) before any court, arbitrator or
administrative or governmental body, which, if finally determined adversely, are
reasonably likely, individually or in the aggregate, to have a material adverse
effect on the assets, liabilities, results of operations, financial condition,
business of ATI and its subsidiaries taken as a whole. All pending or threatened
suits, actions, claims, proceedings or investigations relating to or involving
ATI or any of its subsidiaries (or any of their respective officers or
directors) before any court, arbitrator or administrative or governmental body
are adequately provided for in the 1997 Balance Sheet in accordance with
generally accepted accounting principles. Neither ATI nor any of its
subsidiaries is subject to any judgment, decree, injunction, rule or order of
any court nor is either ATI or any of its subsidiaries subject to any
governmental restriction applicable to it, which is reasonably likely (a) to
have a material adverse effect on the assets, liabilities, results of
operations, financial condition or business of ATI and its subsidiaries taken as
a whole, or (b) to cause a material limitation on the ability of Parent to
operate the business of ATI after the Closing.
SECTION 3.8. Compliance with Law. Each of ATI and its subsidiaries has
all material authorizations, approvals, licenses and orders of and from all
governmental and regulatory officers and bodies necessary to carry on its
business as it is currently being conducted, to own or hold under lease the
properties and assets
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it owns or holds under lease and to perform all of its obligations under the
agreements to which it is a party, and each of ATI and its subsidiaries has been
and is in compliance with all applicable laws, regulations and administrative
orders of any country, state or municipality or of any subdivision thereof to
which its business or its employment of labor or its use or occupancy of
properties or any part thereof are subject, the failure to obtain or the
violation of which would have a material adverse effect upon its assets,
liabilities, results of operations, financial condition or business of ATI and
its subsidiaries taken as a whole.
SECTION 3.9. ATI Material Contracts. The ATI Disclosure Letter contains a
correct and complete list of the following (hereinafter referred to as the "ATI
Material Contracts"):
(a) all bonds, debentures, notes, mortgages, indentures or guarantees
to which ATI or any of its subsidiaries is a party or by which any of its
properties or assets (real, personal or mixed, tangible or intangible) is
bound;
(b) all material leases to which ATI or any of its subsidiaries is a
party or by which any of their respective properties or assets (real,
personal or mixed, tangible or intangible) is bound;
(c) all loans and credit commitments to ATI or any of its subsidiaries
which are outstanding, together with a brief description of such
commitments and the name of each financial institution granting the same;
(d) all contracts or agreements which limit or restrict ATI or any of
its subsidiaries from engaging in any business in any jurisdiction or limit
or restrict others from competing with ATI or any of its subsidiaries in
any jurisdiction;
(e) all agreements and documentation evidencing currently outstanding
loans or advances made by ATI or any of its subsidiaries to or on behalf of
its customers; and
(f) all existing contracts and commitments (other than those described
in subparagraphs (a), (b), (c), (d) or (e) of this Section 3.9, the ATI
Customer Contracts (as hereinafter defined)), and the ATI Benefit Plans (as
hereinafter defined) to which ATI or any of its subsidiaries is a party or
by which their respective properties or assets may be bound involving an
annual commitment or annual payment by any party thereto of more than
$25,000 individually, or which have a fixed term extending more than twelve
(12) months from the date hereof and which involve a total commitment or
payment by any party thereto of more than $50,000.
To the best knowledge of ATI, true and complete copies of all ATI Material
Contracts, including all amendments thereto, have been made available to Parent.
The ATI Material Contracts are valid and enforceable in accordance with their
respective terms with respect to ATI and valid and enforceable in accordance
with their respective terms with respect to any other party thereto, in each
case to the extent material to the business and operations of ATI, and subject
to applicable bankruptcy, insolvency and other similar laws affecting the
enforceability of creditors' rights generally, general equitable principles and
the discretion of courts in granting equitable remedies. Except for events or
occurrences, the consequences of which, individually or in the aggregate, would
not have a material adverse effect on the assets, liabilities, results of
operations, financial condition or business of ATI and its subsidiaries taken as
a whole, there is not under any of the ATI Material Contracts any existing
breach, default or event of default by ATI or event that with notice or lapse of
time or both would constitute a breach, default or event of default by ATI, nor
does ATI know of, and ATI has not received notice of, or made a claim with
respect to, any breach or default by any other party thereto.
SECTION 3.10. ATI Customer Contract. The ATI Disclosure Letter sets forth
a true and complete list of all agreements or contracts pursuant to which ATI or
any of its subsidiaries provides goods or services to their respective customers
(the "ATI Customer Contracts"). Neither ATI nor any of its subsidiaries provides
goods or services to their respective customers pursuant to verbal or oral
agreements or contracts. The ATI Disclosure Letter sets forth a true and
complete list of all customers of ATI which the management of ATI reasonably
believes in good faith may terminate their contracts with ATI or may assert a
claim for damages against ATI as a result of a default by ATI of its obligations
under such contract or for any other reason, other
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than customer terminations arising in the ordinary course of business consistent
with past practices and which do not in any event in the aggregate involve
annual revenues of $50,000 or more. The execution, delivery and performance of
this Agreement by ATI and the Signing Stockholder and the consummation of the
transactions contemplated hereby by ATI and the Signing Stockholder will not,
with the passing of time or giving of notice or both, violate or conflict with
or constitute a default under or give rise to a termination right under any ATI
Customer Contract except such violations, conflicts and defaults which in the
aggregate would not have a material adverse effect on the assets, liabilities,
results of operations, financial condition or business of ATI and its
subsidiaries taken as a whole.
SECTION 3.11. Tax Returns; Taxes. Each of ATI and its subsidiaries has
duly filed all federal, state, local and foreign tax returns required to be
filed by it and has duly paid or made adequate provision for the payment of all
taxes which are due and payable pursuant to such returns or pursuant to any
assessment with respect to taxes in such jurisdictions, whether or not in
connection with such returns, except for incidental interest and penalties which
may be due and payable, but which are not material in amount. The liability for
taxes reflected in the 1997 Balance Sheet is sufficient for the payment of all
unpaid taxes, whether or not disputed, that are accrued or applicable for the
period ended November 30, 1997, and for all years and periods ended prior
thereto. All deficiencies asserted as a result of any examinations by the
Internal Revenue Service ("IRS") or any other taxing authority have been paid,
fully settled or adequately provided for in the 1997 Balance Sheet. There are no
pending claims asserted for taxes of ATI or any of its subsidiaries or
outstanding agreements or waivers extending the statutory period of limitation
applicable to any tax return of ATI or any of its subsidiaries for any period.
Each of ATI and its subsidiaries has made all estimated income tax deposits and
all other required tax payments or deposits and has complied for all prior
periods in all material respects with the tax withholding provisions of all
applicable federal, state, local, foreign and other laws. ATI has made available
to Parent true, complete and correct copies of federal income tax returns of ATI
and its subsidiaries for the last three (3) taxable years and made available
such other tax returns requested by Parent.
SECTION 3.12. Officers, Directors, and Employees. The ATI Disclosure
Letter contains a true and complete list of all of the officers and directors of
ATI and each of its subsidiaries, specifying their office and annual rate of
compensation, and a true and complete list of all of the employees of ATI as of
the date hereof with whom ATI has a written employment agreement or to whom ATI
has made verbal or oral commitments which are binding on ATI or who have an
annual rate of compensation in excess of $50,000.
SECTION 3.13. ATI Employee Benefit Plans.
(a) Definition of Benefit Plans. For purposes of this Section 3.13,
the term "ATI Benefit Plan" means any plan, program, arrangement, fund,
policy, practice or contract which, through which or under which ATI or an
ATI ERISA Affiliate (as hereinafter defined) provides benefits or
compensation to or on behalf of employees or former employees of ATI or an
ATI ERISA Affiliate (as hereinafter defined), whether formal or informal,
whether or not written, including but not limited to the following:
(1) Arrangements. any bonus, incentive compensation, stock option,
deferred compensation, commission, severance pay, golden parachute or
other compensation plan or rabbi trust;
(2) ERISA Plans. any "employee benefit plan" (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), including, but not limited to, any multi-employer
plan (as defined in Section 3(37) and Section 4001(a)(3) of ERISA),
defined benefit plan, profit sharing plan, money purchase pension plan,
401(k) plan, savings or thrift plan, stock bonus plan, employee stock
ownership plan, or any plan, fund, program, arrangement or practice
providing for medical (including post-retirement medical),
hospitalization, accident, sickness, disability, or life insurance
benefits; and
(3) Other Employee Fringe Benefits. any stock purchase, vacation,
scholarship, day care, prepaid legal services, dependent care,
telephone, automobile, dependent travel or other fringe benefit plans,
programs, arrangements, contracts or practices.
(b) ATI ERISA Affiliate. For purposes of this Section 3.13, the term
"ATI ERISA Affiliate" means each trade or business (whether or not
incorporated) which together with ATI is treated as a
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single employer under Section 414(b), (c), (m) or (o) of the Internal
Revenue Code of 1986, as amended (the "Code").
(c) Identification of Benefit Plans. Except as described in the ATI
Disclosure Letter, ATI does not maintain, nor has it at any time
established or maintained, nor has it at any time been obligated to make,
or otherwise made, contributions to or under or otherwise participated in
any ATI Benefit Plan.
(d) MEPPA Liability/Post-Retirement Medical Benefits. Except as
described in the ATI Disclosure Letter, neither ATI nor any ATI ERISA
Affiliate maintains, nor has at any time established or maintained, nor has
at any time been obligated to make, or made, contributions to or under any
multi-employer plan. Except as described in the ATI Disclosure Letter, ATI
does not maintain, nor has it at any time established or maintained, nor
has it at any time been obligated to make, or made, contributions to or
under (i) any plan which provides post-retirement medical or health
benefits with respect to employees of ATI; (ii) any organization described
in Sections 501(c)(9) or 501(c)(20) of the Code; (iii) any defined benefit
pension plan or money purchase pension plan subject to Title IV of ERISA;
or (iv) any plan which provides retirement benefits in excess of the
limitations in Sections 401(a)(17), 401(k), 401(m), 402(g) or 415 of the
Code. There is no lien upon any property of ATI or any ATI ERISA Affiliate
outstanding pursuant to Section 412(n) of the Code in favor of any ATI
Benefit Plan. No assets of ATI or any ATI ERISA Affiliate have been
provided as security for any ATI Benefit Plan pursuant to Section
401(a)(29) of the Code.
(e) Documentation. ATI has made available to Parent a true and
complete copy of the following documents, if applicable, with respect to
each ATI Benefit Plan identified in the ATI Disclosure Letter: (i) all
documents, including any insurance contracts and trust agreements, setting
forth the terms of the ATI Benefit Plan, or if there are no such documents
evidencing the ATI Benefit Plan, a full description of the ATI Benefit
Plan; (ii) the ERISA summary plan description and any other summary of plan
provisions provided to participants or beneficiaries for each such ATI
Benefit Plan; (iii) the annual reports filed for the most recent three (3)
plan years and most recent financial statements or periodic accounting of
related plan assets with respect to each ATI Benefit Plan; (iv) the most
recent favorable determination letter, opinion or ruling from the IRS for
each ATI Benefit Plan, the assets of which are held in trust, to the effect
that such trust is exempt from federal income tax; and (v) each opinion or
ruling from the Department of Labor or the Pension Benefit Guaranty
Corporation ("PBGC") with respect to such ATI Benefit Plans.
(f) Qualified Status. Except as described in the ATI Disclosure
Letter, each ATI Benefit Plan that is funded through a trust or insurance
contract has at all times satisfied in all respects, by its terms and in
its operation, all applicable requirements for an exemption from federal
income taxation under Section 501(a) of the Code. Neither ATI nor any ATI
ERISA Affiliate maintains an ATI Benefit Plan which meets the requirements
of Section 401(a) of the Code (each a "401 Plan"). Any determination letter
issued by the IRS to the effect that any such 401 Plan qualifies under
Section 401(a) of the Code and that the related trust is exempt from
taxation under Section 501(a) of the Code remains in effect and has not
been revoked. Each such 401 Plan, if any, currently complies in form with
the requirements under Section 401(a) of the Code, other than changes
required by statutes, regulations and rulings for which amendments are not
yet required. Each such 401 Plan, if any, has been administered according
to its terms (except for those terms which are inconsistent with the
changes required by statutes, regulations and ruling for which changes are
not yet required to be made, in which case any such 401 Plan has been
administered in accordance with the provisions of those statutes,
regulations and rulings) and in accordance with the requirements of Section
401(a) of the Code. Each such 401 Plan, if any, has been tested for
compliance with, and has satisfied the requirements of, Section 401(k)(3)
and 401(m)(2) of the Code for each plan year ending prior to the Effective
Date.
(g) Compliance. Except as described in the ATI Disclosure Letter,
each ATI Benefit Plan maintained by ATI or an ATI ERISA Affiliate has at
all times been maintained, by its terms and in operation, in accordance
with all applicable laws in all material respects, including (to the extent
applicable) Code Section 4980B. There has been no failure to comply with
applicable ERISA or other
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requirements concerning the filing of reports, documents and notices with
the Secretary of Labor and Secretary of Treasury or the furnishing of such
documents to participants or beneficiaries that could subject any ATI
Benefit Plan, ATI, any ATI ERISA Affiliate, Parent or any of its affiliates
to any material civil or any criminal sanction.
(h) Legal Actions. There are no actions, audits, suits or claims
known to the Signing Stockholder which are pending or threatened against
any ATI Benefit Plan, any fiduciary of any of ATI Benefit Plans with
respect to the ATI Benefit Plans or against the assets of any of the ATI
Benefit Plans, except claims for benefits made in the ordinary course of
the operation of such plans.
(i) Funding. ATI and each ATI ERISA Affiliate has made full and
timely payment of all amounts required to be contributed under the terms of
each ATI Benefit Plan and applicable law or required to be paid as expenses
under such ATI Benefit Plan, and no excise taxes are assessable as a result
of any nondeductible or other contributions made or not made to an ATI
Benefit Plan. No event or condition exists with respect to any ATI Benefit
Plan subject to Title IV of ERISA which could be deemed a "Reportable
Event" (as defined in Title IV of ERISA) with respect to which the thirty
(30) day notice requirement has not been waived which could result in a
material liability to ATI, and no condition exists which would subject ATI
to a material fine under Section 4071 of ERISA. The assets of all ATI
Benefit Plans which are required under applicable laws to be held in trust
are in fact held in trust, and the assets of each such ATI Benefit Plan
equal or exceed the liabilities of each such plan. The liabilities of each
other plan are properly and accurately reported on the financial statements
and records of ATI. The assets of each ATI Benefit Plan are reported at
their fair market value on the books and records of each plan.
(j) Liabilities. Neither ATI nor any ATI ERISA Affiliate is subject
to any material liability, tax or penalty whatsoever to any person
whomsoever as a result of ATI's or any ATI ERISA Affiliate's engaging in a
prohibited transaction under ERISA or the Code, and the Stockholder has no
knowledge of any circumstances which reasonably might result in any such
material liability, tax or penalty as a result of a breach of fiduciary
duty under ERISA. The termination of or withdrawal from any ATI Benefit
Plan maintained by ATI or an ATI ERISA Affiliate which is subject to Title
IV of ERISA or any other ATI Benefit Plan immediately after the Effective
Time will not subject Parent, the Surviving Corporation, Merger Sub or any
ATI ERISA Affiliate to any additional contribution requirement or to any
other liability, tax or penalty whatsoever (excluding any liability, tax or
penalty attributable solely to the fact that such termination or withdrawal
would violate the permanency requirement of Section 401 (a) of the Code or
an excise tax under Code Section 4980). Neither the execution nor the
performance of the transactions contemplated by this Agreement will create,
accelerate or increase any obligations under any ATI Benefit Plan. Neither
ATI nor any ATI ERISA Affiliate has any obligation to any retired or former
employee, or any current employee upon retirement, under any ATI Benefit
Plan.
(k) Amendment/New Plans. From the date of this Agreement to the
Effective Time, no amendment shall be made to any ATI Benefit Plan, no
commitment shall be made to amend any ATI Benefit Plan and no commitment
shall be made to continue any ATI Benefit Plan or to adopt any new ATI
Benefit Plan for the benefit of any employees of ATI or any ATI ERISA
Affiliate absent the express written consent of Parent.
(l) Excess Parachute Payments. No payment required to be made to any
employee associated with ATI as a result of the transactions contemplated
hereby under any contract or otherwise will, if made, constitute an "excess
parachute payment" within the meaning of Section 280G of the Code or be
nondeductible under Section 162(m) of the Code.
(m) No Acceleration of Liability Under Benefit Plans. The
consummation of the transactions contemplated hereby will not accelerate or
increase any liability under any ATI Benefit Plan because of an
acceleration or increase of any of the rights or benefits to which
employees of ATI or any ATI ERISA Affiliate may be entitled thereunder.
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(n) Statutory Benefits. Except as described in the ATI Disclosure
Letter, ATI has, on a timely basis, made all payments, withholdings and
filings of any kind required of it by, and has otherwise complied in all
material respects with, any applicable law, regulation or administrative
order concerning pension, health, welfare, unemployment, workers'
compensation or similar benefits administered by any governmental,
regulatory or public body.
SECTION 3.14. Labor Relations. To the best knowledge of ATI, each of ATI
and its subsidiaries is in compliance in all material respects with all federal,
state and foreign laws respecting employment and employment practices, terms and
conditions of employment, wages and hours, and is not engaged in any unfair
labor or unlawful employment practice. There is no unlawful employment practice
discrimination charge involving ATI pending before the Equal Employment
Opportunity Commission ("EEOC"), EEOC-recognized state "referral agency" or any
other governmental agency. There is no unfair labor practice charge or complaint
against ATI or any of its subsidiaries pending before the National Labor
Relations Board ("NLRB"). There is no labor strike, dispute, slowdown or
stoppage actually pending or, to the best knowledge of ATI, threatened against
or involving or affecting ATI or any of its subsidiaries, and no NLRB
representation question exists respecting any of its employees. No grievance or
arbitration proceeding is pending against ATI and no written claim therefor
exists. There is no collective bargaining agreement that is binding on ATI or
any of its subsidiaries.
SECTION 3.15. Insurance. ATI has heretofore provided to Parent a true and
complete list of its current insurance coverages for ATI and its subsidiaries,
including names of carriers, amounts of coverage and premiums therefor. Each of
ATI and its subsidiaries has been and is insured with respect to its properties
and the conduct of its business in such amounts and against such risks as are
reasonable in relation to its business and will use its reasonable efforts to
maintain such insurance at least through the Effective Time. ATI has made
available to Parent true and complete copies of all insurance policies covering
ATI and its subsidiaries, its properties, assets, employees and/or operations.
SECTION 3.16. Title to Properties and Related Matters. Each of ATI and
its subsidiaries has good and valid title to or valid leasehold interests in its
properties reflected in the 1997 Balance Sheet or acquired after the date
thereof (other than properties sold or otherwise disposed of in the ordinary
course of business), and all of such properties are held free and clear of all
title defects, liens, encumbrances and restrictions, except, with respect to all
such properties, (a) mortgages and liens securing debt reflected as liabilities
on the 1997 Balance Sheet and (b)(i) liens for current taxes and assessments not
in default, (ii) mechanics', carriers', workmen's, materialmen's, repairmen's,
statutory or common law liens either not delinquent or being contested in good
faith, and (iii) encumbrances, covenants, rights of way, building or use
restrictions, easements, exceptions, variances, reservations and other similar
matters or limitations, if any, which do not have a material adverse effect on
ATI's use of the property affected. Notwithstanding the immediately preceding
sentence, ATI makes no representation or warranty in this Section 3.16 or
otherwise regarding the validity of title to any such properties in which ATI
has only a leasehold interest.
SECTION 3.17. Environmental Matters. Neither ATI nor any of its
subsidiaries owns, nor has at any time owned, any real property. To the best
knowledge of ATI, there has been no material release of a hazardous substance,
as that term is defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. ss. 9601(14), or any petroleum
product by ATI or any of its subsidiaries into the environment at any property
ever owned, leased or used by ATI or any of its subsidiaries (the "Premises"),
including, without limitation, any such release in the soil or groundwater
underlying the Premises and, to the best knowledge of ATI, there has been no
such release by any other party at any of the Premises. To the best knowledge of
ATI, neither ATI nor any of its subsidiaries has disposed of any hazardous
substances (as defined below). ATI has not received notice of any violation of
any Environmental Law (as defined below) nor has it been advised of any claim or
liability pursuant to any Environmental Law brought by any domestic or foreign
governmental agency or private party. There are no Environmental Liabilities (as
defined below) of ATI that, individually or in the aggregate, have had or would
reasonably be expected to have a material adverse effect on the assets,
liabilities, results of operations, financial condition or business of ATI and
its subsidiaries taken as a whole. As used in this Agreement, "Environmental
Laws" means any and all federal, state, local and foreign statutes, laws,
judicial decisions, regulations, ordinances, rules, judgments,
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orders, decrees, codes, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and governmental restrictions, whether now or
hereafter in effect, relating to human health, the environment or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment, including without limitation ambient air, surface
water, ground water or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof. "Environmental Liabilities" with respect
to any person means any and all liabilities of or relating to such person or any
of its subsidiaries (including any entity which is, in whole or in part, a
predecessor of such Person or any of its subsidiaries), whether vested or
unvested, contingent or fixed, actual or potential, known or unknown, which (i)
arise under or relate to matters covered by Environmental Laws and (ii) relate
to actions occurring or conditions existing on or prior to the Closing Date.
"Hazardous Substances" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics, including, without limitation, any substance
regulated under Environmental Laws.
SECTION 3.18. Patents, Trademarks, Trade Names. The ATI Disclosure Letter
sets forth a true and complete list of: (a) all material patents, trademarks and
trade names (including all federal, state and foreign registrations pertaining
thereto) and all material copyright registrations owned by ATI or any of its
subsidiaries (collectively, the "Proprietary Intellectual Property"); and (b)
all patents, trademarks, trade names, copyrights and all technology and
processes used by ATI in its business which are material to its business and are
used pursuant to a license or other right granted by a third party
(collectively, the "Licensed Intellectual Property" and, together with the
Proprietary Intellectual Property, herein referred to as "Intellectual
Property"). A true and complete list of all such licenses with respect to
Licensed Intellectual Property is set forth in the ATI Disclosure Letter. Each
of the federal, state and foreign registrations pertaining to the Proprietary
Intellectual Property is valid and in full force and effect. All required
filings in association with such registrations have been properly made and all
required fees have been paid. ATI owns, or has the right to use pursuant to
valid and effective agreements, all Intellectual Property, and the consummation
of the transactions contemplated hereby will not alter or impair any such
rights, except for such defects in title or other matters which in the aggregate
would not have a material adverse effect on the assets, liabilities, results of
operations, financial condition or business of ATI and its subsidiaries taken as
a whole. No claims are pending against ATI by any person with respect to the use
of any Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement relating to the same, and, to the best
knowledge of ATI, the current use by ATI or any of its subsidiaries of the
Intellectual Property does not infringe on the rights of any third party. The
ATI Disclosure Letter sets forth a list of all jurisdictions in which ATI is
operating under a trade name, and each jurisdiction in which any such trade name
is registered.
SECTION 3.19. Transactions with Affiliates. No stockholder or director of
ATI, or any person with whom any such stockholder or director has any direct or
indirect relation by blood, marriage or adoption, or any entity in which any
such person owns any beneficial interest (other than a publicly held corporation
whose stock is traded on a national securities exchange or in the
over-the-counter market and less than 1% of the stock of which is beneficially
owned by all such persons) has any interest in (i) any contract, arrangement or
understanding with, or relating to, the business or operations of ATI or any of
its subsidiaries, (ii) any loan, arrangement, understanding, agreement or
contract for or relating to indebtedness of ATI or any of its subsidiaries, or
(iii) any property (real, personal or mixed, tangible or intangible) used, or
currently intended to be used, in the business or operations of ATI.
SECTION 3.20. Brokers, Finders, and Investment Bankers. Neither ATI nor
any of its officers, directors or employees has employed any broker, finder or
investment banker or incurred any liability for any investment banking fees,
financial advisory fees, brokerage fees or finders' fees in connection with the
transactions contemplated herein.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF PARENT
With such exceptions, if any, as may be set forth in a letter (the "Parent
Disclosure Letter") to be delivered by Parent to ATI on or before December 31,
1997 Parent hereby represents and warrants to ATI as follows:
SECTION 4.1. Organization. Each of Parent and Merger Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted. Each of Parent and Merger Sub is duly qualified to
transact business, and is in good standing, as a foreign corporation in each
jurisdiction where the character of its activities requires such qualification,
except where the failure to so qualify would not have a material adverse effect
on the assets, liabilities, results of operations, financial condition or
business of Parent and its subsidiaries taken as a whole.
SECTION 4.2. Authorization. Each of Parent and Merger Sub has full
corporate power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement and to consummate the Merger and
the other transactions contemplated hereby. The execution and delivery of this
Agreement by Parent and Merger Sub, subject only to the performance by Parent
and Merger Sub of their respective obligations hereunder and the consummation of
the Merger and the other transactions provided for herein, have been duly and
validly authorized by all necessary corporate action on the part of each of
Parent and Merger Sub. The Boards of Directors of each of Parent and Merger Sub
have approved the execution, delivery and performance of this Agreement and the
consummation of the Merger and the other transactions provided for herein. This
Agreement has been duly executed and delivered by each of Parent and Merger Sub
and constitutes the valid and binding agreement of Parent and Merger Sub,
enforceable against each of Parent and Merger Sub in accordance with its terms,
subject to applicable bankruptcy, insolvency and other similar laws affecting
the enforceability of creditors' rights generally, general equitable principles
and the discretion of courts in granting equitable remedies.
SECTION 4.3. Absence of Restrictions and Conflicts. The execution,
delivery and performance of this Agreement, the consummation of the Merger and
the other transactions contemplated by this Agreement, and the fulfillment of
and compliance with the terms and conditions of this Agreement do not and will
not, with the passing of time or the giving of notice or both, violate or
conflict with, constitute a breach of or default under, result in the loss of
any material benefit under, or permit the acceleration of any obligation under,
(i) any term or provision of the Certificate of Incorporation or Bylaws of
Parent or Merger Sub, (ii) any contract material to the business and operations
of Parent or Merger Sub, (iii) any judgment, decree or order of any court or
governmental authority or agency to which Parent or Merger Sub is a party or by
which Parent or Merger Sub or any of their respective properties is bound, or
(iv) any statute, law, regulation or rule applicable to Parent or Merger Sub, so
as to have, in the case of subsections (ii) through (iv) above, a material
adverse effect on the assets, liabilities, results of operations, financial
condition or business of Parent and its subsidiaries taken as a whole. Except
for filing and recordation of the Certificate of Merger, no consent, approval,
order or authorization of, or registration, declaration or filing with, any
government agency or public or regulatory unit, agency, body or authority with
respect to Parent or Merger Sub is required in connection with the execution,
delivery or performance of this Agreement by Parent or Merger Sub or the
consummation of the transactions contemplated by this Agreement by Parent or
Merger Sub, the failure to obtain which would have a material adverse effect
upon the assets, liabilities, results of operations, financial condition,
business of ATI and its subsidiaries taken as a whole of Parent.
SECTION 4.4. Capitalization of Parent and Ownership of Merger Sub. The
authorized capital stock of Parent consists of 40,000,000 shares of common
stock, $.01 par value per share, of which 19,289,077 shares were issued and
outstanding as of December 22, 1997, and 10,000,000 shares of preferred stock,
$.01 par value per share, of which no shares were issued and outstanding as of
December 1, 1997. All shares of Parent Common Stock outstanding as of the date
hereof are duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights. The shares of Parent Common Stock to be issued in the
Merger will be validly
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issued, fully paid, nonassessable and free of preemptive rights. All of the
outstanding capital stock of Merger Sub is held by Parent.
SECTION 4.5. Financial Statements. Parent has made available to ATI the
audited consolidated balance sheets of Parent and its subsidiaries as of
December 31, 1994, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the fiscal years then ended,
including the notes thereto, and the unaudited consolidated balance sheet of
Parent and its subsidiaries as of September 30, 1997 and the related
consolidated statements of operations for the nine months then ended. All of the
foregoing financial statements are hereinafter collectively referred to as the
"Parent Financial Statements" and the balance sheet as of September 30, 1997 is
hereinafter referred to as the "1997 Parent Balance Sheet." The Parent Financial
Statements have been prepared from, and are in accordance with, the books and
records of Parent and present fairly the financial position and results of
operations of Parent as of the dates and for the periods indicated, in each
case, in conformity with generally accepted accounting principles, consistently
applied. As of the Closing Date, Parent shall have no liability or obligation of
any nature whatsoever, whether accrued, absolute, contingent or otherwise, other
than (x) current liabilities and obligations which are recurring in nature and
not overdue on their terms, (y) liabilities and obligations reflected and
adequately provided for on the 1997 Parent Balance Sheet and (z) liabilities and
obligations arising in the ordinary course of business of Parent, or in
connection with the transactions contemplated hereby, since the date of the 1997
Parent Balance Sheet.
SECTION 4.6. Absence of Certain Changes.
(a) Certain Financial Matters; Property; Dividends. Since the date of
the 1997 Parent Balance Sheet, there has not been (i) any material adverse
change in the assets, liabilities, results of operations, financial
condition or business of Parent and its subsidiaries taken as a whole, (ii)
any damage, destruction, loss or casualty to property or assets of Parent,
whether or not covered by insurance, which property or assets are material
to its operations or business, (iii) any declaration, setting aside or
payment of any dividend or distribution (whether in cash, stock or
property) in respect of the capital stock of Parent, or any redemption or
other acquisition by Parent of any of the capital stock of Parent or any
split, combination or reclassification of shares of capital stock declared
or made by Parent, or (iv) any agreement to do any of the foregoing.
(b) Other Changes. Since the date of the 1997 Parent Balance Sheet,
there have not been (i) any losses suffered, (ii) any material assets
mortgaged, pledged or made subject to any lien, charge or other
encumbrance, (iii) any material liability or obligation (absolute, accrued
or contingent) incurred or any material bad debt, contingency or other
reserve increase suffered, except, in each such case, in the ordinary
course of business and consistent with past practice, (iv) any material
claims, liabilities or obligations (absolute, accrued or contingent) paid,
discharged or satisfied, other than the payment, discharge or satisfaction,
in the ordinary course of business and consistent with past practice, of
claims, liabilities and obligations reflected or reserved against in the
Parent Financial Statements or incurred in the ordinary course of business
and consistent with past practice since the date of the Parent Financial
Statements, (v) any material guarantees, checks, notes or accounts
receivable written off as uncollectible, except write-offs in the ordinary
course of business and consistent with past practice, (vi) any write down
of the value of any asset or investment on Parent's books or records,
except for depreciation and amortization taken in the ordinary course of
business and consistent with past practice, (vii) any cancellation of any
material debts or waiver of any material claims or rights of substantial
value, or sale, transfer or other disposition of any material properties or
assets (real, personal or mixed, tangible or intangible) of substantial
value, except, in each such case, in transactions in the ordinary course of
business and consistent with past practice, (viii) any material
transactions entered into other than in the ordinary course of business,
(ix) any agreements to do any of the foregoing, or (x) any other events,
developments or conditions of any character that have had or are reasonably
likely to have a material adverse effect on the assets, liabilities,
results of operations, financial condition or business of Parent and its
subsidiaries taken as a whole.
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SECTION 4.7. Legal Proceedings. There are no suits, actions, claims,
proceedings or investigations pending or, to the best knowledge of Parent,
threatened against, relating to or involving Parent (or any of its officers or
directors) before any court, arbitrator or administrative or governmental body,
which, if finally determined adversely, are reasonably likely, individually or
in the aggregate, to have a material adverse effect on the assets, liabilities,
results of operations, financial condition or business of Parent and its
subsidiaries taken as a whole. All pending or threatened suits, actions, claims,
proceedings or investigations relating to or involving Parent (or any of its
officers or directors) before any court, arbitrator or administrative or
governmental body are adequately provided for in the 1997 Parent Balance Sheet
in accordance with generally accepted accounting principles. Parent is not
subject to any judgment, decree, injunction, rule or order of any court nor is
Parent subject to any governmental restriction applicable to it, which is
reasonably likely to have a material adverse effect on the assets, liabilities,
results of operations, financial condition or business of Parent and its
subsidiaries taken as a whole.
SECTION 4.8. Compliance with Law. Parent has all material authorizations,
approvals, licenses and orders of and from all governmental and regulatory
officers and bodies necessary to carry on its business as it is currently being
conducted, to own or hold under lease the properties and assets it owns or holds
under lease and to perform all of its obligations under the agreements to which
it is a party, and Parent has been and is in compliance with all applicable
laws, regulations and administrative orders of any country, state or
municipality or of any subdivision thereof to which its business or its
employment of labor or its use or occupancy of properties or any part thereof
are subject, the failure to obtain or the violation of which would have a
material adverse effect upon its assets, liabilities, results of operations,
financial condition or business of Parent and its subsidiaries taken as a whole.
SECTION 4.9. Tax Returns; Taxes. Parent has duly filed all federal,
state, local and foreign tax returns required to be filed by it and has duly
paid or made adequate provision for the payment of all taxes which are due and
payable pursuant to such returns or pursuant to any assessment with respect to
taxes in such jurisdictions, whether or not in connection with such returns. The
liability for taxes reflected in the 1997 Parent Balance Sheet is sufficient for
the payment of all unpaid taxes, whether or not disputed, that are accrued or
applicable for the period ended September 30, 1997, and for all years and
periods ended prior thereto. All deficiencies asserted as a result of any
examinations by the IRS or any other taxing authority have been paid, fully
settled or adequately provided for in the 1997 Parent Balance Sheet. There are
no pending claims asserted for taxes of Parent or outstanding agreements or
waivers extending the statutory period of limitation applicable to any tax
return of Parent for any period. Parent has made all estimated income tax
deposits and all other required tax payments or deposits and has complied for
all prior periods in all material respects with the tax withholding provisions
of all applicable federal, state, local, foreign and other laws.
SECTION 4.10. Parent SEC Reports. Parent has heretofore made available to
ATI Parent's Annual Reports on Form 10-K for the years ended December 31, 1994,
1995 and 1996 (the "Parent SEC Reports"). As of their respective dates, the
Parent SEC Reports did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Since January 1, 1994, Parent has filed all forms, reports
and documents with the Securities and Exchange Commission required to be filed
by it pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, each of which complied as to
form, at the time such form, document or report was filed, in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act and the applicable rules and regulations promulgated thereunder.
SECTION 4.11. Transactions with Affiliates. Except as disclosed in the
Parent SEC Reports, no executive officer or director of Parent, or any person
with whom any such executive officer or director has any direct or indirect
relation by blood, marriage or adoption, or any entity in which any such person
owns any beneficial interest (other than a publicly held corporation whose stock
is traded on a national securities exchange or in the over-the-counter market
and less than 1% of the stock of which is beneficially owned by all such
persons) has any interest in (i) any contract, arrangement or understanding
with, or relating to, the business or operations of Parent, (ii) any loan,
arrangement, understanding, agreement or contract for or
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relating to indebtedness of Parent, or (iii) any property (real, personal or
mixed, tangible or intangible) used, or currently intended to be used, in the
business or operations of Parent.
ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
SECTION 5.1. Conduct of Business by ATI. From the date hereof to the
Effective Time, ATI will, except as required in connection with the Merger and
the other transactions contemplated by this Agreement and except as otherwise
disclosed in the ATI Disclosure Letter or consented to in writing by Parent:
(i) Carry on its businesses in the ordinary course in substantially
the same manner as heretofore conducted and not engage in any new line of
business or enter into any agreement, transaction or activity or make any
commitment except those in the ordinary course of business and not
otherwise prohibited under this Section 5.1;
(ii) Neither change nor amend its Certificate of Incorporation or
Bylaws;
(iii) Not sell or grant options, warrants or rights to purchase or
subscribe to, or enter into any arrangement or contract with respect to the
issuance or sale of any of its capital stock of ATI or rights or
obligations convertible into or exchangeable for any shares of its capital
stock and not alter the terms of any of its presently outstanding options,
warrants or other equity securities or make any changes (by split-up,
combination, reorganization or otherwise) in its capital structure;
(iv) Not declare, pay or set aside for payment any dividend or other
distribution in respect of its capital stock or other equity securities,
except for distributions of dividends to its shareholders in the ordinary
course of business consistent with past practice, and not redeem, purchase
or otherwise acquire any shares of its capital stock or other securities or
rights or obligations convertible into or exchangeable for any shares of
its capital stock or other securities or obligations convertible into such,
or any options, warrants or other rights to purchase or subscribe to any of
the foregoing;
(v) Not acquire or enter into an agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
(vi) Use its reasonable efforts to preserve intact its corporate
existence, goodwill and business organizations, to keep its officers and
employees available to Parent and to preserve its relationships with
customers, suppliers and others having business relations with it;
(vii) Not (A) create, incur or assume any long-term debt (including
obligations in respect of capital leases) or any short-term debt for
borrowed money, (B) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, contingently or otherwise) for the
obligations of any other person, except in the ordinary course of business
and consistent with past practice, (C) make any loans or advances to any
other person, except in the ordinary course of business and consistent with
past practice, (D) make any capital contributions to, or investments in,
any person, except in the ordinary course of business and consistent with
past practices with respect to investments, (E) make any capital
expenditure involving in excess of $10,000 in the case of any single
expenditure or $20,000 in the case of all capital expenditures, or (F)
purchase or commit to purchase more than $100,000 of inventory in the
aggregate;
(viii) Not enter into, modify or extend in any manner the terms of any
employment, severance or similar agreements with officers and directors nor
pay or become obligated to pay any bonuses to, or grant any increase in the
compensation of, officers, directors or employees, whether now or hereafter
payable, including any such payment or increase pursuant to any option,
bonus, stock purchase, pension, profit-sharing, deferred compensation,
retirement or other plan, arrangement, contract or commitment; provided,
however, that it shall be permitted hereunder to grant increases in the
compensation payable to employees (but not executives or directors) in the
ordinary course of business consistent with its 1997 budget and which do
not in the case of any specific employee involve an increase in
compensation in
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excess of ten percent (10%) of such employee's 1996 compensation and which
in the aggregate do not involve an annualized compensation expense increase
of $10,000 or more;
(ix) Perform in all material respects all of its obligations under all
ATI Material Contracts (except those being contested in good faith) and not
enter into, assume or amend any contract or commitment that would be an ATI
Material Contract other than contracts to provide services entered into in
the ordinary course of business;
(x) Use its reasonable efforts to maintain in full force and effect
and in the same amounts policies of insurance comparable in amount and
scope of coverage to that now maintained by it;
(xi) Use its reasonable efforts to continue to collect its accounts
receivable and pay its accounts payable in the ordinary course of business
and consistent with past practices; and
(xii) Prepare and file all federal, state, local and foreign returns
for taxes and other tax reports, filings and amendments thereto required to
be filed by it, and allow Parent, at its request, to review all such
returns, reports, filings and amendments at ATI's offices prior to the
filing thereof, which review shall not interfere with the timely filing of
such returns.
In connection with the continued operation of ATI's business between the
date of this Agreement and the Effective Time, ATI shall confer in good faith on
a regular and frequent basis with one or more representatives of Parent
designated in writing to report on operational matters of materiality and the
general status of ongoing operations. ATI acknowledges that Parent does not and
will not waive any rights it may have under this Agreement as a result of such
consultations.
SECTION 5.2. Inspection and Access to Information; Confidentiality.
(a) Inspection and Access. Between the date of this Agreement and the
Effective Time, ATI will provide Parent and its accountants, investment
bankers, counsel and other authorized representatives full access, during
reasonable business hours and under reasonable circumstances to any and all
of its premises, properties, contracts, commitments, books, records and
other information (including tax returns filed and those in preparation)
and will cause its respective officers to furnish to the other party and
its authorized representatives any and all financial, technical and
operating data and other information pertaining to its business, as each
other party shall from time to time reasonably request.
(b) Confidentiality. Parent shall, and shall use its best efforts to
cause its authorized representatives to, hold in strict confidence, and not
disclose to any person without the prior written consent of ATI, or use in
any manner except in connection with the transactions contemplated hereby,
all information obtained from ATI in connection with the transactions
completed hereby, except that such information may be disclosed (i) where
necessary to any regulatory authorities or governmental agencies, (ii) if
required by court order or decree, (iii) if it is ascertainable or obtained
from public or published information, (iv) if it is or becomes known to the
public other than through disclosure by such party, (v) if the recipient
can demonstrate it was in its possession prior to disclosure thereof in
connection with the Agreement, (vi) if the recipient can demonstrate it was
independently developed by it, or (vii) if the disclosing party is advised
in writing by counsel that it is legally required to make such disclosure.
SECTION 5.3. No Solicitation; Acquisition Proposals.
(a) No Solicitation. From the date hereof until the Effective Time or
until this Agreement is terminated or abandoned as provided in Article 8,
ATI shall not, nor shall it authorize or permit any officer, director or
employee of, or any attorney or other advisor or representative of ATI to,
(i) solicit or initiate, or encourage the submission of, any Acquisition
Proposal (as hereinafter defined) or (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with
respect to, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal. For purposes hereof, "Acquisition
Proposal" means an inquiry, proposal or acquisition or purchase of a
substantial amount of assets of ATI (other than investors in the ordinary
course of business) or of over 10% of any class of equity securities of
ATI, or any merger, consolidation, business combination, sale of
substantially all
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assets, recapitalization, liquidation, dissolution or similar transaction
involving ATI other than the transactions contemplated hereby, or any other
transaction the consummation of which would reasonably be expected to
impede, interfere with, prevent or materially delay the Merger or which
would reasonably be expected to dilute materially the benefits to Parent of
the Merger. ATI will notify Parent promptly in writing if ATI becomes aware
that any inquiries or proposals are received by, any information is
requested from, or any negotiations or discussions are sought to be
initiated with ATI with respect to an Acquisition Proposal. ATI shall
immediately cease any existing activities, discussions or negotiations with
any third parties which may have been conducted on or prior to the date
hereof with respect to an Acquisition Proposal and shall direct and use
reasonable efforts to cause its officers, advisors and representatives not
to engage in any such activities, discussions or negotiations.
(b) Action by Board. Except as set forth herein and subject to its
fiduciary duties, the Board of Directors of ATI shall not (i) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal or
(ii) enter into any type of agreement or letter of intent with respect to
any Acquisition Proposal.
(c) Liquidated Damages. If, (i) prior to the termination of this
Agreement, ATI proposes to enter into an agreement or letter of intent with
respect to any Acquisition Proposal, it shall concurrently with entering
into such agreement or letter of intent pay, or cause to be paid, in same
day funds to Parent up to $100,000 of the costs and expenses incurred by
Parent in connection with the Merger, including fees and expenses of its
accountants and counsel (the "Expenses"), plus the sum of $250,000 (the
"Termination Fee"), or (ii) an Acquisition Proposal shall have been made
prior to the termination of this Agreement and within one year of such
termination ATI enters into an agreement or letter of intent with respect
to, or approves or recommends or takes any action to facilitate such
Acquisition Proposal, ATI shall pay, or cause to be paid to Parent, in same
day funds upon demand, the Expenses and the Termination Fee, provided that,
so long as ATI is not then in breach of any of its obligations herein, no
payment shall be due to Parent under subpart (ii) above if, at the time of
the termination of this Agreement, ATI shall desire in good faith to
proceed with the Merger, and Parent shall elect not to do so. The parties
acknowledge that damages in the event of a breach of this Section 5.3 will
be difficult to ascertain, and that the Expenses and the Termination Fee
are intended to be full liquidated damages and such damages represent the
parties' best estimate of their damages. The parties expressly acknowledge
that the foregoing liquidated damages are intended not as a penalty, but as
full liquidated damages, in the event of a breach of this Section 5, and
Parent acknowledges the Expenses and the Termination Fee are its sole and
exclusive remedy for a breach of this Section 5.3.
SECTION 5.4. Reasonable Efforts; Further Assurances; Cooperation. Subject
to the other provisions of this Agreement, the parties hereto shall each use
their reasonable, good faith efforts to perform their obligations herein and to
take, or cause to be taken, or do, or cause to be done, all things necessary,
proper or advisable under applicable law to obtain all regulatory approvals and
satisfy all conditions to the obligations of the parties under this Agreement
and to cause the Merger and the other transactions contemplated herein to be
effected on or prior to January 30, 1998 in accordance with the terms hereof and
shall cooperate fully with each other and their respective officers, directors,
employees, agents, counsel, accountants and other designees in connection with
any steps required to be taken as a part of their respective obligations under
this Agreement, including, without limitation:
(i) ATI and Parent shall promptly make their respective filings and
submissions and shall take, or cause to be taken, all actions and do, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to obtain any required approval of any
federal, state or local governmental agency or regulatory body with
jurisdiction over the transactions contemplated by this Agreement.
(ii) In the event any claim, action, suit, investigation or other
proceeding by any governmental body or regulatory authority is commenced
which questions the validity or legality of the Merger or any of the other
transactions contemplated hereby or seeks damages in connection therewith,
the parties agree to cooperate and use all reasonable efforts to defend
against such claim, action, suit, investigation or other proceeding and, if
an injunction or other order is issued in any such action, suit or other
proceeding, to use
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all reasonable efforts to have such injunction or other order lifted, and
to cooperate reasonably regarding any other impediment to the consummation
of the transactions contemplated by this Agreement.
(iii) Each party shall give prompt written notice to the other of (A)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of ATI or
Parent, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time or that will or may result in the failure to satisfy any of
the conditions specified in Article 6 hereof and (B) any failure of ATI or
Parent, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by any of them
hereunder.
(iv) Without the prior written consent of Parent, ATI will not
terminate any employee if such termination would result in the payment of
any amounts pursuant to "change in control" provisions of any employment
agreement or arrangement.
SECTION 5.5. Public Announcements. The timing and content of all
announcements regarding any aspect of this Agreement or the Merger to the
financial community, government agencies, employees or the general public shall
be mutually agreed upon in advance (unless Parent or ATI are advised by counsel
that any such announcement or other disclosure not mutually agreed upon in
advance is required to be made by law and then only after making a reasonable
attempt to comply with the provisions of this Section 5.5).
SECTION 5.6. Supplements to Disclosure Letters. From time to time prior
to the Effective Time, ATI and Parent will each promptly supplement or amend the
respective disclosure letters which will be delivered pursuant to this Agreement
with respect to any matter hereafter arising which, if existing or occurring at
the date of this Agreement, would have been required to be set forth or
described in any such disclosure letter or which is necessary to correct any
information in any such disclosure letter which has been rendered inaccurate
thereby. No supplement or amendment to any such disclosure letter shall have any
effect for the purpose of determining satisfaction of the conditions set forth
in Sections 6.2 or 6.3 of this Agreement.
SECTION 5.7. Continuation of Business. Parent and Surviving Corporation
each agree to continue the historic business of ATI or use a significant portion
of ATI's historic business assets to the extent necessary to fulfill the
continuity requirements for reorganizations under Section 368 of the Code as
described in Treas. Reg. SS. 1.368-1(d).
SECTION 5.8. Stockholder Matters. ATI shall call a special meeting of its
stockholders to be held as soon as practicable after the date hereof for the
purpose of voting upon this Agreement and the Merger and, through its Board of
Directors, recommend to its stockholders approval of this Agreement and the
Merger at such meeting.
SECTION 5.9. Indemnification Against Certain Liabilities. Parent agrees
that all rights to indemnification and all limitations of liability existing in
favor of the officers and directors of ATI ("Indemnified Parties") as provided
in its certificate of incorporation and bylaws as of the date hereof with
respect to matters occurring prior to the Effective Time shall survive the
Merger and shall continue in full force and effect, without any amendment
thereto, for a period of not less than six (6) years from the Effective Time;
provided, however, that all rights to any indemnification in respect of any
claim asserted or made within such period shall continue until the final
disposition of such claim.
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ARTICLE 6.
OTHER MATTERS
SECTION 6.1. Conditions to Each Party's Obligations. None of the parties
hereto shall be obligated to effect the Merger if, at the Effective Time, (i)
any injunction, writ or preliminary restraining order or any order of any nature
shall have been issued by a court or governmental agency of competent
jurisdiction to the effect that the Merger may not be consummated as herein
provided, (ii) any proceeding or lawsuit shall have been commenced by any
governmental or regulatory agency for the purpose of obtaining any such
injunction, writ or preliminary restraining order, or (iii) written notice shall
have been received from any such agency indicating an intent to restrain,
prevent, materially delay or restructure the transactions contemplated by this
Agreement.
SECTION 6.2. Conditions to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger shall be subject to
the fulfillment at or prior to the Closing of each of the following additional
conditions:
(a) Representations and Warranties. The representations and
warranties of ATI set forth in Article 3 of this Agreement shall be true
and correct as of the date of this Agreement and as of the Effective Time
as though made on and as of the Effective Time.
(b) Performance of Obligations of ATI. ATI shall have performed in
all material respects all covenants and agreements required to be performed
by it under this Agreement.
(c) Opinion of Counsel. Parent shall have received an opinion from
counsel for ATI, dated the Closing Date, in form and substance reasonably
satisfactory to Parent, substantially to the effect that:
(i) ATI is validly organized, existing, in good standing and
authorized to do business in the state of its incorporation and has all
requisite corporate power and authority to own and operate its
properties and to carry on its business as currently conducted and, to
the best of such counsel's knowledge, is duly qualified to do business
in each other state in which the failure to so qualify would have a
material adverse effect on its operations in such state.
(ii) The Signing Stockholder and ATI have full power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby.
(iii) The officers of ATI who have executed this Agreement have the
authority to so execute this Agreement on behalf of ATI.
(iv) The Signing Stockholder and ATI have taken all requisite
action to authorize, approve and carry out this Agreement and the
transactions on the part of the Signing Stockholder contemplated hereby.
(v) The execution, delivery and performance of this Agreement by
the Signing Stockholder and ATI and the consummation of the transactions
on the part of the Signing Stockholder and ATI contemplated by this
Agreement will not result in any breach, violation, default or
acceleration of the obligations of the Stockholders or ATI under any
judgment, decree, order, lease, license, contract or other agreement
which is applicable to the ATI Stockholders or ATI and of which such
counsel has actual knowledge.
(vi) Except as may be required by applicable federal and state
securities laws, as to which no opinion need be expressed, the
consummation of the transactions on the part of the Signing Stockholder
or ATI contemplated by this Agreement does not require the consent,
approval, authorization or order, giving of notice to, or the
registration with, any court or any Federal, state, or other
governmental authority, agency or instrumentality or any other person of
which such counsel has actual knowledge.
(vii) To such counsel's actual knowledge and except with respect to
the pending litigation in the matter of Inverness Corp., et al v. ATI,
Inc., et al. (the "Inverness Matter"), (A) no action or
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proceeding against the Signing Stockholder or ATI is pending before any
court, or before or by any governmental body, to restrain, prohibit,
invalidate or obtain damages with respect to or otherwise question or
attack the transactions contemplated by this Agreement, and (B) the
Signing Stockholder is not involved in any litigation which might have
an adverse effect on ATI.
(d) Authorization of Merger. All corporate action necessary by ATI to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby shall have been duly
and validly taken.
(e) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Certificate of Merger and any other documents required to
be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business of
ATI or Parent, following the Effective Time.
(f) Certificates. ATI shall furnish Parent with a certificate of its
appropriate officers as to compliance with the conditions set forth in
Sections 6.2(a), (b) and (d).
(g) Material Contracts. Parent shall have received consents to
assignment of all ATI Material Contracts and ATI Customer Contracts or
written waivers of the provisions of any ATI Material Contracts or ATI
Customer Contracts requiring the consents or waivers of third parties as
set forth in the ATI Disclosure Letter, except such required consents and
waivers the failure of which to obtain would not in the aggregate have a
material adverse effect on the assets, liabilities, results of operations,
financial condition, business of ATI and its subsidiaries taken as a whole
of ATI following the Effective Time.
(h) Employment Agreement. Mr. Lin shall have executed and delivered
an employment agreement in the form attached hereto as Exhibit 6.2(h) (the
"Employment Agreement").
(i) Non-Competition and Non-Disclosure Agreement. Mr. Lin shall have
executed and delivered a non-competition and non-disclosure agreement in
the form attached hereto as Exhibit 6.2(i) (the "Non-Competition
Agreement").
(j) Resignation Letters. Each of the officers and directors of ATI
shall have tendered to Parent resignation letters in form and substance
reasonably acceptable to Parent on or prior to the Closing Date, such
resignations to be effective immediately following the Closing Date.
(k) Repayment of Stockholder Loans. All loans from (or any other
amounts advanced by) ATI to the ATI Stockholders shall have been repaid in
full.
(l) Escrow Agreement. Each of the Stockholders and the Escrow Agent
shall have duly executed and delivered the Escrow Agreement.
(m) Stock Purchase Transactions. Parent shall have entered into Stock
Purchase Agreements with at least 16 of the ATI Stockholders listed on
Exhibit 6.2(m) hereto, which agreements shall be satisfactory to Parent and
such ATI Stockholders.
(n) Dissenting Stockholders. Holders of not more than five percent
(5%) of the outstanding shares of ATI Stock and ATI Common Stock (in the
aggregate) shall have filed written notice with ATI that they intend to
demand payment for their shares.
(o) Registration Rights Agreement. Each of the Stockholders shall
have executed and delivered a registration rights agreement in the form
attached hereto as Exhibit 6.2(o) (the "Registration Rights Agreement").
(p) Charter Amendment. ATI shall have amended its Certificate of
Incorporation such that the holders of the ATI Stock may receive property
other than cash in the event of a liquidation or deemed liquidation of ATI.
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SECTION 6.3. Conditions to Obligations of ATI. The obligations of ATI to
effect the Merger shall be subject to the fulfillment at or prior to the Closing
of each of the following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Parent set forth in Article 4 of this Agreement shall be true
and correct as of the date of this Agreement and as of the Effective Time
as though made on and as of the Effective Time.
(b) Performance of Obligations by Parent. Parent shall have performed
in all material respects all covenants and agreements required to be
performed by it under this Agreement.
(c) Authorization of Merger. All corporate action necessary by Parent
and Merger Sub to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
shall have been duly and validly taken.
(d) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filing of the Certificate of Merger, and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business of
ATI following the Effective Time.
(e) Certificates. Parent shall furnish ATI with a certificate of its
appropriate officers as to compliance with the conditions set forth in
Sections 6.3(a), (b) and (c).
(f) Employment Agreement. Surviving Corporation and Parent shall have
executed and delivered the Employment Agreement.
(g) Escrow Agreement. Parent and the Escrow Agent shall have duly
executed and delivered the Escrow Agreement.
(h) Non-Competition Agreement. Surviving Corporation and Parent shall
have duly executed and delivered the Non-Competition Agreement.
(i) Registration Rights Agreement. Parent shall have duly executed
and delivered the Registration Rights Agreement.
(j) Opinion of Counsel. ATI shall have received an opinion from
counsel for Parent and Merger Sub, dated the Closing Date, in form and
substance satisfactory to ATI, substantially to the effect that:
(i) The Parent is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own,
operate and lease its property and to carry on its business as it is now
being conducted and, to such counsel's knowledge, is duly qualified to
do business in each other state in which the failure to so qualify would
have a material adverse effect on its operations in such state.
(ii) Merger Sub is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own,
operate and lease its property and to carry on its business as it is now
being conducted and, to such counsel's knowledge, is duly qualified to
do business in each other state in which the failure to so qualify would
have a material adverse effect on its operations in such state.
(iii) The Parent has the requisite power and authority to enter
into the Agreement and to consummate the transactions contemplated
hereby. All corporate action necessary to authorize the execution,
delivery and performance of the Agreement and the consummation by the
Company of the Merger has been duly and validly taken.
(iv) Merger Sub has the requisite power and authority to enter into
the Agreement and to consummate the transactions contemplated hereby.
All corporate action necessary to authorize the
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execution, delivery and performance of the Agreement and the
consummation by Merger Sub of the Merger has been duly and validly
taken.
(v) The Agreement has been duly and validly authorized, executed
and delivered by the Company and Merger Sub.
(vi) The Parent Common Stock to be issued by the Parent pursuant to
the terms of the Agreement has been duly authorized and, when issued and
delivered, will be validly issued and fully paid and non-assessable.
(k) Release of Guaranty. The Parent shall have released Mr. Lin from
his personal guaranty made in favor of the Parent, as assignee of
BankBoston, N.A., relating to certain indebtedness of ATI owing to the
Parent.
(l) Certified Resolutions. The Parent shall have delivered to ATI a
copy of the resolutions adopted by the Parent's Board of Directors with
respect to the determination of the "acquisition price" being less than $15
million for purposes of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, which resolutions shall have been certified by the
Secretary or Assistant Secretary of Parent.
ARTICLE 7.
CLOSING
The consummation of the transactions contemplated by this Agreement are
herein referred to as the "Closing." The "Closing Date" shall be the date on
which the Closing occurs. The Closing shall occur on the first business day
following the day on which the last of the conditions (other than those
conditions which by their terms are to occur only at the Closing) shall have
been satisfied or, if permissible, waived, or such later date as the parties may
agree. The Closing shall take place at the offices of Goodwin, Procter & Hoar
LLP, Boston, Massachusetts or at such other place as ATI and Parent shall agree
in writing.
ARTICLE 8.
TERMINATION
SECTION 8.1. Termination and Abandonment. This Agreement may be
terminated at any time prior to the Closing Date:
(i) by mutual agreement of the Boards of Directors of ATI, Merger Sub
and Parent;
(ii) by ATI, if (A) the conditions set forth in Sections 6.1 and 6.3
hereof shall not have been complied with or performed and such
noncompliance or nonperformance shall not have been cured or eliminated (or
by its nature cannot be cured or eliminated) by Parent on or before January
30, 1998, or (B) ATI determines, in its sole good faith judgment, within
five (5) days of the date of the delivery of the Parent Disclosure Letter,
that the exceptions set forth therein are materially adversely different
from the representations and warranties of Parent in Article 4 hereof,
provided that ATI shall inform Parent upon such termination as to the
reasons for its determination; and
(iii) by Parent or Merger Sub, if (A) the conditions set forth in
Sections 6.1 and 6.2 hereof shall not have been complied with or performed
and such noncompliance or nonperformance shall not have been cured or
eliminated (or by its nature cannot be cured or eliminated) by ATI on or
before January 30, 1998, or (B) Parent determines, in its sole good faith
judgment, within five (5) days of the date of the delivery of the ATI
Disclosure Letter, that the exceptions set forth therein are materially
adversely different from the representations and warranties of ATI in
Article 3 hereof, provided that Parent shall inform ATI upon such
termination as to the reasons for its determination, or (C) Parent
determines, in its sole good faith judgment, within five (5) days of the
date of the delivery of the 1997 Balance Sheet, that the financial
condition or results of operations of ATI as of and for the eleven-month
period ended November 30, 1997 are materially adversely different from the
financial condition or results of operations of ATI as of and for the
fiscal year ended December 31, 1996.
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SECTION 8.2. Specific Performance and Other Remedies. The parties hereto
each acknowledge that the rights of each party to consummate the transactions
contemplated hereby are special, unique and of extraordinary character, and
that, in the event that any party violates or fails or refuses to perform any
covenant or agreement made by it herein. the non-breaching party may be without
an adequate remedy at law. Except as otherwise provided by Section 5.3 hereof,
the parties each agree, therefore, that in the event that either party violates
or fails or refuses to perform any covenant or agreement made by such party
herein, the non-breaching party or parties may, subject to the terms of this
Agreement and in addition to any remedies at law for damages or other relief,
institute and prosecute an action in any court of competent jurisdiction to
enforce specific performance of such covenant or agreement or seek any other
equitable relief.
SECTION 8.3. Effect of Termination. In the event of termination of this
Agreement pursuant to this Article 8, this Agreement shall forthwith become void
and there shall be no liability on the part of any party or its respective
officers, directors or stockholders, except for obligations under Section 5.3
and this Section 8.3, all of which shall survive the termination.
Notwithstanding the foregoing, nothing contained herein shall relieve any party
from liability for any breach of any covenant or agreement in this Agreement.
ARTICLE 9.
INDEMNIFICATION
SECTION 9.1. Definitions. For the purposes of this Article 9:
(i) "ATI Indemnitors" shall mean the Signing Stockholder and the
Stockholders (other than any Stockholders who perfect their right to
dissent in accordance with the DGCL).
(ii) "ATI Indemnitors Representative" shall mean Ernest H. Lin.
(iii) "ATI Indemnitees" shall mean the stockholders of ATI, of record
and beneficially, as of the date hereof, and their respective agents,
representatives, employees, heirs, devisees, legatees, successors and
assigns.
(iv) "Indemnification Claim" shall mean a claim for indemnification
hereunder.
(v) "Indemnitee" or "Indemnitees" shall mean one or more, as the case
may be, of the Parent Indemnitees and the ATI Indemnitees, without
distinction.
(vi) "Indemnitor" or "Indemnitors" shall mean one or more, as the case
may be, of the Parent Indemnitors and the ATI Indemnitors, without
distinction.
(vii) "Indemnitors Representative" shall mean Parent or Mr. Lin,
without distinction, as the case may be.
(viii) "Losses" shall mean any and all demands, claims, actions or
causes of action, assessments, losses, damages (including special and
consequential damages), liabilities, costs and expenses, including, without
limitation, interest, penalties, cost of investigation and defense, and
reasonable attorneys' and other professional fees and expenses, provided
that Losses shall be determined net of any insurance proceeds received by
the Indemnitee in respect of the subject matter of an Indemnification
Claim.
(ix) "Parent Indemnitees" shall mean Parent, the Surviving
Corporation, and their respective agents, representatives, employees,
officers, directors, shareholders, controlling persons and affiliates
(other than the ATI Stockholders).
(x) "Parent Indemnitors" shall mean Parent and the Surviving
Corporation, jointly and severally.
(xi) "Parent Indemnitors Representative" shall mean Parent.
(xii) "Third Party Claim" shall mean any claim, suit or proceeding
(including, without limitation, a binding arbitration or an audit by any
taxing authority) that is instituted against an Indemnitee by a person or
entity other than an Indemnitor and which, if prosecuted successfully,
would result in a Loss for which such Indemnitee is entitled to
indemnification hereunder.
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SECTION 9.2. Agreement of ATI Indemnitors to Indemnify. Subject to the
terms and conditions of this Article 9, the ATI Indemnitors, who shall be
jointly liable proportionately on the basis on which their respective Escrow
Shares (assuming the full release thereof to such persons) bears to the total
number of Escrow Shares, and not jointly and severally, such that each
individual ATI Indemnitor's liability under this Section 9.2 shall never exceed
such proportionate amount of the respective Indemnitor's Losses for which
indemnity is sought hereunder (other than with respect to Mr. Lin whose
liability under this Section 9.2 shall not exceed the sum of (a) his
proportionate amount of the Losses determined in accordance with the foregoing
manner and (b) the value of the Signing Stockholder Parent Shares (as
hereinafter defined)), agree to indemnify, defend and hold harmless Parent
Indemnitees, and each of them, from, against, for and in respect of any and all
Losses asserted against, or paid, suffered or incurred by, a Parent Indemnitee
and resulting from, based upon or arising out of:
(i) the inaccuracy, untruth or incompleteness of any representation or
warranty of ATI contained in or made pursuant to this Agreement or the ATI
Disclosure Letter, in each case as supplemented or amended by the ATI
Disclosure Letter, as amended from time to time prior to the Effective
Time, or in or made pursuant to any Exhibit furnished by ATI or the ATI
Indemnitors in connection herewith regardless of whether the same was
deliberate, reckless, negligent, innocent or unintentional;
(ii) a breach of or failure to perform any covenant, undertaking,
condition or agreement of ATI or the ATI Indemnitors made in this Agreement
regardless of whether the same was deliberate, reckless, negligent,
innocent or unintentional;
(iii) the business or operations of ATI prior to the Effective Time or
the actions or omissions of ATI's officers, directors, stockholders,
employees or agents prior to the Effective Time, irrespective of the date
that any claim, suit or other course of action related thereto is filed or
otherwise instituted, provided that the foregoing shall not apply to any
liability of ATI disclosed in the ATI Disclosure Letter or reflected in the
ATI Financial Statements or the 1997 Balance Sheet;
(iv) any claim by any former stockholder of ATI, or any predecessor
thereto, involving the transactions contemplated hereby or any prior
transaction involving any shares of capital stock of ATI; or
(v) the Inverness Matter to the extent such Losses exceed $300,000.
SECTION 9.3. Agreement of Parent Indemnitors to Indemnify. Subject to the
terms and conditions of this Article 9, the Parent Indemnitors, jointly and
severally, agree to indemnify, defend and hold harmless the ATI Indemnitees, and
each of them, from, against, for and in respect of any and all Losses asserted
against, or paid, suffered or incurred by, each ATI Indemnitee and resulting
from, based upon, arising out of or in connection with:
(i) the inaccuracy, untruth, or incompleteness of any representation
or warranty of any Parent Indemnitor, contained in or made pursuant to this
Agreement or the Parent Disclosure Letter, in each case as supplemented or
amended by the Parent Disclosure Letter, as amended from time to time prior
to the Effective Time, or in or made pursuant to any Exhibit furnished by
the Parent Indemnitors, or either of them, in connection herewith
regardless of whether the same was deliberate, reckless, negligent,
innocent or unintentional; or
(ii) a breach of or failure to perform any covenant, undertaking,
condition or agreement of the Parent Indemnitors, or either of them, made
in this Agreement or in any Exhibit to this Agreement regardless of whether
the same was deliberate, reckless, negligent, innocent or unintentional.
SECTION 9.4. Procedures for Indemnification. The obligations and
liabilities of the parties with respect to an Indemnification Claim shall be
subject to the following terms and conditions:
(i) An Indemnification Claim shall be made by a Parent Indemnitee by
delivery of a written notice to the ATI Indemnitors Representative
requesting indemnification from the ATI Indemnitors and specifying the
basis on which indemnification is sought and the amount of asserted Losses
and, in the case of a Third Party Claim, containing (by attachment or
otherwise) such other information as such Indemnitee shall have concerning
such Third Party Claim.
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(ii) An Indemnification Claim shall be made by an ATI Indemnitee by
delivery of a written notice to the Parent Indemnitors Representative
requesting indemnification and specifying the basis on which
indemnification is sought and the amount of asserted Losses and, in the
case of a Third Party Claim, containing (by attachment or otherwise) such
other information as such Indemnitee shall have concerning such Third Party
Claim.
(iii) If the Indemnification Claim involves a Third Party Claim, the
procedures set forth in Section 9.5 hereof shall also be observed by the
Indemnitee and the Indemnitors Representative.
(iv) If the Indemnification Claim involves a matter other than a Third
Party Claim, the Indemnitors Representative shall have thirty (30) days to
object to such Indemnification Claim by delivery of a written notice of
such objection to such Indemnitee specifying in reasonable detail the basis
for such objection. Failure to timely so object shall constitute a final
and binding acceptance of the Indemnification Claim by the Indemnitors
Representative on behalf of all the subject Indemnitors, and the
Indemnification Claim shall be paid in accordance with subsection (v)
hereof.
(v) Upon determination of the amount of an Indemnification Claim,
whether by agreement between the Indemnitors Representative and the
Indemnitee or otherwise, the Indemnitors shall pay the amount of such
Indemnification Claim within ten (10) days of the date such amount is
determined.
SECTION 9.5. Third Party Claims. The obligations and liabilities of the
parties hereunder with respect to a Third Party Claim shall be subject to the
following terms and conditions:
(i) The Indemnitee shall give the applicable Indemnitors
Representative written notice of a Third Party Claim promptly after receipt
by the Indemnitee of notice thereof, and the Indemnitors Representative, on
behalf of the Indemnitors, may undertake the defense, compromise and
settlement thereof by representatives of its own choosing reasonably
acceptable to the Indemnitee. The failure of the Indemnitee to notify the
Indemnitors Representative of such claim shall not relieve the Indemnitors
of any liability that they may have with respect to such claim except to
the extent the Indemnitors Representative demonstrates that the defense of
such claim is prejudiced by such failure. The assumption of the defense,
compromise and settlement of any such Third Party Claim by the Indemnitors
Representative shall be an acknowledgment of the obligation of the
Indemnitors to indemnify the Indemnitee with respect to such claim
hereunder. If the Indemnitee desires to participate in, but not control,
any such defense, compromise and settlement, it may do so at its sole cost
and expense. If, however, the Indemnitors Representative fails or refuses
to undertake the defense of such Third Party Claim within ten (10) days
after written notice of such claim has been given to the Indemnitors
Representative by the Indemnitee, the Indemnitee shall have the right to
undertake the defense, compromise and settlement of such claim with counsel
of its own choosing, which counsel shall be reasonably satisfactory to the
Indemnitors Representative and which settlement, if any, is reasonably
satisfactory to the Indemnitor Representative. In the circumstances
described in the immediately preceding sentence, the Indemnitee shall,
promptly upon its assumption of the defense of such claim, make an
Indemnification Claim as specified in Section 9.3 which shall be deemed an
Indemnification Claim that is not a Third Party Claim for the purposes of
the procedures set forth herein.
(ii) If, in the reasonable opinion of the Indemnitee, any Third Party
Claim or the litigation or resolution thereof involves an issue or matter
which could have a material adverse effect on the business, operations,
assets, properties or prospects of the Indemnitee (including, without
limitation, the administration of the tax returns and responsibilities
under the tax laws of the Indemnitee), the Indemnitee shall have the right
to control the defense, compromise and settlement of such Third Party Claim
undertaken by the Indemnitors Representative, and the reasonable costs and
expenses of the Indemnitee in connection therewith shall be included as
part of the indemnification obligations of the Indemnitors hereunder. If
the Indemnitee shall elect to exercise such right, the Indemnitors
Representative shall have the right to participate in, but not control, the
defense, compromise and settlement of such Third Party Claim at its sole
cost and expense.
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(iii) No settlement of a Third Party Claim involving the asserted
liability of the Indemnitors under this Article 9 shall be made without the
prior written consent by or on behalf of the Indemnitors Representative,
which consent shall not be unreasonably withheld or delayed. Consent shall
be presumed in the case of settlements of $20,000 or less where the
Indemnitors Representative has not responded within five (5) business days
of notice of a proposed settlement. If the Indemnitors Representative
assumes the defense of such a Third Party Claim, (A) no compromise or
settlement thereof may be effected by the Indemnitors Representative
without the Indemnitee's consent unless (i) there is no finding or
admission of any violation of law or any violation of the rights of any
person and no effect on any other claim that may be made against the
Indemnitee, (ii) the sole relief provided is monetary damages that are paid
in full by the Indemnitors, and (iii) the compromise or settlement
includes, as an unconditional term thereof, the giving by the claimant or
the plaintiff to the Indemnitee of a release, in form and substance
satisfactory to the Indemnitee, from all liability in respect of such Third
Party Claim, and (B) the Indemnitee shall have no liability with respect to
any compromise or settlement thereof effected without its consent.
(iv) In connection with the defense, compromise or settlement of any
Third Party Claim, the parties to this Agreement shall execute such powers
of attorney as may reasonably be necessary or appropriate to permit
participation of counsel selected by any party hereto and, as may
reasonably be related to any such claim or action, shall provide access to
the counsel, accountants and other representatives of each party during
normal business hours to all properties, personnel, books, tax records,
contracts, commitments and all other business records of such other party
and will furnish to such other party copies of all such documents as may
reasonably be requested (certified, if requested), provided that the
receiving party agrees to maintain the confidential nature of the
information provided to the receiving party to the reasonable satisfaction
of the party providing such information.
SECTION 9.6. Rights and Remedies Exclusive. Except as expressly provided
in Section 5.3 hereof and except to the extent the same shall have been the
result of common-law fraud, intentional omission or deliberate concealment by or
on behalf of an Indemnitor, the rights of the Indemnitees under this Article 9
shall be the exclusive rights and remedies of the Indemnitees for any breach of
the representations and warranties on the part of any Indemnitor; provided,
however, that this Section 9.6 does not limit the rights of any party under any
of the Exhibits hereto.
SECTION 9.7. Survival. Subject to Section 9.8 hereof, all
representations, warranties and agreements contained in this Agreement or in any
certificate, schedule or exhibit delivered pursuant to this Agreement, in each
case as supplemented or amended by the respective ATI's or the Parent's
Disclosure Letter, as amended from time to time prior to the Effective Time,
shall survive the Closing notwithstanding any investigation conducted with
respect thereto or any knowledge acquired as to the accuracy or inaccuracy of
any such representation or warranty.
SECTION 9.8. Time Limitations.
(i) If the Closing occurs, the ATI Indemnitors shall have no liability
under Section 9.2, unless on or before the 18th month anniversary of the
Closing Date the ATI Indemnitors Representative is given notice asserting
an Indemnification Claim with respect thereto; provided, however, that an
Indemnification Claim based upon a breach of the representations and
warranties of ATI contained in (a) Sections 3.1, 3.2, 3.3, 3.4(b) and 3.16
may be made at any time except as limited by law, (b) Section 3.11 may be
made at any time prior to the expiration of the applicable statutes of
limitations relative to the liability relating thereto; and (c) Section
3.17 may be made at any time prior to the fifth anniversary of the Closing
Date.
(ii) If the Closing occurs, the Parent Indemnitors shall have no
liability under Section 9.3, unless on or before the 18th month anniversary
of the Closing Date the Parent Indemnitors are given notice asserting an
Indemnification Claim with respect thereto; provided, however, that an
Indemnification Claim based upon a breach of the representations and
warranties of the Parent Indemnitors contained in (a) Sections 4.1, 4.2,
4.3 and 4.4 may be made at any time except as limited by law and (b)
Section 4.9
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may be made at any time prior to the expiration of the applicable statutes
of limitations relative to the liability relating thereto.
SECTION 9.9. Limitations as to Amount Payable by ATI Indemnitors. The ATI
Indemnitors shall have no liability with respect to the matters described in
Section 9.2 until the total of all Losses with respect thereto (other than
Losses described in Section 9.2(v)) exceeds $100,000, in which event the ATI
Indemnitors shall be obligated to indemnify the Indemnitees as provided in this
Article 9 for all such Losses. Except as provided below in this Section 9.9, the
maximum amount of any claim against the ATI Indemnitors shall not exceed the sum
of (i) $5,000,000 and (ii) the value of the Parent Shares to be issued to the
Signing Stockholder (the "Signing Stockholder Parent Shares") where such shares
are valued at the Average Closing Price. Notwithstanding anything herein to the
contrary, satisfaction of any claim by the Parent Indemnitees under this Article
9 shall be limited to and made by a redemption of the Parent Shares and Escrow
Shares (with each such share having a value equal to the Average Closing Price)
as follows: first by a redemption of the Signing Stockholder Parent Shares and
second by a redemption of the Escrow Shares which have become releasable under
the terms of the Escrow Agreement to the ATI Stockholders; provided, however,
that if the conditions precedent to the release of all or any portion of the
Escrow Shares have been satisfied, then the satisfaction of any claim by the
Parent Indemnitees under this Article 9 shall be made first by a redemption of
Escrow Shares to the extent released and second by a redemption of the Signing
Stockholder Parent Shares. The limitations set forth above in this Section 9.9
with respect to the aggregate amount of claims made against the ATI Indemnitors
(but not the method of satisfying such claims pursuant to the immediately
preceding sentence hereof) shall not apply to any intentional misrepresentation
or breach of warranty by or on behalf of ATI or any intentional failure to
perform or comply with any covenant or agreement of ATI, and ATI shall be liable
for all Losses with respect thereto.
SECTION 9.10. Limitations as to Amount Payable by Parent and Surviving
Corporation. The Parent Indemnitors shall have no liability with respect to the
matters described in Section 9.2 until the total of all Losses with respect
thereto exceeds $50,000, in which event the Parent Indemnitors shall be
obligated to indemnify the ATI Indemnitees as provided in this Article 9 for all
such Losses up to an aggregate of $2,000,000.
SECTION 9.11. Subrogation. Upon payment in full of any Indemnification
Claim, whether such payment is effected by set-off or otherwise, or the payment
of any judgment or settlement with respect to a Third Party Claim, the
Indemnitors shall be subrogated to the extent of such payment to the rights of
the Indemnitee against any person or entity with respect to the subject matter
of such Indemnification Claim or Third Party Claim.
SECTION 9.12. Appointment of ATI Indemnitors Representative. Each ATI
Indemnitor constitutes and appoints the ATI Indemnitors Representative as his
true and lawful attorney-in-fact to act for and on behalf of such ATI Indemnitor
in all matters relating to or arising out of this Article 9 and the liability or
asserted liability of such ATI Indemnitor hereunder, including specifically, but
without limitation, accepting and agreeing to the liability of such ATI
Indemnitor with respect to any Indemnification Claim, objecting to any
Indemnification Claim, disputing the liability of such ATI Indemnitor, or the
amount of such liability, with respect to any Indemnification Claim and
prosecuting and resolving such dispute as herein provided, accepting the
defense, compromise and settlement of any Third Party Claim on behalf of such
ATI Indemnitor or refusing to accept the same, settling and compromising the
liability of such ATI Indemnitor hereunder, instituting and prosecuting such
actions (including arbitration proceedings) as the ATI Indemnitors
Representative shall deem appropriate in connection with any of the foregoing
and retaining counsel, accountants, appraisers and other advisers in connection
with any of the foregoing, all for the account of the ATI Indemnitor, such ATI
Indemnitor agreeing to be fully bound by the acts, decisions and agreements of
the ATI Indemnitor Representative taken and done pursuant to the authority
herein granted. Each ATI Indemnitor hereby agrees to indemnify and to save and
hold harmless the ATI Indemnitors Representative from any liability incurred by
the ATI Indemnitors Representative based upon or arising out of any act, whether
of omission or commission, of the ATI Indemnitors Representative pursuant to the
authority herein granted, other than acts, whether of omission or commission, of
the ATI Indemnitors Representative that constitute gross negligence or willful
misconduct in the exercise by the ATI Indemnitors Representative of the
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authority herein granted. The death or incapacity of any ATI Indemnitor shall
not terminate the authority and agency of the ATI Indemnitors Representative. In
the event of the resignation of an ATI Indemnitors Representative, the resigning
ATI Indemnitors Representative shall appoint a successor either from among the
ATI Indemnitors or who shall otherwise be acceptable to Parent and who shall
agree in writing to accept such appointment, and the resigning ATI Indemnitors
Representative's resignation shall not be effective until such a successor shall
exist. If an ATI Indemnitors Representative should die or become incapacitated,
his successor shall be appointed within thirty (30) days of his death or
incapacity by a majority of the ATI Indemnitors, and such successor either shall
be a Stockholder or shall otherwise be acceptable to Parent. The choice of a
successor ATI Indemnitors Representative appointed in any manner permitted above
shall be final and binding upon all of the ATI Indemnitors. The decisions and
actions of any successor ATI Indemnitors Representative shall be, for all
purposes, those of an ATI Indemnitors Representative as if originally named
herein.
SECTION 9.13. Payment. In the event that any Indemnitor is required to
make any payment under this Article 9, such party shall promptly pay the
Indemnitee the amount so determined. If there should be a dispute as to the
amount or manner of determination of any indemnity obligation owed under this
Article 9, the Indemnitor shall nevertheless pay when due such portion, if any,
of the obligation as shall not be subject to dispute. The difference, if any,
between the amount of the obligation ultimately determined as properly payable
under this Article 9 and the portion, if any, theretofore paid shall bear
interest as provided below. If all or part of any indemnification obligation
under this Agreement is not paid when due, then the Indemnitor shall pay the
Indemnitee interest on the unpaid amount of the obligation for each day from the
date the amount became due until payment in full, payable on demand, at the
fluctuating rate per annum which at all times shall be the lowest rate of
interest generally charged from time to time by Morgan Guaranty Trust Company of
New York and publicly announced by such bank as its so-called "prime rate."
ARTICLE 10.
MISCELLANEOUS PROVISIONS
SECTION 10.1. Notices. All notices, communications and deliveries
hereunder shall be made in writing signed by the party making the same, shall
specify the Section hereunder pursuant to which it is given or being made, and
shall be deemed given or made on the date delivered if delivered in person or on
the third (3rd) business day after it is mailed if mailed by registered or
certified mail (return receipt requested) (with postage and other fees prepaid)
as follows:
To Parent, Merger Sub or the Surviving Corporation:
World Access, Inc. 945 E. Paces Ferry Road Suite 2240 Atlanta, Georgia
30326 Attn: Mr. Mark A. Gergel
with a copy to:
Rogers & Hardin LLP 2700 International Tower, Peachtree Center 229
Peachtree Street, N.E. Atlanta, Georgia 30303 Attn: Steven E. Fox, Esq.
To ATI or the Signing Stockholder:
Advanced TechCom, Inc. 181 Ballardvale Street Wilmington, Massachusetts
01887 Attn: Mr. Ernest H. Lin
with a copy to:
Goodwin, Procter & Hoar LLP Exchange Place Boston, Massachusetts
021909-2881 Attn: Paul W. Lee, Esq.
or to such other representative or at such other address of a party as such
party hereto may furnish to the other parties in writing.
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SECTION 10.2. Disclosure Letters and Exhibits. The ATI Disclosure Letter
and the Parent Disclosure Letter and all Exhibits hereto are hereby incorporated
into this Agreement and are hereby made a part hereof as if set out in full in
this Agreement.
SECTION 10.3. Assignment; Successors in Interest. No assignment or
transfer by Parent, Merger Sub or ATI of their respective rights and obligations
hereunder prior to the Closing shall be made except with the prior written
consent of the other parties hereto. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their permitted successors
and assigns, and any reference to a party hereto shall also be a reference to a
permitted successor or assign.
SECTION 10.4. Number; Gender. Whenever the context so requires, the
singular number shall include the plural and the plural shall include the
singular, and the gender of any pronoun shall include the other genders.
SECTION 10.5. Captions. The titles, captions and table of contents
contained in this Agreement are inserted herein only as a matter of convenience
and for reference and in no way define, limit, extend or describe the scope of
this Agreement or the intent of any provision hereof. Unless otherwise specified
to the contrary, all references to Articles and Sections are references to
Articles and Sections of this Agreement and all references to Exhibits are
references to Exhibits to this Agreement and the ATI Disclosure Letter and the
Parent Disclosure Letter.
SECTION 10.6. Controlling Law; Jurisdiction; Integration; Amendment. This
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of Georgia without reference to Georgia's choice of
law rules and each of the parties hereto hereby consents to personal
jurisdiction in any federal or state court in the State of Georgia. This
Agreement and the documents executed pursuant hereto supersede all negotiations,
agreements and understandings among the parties with respect to the subject
matter hereof and constitutes the entire agreement among the parties hereto,
this Agreement may not be amended, modified or supplemented except by written
agreement of the parties hereto.
SECTION 10.7. Knowledge. As used in this Agreement, (i) the terms "the
best knowledge of ATI," "known to ATI" or words of similar import used herein
with respect to ATI shall mean the actual knowledge of any senior executive
officer of ATI, together with the knowledge a reasonable business person would
have obtained after making reasonable inquiry and after exercising reasonable
diligence with respect to the matters at hand; and (ii) the terms "the best
knowledge of Parent," "known to Parent" or words of similar import used herein
with respect to Parent shall mean the actual knowledge of any senior executive
officer of Parent, together with the knowledge a reasonable business person
would have obtained after making reasonable inquiry and after exercising
reasonable diligence with respect to the matters at hand.
SECTION 10.8. Severability. Any provision hereof which is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction will not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by law, the parties hereto waive any
provision of law which renders any such provision prohibited or unenforceable in
any respect.
SECTION 10.9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement or the terms hereof to produce or
account for more than one of such counterparts.
SECTION 10.10. Enforcement of Certain Rights. Nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person, firm or corporation other than the parties hereto, and their
successors or assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, or result in such person, firm or corporation being
deemed a third party beneficiary of this Agreement.
SECTION 10.11. Waiver. At any time prior to the Effective Time, the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors in the case of Parent, Merger Sub and ATI, may, to the
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extent legally permitted: (a) extend the time for the performance of any of the
obligations or other acts of any other party; (b) waive any inaccuracies in the
representations or warranties of any other party contained in this Agreement or
in any document or certificate delivered pursuant hereto; (c) waive compliance
or performance by any other party with any of the covenants, agreements or
obligations of such party contained herein; and (d) waive the satisfaction of
any condition that is precedent to the performance by the party so waiving of
any of its obligations hereunder. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. A waiver by one party of the
performance of any covenant, agreement, obligation, condition, representation or
warranty shall not be construed as a waiver of any other covenant, agreement,
obligation, condition, representation or warranty. A waiver by any party of the
performance of any act shall not constitute a waiver of the performance of any
other act or an identical act required to be performed at a later time.
SECTION 10.12. Fees and Expenses. Each party hereto shall pay its own
fees, costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby, including, but not limited to, the fees, costs
and expenses of its financial advisors, accountants and counsel; provided,
however, that the ATI Stockholders shall pay all of such fees, costs and
expenses incurred by ATI in excess of Fifty Thousand Dollars ($50,000).
[Signatures on next pages]
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IN WITNESS WHEREOF, the parties hereto have duly executed and sealed this
Agreement or have caused this Agreement to be duly executed under seal on its
behalf by an officer or representative thereto duly authorized, all as of the
date first above written.
/s/ ERNST H. LIN
--------------------------------------
(SEAL)
ERNEST H. LIN
ADVANCED TECHCOM, INC.
By: /s/ ERNST H. LIN
------------------------------------
Its: Chairman and CEO
------------------------------------
Attest: /s/ ERIK STROMSTEAD
----------------------------------
Its: V.P. Marketing
------------------------------------
[CORPORATE SEAL]
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Its: Chairman and CEO
------------------------------------
Attest: /s/ MARK A. GERGEL
----------------------------------
Its: ASST. V.P.
------------------------------------
[CORPORATE SEAL]
CELLULAR INFRASTRUCTURE SUPPLY, INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Its: Chairman and CEO
------------------------------------
Attest: /s/ MARK A. GERGEL
----------------------------------
Its: Assistant Secretary
------------------------------------
[CORPORATE SEAL]
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 29th
day of January, 1998, by and between ERNEST H. LIN, a resident of the
Commonwealth of Massachusetts ("Employee"), CELLULAR INFRASTRUCTURE SUPPLY,
INC., a Delaware corporation ("Company"), and WORLD ACCESS, INC., a Delaware
corporation and the parent of the Company (the "Parent").
W I T N E S S E T H:
WHEREAS, the Company and Employee each desire to enter into this Agreement,
pursuant to which the Company will employ the Employee on the terms and
conditions hereinafter set forth and to make certain other agreements;
NOW, THEREFORE, in consideration of the premises and of the promises and
agreement hereinafter set forth, the parties hereto, intending to be legally
bound, do hereby agree as follows:
SECTION 1. Employment.
1.1. General Employment. Subject to the terms hereof, the Company hereby
employs Employee, and Employee hereby accepts such employment. Employee will
devote his full business time and best efforts to rendering services on behalf
of the Company.
SECTION 2. Position.
2.1. Title and Duties. Employee will serve as the President of the
Advanced TechCom Division of the Company (the "ATI Division") and, as such,
Employee will report to the President of the Transport and Access Group of the
Parent. If, at any time after December 31, 1998, the ATI Division is not
performing in accordance with its business plan, then the Parent may remove the
Employee as President, and, if so removed, Employee shall serve as a senior
officer of the ATI Division with such title and having such duties as Employee
and Parent shall mutually agree and the successor President of the ATI Division
to be appointed by Parent shall be reasonably satisfactory to Employee. Employee
shall exercise such authority and perform such duties relating to Company as are
considered standard and typical for an officer in his position. Subject to such
travel requirements as may be reasonably necessary to the performance of
Employee's duties hereunder, Employee will be required to perform the services
and duties provided for in this Agreement only at the location of the offices of
the Company in the Boston, Massachusetts metropolitan area, or at such other
location of the Company as the Employee and the Company may mutually agree.
SECTION 3. Term.
3.1. Initial Term. The employment of Employee hereunder will commence on
the date hereof (the "Effective Date") and will continue until the earlier of:
(a) December 31, 1999 (the "Initial Term"); or
(b) the occurrence of any of the following events: (i) the death or
total disability of Employee (total disability meaning the failure of
Employee to perform his normal required services hereunder at his office
for a period of three (3) consecutive months, by reason of Employee's
mental or physical disability as so determined by a licensed physician
selected by the Company satisfactory to Employee);
(ii) the mutual written agreement of the parties hereto to
terminate Employee's employment hereunder; or
(iii) the Company's termination of Employee's employment hereunder,
upon thirty (30) days' prior written notice to Employee, for "good
cause".
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(c) For purposes of this Section, "good cause" for termination of
Employee's employment will exist:
(i) if Employee is convicted of (from which no appeal may be
taken), or pleads guilty to, any act of fraud, misappropriation or
embezzlement, or any felony;
(ii) if, in the sole determination of the Board of Directors of the
Company ("Board"), and as set forth in a written statement executed by
the Board (not including Employee, if he is a Director), Employee has
engaged in conduct or activities materially damaging to the business of
the Company (it being understood, however, that neither conduct nor
activities pursuant to Employee's exercise of his good faith business
judgment nor unintentional physical damage to any property of the
Company by Employee will be a ground for such a determination by the
Board); or
(iii) if Employee has failed without reasonable cause to devote his
full business time and reasonable efforts to the business of the Company
and, after written notice from the Company of such failure, Employee at
any time thereafter again so fails, provided that the Company gives
Employee notice of such failure prior to or together with any such
notice of termination.
3.2. Renewal. The term of this Agreement will automatically renew after
the expiration of the Initial Term for one or more additional one (1) year terms
unless either party gives notice of non-renewal to the other party at least
sixty (60) days prior to the expiration of the then-existing term, in which
event this Agreement will terminate upon the expiration of the then-existing
term.
SECTION 4. Compensation and Benefits.
4.1. Salary. (a) The Company will pay Employee a salary at the annual rate
of One Hundred Fifty Thousand Dollars ($150,000) payable bi-weekly in accordance
with the payroll payment practices adopted from time to time by the Company.
Employee shall also be entitled to receive an annual bonus as described in
Section 4.3 hereof.
(b) The Company agrees to consider and, if it deems appropriate, to
declare, from time to time (although no more than once during each 12 month
period commencing each January 1) increases in the salary it pays Employee based
upon inflation, adjustments to the salaries of other senior management
personnel, the past performance of Employee and the contribution Employee makes
to the business and profits of the Company during the term hereof
4.2. Compensation Upon Termination or During Disability. (a) Should
Employee's employment be terminated upon the expiration of the term of this
Agreement, as set forth in Section 3.1(a) or (b)(ii), the Company shall pay
Employee his full salary through the date of such termination at the rate in
effect at that time, and Employee shall have the right to exercise any and all
vested stock options granted to him, pursuant to the terms and conditions of
Parent's stock option plan.
(b) Should Employee's employment be terminated by reason of his death, as
set forth in Section 3.1(b)(i), the Company shall pay to such person as he shall
designate in a notice filed with the Company, or, if no such person shall be
designated, to his estate as a lump sum death benefit, his full salary to the
date of his death, in addition to any payments Employee's spouse, beneficiaries
or estate may be entitled to receive pursuant to any pension or employee benefit
plan or life insurance policy maintained by the Company. Employee's designee,
estate or spouse, as the case may be, shall have the right to exercise any and
all vested stock options granted to Employee prior to his date of death,
pursuant to the terms and conditions of Parent's stock option plan.
(c) During any period that Employee fails to perform his duties hereunder
as a result of incapacity due to physical or mental illness, Employee shall
continue to receive his full salary and bonus payments until Employee's
employment is terminated for total disability pursuant to Section 3.1(b)(i).
Upon termination of his employment for total disability, Employee or his
representative, as the case may be, shall have the right to exercise any and all
vested stock options granted to Employee prior to the date of his termination
for total disability, pursuant to the terms and conditions of Parent's stock
option plan.
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(d) Should Employee's employment be terminated for "good cause," as set
forth in Section 3.1(b)(iii), the Company shall pay his full salary through the
date of such termination at a rate in effect at the time of his termination.
(e) Employee shall not be required to mitigate the amount of any payment
provided for in Section 4 of this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in Section 4 of this
Agreement be reduced by any compensation earned by Employee as the result of
employment by another employer after Employee's employment with the Company
terminates.
4.3. Bonus; Benefits. From and after January 1, 1998, Employee shall be
entitled to participate in the incentive and bonus programs of the Company and
Parent to the same extent as others who hold positions and responsibilities
comparable to that of Employee, and the terms of such programs shall provide
that Employee shall be eligible to earn an annual bonus in an amount equal to at
least thirty percent (30%) of Employee's annual salary. Employee shall be
entitled during the term of his employment to receive such employee benefits
consistent with the policies of the Company as applied to employees generally.
4.4. Grant of Stock Options to Employee. During the term of this
Agreement, the Employee shall be eligible to participate in the 1991 Stock
Option Plan of Parent (the "Option Plan"), on the terms and subject to the
conditions under which participation in such plan is made available to eligible
employees of the Parent or its affiliates. On the Effective Date hereof, the
Parent shall grant to Employee non-qualified stock options to purchase 50,000
shares of the common stock of Parent, for a purchase price equal to the fair
market value of such shares on the date of grant, vesting at a rate of
twenty-five percent (25%) on each of the first four (4) anniversaries of the
date of the grant.
4.5. Designation of Employees to Receive Stock Options. Upon execution of
this Agreement, the Company shall grant Employee the right to designate
employees of the ATI Division, other than Employee, as grantees of non-qualified
stock options to purchase 200,000 shares of the common stock of Parent for a
purchase price equal to the fair market value of such shares on the date of
grant pursuant to the Option Plan, vesting at the rate of twenty-five percent
(25%) on each of the first four (4) anniversaries of the date of the grant.
4.6. Insurance. (a) Life and Other Insurance. The Company will, at its
expense, provide or arrange for and keep in effect, during the term of
Employee's employment hereunder, so long as he is insurable, such group term
life insurance, accidental death and dismemberment insurance and long term
disability insurance, or their equivalents, as is provided from time to time for
executives of Parent and its subsidiaries holding positions and responsibilities
comparable to those of Employee.
(b) Medical Insurance. During the term of Employee's employment hereunder,
the Company will, at its expense, provide or arrange for and keep in effect,
hospitalization, major medical and similar medical and health insurance for
Employee and his family, to the same extent as is provided from time to time for
executives of Parent and its subsidiaries holding positions and responsibilities
comparable to those of Employee.
4.7. Vacation; Leave. Employee will be entitled to the same number of days
of paid vacation during each year of his employment hereunder as is allowed to
other executives of Parent and its subsidiaries holding positions and
responsibilities comparable to those of Employee. Employee shall be entitled to
leave of absence and leave for illness or temporary disability in accordance
with policies in effect for executives of Parent and its subsidiaries holding
positions and responsibilities comparable to those of Employee, and any leave on
account of illness or temporary disability which is short of total disability
(as set forth in Section 3.1 hereof) shall not constitute a breach by the
Employee of his agreements hereunder.
4.8. Retirement Benefits. During the term of his employment hereunder,
Employee shall have the same right as other executives of Parent and its
subsidiaries holding positions and responsibilities comparable to those of
Employee to participate in all profit-sharing, pension and other retirement
plans as are now, or as may hereafter be, established by Parent.
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4.9. Out-of-Pocket Expenses. The Company will reimburse Employee for all
reasonable out-of-pocket expenses incurred by Employee in connection with the
performance of his duties hereunder upon presentation of appropriate vouchers
therefor.
SECTION 5. Miscellaneous.
5.1. Successors; Binding Effect. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance reasonably satisfactory to Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Employee to compensation from the Company in the
same amount and on the same terms as he would be entitled to hereunder if his
employment were terminated without "good cause." The date on which any such
succession becomes effective shall be deemed to be the date of Employee's
termination. This Agreement will inure to the benefit of and will be binding
upon Employee, his executor, administrator, personal representatives and
assigns, and upon the Company and its successors and assigns; provided, however,
that the obligation and duties of Employee may not be assigned or delegated.
5.2. Governing Law. This Agreement will be deemed to be made in, and in
all respects interpreted, construed and governed by and in accordance with, the
laws of the Commonwealth of Massachusetts, without giving effect to principles
of conflict of laws.
5.3. Invalid Provisions. The parties herein hereby agree that the
agreements, provisions and covenants contained in this Agreement are severable
and divisible, that none of such agreements, provisions or covenants depends
upon any other provision, agreement or covenant for its enforceability, and that
such agreement, provision and covenant constitutes an enforceable obligation
between the Company and Employee. Consequently, the parties hereto agree that
neither the invalidity nor the enforceability of any agreement, provision or
covenant of this Agreement will affect the other agreements, provisions or
covenants hereof, and this Agreement will remain in full force and effect and be
construed in all respects as if such invalid or unenforceable agreement,
provision or covenant were omitted.
5.4. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.
5.5. Notices. All communications provided for hereunder will be in writing
and will be deemed to given when delivered in person or deposited in the United
States mail, first class, registered mail, return receipt requested, with proper
postage prepaid, and
(a) If to Employee, addressed to:
Ernest H. Lin
(b) If to the Company, addressed to:
Cellular Infrastructure Supply, Inc. c/o World Access, Inc. 945 E.
Paces Ferry Road, Suite 2240 Atlanta, Georgia 30326 Attn: Chief
Executive Officer
or at such other place or places or to such other person or persons as will be
designated in writing by the parties hereto in the manner provided above for
notices.
5.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same instrument.
5.7. Waiver of Breach. The waiver by the Company of a breach of any
provision, agreement or covenant of this Agreement by Employee will not operate
or be construed as a waiver of any prior or subsequent breach of the same or any
other provision, agreement or covenant by Employee.
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5.8. Entire Agreement. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and is the complete and exclusive statement thereof notwithstanding any
representation or statements to the contrary heretofore made. This Agreement may
be modified only by written instrument signed by each of the parties hereto.
IN WITNESS WHEREOF, Employee has extended and delivered this Agreement, and
each of the Company and the Parent has caused this Agreement to be duly executed
and delivered by its duly authorized officers, all on the day and year first
written above.
ERNEST H. LIN
CELLULAR INFRASTRUCTURE SUPPLY, INC.
By:
--------------------------------------
Its:
--------------------------------------
WORLD ACCESS, INC.
By:
--------------------------------------
Its:
--------------------------------------
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EXHIBIT 10.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made and entered into as of the
29th day of January, 1998, by and among WORLD ACCESS, INC., a Delaware
corporation ("Parent"), CELLULAR INFRASTRUCTURE SUPPLY, INC., a Delaware
corporation (the "Surviving Corporation"), CAUTHEN & FELDMAN, P.A., a Florida
professional association (the "Escrow Agent"), and each of the stockholders of
Advanced TechCom, Inc., a Delaware corporation ("ATI"), listed on Schedule 1
hereto (each such person a "Stockholder" and, collectively, the "Stockholders").
W I T N E S S E T H:
WHEREAS, the Stockholders are all of the holders of the Series A
Convertible Preferred Stock, $.10 par value per share, of ATI;
WHEREAS, certain of the parties hereto, among others, have entered into an
Agreement and Plan of Merger dated as of December 24, 1997, a copy of which is
attached hereto as Exhibit A and incorporated herein by reference (the "Merger
Agreement"), pursuant to which, among other things, ATI will be merged with and
into the Surviving Corporation, a wholly-owned subsidiary of Parent, with the
separate corporate existence of ATI then terminating (the "Merger"); and
WHEREAS, Section 2.1(a)(i)(B) of the Merger Agreement requires Parent to
deliver 209,050 shares (the "Escrow Shares") of its common stock, $.01 par value
per share, to the Escrow Agent, to hold and distribute such shares pursuant to
the terms hereof;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Escrow Deposit. Within ten (10) business days of the execution hereof,
Parent shall cause to be delivered to the Escrow Agent, to be held and
distributed as hereinafter provided, a stock certificate issued in the names of
the Stockholders representing the Escrow Shares, and each of the Stockholders
shall deliver to the Escrow Agent a stock power duly endorsed in blank with
signature guarantee with respect to the Escrow Shares.
2. Property Distributed in Respect of Escrow Shares. During the term
hereof, the Escrow Agent shall receive all of the money, securities, rights or
property distributed in respect of the Escrow Shares, including any such
property distributed as dividends, such property to be held and administered as
herein provided (the "Share Proceeds").
3. Voting and Transfer of Escrow Shares. For so long as the Escrow Shares
are held by the Escrow Agent, the Stockholders shall be entitled to exercise any
and all voting or consensual rights and powers relating to or pertaining to the
Escrow Shares so held by the Escrow Agent. No Stockholder shall transfer the
Escrow Shares, or any interest therein, during the term of this Agreement,
except under the laws of descent and distribution.
4. Fees of Escrow Agent. The Escrow Agent shall be entitled to a fee (the
"Escrow Fee") based upon its normal hourly billing rate as compensation for its
services hereunder. The Escrow Fee shall be payable by Parent upon demand
therefor from the Escrow Agent. The Parent upon demand therefor shall reimburse
the Escrow Agent for all costs and expenses incurred by the Escrow Agent in
connection with the performance of its duties hereunder.
5. Distribution of Escrow Shares. (a) Upon receipt of the certificates
provided in Section 7 below, the Escrow Agent shall distribute the Escrow Shares
held by it under this Agreement in the aggregate amounts (each a "Release
Amount") (together with the pro rata portion of the Share Proceeds, if any,
allocable thereto) based upon the Pre-Tax Net Income (as hereinafter defined) of
the ATI Division of the Surviving Corporation (the "ATI Division") on the
release dates set forth below (each a "Release Date") for the
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performance period set forth below (each a "Performance Period") which
corresponds with such Release Date. Notwithstanding the foregoing, any Share
Proceeds that consist solely of cash shall be distributed to the Stockholders
promptly upon receipt thereof, and a Stockholder shall be entitled to receive
such cash in an amount equal to the aggregate of all such cash to be distributed
multiplied by the Proportionate Interest (as set forth in Column C of Schedule 1
hereto) of each such Stockholder. No fractional Escrow Shares will be released.
In lieu thereof, if a Stockholder would otherwise have been entitled to a
fractional share hereunder, then such Stockholder shall be entitled to receive
an amount in cash in lieu of such fractional share, based on a value per share
of the Escrow Shares equal to the Average Closing Price (as hereinafter defined)
and the Parent shall promptly deposit with Escrow Agent an amount sufficient to
fund all such cash amounts prior to each Release Date. Notwithstanding anything
herein to the contrary, in the event the Signing Stockholder Parent Shares (as
defined in the Merger Agreement) have been redeemed to satisfy a claim by the
Parent Indemnities (as defined in the Merger Agreement) pursuant to Article 9 of
the Merger Agreement and subsequently a Release Amount becomes releasable
hereunder, the Escrow Shares, to the extent possible, shall be released to the
Signing Stockholder (as defined in the Merger Agreement) instead of the
Stockholders so that the Signing Stockholder receives a number of shares equal
to the number of Signing Stockholder Parent Shares used to satisfy any claims by
the Parent Indemnities, with each Stockholder contributing a pro rata portion of
the Escrow Shares (together with a pro rata portion of the Share Proceeds, if
any, since the date the Signing Stockholder Parent Shares were redeemed) on the
basis of each Stockholder's Proportionate Interest.
<TABLE>
<CAPTION>
PERFORMANCE PERIOD RELEASE DATE
- ------------------ ------------
<S> <C>
December 15, 1997 to and including December 31, 1998 (the
"First Performance Period")............................... February 15, 1999
January 1, 1999 to and including December 31, 1999 (the
"Second Performance Period").............................. February 15, 2000
</TABLE>
The aggregate amount of the Release Amount releasable hereunder to the
Stockholders on the Release Date which corresponds to the First Performance
Period will be determined based on the Pre-Tax Net Income as set forth in
Release Table No. 1 below. If the Pre-Tax Net Income is between the "less than"
and "greater than" amounts, the aggregate amount of the Release Amount
releasable shall be determined on a pro rata basis.
Release Table No. 1
Aggregate Release Amount
(Value of Pre-Tax Net Income During
Performance Period Escrow Shares Valued
at the Average Closing Price)
<TABLE>
<S> <C>
Less than $2,000,000........................................ None
Greater than $3,000,000..................................... $2,000,000
</TABLE>
The aggregate amount of the Release Amount releasable to the Stockholders
on the Release Date which corresponds to the Second Performance Period will be
determined based on the Pre-Tax Net Income as set forth in Release Table No. 2
below. If the Pre-Tax Net Income is between the "less than" and "greater than"
amounts, the aggregate amount of the Release Amount releasable shall be
determined on a pro rata basis.
Release Table No. 2
Aggregate Release Amount
(Value of Pre-Tax Net Income During
Performance Period Escrow Shares Valued
at the Average Closing Price)
<TABLE>
<S> <C>
Less than $3,000,000........................................ None
Greater than $4,000,000..................................... $3,000,000
</TABLE>
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Notwithstanding the foregoing, if the Pre-Tax Net Income of the ATI
Division is (i) greater than $2,500,000, but less than $3,000,000, with respect
to the First Performance Period and (ii) greater than $4,000,000 with respect to
the Second Performance Period, then Parent will instruct the Escrow Agent to
release to the Stockholders on the Release Date which corresponds to the Second
Performance Period in lieu of the Release Amount otherwise releasable pursuant
hereto Escrow Shares having an aggregate value equal to (i) $3,000,000, plus
(ii) the amount equal to (A) (x) $3,000,000 less (y) the Pre-Tax Net Income for
the First Performance Period, to the extent that such amount does not exceed the
amount by which the Pre-Tax Net Income for the Second Performance exceeds
$4,000,000, multiplied by (B) 2.0. For purposes hereof, the "Average Closing
Price" shall equal $23.9177 per share.
(b) Parent will determine whether to instruct the Escrow Agent to
release the Release Amount to the Stockholders based upon the books and
records of the ATI Division (which will be maintained in accordance with
generally accepted accounting principles) as soon as practicable after the
end of each Performance Period, and Parent will promptly deliver to Ernest
H. Lin as a representative of the Stockholders (the "ATI Representative"),
appointed pursuant to Section 6 hereof, a letter setting out in reasonable
detail the computations made and expressing its opinion that the conditions
for the release of the Release Amount have been satisfied in accordance
with the requirements hereof. The computations set forth in such letter
from Parent will be final and binding on all parties unless the ATI
Representative shall have notified Parent in writing within ten (10) days
after receipt of such letter that he disagrees with such computations. In
such event, if the parties cannot agree on the computations within thirty
(30) days after their receipt of such letter, then the Stockholders may
retain, at their own expense, an independent public accounting firm (the
"Accountants"), which shall have thirty (30) days in which to make its own
calculation of Pre-Tax Net Income for the applicable Performance Period. If
the calculations of the Accountants differ from that of Parent, then the
parties shall negotiate in good faith for a period of ten (10) days to
resolve any differences. If the parties are unable to resolve the dispute
within such 10 day period, then the matter shall be submitted to an
independent public accounting firm selected jointly by Parent and the
Accountants within five days after the end of such ten day period. Such
independent accounting firm shall then have thirty (30) days in which to
make its own calculation of Pre-Tax Net Income for the applicable
Performance Period. The cost of any such calculations by such independent
accounting firm and the Accountants shall be paid by the Stockholders if
its computations result in the Release Amount being the same as or less
than that set forth in the letter from Parent or by Parent if such
computations result in the Release Amount being greater than that set forth
in such letter. Parent and the ATI Representative will instruct the Escrow
Agent by delivering to it a Certificate of Instruction as set forth in
Section 7 to release to the Stockholders the amount of Release Amount set
forth in Parent's letter to the ATI Representative, and any additional
amount thereafter agreed upon by the parties or computed by such
independent accounting firm (if such computations are made) will be
released to Stockholders promptly after delivery of the accountants' report
and supplemental Certificates of Instruction. The Stockholders will
promptly return to Parent any amount of the Release Amount released to them
that is in excess of the Release Amount computed by such independent
accounting firm if its computation is less than that set forth in the
letter from Parent.
(c) For purposes hereof, "Pre-Tax Net Income" means the income of the
ATI Division before (i) income and deductions not related to primary
operations (i.e., gains or losses on disposal of fixed assets and other
miscellaneous unrelated items), (ii) taxes based on income, (iii)
cumulative effects of accounting changes, (iv) extraordinary items and (v)
allocations or charges of expenses to the ATI Division from Parent or any
of its subsidiaries or affiliates unless the expense is for funds loaned
(other than with respect to the first $5.0 million of intercompany loans
which shall not bear interest for purposes of determining Pre-Tax Net
Income), services rendered or goods provided in direct relation to the ATI
Division's business at a negotiated fair market value price. In addition,
for purposes of determining the Pre-Tax Net Income of the ATI Division,
one-half (1/2) of the pre-tax net income of Parent or any of its
subsidiaries (in each case as customarily determined by Parent) relating
directly to the sales of products of Parent or any of its subsidiaries
(other than products of the ATI Division) made directly by Mr. Lin or any
sales person within the ATI Division shall be included in determining the
Pre-Tax Net Income of the ATI Division.
D-65
<PAGE> 301
6. Appointment of ATI Representative. Each Stockholder constitutes and
appoints the ATI Representative as his or her true and lawful attorney-in-fact
to act for and on behalf of such Stockholder in all matters relating to or
arising out of this Agreement, such Stockholder agreeing to be fully bound by
the acts, decisions and agreements of the ATI Representative taken and done
pursuant to the authority herein granted. Each Stockholder hereby agrees to
indemnify and to save and hold harmless the ATI Representative from any
liability incurred by the ATI Representative based upon or arising out of any
act, whether of omission or commission, of the ATI Representative pursuant to
the authority herein granted, other than acts, whether of omission or
commission, of the ATI Representative that constitute gross negligence or
willful misconduct in the exercise by the ATI Representative of the authority
herein granted. The death or incapacity of any Stockholder shall not terminate
the authority and agency of the ATI Representative. In the event of the
resignation of the ATI Representative, the resigning ATI Representative shall
appoint a successor either from among the Stockholders or who shall otherwise be
acceptable to Parent, the Surviving Corporation and the Escrow Agent, and who
shall agree in writing to accept such appointment, and the resigning ATI
Representative's resignation shall not be effective until such a successor shall
exist. If the ATI Representative should die or become incapacitated, his
successor shall be appointed within thirty (30) days of his death or incapacity
by a majority of the Stockholders, and such successor either shall be a
Stockholder or shall otherwise be acceptable to Parent, the Surviving
Corporation and the Escrow Agent. The choice of a successor ATI Representative
appointed in any manner permitted above shall be final and binding upon all of
the Stockholders. The decisions and actions of any successor ATI Representative
shall be, for all purposes, those of the ATI Representative as if originally
named herein.
7. Certificates of Instruction. (a) Within forty (40) days of the end of
each Performance Period, Parent and the ATI Representative shall deliver to the
Escrow Agent a Certificate of Instruction setting forth the Pre-Tax Net Income
of the ATI Division for each such Performance Period and, in the event that
Pre-Tax Net Income equals an amount for such Performance Period which permits
the release of Escrow Shares in accordance with Section 5 above, directing the
Escrow Agent to release to the Stockholders the number of Escrow Shares
(together with the pro rata portion of the Share Proceeds, if any) determined in
accordance with Section 5 above. In the event there is a disagreement or dispute
with respect to the determination of "Pre-Tax Net Income," Parent and the ATI
Representative may provide Escrow Agent with one or more supplemental
Certificates of Instruction with respect to any resolution of such disagreement
or dispute.
(b) Upon receipt of the Certificate of Instruction, the Escrow Agent shall
cause promptly the certificate representing the Escrow Shares to be broken down
into ( ) certificates, one of which will represent the Escrow
Shares to remain subject to the terms of this escrow and one of each of the
other ( ) certificates will be issued to each Stockholder for that
number of the Escrow Shares to be released multiplied by the Proportionate
Interest (as set forth in Column C of Schedule 1 hereto) of each such
Stockholder, and thereafter on the Release Date the Escrow Agent shall deliver
to the Stockholders the certificates representing the Escrow Shares (together
with the pro rata portion of the Share Proceeds, if any) to be released to the
Stockholders as provided herein.
(c) If, on 5:00 p.m. Eastern Standard Time on March 31, 2000, or on such
later date which is ten (10) days following the date on which a final
determination shall have been made pursuant to sub-subsection 5(b) hereof with
respect to the Pre-Tax Net Income and Parent and the ATI Representative shall
have provided Escrow Agent with a Certificate of Instruction in respect of such
final determination, the Escrow Agent continues to hold any of the Escrow
Shares, then the Escrow Agent shall deliver any such shares (together with any
Share Proceeds in the Escrow Agent's possession) to Parent, and this Agreement
shall thereupon be terminated.
8. Duties of the Escrow Agent. The acceptance by the Escrow Agent of its
duties under this Agreement is subject to the following terms and conditions,
which the parties to this Agreement hereby agree shall fully govern and control
with respect to the Escrow Agent's rights, duties, liabilities and immunities:
(a) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document which
the Escrow Agent believes in good faith emanates from both Parent and the
ATI Representative of the parties hereto, not only as to its due execution
and the validity
D-66
<PAGE> 302
and effectiveness of its provisions, but also as to the truth and accuracy
of any information contained therein. The Escrow Agent is also relieved
from the necessity of satisfying itself as to the authority of the persons
executing this Agreement in a representative capacity.
(b) The Escrow Agent shall not be liable for any error of judgment, or
for any act done or step taken or omitted by it in good faith, or for any
mistake of fact or law, or for anything that it may do or refrain from
doing in connection herewith, except for its own gross negligence or
willful misconduct.
(c) The Escrow Agent may consult with, and obtain advice from,
independent legal counsel selected by the Escrow Agent in the event of any
question as to any of the provisions hereof or its duties hereunder (the
cost of obtaining such advice being borne by Parent and the Surviving
Corporation), and it shall incur no liability and shall be fully protected
in acting in accordance with the opinion and instructions of such counsel.
(d) The Escrow Agent shall have no duties except those set forth
herein, and the Escrow Agent shall not be subject to, or obliged to
recognize, any other agreement between, or direction or instruction of, any
of the parties hereto unless signed by Parent and the ATI Representative.
The Escrow Agent shall not be bound by any notice of a claim, demand or
objection with respect to the Escrow Shares or any waiver, modification,
termination or rescission of this Agreement, unless received by it in
writing signed by Parent and the ATI Representative, and, if its duties
herein are materially increased, unless it shall have given its consent
thereto.
(e) If any dispute arises over disbursement of, or conflicting claims
to, the Escrow Shares, then the Escrow Agent may interplead such contested
Escrow Shares into a court of proper jurisdiction of its choosing, and
thereupon the Escrow Agent shall be fully and completely discharged of its
duties as escrow agent with respect to such contested Escrow Shares and
Share Proceeds.
9. Indemnification of the Escrow Agent. Except as otherwise expressly
provided by Section 4 hereof, Parent, the Surviving Corporation and the
Stockholders jointly and severally agree to indemnify, defend and hold harmless
the Escrow Agent from any and all costs, expenses, damages or liability of any
kind whatsoever (including reasonable legal fees) arising by virtue of its
services as escrow agent hereunder, except for liabilities due to the Escrow
Agent's gross negligence or willful misconduct; provided, however, that the
Stockholders shall have no obligation to indemnify the Escrow Agent for any
costs, expenses, damages or liability arising out of any claims made by the
Stockholders.
10. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if (a) delivered by hand, (b) mailed by
registered or certified mail (return receipt requested) or (c) telecommunicated
and immediately confirmed both orally and in writing, to the parties at the
following addresses (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which so
hand-delivered or so telecommunicated or on the third business day following the
date on which so mailed, if deposited in a regularly-maintained receptacle for
United States mail:
If to Escrow Agent:
Cauthen & Feldman, P.A. 215 North Joanna Avenue Tavares, Florida
32778-3200
Attn:
William H. Cauthen, Esq.
Telecopier: 352-343-7759
Telephone: 352-343-2225
If to the Stockholders:
In c/o Mr. Ernest H. Lin
Advanced TechCom, Inc.
181 Ballardvale Street
Wilmington, Massachusetts 01887
Telecopier: 978-694-4801
Telephone: 978-694-3001
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<PAGE> 303
With a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 021909-2881
Attn: Paul W. Lee, P.C.
Telecopier: 617-523-1231
Telephone: 617-570-1000
If to Parent or the Surviving Corporation:
Name of Addressee
945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Attn: Mr. Mark A. Gergel
Telecopier: 404-365-9847
Telephone: 404-231-2025
With a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: Steven E. Fox, Esq.
Telecopier: 404-525-2224
Telephone: 404-522-4700
11. Execution in Counterparts. This Agreement may be executed by
facsimile, and may be executed in several counterparts, each of which shall be
an original, and all of which shall constitute one and the same instrument.
12. Applicable Law. This Agreement shall be construed and governed
exclusively by the laws of the State of Delaware, without giving effect to its
principles of conflicts of laws.
13. Amendment. This Agreement may be amended or modified only in a writing
signed by all parties hereto; provided, however, that Schedule 1 hereto shall be
amended upon Parent's receipt and acceptance of each fully executed Letter of
Transmittal which includes a Power of Attorney appointing Ernest H. Lin as
Attorney-in-Fact to execute this Agreement on behalf of the ATI Stockholder
delivering such Letter of Transmittal, and, upon the receipt and acceptance of
such Letter of Transmittal, Parent shall promptly deliver to the Escrow Agent
and the ATI Representative such amended Schedule 1 which shall thereupon become
a part of this Agreement as though originally included herewith.
[SIGNATURES ON FOLLOWING PAGE]
D-68
<PAGE> 304
IN WITNESS WHEREOF, the parties hereto have duly executed and sealed this
Agreement or have caused this Agreement to be duly executed under seal on its
behalf by an officer or representative thereto duly authorized, all as of the
date first above written.
CAUTHEN & FELDMAN, P.A.
By:
------------------------------------
Its:
------------------------------------
WORLD ACCESS, INC.
By:
------------------------------------
Its:
------------------------------------
CELLULAR INFRASTRUCTURE SUPPLY, INC.
By:
------------------------------------
Its:
------------------------------------
(SEAL)
ERNEST H. LIN, Individually and as
Attorney in Fact for the Stockholders
listed on Schedule 1 hereto
D-69
<PAGE> 305
SCHEDULE 1
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C
NAME AND ADDRESS OF STOCKHOLDER LIQUIDATION PREFERENCE PROPORTIONATE INTEREST
<S> <C> <C>
</TABLE>
D-70
<PAGE> 306
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 29th day of January 1998, by and among WORLD ACCESS, INC., a
Delaware corporation (the "Company"), and each of the stockholders of Advanced
TechCom, Inc., a Delaware corporation ("ATI"), listed on Schedule 1 hereto (each
such person a "Seller" and, collectively, the "Sellers").
IN CONSIDERATION of the mutual promises and covenants set forth herein, and
intending to be legally bound, the parties hereto hereby agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS
1.1 Certain Definitions. Any capitalized terms used herein without
definition shall have the meaning ascribed to such terms in the Agreement and
Plan of Merger dated as of December 24, 1997 to which the Company and certain
other persons are parties relating to the merger of Advanced TechCom, Inc., a
Delaware corporation, with and into Cellular Infrastructure Supply, Inc., a
wholly-owned subsidiary of the Company (the "Merger Agreement"). In addition,
the following terms shall have the meanings set forth below:
(a) "Holder" shall mean any Seller who holds Registrable Securities
and any holder of Registrable Securities to whom the rights conferred by
this Agreement have been transferred in compliance with Section 1.2 hereof.
(b) "Other Stockholders" shall mean persons who, by virtue of
agreements with the Company other than this Agreement, are entitled to
include their securities in certain registrations hereunder.
(c) "Registrable Securities" shall mean shares of Parent Common Stock
issued to the Sellers pursuant to Section 2.1(a)(i)(A) of the Merger
Agreement, provided that Registrable Securities shall not include (i) any
shares of Parent Common Stock held in escrow pursuant to Section 2.1(b) of
the Merger Agreement or (ii) any shares of Parent Common Stock which have
previously been registered or which have been sold to the public or which
have been sold in a private transaction in which the transferor's rights
under this Agreement are not assigned.
(d) The terms "register," "registered" and "registration" shall refer
to a registration effected by preparing and filing a registration statement
in compliance with the Securities Act of 1933, as amended (the "Securities
Act"), and applicable rules and regulations thereunder and the declaration
or ordering of the effectiveness of such registration statement.
(e) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company
and one counsel selected to represent the Holders, which counsel shall be
reasonably satisfactory to the Company, blue sky fees and expenses, and
expenses of any regular or special audits incident to or required by any
such registration, but shall not include (i) Selling Expenses, (ii) the
compensation of regular employees of the Company, which shall be paid in
any event by the Company, and (iii) blue sky fees and expenses incurred in
connection with the registration or qualification of any Registrable
Securities in any state, province or other jurisdiction in a registration
pursuant to Section 1.3 hereof to the extent that the Company shall
otherwise be making no offers or sales in such state, province or other
jurisdiction in connection with such registration.
(f) "Restricted Securities" shall mean any Registrable Securities
required to bear the legend set forth in Section 1.2(c) hereof.
(g) "Rule 144" shall mean Rule 144 as promulgated by the SEC under the
Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the SEC.
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(h) "Rule 145" shall mean Rule 145 as promulgated by the SEC under the
Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the SEC.
(i) "SEC" shall mean the Securities and Exchange Commission.
(j) "Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities.
1.2 Restrictions on Transfer. (a) Each Holder agrees not to make any
disposition of all or any portion of the Registrable Securities unless and until
(i) there is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement, or (ii) (A) such Holder shall have notified
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition and (B) if reasonably requested by the Company, such Holder shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act, it being understood that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(b) Notwithstanding the provisions of subparagraphs (i) and (ii) of
paragraph (a) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder which is (A) a partnership to its
partners in accordance with their partnership interests, (B) a limited liability
company to its members in accordance with their member interests or (C) to the
Holder's family member or a trust for the benefit of an individual Holder or one
or more of his family members, provided the transferee will be subject to the
terms of this Section 1.2 to the same extent as if he were an original Holder
hereunder.
(c) Each certificate representing Registrable Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with a legend substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED, ASSIGNED, PLEDGED
OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY
HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
(d) The Company shall be obligated to promptly reissue unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of in compliance with the
Securities Act without registration, qualification or legend.
(e) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal or if the Holder shall
request such removal and shall have obtained and delivered to the Company an
opinion of counsel reasonably acceptable to the Company to the effect that such
legend and/or stop-transfer instructions are no longer required pursuant to
applicable state securities laws.
1.3 Company Registration. (a) Right to Piggyback. If at any time prior to
the one year anniversary of the date hereof the Company shall determine to
register any of shares of its common stock, $.01 par value per share, either for
its own account or the account of a security holder or holders exercising their
respective demand registration rights, other than a registration relating solely
to employee benefit plans, or a registration relating solely to a Rule 145
transaction, or a registration on any registration form that does not permit
secondary sales, the Company will:
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(i) promptly give to each Holder written notice thereof, which notice
briefly describes the Holders' rights under this Section 1.3 (including
notice deadlines); and
(ii) use its best efforts to include in such registration (and any
related filing or qualification under applicable blue sky laws), except as
set forth in Section 1.3(b) below, and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by any Holder and received by the Company within ten (10)
days after the written notice from the Company described in clause (i)
above is mailed or delivered by the Company, provided that such Holders
shall have requested for inclusion in such registration at least fifty-one
(51%) of the aggregate number of the Registrable Securities which have been
issued to the Holders prior to the date of such written request. Such
written request may specify all or a part of a Holder's Registrable
Securities.
(b) Underwriting. If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
1.3(a)(i). In such event, the right of any Holder to registration pursuant to
this Section 1.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders of securities of the Company with registration rights to
participate therein distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. The Company shall so advise all
Holders of securities requesting registration, and the number of shares of
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being sold for its own
account and thereafter as set forth in Section 1.10. If any person does not
agree to the terms of any such underwriting, he shall be excluded therefrom by
written notice from the Company or the underwriter. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
If shares are so withdrawn from the registration and if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 1.10. hereof.
1.4 Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 1.3 hereof shall be borne by the Company. All Selling Expenses relating
to securities so registered shall be borne by the holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf.
1.5 Registration Procedures. In the case of each registration effected by
the Company pursuant to Section 1.3 hereof, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) keep such registration effective for a period of one hundred
twenty (120) days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by such registration statement;
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(c) furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a
Holder from time to time may reasonably request;
(d) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in
the light of the circumstances then existing, and at the request of any
such Holder, prepare and furnish to such Holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading or incomplete in the light of the circumstances then existing;
provided, however, the Company shall not be obligated to prepare and
furnish any such prospectus supplements or amendments relating to any
material nonpublic information at any such time as the Board of Directors
of the Company has determined that, for good business reasons, the
disclosure of such material nonpublic information at that time is contrary
to the best interests of the Company in the circumstances and is not
otherwise required under applicable law (including applicable securities
laws);
(e) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange and/or included in any
national quotation system on which similar securities issued by the Company
are then listed or included;
(f) provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration; and
(g) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period
of at least twelve (12) months, but not more than eighteen months,
beginning with the first month after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
1.6 Indemnification. (a) The Company will indemnify each Holder, each of
its officers, directors and partners, legal counsel, and accountants and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification, or compliance
has been effected pursuant to this Section 1, and each underwriter, if any, and
each person who controls within the meaning of Section 15 of the Securities Act
any underwriter, against all expenses, claims, losses, damages, and liabilities
(or actions, proceedings, or settlements in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company or relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
1.6(a) shall not apply to amounts paid in
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settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are included in
the securities as to which such registration, qualification, or compliance is
being effected, indemnify the Company, each of its directors, officers,
partners, legal counsel, and accountants and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder and Other Stockholder, and each of their
officers, directors, and partners, and each person controlling such Holder or
Other Stockholder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Other Stockholders, directors, officers, partners,
legal counsel, and accountants, persons, underwriters, or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or action,
in each case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder and stated to be specifically for use therein; provided,
however, that the obligations of such Holder hereunder shall not apply to
amounts paid in settlement of any such claims, losses, damages, or liabilities
(or actions in respect thereof) if such settlement is effected without the
consent of such Holder (which consent shall not be unreasonably withheld) and
(ii) that in no event shall any indemnity under this Section 1.6 exceed the
gross proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
of a release to such Indemnified Party from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.6 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the conduct, statements or omissions that resulted in such loss, liability,
claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
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(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into by the Indemnifying Party and the Indemnified Party in connection with the
underwritten public offering are in conflict with the foregoing provisions, the
provisions in the underwriting agreement shall control.
1.7 Information by Holder. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.
1.8 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) make and keep adequate public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(c) so long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so
filed as a Holder may reasonably request in availing itself of any rule or
regulation of the SEC allowing a Holder to sell any such securities without
registration.
1.9 Delay of Registration. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.10 Allocation of Registration Opportunities. In any circumstance in
which all of the Registrable Securities and other shares of the Company with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or Other Stockholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and Other Stockholders requesting inclusion of
shares pro rata on the basis of the number of shares of Registrable Securities
and Other Shares held by such Holders and Other Stockholders; provided, however,
that such allocation shall not operate to reduce the aggregate number of
Registrable Securities and Other Shares to be included in such registration, if
any Holder or Other Stockholder does not request inclusion of the maximum number
of shares of Registrable Securities and Other Shares allocated to him pursuant
to the above-described procedure, the remaining portion of his allocation shall
be reallocated among those requesting Holders and Other Stockholders whose
allocations did not satisfy their requests pro rata on the basis of the number
of shares of Registrable Securities and Other Shares which would be held by such
Holders and Other Stockholders, assuming conversion, and this procedure shall be
repeated until all of the shares of Registrable Securities and Other Shares
which may be included in the registration on behalf of the Holders and Other
Stockholders have been so allocated.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLERS
2.1 Representations and Warranties of the Company. The Company represents
and warrants to the Sellers as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and
will not violate any provision of law, any order of any court or other
agency of government, the Articles of Incorporation or Bylaws of the
Company, or any provision of any material indenture, agreement or other
instrument to which it or any of its properties or
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assets is bound, or conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under any such
material indenture, agreement or other instrument, or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency and other similar laws affecting the
enforceability of creditors' rights generally, general equitable
principles, the discretion of courts in granting equitable remedies and
public policy considerations.
2.2 Representations and Warranties of the Sellers. The Sellers (jointly
and severally) represent and warrant to the Company as follows:
(a) The execution, delivery and performance of this Agreement by the
Sellers will not violate any provision of law, any order of any court or
any agency or government, or any provision of any material indenture or
agreement or other instrument to which they or any of their respective
properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any
such material indenture, agreement or other instrument, or result in the
creation or imposition of any lien, charge, or encumbrance of any nature
whatsoever upon any of the properties or assets of the Sellers.
(b) This Agreement has been duly executed and delivered by the Sellers
and constitutes the legal, valid and binding obligation of the Sellers,
enforceable against the Sellers in accordance with its terms, subject to
applicable bankruptcy, insolvency and other similar laws affecting the
enforceability of creditors' rights generally, general equitable
principles, the discretion of courts in granting equitable remedies and
public policy considerations.
3. MISCELLANEOUS
3.1 Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Georgia, as if entered into by and between Georgia
residents exclusively for performance entirely within Georgia.
3.2 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
3.3 Entire Agreement; Amendment; Waiver. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subject hereof and thereof. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written instrument
signed by the Company and the Holders of at least fifty-one percent (51%) of the
Registrable Securities and any such amendment, waiver, discharge or termination
shall be binding on all the Holders, but in no event shall the obligation of any
Holder hereunder be materially increased, except upon the written consent of
such Holder; provided, however, that Schedule 1 hereto shall be amended upon the
Company's receipt and acceptance of each fully executed Letter of Transmittal
which includes a Power of Attorney appointing Ernest H. Lin as Attorney-in-Fact
to execute this Agreement on behalf of the ATI stockholder delivering such
Letter of Transmittal, and, upon the receipt and acceptance of such Letter of
Transmittal, the Company shall promptly deliver to the Mr. Lin as representative
of the Sellers such amended Schedule 1 which shall thereupon become a part of
this Agreement as though originally included herewith.
3.4 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, or delivered personally by hand or nationally
recognized courier addressed (a) if to a Holder, as indicated in the stock
records of the Company or at such other address as such Holder shall have
furnished to the Company in writing, or (b) if to the Company, at 945 E. Paces
Ferry Road, Suite 2240, Atlanta, Georgia 30326, or at such other address as the
Company shall have furnished to each Holder in writing, together with a copy to
Rogers & Hardin LLP,
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2700 International Tower, 229 Peachtree Street, Atlanta, Georgia 30303, Attn:
Steven E. Fox, Esq. All such notices and other written communications shall be
effective on the date of mailing or delivery.
3.5 Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to any Holder, upon any breach or default of the Company
under this Agreement shall impair any such right, power or remedy of such Holder
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under this Agreement or any waiver on the part
of any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any Holder, shall be cumulative and not alternative.
3.6 Rights; Severability. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
3.7 Information Confidential. Each Holder acknowledges that the
information received by them pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
3.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
3.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
3.10 Jurisdiction. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Georgia without
reference to Georgia's choice of law rules and each of the parties hereto hereby
consents to personal jurisdiction in any federal or state court in the State of
Georgia.
IN WITNESS WHEREOF, the parties hereto have duly executed and sealed this
Agreement or have caused this Agreement to be duly executed under seal on its
behalf by an officer or representative thereto duly authorized, all as of the
date first above written.
ERNEST H. LIN, Individually and as
Attorney in Fact for the Stockholders
Listed on
Schedule 1 hereto
WORLD ACCESS, INC.
By:
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Its:
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EXHIBIT 10.4
NON-COMPETITION AND NON-DISCLOSURE AGREEMENT
THIS NON-COMPETITION AND NON-DISCLOSURE AGREEMENT (the "Agreement") is made
and entered into as of the 29th day of January, 1998 by and among CELLULAR
INFRASTRUCTURE SUPPLY, INC., a Delaware corporation ("CIS"), WORLD ACCESS, INC.,
a Delaware corporation ("World Access"), and ERNEST H. LIN ("Lin").
WHEREAS, World Access is acquiring the entire equity interest of Advanced
TechCom, Inc. ("ATI") by means of a merger (the "Merger") of ATI with and into
CIS, a wholly-owned subsidiary of World Access, pursuant to that certain
Agreement and Plan of Merger dated as of December 24, 1997 to which this
Agreement is attached as Exhibit 6.2(i) (the "Merger Agreement"); and
WHEREAS, ATI is engaged in the business of designing, manufacturing and
marketing digital microwave and millimeter wave radio systems (the "Business");
and
WHEREAS, Lin is a significant stockholder of ATI and prior to the date
hereof Lin has served as a director and chief executive officer of ATI, has
heretofore been responsible for the management of the Business, and has
knowledge of the trade secrets, customer information and other confidential and
proprietary information of ATI; and
WHEREAS, ATI and Lin desire to have World Access acquire the entire equity
interest of ATI pursuant to the Merger; and
WHEREAS, as a result of the Merger, CIS will succeed to the Business and
all of the Confidential Information and Trade Secrets (each as hereinafter
defined) of ATI; and
WHEREAS, in order to protect the goodwill of the Business and the other
value to be acquired by World Access pursuant to the Merger Agreement for which
World Access is paying substantial consideration, World Access and Lin have
agreed that the obligation of World Access to consummate the transactions
contemplated by the Merger Agreement is subject to the condition, among others,
that Lin shall have entered into this Agreement; and
WHEREAS, World Access has separately bargained and paid additional
consideration for the covenants contained herein; and
WHEREAS, Lin acknowledges that the provisions of this Agreement are
reasonable and necessary to protect the legitimate interest of World Access and
the goodwill of the Business and other value acquired by it pursuant to the
Merger Agreement; and
WHEREAS, Lin has rendered unique, extraordinary and valuable services to
ATI, will continue to render unique, extraordinary and valuable services to CIS
by serving as the president of the ATI Division of CIS (the "ATI Division")
after the Merger, and will have knowledge of the trade secrets, customers,
business plans and other confidential and proprietary information of the ATI
Division; and
WHEREAS, World Access is engaged in the business of manufacturing,
repairing, refurbishing, selling and distributing wireline or wireless
transmission, switching, or access equipment for telecommunications, data or
video applications (the "World Access Business"); and
WHEREAS, in order to induce World Access to consummate the transactions
contemplated by the Merger Agreement, Lin is willing to enter into this
Agreement;
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NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, the parties agree as follows:
1. Definitions. As used in this Agreement, terms defined in the preamble
and recitals of this Agreement shall have the meanings set forth therein and the
following terms shall have the meanings set forth below:
(a) "Competitive Business" shall mean any Person engaged in a business
the same or substantially similar to the Business of ATI as operated by ATI
immediately prior to the Merger.
(b) "Confidential Information" shall mean the ATI Division's and ATI's
customer and supplier lists, marketing arrangements, business plans,
projections, financial information, training manuals, pricing manuals,
market strategies, internal performance statistics and other competitively
sensitive information concerning the ATI Division or ATI which is material
to the ATI Division or ATI and not generally known by the public, other
than Trade Secrets, whether or not in written or tangible form.
(c) "Control" shall mean, with respect to any Person, the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or
otherwise.
(d) "Key Employee" shall mean any Person who is employed in a
management, executive, supervisory, training, marketing or sales capacity
for another Person.
(e) "ATI Market" shall mean any country in which ATI does business or
sells its products.
(f) "Permitted Activities" shall mean (i) owning not more than 5% of
the outstanding shares of publicly-held corporations engaged in a
Competitive Business (except for World Access) which have shares listed for
trading on a securities exchange registered with the Securities and
Exchange Commission or through a national automatic quotation system of a
registered securities association, or (ii) serving as an officer, director
or employee of CIS or the ATI Division.
(g) "Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any other syndicate or group that would be deemed to be
a person under Section 13(d)(3) of the Securities and Exchange Act of 1934,
as amended.
(h) "Restricted Period" shall mean the period commencing on the date
of this Agreement and ending on the date which is three (3) years after the
termination of Lin's employment by CIS or by World Access or any of its
other subsidiaries for any reason whatsoever.
(i) "Trade Secrets" shall mean the whole or any portion or phase of
any scientific or technical information, design, process, procedure,
formula or improvement that is valuable and not generally known to the
competitors of CIS, the ATI Division or ATI, whether or not in written or
tangible form; provided, however, that the parties hereto hereby expressly
acknowledge and agree that nothing in this Agreement or in the foregoing
definition shall diminish, restrict or in any way contravene any claims,
rights or other protections, whether at law or in equity, provided with
respect to trade secrets by the laws of the Commonwealth of Massachusetts
or other applicable laws.
2. No Competing Business. Lin hereby agrees that, during the Restricted
Period, except as permitted by Section 5 of this Agreement, Lin will not
directly or indirectly own, manage, operate, control, invest or acquire an
interest in, or otherwise engage or participate in (whether as a proprietor,
partner, stockholder, director, officer, Key Employee, joint venturer, investor
or other participant in) any Competitive Business in any ATI Market, without
regard to (A) whether the Competitive Business has its office, manufacturing or
other business facilities within any ATI Market, (B) whether any activity of Lin
referred to above itself occurs or is performed within any ATI Market, or (C)
whether Lin resides, or reports to an office, within any ATI Market.
3. No Interference with the Business.
3.1 Lin hereby agrees that during the Restricted Period, except as
permitted by Section 5 of this Agreement, Lin will not directly or
indirectly solicit, induce or influence any customer, supplier, lender,
D-80
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lessor or any other Person which had on the date of this Agreement a
business relationship with ATI in any ATI Market, to discontinue or reduce
the extent of such relationship with ATI in any ATI Market.
3.2 Lin hereby agrees that, during the Restricted Period, except as
permitted by Section 5 of this Agreement, Lin will not (i) directly or
indirectly recruit, solicit or otherwise induce or influence any Key
Employee of ATI who became a Key Employee of the ATI Division to
discontinue such employment or agency relationship with the ATI Division,
or (ii) employ or seek to employ, or cause any Competitive Business to
employ or seek to employ as a Key Employee for any Competitive Business in
any ATI Market, any Person who was within six months prior to the date
hereof employed by ATI as a Key Employee.
4. No Disclosure of Proprietary Information.
4.1 Lin hereby agrees that he will not directly or indirectly disclose
to anyone, or use or otherwise exploit for his own benefit or for the
benefit of anyone other than the ATI Division or CIS, any Trade Secrets for
as long as they remain Trade Secrets, except as permitted by Section 5 of
this Agreement.
4.2 Lin hereby agrees that, during the Restricted Period, he will not
directly or indirectly disclose to anyone, or use or otherwise exploit for
Lin's own benefit or for the benefit of anyone other than the ATI Division,
any Confidential Information, except as permitted by Section 5 of this
Agreement.
5. Permitted Activities. The restrictions set forth in Sections 2, 3 and 4
of this Agreement shall not apply to Permitted Activities or to actions taken by
Lin during the time he is employed by CIS to the extent, but only to the extent,
that such actions are (i) permitted under his Employment Agreement with CIS
entered into pursuant to the Merger Agreement (the "Employment Agreement"), or
(ii) required to enforce his rights under his Employment Agreement, or (iii)
expressly approved by the Board of Directors of CIS.
6. Representations and Warranties. Lin represents and warrants that this
Agreement constitutes the legal, valid and binding obligation of Lin,
enforceable against him in accordance with its terms. Lin represents and
warrants that he has no right, title, interest or claim in, to or under any
Trade Secrets or Confidential Information.
7. Waivers. Neither World Access nor CIS will be deemed as a consequence
of any act, delay, failure, omission, forbearance or other indulgences granted
from time to time by World Access or CIS, as the case may be, or for any other
reason (i) to have waived, or to be estopped from exercising, any of its rights
or remedies under this Agreement, or (ii) to have modified, changed, amended,
terminated, rescind, or superseded any of the terms of this Agreement.
8. Injunctive Relief. Lin acknowledges (i) that any violation of this
Agreement will result in irreparable injury to World Access and CIS, (ii) that
damages at law would not be reasonable or adequate compensation to the World
Access or CIS for violation of this Agreement, and (iii) that World Access and
CIS shall each be entitled to have the provisions of this Agreement specifically
enforced by preliminary and permanent injunctive relief without the necessity of
proving actual damages and without posting bond or other security, as well as to
an equitable accounting of all earnings, profits and other benefits arising out
of any such violation.
9. Notices. All notices and other communications under this Agreement
shall be in writing and may be given by any of the following methods: (i)
personal delivery; (ii) facsimile transmission; (iii) registered or certified
mail, postage prepaid, return receipt requested; or (iv) overnight delivery
service requiring acknowledgment of receipt. Any such notice or communication
shall be sent to the appropriate party at its
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address or facsimile number given below (or at such other address or facsimile
number for such party as shall be specified by notice given hereunder):
To World Access or CIS:
World Access, Inc. 945 East Paces Ferry Road, Suite 2240 Atlanta, Georgia
30326 Facsimile: (404) 262-2598 Attn: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP 2700 International Tower, Peachtree Center 229
Peachtree Street, N.E. Atlanta, Georgia 30303 Facsimile: (404) 525-2224
Attn: Steven E. Fox, Esq.
To Lin:
Mr. Ernest H. Lin Advanced TechCom, Inc. 181 Ballardvale Street Wilmington,
Massachusetts 01887 Facsimile: (978) 694-4801
With a copy to:
Goodwin, Procter & Hoar LLP Exchange Place Boston, Massachusetts 02109-2881
Attn: Paul W. Lee, P.C. Facsimile: (617) 523-1231
All such notices and communications shall be deemed received (i) upon
actual receipt thereof by the addressee, (ii) upon actual delivery thereof to
the appropriate address as evidenced by an acknowledged receipt, or (iii) in the
case of a facsimile transmission, upon transmission thereof by the sender and
confirmation of receipt. In the case of notices or communications sent by
facsimile transmission, the sender shall contemporaneously mail a copy of the
notice or communication to the addressee at the address provided for above;
provided, however, such mailing shall in no way alter the time at which the
facsimile notice or communication is deemed received.
10. Successors in Interest. This Agreement shall be binding upon, and
shall inure to the benefit of and be enforceable by, the parties hereto and
their respective heirs, legal representatives, successors and assigns, and any
reference to a party hereto shall also be a reference to any such heir, legal
representative, successor or assign.
11. Number; Gender. Whenever the context so requires, the singular number
shall include the plural and the plural shall include the singular, and the
gender of any pronoun shall include the other genders.
12. Captions. The titles and captions contained in this Agreement are
inserted herein only as a matter of convenience and for reference and in no way
define, limit, extend or describe the scope of this Agreement or the intent of
any provision hereof. Unless otherwise specified to the contrary, all references
to Sections are references to Sections of this Agreement.
13. Controlling Law; Integration; Amendment. This Agreement shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Georgia without reference to its choice of law rules. This
Agreement and the documents executed pursuant hereto or in connection herewith
supersede all negotiations, agreements and understandings among the parties with
respect to the subject matter hereof and constitutes the entire agreement among
the parties hereto. This Agreement may not be amended, modified or supplemented
except by written agreement of the parties hereto.
14. Severability. Any provision hereof which is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction will not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by law, the parties hereto waive any
provision of law which renders any such provision prohibited or unenforceable in
any respect. In the event that any provision of this Agreement should ever be
deemed to exceed the time, geographic, product or any other limitations
permitted by applicable law, then such provision shall be deemed reformed to the
maximum extent permitted by applicable law.
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15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement or the terms hereof to produce or
account for more than one of such counterparts.
16. Enforcement of Certain Rights. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any Person
other than the parties hereto, and their respective heirs, legal
representatives, successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, or result in such Person being
deemed a third party beneficiary of this Agreement.
[SIGNATURES ON FOLLOWING PAGE]
IN WITNESS WHEREOF, Lin has duly executed and delivered this Agreement, and
World Access and CIS have each caused this Agreement to be duly executed and
delivered on its behalf by an officer thereunto duly authorized, all as of the
date first above written.
ERNEST H. LIN
WORLD ACCESS, INC.
By:
--------------------------------------
Its:
--------------------------------------
CELLULAR INFRASTRUCTURE SUPPLY, INC.
By:
--------------------------------------
Its:
--------------------------------------
Signature Page to
Lin Non-Competition and
Non-Disclosure Agreement
D-83
<PAGE> 319
EXHIBIT 23.1
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statements on
Form S-8 (Nos. 33-77918, 33-47752 and 333-17741) and Form S-3 (No. 333-21079) of
World Access, Inc. of our report dated February 26, 1997 (October 15, 1997 as to
Notes 2 and 13, and the last paragraph of Note 5, which express an unqualified
opinion and includes an explanatory paragraph referring to certain subsequent
events, including entering into an agreement to sub contract certain of Advanced
TechCom, Inc.'s manufacturing, raising of additional equity and the receipt of a
commitment for additional financing) with respect to the consolidated financial
statements of Advanced TechCom, Inc. and Subsidiary (included herein), appearing
as part of Item 7(a) in this Current Report on Form 8-K of World Access, Inc.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 13, 1998
D-84
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EXHIBIT 99.1
News Release
SUMMARY : WORLD ACCESS, INC. ACQUIRES ADVANCED TECHCOM, INC.
CONTACT: Steven A. Odom, Chairman & CEO
Hensley E. West, President & COO
Mark A. Gergel, Exec. VP & CFO
(404) 231-2025
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- January 30, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that it has completed its acquisition of Advanced TechCom, Inc.,
("ATI"), a Wilmington, Massachusetts based designer and manufacturer of digital
microwave and millimeterwave radio systems for short and long haul voice, data
and/or video applications. Pursuant to the terms of a Merger Agreement, the
shareholders of ATI received approximately $10 million worth of World Access
common shares in exchange for their ATI shares and World Access has assumed
approximately $5 million of ATI debt. In addition, the ATI shareholders have the
right to receive additional shares of World Access common stock over the next
two years, contingent upon the achievement of certain pre-tax profitability
levels by ATI.
Steven A. Odom, Chairman and Chief Executive Officer, said "The acquisition
of ATI is in line with the Company's strategy to broaden its offering of
wireless switching, transport and access products and fully support its
customers as they build new and/or upgrade existing telecommunications networks.
ATI is ISO 9001 certified and committed to developing and manufacturing a
complete family of high performance, technologically advanced digital radios for
the global telecommunications markets. ATI's product lines are offered in a wide
range of data rates and frequency bands -- from 1.5 GHz to 38 GHz and DS1/E1 to
DS3/E3. ATI has enjoyed considerable success in recent years in selling its
products to international customers and establishing relationships that
represent significant cross-selling opportunities for other World Access
products and services."
"We are pleased that Dr. Ernie Lin, President of ATI, and his staff of
industry professionals will continue to manage ATI as a division of World
Access. Dr. Lin will report directly to Hatch Graham, President of the Company's
Transport and Access Systems Group. During its latest fiscal year, ATI realized
approximately $15 million in sales. We are optimistic that World Access'
financial strength, extensive U.S. and Latin American telecommunications
customer base, advanced digital switching and wireless transmission products and
broad range of wireless engineering and electronic manufacturing services will
further support ATI's existing business and provide additional sales and profit
growth opportunities for both companies."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales,the Company provides its customers with
a broad range of design, engineering, manufacturing, testing, installation,
repair and other value-added services.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
(Amending Items 7(a) and 7(b))
As Amended on September 3, 1998
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 29, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or other jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) Number)
</TABLE>
<TABLE>
<S> <C> <C>
945 E. Paces Ferry Road, 30326
Suite 2240, Atlanta, Georgia (Zip Code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Explanatory Note: This Amendment No. 1 on Form 8-K/A is being filed to set
forth the audited financial statements of Advanced TechCom, Inc. ("ATI") for the
year ended December 31, 1997 in lieu of ATI's audited financial statements for
the year ended December 31, 1996 and the unaudited financial statements for the
nine months ended September 30, 1997 previously filed.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits. (a) Financial Statements of Business Acquired. Included in this
Report are the consolidated financial statements of Advanced TechCom, Inc.
("ATI") for the year ended December 31, 1997. Such financial statements have
been audited by the independent accounting firm of Tedder Grimsley & Company,
P.A., whose opinion thereon is also included herein.
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ADVANCED TECHCOM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
D-88
<PAGE> 324
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT................................ D-90
FINANCIAL STATEMENTS
Consolidated Balance Sheet.................................. D-91
Consolidated Statement of Operations........................ D-92
Consolidated Statement of Stockholder's Equity.............. D-93
Consolidated Statement of Cash Flows........................ D-94
Notes to Consolidated Financial Statements.................. D-95
</TABLE>
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders Advanced TechCom, Inc.
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheet of Advanced
TechCom, Inc. and Subsidiaries (the "Company") as of December 31, 1997, and the
related consolidated statements of operations, stockholder's 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Advanced
TechCom, Inc. and Subsidiaries as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Tedder, Grimsley & Company, P.A.
March 27, 1998
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<PAGE> 326
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $473,433
Accounts receivable......................................... 1,349,833
Inventory................................................... 4,553,766
Prepaid expenses and other.................................. 73,683
-----------
TOTAL CURRENT ASSETS.............................. 6,450,715
PROPERTY AND EQUIPMENT -- net............................... 1,081,714
-----------
TOTAL ASSETS...................................... $7,532,429
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................... $5,675,021
Accounts payable............................................ 1,700,536
Accrued liabilities......................................... 1,899,597
Warranty reserve............................................ 586,339
Customer deposits........................................... 305,173
-----------
TOTAL CURRENT LIABILITIES......................... 10,166,666
LONG-TERM DEBT -- net of current portion.................... 73,413
-----------
TOTAL LIABILITIES................................. 10,240,079
STOCKHOLDERS' EQUITY
Preferred stock............................................. 1,121,051
Common stock................................................ 38,747
Additional paid-in capital.................................. 13,246,315
Accumulated deficit......................................... (17,113,763)
-----------
TOTAL STOCKHOLDER'S EQUITY........................ (2,707,650)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $7,532,429
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
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ADVANCED TECHCOM, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET SALES................................................... $ 13,686,728
Cost of goods sold.......................................... 10,404,156
Write-off of obsolete inventory............................. 2,188,000
Capitalization of material overhead......................... 431,700
Accrual of liability under firm purchase commitments........ 561,500
------------
TOTAL COST OF GOODS SOLD.......................... 13,585,356
------------
GROSS PROFIT...................................... 101,372
OPERATING EXPENSES
Research and development.................................... 4,282,513
Sales and marketing......................................... 3,524,061
General and administrative.................................. 2,228,273
Customer service............................................ 513,778
------------
TOTAL OPERATING EXPENSES.......................... 10,548,625
------------
LOSS FROM OPERATIONS.............................. (10,447,253)
OTHER INCOME................................................ 64,004
------------
NET LOSS BEFORE INCOME TAXES...................... (10,383,249)
PROVISION FOR INCOME TAXES.................................. --
------------
NET LOSS.......................................... $(10,383,249)
</TABLE>
See accompanying notes to consolidated financial statements.
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ADVANCED TECHCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
$.10 PAR $.10 PAR STOCK
----------------- ----------------------- ADDITIONAL ACCUMULATED SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT PIC DEFICIT RECEIVABLE COMPENSATION
------- ------- ---------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of
year................. 343,989 $34,399 10,097,103 $1,009,710 $10,107,727 $ (6,730,514) $(273,000) $(24,000)
Issuance of stock...... 750 75 913,413 91,341 2,951,766 -- -- --
Exercise of stock
options.............. 42,730 4,273 -- -- 6,822 -- -- --
Stock issued for
services............. -- -- 200,000 20,000 180,000 -- -- 24,000
Forgiveness of debt.... -- -- -- -- -- -- 273,000 --
Net loss............... -- -- -- -- -- (10,383,249) -- --
Balance, end of year... 387,469 $38,747 11,210,516 $1,121,051 $13,246,315 $(17,113,763) $ -- $ --
------- ------- ---------- ---------- ----------- ------------ --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
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ADVANCED TECHCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(10,383,249)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 699,382
Forgiveness of stock subscription receivable................ 273,000
Deferred compensation....................................... 24,000
Issuance of stock for services.............................. 200,000
Other....................................................... 115,401
(Increase) decrease in:
Accounts receivable....................................... 2,238,264
Inventory................................................. 1,289,950
Prepaid expenses and other................................ 73,922
Increase (decrease) in:
Accounts payable.......................................... (930,234)
Accrued liabilities....................................... 1,023,095
Warranty reserve.......................................... 183,488
Customer deposits......................................... 84,266
------------
NET CASH USED BY OPERATING ACTIVITIES............. (5,108,715)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (774,972)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit............................. 975,000
Proceeds from issuance of debt.............................. 2,364,948
Principal payments on debt.................................. (343,548)
Proceeds from sale of stock................................. 3,043,182
Proceeds from exercise of stock options..................... 11,095
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 6,050,677
------------
NET INCREASE IN CASH.............................. 166,990
CASH, BEGINNING OF YEAR..................................... 306,443
------------
CASH, END OF YEAR................................. $ 473,433
------------
</TABLE>
See accompanying notes to consolidated financial statements.
D-94
<PAGE> 330
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced TechCom, Inc. and Subsidiaries (the "Company") designs, develops
and manufactures a series of high-performance digital microwave/millimeter wave
radio equipment, operating in frequencies of 1.5 GHZ to 38 GHZ utilized in the
telecommunications industry.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned foreign sales corporation, Advanced TechCom
(Barbados), Inc. They also include the accounts of Advanced TechCom de Mexico,
S.A. de C.V. which is owned equally by Advanced TechCom, Inc. and Advanced
TechCom (Barbados), Inc.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of products when the products
are shipped. Sales to overseas customers generally require letters of credit
before the products are shipped.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided when accounts are considered
uncollectible.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of assets are as follows:
<TABLE>
<S> <C>
Machinery, equipment and other........... 3-7 years
Furniture and fixtures................... 3-7 years
Leasehold improvements................... Shorter of lease term or useful life
</TABLE>
FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, accounts payable and
borrowings under the Company's various debt instruments approximate fair value
due to the short-term nature of these instruments.
INCOME TAXES
The Company is taxed as a C Corporation. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
D-95
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ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY RESERVE
The Company sells the majority of its products with a two-year repair or
replacement warranty. The accompanying consolidated financial statements include
an accrual of $586,339 for estimated warranty claims based on the Company's
actual claims and anticipated future claims.
EMPLOYEE STOCK-BASED COMPENSATION
The Company used the intrinsic value-based method of Accounting Principles
Board Opinion ("APB") No. 25 as allowed under Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to
account for all of its employee stock-based compensation plans.
CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's products are sold both directly to customers and through
distributors. The Company's customers consist of domestic and international
wireless and cellular companies, telephone companies, utilities and government
and educational institutions.
Approximately 93% of the Company's net sales are derived from international
customers. A major international systems integrator, who resells worldwide,
accounted for approximately 18% of the Company's 1997 net sales and
approximately 12% of the accounts receivable balance at December 31, 1997. A
second customer accounted for approximately 16% of the Company's 1997 net sales
and approximately 10% of the accounts receivable balance at December 31, 1997.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
of certain assets and liabilities at the balance sheet date. Actual results may
differ from such estimates.
NOTE B -- FUNDING OF OPERATIONS
As shown in the consolidated financial statements for the year ended
December 31, 1997, the Company incurred a net loss of $10,383,249 and had
negative cash flow from operations of $5,108,715. The Company's 1997 loss and
working capital needs were principally funded by proceeds from a private
placement equity offering, issuance of short-term debt and borrowings under a
line of credit.
On December 24, 1997, the Company entered into an agreement and plan of
merger with World Access, Inc. and its wholly owned Subsidiary, Cellular
Infrastructure Supply, Inc. (which is a more fully described below). This merger
was completed in January, 1998. Subsequent to the merger, management made
significant revisions to its plan of operations including personnel cut backs
and expenditure reductions.
NOTE C -- ACCOUNTS RECEIVABLE
At December 31, 1997, the Company evaluated its accounts receivable and
determined that $413,092 of accounts receivable may be uncollectible. Such
amount has been established as an allowance for doubtful accounts at December
31, 1997.
Accounts receivable is comprised of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable......................................... $1,762,925
Less allowance for doubtful accounts........................ 413,092
----------
$1,349,833
----------
</TABLE>
D-96
<PAGE> 332
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INVENTORY
Inventory consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw materials............................................... $3,065,469
Work in process............................................. 1,220,720
Finished goods.............................................. 267,577
----------
Total............................................. $4,553,766
----------
</TABLE>
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Leasehold improvements...................................... $ 60,459
Machinery, equipment and other.............................. 1,990,896
Office furniture and equipment.............................. 881,801
----------
2,933,156
Less accumulated depreciation............................. 1,851,442
----------
Property and equipment -- net............................. $1,081,714
----------
</TABLE>
At December 31, 1997, the capitalized cost of property and equipment under
capital leases was approximately $451,979 and related accumulated depreciation
was approximately $78,807.
NOTE F -- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Revolving line of credit -- World Access, Inc............... $4,450,613
Note payable to stockholder, due on demand, interest rate
12%....................................................... 195,000
Note payable to stockholder, due on demand, interest rate
12%....................................................... 200,000
Note payable to a community development finance corporation,
interest payable monthly at a rate of 10%, collateralized
by a second lien on substantially all
of the Company's assets and personally guaranteed by the
principal stockholder of the Company...................... 124,999
Note payable to a community development organization,
interest payable monthly at a rate of 10%, collateralized
by a second lien on substantially all of the Company's
assets and personally guaranteed by the principal
stockholder of the Company................................ 124,999
Note payable to a business development corporation, payable
in installments through August 2000 with interest computed
at prime plus 2.5% (approximately 9% at December 31,
1997), collateralized by a second lien on substantially
all of the Company's assets and personally guaranteed by
the principal stockholder of the Company.................. 274,982
Premium finance agreement payable in monthly installments of
$1,353 including interest at 10.75%....................... 10,217
</TABLE>
D-97
<PAGE> 333
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital lease obligations:
<TABLE>
<CAPTION>
NON-CANCELABLE LEASE OBLIGATIONS, PAYABLE IN MONTHLY INSTALLMENTS,
COLLATERALIZED BY CERTAIN EQUIPMENT
- -------------------------------------------------------------------
MONTHLY INTEREST
PAYMENT RATE MATURITY DATE
- ------------- -------------- -----------------
<C> <C> <S> <C>
$ 3,172 12.24% March, 1999 57,142
2,428 12.24% May, 1999 47,630
13,416 12.38% April, 1999 262,852
- ------------- ------------- ----------------- ---------
5,748,434
Less current portion.................... 5,675,021
---------
$ 73,413
---------
</TABLE>
Maturities on long-term debt as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998........................................................ $5,675,021
1999........................................................ 73,413
----------
$5,748,434
----------
</TABLE>
The Company had a revolving bank line of credit up to a maximum of
$2,500,000 which was due on demand and had interest at the bank's prime rate
plus 1/2%. The line was collateralized by substantially all of the Company's
assets. This line of credit required, among other things, minimum levels of
consolidated tangible net worth, maintenance of certain financial ratios and a
minimum base of inventory and accounts receivable. The Company was out of
compliance with such covenants.
In December 1997, World Access, Inc., assumed the bank's position under
such agreement via assignment by the bank.
World Access, Inc. subsequently increased the line of credit to $5,000,000
and waived compliance with certain covenants.
World Access, Inc. also repaid certain notes payable by the Company to the
bank in the amount of $117,344 which was applied against the line of credit
extended to the Company.
Subsequent to December 31, 1997, all of the notes payable except the line
of credit, the premium finance agreement and the capital lease obligations were
refinanced by the Company by requesting funds from World Access, Inc. for such
purpose. World Access, Inc. formally merged the Company into its wholly owned
subsidiary in 1998. As such debts were in substance, refinanced in 1998, they
are included in current liabilities.
NOTE G -- INCOME TAXES
Deferred income taxes are provided for temporary differences in the
recognition of certain income and expense items for financial reporting and
income tax purposes. Such temporary differences relate primarily to depreciation
methods, inventory allowances, the recognition of certain liabilities for
financial statement purposes that can not be recognized for tax purposes until
later periods and the difference in the recognition of the tax effects of
operating losses for financial reporting and income tax purposes.
D-98
<PAGE> 334
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company had a net deferred tax asset of
approximately $7,437,000 which consisted of the following:
<TABLE>
<S> <C>
State research and development credits...................... $ 654,223
Federal research and development credits.................... 361,202
State investment tax credits................................ 21,837
Inventory................................................... 34,114
Warranty.................................................... 222,220
Accruals.................................................... 450,824
Depreciation................................................ 189,500
Operating loss carry forwards............................... 5,503,080
-----------
7,437,000
Valuation allowance......................................... (7,437,000)
-----------
Net deferred taxes.......................................... $ --
-----------
</TABLE>
A valuation allowance for the full amount has been recognized to fully
offset this asset as the Company will not be able to utilize the future benefit.
As of December 31, 1997, the Company had net operating losses of
approximately $14,520,000.
NOTE H -- STOCKHOLDER'S EQUITY
STOCK --
The Company has authorized the issuance of the following stock as of
December 31, 1997:
<TABLE>
<S> <C> <C>
Common stock................................................ $.10 par value 25,000,000 shares
Preferred stock-designated*................................. $.10 par value 15,000,000 shares
Preferred stock-undesignated................................ $.10 par value 5,000,000 shares
</TABLE>
- ---------------
* Series A preferred stock
The preferred stock has voting rights similar to common stock and equal to
the number of whole shares of common into which the preferred is convertible.
The preferred stock also has preference on liquidation over common stock and on
the payment of dividends. The Series A preferred stock shall be convertible,
without the payment of any additional consideration by the holder, at any time
at the option of the holder, at a conversion rate, subject to adjustment, of one
share of common for each share of preferred.
Each share of Series A preferred stock shall automatically be converted
into common stock at the then effective applicable conversion rate upon the
closing of a public offering with gross proceeds of not less than $15 million or
upon the affirmative vote of the majority of the preferred stockholders.
NOTE I -- OPTIONS
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan initially permitted the grant of options to purchase up to
1,200,000 shares of the Company's common stock at a price at least equal to the
fair market value of the stock, determined by the Board, on the date of grant
for incentive stock options and at prices determined by the Board in its sole
discretion for nonqualified options. On September 6, 1996, the Board and
stockholders approved an increase in the shares available for grants to
1,650,000.
During the fourth quarter of 1996, the Company repriced all options to
reflect the then fair market value of the Company's common stock. The repricing
provided each option holder the right to exchange their existing stock options
for new incentive stock options (the "new options" to purchase an identical
number of
D-99
<PAGE> 335
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock at an exercise price of $.26 per share. The new options
vest according to the original vesting schedule but with a six-month delay, or
in 16 equal quarterly installments beginning three months before the original
vesting date. The options are exercisable for 10 years from the original date of
grant.
At December 31, 1997, there were 824,250 options available for grant under
the 1995 Plan.
Stock Exchanged for Services -- During 1997, the Company issued 200,000
shares of preferred stock in exchange for services by a Director of the Company.
The value of the services provided amounting to $200,000 for 1997 has been
charged to operations.
A summary of all stock option activity for the year ended December 31, 1997
is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
--------------------
SHARES PER SHARE
-------- ---------
<S> <C> <C>
Outstanding at December 31, 1996....................... 821,861 $.26
Options granted........................................ 215,200
Options terminated..................................... (42,730) .26
Options exercised...................................... (168,581) .26
-------- ----
Outstanding at December 31, 1997....................... 825,750 .26
-------- ----
Options exercisable at December 31, 1997............... 463,430 $.26
-------- ----
</TABLE>
The weighted average grant date fair value for options granted in 1997 was
approximately $.31.
The following table sets forth information regarding stock options
outstanding at December 31, 1997 under the Stock Option Plans as described
above:
<TABLE>
<CAPTION>
WEIGHTED
RANGE WEIGHTED WEIGHTED AVERAGE EXERCISE
NUMBER OF OF AVERAGE AVERAGE NUMBER PRICE FOR
OPTIONS EXERCISE EXERCISE REMAINING CURRENTLY CURRENTLY
OUTSTANDING PRICE PRICE LIFE EXERCISABLE EXERCISABLE
- ----------- -------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
825,750 $0.26 $0.26 7.6 years 463,430 $0.26
</TABLE>
PRO FORMA DISCLOSURES
As described in Note 1, the Company applies the intrinsic value method of
APB No. 25 and related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its stock option plan.
Had compensation cost been determined based on the fair value at the grant dates
for awards under the plan consistent with the method of SFAS No. 123, the
Company's net loss for the year ended December 31, 1997 would have been
approximately $10,449,961.
For purposes of pro forma disclosures, the fair value of the options
granted under the Company's stock options plans during 1997 was estimated on the
date of grant using the Black-Scholes option pricing mode. Key assumptions used
to apply this pricing model are as follows:
<TABLE>
<S> <C>
Risk-free interest rate.................................... 6.50%
Expected life of option grants............................. 5 years
</TABLE>
The pro-forma disclosures, as required by SFAS No. 123, only include the
effects of options granted in 1997.
NOTE J -- EMPLOYEE BENEFIT PLAN
In 1994, the Company established a 401(k) retirement plan for substantially
all employees. Employees eligible to participate in the plan must be age 21. The
Company does not contribute to the plan.
D-100
<PAGE> 336
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- LEASES
The Company leases its present facilities in Wilmington, Massachusetts,
under a five-year lease expiring in November 2000. Future minimum lease payments
under noncancelable operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
- ----------- ------
<S> <C>
1998........................................................ $ 351,996
1999........................................................ 368,000
2000........................................................ 384,000
----------
Total............................................. $1,103,996
----------
</TABLE>
The Company is also responsible for real estate taxes and other operating
expenses associated with the property lease. Rent expense under all operating
leases for the year ended December 31, 1997 was approximately $631,000.
NOTE L -- CONTINGENCIES
The Company has been named as a defendant in a suit filed by a successor to
a former vendor. The vendor claims it is owed $1,000,000 from the Company and
has asserted breach of contract and other claims. The Company has counter
claimed for breach of contract and other causes of action. The Company's
recorded liability at December 31, 1997 was approximately $480,564. The ultimate
outcome of this claim cannot be predicted, however, management estimates that
the Company's possible loss that may be incurred will not exceed the amounts
recorded.
NOTE M -- SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES
<TABLE>
<S> <C>
Cash flow information --
Cash paid for interest.................................... $ 292,679
Cash paid for taxes....................................... --
Non-cash investing and financing activities............... --
Debt refinanced by:
World Access, Inc. line of credit......................... $2,315,516
Capital lease obligations................................. 283,933
Other --
Interest expensed......................................... $ 394,653
</TABLE>
NOTE N -- LETTER OF CREDIT
The Company is contingently liable under a letter of credit arrangement
with a bank for $140,000 which is being used as security for the operating lease
on its facilities. The letter of credit is secured by a $140,000 certificate of
deposit (included in cash in the accompanying consolidated balance sheet).
NOTE O -- CONCENTRATION OF CREDIT RISK
The Company maintains certain of its main operating accounts in a single
financial institution. At times throughout the year, the Company may maintain
balances in such accounts in excess of the FDIC insured limits. The excess at
December 31, 1997 was $270,855.
D-101
<PAGE> 337
ADVANCED TECHCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- FORGIVENESS OF STOCK SUBSCRIPTION RECEIVABLE
The Company's Board of Directors authorized the forgiveness of the stock
subscription receivable from the Company's principal stockholder in 1997.
NOTE Q -- PURCHASE COMMITMENTS
The Company has entered into numerous agreements for the purchase of
inventory. In connection with such agreements, the Company has recorded
estimated losses of $561,500 in the accompanying consolidated financial
statements for the future purchase of inventory that they no longer expect to
use and other reasons.
NOTE R -- SUBSEQUENT EVENTS
In December 1997 the Company entered into an Agreement and Plan of Merger
(the "Plan") with World Access, Inc. and its wholly owned Subsidiary, Cellular
Infrastructure Supply, Inc. Under the Plan, the Company's stockholders would
receive shares of World Access, Inc. stock in return for their shares of the
Company's stock. Outstanding stock options were also to be acquired by World
Access, Inc. The final Plan was executed in January 1998.
(b) Pro Forma Financial Information. The acquisition of ATI has been
accounted for using the purchase method of accounting. Immediately subsequent to
such acquisition, World Access recorded a charge of approximately $5.4 million,
representing the portion of the purchase price for ATI allocated to in-process
research and development. World Access has not yet determined the final
allocation of the purchase price, and accordingly, the amount shown below may
differ from the amounts ultimately determined. The following unaudited pro forma
consolidated balance sheet as of December 31, 1997 reflects the acquisition of
ATI as if it had been completed on December 31, 1997. The following unaudited
pro forma consolidated statement of operations for the year ended December 31,
1997 reflect the acquisition of ATI as if it had been completed as of January 1,
1997.
The pro forma data does not purport to be indicative of the results which
would actually have been reported if the acquisition had occurred on such dates
or which may be reported in the future. The pro forma data should be read in
conjunction with the historical consolidated financial statements of the
Company, the historical consolidated financial statements of ATI and the related
notes thereto.
D-102
<PAGE> 338
WORLD ACCESS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS ATI ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.............................. $118,065 $ 473 $ (299)(A) $118,239
Accounts receivable............................... 20,264 1,350 (75)(A) 21,539
Inventories....................................... 22,427 4,554 (250)(A) 26,731
Other current assets.............................. 10,924 74 -- 10,998
-------- -------- -------- --------
Total Current Assets.................... 171,680 6,451 (624) 177,507
Property and equipment............................ 5,705 1,081 -- 6,786
Investment in affiliate........................... 5,002 -- -- 5,002
Goodwill.......................................... 31,660 -- 850(A) 32,510
Other assets...................................... 11,236 -- 5,000(A) 11,751
(4,485)(D)
-------- -------- -------- --------
Total Assets............................ $225,283 $ 7,532 $ 741 $233,556
-------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt................................... $ 82 $ 5,675 $ (4,485)(D) $ 1,272
Accounts payable.................................. 9,340 1,701 -- 11,041
Accrued payroll and benefits...................... 2,589 -- -- 2,589
Purchase price payable............................ 3,700 -- -- 3,700
Other accrued liabilities......................... 2,219 2,791 200(A) 5,210
-------- -------- -------- --------
Total Current Liabilities............... 17,930 10,167 (4,285) 23,812
Other liabilities................................. 334 -- 334
Long-term debt.................................... 115,264 73 115,337
-------- -------- -------- --------
Total Liabilities....................... 133,528 10,240 (4,285) 139,483
-------- -------- -------- --------
Stockholders' Equity Common and preferred stock... 193 1,160 (1,160)(B) 197
4(A)
Capital in excess of par value.................... 84,163 13,246 (13,246)(B) 91,877
7,714(A)
Retained earnings (deficit)....................... 7,399 (17,114) 17,114(B) 1,999
(5,400)(C)
-------- -------- -------- --------
Total Stockholders' Equity.............. 91,755 (2,708) 5,026 94,073
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity................................ $225,283 $ 7,532 $ 741 $233,556
-------- -------- -------- --------
</TABLE>
D-103
<PAGE> 339
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) The acquisition of ATI will be accounted for under the purchase method
of accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to in-process research
and development projects of ATI will be expensed at the consummation of the
acquisition. The amount of the one-time, non-recurring charge is expected to be
approximately $5.4 million. Since this charge is directly related to the
acquisition and will not recurr, the pro forma statements of operations have
been prepared excluding this charge. World Access has not yet determined the
final allocation of the purchase price, and accordingly, the amount shown below
may differ from the amounts ultimately determined.
The unallocated excess of purchase price over net assets acquired is
determined as follows (amounts in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash purchase of ATI shares................................. 34
Cash paid for options....................................... 265
------
Total cash........................................ 299
Restricted stock issued in exchange for ATI shares.......... 7,593
Restricted stock issued in exchange for options........... 125
------
Total restricted stock............................ 7,718
Fees and expenses related to the Merger..................... 200
------
Total purchase price.............................. 8,217
------
Less:
Historical stockholders' equity............................. 2,708
Adjust assets and liabilities:
Inventories................................................. 250
Accounts receivable......................................... 75
In process R&D costs........................................ (5,400)
Deferred income taxes....................................... (5,000)
------
(7,367)
------
Unallocated excess of purchase price over net assets
acquired.................................................. 850
------
</TABLE>
(B) Eliminate ATI's existing stockholders' equity.
(C) Represents retained earnings adjustment for nonrecurring charge related
to write-off of in-process R&D expenses acquired in the Merger.
(D) Eliminate advances received from the World Access in 1997 for repayment
of ATI bank debt and working capital.
D-104
<PAGE> 340
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS ATI ADJUSTMENTS COMBINED
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products.................................. $71,392 $ 13,687 $ (150)(A) $84,929
Service revenues................................... 21,592 -- -- 21,592
------- -------- ------- -------
Total Sales.............................. 92,984 13,687 (150) 106,521
Cost of products sold.............................. 43,827 13,586 (70)(A) 57,343
Cost of services................................... 17,017 -- -- 17,017
------- -------- ------- -------
Total Cost of Sales...................... 60,844 13,586 (70) 74,360
------- -------- ------- -------
Gross Profit............................. 32,140 101 (80) 32,161
Engineering and development........................ 1,862 4,283 -- 6,145
Selling, general and administrative................ 9,000 6,265 -- 15,265
Amortization of goodwill........................... 1,756 60(B) 1,816
------- -------- ------- -------
Operating Income......................... 19,522 (10,447) (140) 8,935
Interest and other income.......................... 2,503 64 -- 2,567
Interest expense................................... (1,355) (1,355)
------- -------- ------- -------
Income Before Income Taxes............... 20,670 (10,383) (140) 10,147
Income taxes....................................... 7,536 -- (3,800)(C) 3,736
------- -------- ------- -------
Net Income....................................... $13,134 $(10,383) $ 3,660 $ 6,411
------- -------- ------- -------
Net Income Per Common Share:....................... $ .70 $ .34(D)
------- -------
Weighted Average Shares Outstanding:............... 18,707 19,132(D)
------- -------
</TABLE>
Notes to Pro forma Consolidated Statement of Operations for the Year Ended
December 31, 1997
(A) Eliminate intercompany sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
(D) Represents diluted earnings per share, including shares of World Access
common stock issued to the shareholders of ATI, calculated in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128").
D-105
<PAGE> 341
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
<TABLE>
<C> <S> <C>
2.1 -- Agreement and Plan of Merger by and among World Access,
Inc., Cellular Infrastructure Supply, Inc., Advanced
TechCom, Inc. and Ernest H. Lin dated as of December 24,
1997.(*)
10.1 -- Employment Agreement dated as of January 29, 1998 by and
among World Access, Inc., Cellular Infrastructure Supply,
Inc. and Ernest H. Lin.(*)
10.2 -- Escrow Agreement dated as of January 29,1998 by and among
World Access, Inc.,Cellular Infrastructure Supply, Inc.,
Ernest H. Lin, individually and as attorney-in-fact for the
former ATI stockholders, and Cauthen & Feldman, P.A.(*)
10.3 -- Registration Rights Agreement dated as of January 29, 1998
by and among World Access, Inc. and Ernest H. Lin,
individually and as attorney-in-fact for the former ATI
stockholders.(*)
10.4 -- Non-Competition and Non-Disclosure Agreement dated as of
January 29, 1998 by and among World Access, Inc., Cellular
Infrastructure Supply, Inc. and Ernest H. Lin.(*)
23.1 -- Consent of Tedder Grimsley & Company, P.A.
99.1 -- Press Release issued on January 30, 1998.(*)
</TABLE>
- ---------------
(*) Incorporated by reference to the Current Report on Form 8-K filed by World
Access, Inc. on February 13, 1998.
D-106
<PAGE> 342
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of April 13, 1998
D-107
<PAGE> 343
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion of our report dated March 27, 1998 with respect
to the consolidated financial statements of Advanced TechCom, Inc. and
Subsidiaries, which report appears in the Form 8-K/A of World Access, Inc. dated
April 13, 1998. We also consent to incorporation by reference in the
registration statements on Form S-8 (Nos. 33-77918, 33-47752, and 333-17741) and
Form S-3 (No. 333-43497) of World Access, Inc. to the above referenced report
which appears in the aforementioned Form 8-K/A.
/s/ TEDDER GRIMSLEY & COMPANY, P.A.
September 3, 1998
Lakeland, Florida
D-108
<PAGE> 344
APPENDIX E
<PAGE> 345
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K
AS AMENDED ON FEBRUARY 25, 1998
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
DECEMBER 31, 1997
WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD, SUITE 2240, 30326
ATLANTA, GEORGIA
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 346
ITEM 5. OTHER EVENTS
On December 31, 1997, GST Telecommunications, Inc., a federally chartered
Canadian corporation ("GST"), GST USA, Inc., a Delaware corporation ("GST USA"),
and World Access, Inc. ("World Access") entered into a Stock Purchase Agreement
(the "Purchase Agreement"), pursuant to which World Access has agreed to
purchase from GST USA (hereinafter referred to as the "Acquisition") 5,113,712
shares of the common stock of NACT Telecommunications, Inc. ("NACT") held by GST
USA (hereinafter referred to as the "Shares"), representing approximately 63% of
the outstanding shares of NACT common stock, $.01 par value per share (the "NACT
Common Stock"). Pursuant to the Purchase Agreement, World Access will (i) pay to
GST USA at the Closing (as defined in the Purchase Agreement) cash in the amount
of $59,662,956 by wire transfer of immediately available funds to a United
States bank account designated by GST USA, and (ii) deliver to GST USA at the
Closing shares of the common stock, par value $.01 per share, of World Access
(the "World Access Common Stock") with a Fair Market Value (as defined in the
Purchase Agreement) equal to $29,827,004. The foregoing summary of the
Acquisition is qualified in its entirety by reference to the terms of the
Purchase Agreement and the exhibits thereto, which are attached hereto as
Exhibit 2.1.
On December 31, 1997, World Access also entered into a Stock Agreement with
GST USA, a copy of which is attached as Exhibit D to the Purchase Agreement
("Stock Agreement"), pursuant to which GST USA agreed to vote all voting
securities of NACT held by GST USA in favor of approval of the Purchase
Agreement and the Acquisition and against any merger, consolidation, sale of
assets, reorganization or recapitalization of NACT with any party other than
World Access and its affiliates and against any liquidation or winding up of
NACT.
The Closing will take place as soon as possible after satisfaction of
certain conditions thereto, which include, but are not limited to: (i) the
expiration or termination of the required waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended; (ii) the truth and
validity of certain representations and warranties of GST, GST USA and World
Access as of the Closing Date (as defined in the Purchase Agreement); and (iii)
the delivery of certain ancillary documents and agreements contemplated by the
Purchase Agreement. World Access expects to consummate the Acquisition in the
first quarter of 1998.
World Access currently expects to fund the Acquisition through its working
capital.
The following transactions could result in the acquisition by World Access
of additional shares of NACT Common Stock and a change in the present board of
directors of NACT:
(i) Following the Closing, World Access intends promptly to propose a
merger transaction with NACT pursuant to which all of the outstanding
shares of NACT Common Stock not owned by World Access would be exchanged
for shares of World Access Common Stock and NACT would be merged with a
wholly-owned subsidiary of World Access.
(ii) GST USA has agreed to use its best efforts to obtain the written
resignation of all of the directors and officers of NACT as World Access
may specify not less than 10 days prior to the Closing Date, such
resignations to be effective as of the Closing Date. GST USA has also
agreed to take all action necessary to cause the board of directors of
NACT, at and immediately after the Closing, to consist of those directors
specified by World Access.
The consideration to be paid pursuant to the Purchase Agreement was
determined as a result of negotiations between World Access and GST and the
Acquisition was approved by the boards of directors of World Access, GST and
NACT. Prior to the Acquisition, neither World Access nor any of its affiliates,
directors or officers, nor any associate of any such director or officer, had
any relationship with GST, GST USA or NACT.
Between November 12, 1997 and December 9, 1997, World Access purchased an
aggregate of 350,000 shares of NACT Common Stock in open market purchase
transactions (the "Open Market Purchase"). Accordingly, upon completion of the
Acquisition, World Access will own approximately 68% of the outstanding NACT
Common Stock.
E-1
<PAGE> 347
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this Report are
the audited consolidated financial statements of NACT for the years ended
September 30, 1997, 1996 and 1995, which have been audited by the independent
accounting firm of KPMG Peat Marwick, LLP, whose opinion thereon is also
included herein, and the unaudited consolidated financial statements of NACT for
the three months ended December 31, 1997.
E-2
<PAGE> 348
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NACT TELECOMMUNICATIONS, INC.:
Independent Auditors' Report.............................. E-4
Balance Sheets -- September 30, 1997 and 1996............. E-5
Statements of Income Years Ended -- September 30, 1997,
1996 and 1995.......................................... E-6
Statements of Stockholders' Equity Years
Ended -- September 30, 1997, 1996 and 1995............. E-7
Statements of Cash Flows Years Ended -- September 30,
1997, 1996 and 1995.................................... E-8
Notes to Financial Statements Years Ended -- September 30,
1997, 1996, and 1995................................... E-9
NACT TELECOMMUNICATIONS, INC.:
Balance Sheets -- December 31, 1997 (Unaudited) and
September 30, 1997 (audited)........................... E-21
Statements of Income Three Months Ended -- December 31,
1997 and 1996 (Unaudited).............................. E-22
Statements of Cash Flows Three Months Ended -- December
31, 1997 and 1996 (Unaudited).......................... E-23
Notes to Financial Statements Three Months
Ended -- September 30, 1997 and 1996 (Unaudited)....... E-24
</TABLE>
E-3
<PAGE> 349
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders NACT Telecommunications, Inc.:
We have audited the accompanying balance sheets of NACT Telecommunications,
Inc. as listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NACT Telecommunications,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
December 4, 1997
E-4
<PAGE> 350
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 11 and 12)................. $ 9,946,621 $ 694,359
Marketable investment securities (note 3)................... 3,247,296 250,000
Trade accounts receivable, less allowance for doubtful
accounts of $380,819 in 1997 and $100,000 in 1996......... 6,840,958 3,171,180
Notes receivable, less allowance for doubtful notes of
$250,000 in 1997 and $310,000 in 1996 (note 4)............ 3,252,170 561,396
Inventories (note 2)........................................ 2,780,467 2,406,399
Prepaid expenses and other.................................. 197,659 16,338
Deferred tax assets (note 8)................................ 587,199 418,449
----------- -----------
Total current assets.............................. 26,852,370 7,518,121
----------- -----------
Property and equipment, net (note 5)........................ 5,783,157 717,804
Notes receivable, less current installments (note 4)........ 966,868 1,179,750
Inventories-long term (note 2).............................. 225,000 --
Intangibles, net (notes 4 and 6)............................ 5,775,673 5,075,366
Other assets................................................ 152,043 193,709
----------- -----------
$39,755,111 $14,684,750
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,432,922 $ 2,251,800
Accrued expenses............................................ 963,034 266,451
Income taxes payable (note 8)............................... 1,353,371 199,557
Deferred revenue............................................ 466,859 350,439
Current installments of obligation under capital lease...... -- 21,848
Payable to GST USA.......................................... 1,446,891 183,176
----------- -----------
Total current liabilities......................... 5,663,077 3,273,271
Obligation under capital lease, less current installments... -- 58,221
Deferred compensation (note 13)............................. 157,819 157,819
Deferred tax liabilities (note 8)........................... 929,984 985,508
----------- -----------
Total long-term liabilities....................... 1,087,803 1,201,548
----------- -----------
Commitments and contingencies (notes 9, 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued and outstanding in 1997 and 1996...... -- --
Common stock, $.01 par value in 1997 and no par value in
1996
Authorized 25,000,000 and 10,000,000 shares in 1997 and
1996, respectively; issued and outstanding 8,113,712
shares in 1997 and 6,113,712 shares 1996............... 81,137 9,244,847
Additional paid-in-capital.................................. 28,130,161 --
Retained earnings........................................... 4,780,760 965,255
Net unrealized gain (loss) on marketable investment
securities (note 3)....................................... 12,173 (171)
----------- -----------
Total stockholders' equity........................ 33,004,231 10,209,931
----------- -----------
$39,755,111 $14,684,750
=========== ===========
</TABLE>
See accompanying notes to financial statements.
E-5
<PAGE> 351
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales........................................... $21,981,854 $ 9,929,702 $ 7,604,071
Network carrier sales................................... 5,716,406 3,783,445 2,781,761
Wins (note 1(b))........................................ -- 2,571,731 1,097,950
----------- ----------- -----------
Total revenues................................ 27,698,260 16,284,878 11,483,782
----------- ----------- -----------
Cost of goods sold (note 6):
Products................................................ 7,140,914 3,941,529 2,645,646
Network carrier usage (note 13)......................... 5,485,671 3,381,716 2,731,295
Wins (note 1(b))........................................ -- 2,571,731 786,699
Amortization of acquired intangibles.................... 362,424 362,428 442,734
----------- ----------- -----------
Total cost of goods sold...................... 12,989,009 10,257,404 6,606,374
----------- ----------- -----------
Gross profit.................................. 14,709,251 6,027,474 4,877,408
Operating expenses (note 6):
Research and development................................ 2,385,243 1,352,138 1,183,422
Selling and marketing................................... 2,504,420 953,486 924,542
General and administrative.............................. 3,472,069 3,024,361 2,152,898
Amortization of acquired intangibles.................... 573,060 573,058 519,780
----------- ----------- -----------
Total operating expenses...................... 8,934,792 5,903,043 4,780,642
----------- ----------- -----------
Income from operations........................ 5,774,459 124,431 96,766
----------- ----------- -----------
Other income (expense):
Interest income......................................... 543,410 127,043 155,949
Interest expense........................................ (30,456) (14,202) (1,514)
Miscellaneous income.................................... 4,439 34,670 34,635
----------- ----------- -----------
Total other income............................ 517,393 147,511 189,070
----------- ----------- -----------
Income before income taxes.............................. 6,291,852 271,942 285,836
Income taxes (note 8)................................... 2,476,347 78,184 205,517
----------- ----------- -----------
Net income.............................................. $ 3,815,505 $ 193,758 $ 80,319
----------- ----------- -----------
Earnings per common and common equivalent share:
Primary................................................. $ 0.52 $ 0.03 $ 0.01
Fully diluted........................................... $ 0.50 $ 0.03 $ 0.01
</TABLE>
See accompanying notes to financial statements.
E-6
<PAGE> 352
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL MARKETABLE
---------------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ---------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994...... 6,113,712 $6,277,572 -- 691,178 -- 6,968,750
Capital contribution by parent
company (note 1(l))
-- 414,981 -- -- -- 414,981
Addition to capital arising from
push down accounting.............. -- 2,162,384 -- -- -- 2,162,384
Net unrealized gain on marketable
investment securities............. -- -- -- -- 3,605 3,605
Net income.......................... -- -- -- 80,319 -- 80,319
--------- ---------- ---------- --------- ------ ----------
Balances at September 30, 1995...... 6,113,712 8,854,937 -- 771,497 3,605 9,630,039
Capital contribution by parent
company (note 1(l))
-- 389,910 -- -- -- 389,910
Net unrealized loss on marketable
investment securities............. -- -- -- -- (3,776) (3,776)
Net income.......................... -- -- -- 193,758 -- 193,758
--------- ---------- ---------- --------- ------ ----------
Balances at September 30, 1996...... 6,113,712 9,244,847 -- 965,255 (171) 10,209,931
Capital contribution by parent
company (note 1(l))
-- -- 899,799 -- -- 899,799
Issuance of common stock for cash,
net of expenses of $1,933,348..... 2,000,000 20,000 18,046,652 -- -- 18,066,652
Net unrealized gain on marketable
investment securities............. -- -- -- -- 12,344 12,344
Reclass of common stock to
additional paid-in capital
resulting from establishing a par
value on common stock............. -- (9,183,710) 9,183,710 -- -- --
Net income.......................... -- -- -- 3,815,505 -- 3,815,505
--------- ---------- ---------- --------- ------ ----------
Balances at September 30, 1997...... 8,113,712 $ 81,137 28,130,161 4,780,760 12,173 33,004,231
========= ========== ========== ========= ====== ==========
</TABLE>
See accompanying notes to financial statements.
E-7
<PAGE> 353
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 3,815,505 $ 193,758 $ 80,319
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,431,226 1,165,885 1,212,039
Provision for loss on accounts, notes receivable, and
recourse obligation..................................... 1,385,734 942,785 229,342
Loss (gain) on sale of marketable investment securities
and equipment......................................... 45,699 (4,399) (34,635)
Capital contribution by parent company.................. 899,799 389,910 414,981
Provision for loss on inventories....................... 111,000 -- --
Deferred taxes.......................................... (224,274) (374,127) (271,762)
Decrease (increase) in operating assets:
Trade accounts and notes receivable................... (8,374,533) (1,980,342) (2,266,741)
Inventories........................................... (920,068) (2,019,310) 19,873
Prepaid expenses...................................... (181,321) 89,441 (94,484)
Other assets.......................................... 41,666 58,360 (227,882)
Increase (decrease) in operating liabilities:
Accounts payable...................................... (818,878) 888,670 1,210,516
Accrued expenses...................................... 496,583 45,287 148,411
Income taxes payable.................................. 1,153,814 60,578 (208,468)
Deferred revenue and deferred compensation............ 116,420 193,475 180,844
Payable to GST USA.................................... 1,263,715 243,176 --
----------- ---------- -----------
Net cash provided by (used in) operating
activities........................................ 242,087 (106,853) 392,353
----------- ---------- -----------
Cash flows from investing activities:
Purchase of land, plant, and equipment...................... (5,169,888) (304,614) (326,796)
Proceeds from sale of equipment............................. -- -- 34,635
Proceeds from sale of available-for-sale securities......... 250,000 596,836 --
Purchase of available-for-sale securities................... (3,234,952) -- --
Capitalization of software development costs................ (821,568) (419,154) (162,025)
Cash included in transfer of Wins to parent (note 1)........ -- (173,718) --
----------- ---------- -----------
Net cash used in investing activities............... (8,976,408) (300,650) (454,186)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 18,066,652 -- --
Principal payments on capital lease obligations............. (80,069) (19,868) (2,271)
----------- ---------- -----------
Net cash provided by (used in) financing
activities........................................ 17,986,583 (19,868) (2,271)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents........ 9,252,262 (427,371) (64,104)
Cash and cash equivalents at beginning of year.............. 694,359 1,121,730 1,185,834
----------- ---------- -----------
Cash and cash equivalents at end of year.................... $ 9,946,621 $ 694,359 $ 1,121,730
----------- ---------- -----------
Supplemental Schedule of Noncash Investing and Financing
Activities
Reclass of common stock to additional paid-in capital
resulting from establishing a par value on common stock... $ 9,183,170 $ -- $ --
Disposition of fully depreciated asset...................... -- 132,270 --
Repossession of equipment in settlement of accounts and
notes receivable
76,922 45,000 128,936
Property purchased under capitalized leases................. -- -- 102,208
Transfer of inventory to property, plant, and equipment..... 210,000 -- --
Intangibles capitalized as a result of push down............ -- -- 2,162,384
Disposition of equipment.................................... -- 47,366 --
Sale of equipment to Wins on note receivable................ -- 60,000 --
Transfer of notes receivable to other assets (note 4)....... 964,207 -- --
Change in net unrealized gain (loss) on marketable
investment securities
12,344 (171) --
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest.................... $ 30,457 $ 17,707 $ 1,145
Cash paid during the year for income taxes.................. 638,287 -- 263,735
Supplemental Disclosure of the Assets and Liabilities
Transferred to GST (note 1(b))
Cash........................................................ $ -- $ (173,718) $ --
Trade accounts receivable................................... -- (68,705) --
Prepaid expenses............................................ -- (751) --
Property and equipment, net................................. -- (46,020) --
Other assets................................................ -- (14,036) --
Accounts payable............................................ -- 150,898 --
Accrued expenses............................................ -- 152,332 --
</TABLE>
See accompanying notes to financial statements.
E-8
<PAGE> 354
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Description of Business
NACT Telecommunications, Inc. (the "Company") designs, develops and
manufactures advanced telecommunications switching platforms with integrated
applications software and network telemanagement capabilities. The Company's
customers include long distance carriers, prepaid debit (calling) card and
prepaid cellular network operators, international call back/reorigination
providers and other specialty telecommunications service providers.
From September 1993 through September 30, 1995, GST USA, Inc. ("GST USA")
acquired all of the issued and outstanding common stock of the Company. This
acquisition was accomplished through a series of purchases of newly issued
shares and the shares of principal stockholders of the Company. As a result of
these transactions, the Company became a wholly owned subsidiary of GST USA. GST
USA accounted for the acquisition using the purchase method of accounting. The
excess of the purchase price over the fair value of the assets acquired totaled
$6,912,322 and was assigned by GST USA as product support contracts, software
development costs, and goodwill. These amounts are included in the accompanying
balance sheet as intangible assets.
In February 1997, the Company closed an initial public offering (IPO) of
3,000,000 shares of common stock with 2,000,000 sold by the Company and
1,000,000 sold by GST USA. Upon completion of the offering, GST USA ownership
was reduced to approximately 63 percent of the outstanding common stock of the
Company and, as such, GST USA continues to control the Company. In connection
with the IPO, the Company established a par value of $.01 for common stock,
increased the number of common shares authorized to 25,000,000, and authorized
10,000,000, $.01 par value preferred shares.
On September 30, 1997, GST USA announced that it had retained Hambrecht and
Quist LLC to explore alternatives for monetizing its 63 percent interest in the
Company, including a potential sale of some or all of the Company's capital
stock to one or more strategic investors.
(b) Wasatch International Network Services
The 1995 financial statements include the accounts of the Company and its
wholly-owned subsidiary Wasatch International Network Services, Inc. ("Wins"),
which commenced operations in fiscal 1995 and had total assets, revenues, and
net loss of $316,455, $1,097,950 and $2,361, respectively, as of and for the
year ended September 30, 1995. All significant intercompany transactions and
balances were eliminated in consolidation. On October 1, 1995, the Company
transferred ownership and operations of Wins to GST USA in the form of a
dividend at historical cost. From October 1, 1995 through September 30, 1996,
the Company provided carrier services to GST USA for the Wins operation for
which it received $2,571,731. GST USA began providing its own carrier services
for Wins on October 1, 1996.
(c) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of three months or less to be cash
equivalents. Cash equivalents consist of money market accounts of $8,472,637 at
September 30, 1997 and $125,785 at September 30, 1996.
(d) Inventories
Raw materials are valued at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods are stated on the basis of
accumulated manufacturing costs, but not in excess of market (net realizable
E-9
<PAGE> 355
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value). Refurbished inventory is stated at the estimated selling price less
refurbishing costs, selling costs and a normal profit margin. Management
periodically reviews the selling price of the refurbished inventory and records
adjustments to the carrying value, if any, in the period in which they occur.
Long-term inventory consists of component parts held in order to provide
support on existing customer equipment beyond one year.
(e) Notes Receivable
Notes receivable are recorded at the principal amount outstanding, net of
an allowance for doubtful notes. The allowance is an amount that management
believes will be adequate to absorb possible losses based on evaluations of
collectibility and prior loss experience. The evaluation takes into
consideration such factors specific problem loans, past payment history, and
current and anticipated economic conditions that may affect the customers'
ability to pay.
While management uses available information to recognize losses on notes,
changing economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance.
(f) Impaired Notes
Management, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a note is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income thereafter.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method for financial reporting purposes.
Depreciation is based upon the estimated useful lives of individual classes
of assets. The estimated useful lives of the individual classes of assets
are as follows:
<TABLE>
<S> <C>
Building................................................. 35 years
Furniture and equipment.................................. 7-10 years
Computer equipment....................................... 3-7 years
Switch and testing equipment............................. 3-7 years
</TABLE>
(h) Intangibles
Intangibles include goodwill, software development costs, customer lists,
and product support contracts and are being amortized on a straight-line basis
over the estimated useful lives of the respective assets.
(i) Software Development Costs
Software development costs are capitalized upon the establishment of
technological feasibility of the product. Capitalization is discontinued when
the product is available for general release to customers. The Company
capitalized software development costs of $821,568, $419,154, and $162,025 in
1997, 1996, and 1995, respectively.
E-10
<PAGE> 356
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(j) Stock-Based Compensation
Effective October 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt
the fair value based method of accounting for stock options or similar equity
instruments. However, it also allows an entity to continue measuring
compensation cost for stock-based compensation using the intrinsic-value method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma footnote
disclosures required by SFAS 123.
(k) Revenue Recognition and Deferred Revenue
Revenue from product sales is recognized when the product is shipped and
the Company has no significant performance obligations. Revenue from network
carrier sales is recognized as the related service is provided. Deferred revenue
consists of warranty payments billed or received in advance and deposits related
to future product sales. Warranty payments are amortized over the period of the
warranty agreement which is typically one year.
(l) Income Taxes
Through February 26, 1997, the Company was a member of a controlled group
which elected for federal income tax purposes to file a consolidated tax return
with GST USA. In accordance with the tax sharing arrangement with GST USA, the
Company recorded the estimated income tax expense as if the Company filed a tax
return on a separate company basis using the asset and liability method. GST USA
agreed to make a capital contribution to the Company in an amount that
approximates the Company's current federal income tax expense through February
26, 1997 in lieu of an intercompany payment for such taxes. Pursuant to the tax
sharing arrangement between the Company and GST USA, the adjustment recorded to
reconcile the intercompany and equity accounts with regard to differences
between the estimated tax determined at year-end and the final tax amount are
recognized in income tax expense in the period determined.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and deferred
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and deferred 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.
After the IPO on February 26, 1997, GST USA's ownership was reduced to 63
percent. As a result, the entities no longer meet the affiliated group test
defined in Internal Revenue Code Section 1504(a) and the Company will file
stand-alone returns for periods subsequent to February 26, 1997.
(m) Marketable Investment Securities
The Company classifies all of its marketable investment securities as
available-for-sale which are recorded at fair market value. Unrealized holding
gains and losses are excluded from earnings and are reported, net of tax, as a
separate component of stockholders' equity until realized. A decline in the
market value of any available-for-sale security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost basis for the security. Dividend income is recognized when earned. Realized
gains and losses are included in earnings and are derived using the
specific-identification method for securities sold.
E-11
<PAGE> 357
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(n) Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed based on the
weighted-average number of common shares and as appropriate, dilutive common
stock equivalents outstanding during the period. Stock options are considered to
be common stock equivalents. The number of shares used to compute primary
earnings per common and common equivalent share were 7,350,623, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively. The number of shares
used to compute fully-diluted earnings per share reflect additional dilution
related to stock options and warrants using the market price at the end of the
period when higher than the average price for the period. The number of shares
used to compute fully-diluted earnings per share were 7,602,156, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively.
(o) Fair Value Disclosure
At September 30, 1997 and 1996, the book value of the Company's financial
instruments approximates fair value.
(p) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the 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 these estimates.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,065,113 $ 377,734
Work-in-process........................................... 498,525 346,273
Finished goods............................................ 302,829 317,392
Refurbished inventory held for sale....................... 914,000 1,365,000
---------- ----------
$2,780,467 $2,406,399
---------- ----------
Inventory -- long-term.................................... $ 225,000 $ --
========== ==========
</TABLE>
E-12
<PAGE> 358
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) MARKETABLE INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale securities by major
security type and class of security at September 30, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At September 30, 1997:
U.S. government securities --
Maturing in one year or less............ $2,237,009 10,287 -- 2,247,296
Certificate of deposit --
Maturing in one year or less............ 998,114 1,886 -- 1,000,000
---------- ------ --- ---------
$3,235,123 12,173 -- 3,247,296
---------- ------ --- ---------
At September 30, 1996:
U.S. government securities --
Maturing in one year or less............ $ 250,171 -- 171 250,000
---------- ------ --- ---------
$ 250,171 -- 171 250,000
========== ====== === =========
</TABLE>
(4) NOTES RECEIVABLE
Notes receivable at September 30, 1997 and 1996 include amounts due from
product sales of approximately $4,065,638 and $1,047,500, respectively. Interest
rates on the notes range from 9 percent to 14 percent with lives ranging from
six months to five years.
The Company's recorded investment in notes receivable for which an
impairment has been recognized was $137,032 and $928,210, and the related
allowance for doubtful accounts was $137,032 and $310,000 at September 30, 1997
and 1996, respectively. The average recorded investment in impaired notes
receivable during 1997 and 1996, was $532,261 and $548,331, respectively. There
was no interest income recognized on impaired notes receivable during 1997 and
1996.
The Company has sold carrier services to Overseas Telecom ("Overseas")
since 1994. Overseas is located in Brazil and provides international call
back/reorigination services to companies and individuals primarily in Brazil and
Eastern Europe. During the year ended September 30, 1996, Overseas became
delinquent on certain of its payments. In fiscal 1997, the Company entered into
a note receivable agreement with Overseas which provided for the repayment of
the noncurrent outstanding amount (approximately $0.93 million) bearing interest
at 12 percent. The note was secured primarily by Overseas' customer lists. In
the fourth quarter of fiscal 1997, the Company exercised its call privileges
under the note and took possession of the underlying collateral -- the customer
lists. There were two separate and distinct customer lists, one from Brazil and
one from Eastern Europe. The customer list related to the Brazilian operations
was sold to Intertoll Communications Network Corp. ("ICN"), an existing customer
of the Company with operations in Argentina and Brazil for $1,000,000 payable in
100 monthly payments of $10,000. The related payments have been discounted at 20
percent with the unpaid amount of approximately $485,000 classified as notes
receivable in the accompanying balance sheet as of September 30, 1997.
The customer list related to the Eastern European operations was recorded
on the Company's books at the lower of fair value or cost. Fair value was
estimated by an independent third party appraiser using generally accepted
valuation standards. Accordingly, a customer list of approximately $964,000 has
been recorded as an intangible asset and will be amortized over a three-year
period.
E-13
<PAGE> 359
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Land...................................................... $ 563,309 $ --
Building.................................................. 3,626,891 --
Furniture and equipment................................... 279,908 212,525
Computer equipment........................................ 784,521 440,827
Switch and testing equipment.............................. 1,082,217 492,052
---------- ---------
6,336,846 1,145,404
Less accumulated depreciation and amortization............ 553,689 427,600
---------- ---------
$5,783,157 $ 717,804
---------- ---------
</TABLE>
(6) INTANGIBLES
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZATION
1997 1996 PERIOD
---------- ---------- ------------
<S> <C> <C> <C>
Goodwill......................................... $2,863,766 $2,863,766 20 years
Software development costs....................... 3,305,127 2,483,559 3-5 years
Product support contracts........................ 2,146,176 2,146,176 5 years
Customer list.................................... 964,207 -- 3 years
---------- ----------
9,279,276 7,493,501
Less amortization................................ 3,503,603 2,418,135
---------- ----------
$5,775,673 $5,075,366
========== ==========
</TABLE>
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value of the asset to its undiscounted estimated future cash flows.
Amortization expense relating to these assets was $1,085,468, $978,813, and
$962,514 for 1997, 1996, and 1995, respectively. Of these amounts, $512,409,
$405,755, and $442,734, for 1997, 1996, and 1995, respectively, was recorded as
a component of cost of goods sold.
(7) STOCK OPTIONS
In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan") which was approved by the board of directors and GST USA. The Company has
reserved 1,250,000 shares for issuance under the 1996 Plan, of which options to
purchase 935,250 shares of common stock at an exercise price of $9.35 per share
were granted. All options granted during the year expire on November 25, 2001.
The Company may grant incentive stock options and nonqualified stock options to
employees, officers, directors, independent contractors, and consultants. The
exercise price of options must be greater than or equal to the estimated fair
market value of the stock at the date of grant. The board of directors or the
compensation committee thereof determines which eligible individuals are granted
options, terms of the options, exercise price, number of shares subject to the
option, vesting and exercisability. The 1996 Plan expires on November 25, 2006.
E-14
<PAGE> 360
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997
----------------------------
WEIGHTED-AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at beginning of year.................... --
Plus options granted........................................ 935,250 $9.35
Less options exercised...................................... --
------- -----
Options outstanding at end of year.......................... 935,250 $9.35
------- -----
Options exercisable at end of year.......................... 289,688 $9.35
Weighted-average fair value of options granted during the
year...................................................... $3.03
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ---------------------------------
---------------------------------------------------- NUMBER
NUMBER WEIGHTED-AVERAGE EXERCISABLE AT
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE SEPTEMBER WEIGHTED-AVERAGE
SEPTEMBER 30, CONTRACTUAL EXERCISE 30, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------------ -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$9.35................. 935,250 4.15 9.35 289,688 9.35
</TABLE>
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net earnings and
earnings per share would have been changed to the following pro forma amount:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Net income.................................................. As reported $3,815,505
2,784,147
Pro Forma
Primary earnings per share:................................. As reported $ 0.52
0.38
Pro Forma
Fully-diluted earnings per share............................ As reported $ 0.50
0.37
Pro Forma
</TABLE>
Pro forma net earnings reflects only options granted in fiscal 1997.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net earnings as shown above may
not be representative of the effects on reported net earnings for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1997: risk-free interest rate of 6.0
percent; expected dividend yield of 0 percent; expected life of 3.4 years; and
expected volatility of 82 percent.
E-15
<PAGE> 361
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Year ended September 30, 1997:
U.S. federal..................................... $2,336,145 $(194,210) $2,141,935
State............................................ 364,476 (30,064) 334,412
---------- --------- ----------
$2,700,621 $(224,274) $2,476,347
---------- --------- ----------
Year ended September 30, 1996:
U.S. federal..................................... $ 389,910 $(322,207) $ 67,703
State............................................ 60,358 (49,877) 10,481
---------- --------- ----------
$ 450,268 $(372,084) $ 78,184
---------- --------- ----------
Year ended September 30, 1995:
U.S. federal..................................... $ 414,981 $(237,014) $ 177,967
State............................................ 64,239 (36,689) 27,550
---------- --------- ----------
$ 479,220 $(273,703) $ 205,517
========== ========= ==========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense....................... $2,139,230 $ 92,460 $ 97,184
Increase (reduction) in income taxes resulting from:
Amortization of goodwill......................... 48,899 48,899 48,899
State and local income taxes, net of federal
income tax benefit............................. 222,862 2,297 18,183
Meals and entertainment.......................... 5,796 3,631 4,060
Adjustment of tax provision to actual (1)........ -- (70,040) 36,214
Other, net....................................... 59,560 937 977
---------- -------- --------
$2,476,347 $ 78,184 $205,517
========== ======== ========
</TABLE>
- ---------------
(1) Represents management's adjustment to the Company's income tax liability
based on a current assessment of its related obligations.
E-16
<PAGE> 362
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net current deferred tax assets:
Accounts and notes receivable principally due to
allowance for doubtful accounts...................... $ 309,895 $ 152,930
Unearned product warranty.............................. 125,422 47,074
Accrued vacation payable............................... 55,386 37,327
Unearned sales deposits................................ -- 83,640
Inventory principally due to uniform capitalization and
reserves
96,496 97,478
--------- ---------
Total gross deferred tax assets................... 587,199 418,449
--------- ---------
Net long-term deferred tax liabilities:
Deferred compensation.................................. 58,866 58,866
Plant and equipment, principally due to differences in
depreciation and capitalized interest
(77,155) (87,588)
Capitalized software................................... (450,716) (200,619)
Push down intangibles.................................. (460,979) (756,269)
Unrealized (gain) loss on investments.................. -- 102
--------- ---------
Total gross deferred tax liabilities.............. (929,984) (985,508)
--------- ---------
Net deferred tax liability........................ $(342,785) $(567,059)
--------- ---------
</TABLE>
Management believes that existing taxable temporary differences will more
likely than not reverse within the applicable carryforward periods to allow
future realization of existing deferred tax assets.
(9) LEASES
The Company has operating leases for office furnishings, various office
equipment and two sales offices. Future minimum lease payments as of September
30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
-------------------------
<S> <C>
1998...................................................... $194,378
1999...................................................... 180,240
2000...................................................... 180,240
2001...................................................... 180,240
2002...................................................... 160,454
--------
Total minimum lease payments................................ $895,552
========
</TABLE>
These leases generally require the Company to pay all executory costs such
as maintenance and insurance. Rental expenses for all operating leases for 1997,
1996, and 1995, were $123,462, $100,299, and $116,944, respectively.
(10) PROFIT SHARING PLANS
The Company sponsors a defined contribution 401(k) plan (the "Plan") for
employees who have completed one year of service and attained the age of 21.
Participants may defer up to 15 percent of eligible compensation. The Company,
at its discretion, may match 50 percent of participant contributions up to 7.5
E-17
<PAGE> 363
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
percent of participant compensation. Employer contributions made to the Plan
were $88,361, $59,881, and $51,863, for the years ended September 30, 1997,
1996, and 1995, respectively.
Through September 30, 1996, the Company established a discretionary profit
sharing program for full time employees who had completed one full year of
employment. Under the plan, 10 percent of the increase in profits based on the
Company's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the discretion
of the board of directors. Contributions to the program were $132,450 and
$171,483 for the years ended September 30, 1996 and 1995, respectively. The
program was terminated on September 30, 1996.
(11) MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND NETWORK CARRIER SALES
Sales to individual customers exceeding 10 percent of total revenues or
total trade accounts and notes receivable as of and for the years ended
September 30, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
------------------
CUSTOMER 1997 1996 1995
- -------- ---- ---- ----
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 8% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 16%
Intertoll Communications Network Corp....................... 9 12% 8
Overseas Telecom............................................ 5 13 7
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NOTES AND
ACCOUNTS RECEIVABLE
---------------------
CUSTOMER 1997 1996 1995
- -------- ----- ----- -----
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 15% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 7%
Intertoll Communications Network Corp....................... 4 6% 7
Overseas Telecom............................................ 3 22 7
</TABLE>
The Company's customers consist of business entities geographically
dispersed primarily throughout the United States. However, the Company also
sells products and/or services to customers in the United Kingdom, Bosnia,
Serbia, Bulgaria, Saudi Arabia, and Brazil. The Company maintains a security
interest in the telecommunications systems it sells until the related account
balances are paid in full.
The Company had deposits with financial institutions in excess of the
federally insured amount of $100,000 in the amount of $9,691,380 and $467,737
for the years ended September 30, 1997 and 1996, respectively.
Network carrier sales originating from countries outside the United States
aggregated approximately $3,180,000 and $2,105,000 for the years ended September
30, 1997 and 1996, respectively. These sales are payable in U.S. dollars.
(12) COMMITMENTS AND CONTINGENCIES
The Company acted as a guarantor for financing transactions executed under
repurchase agreements with a financial institution for $3,482,182 and $1,035,032
at September 30, 1997 and 1996, respectively. This results from the financial
institution providing lease financing to the Company's customers to enable them
to purchase product from the Company. At September 30, 1997, the Company had
established a reserve of $200,000 for its estimated obligation under the
recourse provisions and maintains a security interest in the equipment financed
under the repurchase agreement. No such reserve was recorded as of September 30,
1996.
E-18
<PAGE> 364
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition to other covenants, the repurchase agreement requires the Company to
maintain an unrestricted cash account of $6,000,000. The Company has also
established a $750,000 revolving line of credit with this same financial
institution. No balances were outstanding under this line of credit at September
30, 1997.
On October 1, 1996, the Company entered into employment agreements with
various employees which specify the individual's salary, benefits, and
restrictions. All agreements expire on September 30, 2001.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc., (collectively,
"Aerotel") filed a patent infringement suit against the Company alleging that
telephone systems manufactured and sold by the Company incorporating prepaid
calling features infringe upon a patent which was issued to Aerotel in November
1987. The complaint further alleges defamation and unfair competition by the
Company and seeks various damages. Aerotel seeks injunctive relief, damages of
$18.7 million for willful infringement of its patent and an order requiring the
Company to publish a written apology to Aerotel. The Company has filed an Answer
and Counterclaim denying patent infringement, defamation or unfair competition
and seeking judgment that the Aerotel patent is invalid and that Aerotel has
misused its patent in violation of antitrust laws. Based on information
currently available, an estimate of potential loss cannot be made. However,
management is of the opinion that there will be no material impact of the
Company's financial position, results of operations or liquidity as a result of
this suit. Accordingly, no provision for loss has been provided in the
accompanying financial statements. An unfavorable decision could have a material
adverse effect on the business, financial condition, and results of operations
of the Company.
In addition to the above, the Company has various legal claims and other
contingent matters, incurred in the normal course of business. Although the
final outcome of such matters cannot be predicted, the Company believes the
ultimate disposition of these matters will not have a material adverse effect on
the Company's financial condition, liquidity, or results of operations.
As of September 30, 1997, the Company had capital expenditure purchase
commitments outstanding of approximately $900,000.
(13) RELATED PARTY TRANSACTIONS
In June 1997, and under contract with the Company, GST Realco, Inc. ("GST
Realco"), a subsidiary of GST USA, completed construction of a 40,000 square
foot office building in Provo, Utah. The Company purchased the land and a
portion of the building construction from GST Realco for $563,309 and
$1,293,072, respectively, and currently occupies the property as its corporate
and manufacturing facility.
During the year ended September 30, 1996, GST USA borrowed $250,000 from
the Company on short-term notes bearing interest at 11 percent. The note was
repaid by September 30, 1996. The Company recorded interest income of $2,602
relating to this note during the year ended September 30, 1996. There were no
borrowings during fiscal 1997.
Also, during the years ended September 30, 1997 and 1996, respectively, the
Company sold $32,788 and $356,000 of application platform switching products and
$-0- and $2,571,731 of wholesale carrier usage to GST USA or subsidiaries and
purchased $4,466,907 and $361,000 of wholesale carrier usage from GST USA.
From April 1996 through May 1997 a member of the Company's board was
compensated by GST USA for services rendered to GST USA and its subsidiaries.
The Company has entered into a Deferred Compensation Trust Agreement (the
Trust) with the chairman of the Company whereby the Company funded the trust in
the amount of $144,000. The principal and related interest thereon are payable
to the chairman based on a defined payment schedule. The Company,
E-19
<PAGE> 365
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at its sole discretion, may at any time make additional contributions to the
Trust. The Trust is subject to claims of the Company's creditors in the event of
the Company's insolvency.
(14) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 establishes a different method of computing earnings per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic
earnings per share and diluted earnings per share. Basic and diluted earnings
per share are expected to be comparable to the currently presented earnings per
share. SFAS 128 is effective for the consolidated financial statements for
interim and annual periods ending after December 15, 1997. Accordingly, the
Company plans to adopt SFAS 128 in the first quarter of its 1998 fiscal year and
at that time all historical earnings per share data presented will be restated
to conform with the provisions of SFAS 128.
In 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information. These statements which are effective for periods beginning
after December 15, 1997, expand or modify disclosures and accordingly, will have
no impact on the Company's reported financial position, results of operations or
cash flows.
E-20
<PAGE> 366
NACT TELECOMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPT. 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................ $ 5,252 $ 9,947
Marketable securities....................................... 7,246 3,247
Accounts receivable, less allowance for doubtful accounts of
$631 in Dec. and $381 in Sept............................. 9,496 6,841
Notes receivable, less allowance for doubtful accounts of
$295 in Dec. and $250 in Sept............................. 4,055 3,252
Inventories................................................. 2,814 2,780
Prepaid expenses and other assets........................... 216 198
Deferred tax asset -- current............................... 817 587
------- -------
Total current assets.............................. 29,896 26,852
Fixed Assets:
Property, plant, and equipment.............................. 6,577 6,337
Less: Accumulated depreciation.............................. (698) (554)
------- -------
Net fixed assets............................................ 5,879 5,783
Notes receivable -- long term............................... 785 967
Inventory -- long term...................................... 225 225
Intangibles................................................. 5,598 5,776
Other Assets................................................ 164 152
------- -------
Total Assets...................................... $42,547 $39,755
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ 1,889 1,433
Accrued expenses............................................ 1,206 963
Current corporate tax liability............................. 1,073 1,353
Deferred Revenue............................................ 790 467
Inter company payable....................................... 1,743 1,447
------- -------
Total current liabilities......................... 6,701 5,663
Long Term Liabilities:
Deferred compensation liability............................. 158 158
Deferred tax liability...................................... 1,252 930
------- -------
Total long-term liabilities....................... 1,410 1,088
Stockholders' Equity:
Common stock, .01 par value................................. 81 81
Additional paid-in-capital.................................. 28,271 28,130
Retained earnings........................................... 6,055 4,781
Unrealized appreciation on marketable securities............ 29 12
------- -------
Total stockholders' equity........................ 34,436 33,004
------- -------
Total liabilities and stockholders' equity........ $42,547 $39,755
------- -------
</TABLE>
See accompanying notes to financial statements.
E-21
<PAGE> 367
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Product sales.......................................... $7,300 $ 4,780
Network carrier sales.................................. 1,387 1,610
------ --------
Total revenues.................................... $8,687 $ 6,390
Cost of goods sold:
Products............................................... $2,158 $ 1,730
Network carrier usage.................................. 1,387 1,558
Amortization of acquired intangibles................... 170 91
------ --------
Total cost of goods sold.......................... $3,715 $ 3,379
------ --------
Gross profit................................................ $4,972 $ 3,011
Operating expenses:
Research and development............................... $ 799 $ 423
Sales and marketing.................................... 767 357
General and administrative............................. 1,362 836
Amortization of acquired intangibles................... 143 143
------ --------
Total operating expenses.......................... $3,071 $ 1,759
------ --------
Income from operations...................................... $1,901 $ 1,252
Other Income, net........................................... $ 223 $ 25
------ --------
Income before income taxes.................................. $2,124 $ 1,277
Income taxes................................................ $ 850 $ 569
------ --------
Net income after taxes...................................... $1,274 $ 708
------ --------
Weighted average common and common equivalent shares
outstanding:
Basic..................................................... 8,122 6,114
Diluted................................................... 8,443 6,114
Earnings per share:
Basic..................................................... $ 0.16 $ 0.12
Diluted................................................... $ 0.15 $ 0.12
</TABLE>
See accompanying notes to financial statements.
E-22
<PAGE> 368
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,274 $ 708
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 498 322
Provision for loss on accounts and notes receivable....... 382 218
Provision for loss on inventory........................... 228
Capital contribution by parent company.................... 497
Deferred taxes............................................ 91 (10)
Decrease (increase) in operating assets:
Trade accounts and notes receivable....................... (3,658) (2,717)
Inventories............................................... (262) (205)
Prepaid expenses and other assets......................... (19) (167)
Increase (decrease) in operating liabilities:
Accounts payable.......................................... 456 (1,088)
Accrued expenses.......................................... 243 54
Income taxes payable...................................... (280) 71
Payable to GST USA........................................ 296 2,110
Deferred revenue and deferred compensation................ 324 4
------- -------
Net cash provided by (used in) operating
activities...................................... (427) (203)
Cash flows from investing activities:
Purchase of land, property, plant and equipment........... (240) (63)
Proceeds from sale of marketable securities............... 1,121 250
Purchase of marketable securities......................... (5,103)
Capitalization of software development costs.............. (187) (125)
------- -------
Net cash provided by (used in) investing
activities...................................... (4,409) (142)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 141
Principle payments of capital lease obligations........... (1)
------- -------
Net cash provided by (used in) financing activities....... 141 (1)
Net (decrease) increase in cash........................... (4,695) (142)
Cash at beginning of period............................... 9,947 694
------- -------
Cash at end of period..................................... 5,252 552
------- -------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.................................................. 0 2
Income taxes.............................................. $ 1,038 0
</TABLE>
See accompanying notes to financial statements.
E-23
<PAGE> 369
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by NACT
Telecommunications, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 audited financial
statements filed on form 10K with the SEC in December 1997. In the opinion of
management, the condensed financial statements included herein reflect all
adjustments necessary to present fairly the financial position of the Company as
of December 31, 1997 and September 30, 1997, and the results of its operations
and cash flows for the three month periods ended December 31, 1997 and 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 established a different method of computing earnings per share than these
same computations under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company is required to present both basic earnings
per share and diluted earnings per share. SFAS 128 is effective for both interim
and annual periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128 in the first quarter of fiscal 1998.
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the three month periods ended December 31,
1997 and 1996. Diluted earnings per share for the three month periods ended
December 31, 1997 and 1996 is computed considering the dilutive effect of stock
options, and is not materially different from the basic earnings per share
calculations.
3. STOCK PLAN
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was approved
by the Board of Directors and sole stockholder of the Company on November 26,
1996. The purpose of the Stock Option Plan is to create additional incentives
for the Company's employees, directors and others who perform substantial
services to the Company by providing an opportunity to purchase shares of the
Common Stock pursuant to the exercise of options granted under the Stock Option
Plan. The Company may grant options that qualify as incentive stock options
under Section 422 of the Internal Revenue Code, and non-qualified stock options.
Incentive stock options may be granted to employees (including officers and
directors who are employees). Non-qualified stock options may be granted to
employees, officers, directors, independent contractors and consultants of the
Company. As of December 31, 1997, 1,250,000 shares were reserved for issuance
under the Stock Option Plan and options to purchase 1,039,065 shares of Common
Stock were outstanding.
Options become exercisable at such times and in such installments as the
Board of Directors or Compensation Committee provides. The Stock Option Plan
will terminate on November 25, 2006, unless earlier terminated by the Board of
Directors.
E-24
<PAGE> 370
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Raw materials............................................... $1,577 $1,065
Work-in-process............................................. 587 498
Finished goods.............................................. 189 303
Refurbished inventory held for sale......................... 461 914
------ ------
2,814 2,780
------ ------
Inventory -- long term...................................... $ 225 $ 225
------ ------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Furniture and equipment..................................... $ 311 $ 280
Computer equipment.......................................... 900 785
Switch and testing equipment................................ 1,165 1,082
Land........................................................ 563 563
Building.................................................... 3,638 3,627
------ ------
6,577 6,337
Less accumulated depreciation and amortization.............. 698 554
------ ------
$5,879 $5,783
------ ------
</TABLE>
- ---------------
(b) Pro Forma Financial Information. The Acquisition and Open Market
Purchase has been accounted for using the purchase method of accounting. In
connection with the Acquisition, World Access expects to record a charge of
approximately $43.5 million, representing the portion of the purchase price
allocated to in-process research and development. The following unaudited pro
forma consolidated balance sheet as of September 30, 1997 reflects the
Acquisition (together with the Open Market Purchase) as if it had been completed
on September 30, 1997. The following unaudited pro forma consolidated statement
of operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 reflect the Acquisition (together with the Open Market
Purchase) as if it had been completed as of January 1, 1996.
The pro forma data does not purport to be indicative of the results which
would actually have been reported if the Acquisition (together with the Open
Market Purchase) had occurred on such dates or which may be reported in the
future. The pro forma data should be read in conjunction with the historical
consolidated financial statements of World Access, the historical consolidated
financial statements of NACT, and the related notes thereto.
E-25
<PAGE> 371
WORLD ACCESS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(A)
PRO FORMA (B) PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.......................... $127,357 $ 9,947 $ (64,665)(C) $ 72,639
Marketable investment securities.............. 3,247 -- 3,247
Accounts receivable........................... 22,446 6,841 29,287
Inventories................................... 18,899 2,780 (1,300)(C) 20,379
Other current assets.......................... 7,050 4,037 (300)(C) 10,787
-------- ------- ----------- --------
Total Current Assets................ 175,752 26,852 (66,265) 136,339
Property and equipment........................ 4,287 5,783 -- 10,070
Intangible assets............................. 29,370 5,776 (3,676)(C) 66,929
35,459(C)
Technology licenses........................... 904 -- -- 904
Debt issuance costs........................... 4,091 -- -- 4,091
Other assets.................................. 2,035 1,344 -- 3,379
-------- ------- ----------- --------
Total Assets........................ $216,439 $39,755 $ (34,482) $221,712
-------- ------- ----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............................... $ 66 $ -- $ -- $ 66
Accounts payable.............................. 6,902 1,433 -- 8,335
Accrued payroll and benefits.................. 3,073 -- -- 3,073
CIS purchase price payable.................... 3,500 -- -- 3,500
Other accrued liabilities..................... 1,550 4,231 300(C) 6,481
400(C)
-------- ------- ----------- --------
Total Current Liabilities........... 15,091 5,664 700 21,455
Long-term debt................................ 115,301 -- -- 115,301
Other long-term liabilities................... -- 1,087 -- 1,087
-------- ------- ----------- --------
Total Liabilities................... 130,392 6,751 700 137,843
-------- ------- ----------- --------
Minority interest in subsidiary............... 10,560(C) 10,560
Stockholders' Equity
Common and preferred stock.................... 192 81 (81)(D) 206
14(C)
Capital in excess of par value................ 81,178 28,130 (28,130)(D) 111,914
30,736(C)
Retained earnings (deficit)................... 4,677 4,781 (4,781)(D) (38,823)
(43,500)(E)
Net unrealized gain on marketable investment
securities.................................. 12 12
-------- ------- ----------- --------
Total Stockholders' Equity.......... 86,047 33,004 (45,742) 73,309
-------- ------- ----------- --------
Total Liabilities and Stockholders'
Equity............................ $216,439 $39,755 $ (34,482) $221,712
-------- ------- ----------- --------
</TABLE>
E-26
<PAGE> 372
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the pro forma balance sheet for World Access, Inc. as
presented in the Report on Form 10Q for the Three Months Ended September 30,
1997. The pro forma balance sheet presented above includes the effects of the
sale of $115 million 4.5% convertible subordinated notes which was completed in
October 1997.
(B) Represents the historical balance sheet of NACT Telecommunications,
Inc. as of September 30, 1997.
(C) The Acquisition will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to in-process research
and development projects of NACT will be expensed at the consummation of the
Acquisition. The amount of the one-time non-recurring charge is expected to be
approximately $43.5 million. Since this charge is directly related to the
Acquisition and will not recurring, the pro forma statements of operations have
been prepared excluding this charge. The Company has not yet determined the
final allocation of the purchase price, and accordingly, the amount shown below
may differ from the amounts ultimately determined.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price of 68% interest in NACT:
Cash purchase of GST shares............................... 59,663
Open market purchase of NACT shares....................... 5,002
------
Total cash........................................ 64,665
Restricted stock issued in exchange for GST's shares...... 20,900
"In the money" value of WAXS options issued in exchange
for NACT options....................................... 9,850
------
Total stock....................................... 30,750
Fees and expenses related to the Merger................... 300
-------
Total purchase price.............................. 95,715
-------
Allocation:
Historical stockholders' equity........................... (32,992)
Minority interest in subsidiary........................... 10,560
Adjust assets and liabilities:
Inventories............................................ 1,300
Intangibles............................................ 3,676
In process R&D costs................................... (43,500)
Notes receivable....................................... 300
Reserve for recourse leases............................ 400
-------
(60,256)
-------
Unallocated excess of purchase price over net assets
acquired.................................................. 35,459
-------
</TABLE>
(D) Eliminate existing stockholders' equity.
(E) Represents retained earnings adjustment for nonrecurring charge related
to write-off of in-process R&D expenses acquired.
E-27
<PAGE> 373
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ ---- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products........................... $56,099 $17,202 $ -- $ 73,301
Service revenues............................ 15,622 4,106 -- 19,728
------- ------- ---------- ----------
Total Sales....................... 71,721 21,308 -- 93,029
Cost of products sold....................... 33,811 5,411 -- 39,222
Cost of services............................ 12,832 4,199 (175)(A) 16,856
------- ------- ---------- ----------
Total Cost of Sales............... 46,643 9,610 (175) 56,078
------- ------- ---------- ----------
Gross Profit...................... 25,078 11,698 175 36,951
Engineering and development................. 1,350 1,962 -- 3,312
Selling, general and administrative......... 6,860 4,784 -- 11,644
Amortization of goodwill.................... 1,210 430 (275)(A) 3,165
1,800(B)
------- ------- ---------- ----------
Operating Income.................. 15,658 4,522 (1,350) 18,830
Interest and other income................... 835 523 -- 1,358
Interest and other expense.................. (95) (30) (125)
Minority interest in net income of
subsidiary................................ (1,085)(C) (1,085)
------- ------- ---------- ----------
Income Before Income Taxes........ 16,398 5,015 (2,435) 18,978
Income taxes................................ 5,986 1,907 170(D) 8,063
------- ------- ---------- ----------
Net Income........................ $10,412 $ 3,108 $ (2,605) $ 10,915
------- ------- ---------- ----------
Net Income Per Common Share:...... $ .55 $ .52(E)
------- ----------
Weighted Average Shares Outstanding:........ 19,076 21,063(E)
------- ----------
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(A) Eliminate amortization of certain previously acquired intangibiles of
NACT.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Record the 32% minority interest in net income of NACT including
applicable pro forma adjustments.
(D) Adjust tax provision for the pro forma adjustments.
(E) Represents fully diluted earnings per share, including shares of
Company common stock issued to GST and common stock equivalents related to stock
options issued in exchange for NACT options.
E-28
<PAGE> 374
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 1996
DECEMBER 31, 1996 SEPTEMBER 30, 1996 PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
----------------- ------------------ ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products..................... $34,411 $ 9,930 $ -- $44,341
Service revenues...................... 16,589 6,355 (2,572)(A) 20,372
------- ------- ------- -------
Total Sales................. 51,000 16,285 (2,572) 64,713
Cost of products sold................. 21,485 3,942 -- 25,427
Cost of services...................... 14,520 6,316 (230)(B) 18,034
(2,572)(A)
------- ------- ------- -------
Total Cost of Sales......... 36,005 10,258 (2,802) 43,461
------- ------- ------- -------
Gross Profit................ 14,995 6,027 230 21,252
Engineering and development........... 892 1,352 -- 2,244
Selling, general and administrative... 6,211 3,978 -- 10,189
Amortization of goodwill.............. 534 573 (365)(B) 3,142
2,400(C)
------- ------- ------- -------
Operating Income............ 7,358 124 (1,805) 5,677
Interest and other income............. 485 162 -- 647
Interest and other expense............ (319) (14) (333)
Minority interest in net income of
subsidiary.......................... (252)(D) (252)
------- ------- ------- -------
Income Before Income
Taxes..................... 7,524 272 (2,057) 5,739
Income taxes.......................... 745 78 175(E) 998
------- ------- ------- -------
Net Income.................. 6,779 $ 194 $(2,232) 4,741
------- ------- ------- -------
Net Income Per Common
Share..................... $ .46 $ .30(F)
------- -------
Weighted Average Shares
Outstanding:........................ 14,424 15,854(F)
------- -------
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR 1996
(A) Eliminate nonrecurring NACT Wins revenue and associated cost of sales.
See note 1(b) to the audited financial statements.
(B) Eliminate amortization of certain acquired intangibles.
(C) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(D) Record the 32% minority interest in net income of NACT including
applicable pro forma adjustments.
(E) Adjust tax provision for the pro forma adjustments.
(F) Represents fully diluted earnings per share, including shares of
Company common stock issued to GST.
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "EDGAR."
<TABLE>
<C> <C> <S>
2.1 -- Stock Purchase Agreement among World Access, Inc. GST USA,
Inc. and GST Telecommunications, Inc. dated December 31,
1997, with exhibits thereto.
23.1 -- Consent of KPMG Peat Marwick LLP.
99.1 -- Press Release issued on January 2, 1998.
</TABLE>
E-29
<PAGE> 375
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of February 25, 1998
E-30
<PAGE> 376
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
WORLD ACCESS, INC.
GST TELECOMMUNICATIONS, INC.
GST USA, INC.
DECEMBER 31, 1997
E-31
<PAGE> 377
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I. PURCHASE AND SALE OF SHARES..................................... E-38
Section 1.1. Purchase and Sale of Shares................................. E-38
Section 1.2. Purchase Price.............................................. E-38
Section 1.3. Option of Seller............................................ E-38
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLER AND GST............... E-39
Section 2.1. Corporate Existence......................................... E-39
Section 2.2. Authorization; Validity..................................... E-39
Section 2.3. No Breach of Statute or Contract............................ E-39
Section 2.4. Subsidiaries................................................ E-40
Section 2.5. Ownership of Shares......................................... E-40
Section 2.6. Capitalization; Shares...................................... E-40
Section 2.7. SEC Reports and Financial Statements........................ E-40
Section 2.8. Absence of Undisclosed Liabilities.......................... E-40
Section 2.9. Absence of Certain Changes or Events........................ E-41
Section 2.10. Proprietary Rights.......................................... E-41
Section 2.11. Litigation.................................................. E-42
Section 2.12. Contracts and Commitments................................... E-42
Section 2.13. Compliance with Laws; Environmental Matters................. E-43
Section 2.14. Taxes....................................................... E-43
Section 2.15. Employees................................................... E-44
Section 2.16. Company Employee Benefit Plans.............................. E-44
Section 2.17. Brokers..................................................... E-46
Section 2.18. Closing Date Effect......................................... E-46
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER....................... E-46
Section 3.1. Corporate Existence......................................... E-46
Section 3.2. Authorization; Validity..................................... E-47
Section 3.3. No Breach of Statute or Contract............................ E-47
Section 3.4. Capitalization; Buyer Common Stock.......................... E-47
Section 3.5. SEC Reports and Financial Statements........................ E-47
Section 3.6. Absence of Undisclosed Liabilities.......................... E-48
Section 3.7. Absence of Certain Changes or Events........................ E-48
Section 3.8. Litigation.................................................. E-49
Section 3.9. Compliance with Laws; Environmental Matters................. E-49
Section 3.10. Taxes....................................................... E-49
Section 3.11. Brokers..................................................... E-50
Section 3.12. Closing Date Effect......................................... E-50
ARTICLE IV. COVENANTS...................................................... E-50
Section 4.1. Access to Information....................................... E-50
Section 4.2. Agreement to Cooperate...................................... E-50
Section 4.3. Directors' and Officers' Indemnification.................... E-51
Section 4.4. Conduct of Business Prior to the Closing Date............... E-52
Section 4.5. Conduct of Buyer's Business Prior to the Closing Date....... E-53
Section 4.6. Acquisition of Minority Interest............................ E-53
Section 4.7. Announcements............................................... E-53
Section 4.8. Exemption from Anti-Takeover Statutes....................... E-53
Section 4.9. Resignations................................................ E-53
Section 4.10. Compliance with Rule 14f-1.................................. E-54
Section 4.11. Satisfaction of Conditions.................................. E-54
Section 4.12. Notice of Developments...................................... E-54
</TABLE>
E-32
<PAGE> 378
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE V. CLOSING......................................................... E-54
Section 5.1. Closing..................................................... E-54
Section 5.2. Deliveries by Seller and GST................................ E-54
Section 5.3. Deliveries by Buyer......................................... E-55
ARTICLE VI. CONDITIONS PRECEDENT TO OBLIGATIONS............................ E-55
Section 6.1. Conditions to Obligations of Buyer.......................... E-55
Section 6.2. Conditions to Obligations of Seller and GST................. E-56
ARTICLE VII. INDEMNIFICATION; AEROTEL LITIGATION........................... E-57
Section 7.1. Survival of Covenants and Agreements........................ E-57
Section 7.2. Survival of Representations and Warranties.................. E-57
Section 7.3. Indemnification............................................. E-57
Section 7.4. Limitations on Indemnification.............................. E-57
Section 7.5. Procedure for Indemnification with Respect to Third-Party E-58
Claims......................................................
Section 7.6. Procedure For Indemnification with Respect to E-58
Non-Third-Party Claims......................................
Section 7.7. Aerotel Litigation.......................................... E-59
Section 7.8. Payment..................................................... E-61
ARTICLE VIII. TERMINATION.................................................. E-61
Section 8.1. Termination by Buyer........................................ E-61
Section 8.2. Termination by Seller and GST............................... E-61
Section 8.3. Termination by Any Party.................................... E-61
Section 8.4. Termination by Mutual Consent............................... E-61
Section 8.5. Effect of Termination....................................... E-61
Section 8.6. Specific Performance........................................ E-61
ARTICLE IX. MISCELLANEOUS PROVISIONS....................................... E-62
Section 9.1. Notices..................................................... E-62
Section 9.2. Entire Agreement............................................ E-62
Section 9.3. Binding Effect; Assignment.................................. E-62
Section 9.4. Captions.................................................... E-62
Section 9.5. Expenses of Transaction..................................... E-62
Section 9.6. Waiver; Consent............................................. E-63
Section 9.7. No Third Party Beneficiaries................................ E-63
Section 9.8. Counterparts................................................ E-63
Section 9.9. Gender...................................................... E-63
Section 9.10. Governing Law............................................... E-63
Section 9.11. Knowledge................................................... E-63
Section 9.12. Incorporation of Exhibits and Schedules..................... E-63
</TABLE>
E-33
<PAGE> 379
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Aerotel Contest Notice...................................... 7.7(d)
Aerotel Damages............................................. 7.7(c)
Affiliate................................................... 2.17
Antitrust Division.......................................... 4.4(b)
Business.................................................... Recitals
Buyer....................................................... Introductory Paragraph
Buyer Common Stock.......................................... 1.2(b)
Buyer Material Adverse Effect............................... 3.1
Buyer Representatives....................................... 4.3(a)
Buyer SEC Reports........................................... 3.5
Closing..................................................... 5.1
Closing Date................................................ 5.1
Code........................................................ 2.16(b)
Common Stock................................................ Recitals
Company..................................................... Recitals
Company Benefit Plan........................................ 2.16(a)
Company ERISA Affiliate..................................... 2.16(b)
Company Intellectual Property Rights........................ 2.10
Company SEC Reports......................................... 2.7
Contest Notice.............................................. 7.6
Contracts................................................... 2.12
Damages..................................................... 7.3
Determination Date.......................................... 7.7(c)
Environmental Laws.......................................... 2.13
ERISA....................................................... 2.16(a)
Exchange Act................................................ 2.7
Fair Market Value........................................... 1.2(b)
FTC......................................................... 4.4(b)
401 Plan.................................................... 2.16(f)
Governmental Authority...................................... 2.11
GST......................................................... Introductory Paragraph
Hazardous Substance......................................... 2.13
HSR Act..................................................... 2.2
Indemnifiable Claims........................................ 7.3(a) and (b)
Indemnification Agreement................................... 5.2(h)
Indemnification Notice...................................... 7.5
Indemnified Party........................................... 7.4(b)
Indemnifying Party.......................................... 7.4(b)
Intellectual Property Rights................................ 2.10
M&M......................................................... 7.7(a)
Material Adverse Effect..................................... 2.1
Minority Interest........................................... 4.6
NACT Claim.................................................. 4.3(a)
NACT Indemnified Parties.................................... 4.5(a)
Non-Competition Agreement................................... 5.2(i)
Non-Disclosure Agreement.................................... 4.3
Non-Third Party Claim.......................................
Indemnification Notice...................................... 7.6
Payment Shares.............................................. 3.4
</TABLE>
E-34
<PAGE> 380
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Post Determination Date Period.............................. 7.7(c)
Proceedings................................................. 2.11
Purchase Price.............................................. 1.2
Registration Rights Agreement............................... 5.2(g)
SEC......................................................... 2.7
Securities Act.............................................. 2.7
Seller...................................................... Introductory Paragraph
Seller Option............................................... 1.3
Seller Representatives...................................... 4.3
Shares...................................................... Recitals
Third Party Intellectual Property Rights.................... 2.10
</TABLE>
E-35
<PAGE> 381
INDEX TO EXHIBITS AND ANNEXES
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
A Registration Rights Agreement
B Indemnification Agreement
C Noncompetition and Non-Disclosure Agreement
D Stock Agreement
</TABLE>
E-36
<PAGE> 382
INDEX TO SCHEDULES
<TABLE>
<S> <C>
SELLER
2.1. List of Jurisdictions in Which the Company is Qualified to
Do Business
2.3 Effects under Statute or Contract
2.6. Agreements, Etc. with Respect to Common Stock
2.9 Absence of Certain Changes or Events
2.10 Intellectual Property Rights
2.11 Litigation
2.12. Contracts and Commitments
2.13 Compliance with Laws; Hazardous Substances
2.14. Taxes
2.16. Benefit Plans
2.17. Brokers
BUYER
3.1. List of Jurisdictions in Which Buyer is Qualified to Do
Business
3.4. Agreements, Etc. with Respect to Buyer Common Stock
3.7. Absence of Certain Changes or Events
3.8. Litigation
3.9. Compliance with Laws; Hazardous Substances
3.10. Taxes
3.11. Brokers
</TABLE>
E-37
<PAGE> 383
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, dated December 31, 1997, is by and among World Access,
Inc., a Delaware corporation ("Buyer"), GST Telecommunications, Inc., a
federally chartered Canadian corporation ("GST"), and GST USA, Inc., a Delaware
corporation ("Seller").
WITNESSETH:
WHEREAS, NACT Telecommunications, Inc., a Delaware corporation (the
"Company"), is engaged in the business (the "Business") of providing advanced
telecommunications switching platforms with integrated applications software and
network telecommunications capabilities; and
WHEREAS, Seller is a wholly-owned subsidiary of GST and is the record and
beneficial owner of 5,113,712 shares (the "Shares") of the issued and
outstanding common stock, $.01 par value per share (the "Common Stock"), of the
Company; and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, the Shares upon the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained, each of Buyer and Seller agrees as follows:
ARTICLE I.
PURCHASE AND SALE OF SHARES
SECTION 1.1. Purchase and Sale of Shares. Upon the terms and subject to
the conditions set forth in this Agreement, on the Closing Date (as hereinafter
defined), Seller shall sell, convey, assign, transfer and deliver to Buyer, and
Buyer shall purchase from Seller, all right, title and interest in and to the
Shares for an amount equal to the Purchase Price (as hereinafter defined). On
the Closing Date, Seller shall deliver to Buyer a certificate or certificates
representing the Shares, duly endorsed in blank or accompanied by a stock power
executed in blank.
SECTION 1.2. Purchase Price. The purchase price for the Shares (the
"Purchase Price") shall be $89,489,960. The Purchase Price shall be payable as
follows:
(a) $59,662,956 shall be paid on the Closing Date by wire transfer of
immediately available funds to a United States bank account of Seller
specified in writing to Buyer not later than two days prior to the Closing
Date; and
(b) the remainder of the Purchase Price shall be paid by delivery on
the Closing Date of shares (the "Payment Shares"), of Buyer's Common Stock,
$.01 par value per share (the "Buyer Common Stock"), with a Fair Market
Value (as hereinafter defined) of $29,827,004. For the purposes of this
Agreement, Fair Market Value shall mean the average of the closing sales
prices of Buyer Common Stock on the Nasdaq National Market for the 20
consecutive trading days next preceding the day on which a public
announcement of the sale of the Shares is made.
SECTION 1.3. Option of Seller. Anything in this Agreement to the contrary
notwithstanding, Seller shall have the option (the "Seller Option"), exercisable
at any time prior to 11:00 p.m., Eastern Standard Time, on January 7, 1998, by
notice to Buyer, to elect to reduce to 4,105,043 the number of shares of Common
Stock to be sold to Buyer pursuant to the Agreement. Any such notice may be
given in a writing delivered to Buyer by facsimile transmission at (404)
262-2598 as to which confirmation of receipt is obtained, or by any other method
specified in Section 9.1 hereof. In the event that the Seller Option is
exercised, the following provisions shall be applicable:
(a) All references in this Agreement to the Shares shall be references
to an aggregate of 4,105,043 shares of Common Stock to be sold by Seller to
Buyer.
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(b) The Purchase Price shall be $71,838,252 and
shall be payable as follows:
(i) $59,662,956 shall be paid on the Closing Date by wire transfer of
immediately available funds as provided in Section 1.2(a) hereof; and
(ii) the remainder of the Purchase Price shall be paid by delivery on
the Closing Date of shares of Buyer Common Stock with a Fair Market Value
of $12,175,296. All references in this Agreement to the Payment Shares
shall be references to an aggregate number of shares of Buyer Common Stock
with such Fair Market Value.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF SELLER AND GST
Each of Seller and GST represents and warrants to Buyer that:
SECTION 2.1. Corporate Existence. Each of Seller, GST and the Company is
a corporation duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and has the corporate power
to own, operate or lease its respective properties and to carry on its business
as now being conducted. Complete and correct copies of the Certificate of
Incorporation of the Company and all amendments thereto, certified by the
Secretary of State of the State of Delaware, and of the ByLaws of the Company
and all amendments thereto, certified by the Secretary of the Company,
heretofore have been delivered to Buyer. As a result of the business conducted
by the Company or the character or location of its properties, the Company is
duly qualified to do business and is in good standing in those states listed on
Schedule 2.1 hereto, which states are the only states where the nature of the
business conducted by it or the character or location of its properties requires
such qualification and where the failure to so qualify would have a material
adverse effect upon the business, operations, assets, properties, rights or
condition (financial or otherwise) or prospects of the Company or upon the
ability of the Company to consummate the transactions contemplated by this
Agreement (a "Material Adverse Effect").
SECTION 2.2. Authorization; Validity. Each of Seller and GST has all
requisite corporate power and authority to enter into this Agreement, to perform
its respective obligations hereunder and to consummate the transactions
contemplated hereby. Except for the filings by Seller and Buyer required by The
Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), no declaration, recording or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of this Agreement by
Seller or GST or the consummation by Seller and GST of the transactions
contemplated hereby, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals which, if not made or obtained,
as the case may be, would not, in the aggregate, have a Material Adverse Effect.
All necessary action has been taken by each of Seller and GST with respect to
the execution, delivery and performance by each of Seller and GST of this
Agreement and the consummation of the transactions contemplated hereby. Assuming
the due execution and delivery of this Agreement by Buyer, this Agreement is a
legal, valid and binding obligation of each of Seller and GST, enforceable
against each of Seller and GST in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws of general application affecting the enforcement of creditors' rights and
general principles of equity (whether applied in a proceeding at law or in
equity).
SECTION 2.3. No Breach of Statute or Contract. Except as set forth on
Schedule 2.3 hereto, neither the execution and delivery of this Agreement, nor
the consummation by each of Seller and GST of the transactions contemplated
hereby, nor compliance by each of Seller and GST with any of the provisions
hereof, will (a) violate or cause a default under any statute (domestic or
foreign), judgment, order, writ, decree, rule or regulation of any court or
governmental authority applicable to Seller, GST or the Company or any of their
respective properties; (b) breach or conflict with any of the terms, provisions
or conditions of the respective Certificates or Articles of Incorporation or
respective By-Laws of Seller, GST or the Company; or (c) violate, conflict with
or breach or require the authorization, consent or approval of any party under
any agreement, contract, mortgage, instrument, indenture or license to which
Seller, GST or the Company is a
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party or by which Seller, GST or the Company is or may be bound, or constitute a
default (in and of itself or with the giving of notice, passage of time or both)
thereunder, or result in the creation or imposition of any encumbrance upon, or
give to any other party or parties any claim, interest or right, including
rights of termination or cancellation in, or with respect to, any of their
respective properties or the Shares.
SECTION 2.4. Subsidiaries. The Company has no subsidiaries or equity
investments in any other corporation, association, partnership, joint venture or
other entity.
SECTION 2.5. Ownership of Shares. Seller is the record and beneficial
owner of the Shares. Seller owns the Shares and the Shares will be transferred
to Buyer, free and clear of all liens, claims, charges and other encumbrances
and restrictions of any kind or nature. Seller has the power, authority and
capacity to transfer and deliver the Shares pursuant to this Agreement and is
not party to or bound by any agreement, arrangement or option restricting in any
manner the sale and transfer of any of the Shares.
SECTION 2.6. Capitalization; Shares. The Company's authorized capital
stock consists of 25,000,000 shares of Common Stock, of which 8,128,797 shares
are issued and outstanding on the date hereof and 10,000,000 shares of preferred
stock, $.01 par value per share, none of which are outstanding on the date
hereof. No shares of the Company's capital stock are owned directly or
indirectly by the Company. All of the Company's issued and outstanding shares of
capital stock are duly authorized and validly issued, fully paid and
non-assessable. Except as set forth on Schedule 2.6 hereto, there are no
subscriptions, options, warrants, calls, rights, agreements, commitments,
understandings, restrictions or arrangements of any kind relating to the
issuance, sale or transfer by the Company of any of its capital stock or
relating to the sale or transfer of the Shares, including, without limitation,
any rights of conversion or exchange under any outstanding securities or other
instruments. There are no voting trusts or other agreements or understandings of
any kind with respect to the Shares.
SECTION 2.7. SEC Reports and Financial Statements. The Company has timely
filed with the Securities and Exchange Commission (the "SEC"), and has
heretofore made available to Buyer true and complete copies of, all forms,
reports, schedules, statements and other documents required to be filed by it
under the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such
documents have been amended or supplemented since the time of their filing and,
in the case of registration statements and proxy statements, on the dates of
effectiveness and the dates of mailing, respectively, collectively, the "Company
SEC Reports"). At the time of filing, the Company SEC Reports (including any
financial statements or schedules included therein) (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (b) complied in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act, as the case may be. The audited consolidated financial statements
and unaudited interim consolidated financial statements (including the related
notes) of the Company included in the Company SEC Reports have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of its operations and changes in financial
position for the periods then ended, subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments and any other
adjustments described therein (which will not be material individually or in the
aggregate).
SECTION 2.8. Absence of Undisclosed Liabilities. Except as disclosed in
the Company SEC Reports, the Company has no material debts, liabilities or
obligations of any kind, whether accrued, absolute, contingent or other, whether
due or to become due, that would have a Material Adverse Effect.
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SECTION 2.9. Absence of Certain Changes or Events. Except as set forth on
Schedule 2.9 hereto, since June 30, 1997, no event or circumstance has occurred
resulting or reasonably likely to result in a Material Adverse Effect. Without
limiting the generality of the foregoing, since that date there has not been,
with respect to the Company:
(a) Any change in its Business, operations (as now conducted or as
presently proposed to be conducted), assets, properties or rights,
prospects or condition (financial or otherwise), or combination thereof
which reasonably could be expected to result in a Material Adverse Effect;
(b) Other than in the usual and ordinary course of business, any
increase in amounts payable by the Company to or for the benefit of or
committed to be paid by the Company to or for the benefit of any officer,
director, stockholder, consultant, agent or employee of the Company, in any
capacity, or in any benefits granted under any bonus, stock option, profit
sharing, pension, retirement, deferred compensation, insurance, or other
direct or indirect benefit plan with respect to any such person;
(c) Any transaction entered into or carried out other than in the
ordinary and usual course of its business, including without limitation,
any transaction resulting in the incurrence of liabilities or obligations;
(d) Any material change made in the methods of doing business or in
the accounting principles or practices or the method of application of such
principles or practices;
(e) Any mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or with
respect to any of its properties that will not be discharged prior to the
Closing Date except for financing statements filed by personal property
lessors as a matter of notification only;
(f) Except in the ordinary course of business, any sale, lease or
other disposition of, or any agreement to sell, lease or otherwise dispose
of any of its properties, assets or services, individually or in the
aggregate, in excess of $100,000;
(g) Any purchase of or any agreement to purchase capital assets or any
lease or any agreement to lease, as lessee, any capital assets,
individually or in the aggregate, with a purchase price or carrying value
in excess of $100,000;
(h) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to, any material
term, condition or provision of any contract, agreement, license or other
instrument to which the Company is a party, other than any satisfaction by
performance in accordance with the terms thereof in the usual and ordinary
course of its business;
(i) Any declaration of, or dividend or other distribution to the
Company's stockholders, purchase, redemption or reclassification of any of
the Company's capital stock or stock split, stock dividend, exchange or
recapitalization or execution of any agreement in respect of the foregoing;
(j) Any damage, destruction or similar loss, whether or not covered by
insurance, adversely affecting the Business; or
(k) Any commitment by the Company to do any of the foregoing.
SECTION 2.10. Proprietary Rights. Schedule 2.10 sets forth a complete and
accurate list of all patents (including all reissues, reexaminations,
continuations, continuations-in-part and divisions thereof), inventions, trade
secrets, processes, proprietary rights, proprietary knowledge, know-how,
computer software, trademarks, names, service marks, trade names, copyrights,
symbols, logos, franchises and permits of the Company and all applications
therefor, registrations thereof and licenses, sublicenses or agreements in
respect thereof that the Company owns or has the right to use or to which the
Company is a party and all filings, registrations or issuances of any of the
foregoing with or by any federal, state, local or foreign regulatory,
administrative or governmental office or offices (collectively, the
"Intellectual Property Rights"). Except as set forth on Schedule 2.10, the
Company is the sole and exclusive owner of all right, title and interest in and
to all Proprietary Rights free and clear of all liens, claims, charges,
equities, rights of use, encumbrances and
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restrictions whatsoever. Except as disclosed in Schedule 2.10 or as would not
reasonably be expected to have a Material Adverse Effect (a) the Company is not,
nor will it be as a result of the execution and delivery of this Agreement or
the performance of its obligations hereunder, in violation of any license,
sublicense or other agreement to which it is a party and pursuant to which it is
authorized to use any third-party patents, trademarks, service marks or
copyrights (the "Third-Party Intellectual Property Rights"); (b) no claims with
respect to the patents, registered and material unregistered trademarks and
service marks, registered copyrights, trade names and any applications therefor
owned by the Company (the "Company Intellectual Property Rights"), any trade
secret material to the Company, or Third Party Intellectual Property Rights to
the extent arising out of any use, reproduction or distribution of such Third
Party Intellectual Property Rights or through the Company, are currently pending
or, to the knowledge of Seller, are threatened in writing by any person; and (c)
Seller does not know of any valid ground for any bona fide claims (i) to the
effect that the manufacture, sale, licensing or use of any products as now used,
sold or licensed or proposed for use, sale or license by the Company, infringes
on any copyright, patent, trademarks, service mark or trade secrets, copyrights,
patents, technology, know-how or computer software programs and applications
used in the business of the Company as currently conducted or as proposed to be
conducted; (iii) challenging the ownership, validity or effectiveness of any of
the Company Intellectual Property Rights or other trade secret material to the
Company; or (iv) challenging the license or legally enforceable right to use of
the Third Party Intellectual Property Rights by the Company.
SECTION 2.11. Litigation. Schedule 2.11 sets forth a complete and
accurate list as of the date hereof of all claims, actions, suits, proceedings
or, to Seller's knowledge, investigations (collectively, the "Proceedings")
pending or, to Seller's knowledge, threatened against or affecting the Company
or any of the Company's properties or to Seller's knowledge, any of the
Company's officers or directors in their capacities as such, in, before or by
any federal, state, or local or foreign court, governmental agency or other
governmental body (each a "Governmental Authority"). Seller shall update
Schedule 2.11 as of the Closing Date, but any information on such updated
schedule relating to Proceedings arising after the date hereof shall not
constitute a breach of this Section 2.11 unless such Proceedings have had or can
reasonably be expected to have a Material Adverse Effect. Except as set forth on
Schedule 2.11 or as disclosed in the Company SEC Reports, there is no Proceeding
pending or, to the knowledge of Seller, threatened against or affecting the
Company or any of the Company's properties or to Seller's knowledge, any of the
Company's officers or directors in their capacity as such, in, before or by any
Governmental Authority that has had or can reasonably be expected to have a
Material Adverse Effect, nor to Seller's knowledge, has any Governmental
Authority notified the Company prior to the date hereof of any intention to
conduct any investigation with respect to the Company. To Seller's knowledge,
the Company is not subject to or in default with the respect to any judgment,
order, writ, injunction or decree or any governmental restriction.
SECTION 2.12. Contracts and Commitments. Schedule 2.12 lists all personal
property leases, contracts, agreements, contract rights, license agreements,
franchise rights and agreements, policies, purchase and sales orders, quotations
and executory commitments, instruments, third party guaranties,
indemnifications, arrangements, obligations and understandings, whether oral or
written, to which the Company is a party (whether or not legally bound thereby)
(collectively, the "Contracts"), other than purchase and sale orders, quotations
and executory commitments incurred in the ordinary course of business of the
Company, that are currently in effect and that require payments, individually or
in the aggregate, in excess of $100,000. Each of the Contracts is valid and
binding, in full force and effect and enforceable against the Company in
accordance with its provisions. Except as set forth on Schedule 2.12, the
Company has not assigned, mortgaged, pledged, encumbered, or otherwise
hypothecated any of its right, title or interest under any of the Contracts.
Neither the Company nor, to Seller's knowledge, any other party thereto is in
violation of, in default in respect of nor has there occurred an event or
condition which, with the passage of time or giving of notice (or both), would
constitute a material violation or a default of any Contract. No notice has been
received by Seller or the Company claiming any such default by the Company or
indicating the desire or intention of any other party thereto to amend, modify,
rescind or terminate the same.
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SECTION 2.13. Compliance with Laws; Environmental Matters.
(a) For the purposes of this Section 2.13, the following terms shall
have the following meanings:
(i) "Environmental Laws" means the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
ss.ss.9601 et seq., the Toxic Substances Control Act, 15 U.S.C.
ss.ss.2601, et seq., the Resource Conservation and Recovery Act of 1976,
42 U.S.C. ss.ss.6901, et seq., and any other applicable federal, state
or local law or statute, ordinance, order, judgment, rule or regulation
relating to the environment, its pollution or protection.
(ii) "Hazardous Substance" means any hazardous waste, hazardous
substance, contaminant, solid waste or material, toxic substance,
petroleum product, distillate or residue, or pollutant (as those or
similar terms are defined under any Environmental Laws).
(b) The Company is in compliance in all material respects with all
laws, ordinances, regulations and orders applicable to the Business, and
Seller has no notice or actual knowledge of any violations thereof, whether
actual, claimed or alleged, except as disclosed on Schedule 2.13 hereto and
except for those instances of non-compliance or those violations as are not
reasonably likely to have a Material Adverse Effect.
(c) The Company is not the subject of or, to the knowledge of Seller,
being threatened to be the subject of (i) any enforcement proceeding, or
(ii) any investigation, brought in either case under any Environmental Law,
at any time in effect or (iii) any third party claim relating to the
violation of any Environmental Law on or off the properties of the Company.
The Company has not been notified that it must obtain any permits and
licenses or file documents for the operation of its business under any
Environmental Laws. The Company has not been notified of any conditions on
or off its properties that can reasonably be expected to give rise to any
liabilities, known or unknown, under any Environmental Law and that would
reasonably be anticipated to result in a Material Adverse Effect.
(d) Except as disclosed on Schedule 2.13, there are no Hazardous
Substances that, to the knowledge of Seller, the Company has used, stored
or otherwise held in or on any of the facilities of the Company that are
present at or have migrated from the facilities, whether contained in
ambient air, surface water, groundwater, land surface or subsurface strata.
SECTION 2.14. Taxes. Except as set forth on Schedule 2.14:
(a) The Company has duly filed all federal, state, local and foreign
tax returns and tax reports required to have been filed by it prior to the
date hereof and will file, on or before the Closing Date, all such returns
and reports that are required to be filed after the date hereof and on or
before the Closing Date, all such returns and reports are true, correct and
complete in all material respects, none of such returns and reports has
been amended, and all taxes, assessments, fees and other governmental
charges arising under such returns and reports (i) have been fully paid
(or, with respect to any returns or reports filed between the date hereof
and the Closing Date, will be, or (ii) are being contested in good faith by
appropriate proceedings (and are set forth on Schedule 2.14);
(b) Schedule 2.14 sets forth the dates and results of any and all
audits of federal, state, local and foreign tax returns of the Company
performed by federal, state, local or foreign taxing authorities. No
waivers of any applicable statutes of limitations are outstanding. All
deficiencies proposed as a result of any audits have been paid or settled.
There is no pending or threatened federal, state, local or foreign tax
audit of the Company and no agreement with any federal, state, local or
foreign tax authority that may affect the subsequent tax liabilities of the
Company; and
(c) The Company has no material liabilities for taxes other than as
shown on the financial statements included in the Company SEC Reports, and
no federal, state, local or foreign tax authority is now asserting or, to
the knowledge of Seller, threatening to assert any deficiency or assessment
for additional taxes with respect to the Company.
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SECTION 2.15. Employees. To the knowledge of Seller, no executive, key
employee or group thereof plans to terminate employment with the Company during
the six month period following the date hereof. The Company is not a party to or
bound by any collective bargaining agreement, nor has the Company experienced
any strike or material grievance, unfair labor practice or other collective
bargaining dispute within the three year period prior to the date hereof. To the
knowledge of Seller, the Company has not committed any wrongful discharge or
other wrongful act with respect to the employment or termination of any employee
prior to the Closing Date that, individually or in the aggregate, can reasonably
be expected to result in a Material Adverse Effect.
SECTION 2.16. Company Employee Benefit Plans.
(a) For purposes of this Section 2.16, the term Company Benefit Plan means
any plan, program, arrangement, fund, policy, practice or contract which,
through which or under which the Company or a Company ERISA Affiliate (as
hereinafter defined) provides benefits or compensation to or on behalf of
employees or former employees of the Company or a Company ERISA Affiliate (as
hereinafter defined), whether formal or informal, whether or not written,
including but not limited to the following:
(1) Arrangements -- any bonus, incentive compensation, stock option,
deferred compensation, commission, severance pay, golden parachute or other
compensation plan or rabbi trust;
(2) ERISA Plans -- any "employee benefit plan" (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including, but not limited to, any multi-employer plan (as
defined in Section 3(37) and Section 4001(a)(3) of ERISA), defined benefit
plan, profit sharing plan, money purchase pension plan, 401(k) plan,
savings or thrift plan, stock bonus plan, employee stock ownership plan, or
any plan, fund, program, arrangement or practice providing for medical
(including post-retirement medical), hospitalization, accident, sickness,
disability, or life insurance benefits; and
(3) Other Employee Fringe Benefits -- any stock purchase, vacation,
scholarship, day care, prepaid legal services, dependent care, telephone,
automobile, department travel or other fringe benefit plans, programs,
arrangements, contracts or practices.
(b) For purposes of Section 2.16, the term "Company ERISA Affiliate" means
each trade or business (whether or not incorporated) that together with the
Company is treated as a single employer under Section 414(b), (c), (m) or (o) of
the Internal Revenue Code of 1986, as amended (the "Code").
(c) Except as described in the Company SEC Reports or Schedule 2.16 hereto,
the Company does not maintain, nor has it at any time established or maintained,
nor has it at any time been obligated to make, or otherwise made, contributions
to or under or otherwise participated in any Company Benefit Plan.
(d) Except as described in the Company SEC Reports or on Schedule 2.16
hereto, neither the Company nor any Company ERISA Affiliate maintains, nor has
at any time established or maintained nor has at any time been obligated to
make, or made, contributions to or under any multi-employer plan. Except as
described in the Company SEC Reports or on Schedule 2.16 hereto, the Company
does not maintain, nor has it at any time established or maintained, nor has it
at any time been obligated to make, or made contributions to or under (i) any
plan that provides post-retirement medical or health benefits with respect to
employees of the Company; (ii) any organization described in Section 501(s)(9)
or 501(c)(20) of the Code; (iii) any defined benefit pension plan or money
purchase pension plan subject to Title IV of ERISA; or (iv) any plan that
provides retirement benefits in excess of the limitations in Section 401(a)(17),
401(k), 401(m), 402(g) or 415 of the Code. There is no lien upon any property of
the Company or any Company ERISA Affiliate outstanding pursuant to Section
412(n) of the Code in favor of any Company Benefit Plan. No assets of the
Company or any Company ERISA Affiliate have been provided as security for any
Company Benefit Plan pursuant to Section 401(a)(29) of the Code.
(e) The Company has made available to Buyer a true and complete copy of the
following documents, if applicable, with respect to each Company Benefit Plan
identified in the Company SEC Reports and in Schedule 2.16 hereto; (i) all
documents, including any insurance contracts and trust agreements, setting forth
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the terms of the Company Benefit Plan, or if there are no such documents
evidencing the Company Benefit Plan, a full description of the Company Benefit
Plan; (ii) the ERISA summary plan description and any other summary of plan
provisions provided to participants or beneficiaries for each such Company
Benefit Plan; (iii) the annual reports filed for the most recent three plan
years and most recent financial statements or periodic accounting of related
plan assets with respect to each Company Benefit Plan; (iv) the more recent
favorable determination letter, opinion or ruling from the Internal Revenue
Service for each Company Benefit Plan, the assets of which are held in trust, to
the effect that such trust is exempt from federal income tax; and (v) each
opinion or ruling from the Department of Labor or the Pension Benefit Guaranty
Corporation with respect to such Company Benefit Plans.
(f) Except as described in Exhibit 2.16 hereto, each Company Benefit Plan
that is funded through a trust or insurance contract has at all times satisfied
in all material respects, by its terms and its operation, all applicable
requirements for an exemption from federal income taxation under Section 501(a)
of the Code. Neither the Company nor any Company ERISA Affiliate maintains a
Company Benefit Plan that meets the requirements of Section 401(a) of the Code
(each a "401 Plan"). Any determination letter issued by the IRS to the effect
that any such 401 Plan qualifies under Section 401(a) of the Code and that the
related trust is exempt from taxation under Section 501(a) of the Code remains
in effect and has not been revoked. Each such 401 Plan, if any, currently
complies in form in all material respects with the requirements under Section
401(a) of the Code, other than changes required by statutes, regulations and
rulings for which amendments are not required. Each 401 Plan, if any, has been
administered in all material respects according to its terms (except for those
terms which are inconsistent with the changes required by statutes, regulations
and rulings) and in accordance with the requirements of Section 401(a) of the
Code. Each such 401 Plan, if any, has been tested for compliance with, and has
satisfied the requirements of, Section 401(k)(3) and (4)(m)(2) of the Code for
each plan year ending prior to the Closing Date.
(g) Except as described in Schedule 2.16 hereto, each Company Benefit Plan
maintained by the Company or a Company ERISA Affiliate has at all times been
maintained, by its terms and in operation, in accordance with all applicable
laws in all material respects, including (to the extent applicable) Code Section
4980B. There has been no failure to comply with applicable ERISA or other
material requirements concerning the filing of reports, documents and notices
with the Secretary of Labor and Secretary of Treasury or the furnishing of such
documents to participants or beneficiaries that could subject any Company
Benefit Plan, the Company or any Company ERISA Affiliate to any material civil
or any criminal sanction.
(h) There are no actions, audits, suits or claims known to Seller that are
pending or threatened against any Company Benefit Plan, any fiduciary of any of
Company Benefit Plans with respect to the Company Benefit Plans, except claims
for benefits made in the ordinary course of the operation of such plans.
(i) The Company and each Company ERISA Affiliate has made full and timely
payment of all amounts required to be contributed under the terms of each
Company Benefit Plan and applicable law or required to be paid as expenses under
such Company Benefit Plan, and no excise taxes are assessable as a result of any
nondeductible or other contributions made or not made to a Company Benefit Plan.
No event or condition exists with respect to any Company Benefit Plan subject to
Title IV of ERISA that could be deemed a "Reportable Event" (as defined in Title
IV or ERISA) with respect to which the 30 day notice requirement has not been
waived that could result in a material liability to Company, and no condition
exists that would subject Company to a material fine under Section 4071 of
ERISA. The assets of all Company Benefit Plans that are required under
applicable laws to be held in trust are in fact held in trust, and the assets of
each such Company Benefit Plan equal or exceed the liabilities of each such
plan. The liabilities of each other plan are properly and accurately reported in
all material respects on the financial statements and records of the Company.
The assets of each Company Benefit Plan are reported at their fair market value
on the books and records of each plan.
(j) Neither the Company nor any Company ERISA Affiliate is subject to any
material liability, tax or penalty whatsoever to any person whomsoever as a
result of Company's or any Company ERISA Affiliate's engaging in a prohibited
transaction under ERISA or the Code, and Seller has no knowledge of any
circumstances that reasonably might result in any such material liability, tax
or penalty as a result of a breach
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of fiduciary duty under ERISA. The termination of or withdrawal from any Company
Benefit Plan maintained by Company or Company ERISA Affiliate that is subject to
Title IV of ERISA or any other Company Benefit Plan immediately after the
Closing Date will not subject to Company or any Company ERISA Affiliate to any
additional material contribution requirement or to any other material liability,
tax or penalty whatsoever (excluding any liability, tax or penalty attributable
solely to the fact that such termination or withdrawal would violate the
permanency requirement of Section 401(a) of the code or an excise tax under Code
Section 4980). Neither the execution nor the performance of the transactions
contemplated by this Agreement will create, accelerate or increase materially
any obligations under any Company Benefit Plan. Neither the Company nor any
Company ERISA Affiliate has any obligation to any retired or former employee, or
any current employee upon retirement, under any Company Benefit Plan.
(k) From the date of this Agreement to the Closing Date, no amendment shall
be made to any Company Benefit Plan, no commitment shall be made to amend any
Company Benefit Plan and no commitment shall be made to continue any Company
Benefit Plan or to adopt any new Company Benefit Plan for the benefit of any
employees of Company or any Company ERISA Affiliate absent the express written
consent of Buyer.
(l) No payment required to be made to any employee associated with the
Company as a result of the transactions contemplated hereby under any contract
or otherwise will, if made, constitute an "excess parachute payment" within the
meaning of Section 280G of the Code.
(m) Except as described on Schedule 2.16, the consummation of the
transactions contemplated hereby will not accelerate or increase materially
liability under any Company Benefit Plan because of an acceleration or increase
of any of the rights or benefits to which employees of the Company or any
Company ERISA Affiliate may be entitled thereunder.
(n) Except as described on Schedule 2.16, the Company has, on a timely
basis, made all material payments, withholdings and filings of any kind required
of it by, and has otherwise complied in all material respects with, any
applicable law, regulation or administrative order concerning pension, health,
welfare, unemployment, workers' compensation or similar benefits administered by
any governmental, regulatory or public body.
SECTION 2.17. Brokers. Except as disclosed on Schedule 2.17, all
negotiations relative to this Agreement and the transactions contemplated hereby
have been carried on by or on behalf of Seller, GST and the Company in such a
manner as not to give rise to any claim against Buyer, any Affiliate (as such
term is defined in the rules and regulations promulgated under the Securities
Act) thereof, Seller, GST or the Company for a finder's fee, brokerage
commission, advisory fee or other similar payment.
SECTION 2.18. Closing Date Effect. All of the representations and
warranties of Seller and GST are true and correct as of the date hereof and
shall be true and correct on and as of the Closing Date with the same force and
effect as if such representations and warranties were made by Seller and GST to
Buyer on the Closing Date.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and GST that:
SECTION 3.1. Corporate Existence. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Complete and correct copies of the Certificate of Incorporation of Buyer and all
amendments thereto, certified by the Secretary of State of the State of
Delaware, and the By-laws of Buyer, and all amendments thereto, certified by the
Secretary of Buyer, heretofore have been delivered to Seller. As a result of the
business conducted by Buyer or the character or location of its properties,
Buyer is duly qualified to do business and is in good standing in those states
listed on Schedule 3.1 hereto, which are the only states where the nature of the
business conducted by it or the character or location of its properties requires
such qualification and where the failure to so qualify would have a material
adverse effect upon the business, operations, assets, properties, rights or
condition (financial or
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otherwise) or prospects of Buyer or upon the ability of the Buyer to consummate
the transactions contemplated by this Agreement (a "Buyer Material Adverse
Effect").
SECTION 3.2. Authorization; Validity. Buyer has all requisite corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. Except for the
filings by Seller and Buyer required by the HSR Act, no declaration, recording
or registration with, or notice to, or authorization, consent or approval of,
any governmental or regulatory body or authority is necessary for the execution
and delivery of this Agreement by Buyer or the consummation by Buyer of the
transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not made
or obtained, as the case may be, would not, in the aggregate, have a Buyer
Material Adverse Effect. All necessary corporate action has been taken by Buyer
with respect to the execution, delivery and performance by Buyer of this
Agreement and the consummation of the transactions contemplated hereby. Assuming
the due execution and delivery of this Agreement by Seller and GST, this
Agreement is a legal, valid and binding obligation of Buyer, enforceable against
Buyer in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
application affecting the enforcement of creditors' rights and general
principles of equity (whether applied in a proceeding at law or in equity).
SECTION 3.3. No Breach of Statute or Contract. Neither the execution and
delivery of this Agreement, nor the consummation by Buyer of the transactions
contemplated hereby, nor compliance by Buyer with any of the provisions hereof,
will (a) violate or cause a default under any statute (domestic or foreign),
judgment, order, writ, decree, rule or regulation of any court or governmental
authority applicable to Buyer or any of its material properties; (b) breach or
conflict with any of the terms, provisions or conditions of the Certificate of
Incorporation or By-laws of Buyer; or (c) violate, conflict with or breach or
require the authorization, consent or approval of any party under any agreement,
contract, mortgage, instrument, indenture or license to which Buyer is party or
by which Buyer is or may be bound, or constitute a default (in and of itself or
with the giving of notice, passage of time or both) thereunder, or result in the
creation or imposition of any encumbrance upon, or give to any other party or
parties, any claim, interest or right, including rights of termination or
cancellation in, or with respect to any of Buyer's properties.
SECTION 3.4. Capitalization; Buyer Common Stock. Buyer's authorized
capital stock consists of 20,000,000 shares of Buyer Common Stock, of which
19,290,939 shares are issued and outstanding on the date hereof and will be
outstanding on the Closing Date. Except as set forth in Schedule 3.4, there are
no subscriptions, options, warrants, calls, rights, contracts, commitments,
understandings, restrictions or arrangements of any kind relating to the
issuance, sale or transfer by Buyer of its capital stock, including without
limitation, any rights of conversion or exchange under any outstanding
securities or other instruments. The issuance and delivery of the Payment Shares
have been duly and validly authorized by all necessary corporate action on the
part of Buyer and, upon issuance as provided in the Note, will be duly and
validly issued, fully paid and non-assessable. The Payment Shares will be
issued, transferred and delivered to Seller free and clear of any and all liens,
claims, charges, encumbrances, restrictions and agreements of any nature
whatsoever. The Payment Shares will not be issued, transferred, and delivered to
Seller in violation of any preemptive rights, rights of first refusal or other
similar rights.
SECTION 3.5. SEC Reports and Financial Statements. Buyer has timely filed
with the SEC, and has heretofore made available to Seller and GST true and
complete copies of, all forms, reports, schedules, statements and other
documents required to be filed by it under the Securities Act and the Exchange
Act on or after January 1, 1995 (as such documents have been amended or
supplemented since the time of their filing and, in the case of registration
statements and proxy statements, on the dates of effectiveness and the dates of
mailing, respectively, collectively, the "Buyer SEC Reports"). At the time of
filing, the Buyer SEC Reports (including any financial statements or schedules
included therein) (a) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading and (b) complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be. The audited consolidated financial statements and unaudited interim
consolidated financial statements (including the related notes) of Buyer
included in the Buyer SEC Reports have been
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prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects the financial position of Buyer and
its subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein (which will not be
material individually or in the aggregate).
SECTION 3.6. Absence of Undisclosed Liabilities. Except as disclosed in
the Buyer SEC Reports, Buyer has no material debts, liabilities or obligations
of any kind, whether accrued, absolute, contingent or other, whether due or to
become due, that would have a Buyer Material Adverse Effect.
SECTION 3.7. Absence of Certain Changes or Events. Except as set forth on
Schedule 3.7 hereto, since September 30, 1997, no event or circumstance has
occurred resulting or reasonably likely to result in a Buyer Material Adverse
Effect. Without limiting the generality of the foregoing, since that date, there
has not been with respect to Buyer:
(a) Any change in its business, operations (as now conducted or as
presently proposed to be conducted), assets, properties or rights,
prospects or condition (financial or otherwise), or combination thereof
which reasonably could be expected to result in a Buyer Material Adverse
Effect;
(b) Other than in the usual and ordinary course of business, any
increase in amounts payable by Buyer to or for the benefit of or committed
to be paid by Buyer to or for the benefit of any officer, director,
stockholder, consultant, agent or employee of Buyer, in any capacity, or in
any benefits granted under any bonus, stock option, profit sharing,
pension, retirement, deferred compensation, insurance, or other direct or
indirect benefit plan with respect to any such person;
(c) Any transaction entered into or carried out other than in the
ordinary and usual course of its business, including without limitation,
any transaction resulting in the incurrence of liabilities or obligations;
(d) Any material change made in the methods of doing business or in
the accounting principles or practices or the method of application of such
principles or practices;
(e) Any mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or with
respect to any of its properties that will not be discharged prior to the
Closing Date except for financing statements filed by personal property
lessors as a matter of notification only;
(f) Except in the ordinary course of business, any sale, lease or
other disposition of, or any agreement to sell, lease or otherwise dispose
of any of its properties, assets or services, individually or in the
aggregate, in excess of $100,000;
(g) Any purchase of or any agreement to purchase capital assets or any
lease or any agreement to lease, as lessee, any capital assets,
individually or in the aggregate, with a purchase price or carrying value
in excess of $100,000;
(h) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to, any material
term, condition or provision of any contract, agreement, license or other
instrument to which the Company is a party, other than any satisfaction by
performance in accordance with the terms thereof in the usual and ordinary
course of its business;
(i) Any declaration of, or dividend or other distribution to the
Company's shareholders, purchase, redemption or reclassification of any of
the Company's capital stock or stock split, stock dividend, exchange or
recapitalization or execution of any agreement in respect of the foregoing;
(j) Any damage, destruction or similar loss, whether or not covered by
insurance, adversely affecting Buyer's business; or
(k) Any commitment by the Buyer to do any of the foregoing.
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SECTION 3.8. Litigation. Schedule 3.8 sets forth a complete and accurate
list as of the date hereof of all Proceedings pending or, to Buyer's knowledge,
threatened against or affecting the Buyer or any of the Buyer's properties or to
Buyer's knowledge any of Buyer's officers or directors in their capacities as
such, in, before or by any Governmental Authority. Seller shall update Schedule
3.8 as of the Closing Date, but any information on such updated schedule
relating to Proceedings arising after the date hereof shall not constitute a
breach of this Section 3.8 unless such Proceedings have had or can reasonably be
expected to have a Buyer Material Adverse Effect. Except as set forth on
Schedule 3.8 or as disclosed in the Buyer SEC Reports, there is no Proceeding
pending or, to the knowledge of Buyer, threatened against or affecting the Buyer
or any of the Buyer's properties or to Buyer's knowledge any of the Buyer's
officers or directors in their capacity as such, in, before or by any
Governmental Authority that has had or can reasonably be expected to have a
Buyer Material Adverse Effect, nor has any Governmental Authority notified the
Buyer prior to the date hereof of any intention to conduct any investigation
with respect to Buyer. The Buyer is not subject to or in default with the
respect to any judgment, order, writ, injunction or decree or any governmental
restriction.
SECTION 3.9. Compliance with Laws; Environmental Matters.
(a) Buyer is in compliance in all material respects with all laws,
ordinances, regulations and orders applicable to its business and Buyer has no
notice or actual knowledge of any violations thereof, whether actual, claimed or
alleged, except as disclosed on Schedule 3.9 hereto and except for those
instances of non-compliance or those violations as are not reasonably likely to
have a Buyer Material Adverse Effect.
(b) Buyer is not the subject of or, to its knowledge, being threatened to
be the subject of (i) any enforcement proceeding, or (ii) any investigation,
brought in either case under any Environmental Law, at any time in effect or
(iii) any third party claim relating to the violation of any Environmental Law
on or off the properties of Buyer. Buyer has not been notified that it must
obtain any permits and licenses or file documents for the operation of its
business under any Environmental Laws. Buyer has not been notified of any
conditions on or off its properties that can reasonably be expected to give rise
to any Environmental Law and that would result in a Buyer Material Adverse
Effect.
(c) Except as disclosed on Schedule 3.9, there are no Hazardous Substances
that Buyer has used, stored or otherwise held in or on any of the facilities of
Buyer that are present at or have migrated from the facilities, whether
contained in ambient air, surface water, groundwater, land surface or subsurface
strata.
SECTION 3.10. Taxes. Except as set forth on Schedule 3.10:
(a) Buyer and its subsidiaries have duly filed all federal, state, local
and foreign tax returns and tax reports required to be filed by them prior to
the date hereof and will file, on or before the Closing Date, all such returns
and reports which are required to be filed after the date hereof and on or
before the Closing Date, all such returns and reports are true, correct and
complete in all material respects, none of such returns and reports has been
amended, and all taxes, assessments, fees and other governmental charges arising
under such returns and reports (i) have been fully paid (or, with respect to any
returns or reports filed between the date hereof and the Closing Date, will be)
or (ii) are being contested in good faith by appropriate proceedings (and are
set forth on Schedule 3.10);
(b) Schedule 3.10 sets forth the dates and results of any and all audits of
federal, state, local and foreign tax returns of Buyer and its subsidiaries have
performed by federal, state, local or foreign taxing authorities. No waivers of
any applicable statutes of limitations are outstanding. All deficiencies
proposed as a result of any audits have been paid or settled. There is no
pending or threatened federal, state, local or foreign tax audit of Buyer and
its subsidiaries and no agreement with any federal, state, local or foreign tax
authority that may affect the subsequent tax liabilities of the Company; and
(c) Buyer and its subsidiaries have no material liabilities for taxes other
than as shown on the financial statements included in the Buyer SEC Reports, and
no federal, state, local or foreign tax authority is now asserting or, to the
knowledge of Buyer, threatening to assert any deficiency or assessment for
additional taxes with respect to the Company.
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SECTION 3.11. Brokers. Except as disclosed on Schedule 3.11 all
negotiations relative to this Agreement and the transactions contemplated hereby
have been carried on by or on behalf of Buyer in such a manner as not to give
rise to any claim against Buyer, Seller, GST, any Affiliate thereof, or the
Company for a finder's fee, brokerage commission, advisory fee or other similar
payment.
SECTION 3.12. Closing Date Effect. All of the representations and
warranties of Buyer are true and correct as of the date hereof and shall be true
and correct on and as of the Closing Date with the same force and effect as if
such representations and warranties were made by Buyer to Seller and GST on the
Closing Date.
ARTICLE IV.
COVENANTS
SECTION 4.1. Access to Information.
(a) GST and Seller shall cause the Company to afford to Buyer and, on a
need to know basis, its accountants, counsel, financial advisors and other
representatives (the "Buyer Representatives") full access during normal business
hours throughout the period prior to the Closing Date to all of its properties,
books, contracts, commitments and records (including, but not limited to, tax
returns) and, during such period, shall furnish promptly to the Buyer or Buyer
Representatives (i) a copy of each report, schedule and other document filed by
it with the SEC in connection with the transactions contemplated by this
Agreement or that may have a material effect on its businesses, and (ii) such
other information concerning the Company's business as Buyer shall reasonably
request; provided that no investigation pursuant to this Section 4.1 shall amend
or modify any representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the transactions
contemplated hereby. Buyer shall treat, and shall cause the Buyer
Representatives to treat, all such materials and information in accordance with
the terms and conditions of that certain Mutual Non-Disclosure Agreement dated
December , 1997 between Buyer and GST (the "Non-Disclosure Agreement").
(b) Buyer shall afford GST and Seller and, on a need to know basis, their
respective accountants, counsel, financial advisors and other representatives
(the "Seller Representatives") full access during normal business hours
throughout the period prior to the Closing Date to all of the respective
properties, books, contracts, commitments and records (including, but not
limited to, tax returns) of Buyer and its subsidiaries and, during such period,
shall furnish promptly to GST and Seller or the Seller Representatives (i) a
copy of each report, schedule and other document filed by any of them with the
SEC in connection with the transactions contemplated by this Agreement or that
may have a material effect on their respective businesses, and (ii) such other
information concerning Buyer's business as GST and Seller shall reasonably
request; provided that no investigation pursuant to this Section 4.1 shall amend
or modify any representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the transactions
contemplated hereby. Seller and GST shall treat, and shall cause the Seller
Representative to treat, all such materials and information in accordance with
the terms and conditions of the Non-Disclosure Agreement.
SECTION 4.2. Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto shall use all reasonable efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary or appropriate waivers, consents and approvals
and to effect all necessary filings and submissions.
(b) Without limitation of the foregoing, each of Buyer and Seller
undertakes and agrees to file as soon as practicable after the date hereof a
Notification and Report Form under the HSR Act with the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division"). Each of Buyer and Seller shall (i) use its best efforts
to comply as expeditiously as possible with
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all lawful requests of the FTC or the Antitrust Division for additional
information and documents and (ii) not extend any waiting period under the HSR
Act or enter into any agreement with the FTC or the Antitrust Division not to
consummate the transactions contemplated by this Agreement, except with the
prior consent of the other parties hereto.
SECTION 4.3. Directors' and Officers' Indemnification.
(a) Subject to the terms of this Section 4.3, after the Closing Date and
notwithstanding any other provision contained in this Agreement, Buyer shall and
shall cause the Company, to the fullest extent permitted under applicable law,
to jointly and severally indemnify and hold harmless, each director, officer,
employee and agent of the Company who served as such at any time prior to the
Closing Date (each, together with such person's heirs, executors or
administrators, an "NACT Indemnified Party" and collectively, the "NACT
Indemnified Parties") against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative (each an
"NACT Claim"), arising out of, relating to or in connection with any action or
omission occurring prior to the Closing Date (including, without limitation,
acts or omissions in connection with such persons serving as an officer,
director or other fiduciary in any entity if such service was at the request or
for the benefit of the Company) or arising out of or pertaining to the
transactions contemplated by this Agreement; provided, however, that Buyer shall
have no obligation to indemnify any of the NACT Indemnified Parties hereunder
unless such party acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful (the "Conduct Standard").
(b) If any NACT Indemnified Party shall seek indemnification pursuant to
Section 4.3(a), such NACT Indemnified Party shall give prompt notice to Buyer of
an NACT Claim within 10 days after receipt by the NACT Indemnified Party of
notice of any such NACT Claim; provided, however, that the failure to provide
such notice shall not release Buyer or the Company from any of their respective
obligations under this Section 4.3, except to the extent that Buyer or the
Company is materially prejudiced by such failure. The obligations and
liabilities of Buyer and the Company under this Section 4.3 shall be governed by
and contingent upon the following additional terms and conditions: Upon receipt
of notice from an NACT Indemnified Party as provided in this Section 4.3(b),
Buyer shall be entitled to assume and control the defense of the NACT Claim
identified in such notice at its expense and through counsel of its choice
reasonably satisfactory to such NACT Indemnified Party, if it gives notice of
its intention to do so to such NACT Indemnified Party within 10 days after the
receipt of such notice from such NACT Indemnified Party and actually assumes and
controls such defense. The NACT Indemnified Party may, at its election and at
its sole cost and expense, participate in any such defense. Notwithstanding the
foregoing, if there exists a conflict of interest that would make it
inappropriate for the same counsel to represent both the Indemnified Party, on
the one hand, and the Indemnifying Party, on the other hand, in connection with
any Indemnifiable Claim, then the Indemnified Party shall be entitled to retain
its own counsel as is reasonably satisfactory to the Indemnifying Party at the
Indemnifying Party's expense. In the event that such Indemnified Party shall
seek indemnification as provided herein, such Indemnified Party shall make
available to the Indemnifying Party, at its expense, all witnesses, pertinent
records, materials and information in the Indemnified Party's possession or
under the Indemnified Party's control relating thereto as is reasonably required
by the Indemnifying Party.
(c) Any determination required to be made with respect to whether an NACT
Indemnified Party's conduct satisfies the Conduct Standard shall be made by
independent legal counsel acceptable to Buyer, the Company and the NACT
Indemnified Party.
(d) In the event Buyer or the Company or any of their successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions shall be made so that the
successors and assigns of the Buyer or the Company, as the case may be, shall
assume the obligations set forth in this Section 4.3.
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SECTION 4.4. Conduct of Business Prior to the Closing Date.
(a) During the period from the date of this Agreement to the Closing Date,
except as otherwise contemplated by this Agreement or consented to or approved
by Buyer in writing, Seller and GST shall cause the Company (i) to conduct its
business in the usual, regular and ordinary course consistent with past practice
and prudent business principles and (ii) to use its reasonable efforts to
maintain and preserve intact its business organization, employees, goodwill with
customers and advantageous business relationships and to retain the services of
its officers and key employees.
(b) Seller and GST agree that on and or after the date hereof and prior to
the Closing Date, without the consent of Buyer, Seller and GST shall not cause
or otherwise suffer or permit the Company to:
(i) incur or become subject to, or agree to incur or become subject
to, any obligation or liability (absolute or contingent) except current
liabilities incurred, and obligations under contracts entered into, in the
ordinary course of business;
(ii) discharge or satisfy any lien or encumbrance or pay any
obligation or liability (absolute or contingent) other than liabilities
payable in the ordinary course of business;
(iii) mortgage, pledge or subject to lien, charge or any encumbrance,
any of the Company's properties or agree so to do;
(iv) sell or transfer or agree to sell or transfer any of its assets,
properties or services or cancel or agree to cancel any debt or claim,
except in each case in the ordinary course of business;
(v) consent or agree to a waiver of any right of substantial value;
(vi) enter into any transaction other than in the ordinary course of
its business;
(vii) increase the rate of compensation payable or to become payable
by it to any officers, employees or agents of the Company by more than 5%
of the rate being paid to them at October 1, 1997;
(viii) terminate any contract, agreement, license or other instrument
to which it is a party that provides for monthly payments by or to the
Company in excess of $10,000;
(ix) through negotiation or otherwise, make any commitment or incur
any liability or obligation to any labor organization except in the
ordinary course of business consistent with past practice;
(x) make or agree to make any accrual or arrangement for or payment of
bonuses or special compensation of any kind to any officer, employee or
agent;
(xi) terminate any employee of the Company earning in excess of
$25,000 per annum or directly or indirectly pay or make a commitment to pay
any severance or termination pay to any officer, employee or agent except
in the ordinary course of business consistent with past practice;
(xii) introduce any new method of management, operation or accounting
with respect to its business or any of the assets, properties or rights
applicable thereto;
(xiii) offer or extend more favorable prices, discounts or allowances
than were offered or extended regularly on and prior to the date hereof;
(xiv) make capital expenditures or commitments therefor in excess of
$100,000 except for repairs and maintenance in the ordinary course of
business consistent with past practice; or
(xv) authorize or enter into any agreement to do any of the foregoing.
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SECTION 4.5. Conduct of Buyer's Business Prior to the Closing Date. Buyer
agrees that, between the date of this Agreement and the Closing Date, except (a)
for any actions taken by Buyer relating to any other acquisitions or business
combinations or (b) as expressly contemplated by any other provision of this
Agreement, unless Seller shall otherwise agree in writing, (x) the respective
business of Buyer and its subsidiaries shall be conducted only in, and shall not
take any action except in, the ordinary course of business consistent with past
practice. By way of amplification and not limitation, except (a) for any actions
taken by Buyer relating to any other acquisitions or business combinations or
(b) as expressly contemplated by any other provision of this Agreement, neither
Buyer nor its subsidiaries shall, between the date of this Agreement and the
Closing Date, directly or indirectly, do, or agree to do, any of the following
without the prior written consent of Seller, which consent shall not be
unreasonably withheld or delayed:
(i) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except that any subsidiary of Buyer may pay
dividends or make other distributions to Buyer or any other subsidiary of
Buyer;
(ii) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(iii) sell, transfer, license, sublicense or otherwise dispose of any
material assets; or
(iv) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing.
SECTION 4.6. Acquisition of Minority Interest. Except as hereinafter
provided, within 180 days after the Closing Date, subject, however, to
compliance with the provisions of applicable laws, Buyer shall acquire, whether
through tender or exchange offer, merger or otherwise, all of the outstanding
Common Stock not then owned by it (the "Minority Interest") for a per share
purchase price of not less than $17.50, payable in Buyer Common Stock, cash or a
combination thereof. Not later than the time Buyer consummates any such
transaction, it shall obtain (or shall cause the Company to obtain) a written
opinion from a nationally recognized investment banking firm as to the fairness
from a financial point of view of the consideration to be received by the
holders of Common Stock in such transaction. Notwithstanding the foregoing,
Buyer may elect not to acquire the Minority Interest, in which event, during
such 180 day period, provided Seller has exercised the Seller Option, Buyer
shall offer in writing to acquire the remaining shares of Common Stock owned by
Seller for a per share price of not less than $17.50, payable in Buyer Common
Stock, cash or a combination thereof. Within 15 days after receipt of such
offer, Seller shall advise Buyer in writing whether or not it accepts Buyer's
offer, which acceptance will be solely within Seller's discretion. In the event
that Seller exercises the Seller Option, the shares of Buyer Common Stock to be
received by Seller upon acquisition by Buyer of the Minority Interest or upon
acceptance by Seller of Buyer's offer shall be registered in the name of Seller
and/or its designee, any such designation to be made in writing by Seller, and
Seller and/or such designee shall hold and dispose of such shares of Buyer
Common Stock on substantially the same terms and conditions as those provided in
the Registration Rights Agreement (as hereinafter defined). Seller and Buyer
shall execute an agreement containing such terms and conditions at or before the
time of Buyer's acquisition of the Common Stock owned by Seller.
SECTION 4.7. Announcements. None of the parties to this Agreement nor any
of their respective Affiliates shall make any public announcements prior to the
Closing Date or any time thereafter with respect to this Agreement or the
transactions contemplated hereby without the written consent of the other
parties hereto, unless advised by counsel that such disclosure is required by
law (in which event such party shall promptly notify the other parties hereto).
SECTION 4.8. Exemption from Anti-Takeover Statutes. Each of Seller and
GST will use its best efforts to take, and to cause the Company to take, all
steps required to exempt the transactions contemplated by this Agreement from
any applicable state anti-takeover law, including, without limitation, Section
203 of the General Corporate Law of the State of Delaware.
SECTION 4.9. Resignations. Seller (a) shall use its best efforts to
obtain the written resignation of all directors and officers of the Company as
Buyer may specify to Seller in writing not less than 10 days prior
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to the Closing Date, effective as of the Closing Date, and (b) shall take all
action necessary to cause the Board of Directors of the Company, at and
immediately after the Closing, to consist of those directors specified by Buyer
in writing not less than 10 days prior to Closing.
SECTION 4.10. Compliance with Rule 14f-1. Seller shall cause the Company
to comply on a timely basis with Rule 14f-1 promulgated under the Exchange Act.
Buyer shall cooperate in effecting such compliance and shall supply the Company
with all information concerning it and its designees on the Board of Directors
of the Company required to be presented in accordance with such rule.
SECTION 4.11. Satisfaction of Conditions. Each of the parties hereto
shall use its best efforts to fulfill or obtain the fulfillment of all of the
conditions to Closing.
SECTION 4.12. Notice of Developments. Buyer, GST and Seller agree to give
each other prompt written notice in the event its own representations and
warranties are discovered to be untrue as of the time made or in the event such
party determines that such representations and warranties shall be untrue as if
made at and as the Closing Date. No disclosure by Buyer, GST or Seller pursuant
to this Section 4.12, however, shall be deemed to or shall supplement the
schedules hereto or to cure any misrepresentation or breach of warranty;
provided, however, that the delivery of or failure to deliver any notice
pursuant to this Section 4.12 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
ARTICLE V.
CLOSING
SECTION 5.1. Closing. This transaction shall close and all deliveries to
be made at the time of closing (the "Closing") shall take place at 10:00 a.m.,
local time, on the date that is two business days after the date upon which the
last of the conditions set forth in Article VI is satisfied or waived, or on
such other date as may be agreed upon from time to time in writing by Seller and
Buyer (the "Closing Date"). The Closing shall take place at the offices of
Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York.
SECTION 5.2. Deliveries by Seller and GST. On or prior to the Closing
Date, Seller and GST shall deliver to Buyer, duly and properly executed, the
following:
(a) A certificate or certificates representing the Shares, duly
endorsed in blank for transfer or accompanied by separate stock powers duly
executed in blank, with all necessary documentary stamps evidencing the
payment of all applicable transfer taxes.
(b) Resignation letters in accordance with Section 4.10 hereof.
(c) Resolutions of the Board of Directors of each of Seller and GST
authorizing the execution and delivery of this Agreement by each of Seller
and GST and the performance of its obligations hereunder, certified by the
Secretary of each of Seller and GST.
(d) A certificate of the Secretary of State of Delaware dated as of a
recent date as to the good standing of the Company in such state.
(e) A certificate of the Secretary of State of each state listed on
Schedule 2.1, dated as of a recent date as to the good standing of the
Company in each such state.
(f) A Certificate of the President and Secretary of each of Seller and
GST in accordance with Section 6.1(d).
(g) A Registration Rights Agreement to be entered into by and between
Buyer and Seller, in the form attached hereto as Exhibit A (the
"Registration Rights Agreement").
(h) An Indemnification Agreement to be entered into among Buyer,
Seller and GST, in the form attached hereto as Exhibit B (the
"Indemnification Agreement").
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(i) A Noncompetition and Non-Disclosure Agreement to be entered into
among Buyer, Seller and GST, in the form attached hereto as Exhibit C (the
"Noncompetition Agreement").
(j) A Stock Agreement to be entered into by and between Buyer and
Seller, in the form attached hereto as Exhibit D (the "Stock Agreement").
(k) Such other separate instruments or documents that Buyer may
reasonably deem necessary or appropriate in order to consummate the
transactions contemplated by this Agreement including, without limitation,
all regulatory and contractual consents of third parties.
SECTION 5.3. Deliveries by Buyer. On or prior to the Closing Date, Buyer
shall deliver to Seller all duly and properly executed, the following:
(a) Resolutions of the Board of Directors of Buyer authorizing the
execution and delivery of this Agreement by Buyer and the performance of
its obligations hereunder, certified by the Secretary of Buyer.
(b) A certificate of the Secretary of State of Delaware dated as of a
recent date as to the good standing of Buyer in such state.
(c) A certificate of the President and Secretary of Buyer in
accordance with Section 6.2(d).
(d) The sum of $59,662,956 in accordance with Section 1.2 hereof.
(e) The Payment Shares, registered in the name of Seller or its
designee, any such designation to be made by Seller in writing and
delivered to Buyer not later than two days prior to the Closing Date.
(f) The Registration Rights Agreement.
(g) The Indemnification Agreement.
(h) The Noncompetition Agreement.
(i) The Stock Agreement.
(j) Such other separate instruments or documents that Seller may
reasonably deem necessary or appropriate in order to consummate the
transactions contemplated by this Agreement.
ARTICLE VI.
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 6.1. Conditions to Obligations of Buyer. Each and every
obligation of Buyer to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Buyer):
(a) Representations and Warranties. Seller's and GST's representations
and warranties set forth in Article II of this Agreement shall have been
true and correct in all respects when made and shall be true and correct in
all material respects at and as of the Closing Date as if such
representations and warranties were made as of the Closing Date, except for
changes permitted or contemplated by this Agreement and except to the
extent that any representation or a warranty is made as of a specified
date, in which case such representation or warranty shall be true in all
material respects as of such date.
(b) Performance of Agreement. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with
by Seller and GST shall have been fully performed and complied with on or
prior to the Closing Date, including, without limitation, the delivery of
the fully executed instruments and documents in accordance with Section 5.2
hereof.
(c) No Adverse Proceeding. There shall be no pending or threatened
claim, action, litigation or proceeding, judicial or administrative, or
governmental investigation against Buyer, Seller, GST or the
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Company, for the purpose of enjoining or preventing the consummation of
this Agreement, or otherwise claiming that this Agreement or the
consummation hereof is illegal.
(d) Certificate. Seller and GST shall have delivered to Buyer a
certificate, dated the Closing Date, executed by Seller's and GST's
President and Secretary, to the effect that (i) the conditions set forth in
subsections (a) and (b) and, to the best knowledge of such officers, (c),
of this Section 6.1 have been satisfied and (ii) the Certificate of
Incorporation and By-laws of the Company shall have not been amended since
the date upon which certified copies of each had been delivered to Buyer
and remain in full force and effect.
(e) HSR Act Waiting Period. Any applicable waiting period under the
HSR Act shall have expired or been terminated.
(f) No Material Adverse Effect. There shall not have occurred any
event or circumstance resulting or reasonably likely to result in a
Material Adverse Effect.
(g) Billing Arrangements. The firm of Madson & Metcalf shall have
acknowledged in writing the billing arrangements with respect to the
representation of the Company, GST and Seller contemplated by Section 7.7
hereof.
SECTION 6.2. Conditions to Obligations of Seller and GST. Each and every
obligation of Seller and GST to be performed on the Closing Date shall be
subject to the satisfaction as of or before the Closing Date of the following
conditions (unless waived in writing by Seller or GST):
(a) Representations and Warranties. Buyer's representations and
warranties set forth in Article III of this Agreement shall have been true
and correct in all material respects when made and shall be true and
correct in all material respects at and as of the Closing Date as if such
representations and warranties were made as of the Closing Date, except for
changes permitted or contemplated by this Agreement and except to the
extent that any representation or a warranty is made as of a specified
date, in which case such representation or warranty shall be true in all
material respects as of such date.
(b) Performance of Agreement. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with
by Buyer shall have been fully performed and complied with on or prior to
the Closing Date including, without limitation, the delivery and the fully
executed instruments and documents in accordance with Section 5.3 hereof.
(c) No Adverse Proceeding. There shall be no pending or threatened
claim, action, litigation or proceeding, judicial or administrative, or
governmental investigation against Buyer, Seller, GST or the Company, for
the purpose of enjoining or preventing the consummation of this Agreement,
or otherwise claiming that this Agreement or the consummation hereof is
illegal.
(d) Certificate. Buyer shall have delivered to Seller and GST a
certificate, dated the Closing Date, executed by Buyer's President and
Secretary to the effect that (i) the conditions set forth in subsections
(a) and (b) and, to the best knowledge of such officers, (c), of this
Section 6.2 have been satisfied and (ii) the Certificate of Incorporation
and By-laws of Buyer shall have not been amended since the date upon which
certified copies of each had been delivered to Seller and GST and remain in
full force and effect.
(e) HSR Act Waiting Period. Any applicable waiting period under the
HSR Act shall have expired or been terminated.
(f) No Buyer Material Adverse Effect. There shall not have occurred
any event or circumstance resulting or reasonably likely to result in a
Buyer Material Adverse Effect.
(g) Billing Arrangements. The firm of Madson & Metcalf shall have
acknowledged in writing the billing arrangements with respect to the
representation of the Company, GST and Seller contemplated by Section 7.7
hereof.
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ARTICLE VII.
INDEMNIFICATION; AEROTEL LITIGATION
SECTION 7.1. Survival of Covenants and Agreements. Each of the covenants
and agreements contained in this Agreement and in each of the documents and
instruments referred to herein that is intended by its terms to be performed in
whole or in part subsequent to the Closing Date shall survive the execution and
delivery of this Agreement and the Closing.
SECTION 7.2. Survival of Representations and Warranties. Except as
hereinafter provided, none of the representations and warranties contained
herein shall survive the Closing and from and after the Closing Date, no party
hereto or any Affiliate of such party shall have any liability or obligation in
respect thereof. Notwithstanding the foregoing, (a) the representations and
warranties contained in Sections 2.14 and 3.10 hereof shall survive the Closing
until the expiration of the periods of limitations and any extensions thereof
under applicable federal, state and local laws, rules and regulations applicable
to assessment and collection of the tax or taxes to which any such
representation or warranty relates; (b) the representations and warranties
contained in Sections 2.2, 2.5 and 3.2 hereof shall survive until the fifth
anniversary of the Closing Date.
SECTION 7.3. Indemnification.
(a) Subject to the limitations set forth in this Article VII, GST and
Seller jointly and severally indemnify and hold harmless Buyer from and against
any and all losses, liabilities, damages, demands, claims, suits, actions,
judgments or causes of action, assessments, costs and expenses including,
without limitation, interest, penalties, reasonable attorneys' fees, any and all
reasonable expenses incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation (collectively,
"Damages"), asserted against, resulting to, imposed upon, or incurred or
suffered by Buyer, directly or indirectly, as a result of or arising from any
inaccuracy in or breach of the representations and warranties made in Sections
2.2, 2.5 and 2.14 of this Agreement (individually an "Indemnifiable Claim" and
collectively "Indemnifiable Claims" when used in the context of Buyer as the
Indemnified Party (as hereinafter defined)).
(b) Subject to the limitations set forth in this Article VII, Buyer shall
indemnify and hold harmless each of GST and Seller from and against any and all
Damages asserted against, resulting to, imposed upon, or incurred or suffered by
GST or Seller, directly or indirectly, as a result of or arising from any
inaccuracy in or breach of any of the representations and warranties made by
Buyer in Sections 3.2 and 3.10 of this Agreement (individually an "Indemnifiable
Claim" and collectively "Indemnifiable Claims" when used in the context of GST
or Seller as the Indemnified Party).
(c) For purposes of this Article VII, all Damages shall be computed net of
any insurance coverage (from the amount of which coverage there shall be
deducted all costs and expenses, including attorneys' fees, of the Indemnified
Party not reimbursed by such coverage) with respect thereto that reduces the
Damages that would otherwise be sustained; provided, however, that in all cases,
the timing of the receipt or realization of insurance proceeds shall be taken
into account in determining the amount of reduction of Damages.
SECTION 7.4. Limitations on Indemnification. Rights to indemnification
hereunder are subject to the following limitations:
(a) The obligation of indemnity in respect of (i) Sections 2.14 and
3.10 hereof shall terminate on the expiration of the periods of limitations
and any extensions thereof under federal, state and local laws, rules and
regulations applicable to assessment and collection of the tax or taxes
with respect to which indemnification is sought; and (ii) Sections 2.2, 2.5
and 3.2 hereof shall terminate on the fifth anniversary of the Closing
Date.
(b) If, prior to the termination of any obligation to indemnify as
provided for herein, written notice of a claimed breach is given by the
party seeking indemnification including in detail the basis therefor (the
"Indemnified Party") to the party from whom indemnification is sought (the
"Indemnifying Party")
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or a suit or action based upon a claimed breach is commenced against the
Indemnified Party, the Indemnified Party shall not be precluded from
pursuing such claimed breach or suit or action, or from recovering from the
Indemnifying Party (whether through the courts or otherwise) on the claim,
suit or action, by reason of the termination otherwise provided for above.
(c) The right of any party hereto to commence or assert an action,
suit, claim or proceeding for Damages in respect of the breach of a
representation or warranty contained herein shall terminate at the same
time that the obligation of indemnification provided herein with respect to
such breach shall terminate.
SECTION 7.5. Procedure for Indemnification with Respect to Third-Party
Claims. The Indemnified Party shall give the Indemnifying Party prompt written
notice of any third party claim, demand, assessment, suit or proceeding to which
the indemnification set forth in Section 7.3 applies, which notice to be
effective must describe such claim in reasonable detail (the "Indemnification
Notice"). Notwithstanding the foregoing, the Indemnified Party shall not have
any obligation to give any notice of any assertion of liability by a third party
unless such assertion is in writing, and the rights of the Indemnified Party to
be indemnified hereunder in respect of any third party claim shall not be
adversely affected by its failure to give notice pursuant to the foregoing
unless and, if so, only to the extent that, the Indemnifying Party is materially
prejudiced thereby. The Indemnifying Party shall have the right to control the
defense or settlement of any such action subject to the provisions set forth
below, but the Indemnified Party may, at its election, participate in the
defense of any action or proceeding at its sole cost and expense.
Notwithstanding the foregoing, if there exists a conflict of interest that would
make it inappropriate for the same counsel to represent both the Indemnified
Party, on the one hand, and the Indemnifying Party, on the other hand, in
connection with any Indemnifiable Claim, then the Indemnified Party shall be
entitled to retain its own counsel as is reasonably satisfactory to the
Indemnifying Party at the Indemnifying Party's expense. In the event that such
Indemnified Party shall seek indemnification as provided herein, such
Indemnified Party shall make available to the Indemnifying Party, at its
expense, all witnesses, pertinent records, materials and information in the
Indemnified Party's possession or under the Indemnified Party's control relating
thereto as is reasonably required by the Indemnifying Party. Should the
Indemnifying Party fail to defend any such Indemnifiable Claim (except for
failure resulting from the Indemnified Party's failure to timely give notice of
such Indemnifiable claim), then, in addition to any other remedy, the
Indemnified Party may settle or defend such action or proceeding through counsel
of its own choosing and may recover from the Indemnifying Party the amount of
such settlement, demand, or any judgment or decree and all of its costs and
expenses, including reasonable fees and disbursements of counsel. Except as
permitted in the preceding sentence, the Indemnifying Party shall not be liable
for any settlement effected without its written consent, which consent shall not
be unreasonably withheld; provided, however, if such approval is unreasonably
withheld, the liability of the Indemnifying Party shall be limited to the amount
of the proposed compromise or settlement and the amount of the Indemnified
Party's reasonable counsel fees incurred in defending such claim, as permitted
by the preceding sentence, at the time such consent is unreasonably withheld.
Notwithstanding the preceding sentence, the right of the Indemnified Party to
compromise or settle any claim without the prior written consent of the
Indemnifying Party shall only be available if a complete release of the
Indemnifying Party is contemplated to be part of the proposed compromise or
settlement of such third party claim.
SECTION 7.6. Procedure For Indemnification with Respect to Non-Third-Party
Claims. In the event that the Indemnified Party asserts the existence of an
Indemnifiable Claim (but excluding claims resulting from the assertion of
liability by third parties), it shall give prompt written notice to the
Indemnifying Party specifying the nature and amount of the claim asserted (the
"Non-Third Party Claim Indemnification Notice"). If the Indemnifying Party,
within 30 days (or such greater time as may be necessary for the Indemnifying
Party to investigate such Indemnifiable Claim not to exceed 60 days), after
receiving the Non-Third Party Claim Indemnification Notice from the Indemnified
Party, shall not give written notice to the Indemnified Party announcing its
intent to contest such assertion of the Indemnified Party (the "Contest
Notice"), such assertion shall be deemed accepted and the amount of the claim
shall be deemed a valid Indemnifiable Claim. During the time period set forth in
the preceding sentence, the Indemnified Party shall cooperate fully with the
Indemnifying Party in respect of such Indemnifiable Claim. In the event,
however,
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that the Indemnifying Party contests the assertion of a claim by giving a
Contest Notice to the Indemnified Party within such period, then if the parties
hereto, acting in good faith, cannot reach agreement with respect to such claim
within 60 days after such notice was first given to the Indemnifying Party, such
parties may seek any remedy available to them at law or in equity.
SECTION 7.7. Aerotel Litigation. GST, Seller, the Company and others are
parties to the action identified as item 1 in Schedule 2.11 hereto (the "Aerotel
Litigation"). Notwithstanding anything herein to the contrary, the following
provisions shall be applicable with respect to the Aerotel Litigation from and
after the Closing Date:
(a) The firm of Madson & Metcalf ("M&M"), currently counsel to NACT,
shall also become counsel to GST and Seller in the Aerotel Litigation. So
long as the Aerotel Litigation is pending, each of the Company, GST and
Seller shall waive any and all conflicts that may arise in the course of
the representation of each, so that each may continue to be represented by
M&M therein. In connection with the Aerotel Litigation, each of (i) the
Company and (ii) GST and Seller (jointly and severally) shall be
responsible for 50% of all of the reasonable attorneys' fees and expenses
of M&M in its representation of the Company, and M&M shall bill the Company
(on the one hand) and GST and Seller (on the other hand) for such fees and
expenses in accordance therewith.
(b) The aggregate Aerotel Damages (as hereinafter defined) shall be
borne by the parties hereto in the following proportions: the
Company -- 50%; and GST and Seller jointly and severally -- 50%.
Notwithstanding anything to the contrary, the Company shall not be
responsible for any fees or expenses of any counsel to either GST or Seller
in connection with the Aerotel Litigation.
(c) For the purposes hereof, "Aerotel Damages" shall mean the
following required to be paid by the Company relating to the Aerotel
Litigation: (i) reasonable attorneys' fees (including those incurred in the
representation of Thomas E. Sawyer and Kyle B. Love by separate counsel)
incurred in defending any claim or prosecuting any defense or counterclaim
asserted in the Aerotel Litigation, including any and all appeals; (ii) in
respect of all periods ending on or before the Determination Date (as
hereinafter defined), all losses, liabilities, damages, demands, claims,
suits, actions, judgments, causes of action, assessments, costs and
expenses, including without limitation, interest, penalties, royalties,
license fees, any and all reasonable expenses incurred in investigating,
preparing or defending the Aerotel Litigation and amounts paid in
settlement thereof; and (iii) in respect of the Post Determination Date
Period (as hereinafter defined), (A) all royalties or license fees that are
required to be paid pursuant to a license or royalty agreement entered into
on a good faith basis subsequent to the Determination Date by the Company
on behalf of itself and on behalf of purchasers of its products (to the
extent not directly or indirectly passed on to such purchasers) for the use
of intellectual property at issue in the Aerotel Litigation; (B) refunds
required to be made to such purchasers pursuant to written agreements with
such purchasers as a result of the Aerotel Litigation; and (C) costs of
replacement or modification of products sold to such purchasers required to
be made as a direct result of the Aerotel Litigation; provided, that in no
event shall the proportion of Aerotel Damages in respect to the Post
Determination Date Period to be borne by GST and Seller jointly exceed
$2,000,000 in aggregate amount. Anything in the foregoing to the contrary
notwithstanding, Aerotel Damages shall not include (i) the Company's
internal costs, including without limitation those of the Company's
personnel in assisting counsel and in preparing for pre-trial discovery and
trial and in post-trial matters, and the Company's direct expenses in
assisting counsel, including without limitation, photocopying,
telecommunications and transportation costs; (ii) the fees of more than two
law firms representing the Company, and in such connection, the parties
hereto agree that the two law firms representing the Company shall be M&M
and the law firm substituted for Olshan Grundman Frome & Rosenzweig LLP, as
New York counsel in the Aerotel Litigation; (iii) the fees of any law firm
that may hereafter represent Buyer; (iv) any claim or theory of damages
based upon diminution or alleged diminution in value of the Company as an
enterprise as a result of any adjudication or settlement of the Aerotel
Litigation; or (v) losses, liabilities, damages, demands, claims, suits,
actions, judgments, causes of action, assessments, costs and expenses,
including without limitation, interest, penalties, attorneys' fees, or any
and all expenses required to be paid by the Company in respect of periods
commencing subsequent to the Post Determination Date Period. For the
purposes hereof,
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"Determination Date" shall mean the date on which a judgment is issued by
the District Court in the Aerotel Litigation, which judgment includes an
adjudication that Aerotel's patent is valid and that it has been infringed.
Within 15 days after the Determination Date, GST shall give written notice
to Buyer whether GST desires that an appeal be taken from the judgment of
the District Court. Within 15 days after such notice is given, Buyer shall
give written notice of its determination whether to take such appeal. If
Buyer determines not to take such appeal, or if Buyer determines to take
such appeal and GST has notified Buyer that it desires that such appeal not
be taken, then the Post Determination Date Period shall be the period
commencing on the Determination Date and ending on the day preceding the
first anniversary thereof. If Buyer determines to take such appeal and GST
has notified Buyer that it desires that such appeal be taken, then the Post
Determination Date Period shall be the period commencing on the
Determination Date and ending on the day preceding the second anniversary
thereof.
(d) Within 30 days after the end of each calendar quarter, commencing
with the calendar quarter in which the Closing Date occurs, Buyer shall
give to Seller and Seller shall give to Buyer written notice (the "Aerotel
Damages Notice") of the amount of Aerotel Damages paid by it during such
calendar quarter, providing reasonable detail of such Aerotel Damages and
accompanying such Aerotel Damages Notice with supporting invoices and
vouchers. If, within 30 days after receiving an Aerotel Damages Notice, the
recipient shall not give written notice to the other party announcing its
intent to contest such Aerotel Damages Notice (the "Aerotel Contest
Notice"), such Aerotel Damages Notice shall be deemed accepted. In such
event, the parties shall make appropriate payments to one another so that
the Aerotel Damages for such calendar quarter shall be borne by them in the
relative proportions set forth in Section 7.7(b). During the time period
set forth in the preceding sentence, the parties shall cooperate fully in
respect of such Aerotel Damages Notice. In the event, however, that a party
contests the Aerotel Damages Notice by giving an Aerotel Contest Notice to
the other party within such period, then if the parties, acting in good
faith, cannot reach agreement with respect to such contest within 60 days
after the Aerotel Contest Notice was first given, the provisions of Section
7.7(g) shall be applicable.
(e) In the event that GST and Seller cease to be parties in the
Aerotel Litigation and the Company remains a defendant, including a
defendant-appellant therein, Buyer shall cause the Company to keep GST
fully informed at all times as to the status of the Aerotel Litigation. It
shall cause the Company to provide GST with a copy of all material
documents proposed to be filed therein not less than five days prior to
such proposed filing and the Company will give due consideration to any
comment of GST with respect thereto. If for any reason (other than
settlement as contemplated below) the Company fails or refuses to maintain
the defense of the Aerotel Litigation or to pursue the immediate appeal of
any adverse ruling therein, GST shall have the right in the name of the
Company to assume such defense or to perfect such appeal in such manner as
it deems appropriate.
(f) After the Closing, Buyer shall not and shall cause the Company not
to, settle or compromise the Aerotel Litigation on behalf of the Company,
without the express written consent of each of the parties to this
Agreement, which consent shall not be unreasonably withheld or delayed.
Prior to the Closing, GST shall not, and shall cause the Company not to,
settle or compromise the Aerotel Litigation on behalf of the Company,
without the express written consent of each of the parties to this
Agreement, which consent shall not be unreasonably withheld or delayed.
(g) Any dispute arising out of this Section 7.7 shall be submitted to
and settled by arbitration in accordance with the commercial arbitration
rules of the American Arbitration Association then in effect. Such
arbitration shall be held in Washington, D.C. before a panel of three
arbitrators, one selected by each of the parties and the third selected by
mutual agreement of the first two, and all of whom shall be independent and
impartial under the rules of the American Arbitration Association. The
decision of the arbitrators shall be final and binding as to any matter
submitted under this Agreement. To the extent the decision of the
arbitrators is that a party shall be indemnified hereunder, the amount
shall be satisfied as herein provided. Judgment upon any award rendered by
the arbitrators may be entered in any court of competent jurisdiction.
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SECTION 7.8. Payment. In the event that any party is required to make any
payment under this Article VII, such party shall promptly pay the other party
the amount so determined. If there should be a dispute as to the amount or
manner of determination of any indemnity obligation owed under this Article VII,
the paying party shall nevertheless pay when due such portion, if any, of the
obligation as shall not be subject to dispute. The difference, if any, between
the amount of the obligation ultimately determined as properly payable under
this Article VII and the portion, if any, theretofore paid shall bear interest
as provided below. If all or part of any indemnification obligation under this
Agreement is not paid when due, then the paying party shall pay the other party
interest on the unpaid amount of the obligation for each day from the date the
amount became due until payment in full, payable on demand, at the fluctuating
rate per annum which at all times shall be equal to (i) the lowest rate of
interest generally charged from time to time by Morgan Guaranty Trust Company of
New York and publicly announced by such bank as its so-called "prime rate" plus
(ii) five percent (5%).
ARTICLE VIII.
TERMINATION
SECTION 8.1. Termination by Buyer. This Agreement may be terminated and
cancelled at any time prior to the Closing Date by Buyer upon written notice to
Seller and GST if: (i) any of the representations or warranties of Seller and
GST contained herein shall prove to be inaccurate or untrue in any respect; or
(ii) any obligation, term or condition to be performed, kept or observed by
Seller and GST hereunder has not been performed, kept or observed in any
material respect at or prior to the time specified in this Agreement.
SECTION 8.2. Termination by Seller and GST. This Agreement may be
terminated and cancelled at any time prior to the Closing Date by Seller and GST
upon written notice to Buyer if: (i) any of the representations or warranties of
Buyer contained herein shall prove to be inaccurate or untrue in any material
respect; or (ii) any obligation, term or condition to be performed, kept or
observed by Buyer hereunder has not been performed, kept or observed in any
material respect at or prior to the time specified in this Agreement.
SECTION 8.3. Termination by Any Party. Any party hereto shall have the
right to terminate and cancel this Agreement if (i) the Closing Date shall not
have occurred on or before March 15, 1998; provided that such failure of
occurrence shall not have resulted from the delay, default or breach of such
party; or (ii) a court of competent jurisdiction shall have issued an order,
decree or ruling permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and nonappealable.
SECTION 8.4. Termination by Mutual Consent. This Agreement may be
terminated and cancelled at any time prior to the Closing Date by mutual written
consent of Buyer, Seller and GST.
SECTION 8.5. Effect of Termination. In the event of termination of this
Agreement by any party hereto as provided in this Article VII, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of any party or their respective officers or directors (except as set forth in
this Section 8.5 and in Sections 4.1 and 4.7 which shall survive the
termination). Nothing in this Section 8.5 shall relieve any party from liability
for any breach or failure of observance of the provisions of this Agreement.
SECTION 8.6. Specific Performance. The parties hereto agree that money
damages or other remedy at law would not be a sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement by them and that
in addition to all other remedies available to them, each of them shall be
entitled to the fullest extent permitted by law to an injunction restraining
such breach, violation or default, threatened breach, violation or default and
to any other equitable relief, including, without limitation, specific
performance.
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ARTICLE IX.
MISCELLANEOUS PROVISIONS
SECTION 9.1. Notices. Except as otherwise provided in Section 1.3 hereof,
all notices and other communications required or permitted under this Agreement
shall be deemed to have been duly given and made when received if in writing and
if served either by personal delivery to the party for whom intended (which
shall include delivery by Federal Express or similar nationally recognized
service) or five business days after being deposited, postage prepaid, certified
or registered mail, return receipt requested, in the United States mail bearing
the address shown in this Agreement for, or such other address as may be
designated in writing hereafter by, such party:
If to Seller:
GST Telecommunications, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
If to Buyer:
World Access, Inc.
945 E. Paces Ferry Road, Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.
SECTION 9.2. Entire Agreement. This Agreement and the documents referred
to herein embody the entire agreement and understanding of the parties hereto
with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to said
subject matter.
SECTION 9.3. Binding Effect; Assignment. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon Buyer, Seller and GST and their respective successors and permitted
assigns. Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be transferred or assigned (by operation of law or otherwise) by
either of the parties hereto without the prior written consent of the other
party except that Buyer shall have the right to assign its rights but not its
obligations hereunder to any Affiliate thereof. Any transfer or assignment of
any of the rights, interests or obligations hereunder in violation of the terms
hereof shall be void and of no force or effect.
SECTION 9.4. Captions. The Article and Section headings of this Agreement
are inserted for convenience only and shall not constitute a part of this
Agreement in construing or interpreting any provision hereof.
SECTION 9.5. Expenses of Transaction. Seller and GST shall pay all costs
and expenses incurred thereby in connection with this Agreement and the
transactions contemplated hereby. Buyer shall pay all costs and expenses
incurred by it in connection with this Agreement and the transactions
contemplated hereby.
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SECTION 9.6. Waiver; Consent. This Agreement may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by a writing executed by each of the parties hereto,
and no waiver of any of the provisions or conditions of this Agreement or any of
the rights of a party hereto shall be effective or binding unless such waiver
shall be in writing and signed by the party claimed to have given or consented
thereto. Except to the extent that a party hereto may have otherwise agreed to
in writing, no waiver by that party of any condition of this Agreement or breach
by the other party of any of its obligations, representations or warranties
hereunder shall be deemed to be a waiver of any other condition or subsequent or
prior breach of the same or any other obligation or representation or warranty
by such other party, nor shall any forbearance by the first party to seek a
remedy for any noncompliance or breach by such other party be deemed to be a
waiver by the first party of its rights and remedies with respect to such
noncompliance or breach.
SECTION 9.7. No Third Party Beneficiaries. Subject to the provisions of
Section 9.3 hereof, nothing herein, expressed or implied, is intended or shall
be construed to confer upon or give to any person, firm, corporation or legal
entity, other than the parties hereto, any rights, remedies or other benefits
under or by reason of the provisions of this Agreement, including without
limitation, those of Section 7.7 hereof.
SECTION 9.8. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
SECTION 9.9. Gender. Whenever the context requires, words used in the
singular shall be construed to mean or include the plural and vice versa, and
pronouns of any gender shall be deemed to include and designate the masculine,
feminine or neuter gender.
SECTION 9.10. Governing Law. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of Delaware,
without regard to the principles of conflicts of laws thereof.
SECTION 9.11. Knowledge. As used in this Agreement, the term "knowledge",
when used herein with respect to Seller or Buyer shall mean the knowledge of
each of the executive officers of Seller or Buyer, as the case may be.
SECTION 9.12. Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
BUYER:
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Name: Mark A. Gergel
Title: Executive Vice President and
Chief Financial Officer
SELLER:
GST USA, INC.
By: /s/ STEPHEN IRWIN
------------------------------------
Name: Stephen Irwin
Title: Authorized Signatory
GST TELECOMMUNICATIONS, INC.
By: /s/ STEPHEN IRWIN
------------------------------------
Name: Stephen Irwin
Title: Vice Chairman
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EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of 1998, by and between World Access, Inc., a Delaware
corporation (the "Company"), and GST USA, Inc., a Delaware corporation
("Purchaser"), pursuant to the Stock Purchase Agreement dated as of December 31,
1997 (the "Purchase Agreement"), among the Company, GST Telecommunications,
Inc., a federally chartered Canadian corporation, and Purchaser. In order to
induce Purchaser to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution of
this Agreement is a condition to the closing under the Purchase Agreement.
The Company agrees with Purchaser and the Holders (as hereinafter defined),
for the benefit of Purchaser and such Holders, as follows:
1. Definitions. Capitalized terms used herein without definition
shall have their respective meanings set forth in the Purchase Agreement.
As used in this Agreement, the following terms shall have the following
meanings:
Affiliate: With respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by, or under
direct or indirect common control with, such specified Person or (ii)
any officer or director of such other Person. For purposes of this
definition, the term "control" of a Person means the possession, direct
or indirect, of the power (whether or not exercised) to direct or cause
the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract, or otherwise,
and the terms "controlling," "controlled by," and "under direct or
indirect common control with" have meanings correlative thereto.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in the City of New York
are authorized or obligated by law or executive order to close.
Closing Date: See Section 5.1 of the Purchase Agreement.
Common Stock: The shares of common stock, $.01 par value, of the
Company.
Effectiveness Period: The period commencing with the date hereof
and ending on the earlier of the date that is one year after the Closing
Date and the date that all Registrable Securities have ceased to be
Registrable Securities.
Effectiveness Target Date: See Section 2(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
Filing Date: See Section 2(a) hereof.
Holder: The Purchaser and any holder of a majority of Registrable
Securities.
Indemnified Party: See Section 5(c) hereof.
Indemnifying Party: See Section 5(c) hereof.
Initial Shelf Registration: See Section 2(a) hereof.
Losses: See Section 5(a) hereof.
Managing Underwriters: The investment banking firm or firms that
shall manage or co-manage an Underwritten Offering.
Person: Any natural person, corporation, partnership, limited
liability partnership, limited liability company, trust or other legal
entity.
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Prospectus: The prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any amendment or
prospectus supplement, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by
reference in such Prospectus.
Purchase Agreement: See the first paragraph of this Agreement.
Registrable Securities: Each share of Common Stock issued to
Purchaser pursuant to the Purchase Agreement or subsequently transferred
to any Holder, and any Common Stock issued with respect thereto upon any
stock dividend, split or similar event, until (i) it is effectively
registered under the Securities Act and disposed of in accordance with
the Registration Statement covering it, (ii) it is salable by the holder
thereof pursuant to Rule 144(k) or (iii) it is sold to the public
pursuant to Rule 144, and, as a result of an event or circumstance
described in any of the foregoing clauses (i) through (iii), the legends
with respect to transfer restrictions required under the Securities Act
(other than any such legends required solely as the consequences of the
fact that the Registrable Securities are owned by, or were previously
owned by, the Company or an Affiliate of the Company) are removed or
removable.
Registration Expenses: See Section 5 hereof.
Registration Statement: Any registration statement of the Company
which covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement, including post-effective
amendments, all exhibits and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.
Rule 144: Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
Selling Expenses: All underwriting discounts, selling commissions
and stock transfer taxes applicable to the Registrable Securities.
Selling Holder: A Holder offering to sell Registrable Securities.
Shelf Registration: See Section 2(a) hereof.
Subsequent Shelf Registration: See Section 2(b) hereof.
Suspension Period: See Section 2(c).
Underwritten Registration or Underwritten Offering: A registration
in which the Registrable Securities are sold by the Holder thereof to an
underwriter for reoffering to the public.
2. SHELF REGISTRATION.
(a) The Company shall prepare and file with the SEC, as soon as practicable
but in any event on or prior to the date 60 days following the date hereof (the
"Filing Date"), a Registration Statement for an offering to be made on a
continuous basis pursuant to Rule 415 of the Securities Act (a "Shelf
Registration") registering the resale from time to time by the Holders thereof
of all of the Registrable Securities (the "Initial Shelf Registration"). The
Initial Shelf Registration shall be on an appropriate SEC Registration Statement
form permitting registration of such Registrable Securities for resale by such
Holders in the manner or manners designated thereby (including, without
limitation, one or more Underwritten Offerings). The Company shall use its best
efforts to cause the Initial Shelf Registration to be declared effective under
the Securities Act as
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soon as practicable but in any event on or prior to the date 180 days following
the date hereof (the "Effectiveness Target Date"), and shall use its best
efforts to keep the Initial Shelf Registration continuously effective under the
Securities Act, subject to the provisions of Section 2(c), until the earlier of
the expiration of the Effectiveness Period or the date a Subsequent Shelf
Registration (as defined below) covering all of the Registrable Securities has
been declared effective under the Securities Act. Subject to the right of the
Company to have the Initial Shelf Registration not be effective, or not to be
updated, amended or supplemented, for periods of time set forth in Section 2(c),
the Company further agrees to use its best efforts to prevent the happening of
any event that would cause the Initial Shelf Registration to contain a material
misstatement or omission or to be not effective and usable for resale of the
Registrable Securities during the Effective Period.
(b) If the Initial Shelf Registration or any Subsequent Shelf Registration
ceases to be effective for any reason as a result of the issuance of a stop
order by the SEC at any time during the Effectiveness Period, the Company shall
use its best efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof, and in any event shall within 15 days of such cessation
of effectiveness amend the Shelf Registration in a manner reasonably expected to
obtain the withdrawal of the order suspending the effectiveness thereof, or file
an additional Shelf Registration covering all of the Registrable Securities (a
"Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed,
the Company shall use its best efforts to cause the Subsequent Shelf
Registration to be declared effective as soon as practicable after such filing
and to keep such Registration Statement continuously effective until the end of
the Effectiveness Period.
(c) In the event (A) of the happening of any event of the kind described in
Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi) hereof or (B) that,
in the good faith-judgment of the Company, it is advisable to suspend the use of
the Prospectus for a discrete period of time due to pending material corporate
developments or similar material events that have not yet been publicly
disclosed and as to which the Company believes public disclosure will be
prejudicial to the Company, the Company shall deliver a certificate in writing,
signed by an authorized executive officer of the Company, to the Holders and the
Managing Underwriters, if any, to the effect of the foregoing and thereafter the
use of the Prospectus shall be suspended, and the Company, subject to the terms
of this Section 2(c), shall thereafter not be required to maintain the
effectiveness or update the Shelf Registration. The Company will use its best
efforts to ensure that the use of the Prospectus may be resumed as soon as
practicable, in the case of suspension under Section 2(c)(A), and, in the case
of a pending development or event referred to in Section 2(c)(B) hereof, as soon
as, in the good faith-judgment of the Company, public disclosure of such
material corporate development or similar material event would not have a
material adverse effect on the Company. Notwithstanding the foregoing, the
Company shall not under any circumstances be entitled to exercise its right
under this Section 2(c) to suspend the use of the Prospectus (whether as a
result of events referred to in Section 2(c)(A) hereof or as a result of the
pending development or event referred to in Section 2(c)(B) hereof) more than
one (1) time in any three (3) month period, and the periods in which the use of
the Prospectus is suspended shall not exceed 15 days in any three-month period
(a "Suspension Period").
3. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations under Section 2
hereof, the Company shall effect such registrations to permit the sale of the
Registrable Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Company shall as expeditiously as
possible:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on any appropriate form under the Securities Act
available for the sale of the Registrable Securities by the Holders in
accordance with the intended method or methods of distribution thereof and
shall include all required financial statements, and use its best efforts
to cause each such Registration Statement to become effective and remain
effective as provided herein; provided that before filing any such
Registration Statement or Prospectus or any amendments or supplements
thereto the Company shall furnish within a reasonable time period to each
Selling Holder (if requested by such Selling Holder) and
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the Managing Underwriters of such offering, if any, copies of all such
documents proposed to be filed, which documents will be subject to the
review of such Selling Holders (if requested by such Selling Holders) and
such Managing Underwriters, and the Company shall not file any such
Registration Statement or amendment thereto or any Prospectus or any
supplement thereto to which such Selling Holders shall reasonably object in
writing within five Business Days after the receipt thereof. In addition,
the Company shall use its best efforts to reflect in each such document
referenced in this paragraph so filed with the SEC such comments as each
Selling Holder and the Managing Underwriters, if any, may propose.
(b) Subject to Section 2(c), prepare and file with the SEC such
amendments and post-effective amendments to each Registration Statement as
may be necessary to keep such Registration Statement continuously effective
for the applicable period specified in Section 2; cause the related
Prospectus to be supplemented by any required Prospectus supplement, and as
so supplemented to be filed pursuant to Rule 424 (or any similar provisions
then in force) under the Securities Act and comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by such Registration Statement during the applicable period in
accordance with the intended methods or disposition by the sellers thereof
set forth in such Registration Statement as so amended or such Prospectus
as so supplemented. The Company shall ensure that (i) any Shelf
Registration and any amendment thereto and any Prospectus forming a part
thereof and any amendment or supplement thereto complies in all material
respects with the Act and the rules and regulations thereunder, (ii) any
Shelf Registration and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading and (iii) any Prospectus forming part of any Shelf
Registration, and any amendment or supplement to such Prospectus, does not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) Notify each Selling Holder and the Managing Underwriters, if any,
promptly, and (if requested by any such Person) confirm such notice in
writing, (i) when a Prospectus, any Prospectus supplement, a Registration
Statement or a post-effective amendment to a Registration Statement has
been filed with the SEC, and, with respect to a Registration Statement or
any post-effective amendment, when the same has become effective; (ii) of
any request by the SEC or any other federal or state governmental authority
for amendments or supplements to a Registration Statement or related
Prospectus or for additional information, (iii) of the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation
or threatening of any proceedings for that purpose, (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of
any proceedings for such purpose, (v) of the existence of any fact or
happening of any event which makes any statement of a material fact in such
Registration Statement or related Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue or which would
require the making of any changes in the Registration Statement or
Prospectus in order that the Registration Statement will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and that the Prospectus will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and (vi)
of the Company's good faith determination that a post-effective amendment
to a Registration Statement is required by applicable laws, rules or
regulations.
(d) Use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of
any suspension of the qualification (or exemption from qualification) of
any of the Registrable Securities for sale in any jurisdiction, at the
earliest possible moment.
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(e) If requested by the Selling Holders or the Managing Underwriters,
if any, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as
the Selling Holders or the Managing Underwriters, if any, and the Company
mutually agree should be included therein, and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as
soon as practicable after the Company has received notification of the
matters proposed to be incorporated in such Prospectus supplement or
post-effective amendment.
(f) Furnish to the Selling Holders and each Managing Underwriter, if
any, without charge, at least one conformed copy of the Registration
Statement or Statements and any amendment thereto, including financial
statements but excluding schedules, all documents incorporated or deemed to
be incorporated therein by reference and all exhibits.
(g) Deliver to each Selling Holder and each Managing Underwriter, if
any, in connection with any offering of Registrable Securities, without
charge, as many copies of the Prospectus or Prospectuses relating to such
Registrable Securities (including each preliminary prospectus) and any
amendment or supplement thereto as such Persons may reasonably request; and
the Company hereby consents to the use of such Prospectus or each amendment
or supplement thereto by each of the Selling Holders and the Underwriters,
if any, in connection with any offering and sale of the Registrable
Securities covered by such Prospectus or any amendment or supplement
thereto.
(h) Prior to any public offering of Registrable Securities, to
register or qualify or cooperate with the Holders and the Managing
Underwriters, if any, in connection with the registration or qualification
(or exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as the Selling Holders or Managing
Underwriters reasonably requests in writing, keep each such registration or
qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and do any and all
other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the applicable
Registration Statement, provided that the Company will not be required to
(i) qualify generally to do business in any jurisdiction where it is not
then so qualified or (ii) take any action that would subject it to general
service of process in suits or to taxation in any jurisdiction where it is
not then so subject.
(i) Cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies in addition to the SEC or authorities within the
United States as may be necessary to enable each Selling Holder or the
Managing Underwriters, if any, to consummate the disposition of such
Registrable Securities.
(j) During the Effectiveness Period (subject to the provisions of
Section 2(c)), immediately upon the existence of any fact or the occurrence
of any event as a result of which (i) a Registration Statement shall
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or (ii) a Prospectus shall contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, promptly
prepare and file a post-effective amendment to each Registration Statement
or a supplement to the related Prospectus or any document incorporated
therein by reference or file any other required document (such as a Current
Report on Form 8-K) that would be incorporated by reference into the
Registration Statement so that the Registration Statement shall not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, in light of the circumstances under which they were made,
and so that the Prospectus will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, as thereafter
delivered to the purchasers of the Registrable Securities being sold
thereunder; and in the case of a post-effective amendment to a Registration
Statement, use its best efforts to cause it to become effective as soon as
practicable.
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(k) Enter into such agreements (including, in the event of an
Underwritten Offering, an underwriting agreement in form, scope and
substance as is customary in Underwritten Offerings) and take all such
other actions in connection therewith (including, in the event of an the
Underwritten Offering, those reasonably requested by the Managing
Underwriters, if any, or the Holders of a majority of the Registrable
Securities) in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, whether or not an
underwriting agreement is entered into, and if the registration is an
Underwritten Registration, (i) make such representations and warranties to
the Holders and the underwriters with respect to the business of the
Company and its subsidiaries, the Registration Statement, Prospectus and
documents incorporated by reference or deemed incorporated by reference, if
any, in each case, in form, substance and scope as are customarily made by
issuers to underwriters in underwritten offerings and confirm the same if
and when requested; (ii) use its best efforts to obtain opinions of counsel
to the Company and updates thereof (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the Managing
Underwriters, if any, and the Holders of a majority of the Registrable
Securities) addressed to each of the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Managing
Underwriters; (iii) use its best efforts to obtain "cold comfort" letters
and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other certified public accountants of
any subsidiary of the Company or any business acquired or to be acquired by
the Company for which financial statements and financial data are, or are
required to be, included in the Registration Statement), addressed to each
of the Managing Underwriters, if any, such letters to be in customary form
and covering matters of the type customarily covered in "cold comfort"
letters in connection with Underwritten Offerings, and (iv) deliver such
documents and certificates as may be reasonably requested by the Holders of
a majority of the Registrable Securities being sold, the Managing
Underwriters, if any, to evidence the continued validity of the
representations and warranties of the Company and its subsidiaries made
pursuant to clause (i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company. The above shall be done at each closing under
such underwriting or similar agreement as and to the extent required
thereunder.
(l) Make available for inspection by a representative of the Selling
Holders, any Managing Underwriter participating in any disposition of
Registrable Securities, and any attorney or accountant retained by the
Selling Holders or such underwriter, financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, and
cause the executive officers, directors and employees of the Company and
its subsidiaries to supply all information reasonably requested by any such
representative, Managing Underwriter, attorney or accountant in connection
with such disposition; provided, however, that any information that is
reasonable and in good faith designated by the Company in writing as
confidential at the time of delivery of such information shall be kept
confidential by such Persons, unless (i) disclosure of such information is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities, (ii) disclosure of such information is
required by law (including any disclosure requirements pursuant to federal
securities laws in connection with the filing of any Registration Statement
or the use of any prospectus referred to in this Agreement), (iii) such
information becomes generally available to the public other than as a
result of disclosure or failure to safeguard by any such Person or (iv)
such information becomes available to any such Person from a source other
than the Company and such source is not bound by a confidentiality
agreement.
(m) Comply with all applicable rules and regulations of the SEC in all
material respects and make generally available to its securityholders
earnings statements (which need not be audited) satisfying the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder (or any
similar rule promulgated under the Securities Act) no later than 45 days
after the end of any 12-month period (or 90 days after the end of any
12-month period if such period is a fiscal year) (i) commencing at the end
of any fiscal quarter in which Registrable Securities are sold to
underwriters in firm commitment or best efforts underwritten offering and
(ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company commencing after the
effective date of a Registration Statement, which statements shall cover
said 12-month periods.
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(n) Cooperate with the Selling Holders and the Managing Underwriters,
if any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any
restrictive legends, and enable such Registrable Securities to be in such
denominations and registered in such names as such Selling Holder may
request.
(o) Cause all shares of Common Stock covered by the Registration
Statement to be listed on each securities exchange or quotation system on
which the Company's Common Stock is then listed or quoted no later than the
date the Registration Statement is declared effective, and, in connection
therewith, to the extent applicable, to make such filings under the
Exchange Act (e.g., the filing of a Registration Statement on Form 8-A) and
to have such filings declared effective thereunder.
(p) Cooperate and assist in any filing required to be made with the
National Association of Securities Dealers, Inc.
The Company may require each Selling Holder to furnish to the Company such
information regarding such Selling Holder and the distribution of such
securities as the Company, upon advice of counsel, may from time to time
determine to be required under applicable laws, rules and regulations for
inclusion in such Registration Statement. If any Selling Holder fails to provide
such information, then such Selling Holder shall not be entitled to use the
Prospectus.
4. REGISTRATION EXPENSES.
All fees and expenses (other than Selling Expenses) incident to the
Company's obligations under this Agreement shall be borne by the Company whether
or not any of the Registration Statements become effective. Such fees and
expenses shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses with respect to filings
required to be made with the National Association of Securities Dealers, Inc.),
(ii) printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities in a form eligible for deposit with The
Depository Trust Company and of printing Prospectuses if the printing of
Prospectuses is requested by the Holders of a majority of the Registrable
Securities or the Managing Underwriters), (iii) reasonable fees and
disbursements of counsel for the Company in connection with the Shelf
Registration (provided that the Company shall not be liable for the fees and
expenses of more than one separate firm for all parties (other than the Company)
participating in any transaction hereunder), and (iv) fees and disbursements of
all independent certified public accountants referred to in Section 3(k)(iii)
hereof (including the expenses of any special audit and "cold comfort" letters
required by or incident to such performance). In addition, the Company shall pay
the fees and expenses incurred in connection with the listing or quotation of
the securities to be registered on any securities exchange or quotations system
on which similar securities issued by the Company are then listed and the fees
and expenses of any Person, including special experts, retained by the Company.
5. INDEMNIFICATION.
(a) Indemnification by the Company. The Company shall indemnify and hold
harmless each Holder, the directors, officers, employees and agents of each
Holder and each Person, if any, who controls any such Holder (within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act)
from and against all losses, liabilities, damages and expenses (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
(collectively, "Losses"), arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus or in any amendment or supplement thereto, or arising
out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances under which they were
made, except insofar as such Losses arise out of or are based upon the
information relating to such Holder furnished to the Company in writing by such
Holder expressly for use therein; provided, however, that the Company shall not
be liable in any such case to the extent that any such loss, damage, liability
or expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any preliminary prospectus if
(i) such Holder failed to send
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or deliver a copy of the Prospectus with or prior to the delivery of written
confirmation of the sale of Registrable Securities and (ii) the Prospectus would
have corrected such untrue statement or omission; and provided further, that the
Company shall not be liable in any such case to the extent that any such loss,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission in the Prospectus,
if such untrue statement or alleged untrue statement, omission or alleged
omission is corrected in an amendment or supplement to the Prospectus and if,
having previously been furnished by or on behalf of the Company with copies of
the Prospectus as so amended or supplemented, such Holder thereafter fails to
deliver such Prospectus, as so amended or supplemented, prior to or concurrently
with the sale of a Registrable Security to the person asserting such loss,
damage, liability or expense who purchased such Registrable Security which is
the subject thereof from such Holder. The Company shall also indemnify each
underwriter, their officers and directors, and each Person who controls such
Person (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) to the same extent and with the same limitations as provided
above with respect to the indemnification of the Holders.
(b) Indemnification by Holders. Each Holder agrees severally and not
jointly to indemnify and hold harmless the Company, its directors, its officers
who sign a Registration Statement and each Person, if any, who controls the
Company (within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act), from and against all losses arising out of or
based upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or arising out of or based upon any omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in light of the circumstances under which they were made, to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information relating to such Holder so furnished in writing by
such Holder to the Company expressly for use in such Registration Statement or
Prospectus. In no event shall the liability of any Holder hereunder be greater
in amount than the dollar amount of the proceeds received by such Holder upon
the sale of the Registrable Securities giving rise to such indemnification
obligation.
(c) Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to either of the two
preceding paragraphs, such Person (the "Indemnified Party") shall promptly
notify the Person against whom such indemnity may be sought (the "Indemnifying
Party") in writing, but failure so to notify an Indemnifying Party shall not
relieve such Indemnifying Party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof. The Indemnifying Party, upon
request of the Indemnified Party, shall retain counsel satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention to such counsel (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them, or (iii) the Indemnifying Party shall not have
employed counsel satisfactory to the Indemnified Party to represent the
Indemnified Party within a reasonable time after notice of commencement of the
action. It is understood that the Indemnifying Party shall not, in respect of
the legal expenses of any Indemnified Party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all indemnified parties under Section 5(a) or 5(b) hereof who are parties to
such proceeding or proceedings, and that all such fees and expenses shall be
reimbursed as they are incurred. The Indemnifying Party shall not be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify the Indemnified Party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an Indemnified Party shall have requested
an Indemnifying Party to reimburse the Indemnified Party for fees and expenses
of counsel as contemplated by the second and third sentences of this paragraph,
such Indemnifying Party agrees that it shall be liable for any settlements of
any proceeding effected without its
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written consent if (i) such settlement is entered into more than 45 days after
receipt by such Indemnifying Party of the aforesaid request and (ii) such
Indemnifying Party shall not have reimbursed the Indemnified Party in accordance
with such request prior to the date of such settlement. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Party is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such proceeding.
(d) Contribution. If the indemnification provided for in this Section 5 is
unavailable to an Indemnified Party under Section 5(a) or 5(b) hereof in respect
of any Losses or is insufficient to hold such Indemnified Party harmless, then
each applicable Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses, (i) in such proportion as is appropriate to reflect
the relative benefits received by the Indemnifying Party or Indemnifying Parties
on the one hand and the Indemnified Party or Indemnified Parties an the other
hand or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Indemnifying Party or Indemnified Parties on the one hand and of the
Indemnified Party or Indemnifying Parties on the other hand in connection with
the statements or omissions that resulted in such Losses, as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the total number of Registrable Shares multiplied by the
per share closing price of the Common Stock on the Closing Date, as listed on
the Nasdaq National Market. Benefits received by the Holders shall be deemed to
be equal to the value of receiving the Registrable Shares and having such shares
registered under the Securities Act. Benefits received by any underwriter shall
be deemed to be equal to the total underwriting discounts and commissions, as
set forth on the cover page of the Prospectus forming a part of the Registration
Statement which resulted in such Losses. The relative fault of the Holders on
the one hand and the Company on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Holders or by the Company and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method or allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the Losses
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding this Section 5(d), a
Selling Holder shall not be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities sold by such
Selling Holder and distributed to the public were offered to the public exceeds
the amount of any damages which such Selling Holder has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. The indemnity, contribution and expense reimbursement
obligations of the Company hereunder shall be in addition to any liability the
Company may otherwise have hereunder, under the Purchase Agreement or otherwise.
The indemnity and contribution provisions contained in this Section 5 shall
remain operative and in full force and effect regardless of (i) any termination
of this Agreement, (ii) any investigation made by or on behalf of any Holder or
any Person controlling any Holder, or the Company, its officers or directors or
any Person controlling the Company and (iii) the sale of any Registrable
Securities by any Selling Holder.
6. INFORMATION REQUIREMENTS.
(a) The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act, and if at any time the Company is not
required to file such reports, it will, upon the request of
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any Holder of Registrable Securities, make publicly available other information
so long as necessary to permit sales pursuant to Rule 144 under the Securities
Act. The Company further covenants that it will cooperate with any Holder and
take such further reasonable action as any such Holder may reasonably request
(including, without limitation, making such reasonable representations as any
such Holder may reasonably request), all to the extent required from time to
time to enable such Holder to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 under the Securities Act. Notwithstanding the foregoing, nothing in
this Section 6 shall be deemed to require the Company to register any of its
securities under any Section of the Exchange Act.
(b) The Company shall file the reports required to be filed by it under the
Exchange Act and shall comply with all other requirements set forth in the
instructions to the appropriate SEC Registration Statement form permitting
registration of the Registrable Securities for resale by the Holders in the
manner or manners designated by them.
7. VOLUME LIMITATIONS.
Notwithstanding anything herein to the contrary, (i) no Holder may sell any
Registrable Securities, without the prior written consent of the Company, prior
to the Effectiveness Target Date, except that without such consent, Purchaser
may sell the Registrable Securities to a buyer that acquires such Registrable
Securities for investment and not with a view toward distribution thereof
otherwise than pursuant to the terms of this Agreement, and (ii) thereafter no
Holder may sell more than 12.5% of the Registrable Securities held by such
Holder in any one month period, provided that a Holder may effect a block trade
(within the meaning of New York Stock Exchange Rule 127.10) of any amount of
Registrable Securities upon five (5) days prior written notice to the Company.
8. OTHER COVENANTS OF THE PURCHASER.
Neither the Purchaser nor any Person controlled by, related to or
affiliated with the Purchaser (collectively, the "Stockholder Group") shall,
directly or indirectly, acquire any shares of capital stock of the Company which
are then entitled to vote generally in the election of directors (the "Voting
Securities") (except by way of stock dividend or other distributions or
offerings made available to holders of Voting Securities generally) if the
effect of such acquisition would be to increase the aggregate voting power in
the election of directors of all Voting Securities then owned by all members of
the Stockholder Group to greater than 15% of such total combined voting power of
all the Voting Securities then outstanding.
9. MISCELLANEOUS.
(a) Remedies. In the event of a breach by the Company of its obligations
under this Agreement, each Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason or a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be
adequate.
(b) No Conflicting Agreements. The Company has not entered, as of the date
hereof and shall not, on or after the date of this Agreement, enter into any
agreement with respect to its securities which conflicts with the rights granted
to the Holders in this Agreement. The Company represents and warrants that the
rights granted to the Holders hereunder do not in any way conflict with the
rights granted to the holders of the Company's securities under any other
agreements.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the Company has obtained the written consent of the Holders of a
majority of the Registrable Securities.
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(d) Notices. All notices and other communications provided for or
permitted hereunder shall be deemed to have been duly given and made if in
writing and if served either by personal delivery to the party for whom intended
(which shall include delivery by Federal Express or similar nationally
recognized service) or five business days after being deposited, postage
prepaid, certified or registered mail, return receipt requested, in the United
States mail bearing the address shown in this Agreement for, or such other
address as may be designated in writing hereafter by, such party:
If to Purchaser:
GST USA, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
If to the Company:
World Access, Inc.
Suite 2240
945 East Paces Ferry Road
Atlanta, Georgia 30326
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, NE
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.
If to any Holder, at the most current address given by such Holder to the
Company in accordance with the provisions of Section 9(e).
(e) Owner of Registrable Securities. The Company will maintain, or will
cause its transfer agent to maintain, a register with respect to the Registrable
Securities in which all transfers of Registrable Securities of which the Company
has received notice will be recorded. The Company may deem and treat the Person
in whose name Registrable Securities are registered in such register of the
Company as the owner thereof for all purposes, including, without limitation,
the giving of notices under this Agreement.
(f) Successors and Assigns. Any Person who purchases any Registrable
Securities from Purchaser shall be deemed, for purposes of this Agreement to be
an assignee of Purchaser. The Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the parties and shall inure
to the benefit of and be binding upon each holder of any Registrable Securities.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be original and all of which taken together
shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCEPT THAT BODY OF LAW
RELATING TO CHOICE OF LAWS.
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(j) Severability. If any term, provision, covenant or restriction of this
Agreement is held to be invalid, illegal, void or unenforceable, the remainder
of the terms, provisions, covenants and restrictions set forth herein shall
remain in full force and effect, and shall in no way be affected, impaired or
invalidated thereby, and the parties hereto shall use their best efforts to find
and employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction. It
is hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such which may be hereafter declared invalid, illegal,
void or unenforceable.
(k) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. Except as provided in the Purchase
Agreement, there are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein, with respect to the
registration rights granted by the Company with respect to the securities issued
pursuant to the Purchase Agreement. This Agreement supersedes all prior
agreements and understandings among the parties with respect to such subject
matter.
(l) Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
(m) Further Assurances. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things reasonably necessary, proper or advisable under
applicable law, and execute and deliver such documents and other papers, as may
be required to carry out the provisions of this Agreement and the other
documents contemplated hereby and consummate the make effective the transactions
contemplated hereby.
(n) Termination. This Agreement and the obligations of the parties
hereunder shall terminate upon the end of the Effectiveness Period, except for
any liabilities or obligations under Sections 4 or 5 hereof, each of which shall
remain in effect in accordance with their terms.
[Signatures on Following Page]
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IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
WORLD ACCESS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
GST USA, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT B
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement"), dated , 1998,
by and among WORLD ACCESS, INC., a Delaware corporation with its principal
office at 945 East Paces Ferry Road, Suite 2240, Atlanta, Georgia 30326 (the
"Buyer"), GST TELECOMMUNICATIONS, INC., a federally chartered Canadian
corporation ("GST"), and GST USA, INC., a Delaware corporation (the "Seller"),
each with their principal offices at 4001 Main Street, Vancouver, Washington
98663.
WITNESSETH:
WHEREAS, NACT Telecommunications, Inc., a Delaware corporation (the
"Company"), is engaged in the business of providing advanced telecommunications
switching platforms with integrated applications software and network
telecommunications capabilities; and
WHEREAS, Seller is a wholly-owned subsidiary of GST and is the record and
beneficial owner of 5,113,712 shares (the "Shares") of the common stock, $.01
par value per share (the "Common Stock"), of the Company; and
WHEREAS, Buyer, GST and Seller are parties to that certain Stock Purchase
Agreement, dated December 31, 1997 (the "Stock Purchase Agreement"), pursuant to
which Seller is selling to Buyer, and Buyer is purchasing from Seller, the
Shares; and
WHEREAS, there are, and subsequent to the sale of the Shares to Buyer,
there will be, issued and outstanding shares of Common Stock held of record
and/or beneficially by stockholders of the Company other than Buyer (such shares
of Common Stock and any and all additional shares of Common Stock from time to
time outstanding subsequent to such sale and held by such stockholders being
hereinafter referred to as the "Minority Shares"); and
WHEREAS, it is a condition to the sale of the Shares that Buyer provide
indemnification in respect of any Damages (as hereinafter defined) to Seller,
GST and their Affiliates, as such term is defined in the rules and regulations
promulgated under the Securities Act of 1933, as amended (Seller, GST and their
Affiliates being hereinafter referred to individually as an "Indemnified Party"
and collectively as the "Indemnified Parties");
NOW, THEREFORE, in consideration of the premises, and the covenants and
agreements contained herein and in the Stock Purchase Agreement, the parties
hereby agree as follows:
SECTION 1. Indemnification Obligations.
(a) Buyer shall indemnify and hold harmless the Indemnified Parties, and
each of them, from, against, for and in respect of any and all losses,
liabilities, damages, demands, obligations, judgments, fines, deficiencies,
encumbrances, assessments, costs and expenses including, without limitation,
interest, penalties and reasonable attorneys' fees, incident to any action,
suit, claim, proceeding or investigation commenced or threatened by or on behalf
of any holder of Minority Shares and by any governmental or quasi-governmental
agency, board, bureau, commission or other instrumentality, and any and all
amounts paid in settlement of any such action, suit, claim, proceeding or
investigation, asserted against, resulting to, imposed upon, or incurred or
suffered by the Indemnified Parties, or any of them, in each case in respect of
the purchase or attempted purchase by Buyer or any designee thereof of the
Minority Shares or any of them, whether by tender or exchange offer,
acquisition, merger, open market purchase or otherwise (all hereinafter
collectively referred to as "Damages"). Notwithstanding anything herein to the
contrary, Buyer shall have no obligation to any of the Indemnified Parties under
this Section 1 in respect of the business or operations of the Company prior to
the Closing (as defined in the Stock Purchase Agreement) or the actions or
omissions of the Company's officers, directors, stockholders, employees or
agents prior to the Closing, irrespective of the date that any claim, suit or
other cause of action related thereto is filed or otherwise instituted,
provided, however, that nothing contained
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herein shall be construed to limit or negate the indemnification obligations
provided for in the Stock Purchase Agreement.
(b) For purposes of this Agreement, all Damages shall be computed net of
any insurance coverage with respect thereto that reduces the Damages that would
otherwise be sustained by any of the Indemnified Parties; provided, however,
that in all cases, the timing of the receipt or realization of insurance
proceeds shall be taken into account in determining the amount of reduction of
Damages.
SECTION 2. Procedure for Indemnification with Respect to Indemnifiable
Claims. Seller, for itself and on behalf of any Indemnified Party, shall give
Buyer prompt written notice of any action, suit, claim, investigation or
proceeding to which the indemnification provided in this Agreement applies (each
an "Indemnifiable Claim"), which notice shall describe such Indemnifiable Claim
in reasonable detail (the "Indemnification Notice"). Notwithstanding the
foregoing, Seller shall not have any obligation to give any notice to Buyer of
any assertion by a third party that could give rise to an Indemnifiable Claim
unless such assertion is in writing, and the rights of any Indemnified Party to
be indemnified hereunder in respect of any Indemnifiable Claim shall not be
adversely affected by Seller's failure to give notice thereof as herein
provided, unless and, if so, only to the extent that, Buyer is materially
prejudiced thereby.
Buyer shall have the right to control the defense or settlement of any such
Indemnifiable Claim employing counsel and other professionals reasonably
satisfactory to the Indemnified Party, subject to the provisions set forth
below, but the Indemnified Party may, at its election, participate in the
defense of any action, suit, claim, investigation or proceeding at its sole cost
and expense. Notwithstanding the foregoing, if there exists a conflict of
interest that would make it inappropriate for the same counsel to represent both
the Indemnified Party, on the one hand, and Buyer, on the other hand, in
connection with any Indemnifiable Claim, then the Indemnified Party shall be
entitled to retain its own counsel as is reasonably satisfactory to Buyer at
Buyer's expense; provided that Buyer shall not be obligated to pay the
attorneys' fees of more than one separate counsel under the Agreement. In the
event that such Indemnified Party shall seek indemnification as provided herein,
such Indemnified Parties shall make available to Buyer, at Buyer's expense, all
witnesses, pertinent records, materials and information in the Indemnified
Party's possession or under the Indemnified Party's control relating thereto as
is reasonably required by Buyer.
Should Buyer fail to defend any such action (except for failure resulting
from Seller's failure to timely give the Indemnification Notice) within 20 days
after the date of receipt of the Indemnification Notice, then, in addition to
any other remedy, the Indemnified Party may settle or defend any such action,
suit, claim, investigation or proceeding through counsel of its own choosing and
may recover from Buyer the amount of its Damages. Except as provided in the
preceding sentence, no Indemnified Party shall compromise or settle any
Indemnifiable Claim without the prior written consent of Buyer, which consent
shall not be unreasonably withheld; provided, however, that if Buyer's consent
is unreasonably withheld, the liability of Buyer shall be limited to the amount
of the proposed compromise or settlement and the amount of the Indemnified
Party's reasonable counsel fees incurred in defending such claim, as permitted
by the preceding sentence, at the time such approval is unreasonably withheld.
Notwithstanding the preceding sentence, the right of the Indemnified Party to
compromise or settle any such action, suit, claim, investigation or proceeding
shall only be available if a complete release of Buyer is contemplated to be
part of such proposed compromise or settlement.
3. EXCLUSIVITY; SURVIVAL.
Any and all Indemnifiable Claims shall be subject to the terms and
conditions of this Agreement, and shall survive the execution and delivery of,
and the consummation of the transactions contemplated by, the Stock Purchase
Agreement.
4. MISCELLANEOUS PROVISIONS.
(a) Notices. All notices and other communications required or permitted
under this Agreement shall be deemed to have been duly given and made when
received if in writing and if served either by personal delivery to the party
for whom intended (which shall include delivery by Federal Express or similar
nationally recognized service), or five business days after being deposited,
postage prepaid, certified or registered mail,
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return receipt requested, in the United States mail, bearing the address shown
in this Agreement for, or such other address as may be designated in writing
hereafter by, such party:
If to Buyer:
World Access, Inc.
945 East Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower,
Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.
If to any Indemnified Party:
GST Telecommunications, Inc.
Indemnified Party: 4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
(b) Entire Agreement. This Agreement and the documents referred to
herein embody the entire agreement and understanding of the parties hereto
with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to
said subject matter.
(c) Binding Effect; Assignment. This Agreement and the various rights
and obligations arising hereunder shall inure to the benefit of and be
binding upon Buyer, GST and Seller and their respective Affiliates,
successors and permitted assigns. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be transferred or assigned
(by operation of law or otherwise) by any of the parties hereto without the
prior written consent of the other parties. Any transfer or assignment of
any of the rights, interests or obligations hereunder in violation of the
terms hereof shall be void and of no force or effect.
(d) Waiver; Consent. This Agreement may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance),
in whole or in part, except by a writing executed by all the parties
hereto, and no waiver of any of the provisions or conditions of this
Agreement or any of the rights of a party hereto shall be effective or
binding unless such waiver shall be in writing and signed by the parties
claiming to have given or consented thereto. Except to the extent that a
party hereto may have otherwise agreed to in writing, no waiver by that
party of any condition of this Agreement or breach by any other party of
any of its obligations hereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation by such other party, nor shall any forbearance by any party to
seek a remedy for any noncompliance or breach by any other party be deemed
to be a waiver by any party of its rights and remedies with respect to such
noncompliance or breach.
(e) Governing Law. This Agreement shall in all respects be construed
in accordance with and governed by the laws of the State of Delaware,
except that body of law relating to choice of law.
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(f) Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.
WORLD ACCESS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
GST TELECOMMUNICATIONS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
GST USA, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT C
NON-COMPETITION AND NON-DISCLOSURE AGREEMENT
THIS NON-COMPETITION AND NON-DISCLOSURE AGREEMENT (the "Agreement") is made
and entered into as of the day of , 1998 by and among NACT
TELECOMMUNICATIONS, INC., a Delaware corporation ("NACT"), WORLD ACCESS, INC., a
Delaware corporation ("World Access"), and GST USA, INC., a Delaware corporation
("GST").
WHEREAS, World Access is acquiring the all of the equity interest of NACT
held by GST (the "Transaction") by means of a Stock Purchase Agreement dated
December 31, 1997 (the "Purchase Agreement");
WHEREAS, NACT is engaged in the business of providing advanced
telecommunications switching platforms with integrated applications software and
network telecommunications capabilities (the "Business");
WHEREAS, GST has been the principal stockholder of NACT and its
representatives have heretofore been responsible for the management of the
Business;
WHEREAS, GST has knowledge of the trade secrets, customer information and
other confidential and proprietary information of NACT;
WHEREAS, GST desires to have World Access acquire the equity interest of
NACT held by GST pursuant to the Transaction;
WHEREAS, as a result of the Transaction, World Access will succeed to the
Business and all of the Confidential Information and Trade Secrets (each as
hereinafter defined) of NACT;
WHEREAS, in order to protect the goodwill of the Business and the other
value to be acquired by World Access pursuant to the Purchase Agreement for
which World Access is paying substantial consideration, World Access and GST
have agreed that the obligation of World Access to consummate the transactions
contemplated by the Purchase Agreement is subject to the condition, among
others, that GST shall have entered into this Agreement;
WHEREAS, World Access has separately bargained and paid additional
consideration for the covenants contained herein;
WHEREAS, GST acknowledges that the provisions of this Agreement are
reasonable and necessary to protect the legitimate interest of World Access and
the goodwill of the Business and other value acquired by it pursuant to the
Purchase Agreement; and
WHEREAS, in order to induce World Access to consummate the transactions
contemplated by the Purchase Agreement, GST is willing to enter into this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, terms defined in the preamble and recitals of
this Agreement shall have the meanings set forth therein and the following terms
shall have the meanings set forth below:
(a) "Affiliate" shall have the meaning specified in Rule 144
promulgated under the Securities Act of 1933, as amended.
(b) "Competitive Business" shall mean any Person engaged in a business
the same as or substantially similar to the Business as conducted
immediately prior to the Transaction, but shall not include any business
conducted by any Affiliate of GST on the date hereof.
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(c) "Confidential Information" shall mean NACT's customer and supplier
lists, marketing arrangements, business plans, projections, financial
information, training manuals, pricing manuals, market strategies, internal
performance statistics and other competitively sensitive information
concerning NACT which is material to NACT and not generally known by the
public, other than Trade Secrets, whether or not in written or tangible
form.
(d) "Control" shall mean, with respect to any Person, the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or
otherwise.
(e) "Key Employee" shall mean any Person who is employed in a
management, executive or supervisory capacity for another Person.
(f) "NACT Market" shall mean the continents of North and South
America, Australia, Asia, Africa and Europe and all other places in the
world.
(g) "Permitted Activities" shall mean owning not more than 5% of the
outstanding shares of publicly-held corporations engaged in a Competitive
Business (except for World Access) which have shares listed for trading on
a securities exchange registered with the Securities and Exchange
Commission or through a national automatic quotation system of a registered
securities association.
(h) "Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any other syndicate or group that would be deemed to be
a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended.
(i) "Restricted Period" shall mean the period commencing on the date
of this Agreement and ending on the date which is three (3) years
thereafter.
(j) "Trade Secrets" shall mean the whole or any portion or phase of
any scientific or technical information, design, process, procedure,
formula or improvement that is valuable and not generally known to the
competitors of NACT, whether or not in written or tangible form; provided,
however, that the parties hereto hereby expressly acknowledge and agree
that nothing in this Agreement or in the foregoing definition shall
diminish, restrict or in any way contravene any claims, rights or other
protections, whether at law or in equity, provided with respect to trade
secrets under any applicable law; and provided further that Trade Secrets
of NACT shall not include any information, design, process, procedure,
formula or improvement that is a Trade Secret of any Affiliate of GST and
that is used in the business of such Affiliate on the date hereof.
2. NO COMPETING BUSINESS.
GST hereby agrees that, during the Restricted Period, except for Permitted
Activities, neither it nor any of its Affiliates will, directly or indirectly,
own, manage, operate, control, invest or acquire an interest in, or otherwise
engage or participate in (whether as a partner, stockholder, joint venturer,
investor or other participant in) any Competitive Business in any NACT Market,
without regard to (i) whether the Competitive Business has its office,
manufacturing or other business facilities within any NACT Market, (ii) whether
any activity of GST referred to above itself occurs or is performed within any
NACT Market, or (iii) whether GST has offices located within any NACT Market.
3. NO INTERFERENCE WITH THE BUSINESS.
3.1 GST hereby agrees that, during the Restricted Period, neither it nor
any of its Affiliates will, directly or indirectly, solicit, induce or influence
any customer, supplier, lender, lessor or any other Person which had on the date
of this Agreement a business relationship with NACT in any NACT Market, to
discontinue or reduce the extent of such relationship with NACT in any NACT
Market.
3.2 GST hereby agrees that, during the Restricted Period, neither it nor
any of its Affiliates will, directly or indirectly, (i) recruit, solicit or
otherwise induce or influence any Key Employee of NACT to discontinue such
employment or agency relationship with NACT or (ii) employ or seek to employ, or
cause any
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Competitive Business to employ or seek to employ as a Key Employee for any
Competitive Business in any NACT Market, any Person who was within six months
prior to the date hereof employed by NACT as a Key Employee; provided, however,
that the foregoing restriction shall not apply to any Key Employee whose
employment is terminated by NACT.
4. NO DISCLOSURE OF PROPRIETARY INFORMATION.
4.1 GST hereby agrees that neither it nor any of its Affiliates will,
directly or indirectly, disclose to anyone, or use or otherwise exploit for its
own benefit or for the benefit of anyone other than NACT or World Access, any
Trade Secrets for as long as they remain Trade Secrets.
4.2 GST hereby agrees that, during the Restricted Period, neither it nor
any of its Affiliates will, directly or indirectly, disclose to anyone, or use
or otherwise exploit for GST's own benefit or for the benefit of anyone other
than NACT or World Access, any Confidential Information.
5. REPRESENTATIONS AND WARRANTIES.
GST represents and warrants that this Agreement constitutes the legal,
valid and binding obligation of GST, enforceable against it in accordance with
its terms. GST represents and warrants that it has no right, title, interest or
claim in, to or under any Trade Secrets or Confidential Information.
6. WAIVERS.
Neither World Access nor NACT will be deemed as a consequence of any act,
delay, failure, omission, forbearance or other indulgences granted from time to
time by World Access or NACT, as the case may be, or for any other reason (i) to
have waived, or to be estopped from exercising, any of its rights or remedies
under this Agreement, or (ii) to have modified, changed, amended, terminated,
rescind, or superseded any of the terms of this Agreement.
7. INJUNCTIVE RELIEF.
GST acknowledges (i) that any violation of this Agreement will result in
irreparable injury to World Access and NACT, (ii) that damages at law would not
be reasonable or adequate compensation to the World Access or NACT for violation
of this Agreement, and (iii) World Access and NACT shall each be entitled to
have the provisions of this Agreement specifically enforced by preliminary and
permanent injunctive relief without the necessity of proving actual damages and
without posting bond or other security, as well as to an equitable accounting of
all earnings, profits and other benefits arising out of any such violation.
8. NOTICES.
All notices and other communications provided for or permitted hereunder
shall be deemed to have been duly given and made if in writing and if served
either by personal delivery to the party for whom intended (which shall include
delivery by Federal Express or similar nationally recognized service) or five
business days after being deposited, postage prepaid, certified or registered
mail, return receipt requested, in the United States mail bearing the address
shown in this Agreement for, or such other address as may be designated in
writing hereafter by, such party:
If to GST:
GST USA, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
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If to World Access:
World Access, Inc.
Suite 2240
945 East Paces Ferry Road
Atlanta, Georgia 30326
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, NE
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.
All such notices and communications shall be deemed received upon (i)
actual receipt thereof by the addressee, or (ii) actual delivery thereof to the
appropriate address as evidenced by an acknowledged receipt.
9. SUCCESSORS IN INTEREST.
This Agreement shall be binding upon, and shall inure to the benefit of and
be enforceable by, the parties hereto and their respective heirs, legal
representatives, successors and assigns, and any reference to a party hereto
shall also be a reference to any such heir, legal representative, successor or
assign.
10. NUMBER; GENDER.
Whenever the context so requires, the singular number shall include the
plural and the plural shall include the singular, and the gender of any pronoun
shall include the other genders.
11. CAPTIONS.
The titles and captions contained in this Agreement are inserted herein
only as a matter of convenience and for reference and in no way define, limit,
extend or describe the scope of this Agreement or the intent of any provision
hereof. Unless otherwise specified to the contrary, all references to Sections
are references to Sections of this Agreement.
12. CONTROLLING LAW; INTEGRATION; AMENDMENT.
This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware without reference to
its choice of law rules. This Agreement and the documents executed pursuant
hereto or in connection herewith supersede all negotiations, agreements and
understandings among the parties with respect to the subject matter hereof and
constitutes the entire agreement among the parties hereto. This Agreement may
not be amended, modified or supplemented except by written agreement of the
parties hereto.
13. SEVERABILITY.
Any provision hereof which is prohibited or unenforceable in any jurisdiction
will, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction will not invalidate
or render unenforceable such provision in any other jurisdiction. To the extent
permitted by law, the parties hereto waive any provision of law which renders
any such provision prohibited or unenforceable in any respect. In the event that
any provision of this Agreement should ever be deemed to exceed the time,
geographic, product or any other limitations permitted by applicable law, then
such provision shall be deemed reformed to the maximum extent permitted by
applicable law.
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14. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, and it shall not be necessary in making proof of this
Agreement or the terms hereof to produce or account for more than one of such
counterparts.
15. ENFORCEMENT OF CERTAIN RIGHTS.
Nothing expressed or implied in this Agreement is intended, or shall be
construed, to confer upon or give any Person other than the parties hereto, and
their respective heirs, legal representatives, successors or assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, or result in such Person being deemed a third party beneficiary of
this Agreement.
IN WITNESS WHEREOF, GST, World Access and NACT have each caused this
Agreement to be duly executed and delivered on its behalf by an officer
thereunto duly authorized, all as of the date first above written.
GST USA, INC.
By:
--------------------------------------
Its:
--------------------------------------
WORLD ACCESS, INC.
By:
--------------------------------------
Its:
--------------------------------------
NACT TELECOMMUNICATIONS, INC.
By:
--------------------------------------
Its:
--------------------------------------
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EXHIBIT D
STOCK AGREEMENT
STOCK AGREEMENT (the "Agreement"), dated as of December 31, 1997, between
WORLD ACCESS, INC., a Delaware corporation ("World Access"), and GST USA, INC.,
a Delaware corporation (the "Stockholder")
WHEREAS, as of the date hereof the Stockholder owns an aggregate of
5,113,712 shares of common stock, $.01 par value per share (the "Common Stock"),
of NACT Telecommunications, Inc. (the "Company") (all such shares and shares
hereafter acquired by the Stockholder prior to the termination of this Agreement
being referred to herein as the "Shares");
WHEREAS, concurrently herewith, World Access and the Stockholder have
entered into a Stock Purchase Agreement (the "Purchase Agreement") relating to
the purchase by World Access of the Shares (the "Transaction");
WHEREAS, as a condition to the willingness of World Access to enter into
the Purchase Agreement, World Access has requested that the Stockholder agree,
and, in order to induce the World Access to enter into the Purchase Agreement,
the Stockholder has agreed, to grant World Access proxies to vote the Shares;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
Section 1.01 Voting of Shares; Further Assurances. The Stockholder, by
this Agreement, with respect to those Shares that the Stockholder owns of record
on the record date for voting at any meeting (special or annual) of the
stockholders of the Company, to vote such shares (or to execute written consents
with respect to such Shares) against any Acquisition Proposal (as hereinafter
defined). The Stockholder agrees to vote the Shares owned by it beneficially to
be voted in accordance with the foregoing. For purposes hereof, Acquisition
Proposal shall mean any inquiry, proposal or acquisition or purchase of a
substantial amount of assets of the Company or of over 10% of any class of
equity securities of the Company, or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company other than the
transactions contemplated by the Purchase Agreement, or any other transaction
the consummation of which would reasonably be expected to impede, interfere
with, prevent or materially delay the Transaction or which would reasonably be
expected to dilute materially the benefits to World Access of the Transaction.
Section 1.02 No Solicitation. Prior to the closing of the Transaction (as
provided by the Purchase Agreement), the Stockholder agrees (a) that neither it
nor the Company shall, nor shall it or the Company permit their respective
officers, employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or the Company) to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to the Company's stockholders) with respect to an Acquisition
Proposal or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any individual,
partnership, firm, corporation, association, trust, unincorporated organization
or other entity, as well as any other syndicate or group that would be deemed to
be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal
and (b) to notify World Access immediately if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, the
Stockholder or the Company.
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ARTICLE II
SECTION 2.01 Notices. All notices and other communications provided for
or permitted hereunder shall be deemed to have been duly given and made if in
writing and if served either by personal delivery to the party for whom intended
(which shall include delivery by Federal Express or similar nationally
recognized service) or five business days after being deposited, postage
prepaid, certified or registered mail, return receipt requested, in the United
States mail bearing the address shown in this Agreement for, or such other
address as may be designated in writing hereafter by, such party:
If to Stockholder:
GST USA, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
If to World Access:
World Access, Inc.
Suite 2240
945 East Paces Ferry Road
Atlanta, Georgia 30326
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, NE
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.
SECTION 2.02 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 2.03 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 2.04 Entire Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements and undertakings,
both written and oral, between the parties, or any of them, with respect to the
subject matter hereof.
SECTION 2.05 Certain Events. The Stockholder agrees that this Agreement
and the obligations hereunder shall attach to the Shares and shall be binding
upon any person to which legal or beneficial ownership (as such term is applied
under Rule 13d-3 of the Exchange Act) of such Shares shall pass, whether by
operation of law or otherwise. Notwithstanding the transfer of any Shares, the
transferor shall remain liable for the performance of all obligations under this
Agreement of the transferor.
SECTION 2.06 Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
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SECTION 2.07 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 2.08 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 2.09 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without giving
effect to principles of conflicts of laws.
SECTION 2.10 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which, taken
together, shall constitute one and the same agreement.
SECTION 2.11 Termination. This Agreement shall terminate automatically
immediately upon the termination of the Purchase Agreement.
[SIGNATURES NEXT PAGE]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized representatives as of the date first
above written.
WORLD ACCESS, INC.
By:
--------------------------------------
Its:
--------------------------------------
GST USA, INC.
By:
--------------------------------------
Its:
--------------------------------------
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NACT Telecommunications, Inc.:
We consent to the inclusion of our report dated December 4, 1997, with
respect to the balance sheets of NACT Telecommunications, Inc. as of September
30, 1997 and 1996, and the related statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1997, which report appears in the Form 8-K of World Access, Inc. dated
February 20, 1998. We also consent to incorporation by reference in the
registration statements on Form S-8 (Nos. 33-77918, 33-47752 and 333-17741) of
World Access, Inc. to the above referenced report which appears in the
aforementioned Form 8-K.
KPMG Peat Marwick LLP
Salt Lake City, Utah
February 20, 1998
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[LOGO] WORLD ACCESS, INC. NEWS RELEASE
SUMMARY: WORLD ACCESS, INC. SIGNS DEFINITIVE
AGREEMENT TO ACQUIRE MAJORITY STAKE
IN NACT TELECOMMUNICATIONS, INC.
<TABLE>
<S> <C> <C> <C> <C>
CONTACT: Steven A. Odom Chairman & CEO
Hensley E. West President & COO
Mark A. Gergel Exec. VP & CFO
(404) 231-2025
</TABLE>
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- January 2, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that it has signed a definitive agreement with GST
Telecommunications, Inc. ("GST") and GST USA, Inc., a wholly owned subsidiary of
GST ("GST USA"), to acquire 4,105,043 shares of NACT Telecommunications, Inc.
("NACT") common stock held by GST USA. NACT (NASDAQ: NACT) is a Provo, Utah
based provider of advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT's
customers include national and international long distance carriers, prepaid
debit and prepaid cellular network operators, international
callback/reorigination providers and other specialty telecommunications service
providers.
Pursuant to the terms of a Stock Purchase Agreement, World Access will pay
GST $17.50 per share of NACT common stock, or approximately $71.8 million, $59.6
million of which will be paid in cash and $12.2 million of which will be paid
through the issuance of shares of World Access common stock. The completion of
this transaction, currently scheduled for mid-February, will raise World Access'
equity ownership in NACT to approximately 55%. In addition, GST has the option
under the Agreement to sell World Access the remaining 1,008,669 shares of NACT
common stock held by GST USA at the same price of $17.50 per share, or
approximately $17.7 million, payable through the issuance of shares of World
Access common stock. IF GST elects to exercise this option, World Access' equity
ownership in NACT will increase to approximately 67%.
World Access intends to promptly propose a merger with NACT pursuant to
which all of the shares of NACT common stock not owned by World Access would be
exchanged for shares of World Access common stock. The merger would be
contingent upon the completion of the GST stock purchase.
World Access also announced today, that upon the completion of its pending
acquisition of Advanced TechCom, Inc. ("ATI") and the NACT stock purchase, it
expects to record a significant one-time charge to earnings for in-process ATI
and NACT research and development projects and other related costs. The exact
amount of the one-time charge has not yet been determined.
Steven A. Odom, Chairman and Chief Executive Officer, said "The acquisition
of NACT, which is expected to be accretive to World Access' 1998 earnings, is in
line with the Company's strategy to broaden its offering of switching, transport
and access products and fully support its customers as they build new and/or
upgrade existing telecommunications networks. NACT has been providing its
customers comprehensive telecommunications network equipment and services since
1982. It has enjoyed considerable growth and success in recent years since the
introduction of its STX tandem switch in February 1996. The STX switch, when
combined with NACT's multi-tasking billing systems, provide a turnkey package
for the emerging interexchange carrier industry. We believe that the STX switch
represents today's benchmark for the fast growing, specialty application
switching systems industry."
"We are particularly pleased that Lindsay Wallace, President and Chief
Executive Officer of NACT, will continue to manage NACT as a majority owned
subsidiary of World Access. Under the leadership of Mr. Wallace, and his
outstanding team of engineering, sales and operations professionals, NACT
reported record revenues of $27.7 million and pre-tax income of $6.3 million in
its most recently completed fiscal year,
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increases of 70% and 2200%, respectively from the previous year's results. We
are optimistic that World Access' financial strength, extensive customer base,
engineering capabilities and broad range of manufacturing and support services
will further support NACT's existing business and provide additional sales and
profit growth opportunities for both companies."
Mr. Odom added, "World Access will be sponsoring a conference call on
Monday, January 5th at 4:30 E.S.T. to further review the strategic and financial
impact of the NACT and ATI acquisitions with our shareholders and other
interested parties. Further information on the conference call will be released
later today."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales, the Company also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services. The Company is
headquartered in Atlanta, Georgia and conducts its principal operations from
eight facilities located strategically throughout the United States.
E-93
<PAGE> 439
APPENDIX F
<PAGE> 440
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 12, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD,
SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive (Zip Code)
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-1
<PAGE> 441
ITEM 5. OTHER EVENTS.
On February 12, 1998, World Access, Inc. (the "Company") announced that it
had signed a letter of intent to acquire Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) ("Resurgens") in a merger transaction
upon terms to be negotiated.
Also on February 12, 1998, the Company announced a delay in reporting
earnings due to the negotiations with Resurgens.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
99.1 Letter of Intent dated February 12, 1998 between World Access, Inc.
and Cherry Communications Incorporated (d/b/a Resurgens
Communications Group).
99.2 Press Release issued on February 12, 1998 (regarding execution of
letter of intent).
99.3 Press Release issued on February 12, 1998 (regarding delay in
announcing earnings).
F-2
<PAGE> 442
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of February 20, 1998
F-3
<PAGE> 443
EXHIBIT 99.1
February 12, 1998
CONFIDENTIAL
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
945 East Paces Ferry Road
Atlanta, Georgia 30326
Attn: Mr. John D. Phillips, Chairman and Chief Executive Officer
Gentlemen:
This letter sets forth the terms upon which World Access, Inc., a Delaware
corporation ("Acquiror"), and Cherry Communications Incorporated, (d/b/a
Resurgens Communications Group) an Illinois corporation ("Target"), agree to
enter into discussions regarding a possible business combination between Target
and Acquiror (the "Transaction").
In consideration of the mutual covenants set forth below, Acquiror and
Target agree as follows:
1. Proposed Terms.
Attached as Exhibit A is a Preliminary Summary Term Sheet (the "Term
Sheet") for the Transaction. Although it is the intent of the parties that their
discussions initially proceed based on the Term Sheet, the terms contained in
the Term Sheet have not been agreed to by the parties, are not binding on the
parties, are subject to change based upon due diligence results and are not
intended to create rights in favor of the parties with respect to the
Transaction. Without limiting the generality of the foregoing, it is the intent
of the parties that, until the execution and delivery of a definitive agreement
with respect to the Transaction, no agreement shall exist among them and there
shall be no obligations whatsoever based on such things as parol evidence,
extended negotiations, "handshakes," oral understandings or courses of conduct
(including reliance and changes of position). The obligations of the parties to
consummate the Transaction shall be subject in all respects to the negotiation,
execution and delivery of a definitive agreement approved by the boards of
directors of Acquiror and Target and the satisfaction of the conditions
contained in the definitive agreement, including, without limitation, any
necessary corporate and regulatory approval and the confirmation of the Target's
Plan of Reorganization. However, the obligations of Acquiror and Target pursuant
to section 2 of this
letter are intended to be binding and enforceable obligations of Acquiror and
Target, with Section 2 continuing in full force and effect until this letter of
intent is terminated pursuant to Section 2 hereof.
2. Public Announcements; Termination.
A. Public Announcements. Target will not, at any time, without the prior
written consent of Acquiror, make any announcement, issue any press release or
make any other public statement with respect to this letter of intent or any of
the terms or conditions hereof except as may be necessary to comply with any
law, regulation or order and then only after prior written notice to Acquiror of
the timing, context and content of such announcement, press release or
statement.
B. Termination. This letter of intent may be terminated (i) by mutual
consent of the parties; or (ii) by either party if the Definitive Agreement has
not been executed by April 30, 1998.
F-4
<PAGE> 444
Please indicate your agreement with the terms of this letter by executing
it in the space provided below and returning a copy to us.
Very truly yours,
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
----------------------------------
Name: Steven A. Odom
Title: Chairman and CEO
AGREED AND ACCEPTED:
CHERRY COMMUNICATIONS INCORPORATED
(d/b/a Resurgens Communications Group)
By: /s/ JOHN D. PHILLIPS
----------------------------------
Name: John D. Phillips
Title:
F-5
<PAGE> 445
CONFIDENTIAL
PRELIMINARY SUMMARY TERM SHEET
February 12, 1998
1. Structure of Transaction and Consideration.
A. Structure of Transaction. A wholly-owned subsidiary of Acquiror or an
affiliate of Acquiror will merged with and into Target (the "Merger").
B. Consideration. In connection with the Merger, all of the outstanding
capital stock of Target and certain of its outstanding indebtedness will be
converted into the right to receive shares of the Acquiror's capital stock in
amounts to be negotiated.
2. Definitive Agreement.
A. Definitive Agreement. The parties will negotiate in good-faith to
prepare and execute a definitive merger agreement as soon as possible to give
effect to the Merger (the "Definitive Agreement"). The Definitive Agreement will
be subject to the satisfactory completion of Acquiror's due diligence
investigation of Target, approval of its board of directors and such other
conditions upon which the parties may agree.
B. Closing Conditions. The closing of the Merger will be subject to the
satisfaction or waiver of customary conditions, including, without limitation,
the receipt of all necessary corporate and regulatory approvals, the
confirmation of Target's Plan of Reorganization, and such other conditions upon
which the parties may agree.
C. Customary Terms. The Definitive Agreement will contain representations,
conditions, covenants and the like typical in agreements for transactions such
as the one proposed.
F-6
<PAGE> 446
EXHIBIT 99.2
SUMMARY: WORLD ACCESS, INC. SIGNS LETTER OF INTENT TO ACQUIRE RESURGENS
COMMUNICATIONS GROUP
CONTACT: Steven A. Odom, Chairman & CEO
Hensley E. West, President & COO
Mark A. Gergel, Exec. VP & CFO
(404) 231-2025
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- February 12, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that it has signed a letter of intent to acquire Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) ("Resurgens")
in a merger transaction upon terms to be negotiated. Resurgens, currently
operating under the protection of Chapter 11 of the United States Bankruptcy
Code, is a facilities-based provider of international network access, commonly
referred to in the industry as a carriers' carrier. Resurgens had revenues of
approximately $180 million in 1997.
The transaction is subject to, among other things, the satisfactory
completion by World Access of its due diligence investigation of Resurgens, the
preparation and execution of a definitive merger agreement, the receipt of the
requisite corporate and regulatory approvals and the confirmation of Resurgens'
Plan of Reorganization. World Access has retained The Robinson-Humphrey Company,
Inc. as its financial advisor in connection with the transaction.
In October 1997, John D. ("Jack") Phillips entered into a series of
agreements whereby, among other things, he became the new Chairman and Chief
Executive Officer of Resurgens and Resurgens was placed into bankruptcy.
WorldCom, Inc. ("WorldCom"), a major customer and vendor of Resurgens, has
subsequently agreed to provide Resurgens up to $28 million in financing in the
form of a debtor in possession facility and other credits. Upon consummation of
the anticipated Plan of Reorganization, WorldCom is expected to own
approximately 55% of the outstanding stock of Resurgens.
Steven A. Odom, Chairman and Chief Executive Officer of World Access, said,
"The acquisition of Resurgens would be in line with the Company's strategy to
provide its customers with a complete telecommunications network solution,
including switching, transport and access products and related services. The
international network access product offered by Resurgens is a critical element
of new and expanded networks currently being planned or implemented by many
customers of World Access. We believe the ability to offer both equipment and
network access would provide World Access with a more comprehensive and
cost-competitive product offering, especially for international competitive
local exchange providers ("CLECs") and other providers of phone service in
emerging growth markets."
"We are excited that Jack Phillips, a director of World Access, has agreed
to serve as the Chairman of the combined company upon consummation of the
transaction. He is one of the pioneers of the U.S alternative long distance
business, having built up Advanced Telecommunications Corporation, which merged
with WorldCom in 1992, and Resurgens Communications Group, Inc., which merged
with Metromedia Communications Corporation and WorldCom in 1993. We are also
extremely pleased that WorldCom, a recognized leader in today's
telecommunications industry, will become the largest stockholder of the combined
company in the event the transaction is consummated."
John D. Phillips, Chairman and Chief Executive Officer of Resurgens, said
"Steve Odom and his management team have done a tremendous job over the past
three years of building World Access into a highly respected, fast growing
telecommunications equipment manufacturer. Steve will continue to serve as the
Chief Executive Officer of the combined company and I look forward to working
with him as we continue to work towards achieving significant long-term value
for World Access stockholders. Upon consummation of the Resurgens merger, World
Access will be exceptionally well positioned to provide its customers a unique,
comprehensive and value-added telecommunications network solution and to pursue
the significant growth opportunities present within the worldwide
telecommunications markets."
F-7
<PAGE> 447
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales, the Company also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services.
Except for any historical information contained herein, the matters
discussed in this press release contain forward-looking statements that involve
risks and uncertainties which are described in the Company's SEC reports,
including the Company's Annual Report on Form 10-K for the year ended December
31, 1996, the Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1997, June 30, 1997 and September 30, 1997 and the Company's
Registration Statement on Form S-3 (No. 333-07087).
F-8
<PAGE> 448
EXHIBIT 99.3
SUMMARY: WORLD ACCESS, INC. ANNOUNCES DELAY IN REPORTING EARNINGS DUE TO
PENDING ACQUISITION
CONTACT: Steven A. Odom, Chairman & CEO
Hensley E. West, President & COO
Mark A. Gergel Exec. VP & CFO
(404) 231-2025
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- February 12, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that during the fourth quarter of 1997 it shipped approximately
$9.4 million of switching equipment to Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("Resurgens"). Earlier today in a separate press
release, World Access announced that it has signed a letter of intent to acquire
Resurgens. In view of the execution of the letter of intent, World Access will
not record the shipment to Resurgens as revenue in the fourth quarter of 1997.
As a result, the Company will not meet analysts' consensus estimates for the
fourth quarter and year ended December 31, 1997. Accordingly, the Company has
delayed its previously scheduled release of financial results for the fourth
quarter and the year ended December 31, 1997 pending the outcome of its
negotiations with Resurgens.
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales, the Company also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services.
Except for any historical information contained herein, the matters
discussed in this press release contain forward-looking statements that involve
risks and uncertainties which are described in the Company's SEC reports,
including the Company's Annual Report on Form 10-K for the year ended December
31, 1996, the Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1997, June 30, 1997 and September 30, 1997 and the Company's
Registration Statement on Form S-3 (No. 333-07087).
F-9
<PAGE> 449
APPENDIX G
<PAGE> 450
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 27, 1998
WORLD ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD,
SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive (Zip Code)
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 451
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 31, 1997, GST Telecommunications, Inc., a federally chartered
Canadian corporation ("GST"), GST USA, Inc., a Delaware corporation ("GST USA"),
and World Access, Inc. ("World Access") entered into a Stock Purchase Agreement
(the "Purchase Agreement"), pursuant to which World Access has agreed to
purchase from GST USA (hereinafter referred to as the "Acquisition") 5,113,712
shares of the common stock of NACT Telecommunications, Inc. ("NACT") held by GST
USA (hereinafter referred to as the "Shares"), representing approximately 63% of
the outstanding shares of NACT common stock, $.01 par value per share (the "NACT
Common Stock").
On February 27, 1998, the Acquisition was consummated and World Access paid
to GST USA cash in the amount of $59,662,956 and delivered to GST USA 1,429,907
shares of World Access common stock (the "World Access Common Stock"). The
foregoing summary of the Acquisition is qualified in its entirety by reference
to the terms of the Purchase Agreement and the exhibits thereto, which are
included as Exhibit 2.1 hereto.
In connection with the consummation of the Acquisition, W. Gordon
Blankstein, Stephen Irwin, Robert Olson and Clifford V. Sander, each designees
of GST USA, resigned from NACT's Board of Directors and Steven A. Odom, Hensley
E. West, Mark A. Gergel and Scott N. Madigan, each executive officers of World
Access, were appointed to fill the vacancies thus created.
The consideration paid pursuant to the Purchase Agreement was determined as
a result of negotiations between World Access and GST and the Acquisition was
approved by the boards of directors of World Access, GST and NACT. Prior to the
Acquisition, neither World Access nor any of its affiliates, directors or
officers, nor any associate of any such director or officer, had any
relationship with GST, GST USA or NACT.
Between November 12, 1997 and December 9, 1997, World Access purchased an
aggregate of 355,000 shares of NACT Common Stock in open market purchase
transactions (the "Open Market Purchase"). Accordingly, after the completion of
the Acquisition World Access now owns approximately 68% of the outstanding NACT
Common Stock.
On February 24, 1998 World Access entered into a merger agreement with NACT
pursuant to which World Access agreed to acquire all of the shares of NACT
Common Stock not already then owned by World Access or GST USA. Pursuant to the
terms of the merger agreement, each share of NACT Common Stock will be converted
into shares of World Access Common Stock having a value of $17.50 per share
based on the average of the daily closing price of the World Access Common Stock
on the NASDAQ National Market on each of the twenty consecutive trading days
ending with the third day immediately preceding the effective time of the merger
(the "Closing Price"), provided that if the Closing Price is more than $25.52,
then each share of NACT Common Stock will be converted into 0.6857 shares of
World Access Common stock, and if the Closing Price is less than $20.88, then
World Access can terminate the agreement. The merger agreement was negotiated on
behalf of NACT by a Special Committee of the NACT Board and has been approved by
the Boards of Directors of NACT and World Access. In addition, NACT has received
a fairness opinion with respect to the merger from NationsBanc Montgomery
Securities LLC. The merger is subject to, among other things, the approval of
the NACT stockholders and the satisfaction of certain other customary
conditions.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this Report are
the audited consolidated financial statements of NACT for the years ended
September 30, 1997, 1996 and 1995, which have been audited by the independent
accounting firm of KPMG Peat Marwick, LLP, whose opinion thereon is also
included herein, and the unaudited consolidated financial statements of NACT for
the three months ended December 31, 1997.
G-1
<PAGE> 452
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NACT TELECOMMUNICATIONS, INC.:
Independent Auditors' Report.............................. G-3
Balance Sheets -- September 30, 1997 and 1996............. G-4
Statements of Income Years Ended -- September 30, 1997,
1996 and 1995.......................................... G-5
Statements of Stockholders' Equity Years
Ended -- September 30, 1997, 1996 and 1995............. G-6
Statements of Cash Flows Years Ended -- September 30,
1997, 1996 and 1995.................................... G-7
Notes to Financial Statements Years Ended -- September 30,
1997, 1996, and 1995................................... G-9
NACT TELECOMMUNICATIONS, INC.:
Balance Sheets -- December 31, 1997 (Unaudited) and
September 30, 1997 (audited)........................... G-20
Statements of Income Three Months Ended -- December 31,
1997 and 1996 (Unaudited).............................. G-21
Statements of Cash Flows Three Months Ended -- December
31, 1997 and 1996 (Unaudited).......................... G-22
Notes to Financial Statements Three Months
Ended -- September 30, 1997 and 1996 (Unaudited)....... G-23
</TABLE>
G-2
<PAGE> 453
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders NACT Telecommunications, Inc.:
We have audited the accompanying financial statements of NACT
Telecommunications, Inc. as listed in the accompanying index. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NACT Telecommunications,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
KPMG Peat Marwick LLP
Salt Lake City, Utah
December 4, 1997
G-3
<PAGE> 454
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 11 and 12)................. $ 9,946,621 694,359
Marketable investment securities (note 3)................... 3,247,296 250,000
Trade accounts receivable, less allowance for doubtful
accounts of $380,819 in 1997 and $100,000 in 1996......... 6,840,958 3,171,180
Notes receivable, less allowance for doubtful notes of
$250,000 in 1997 and $310,000 in 1996 (note 4)............ 3,252,170 561,396
Inventories (note 2)........................................ 2,780,467 2,406,399
Prepaid expenses and other.................................. 197,659 16,338
Deferred tax assets (note 8)................................ 587,199 418,449
----------- ----------
Total current assets.............................. 26,852,370 7,518,121
----------- ----------
Property and equipment, net (note 5)........................ 5,783,157 717,804
Notes receivable, less current installments (note 4)........ 966,868 1,179,750
Inventories -- long term (note 2)........................... 225,000 --
Intangibles, net (notes 4 and 6)............................ 5,775,673 5,075,366
Other assets................................................ 152,043 193,709
----------- ----------
$39,755,111 14,684,750
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,432,922 2,251,800
Accrued expenses............................................ 963,034 266,451
Income taxes payable (note 8)............................... 1,353,371 199,557
Deferred revenue............................................ 466,859 350,439
Current installments of obligation under capital lease...... -- 21,848
Payable to GST USA.......................................... 1,446,891 183,176
----------- ----------
Total current liabilities......................... 5,663,077 3,273,271
Obligation under capital lease, less current installments... -- 58,221
Deferred compensation (note 13)............................. 157,819 157,819
Deferred tax liabilities (note 8)........................... 929,984 985,508
----------- ----------
Total long-term liabilities....................... 1,087,803 1,201,548
----------- ----------
Commitments and contingencies (notes 9, 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued and outstanding in 1997 and 1996...... -- --
Common stock, $.01 par value in 1997 and no par value in
1996
Authorized 25,000,000 and 10,000,000 shares in 1997 and
1996, respectively; issued and outstanding 8,113,712
shares in 1997 and 6,113,712 shares 1996............... 81,137 9,244,847
Additional paid-in-capital.................................. 28,130,161 --
Retained earnings........................................... 4,780,760 965,255
Net unrealized gain (loss) on marketable investment
securities (note 3)....................................... 12,173 (171)
----------- ----------
Total stockholders' equity........................ 33,004,231 10,209,931
----------- ----------
$39,755,111 14,684,750
=========== ==========
</TABLE>
See accompanying notes to financial statements.
G-4
<PAGE> 455
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product sales............................................. $21,981,854 $ 9,929,702 $ 7,604,071
Network carrier sales..................................... 5,716,406 3,783,445 2,781,761
Wins (note 1(b)).......................................... -- 2,571,731 1,097,950
----------- ----------- -----------
Total revenues.................................. 27,698,260 16,284,878 11,483,782
----------- ----------- -----------
Cost of goods sold (note 6):
Products.................................................. 7,140,914 3,941,529 2,645,646
Network carrier usage (note 13)........................... 5,485,671 3,381,716 2,731,295
Wins (note 1(b)).......................................... -- 2,571,731 786,699
Amortization of acquired intangibles...................... 362,424 362,428 442,734
----------- ----------- -----------
Total cost of goods sold........................ 12,989,009 10,257,404 6,606,374
----------- ----------- -----------
Gross profit.............................................. 14,709,251 6,027,474 4,877,408
Operating expenses (note 6):
Research and development.................................. 2,385,243 1,352,138 1,183,422
Selling and marketing..................................... 2,504,420 953,486 924,542
General and administrative................................ 3,472,069 3,024,361 2,152,898
Amortization of acquired intangibles...................... 573,060 573,058 519,780
----------- ----------- -----------
Total operating expenses........................ 8,934,792 5,903,043 4,780,642
----------- ----------- -----------
Income from operations.................................... 5,774,459 124,431 96,766
----------- ----------- -----------
Other income (expense):
Interest income........................................... 543,410 127,043 155,949
Interest expense.......................................... (30,456) (14,202) (1,514)
Miscellaneous income...................................... 4,439 34,670 34,635
----------- ----------- -----------
Total other income.............................. 517,393 147,511 189,070
----------- ----------- -----------
Income before income taxes................................ 6,291,852 271,942 285,836
Income taxes (note 8)..................................... 2,476,347 78,184 205,517
----------- ----------- -----------
Net income................................................ $ 3,815,505 $ 193,758 $ 80,319
----------- ----------- -----------
Earnings per common and common equivalent share:
Primary................................................... $0.52 $0.03 $0.01
Fully diluted............................................. $0.50 $0.03 $0.01
</TABLE>
See accompanying notes to financial statements.
G-5
<PAGE> 456
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL MARKETABLE
---------------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ---------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1994.......................... 6,113,712 $6,277,572 $ -- $ 691,178 $ -- $6,968,750
Capital contribution by parent
company (note 1(l))........... -- 414,981 -- -- -- 414,981
Addition to capital arising from
push down accounting.......... -- 2,162,384 -- -- -- 2,162,384
Net unrealized gain on
marketable investment
securities.................... -- -- -- -- 3,605 3,605
Net income...................... -- -- -- 80,319 -- 80,319
--------- ---------- ----------- ---------- ------- ----------
Balances at September 30,
1995.......................... 6,113,712 8,854,937 -- 771,497 3,605 9,630,039
Capital contribution by parent
company (note 1(l))........... -- 389,910 -- -- -- 389,910
Net unrealized loss on
marketable investment
securities.................... -- -- -- -- (3,776) (3,776)
Net income...................... -- -- -- 193,758 -- 193,758
--------- ---------- ----------- ---------- ------- -----------
Balances at September 30,
1996.......................... 6,113,712 9,244,847 -- 965,255 (171) 10,209,931
Capital contribution by parent
company (note 1(l))........... -- -- 899,799 -- -- 899,799
Issuance of common stock for
cash, net of expenses of
$1,933,348.................... 2,000,000 20,000 18,046,652 -- -- 18,066,652
Net unrealized gain on
marketable investment
securities.................... -- -- -- -- 12,344 12,344
Reclass of common stock to
additional paid-in capital
resulting from establishing a
par value on common stock..... -- (9,183,710) 9,183,710 -- -- --
Net income...................... -- -- -- 3,815,505 -- 3,815,505
--------- ---------- ----------- ---------- ------- -----------
Balances at September 30,
1997.......................... 8,113,712 $ 81,137 $28,130,161 $4,780,760 $12,173 $33,004,231
========= ========== =========== ========== ======= ===========
</TABLE>
See accompanying notes to financial statements.
G-6
<PAGE> 457
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $3,815,505 193,758 80,319
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 1,431,226 1,165,885 1,212,039
Provision for loss on accounts, notes receivable, and
recourse obligation................................... 1,385,734 942,785 229,342
Loss (gain) on sale of marketable investment
securities and equipment............................ 45,699 (4,399) (34,635)
Capital contribution by parent company................ 899,799 389,910 414,981
Provision for loss on inventories..................... 111,000 -- --
Deferred taxes........................................ (224,274) (374,127) (271,762)
Decrease (increase) in operating assets:
Trade accounts and notes receivable................. (8,374,533) (1,980,342) (2,266,741)
Inventories......................................... (920,068) (2,019,310) 19,873
Prepaid expenses.................................... (181,321) 89,441 (94,484)
Other assets........................................ 41,666 58,360 (227,882)
Increase (decrease) in operating liabilities:
Accounts payable.................................... (818,878) 888,670 1,210,516
Accrued expenses.................................... 496,583 45,287 148,411
Income taxes payable................................ 1,153,814 60,578 (208,468)
Deferred revenue and deferred compensation.......... 116,420 193,475 180,844
Payable to GST USA.................................. 1,263,715 243,176 --
---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 242,087 (106,853) 392,353
---------- ---------- ----------
Cash flows from investing activities:
Purchase of land, plant, and equipment..................... (5,169,888) (304,614) (326,796)
Proceeds from sale of equipment............................ -- -- 34,635
Proceeds from sale of available-for-sale securities........ 250,000 596,836 --
Purchase of available-for-sale securities.................. (3,234,952) -- --
Capitalization of software development costs............... (821,568) (419,154) (162,025)
Cash included in transfer of Wins to parent (note 1)....... -- (173,718) --
---------- ---------- ----------
Net cash used in investing activities............ (8,976,408) (300,650) (454,186)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock..................... 18,066,652 -- --
Principal payments on capital lease obligations............ (80,069) (19,868) (2,271)
---------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... 17,986,583 (19,868) (2,271)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....... 9,252,262 (427,371) (64,104)
Cash and cash equivalents at beginning of year............. 694,359 1,121,730 1,185,834
---------- ---------- ----------
Cash and cash equivalents at end of year................... $9,946,621 694,359 1,121,730
---------- ---------- ----------
</TABLE>
G-7
<PAGE> 458
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
---------- ---------- ----------
Supplemental Schedule of Noncash Investing and Financing
Activities
Reclass of common stock to additional paid-in capital
resulting from establishing a par value on common
stock.................................................... $9,183,170 -- --
Disposition of fully depreciated asset..................... -- 132,270 --
Repossession of equipment in settlement of accounts and
notes receivable......................................... 76,922 45,000 128,936
Property purchased under capitalized leases................ -- -- 102,208
Transfer of inventory to property, plant, and equipment.... 210,000 -- --
Intangibles capitalized as a result of push down........... -- -- 2,162,384
Disposition of equipment................................... -- 47,366 --
Sale of equipment to Wins on note receivable............... -- 60,000 --
Transfer of notes receivable to other assets (note 4)...... 964,207 -- --
Change in net unrealized gain (loss) on marketable
investment securities.................................... 12,344 (171) --
Supplemental Disclosures of Cash Flow Information Cash paid
during the year for interest............................. $ 30,457 17,707 1,145
Cash paid during the year for income taxes................. 638,287 -- 263,735
Supplemental Disclosure of the Assets and Liabilities
Transferred to GST (note 1(b))
Cash....................................................... $ -- (173,718) --
Trade accounts receivable.................................. -- (68,705) --
Prepaid expenses........................................... -- (751) --
Property and equipment, net................................ -- (46,020) --
Other assets............................................... -- (14,036) --
Accounts payable........................................... -- 150,898 --
Accrued expenses........................................... -- 152,332 --
</TABLE>
See accompanying notes to financial statements.
G-8
<PAGE> 459
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Description of Business
NACT Telecommunications, Inc. (the "Company") designs, develops and
manufactures advanced telecommunications switching platforms with integrated
applications software and network telemanagement capabilities. The Company's
customers include long distance carriers, prepaid debit (calling) card and
prepaid cellular network operators, international call back/reorigination
providers and other specialty telecommunications service providers.
From September 1993 through September 30, 1995, GST USA, Inc. ("GST USA")
acquired all of the issued and outstanding common stock of the Company. This
acquisition was accomplished through a series of purchases of newly issued
shares and the shares of principal stockholders of the Company. As a result of
these transactions, the Company became a wholly owned subsidiary of GST USA. GST
USA accounted for the acquisition using the purchase method of accounting. The
excess of the purchase price over the fair value of the assets acquired totaled
$6,912,322 and was assigned by GST USA as product support contracts, software
development costs, and goodwill. These amounts are included in the accompanying
balance sheet as intangible assets.
In February 1997, the Company closed an initial public offering (IPO) of
3,000,000 shares of common stock with 2,000,000 sold by the Company and
1,000,000 sold by GST USA. Upon completion of the offering, GST USA ownership
was reduced to approximately 63 percent of the outstanding common stock of the
Company and, as such, GST USA continues to control the Company. In connection
with the IPO, the Company established a par value of $.01 for common stock,
increased the number of common shares authorized to 25,000,000, and authorized
10,000,000, $.01 par value preferred shares.
On September 30, 1997, GST USA announced that it had retained Hambrecht and
Quist LLC to explore alternatives for monetizing its 63 percent interest in the
Company, including a potential sale of some or all of the Company's capital
stock to one or more strategic investors.
(b) Wasatch International Network Services
The 1995 financial statements include the accounts of the Company and its
wholly-owned subsidiary Wasatch International Network Services, Inc. ("Wins"),
which commenced operations in fiscal 1995 and had total assets, revenues, and
net loss of $316,455, $1,097,950 and $2,361, respectively, as of and for the
year ended September 30, 1995. All significant intercompany transactions and
balances were eliminated in consolidation. On October 1, 1995, the Company
transferred ownership and operations of Wins to GST USA in the form of a
dividend at historical cost. From October 1, 1995 through September 30, 1996,
the Company provided carrier services to GST USA for the Wins operation for
which it received $2,571,731. GST USA began providing its own carrier services
for Wins on October 1, 1996.
(c) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of three months or less to be cash
equivalents. Cash equivalents consist of money market accounts of $8,472,637 at
September 30, 1997 and $125,785 at September 30, 1996.
(d) Inventories
Raw materials are valued at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods are stated on the basis of
accumulated manufacturing costs, but not in excess of market (net realizable
value). Refurbished inventory is stated at the estimated selling price less
refurbishing costs, selling costs and a
G-9
<PAGE> 460
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
normal profit margin. Management periodically reviews the selling price of the
refurbished inventory and records adjustments to the carrying value, if any, in
the period in which they occur.
Long-term inventory consists of component parts held in order to provide
support on existing customer equipment beyond one year.
(e) Notes Receivable
Notes receivable are recorded at the principal amount outstanding, net of
an allowance for doubtful notes. The allowance is an amount that management
believes will be adequate to absorb possible losses based on evaluations of
collectibility and prior loss experience. The evaluation takes into
consideration such factors specific problem loans, past payment history, and
current and anticipated economic conditions that may affect the customers'
ability to pay.
While management uses available information to recognize losses on notes,
changing economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance.
(f) Impaired Notes
Management, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a note is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income thereafter.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes. Depreciation is based
upon the estimated useful lives of individual classes of assets. The estimated
useful lives of the individual classes of assets are as follows:
<TABLE>
<S> <C>
Building................................................. 35 years
Furniture and equipment.................................. 7-10 years
Computer equipment....................................... 3-7 years
Switch and testing equipment............................. 3-7 years
</TABLE>
(h) Intangibles
Intangibles include goodwill, software development costs, customer lists,
and product support contracts and are being amortized on a straight-line basis
over the estimated useful lives of the respective assets.
(i) Software Development Costs
Software development costs are capitalized upon the establishment of
technological feasibility of the product. Capitalization is discontinued when
the product is available for general release to customers. The Company
capitalized software development costs of $821,568, $419,154, and $162,025 in
1997, 1996, and 1995, respectively.
(j) Stock-Based Compensation
Effective October 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt
the fair value based method of accounting for stock options or similar equity
instruments. However, it also allows an entity to continue measuring
compensation cost for stock-based
G-10
<PAGE> 461
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
compensation using the intrinsic-value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue to apply the provisions
of APB 25 and provide pro forma footnote disclosures required by SFAS 123.
(k) Revenue Recognition and Deferred Revenue
Revenue from product sales is recognized when the product is shipped and
the Company has no significant performance obligations. Revenue from network
carrier sales is recognized as the related service is provided. Deferred revenue
consists of warranty payments billed or received in advance and deposits related
to future product sales. Warranty payments are amortized over the period of the
warranty agreement which is typically one year.
(l) Income Taxes
Through February 26, 1997, the Company was a member of a controlled group
which elected for federal income tax purposes to file a consolidated tax return
with GST USA. In accordance with the tax sharing arrangement with GST USA, the
Company recorded the estimated income tax expense as if the Company filed a tax
return on a separate company basis using the asset and liability method. GST USA
agreed to make a capital contribution to the Company in an amount that
approximates the Company's current federal income tax expense through February
26, 1997 in lieu of an intercompany payment for such taxes. Pursuant to the tax
sharing arrangement between the Company and GST USA, the adjustment recorded to
reconcile the intercompany and equity accounts with regard to differences
between the estimated tax determined at year-end and the final tax amount are
recognized in income tax expense in the period determined.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and deferred
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and deferred 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.
After the IPO on February 26, 1997, GST USA's ownership was reduced to 63
percent. As a result, the entities no longer meet the affiliated group test
defined in Internal Revenue Code Section 1504(a) and the Company will file
stand-alone returns for periods subsequent to February 26, 1997.
(m) Marketable Investment Securities
The Company classifies all of its marketable investment securities as
available-for-sale which are recorded at fair market value. Unrealized holding
gains and losses are excluded from earnings and are reported, net of tax, as a
separate component of stockholders' equity until realized. A decline in the
market value of any available-for-sale security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost basis for the security. Dividend income is recognized when earned. Realized
gains and losses are included in earnings and are derived using the
specific-identification method for securities sold.
(n) Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed based on the
weighted-average number of common shares and as appropriate, dilutive common
stock equivalents outstanding during the period. Stock options are considered to
be common stock equivalents. The number of shares used to compute primary
earnings per common and common equivalent share were 7,350,623, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively. The number of shares
used to compute fully-diluted earnings per share reflect additional dilution
related to stock options and warrants using the market price at the end of the
period
G-11
<PAGE> 462
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
when higher than the average price for the period. The number of shares used to
compute fully-diluted earnings per share were 7,602,156, 6,113,712, and
6,113,712, shares in 1997, 1996, and 1995, respectively.
(o) Fair Value Disclosure
At September 30, 1997 and 1996, the book value of the Company's financial
instruments approximates fair value.
(p) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the 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 these estimates.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Raw materials........................................ $1,065,113 377,734
Work-in-process...................................... 498,525 346,273
Finished goods....................................... 302,829 317,392
Refurbished inventory held for sale.................. 914,000 1,365,000
---------- ---------
$2,780,467 2,406,399
---------- ---------
Inventory -- long-term............................... $ 225,000 --
---------- ---------
</TABLE>
(3) MARKETABLE INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale securities by major
security type and class of security at September 30, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
At September 30, 1997:
U.S. government securities --
Maturing in one year or less............... $2,237,009 10,287 -- 2,247,296
Certificate of deposit --
Maturing in one year or less............... 998,114 1,886 -- 1,000,000
---------- ------ --- ---------
$3,235,123 12,173 -- 3,247,296
========== ====== === =========
At September 30, 1996:
U.S. government securities --
Maturing in one year or less............... $ 250,171 -- 171 250,000
---------- ------ --- ---------
$ 250,171 -- 171 250,000
========== ====== === =========
</TABLE>
G-12
<PAGE> 463
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES RECEIVABLE
Notes receivable at September 30, 1997 and 1996 include amounts due from
product sales of approximately $4,065,638 and $1,047,500, respectively. Interest
rates on the notes range from 9 percent to 14 percent with lives ranging from
six months to five years.
The Company's recorded investment in notes receivable for which an
impairment has been recognized was $137,032 and $928,210, and the related
allowance for doubtful accounts was $137,032 and $310,000 at September 30, 1997
and 1996, respectively. The average recorded investment in impaired notes
receivable during 1997 and 1996, was $532,261 and $548,331, respectively. There
was no interest income recognized on impaired notes receivable during 1997 and
1996.
The Company has sold carrier services to Overseas Telecom ("Overseas")
since 1994. Overseas is located in Brazil and provides international call
back/reorigination services to companies and individuals primarily in Brazil and
Eastern Europe. During the year ended September 30, 1996, Overseas became
delinquent on certain of its payments. In fiscal 1997, the Company entered into
a note receivable agreement with Overseas which provided for the repayment of
the noncurrent outstanding amount (approximately $0.93 million) bearing interest
at 12 percent. The note was secured primarily by Overseas' customer lists. In
the fourth quarter of fiscal 1997, the Company exercised its call privileges
under the note and took possession of the underlying collateral -- the customer
lists. There were two separate and distinct customer lists, one from Brazil and
one from Eastern Europe. The customer list related to the Brazilian operations
was sold to Intertoll Communications Network Corp. ("ICN"), an existing customer
of the Company with operations in Argentina and Brazil for $1,000,000 payable in
100 monthly payments of $10,000. The related payments have been discounted at 20
percent with the unpaid amount of approximately $485,000 classified as notes
receivable in the accompanying balance sheet as of September 30, 1997.
The customer list related to the Eastern European operations was recorded
on the Company's books at the lower of fair value or cost. Fair value was
estimated by an independent third party appraiser using generally accepted
valuation standards. Accordingly, a customer list of approximately $964,000 has
been recorded as an intangible asset and will be amortized over a three-year
period.
(5) PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Land................................................. $ 563,309 --
Building............................................. 3,626,891 --
Furniture and equipment.............................. 279,908 212,525
Computer equipment................................... 784,521 440,827
Switch and testing equipment......................... 1,082,217 492,052
---------- ---------
6,336,846 1,145,404
Less accumulated depreciation and amortization....... 553,689 427,600
---------- ---------
$5,783,157 717,804
========== =========
</TABLE>
G-13
<PAGE> 464
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INTANGIBLES
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZATION
1997 1996 PERIOD
---------- --------- ------------
<S> <C> <C> <C>
Goodwill................................ $2,863,766 2,863,766 20 years
Software development costs.............. 3,305,127 2,483,559 3-5 years
Product support contracts............... 2,146,176 2,146,176 5 years
Customer list........................... 964,207 -- 3 years
---------- --------- ---------
9,279,276 7,493,501
Less amortization....................... 3,503,603 2,418,135
---------- ---------
$5,775,673 5,075,366
========== =========
</TABLE>
On an ongoing basis, management reviews the valuation and amortization of
intangible assets to determine possible impairment by comparing the carrying
value of the asset to its undiscounted estimated future cash flows.
Amortization expense relating to these assets was $1,085,468, $978,813, and
$962,514 for 1997, 1996, and 1995, respectively. Of these amounts, $512,409,
$405,755, and $442,734, for 1997, 1996, and 1995, respectively, was recorded as
a component of cost of goods sold.
(7) STOCK OPTIONS
In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan") which was approved by the board of directors and GST USA. The Company has
reserved 1,250,000 shares for issuance under the 1996 Plan, of which options to
purchase 935,250 shares of common stock at an exercise price of $9.35 per share
were granted. All options granted during the year expire on November 25, 2001.
The Company may grant incentive stock options and nonqualified stock options to
employees, officers, directors, independent contractors, and consultants. The
exercise price of options must be greater than or equal to the estimated fair
market value of the stock at the date of grant. The board of directors or the
compensation committee thereof determines which eligible individuals are granted
options, terms of the options, exercise price, number of shares subject to the
option, vesting and exercisability. The 1996 Plan expires on November 25, 2006.
A summary of activity follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
------------------------------------
WEIGHTED-AVERAGE
EXERCISE
NUMBER OF SHARES PRICE
---------------- ----------------
<S> <C> <C>
Options outstanding at beginning of year..... --
Plus options granted......................... 935,250 $9.35
Less options exercised....................... --
-------
Options outstanding at end of year........... 935,250 $9.35
------- -----
Options exercisable at end of year........... 289,688 $9.35
Weighted-average fair value of options
granted during the year.................... $3.03
</TABLE>
G-14
<PAGE> 465
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF SEPTEMBER 30, CONTRACTUAL WEIGHTED-AVERAGE SEPTEMBER 30, WEIGHTED-AVERAGE
EXERCISE PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
--------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$9.35 935,250 4.15 9.35 289,688 9.35
</TABLE>
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net earnings and
earnings per share would have been changed to the following pro forma amount:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Net income As reported $3,815,505
Pro Forma 2,784,147
Primary earnings per share: As reported $ 0.52
Pro Forma 0.38
Fully-diluted earnings per share As reported $ 0.50
Pro Forma 0.37
</TABLE>
Pro forma net earnings reflects only options granted in fiscal 1997.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net earnings as shown above may
not be representative of the effects on reported net earnings for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1997: risk-free interest rate of 6.0
percent; expected dividend yield of 0 percent; expected life of 3.4 years; and
expected volatility of 82 percent.
(8) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- ---------
<S> <C> <C> <C>
Year ended September 30, 1997:
U.S. federal........................... $2,336,145 (194,210) 2,141,935
State.................................. 364,476 (30,064) 334,412
---------- -------- ---------
$2,700,621 (224,274) 2,476,347
========== ======== =========
Year ended September 30, 1996:
U.S. federal........................... $ 389,910 (322,207) 67,703
State.................................. 60,358 (49,877) 10,481
---------- -------- ---------
$ 450,268 (372,084) 78,184
========== ======== =========
Year ended September 30, 1995:
U.S. federal........................... $ 414,981 (237,014) 177,967
State.................................. 64,239 (36,689) 27,550
---------- -------- ---------
$ 479,220 (273,703) 205,517
========== ======== =========
</TABLE>
G-15
<PAGE> 466
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense............. $2,139,230 92,460 97,184
Increase (reduction) in income taxes
resulting from:
Amortization of goodwill.................. 48,899 48,899 48,899
State and local income taxes, net of
federal income tax benefit............. 222,862 2,297 18,183
Meals and entertainment................... 5,796 3,631 4,060
Adjustment of tax provision to
actual(1).............................. -- (70,040) 36,214
Other, net................................ 59,560 937 977
---------- ------- -------
$2,476,347 78,184 205,517
========== ======= =======
</TABLE>
- ---------------
(1) Represents management's adjustment to the Company's income tax liability
based on a current assessment of its related obligations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Net current deferred tax assets:
Accounts and notes receivable principally due to allowance
for doubtful accounts.................................. $ 309,895 152,930
Unearned product warranty................................. 125,422 47,074
Accrued vacation payable.................................. 55,386 37,327
Unearned sales deposits................................... -- 83,640
Inventory principally due to uniform capitalization and
reserves............................................... 96,496 97,478
--------- --------
Total gross deferred tax assets................... 587,199 418,449
--------- --------
Net long-term deferred tax liabilities:
Deferred compensation..................................... 58,866 58,866
Plant and equipment, principally due to differences in
depreciation and capitalized interest.................. (77,155) (87,588)
Capitalized software...................................... (450,716) (200,619)
Push down intangibles..................................... (460,979) (756,269)
Unrealized (gain) loss on investments..................... -- 102
--------- --------
Total gross deferred tax liabilities.............. (929,984) (985,508)
--------- --------
Net deferred tax liability........................ $(342,785) (567,059)
--------- --------
</TABLE>
Management believes that existing taxable temporary differences will more
likely than not reverse within the applicable carryforward periods to allow
future realization of existing deferred tax assets.
G-16
<PAGE> 467
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) LEASES
The Company has operating leases for office furnishings, various office
equipment and two sales offices. Future minimum lease payments as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1998.................................................... $194,378
1999.................................................... 180,240
2000.................................................... 180,240
2001.................................................... 180,240
2002.................................................... 160,454
--------
Total minimum lease payments.................... $895,552
========
</TABLE>
These leases generally require the Company to pay all executory costs such
as maintenance and insurance. Rental expenses for all operating leases for 1997,
1996, and 1995, were $123,462, $100,299, and $116,944, respectively.
(10) PROFIT SHARING PLANS
The Company sponsors a defined contribution 401(k) plan (the "Plan") for
employees who have completed one year of service and attained the age of 21.
Participants may defer up to 15 percent of eligible compensation. The Company,
at its discretion, may match 50 percent of participant contributions up to 7.5
percent of participant compensation. Employer contributions made to the Plan
were $88,361, $59,881, and $51,863, for the years ended September 30, 1997,
1996, and 1995, respectively.
Through September 30, 1996, the Company established a discretionary profit
sharing program for full time employees who had completed one full year of
employment. Under the plan, 10 percent of the increase in profits based on the
Company's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the discretion
of the board of directors. Contributions to the program were $132,450 and
$171,483 for the years ended September 30, 1996 and 1995, respectively. The
program was terminated on September 30, 1996.
(11) MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND NETWORK CARRIER SALES
Sales to individual customers exceeding 10 percent of total revenues or
total trade accounts and notes receivable as of and for the years ended
September 30, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REVENUES
--------------------
CUSTOMER 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 8% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 16%
Intertoll Communications Network Corp....................... 9 12% 8
Overseas Telecom............................................ 5 13 7
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NOTES
AND ACCOUNTS RECEIVABLE
--------------------------
CUSTOMER 1997 1996 1995
-------- ------ ------ ------
<S> <C> <C> <C>
J.D. Services, Inc.......................................... 15% -- --
Caribbean Telephone and Telegraph, Inc...................... -- -- 7%
Intertoll Communications Network Corp....................... 4 6% 7
Overseas Telecom............................................ 3 22 7
</TABLE>
G-17
<PAGE> 468
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's customers consist of business entities geographically
dispersed primarily throughout the United States. However, the Company also
sells products and/or services to customers in the United Kingdom, Bosnia,
Serbia, Bulgaria, Saudi Arabia, and Brazil. The Company maintains a security
interest in the telecommunications systems it sells until the related account
balances are paid in full.
The Company had deposits with financial institutions in excess of the
federally insured amount of $100,000 in the amount of $9,691,380 and $467,737
for the years ended September 30, 1997 and 1996, respectively.
Network carrier sales originating from countries outside the United States
aggregated approximately $3,180,000 and $2,105,000 for the years ended September
30, 1997 and 1996, respectively. These sales are payable in U.S. dollars.
(12) COMMITMENTS AND CONTINGENCIES
The Company acted as a guarantor for financing transactions executed under
repurchase agreements with a financial institution for $3,482,182 and $1,035,032
at September 30, 1997 and 1996, respectively. This results from the financial
institution providing lease financing to the Company's customers to enable them
to purchase product from the Company. At September 30, 1997, the Company had
established a reserve of $200,000 for its estimated obligation under the
recourse provisions and maintains a security interest in the equipment financed
under the repurchase agreement. No such reserve was recorded as of September 30,
1996. In addition to other covenants, the repurchase agreement requires the
Company to maintain an unrestricted cash account of $6,000,000. The Company has
also established a $750,000 revolving line of credit with this same financial
institution. No balances were outstanding under this line of credit at September
30, 1997.
On October 1, 1996, the Company entered into employment agreements with
various employees which specify the individual's salary, benefits, and
restrictions. All agreements expire on September 30, 2001.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc., (collectively,
"Aerotel") filed a patent infringement suit against the Company alleging that
telephone systems manufactured and sold by the Company incorporating prepaid
calling features infringe upon a patent which was issued to Aerotel in November
1987. The complaint further alleges defamation and unfair competition by the
Company and seeks various damages. Aerotel seeks injunctive relief, damages of
$18.7 million for willful infringement of its patent and an order requiring the
Company to publish a written apology to Aerotel. The Company has filed an Answer
and Counterclaim denying patent infringement, defamation or unfair competition
and seeking judgment that the Aerotel patent is invalid and that Aerotel has
misused its patent in violation of antitrust laws. Based on information
currently available, an estimate of potential loss cannot be made. However,
management is of the opinion that there will be no material impact of the
Company's financial position, results of operations or liquidity as a result of
this suit. Accordingly, no provision for loss has been provided in the
accompanying financial statements. An unfavorable decision could have a material
adverse effect on the business, financial condition, and results of operations
of the Company.
In addition to the above, the Company has various legal claims and other
contingent matters, incurred in the normal course of business. Although the
final outcome of such matters cannot be predicted, the Company believes the
ultimate disposition of these matters will not have a material adverse effect on
the Company's financial condition, liquidity, or results of operations.
As of September 30, 1997, the Company had capital expenditure purchase
commitments outstanding of approximately $900,000.
G-18
<PAGE> 469
NACT TELECOMMUNICATIONS, INC.
(A MAJORITY OWNED SUBSIDIARY OF GST USA)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) RELATED PARTY TRANSACTIONS
In June 1997, and under contract with the Company, GST Realco, Inc. ("GST
Realco"), a subsidiary of GST USA, completed construction of a 40,000 square
foot office building in Provo, Utah. The Company purchased the land and a
portion of the building construction from GST Realco for $563,309 and
$1,293,072, respectively, and currently occupies the property as its corporate
and manufacturing facility.
During the year ended September 30, 1996, GST USA borrowed $250,000 from
the Company on short-term notes bearing interest at 11 percent. The note was
repaid by September 30, 1996. The Company recorded interest income of $2,602
relating to this note during the year ended September 30, 1996. There were no
borrowings during fiscal 1997.
Also, during the years ended September 30, 1997 and 1996, respectively, the
Company sold $32,788 and $356,000 of application platform switching products and
$-0- and $2,571,731 of wholesale carrier usage to GST USA or subsidiaries and
purchased $4,466,907 and $361,000 of wholesale carrier usage from GST USA.
From April 1996 through May 1997 a member of the Company's board was
compensated by GST USA for services rendered to GST USA and its subsidiaries.
The Company has entered into a Deferred Compensation Trust Agreement (the
Trust) with the chairman of the Company whereby the Company funded the trust in
the amount of $144,000. The principal and related interest thereon are payable
to the chairman based on a defined payment schedule. The Company, at its sole
discretion, may at any time make additional contributions to the Trust. The
Trust is subject to claims of the Company's creditors in the event of the
Company's insolvency.
(14) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 establishes a different method of computing earnings per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic
earnings per share and diluted earnings per share. Basic and diluted earnings
per share are expected to be comparable to the currently presented earnings per
share. SFAS 128 is effective for the consolidated financial statements for
interim and annual periods ending after December 15, 1997. Accordingly, the
Company plans to adopt SFAS 128 in the first quarter of its 1998 fiscal year and
at that time all historical earnings per share data presented will be restated
to conform with the provisions of SFAS 128.
In 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information. These statements which are effective for periods beginning
after December 15, 1997, expand or modify disclosures and accordingly, will have
no impact on the Company's reported financial position, results of operations or
cash flows.
G-19
<PAGE> 470
NACT TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1997
(UNAUDITED) SEPT. 30, 1997
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................ $ 5,252 $ 9,947
Marketable securities....................................... 7,246 3,247
Accounts receivable, less allowance for doubtful accounts of
$631 in Dec.
and $381 in Sept.......................................... 9,496 6,841
Notes receivable, less allowance for doubtful accounts of
$295 in Dec.
and $250 in Sept.......................................... 4,055 3,252
Inventories................................................. 2,814 2,780
Prepaid expenses and other assets........................... 216 198
Deferred tax asset -- current............................... 817 587
------- -------
Total current assets.............................. $29,896 $26,852
Fixed Assets:
Property, plant, and equipment.............................. $ 6,577 $ 6,337
Less: Accumulated depreciation............................ (698) (554)
------- -------
Net fixed assets............................................ $ 5,879 $ 5,783
Notes receivable-long term.................................. $ 785 $ 967
Inventory-long term......................................... $ 225 $ 225
Intangibles................................................. $ 5,598 $ 5,776
Other Assets................................................ $ 164 $ 152
------- -------
Total Assets...................................... $42,547 $39,755
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 1,889 $ 1,433
Accrued expenses............................................ 1,206 963
Current corporate tax liability............................. 1,073 1,353
Deferred Revenue............................................ 790 467
Inter company payable....................................... 1,743 1,447
------- -------
Total current liabilities......................... $ 6,701 $ 5,663
Long Term Liabilities:
Deferred compensation liability............................. $ 158 $ 158
Deferred tax liability...................................... 1,252 930
------- -------
Total long-term liabilities....................... $ 1,410 $ 1,088
Stockholders' Equity:
Common stock, $.01 par value................................ $ 81 $ 81
Additional paid-in-capital.................................. 28,271 28,130
Retained earnings........................................... 6,055 4,781
Unrealized appreciation on marketable securities............ 29 12
------- -------
Total stockholders' equity........................ $34,436 $33,004
------- -------
Total liabilities and stockholders' equity........ $42,547 $39,755
------- -------
</TABLE>
See accompanying notes to financial statements.
G-20
<PAGE> 471
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
DEC 31, 1997 DEC 31, 1996
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues:
Product sales............................................ $7,300 $4,780
Network carrier sales.................................... 1,387 1,610
------ ------
Total revenues........................................... $8,687 $6,390
Cost of goods sold:
Products................................................. $2,158 $1,730
Network carrier usage.................................... 1,387 1,558
Amortization of acquired intangibles..................... 170 91
------ ------
Total cost of goods sold................................. $3,715 $3,379
------ ------
Gross profit............................................... $4,972 $3,011
Operating expenses:
Research and development................................. $ 799 $ 423
Sales and marketing...................................... 767 357
General and administrative............................... 1,362 836
Amortization of acquired intangibles..................... 143 143
------ ------
Total operating expenses................................. $3,071 $1,759
------ ------
Income from operations..................................... $1,901 $1,252
Other Income, net.......................................... $ 223 $ 25
------ ------
Income before income taxes................................. $2,124 $1,277
Income taxes............................................... $ 850 $ 569
------ ------
Net income after taxes..................................... $1,274 $ 708
------ ------
Weighted average common and common equivalent shares
outstanding:
Basic.................................................... 8,122 6,114
Diluted.................................................. 8,443 6,114
Earnings per share:
Basic.................................................... $ 0.16 $ 0.12
Diluted.................................................. $ 0.15 $ 0.12
</TABLE>
See accompanying notes to financial statements.
G-21
<PAGE> 472
NACT TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $1,274 $ 708
Adjustments to reconcile net income to net cash Provided by
(used in) operating activities:
Depreciation and amortization............................... 498 322
Provision for loss on accounts and notes receivable......... 382 218
Provision for loss on inventory............................. 228
Capital contribution by parent company...................... 497
Deferred taxes.............................................. 91 (10)
Decrease (increase) in operating assets:
Trade accounts and notes receivable......................... (3,658) (2,717)
Inventories................................................. (262) (205)
Prepaid expenses and other assets........................... (19) (167)
Increase (decrease) in operating liabilities:
Accounts payable............................................ 456 (1,088)
Accrued expenses............................................ 243 54
Income taxes payable........................................ (280) 71
Payable to GST USA.......................................... 296 2,110
Deferred revenue and deferred compensation.................. 324 4
------ ------
Net cash provided by (used in) operating activities......... (427) (203)
Cash flows from investing activities:
Purchase of land, property, plant and equipment............. (240) (63)
Proceeds from sale of marketable securities................. 1,121 250
Purchase of marketable securities........................... (5,103)
Capitalization of software development costs................ (187) (125)
------ ------
Net cash provided by (used in) investing activities......... (4,409) (142)
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 141
Principle payments of capital lease obligations............. (1)
------ ------
Net cash provided by (used in) financing activities......... 141 (1)
Net (decrease) increase in cash............................. (4,695) (142)
Cash at beginning of period................................. 9,947 694
------ ------
Cash at end of period....................................... $5,252 $ 552
------ ------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.................................................. $ -0- $ 2
Income taxes.............................................. $1,038 $ -0-
</TABLE>
See accompanying notes to financial statements.
G-22
<PAGE> 473
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by NACT
Telecommunications, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 audited financial
statements filed on form 10K with the SEC in December 1997. In the opinion of
management, the condensed financial statements included herein reflect all
adjustments necessary to present fairly the financial position of the Company as
of December 31, 1997 and September 30, 1997, and the results of its operations
and cash flows for the three month periods ended December 31, 1997 and 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 established a different method of computing earnings per share than these
same computations under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company is required to present both basic earnings
per share and diluted earnings per share. SFAS 128 is effective for both interim
and annual periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128 in the first quarter of fiscal 1998.
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the three month periods ended December 31,
1997 and 1996. Diluted earnings per share for the three month periods ended
December 31, 1997 and 1996 is computed considering the dilutive effect of stock
options, and is not materially different from the basic earnings per share
calculations.
3. STOCK PLAN
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was approved
by the Board of Directors and sole stockholder of the Company on November 26,
1996. The purpose of the Stock Option Plan is to create additional incentives
for the Company's employees, directors and others who perform substantial
services to the Company by providing an opportunity to purchase shares of the
Common Stock pursuant to the exercise of options granted under the Stock Option
Plan. The Company may grant options that qualify as incentive stock options
under Section 422 of the Internal Revenue Code, and non-qualified stock options.
Incentive stock options may be granted to employees (including officers and
directors who are employees). Non-qualified stock options may be granted to
employees, officers, directors, independent contractors and consultants of the
Company. As of December 31, 1997, 1,250,000 shares were reserved for issuance
under the Stock Option Plan and options to purchase 1,039,065 shares of Common
Stock were outstanding.
Options become exercisable at such times and in such installments as the
Board of Directors or Compensation Committee provides. The Stock Option Plan
will terminate on November 25, 2006, unless earlier terminated by the Board of
Directors.
G-23
<PAGE> 474
NACT TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials................................ $1,577 $1,065
Work-in-process.............................. 587 498
Finished goods............................... 189 303
Refurbished inventory held for sale.......... 461 914
------ ------
$2,814 $2,780
------ ------
Inventory-long term.......................... $ 225 $ 225
------ ------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Furniture and equipment...................... $ 311 $ 280
Computer equipment........................... 900 785
Switch and testing equipment................. 1,165 1,082
Land......................................... 563 563
Building..................................... 3,638 3,627
------ ------
6,577 6,337
Less accumulated depreciation and
amortization............................... 698 554
------ ------
$5,879 $5,783
====== ======
</TABLE>
(b) Pro Forma Financial Information. The Acquisition and Open Market
Purchase has been accounted for using the purchase method of accounting. In
connection with the Acquisition, World Access expects to record a charge of
approximately $43.5 million, representing the portion of the purchase price
allocated to in-process research and development. The following unaudited
pro forma consolidated balance sheet as of September 30, 1997 reflects the
Acquisition (together with the Open Market Purchase) as if it had been
completed on September 30, 1997. The following unaudited pro forma
consolidated statement of operations for the year ended December 31, 1996
and the nine months ended September 30, 1997 reflect the Acquisition
(together with the Open Market Purchase) as if it had been completed as of
January 1, 1996.
The pro forma data does not purport to be indicative of the results which
would actually have been reported if the Acquisition (together with the Open
Market Purchase) had occurred on such dates or which may be reported in the
future. The pro forma data should be read in conjunction with the historical
consolidated financial statements of World Access, the historical consolidated
financial statements of NACT, and the related notes thereto.
G-24
<PAGE> 475
WORLD ACCESS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(A)
PRO FORMA (B) PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents............................ $127,357 $ 9,947 $(64,665)(C) $ 72,639
Marketable investment securities................ 3,247 -- 3,247
Accounts receivable............................. 22,446 6,841 29,287
Inventories..................................... 18,899 2,780 (1,300)(C) 20,379
Other current assets............................ 7,050 4,037 (300)(C) 10,787
-------- ------- -------- --------
Total Current Assets.................. 175,752 26,852 (66,265) 136,339
Property and equipment.......................... 4,287 5,783 -- 10,070
Intangible assets............................... 29,370 5,776 (3,676)(C) 66,929
35,459(C)
Technology licenses............................. 904 -- -- 904
Debt issuance costs............................. 4,091 -- -- 4,091
Other assets.................................... 2,035 1,344 -- 3,379
-------- ------- -------- --------
Total Assets.......................... $216,439 $39,755 $(34,482) $221,712
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt................................. $ 66 $ -- $ -- $ 66
Accounts payable................................ 6,902 1,433 -- 8,335
Accrued payroll and benefits.................... 3,073 -- -- 3,073
CIS purchase price payable...................... 3,500 -- -- 3,500
Other accrued liabilities....................... 1,550 4,231 300(C) 6,481
400(C)
-------- ------- -------- --------
Total Current Liabilities............. 15,091 5,664 700 21,455
Long-term debt.................................. 115,301 -- -- 115,301
Other long-term liabilities..................... -- 1,087 -- 1,087
-------- ------- -------- --------
Total Liabilities..................... 130,392 6,751 700 137,843
-------- ------- -------- --------
Minority interest in subsidiary................. 10,560(C) 10,560
Stockholders' Equity
Common and preferred stock.................... 192 81 (81)(D) 206
14(C)
Capital in excess of par value.................. 81,178 28,130 (28,130)(D) 111,914
30,736(C)
Retained earnings (deficit)..................... 4,677 4,781 (4,781)(D) (38,823)
(43,500)(E)
Net unrealized gain on marketable investment
securities.................................... 12 12
-------- ------- -------- --------
Total Stockholders' Equity............ 86,047 33,004 (45,742) 73,309
-------- ------- -------- --------
Total Liabilities and Stockholders'
Equity.............................. $216,439 $39,755 $(34,482) $221,712
======== ======= ======== ========
</TABLE>
G-25
<PAGE> 476
- ---------------
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the pro forma balance sheet for World Access, Inc. as presented
in the Report on Form 10Q for the Three Months Ended September 30, 1997. The
pro forma balance sheet presented above includes the effects of the sale of
$115 million 4.5% convertible subordinated notes which was completed in
October 1997.
(B) Represents the historical balance sheet of NACT Telecommunications, Inc. as
of September 30, 1997.
(C) The Acquisition will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to in-process
research and development projects of NACT will be expensed at the
consummation of the Acquisition. The amount of the one-time non-recurring
charge is expected to be approximately $43.5 million. Since this charge is
directly related to the Acquisition and will not recur, the pro forma
statements of operations have been prepared excluding this charge. The
Company has not yet determined the final allocation of the purchase price,
and accordingly, the amount shown below may differ from the amounts
ultimately determined.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price of 68% interest in NACT:
Cash purchase of GST shares............................... 59,663
Open market purchase of NACT shares....................... 5,002
------
Total cash........................................ 64,665
Restricted stock issued in exchange for GST's shares...... 20,900
"In the money" value of WAXS options issued in exchange
for NACT options....................................... 9,850
------
Total stock....................................... 30,750
Fees and expenses related to the Merger................... 300
-------
Total purchase price.............................. 95,715
-------
Allocation:
Historical stockholders' equity........................... (32,992)
Minority interest in subsidiary........................... 10,560
Adjust assets and liabilities:
Inventories............................................ 1,300
Intangibles............................................ 3,676
In process R&D costs................................... (43,500)
Notes receivable.......................................... 300
Reserve for recourse leases............................... 400
-------
(60,256)
-------
Unallocated excess of purchase price over net assets
acquired.................................................. 35,459
-------
</TABLE>
(D) Eliminate existing stockholders' equity.
(E) Represents retained earnings adjustment for nonrecurring charge related to
write-off of in-process R&D expenses acquired.
G-26
<PAGE> 477
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales of products........................... $56,099 $17,202 $ -- $73,301
Service revenues............................ 15,622 4,106 -- 19,728
------- ------- ------- -------
Total Sales....................... 71,721 21,308 0 93,029
Cost of products sold....................... 33,811 5,411 -- 39,222
Cost of services............................ 12,832 4,199 (175)(A) 16,856
------- ------- ------- -------
Total Cost of Sales............... 46,643 9,610 (175) 56,078
------- ------- ------- -------
Gross Profit.............................. 25,078 11,698 175 36,951
Engineering and development................. 1,350 1,962 -- 3,312
Selling, general and administrative......... 6,860 4,784 -- 11,644
Amortization of goodwill.................... 1,210 430 (275)(A) 3,165
1,800(B)
-------
Operating Income.......................... 15,658 4,522 (1,350) 18,830
Interest and other income................... 835 523 -- 1,358
Interest and other expense.................. (95) (30) (125)
Minority interest in net income of
subsidiary................................ (1,085)(C) (1,085)
------- -------
Income Before Income Taxes................ 16,398 5,015 (2,435) 18,978
Income taxes................................ 5,986 1,907 170(D) 8,063
------- ------- ------- -------
Net Income................................ $10,412 $ 3,108 $(2,605) $10,915
------- ------- ------- -------
Net Income Per Common Share:................ $ .55 $ .52(E)
------- -------
Weighted Average Shares Outstanding:........ 19,076 21,063(E)
------- -------
</TABLE>
- ---------------
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(A) Eliminate amortization of certain previously acquired intangibles of
NACT.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Record the 32% minority interest in net income of NACT including
applicable pro forma adjustments.
(D) Adjust tax provision for the pro forma adjustments.
(E) Represents fully diluted earnings per share, including shares of
Company common stock issued to GST and common stock equivalents
related to stock options issued in exchange for NACT options.
G-27
<PAGE> 478
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 1996
DECEMBER 31, 1996 SEPTEMBER 30, 1996 PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
----------------- ------------------ ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales of products.................. $34,411 $ 9,930 $ -- $44,341
Service revenues................... 16,589 6,355 (2,572)(A) 20,372
------- ------- ------- -------
Total Sales.............. 51,000 16,285 (2,572) 64,713
Cost of products sold.............. 21,485 3,942 -- 25,427
Cost of services................... 14,520 6,316 (230)(B) 18,034
(2,572)(A)
-------
Total Cost of Sales...... 36,005 10,258 (2,802) 43,461
------- ------- ------- -------
Gross Profit..................... 14,995 6,027 230 21,252
Engineering and development........ 892 1,352 -- 2,244
Selling, general and
administrative................... 6,211 3,978 -- 10,189
Amortization of goodwill........... 534 573 (365)(B) 3,142
2,400(C)
-------
Operating Income................. 7,358 124 (1,805) 5,677
Interest and other income.......... 485 162 -- 647
Interest and other expense......... (319) (14) (333)
Minority interest in net income of
subsidiary....................... (252)(D) (252)
------- -------
Income Before Income Taxes....... 7,524 272 (2,057) 5,739
Income taxes....................... 745 78 175(E) 998
------- ------- ------- -------
Net Income....................... $ 6,779 $ 194 $(2,232) $ 4,741
------- ------- ------- -------
Net Income Per Common Share:....... $ .46 $ .30(F)
------- -------
Weighted Average Shares
Outstanding:..................... 14,424 15,854(F)
------- -------
</TABLE>
- ---------------
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR 1996
(A) Eliminate nonrecurring NACT Wins revenue and associated cost of sales.
See note 1(b) to the audited financial statements.
(B) Eliminate amortization of certain acquired intangibles.
(C) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(D) Record the 32% minority interest in net income of NACT including
applicable pro forma adjustments.
(E) Adjust tax provision for the pro forma adjustments.
(F) Represents fully diluted earnings per share, including shares of
Company common stock issued to GST.
G-28
<PAGE> 479
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
2.1 Stock Purchase Agreement among World Access, Inc. GST USA, Inc. and
GST Telecommunications, Inc. dated December 31, 1997, with exhibits
thereto.*
2.2 Agreement and Plan of Merger and Reorganization by and among WAXS,
Inc., World Access, Inc., WAXS Acquisition Corp., NACT
Telecommunications, Inc. and NACT Acquisition Corp. dated February
24, 1998.
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Press Release issued on January 2, 1998.*
99.2 Press Release issued on February 25, 1998.
99.3 Press Release issued on February 27, 1998.
- ---------------
* Incorporated by reference to the Current Report on Form 8-K filed by World
Access, Inc. on February 20, 1998.
G-29
<PAGE> 480
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of March 13, 1998
G-30
<PAGE> 481
EXHIBIT 2.2
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
WAXS INC.,
WORLD ACCESS, INC.,
WAXS ACQUISITION CORP.,
NACT TELECOMMUNICATIONS, INC.
AND
NACT ACQUISITION CORP.
DATED: FEBRUARY 24, 1998
G-31
<PAGE> 482
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1. THE MERGERS....................................................... G-35
SECTION 1.1. The Mergers................................................. G-35
SECTION 1.2. The Effective Time and the Closing Date..................... G-35
SECTION 1.3. Effect of the Mergers....................................... G-35
SECTION 1.4. Charter and Bylaws.......................................... G-35
SECTION 1.5. Directors and Officers...................................... G-35
ARTICLE 2. CONVERSION OF STOCK...............................................
SECTION 2.1. Conversion of Sub-1 Stock and World Access Stock............ G-35
SECTION 2.2. Conversion of Sub-2 Stock and NACT Stock.................... G-36
SECTION 2.3. Fractional Shares........................................... G-36
SECTION 2.4. Exchange Ratio for World Access Options and World Access
Warrants.................................................... G-36
SECTION 2.5. Exchange Ratio for NACT Options............................. G-37
ARTICLE 3. PAYMENT OF THE MERGER CONSIDERATION............................... G-37
SECTION 3.1. Payment of the World Access Consideration and the NACT
Consideration............................................... G-37
SECTION 3.2. Lost Certificates........................................... G-38
SECTION 3.3. Payment to Another Person................................... G-38
SECTION 3.4. Right to Receive the Merger Consideration Only.............. G-38
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF NACT............................ G-38
SECTION 4.1. Corporate Organization...................................... G-38
SECTION 4.2. Capitalization.............................................. G-39
SECTION 4.3. Authority Relative to this Agreement........................ G-39
SECTION 4.4. No Violation................................................ G-39
SECTION 4.5. Compliance with Laws........................................ G-40
SECTION 4.6. Litigation.................................................. G-40
SECTION 4.7. Financial Statements and Reports............................ G-40
SECTION 4.8. Absence of Certain Changes or Events........................ G-40
SECTION 4.9. No Undisclosed Material Liabilities......................... G-41
SECTION 4.10. No Default.................................................. G-41
SECTION 4.11. Finders' and Bankers' Fees.................................. G-41
SECTION 4.12. Fairness Opinion............................................ G-41
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS.................... G-41
SECTION 5.1. Corporate Organization...................................... G-42
SECTION 5.2. Capitalization.............................................. G-42
SECTION 5.3. Authority Relative to this Agreement........................ G-42
SECTION 5.4. No Violation................................................ G-42
SECTION 5.5. Compliance with Laws........................................ G-43
SECTION 5.6. Litigation.................................................. G-43
SECTION 5.7. Financial Statements and Reports............................ G-43
SECTION 5.8. Absence of Certain Changes or Events........................ G-44
SECTION 5.9. No Undisclosed Material Liabilities......................... G-44
SECTION 5.10. No Default.................................................. G-44
SECTION 5.11. Finders' and Bankers' Fees.................................. G-45
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF HOLDCO, SUB-1 AND SUB-2......... G-45
SECTION 6.1. Organization, Qualification, and Corporate Power............ G-45
SECTION 6.2. Capitalization.............................................. G-45
SECTION 6.3. Authority Relative to this Agreement........................ G-45
ARTICLE 7. CERTAIN COVENANTS AND AGREEMENTS.................................. G-46
SECTION 7.1. Conduct of Business by NACT................................. G-46
</TABLE>
G-32
<PAGE> 483
<TABLE>
<S> <C> <C>
SECTION 7.2. Regulatory Matters.......................................... G-46
SECTION 7.3. Stockholder Matters......................................... G-46
SECTION 7.4. Access to Information....................................... G-47
SECTION 7.5. Notices of Certain Events................................... G-47
SECTION 7.6. Indemnification............................................. G-47
SECTION 7.7. Best Efforts................................................ G-47
SECTION 7.8. Public Announcements........................................ G-47
SECTION 7.9. Further Assurances.......................................... G-48
SECTION 7.10. Listing of Holdco Stock..................................... G-48
SECTION 7.11. Affiliates.................................................. G-48
SECTION 7.12. Tax Treatment............................................... G-48
ARTICLE 8. CONDITIONS TO THE MERGERS......................................... G-48
SECTION 8.1. Conditions to the Obligations of Each Party................. G-48
SECTION 8.2. Additional Conditions to the Obligations of Holdco, World
Access, Sub-1 and Sub-2..................................... G-48
SECTION 8.3. Additional Conditions to the Obligations of NACT............ G-49
ARTICLE 9. TERMINATION....................................................... G-50
SECTION 9.1. Termination................................................. G-50
SECTION 9.2. Effect of Termination....................................... G-50
ARTICLE 10. MISCELLANEOUS.................................................... G-50
SECTION 10.1. Definitions................................................. G-50
SECTION 10.2. Notices..................................................... G-51
SECTION 10.3. No Survival of Representations and Warranties............... G-51
SECTION 10.4. Amendments; No Waivers...................................... G-52
SECTION 10.5. Fees and Expenses........................................... G-52
SECTION 10.6. Successors and Assigns...................................... G-52
SECTION 10.7. Governing Law............................................... G-52
SECTION 10.8. Severability................................................ G-52
SECTION 10.9. Interpretations............................................. G-52
SECTION 10.10. Counterparts; Effectiveness................................. G-52
SECTION 10.11. Construction................................................ G-52
EXHIBIT A Affiliate Agreement
</TABLE>
G-33
<PAGE> 484
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (as amended,
supplemented or otherwise modified from time to time, the "Agreement"), dated as
of the 24th day of February, 1998, is entered into by and among WAXS INC., a
Delaware corporation and a direct wholly-owned subsidiary of World Access, Inc.
("Holdco"), WORLD ACCESS, INC., a Delaware corporation ("World Access"), WAXS
ACQUISITION CORP., a Delaware corporation and a direct wholly-owned subsidiary
of Holdco ("Sub-1"), NACT TELECOMMUNICATIONS, INC., a Delaware corporation
("NACT"), and NACT ACQUISITION CORP., a Delaware corporation and a direct
wholly-owned subsidiary of Holdco ("Sub-2").
WHEREAS, World Access currently owns 355,000 shares of common stock, $.01
par value per share, of NACT (the "NACT Stock") and has agreed to purchase an
additional 5,113,712 shares of NACT Stock from GST USA, Inc. (the "GST Stock
Purchase"), which shares together represent approximately 67.3% of the total
NACT Stock currently issued and outstanding;
WHEREAS, Sub-1, upon the terms and subject to the conditions of this
Agreement, will be merged with and into World Access (the "World Access
Merger");
WHEREAS, Sub-2, upon the terms and subject to the conditions of this
Agreement, will be merged with and into NACT (the "NACT Merger" and, together
with the World Access Merger, the "Mergers");
WHEREAS, the respective boards of directors of World Access and Sub-1 deem
it in the best interests of World Access and Sub-1, respectively, and of their
respective stockholders that the World Access Merger be consummated;
WHEREAS, a special committee of the Board of Directors of NACT (the "NACT
Board") appointed on January 12, 1998 and comprised entirely of directors who
are neither members of management of NACT nor affiliated with World Access or
any Affiliate of World Access (other than NACT) (the "Special Committee") has
unanimously determined that the NACT Merger is fair to and in the best interests
of the stockholders of NACT other than World Access (the "Public Stockholders")
and has unanimously approved this Agreement and unanimously recommends its
approval and adoption by the NACT Board and by the stockholders of NACT;
WHEREAS, the NACT Board, based in part on the recommendation of the Special
Committee, has determined that the NACT Merger is fair to and in the best
interests of the Public Stockholders and has resolved to approve and adopt this
Agreement and the transactions contemplated hereby and, subject to the following
terms and conditions, to recommend the approval and adoption of this Agreement
and the NACT Merger by the stockholders of NACT;
WHEREAS, the respective boards of directors of all of the Parties have
unanimously approved this Agreement, and the board of directors of NACT has
directed that this Agreement be submitted to its stockholders for approval and
adoption;
WHEREAS, Holdco, as the sole stockholder of Sub-1, Sub-2, has unanimously
approved this Agreement prior to its execution;
WHEREAS, Holdco, as the sole stockholder of Sub-1 and Sub-2, will deliver,
or cause to be delivered, to the stockholders of World Access and NACT the
consideration to be paid pursuant to the World Access Merger and the NACT
Merger, respectively, in accordance with the terms of this Agreement;
WHEREAS, World Access and NACT desire to make certain representations,
warranties, covenants and agreements in connection with the Mergers;
WHEREAS, for Federal income tax purposes it is intended that the Mergers
qualify as exchanges under Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, certain capitalized terms used herein shall have the meaning set
forth in Section 10.1 hereof.
G-34
<PAGE> 485
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the warranties and covenants herein
contained, the Parties agree as follows:
ARTICLE 1.
THE MERGERS
SECTION 1.1. The Mergers. On the terms and subject to the conditions
contained in this Agreement, the Mergers will be consummated. World Access shall
be the corporation surviving the World Access Merger (the "World Access
Surviving Corporation"). NACT shall be the corporation surviving the NACT Merger
(the "NACT Surviving Corporation").
SECTION 1.2. The Effective Time and the Closing Date. As soon as
practicable following the satisfaction or waiver of the conditions set forth in
Article 8 hereof, the Parties shall file certificates of merger (the
"Certificates of Merger") executed in accordance with the relevant provisions of
the Delaware General Corporation Law (the "DGCL") and shall make all other
filings, recordings or publications required by the DGCL in connection with the
Mergers. Each Merger shall become effective at the time specified in its related
Certificate of Merger, which specified time shall be the same in each
Certificate of Merger (the "Effective Time"). Upon the terms and subject to the
conditions hereof, unless otherwise agreed upon by the Parties, the closing of
the transactions contemplated by this Agreement (the "Closing") shall take place
at the offices of Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah,
commencing at 10:00 a.m. local time, as soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 8 hereof, but in
no event later than two business days thereafter (the date of such being
referred to herein as the "Closing Date"), unless otherwise agreed to by the
Parties.
SECTION 1.3. Effect of the Mergers. At the Effective Time, the World
Access Merger and the NACT Merger shall have the effects set forth in the DGCL.
SECTION 1.4. Charter and Bylaws. At the Effective Time: (i) with respect
to the World Access Merger, the certificate of incorporation and bylaws of
Sub-1, as in effect on the date hereof and otherwise amended prior to the
Effective Time, shall be the certificate of incorporation and bylaws of the
World Access Surviving Corporation until further amended as provided therein and
in accordance with applicable Law; (ii) with respect to the NACT Merger, the
certificate of incorporation and bylaws of Sub-2, as in effect on the date
hereof and otherwise amended prior to the Effective Time, shall be the
certificate of incorporation and bylaws of the NACT Surviving Corporation until
further amended as provided therein and in accordance with applicable Law; and
(iii) the certificate of incorporation of Holdco as in effect immediately prior
to the Effective Time shall be amended at the Effective Time so that Article I
thereof reads in its entirety as follows: "The name of the Corporation is "World
Access, Inc." and, as so amended, such certificate of incorporation shall be the
certificate of incorporation of Holdco until further amended as provided therein
and in accordance with applicable Law.
SECTION 1.5. Directors and Officers. From and after the Effective Time,
the directors and officers of each of World Access and NACT shall be the
directors and officers of each of World Access Surviving Corporation and NACT
Surviving Corporation, respectively.
ARTICLE 2.
CONVERSION OF STOCK
SECTION 2.1. Conversion of Sub-1 Stock and World Access Stock. Subject to
the terms and conditions of this Agreement, as of the Effective Time and by
virtue of the World Access Merger and without any further action on the part of
the holder of any Sub-1 Stock or World Access Stock:
(a) all shares of World Access Stock which are held by World Access as
treasury stock shall be canceled and retired, and no consideration shall be
paid or delivered in exchange therefor;
G-35
<PAGE> 486
(b) each share of World Access Stock outstanding immediately prior to
the Effective Time shall be canceled and converted solely into the right to
receive and be exchangeable for one share of common stock, $.01 par value
per share (the "Holdco Stock"), of Holdco (the "World Access
Consideration"); and
(c) each share of Sub-1 Stock issued and outstanding immediately prior
to the Effective Time shall be converted solely into one fully paid and
nonassessable share of common stock, par value $.01 per share, of the World
Access Surviving Corporation.
SECTION 2.2. Conversion of Sub-2 Stock and NACT Stock. Subject to the
terms and conditions of this Agreement, as of the Effective Time and by virtue
of the NACT Merger and without any further action on the part of the holder of
any Sub-2 Stock or NACT Stock:
(a) all shares of NACT Stock which are held by NACT as treasury stock
shall be canceled and retired, and no consideration shall be paid or
delivered in exchange therefor;
(b) subject to Section 2.3 hereof, each share of NACT Stock
outstanding immediately prior to the Effective Time shall be canceled and
converted solely into the right to receive and become exchangeable for that
number of shares of Holdco Stock equal to the quotient of (x) $17.50
divided by (y) the Closing Date Market Price (the "Exchange Ratio");
provided, however, that (i) if the Closing Date Market Price is less than
$20.88, then World Access may terminate this Agreement by delivering notice
of termination to NACT in the manner contemplated by Section 10.2 hereof,
and (ii) if the Closing Date Market Price is more than $25.52, then the
Exchange Ratio shall be equal to 0.6857 (the number of shares of Holdco
Stock into which each share of NACT Stock shall be convertible pursuant to
this Section 2.2(b) is hereinafter referred to as the "NACT
Consideration"); and
(c) each share of Sub-2 Stock issued and outstanding immediately prior
to the Effective Time shall be converted solely into one fully paid and
nonassessable share of common stock, par value $.01 per share, of the NACT
Surviving Corporation.
SECTION 2.3. Fractional Shares. No scrip or fractional shares of Holdco
Stock shall be issued pursuant to the NACT Merger, and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder of Holdco. In lieu thereof, if any holder of NACT Stock would have
otherwise been entitled to a fractional share of Holdco Stock hereunder, then
such holder shall be entitled, after the later of the Effective Time or the
surrender of such holder's stock certificates that represent such shares of NACT
Stock to receive from Holdco cash (without interest) in an amount equal to the
product of such fractional part of a share of Holdco Stock multiplied by the
Closing Date Market Price.
SECTION 2.4. Exchange Ratio for World Access Options and World Access
Warrants.
2.4.1. As of the Effective Time, each outstanding option ("World Access
Option") and warrant ("World Access Warrant") to purchase World Access Common
Stock shall be assumed by Holdco and converted into an option or warrant, as the
case may be, to purchase shares of Holdco Common Stock, as provided below.
Following the Effective Time, each World Access Option shall continue to have,
and shall be subject to, the same terms and conditions set forth in the
applicable option plan or warrant plan (the "World Access Plans") pursuant to
which such World Access Option or World Access Warrant was granted, except that
each such World Access Option or World Access Warrant shall be exercisable for
the same number of shares of Holdco Common Stock as the number of shares of
World Access Common Stock for which such World Access Option or World Access
Warrant was exercisable immediately prior to the Effective Time.
2.4.2. As of the Effective Time, Holdco shall enter into an assumption
agreement with respect to each World Access Option and each World Access
Warrant, which shall provide for Holdco's assumption of the obligations of World
Access under the applicable World Access Plan. Prior to the Effective Time,
World Access shall make such amendments, if any, to the World Access Plans as
shall be necessary to permit such assumption in accordance with this Section
2.4.2.
2.4.3. It is the intention of the Parties that, to the extent that any
World Access Option constitutes an "incentive stock option" (within the meaning
of Section 422 of the Code) immediately prior to the Effective
G-36
<PAGE> 487
Time, such World Access Option shall continue to qualify as an incentive stock
option to the maximum extent permitted by Section 422 of the Code, and that the
assumption of the World Access Option provided by this Section 2.4 shall satisfy
the conditions of Section 424(a)of the Code.
SECTION 2.5. Exchange Ratio for NACT Options.
2.5.1. As of the Effective Time, each option ("NACT Option") to purchase
NACT Common Stock then outstanding shall be assumed by Holdco and converted into
an option to purchase shares of Holdco Common Stock, as provided below.
Following the Effective Time, each NACT Option shall continue to have, and shall
be subject to, the same terms and conditions set forth in the applicable option
plan (the "NACT Plans") pursuant to which such NACT Option was granted, except
that (i) each such NACT Option shall be exercisable for that number of shares of
Holdco Stock equal to the product of (x) the number of shares of NACT Stock for
which such NACT Option was exercisable immediately prior to the Effective Time
and (y) the Exchange Ratio, rounded in the case of any NACT Option other than
any incentive stock option, up and, in the case of any incentive stock option,
down to the nearest whole share, if necessary, and (ii) the exercise price per
share of such NACT Option shall be equal to the aggregate exercise price of such
NACT Option immediately prior to the Effective Time divided by the number of
shares of Holdco Stock for which such NACT Option shall be exercisable as
determined in accordance with the preceding clause (i), rounded up to the next
highest cent, if necessary.
2.5.2. As of the Effective Time, Holdco shall enter into an assumption
agreement with respect to each NACT Option, which shall provide for Holdco's
assumption of the obligations of NACT under the applicable NACT Plan. Prior to
the Effective Time, NACT shall make such amendments, if any, to the NACT Plans
as shall be necessary to permit such assumption in accordance with this Section
2.5.2.
2.5.3. It is the intention of the Parties that, to the extent that any
NACT Option constitutes an "incentive stock option" (within the meaning of
Section 422 of the Code) immediately prior to the Effective Time, such NACT
Option shall continue to qualify as an incentive stock option to the maximum
extent permitted by Section 422 of the Code, and that the assumption of the NACT
Option provided by this Section 2.5 shall satisfy the conditions of Section
424(a) of the Code.
ARTICLE 3.
PAYMENT OF THE MERGER CONSIDERATION
SECTION 3.1. Payment of the World Access Consideration and the NACT
Consideration.
3.1.1. At or prior to the Effective Time, Holdco shall appoint an agent
reasonably satisfactory to World Access and NACT (the "Exchange Agent") for the
purpose of exchanging certificates representing outstanding shares of World
Access Stock and NACT Stock as provided herein. As of the Effective Time, Holdco
will deposit with the Exchange Agent, in trust for the benefit of holders of
shares of World Access Stock and NACT Stock, certificates representing the
shares of Holdco Stock issuable pursuant to Section 2.1 hereof. Holdco agrees to
make available to the Exchange Agent, from time to time as needed, cash
sufficient to pay cash in lieu of fractional shares pursuant to Section 2.3
hereof.
3.1.2. As promptly as practicable after the Effective Time, the Exchange
Agent shall send or cause to be sent to each former holder of record of shares
of World Access Stock and NACT Stock transmittal materials (the "Letter of
Transmittal") for use in exchanging their certificates formerly representing
World Access Stock and NACT Stock for the Merger Consideration provided for in
this Agreement. The Letter of Transmittal will contain instructions with respect
to the surrender of certificates representing World Access Stock and NACT Stock
and the receipt of the Merger Consideration contemplated by this Agreement and
will require each holder of World Access Stock and NACT Stock to transfer good
and marketable title to such World Access Stock and NACT Stock to Holdco, free
and clear of all Liens. Upon receipt of properly completed Letters of
Transmittal, the Exchange Agent shall pay the appropriate Merger Consideration
to the stockholders of World Access and NACT, as appropriate. The Exchange Agent
shall, as promptly as practicable after the Effective Time, send or cause to be
sent to each former holder of record of World Access
G-37
<PAGE> 488
Stock and NACT Stock a Letter of Transmittal and, upon the proper execution and
return of such Letter of Transmittal to the Exchange Agent, the appropriate
Merger Consideration shall be promptly paid.
3.1.3. At the Effective Time, the stock transfer books of World Access and
NACT shall be closed as to holders of World Access Stock and NACT Stock
immediately prior to the Effective Time, and no transfer of World Access Stock
and NACT Stock by any such holder shall thereafter be made or recognized and
each outstanding certificate formerly representing World Access Stock and NACT
Stock shall, without any action on the part of any holder thereof, no longer
represent World Access Stock and NACT Stock. If, after the Effective Time,
certificates are properly presented to the Exchange Agent, such certificates
shall be exchanged for the Merger Consideration contemplated by this Agreement
into which the World Access Stock and NACT Stock represented thereby were
converted in the Mergers.
SECTION 3.2. Lost Certificates. In the event that any holder of World
Access Stock and NACT Stock is unable to deliver the certificate which
represents such holder's World Access Stock or NACT Stock, Holdco, in the
absence of actual notice that any World Access Stock or NACT Stock theretofore
represented by any such certificate has been acquired by a bona fide purchaser,
may, in its sole discretion, deliver to such holder the Merger Consideration
contemplated by this Agreement to which such holder is entitled in accordance
with the provisions of this Agreement upon the presentation of all of the
following:
(a) an affidavit or other evidence to the reasonable satisfaction of
Holdco that any such certificate has been lost, wrongfully taken or
destroyed;
(b) such security or indemnity as may be reasonably requested by
Holdco to indemnify and hold Holdco harmless; and
(c) evidence to the satisfaction of Holdco that such holder is the
owner of World Access Stock or NACT Stock theretofore represented by each
certificate claimed by such holder to be lost, wrongfully taken or
destroyed and that such holder is the Person who would be entitled to
present each such certificate for exchange pursuant to this Agreement.
SECTION 3.3. Payment to Another Person. In the event that the delivery of
any Merger Consideration contemplated by this Agreement is to be made to a
Person other than the Person in whose name any certificate representing World
Access Stock or NACT Stock surrendered is registered, such certificate so
surrendered shall be properly endorsed (or accompanied by an appropriate
instrument of transfer), with the signature(s) appropriately guaranteed, and
otherwise in proper form for transfer, and the Person requesting such delivery
shall pay any transfer or other taxes required by reason of the delivery to a
Person other than the registered holder of such certificate surrendered or
establish to the satisfaction of Holdco that such tax has been paid or is not
applicable.
SECTION 3.4. Right to Receive the Merger Consideration Only. Until
surrendered in accordance with the provisions of this Article 3, each
certificate representing World Access Stock and NACT Stock shall represent for
all purposes the right to receive the appropriate Merger Consideration
contemplated by this Agreement and shall not represent the right to receive any
other consideration.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF NACT
NACT represents and warrants to World Access that, except as set forth in
the Disclosure Schedule delivered by NACT to World Access prior hereto (the
"NACT Disclosure Schedule"), which shall identify exceptions by specific Section
references:
SECTION 4.1. Corporate Organization. NACT has been duly organized and is
validly existing and in good standing under the Laws of the jurisdiction of its
organization, has all requisite power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than
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where failure to be so qualified or licensed, individually or in the aggregate,
would not have an NACT Material Adverse Effect. NACT is not in violation of any
provision of its certificate of incorporation or bylaws or other organizational
documents, as the case may be. NACT has no subsidiaries or equity investments in
any other Person.
SECTION 4.2. Capitalization. As of the date of this Agreement, the
authorized capital stock of NACT consists in its entirety of 25,000,000 shares
of NACT Stock and 10,000,000 shares of preferred stock, $.01 par value per share
("NACT Preferred Stock"). As of the date of this Agreement, (i) 8,129,096 shares
of NACT Stock are issued and outstanding, (ii) no shares of NACT Preferred Stock
are outstanding, and (iii) options to acquire 1,039,065 shares of NACT Stock are
outstanding under the NACT Plans. All of the outstanding shares of capital stock
of NACT have been duly authorized, validly issued and are fully paid and
nonassessable and are not subject to preemptive rights created by statute,
charter or bylaws or any agreement to which NACT is a Party or by which NACT is
bound. Except as set forth in this Section 4.2, there are no options, warrants
or other rights (including registration rights), agreements, arrangements or
commitments of any character to which NACT is a Party relating to the issued or
unissued capital stock of, or other interest in, NACT or obligating NACT to
grant, issue or sell any shares of capital stock of, or other interest in, NACT
by sale, lease, license or otherwise.
SECTION 4.3. Authority Relative to this Agreement. NACT has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated on its
part hereby to be consummated by NACT. The execution and delivery of this
Agreement by NACT and the consummation of the transactions contemplated on its
part hereby have been duly authorized by all necessary corporate action, and,
other than the approval of NACT's stockholders as provided in Section 7.3
hereof, no other corporate proceedings on the part of NACT are necessary to
authorize the consummation of the transactions contemplated on its part hereby.
This Agreement has been duly executed and delivered by NACT and, assuming the
due authorization, execution and delivery hereof by the other Parties,
constitutes the legal, valid and binding obligation of NACT, enforceable against
NACT in accordance with its terms, except to the extent that such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or other Law
affecting the enforcement of creditors' rights generally or by general equity
principles.
SECTION 4.4. No Violation. The execution and delivery of this Agreement
by NACT do not, the performance by NACT of its obligations hereunder will not,
and the consummation by NACT of the transactions contemplated to be performed by
it hereby will not, (i) violate or conflict with any provision of any Law in
effect on the date of this Agreement and applicable to NACT or by which any of
its properties or assets is bound or to which any of its properties or assets is
subject, (ii) require NACT to obtain any consent, waiver, approval, license or
authorization or permit of, or make any filing with, or notification to, any
Governmental Authority, based on any Law, rule, regulation or other requirement
of any Governmental Authority in effect and of the date of this Agreement (other
than (a) filings or authorizations required in connection or in compliance with
the provisions of the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
DGCL and (b) any other filings and approvals expressly contemplated by this
Agreement), (iii) require the consent, waiver, approval, license or
authorization of any Person (other than any Governmental Authority), (iv)
violate, conflict with or result in a breach of or the acceleration of any
obligation under, or constitute a default (or an event which with notice or the
lapse of time or both would become a default) under, or give to others any
rights of, or result in any, termination, amendment, acceleration or
cancellation of, or loss of any benefit or creation of a right of first refusal,
or require any payment under, or result in the creation of a lien or other
encumbrance on any of the properties or assets of NACT pursuant to or under any
provision of any indenture, mortgage, note, bond, lien, lease, license,
agreement, contract, order, judgment, ordinance, NACT Permit (as herein defined)
or other instrument or obligation to which NACT is a Party or by which NACT or
any of its properties is bound or to which any of its properties is subject, or
(v) conflict with or violate the certificate of incorporation or bylaws, in each
case as amended or restated, of NACT, except for any such conflicts or
violations described in clause (i) or breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment obligations or
liens or encumbrances described in clause (iv) that would not have an
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NACT Material Adverse Effect and except where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications would not, either individually or in the aggregate, prevent NACT
from performing any of its obligations under this Agreement and would not have
an NACT Material Adverse Effect.
SECTION 4.5. Compliance With Laws.
4.5.1. As of the date of this Agreement, NACT holds all licenses,
franchises, grants, permits, easements, variances, exemptions, consents,
certificates, identification numbers, approvals, orders, and other
authorizations (collectively, "NACT Permits") necessary to own, lease and
operate its properties and to carry on its business as it is now being conducted
and is in compliance with all NACT Permits and all Laws governing its business,
except where the failure to hold such NACT Permits or to so comply, individually
or in the aggregate, would not have an NACT Material Adverse Effect.
4.5.2. No action or proceeding is pending or, to NACT's knowledge,
threatened that may result in the suspension, revocation or termination of any
NACT Permit, the issuance of any cease-and-desist order, or the imposition of
any administrative or judicial sanction, and NACT has not received any notice
from any Governmental Authority in respect of the suspension, revocation or
termination of any NACT Permit, or any notice of any intention to conduct any
investigation or institute any proceeding, in any such case where such
suspension, revocation, termination, order, sanction, investigation or
proceeding would result, individually or in the aggregate, in an NACT Material
Adverse Effect.
SECTION 4.6. Litigation. As of the date of this Agreement, except as may
be disclosed in the NACT 10-K (as herein defined) or in reports filed by NACT on
Forms 10-Q or 8-K for periods subsequent to the period covered by the NACT 10-K,
in each case filed prior to the date hereof (such reports and filings, including
the NACT 10-K, collectively, the "NACT Current Reports"), there is no claim,
litigation, suit, arbitration, mediation, action, proceeding, unfair labor
practice complaint or grievance pending or, to NACT's knowledge, investigation
of any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to NACT's knowledge, threatened in writing
against NACT or with respect to any property or asset of NACT, except for
claims, litigations, suits, arbitrations, mediations, actions, proceedings,
complaints, grievances or investigations which, individually or in the
aggregate, would not have an NACT Material Adverse Effect. Neither NACT nor any
property or asset of NACT is subject to any continuing order, judgment,
settlement agreement, injunction, consent decree or other similar written
agreement with or, to NACT's knowledge, continuing investigation by, any
Governmental Authority, or any judgment, order, writ, injunction, consent decree
or award of any Governmental Authority or arbitrator, including cease-and-
desist or other orders, except for such matters which would not have an NACT
Material Adverse Effect.
SECTION 4.7. Financial Statements and Reports. NACT has made available to
World Access true and complete copies (in each case, as amended) of (i) its
Annual Report on Form 10-K for the year ended September 30, 1997 (the "NACT
10-K"), as filed with the Securities and Exchange Commission (the
"Commission"), and (ii) all other reports, statements and registration
statements (including Quarterly Reports on Form 10-Q and Current Reports on Form
8-K) filed by it with the Commission. The reports, statements and registration
statements referred to in the immediately preceding sentence (including any
financial statements or schedules or other information included or incorporated
by reference therein) are referred to in this Agreement as the "NACT SEC
Filings." As of the respective times such documents were filed or, as
applicable, were effective, the NACT SEC Filings complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder, except for such
noncompliance which, individually or in the aggregate, would not have an NACT
Material Adverse Effect, and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of NACT included
in the NACT SEC Filings comply as to form in all material respect with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto, were prepared in accordance with GAAP
(as in effect from time to time) during the periods involved (except as may be
indicated therein or in the notes thereto or, in the case of the unaudited
interim financial statements, as
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permitted by Form 10-Q of the Commission) and present fairly the financial
position, results of operations and cash flows of NACT as of the dates and for
the periods indicated, except (i) in the case of unaudited interim financial
statements, to normal recurring year-end adjustments and any other adjustments
described therein and (ii) any pro forma financial information contained therein
is not necessarily indicative of the financial position of NACT as of the
respective dates thereof and the results of operations and cash flows for the
periods indicated.
SECTION 4.8. Absence of Certain Changes or Events. Other than as
disclosed in the NACT Current Reports, or otherwise disclosed in this Agreement,
since September 30, 1997 and through the date hereof, the business of NACT has
been conducted in the ordinary course, and there has not been (i) any NACT
Material Adverse Effect; (ii) any material indebtedness incurred by NACT for
money borrowed; (iii) any material transaction or commitment, except in the
ordinary course of business or as contemplated by this Agreement, entered into
by NACT; (iv) any damage, destruction or loss, whether covered by insurance or
not, which, individually or in the aggregate, would have an NACT Material
Adverse Effect; (v) any material change by NACT in accounting principles or
methods except insofar as may be required by a change in GAAP; (vi) any material
revaluation by NACT of any asset (including any writing down of the value of
inventory or writing off of notes or accounts receivable); (vii) any mortgage or
pledge of any of the assets or properties of NACT or the subjection of any of
the assets or properties of NACT to any material liens, charges, encumbrances,
imperfections of title, security interest, options or rights or claims of others
with respect thereto other than in the ordinary course consistent with past
practice; or (viii) any assumption or guarantee by NACT of the indebtedness of
any Person other than in the ordinary course consistent with past practice.
SECTION 4.9. No Undisclosed Material Liabilities. Except as disclosed in
the NACT Current Reports, NACT has not incurred any liabilities of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, that, individually or in the aggregate, would have a Material Adverse
Effect other than (i) liabilities incurred in the ordinary course consistent
with past practice since September 30, 1997, (ii) liabilities that have been
repaid, discharged or otherwise extinguished and (iii) liabilities under or
contemplated by this Agreement.
SECTION 4.10. No Default. NACT is not in default or violation (and no
event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (i)
its certificate of incorporation or bylaws, (ii) indenture, mortgage, note,
bond, lien, lease, license, agreement, contract, order, judgment, ordinance,
NACT Permit or other instrument or obligation to which NACT is a Party or by
which NACT or any of its assets or properties is bound or subject to, or (iii)
any order, writ, injunction, decree or Law applicable to NACT, except in the
case of clauses (ii) and (iii) above for defaults or violations that would not
have an NACT Material Adverse Effect.
SECTION 4.11. Finders' and Bankers' Fees. Except for NationsBanc
Montgomery Securities LLC ("Montgomery Securities"), a copy of whose engagement
agreement has been
provided to World Access, there is no investment banker, broker, finder, or
other intermediary which has been retained by or is authorized to act on behalf
of NACT or the Special Committee who might be entitled to any fee or commission
from NACT or any of its Affiliates upon consummation of the transactions
contemplated by this Agreement.
SECTION 4.12. Fairness Opinion. NACT has received the opinion of
Montgomery Securities to the effect that, as of the date hereof, the
consideration to be received by NACT's stockholders in the NACT Merger is fair
to the Public Stockholders from a financial point of view.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS
World Access represents and warrants to NACT that, except as set forth in
the Disclosure Schedule delivered by World Access to NACT prior hereto (the
"World Access Disclosure Schedule"), which shall identify exceptions by specific
Section references:
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SECTION 5.1. Corporate Organization. Each of World Access and its
Subsidiaries (the "World Access Subsidiaries") has been duly organized and is
validly existing and in good standing under the Laws of the jurisdiction of its
organization, has all requisite power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than where failure to be so qualified or licensed, individually or in the
aggregate, would not have a World Access Material Adverse Effect. Neither World
Access nor any World Access Subsidiary is in violation of any provision of its
charter or bylaws or other organizational documents, as the case may be.
SECTION 5.2. Capitalization. As of the date of this Agreement, the
authorized capital stock of World Access consists in its entirety of 40,000,000
shares of World Access Stock and 10,000,000 shares of preferred stock, $.01 par
value per share (the "World Access Preferred Stock"). As of the date of this
Agreement, (i) 19,754,046 shares of World Access Common Stock are issued and
outstanding, (ii) no shares of Preferred Stock are outstanding, and (iii)
options and warrants to acquire 4,218,401 shares of World Access Common Stock
are outstanding under the World Access Plans. All of the outstanding shares of
capital stock of each of the World Access Subsidiaries are owned beneficially
and of record by World Access or a World Access Subsidiary free and clear of all
liens, charges, encumbrances, options, rights of first refusal or limitations or
agreements regarding voting rights of any nature. All of the outstanding shares
of capital stock of World Access and each of the World Access Subsidiaries have
been duly authorized, validly issued and are fully paid and nonassessable and
are not subject to preemptive rights created by statute, their respective
charter or bylaws or any agreement to which any such entity is a Party or by
which any such entity is bound. Except as set forth in this Section 5.2, there
are no options, warrants or other rights (including registration rights),
agreements, arrangements or commitments of any character to which World Access
or any World
Access Subsidiary is a Party relating to the issued or unissued capital stock,
or other interest in, of World Access or any World Access Subsidiary or
obligating World Access or any World Access Subsidiary to grant, issue or sell
any shares of capital stock of, or other equity interests in, World Access or
any World Access Subsidiary, by sale, lease, license or otherwise.
SECTION 5.3. Authority Relative to this Agreement. World Access has all
requisite corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated on its part hereby to be consummated by World Access. The execution
and delivery of this Agreement by World Access and the consummation of the
transactions contemplated on its part hereby have been duly authorized by all
necessary corporate action, and no other corporate proceedings on the part of
World Access are necessary to authorize the consummation of the transactions
contemplated on its part hereby. This Agreement has been duly executed and
delivered by World Access and, assuming the due authorization, execution and
delivery hereof by the other Parties, constitutes the legal, valid and binding
obligation of World Access, enforceable against World Access in accordance with
its terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other Law affecting the
enforcement of creditors' rights generally or by general equity principles.
SECTION 5.4. No Violation. The execution and delivery of this Agreement
by World Access do not, the performance by World Access of its obligations
hereunder will not, and the consummation by World Access of the transactions
contemplated to be performed by it hereby will not, (i) violate or conflict with
any provision of any Law in effect on the date of this Agreement and applicable
to World Access or any World Access Subsidiary or by which any of their
respective properties or assets is bound or to which any of their respective
properties or assets is subject, (ii) require World Access or any World Access
Subsidiary to obtain any consent, waiver, approval, license or authorization or
permit of, or make any filing with, or notification to, any Governmental
Authority, based on any Law, rule, regulation or other requirement of any
Governmental Authority in effect and of the date of this Agreement (other than
(a) filings or authorizations required in connection or in compliance with the
provisions of the Securities Act, the Exchange Act and the DGCL and (b) any
other filings and approvals expressly contemplated by this Agreement), (iii)
require the consent, waiver, approval, license or authorization of any Person
(other than any Governmental Authority), (iv) violate, conflict with or result
in a breach of or the acceleration of any obligation under, or constitute a
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default (or an event which with notice or the lapse of time or both would become
a default) under, or give to others any rights of, or result in any,
termination, amendment, acceleration or cancellation of, or loss of any benefit
or creation of a right of first refusal, or require any payment under, or result
in the creation of a lien or other encumbrance on any of the properties or
assets of World Access or any World Access Subsidiary pursuant to or under any
provision of any indenture, mortgage, note, bond, lien, lease, license,
agreement, contract, order, judgment, ordinance, World Access Permit (as herein
defined) or other instrument or obligation to which World Access or any World
Access Subsidiary is a Party or by which World Access or any World Access
Subsidiary or any of their respective properties is bound or to which any of
their respective properties is subject, or (v) conflict with or violate the
certificate of incorporation or bylaws, or the equivalent organizational
documents, in each case as amended or restated, of World Access or any of World
Access Subsidiary, except for any such conflicts or violations described in
clause (i) or breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
described in clause (iv) that would not have a World Access Material Adverse
Effect and except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications would not,
either individually or in the aggregate, prevent World Access from performing
any of its obligations under this Agreement and would not have a World Access
Material Adverse Effect.
SECTION 5.5. Compliance with Laws.
5.5.1. As of the date of this Agreement, each of World Access and the
World Access Subsidiaries holds all licenses, franchises, grants, permits,
easements, variances, exemptions, consents, certificates, identification
numbers, approvals, orders, and other authorizations (collectively, "World
Access Permits") necessary to own, lease and operate its properties and to carry
on its business as it is now being conducted and is in compliance with all World
Access Permits and all Laws governing its business, except where the failure to
hold such World Access Permits or to so comply, individually or in the
aggregate, would not have a World Access Material Adverse Effect.
5.5.2. No action or proceeding is pending or, to World Access's knowledge,
threatened that may result in the suspension, revocation or termination of any
World Access Permit, the issuance of any cease-and-desist order, or the
imposition of any administrative or judicial sanction, and neither World Access
nor any World Access Subsidiary has received any notice from any Governmental
Authority in respect of the suspension, revocation or termination of any World
Access Permit, or any notice of any intention to conduct any investigation or
institute any proceeding, in any such case where such suspension, revocation,
termination, order, sanction, investigation or proceeding would result,
individually or in the aggregate, in a World Access Material Adverse Effect.
SECTION 5.6. Litigation. As of the date of this Agreement, except as may
be disclosed in the World Access 10-K (as herein defined) or in reports filed by
World Access on Forms 10-Q or 8-K for periods subsequent to the period covered
by the World Access 10-K, in each case filed prior to the date hereof (such
reports and filings, including the World Access 10-K, collectively, the "World
Access Current Reports"), there is no claim, litigation, suit, arbitration,
mediation, action, proceeding, unfair labor practice complaint or grievance
pending or, to World Access's knowledge, investigation of any kind, at law or in
equity (including actions or proceedings seeking injunctive relief), pending or,
to World Access's knowledge, threatened in writing against World Access or any
World Access Subsidiary or with respect to any property or asset of any of them,
except for claims, litigations, suits, arbitrations, mediations, actions,
proceedings, complaints, grievances or investigations which, individually or in
the aggregate, would not have a World Access Material Adverse Effect. Neither
World Access nor any World Access Subsidiary nor any property or asset of any of
them is subject to any continuing order, judgment, settlement agreement,
injunction, consent decree or other similar written agreement with or, to World
Access's knowledge, continuing investigation by, any Governmental Authority, or
any judgment, order, writ, injunction, consent decree or award of any
Governmental Authority or arbitrator, including cease-and-desist or other
orders, except for such matters which would not have a World Access Material
Adverse Effect.
SECTION 5.7. Financial Statements and Reports. World Access has made
available to NACT true and complete copies (in each case, as amended) of (i) its
Annual Report on Form 10-K for the year ended
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December 31, 1996 (the "World Access 10-K"), as filed with the Commission, and
(ii) all other reports, statements and registration statements (including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed by it with
the Commission subsequent to December 31, 1996. The reports, statements and
registration statements referred to in the immediately preceding sentence
(including any financial statements or schedules or other information included
or incorporated by reference therein) are referred to in this Agreement as the
"World Access SEC Filings." As of the respective times such documents were filed
or, as applicable, were effective, the World Access SEC Filings complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act and the rules and regulations promulgated thereunder, except for
such noncompliance which, individually or in the aggregate, would not have a
World Access Material Adverse Effect, and did not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of World Access included in the World Access SEC Filings
comply as to form in all material respect with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto, were prepared in accordance with GAAP (as in effect from time
to time) during the periods involved (except as may be indicated therein or in
the notes thereto or, in the case of the unaudited interim financial statements,
as permitted by Form 10-Q of the Commission) and present fairly the consolidated
financial position, consolidated results of operations and consolidated cash
flows of World Access and the World Access Subsidiaries as of the dates and for
the periods indicated, except (i) in the case of unaudited interim consolidated
financial statements, to normal recurring year-end adjustments and any other
adjustments described therein and (ii) any pro forma financial information
contained therein is not necessarily indicative of the consolidated financial
position of World Access and the World Access Subsidiaries as of the respective
dates thereof and the consolidated results of operations and cash flows for the
periods indicated. No World Access Subsidiary is required to file any form,
report or other document with the Commission.
SECTION 5.8. Absence of Certain Changes or Events. Other than as
disclosed in the World Access Current Reports, or otherwise disclosed in this
Agreement, since September 30, 1997 and through the date hereof, the business of
World Access and of each World Access Subsidiary has been conducted in the
ordinary course, and there has not been (i) any World Access Material Adverse
Effect; (ii) any material indebtedness incurred by World Access or any World
Access Subsidiary for money borrowed; (iii) any material transaction or
commitment, except in the ordinary course of business or as contemplated by this
Agreement, entered into by World Access or any World Access Subsidiary; (iv) any
damage, destruction or loss, whether covered by insurance or not, which,
individually or in the aggregate, would have a World Access Material Adverse
Effect; (v) any material change by World Access in accounting principles or
methods except insofar as may be required by a change in GAAP; (vi) any material
revaluation by World Access or any World Access Subsidiary of any asset
(including any writing down of the value of inventory or writing off of notes or
accounts receivable); (vii) any mortgage or pledge of any of the assets or
properties of World Access or any World Access Subsidiary or the subjection of
any of the assets or properties of World Access or any World Access Subsidiary
to any material liens, charges, encumbrances, imperfections of title, security
interest, options or rights or claims of others with respect thereto other than
in the ordinary course consistent with past practice; or (viii) any assumption
or guarantee by World Access or a World Access Subsidiary of the indebtedness of
any Person other than in the ordinary course consistent with past practice.
SECTION 5.9. No Undisclosed Material Liabilities. Except as disclosed in
the World Access Current Reports, neither World Access nor any World Access
Subsidiary has incurred any liabilities of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that, individually
or in the aggregate, would have a World Access Material Adverse Effect other
than (i) liabilities incurred in the ordinary course consistent with past
practice since September 30, 1997, (ii) liabilities that have been repaid,
discharged or otherwise extinguished and (iii) liabilities under or contemplated
by this Agreement.
SECTION 5.10. No Default. Neither World Access nor any World Access
Subsidiary is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation) of
any term, condition or provision of (i) its certificate of incorporation or
bylaws or other organizational document, (ii) indenture, mortgage, note, bond,
lien, lease, license, agreement, contract, order,
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judgment, ordinance, World Access Permit or other instrument or obligation to
which World Access or any World Access Subsidiary is a Party or by which World
Access or any World Access Subsidiary or any of their respective properties or
assets is bound or subject to, or (iii) any order, writ, injunction, decree or
Law applicable to World Access or any World Access Subsidiary, except in the
case of clauses (ii) and (iii) above for defaults or violations that would not
have a World Access Material Adverse Effect.
SECTION 5.11. Finders' and Bankers' Fees. Except as set forth in Section
4.11 hereof, there is no investment banker, broker, finder, or other
intermediary which has been retained by or is authorized to act on behalf of
World Access or any World Access Subsidiary who might be entitled to any fee or
commission from World Access or any of its Affiliates upon consummation of the
transactions contemplated by this Agreement.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF HOLDCO, SUB-1 AND SUB-2
In order to induce World Access and NACT to enter into this Agreement,
Holdco and its subsidiaries, Sub-1 and Sub-2 (collectively, the "Holdco Subs"),
jointly and severally, represent and warrant to World Access and NACT as
follows:
SECTION 6.1. Organization, Qualification, and Corporate Power. Each of
Holdco and the Holdco Subs is a corporation duly organized, validly existing,
and in good standing under the Laws of the jurisdiction of its incorporation.
Each of Holdco and the Holdco Subs is duly authorized and qualified to conduct
business and is in good standing under the Laws of each jurisdiction where such
qualification is required, except where the lack of such qualification would not
have a material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of Holdco and the Holdco Subs. Each
of Holdco and the Holdco Subs has full corporate power and authority to carry on
the businesses in which it is engaged and to own, lease, use and operate the
properties owned, leased used and operated by it.
SECTION 6.2. Capitalization. The entire authorized capital stock of
Holdco consists in its entirety of 40,000,000 shares of Holdco Stock and
10,000,000 shares of preferred stock, $.01 par value per share (the "Holdco
Preferred Stock"). As of the date of this Agreement, (i) 1,000 shares of Holdco
Stock are issued and outstanding and (ii) no shares of Holdco Preferred Stock
are outstanding. No shares of Holdco Stock are held in treasury. All of the
issued and outstanding shares of Holdco Stock have been duly authorized and are
validly issued, fully paid, and nonassessable. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments (except for this
Agreement) that could require Holdco or any of the Holdco Subs to issue, sell,
or otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Holdco and the Holdco Subs.
Holdco and the Holdco Subs have no outstanding bonds, debentures, notes or
similar obligations the holders of which have the right to vote generally with
holders of Holdco Stock.
SECTION 6.3. Authority Relative to this Agreement. Each of Holdco and the
Holdco Subs has all requisite corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated on its part hereby to be consummated by it. The
execution and delivery of this Agreement by each of Holdco and the Holdco Subs
and the consummation of the transactions contemplated on its part hereby have
been duly authorized by all necessary corporate action, and no other corporate
proceedings on the part of Holdco or either of the Holdco Subs are necessary to
authorize the consummation of the transactions contemplated on its part hereby.
This Agreement has been duly executed and delivered by Holdco and the Holdco
Subs and, assuming the due authorization, execution and delivery hereof by the
other Parties, constitutes the legal, valid and binding obligations of Holdco
and the Holdco Subs, enforceable against each of them in accordance with its
terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other Law affecting the
enforcement of creditors' rights generally or by general equity principles.
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ARTICLE 7.
CERTAIN COVENANTS AND AGREEMENTS
SECTION 7.1. Conduct of Business by NACT. From the date of this Agreement
until the Effective Time, NACT shall conduct its business in the ordinary course
consistent with past practice and (except for acts in connection with the NACT
Merger) shall use its best efforts to preserve intact its business relationships
with third parties and to keep available the services of its present officers
and employees.
SECTION 7.2. Regulatory Matters.
7.2.1. As promptly as practicable after the execution of this Agreement,
Holdco, NACT and World Access shall jointly prepare and file with the Commission
a Registration Statement on Form S-4 relating to the shares of Holdco Stock to
be issued in the Mergers (the "Registration Statement") in which a definitive
proxy statement/prospectus to be furnished to the stockholders of NACT (the
"Proxy Statement") will be included as a part. Each of Holdco, World Access and
NACT shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and NACT shall thereafter mail or deliver the Proxy Statement to
its stockholders. Holdco shall also use all reasonable efforts to obtain all
necessary state securities Law or "blue sky" permits and approvals required to
carry out the transactions contemplated by this Agreement, and NACT shall
furnish all information concerning NACT and the holders of NACT Stock as may be
reasonably requested in connection with any such action. Holdco, World Access
and NACT agree to cooperate in making any preliminary filings of the Proxy
Statement with the Commission, as promptly as practicable, pursuant to Rule
14a-6 under the Exchange Act.
7.2.2. The Parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities which are necessary or advisable to
consummate the transactions contemplated by this Agreement (including the
Mergers) and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such Governmental Authorities.
World Access and NACT shall have the right to review in advance, and, to the
extent practicable, each will consult the other on, in each case subject to
applicable Laws relating to the exchange of information, all the information
relating to World Access or NACT, as the case may be, which appear in any filing
made with, or written materials submitted to, any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the Parties hereto shall
act reasonably and as promptly as practicable. The Parties agree that they will
consult with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each Party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated herein.
7.2.3. Holdco, World Access and NACT shall, upon request, furnish each
other with all information concerning themselves, their subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Proxy Statement, the Registration Statement
or any other statement, filing, notice or application made by or on behalf of
Holdco, World Access, NACT or any of their respective subsidiaries to any
Governmental Authority in connection with the Mergers and the other transactions
contemplated by this Agreement.
SECTION 7.3. Stockholder Matters. NACT shall call and hold a meeting of
its stockholders as promptly as practicable after the date hereof for the
purpose of voting upon the approval of this Agreement and the NACT Merger and
upon such other matters as may be properly considered at such meeting. NACT
shall use all reasonable efforts to solicit from its stockholders proxies in
favor of the approval of this Agreement and the NACT Merger and shall take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by the DGCL to obtain such approval. NACT shall take all
other action necessary or, in the opinion of the other Parties hereto, advisable
to promptly and expeditiously secure any
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vote or consent of its stockholders required by applicable Law and its
certificate of incorporation and bylaws to effect the NACT Merger.
SECTION 7.4. Access to Information. From the date of this Agreement until
the Effective Time, NACT will give World Access, its counsel, financial
advisors, auditors, and other authorized representatives full access to the
offices, properties, books and records of NACT, will furnish to World Access,
its counsel, financial advisors, auditors, and other authorized representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct NACT's employees, counsel, financial
advisors, and auditors to cooperate with World Access in its investigation of
the business of NACT, provided that no investigation pursuant to this Section
shall affect any representation or warranty given by NACT to World Access
hereunder.
SECTION 7.5. Notices of Certain Events.
7.5.1. NACT shall promptly notify World Access of:
(A) any notice or other communication received by NACT from any
Person alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement; and
(B) any notice or other communication received by NACT from any
Governmental Authority in connection with the transactions contemplated by
this Agreement.
7.5.2. World Access shall promptly notify NACT of:
(A) any notice or other communication received by World Access from
any Person alleging that the consent of such Person is or may be required
in connection with the transactions contemplated by this Agreement; and
(B) any notice or other communication received by World Access from
any Governmental Authority in connection with the transactions contemplated
by this Agreement.
SECTION 7.6. Indemnification. Holdco and World Access agree that all
rights to indemnification for acts or omissions occurring prior to the Effective
Time existing as of the date of this Agreement, in favor of the current or
former directors or officers of NACT as provided in its Certificate of
Incorporation or Bylaws shall survive the NACT Merger and shall continue in full
force and effect in accordance with their terms from the Effective Time until
the expiration of the applicable statute of limitations with respect to any
claims against such current or former directors of officers of NACT arising out
of such acts or omissions. Holdco shall cause to be maintained for a period of
not less than six years from the Effective Time NACT's directors' and officers'
insurance and indemnification policy in effect as of the date of this Agreement
to the extent that it provides coverage for events occurring prior to the
Effective Time (the "D&O Insurance") for all persons who are directors and
officers of NACT who are covered persons under NACT's D&O insurance policies in
effect on the date of this Agreement, so long as the annual premium therefor
would not be in excess of 125% of the last annual premium paid prior to the date
of this Agreement (the "Maximum Premium"). If the existing D&O Insurance
expires, is terminated or is canceled during such six-year period, then Holdco
shall use all reasonable efforts to cause to be obtained as much D&O Insurance
as can be obtained for the remainder of such period for an annualized premium
not in excess of the Maximum Premium on terms and conditions no less
advantageous to the covered Persons than the existing D&O Insurance.
SECTION 7.7. Best Efforts. Subject to the terms and conditions of this
Agreement, each Party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Law to consummate the transactions contemplated by
this Agreement.
SECTION 7.8. Public Announcements. World Access and NACT will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement and the contemplated transactions and, except as
may be required by applicable Law or any agreement with NASDAQ, will not issue
any such press release or make any such public statement prior to such
consultation.
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SECTION 7.9. Further Assurances. After the Effective Time, the officers
and directors of the NACT Surviving Corporation will be authorized to execute
and deliver in the name and on behalf of NACT and Sub-2 any deeds, bills of
sale, assignments, agreements, certificates, other documents, or assurances and
to take and do in the name and on behalf of NACT and Sub-2 any other actions and
things they may deem desirable to vest, perfect, or confirm of record or
otherwise in the NACT Surviving Corporation, any and all right, title, and
interest in, to, and under any of the rights, properties, or assets of NACT
acquired or to be acquired by the NACT Surviving Corporation as a result of, or
in connection with, the NACT Merger.
SECTION 7.10. Listing of Holdco Stock. World Access shall use its best
efforts to cause the shares of Holdco Stock to be issued pursuant to this
Agreement to be listed on NASDAQ.
SECTION 7.11. Affiliates. Prior to the Closing Date, each of NACT and
World Access shall deliver to Holdco a letter identifying all Persons who are,
at the time this Agreement is submitted for approval to the NACT stockholders,
Affiliates of NACT or World Access, as the case may be, for purposes of Rule 145
under the Securities Act. Each of NACT and World Access shall use its best
efforts to cause each such Person to deliver to Holdco on or prior to the
Closing Date a written agreement substantially in the form of attached hereto as
Exhibit A.
SECTION 7.12. Tax Treatment. Each of Holdco, World Access and NACT shall
use its reasonable best efforts to cause the Mergers to qualify as exchanges
governed by Section 351 of the Code and to obtain the opinions of counsel
referred to in Sections 8.2(e) and 8.3(e) hereof.
ARTICLE 8.
CONDITIONS TO THE MERGERS
SECTION 8.1. Conditions to the Obligations of each Party. The obligations
of each Party to consummate the Mergers are subject to the satisfaction at or
before the Effective Time of the following conditions, any or all of which may
be waived, in whole or in part, by each of the Parties intended to benefit
therefrom, to the extent permitted by applicable Law:
(A) this Agreement and the transactions contemplated hereby shall
have been approved in the manner required by applicable Law by the holders
of the NACT Stock;
(B) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and Holdco shall have received all state
securities or "blue sky" authorizations necessary to issue the Holdco Stock
issuable pursuant and to this Agreement;
(C) no Governmental Authority shall have enacted, issued,
promulgated, enforced, or entered any Law or Order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Mergers illegal or otherwise prohibiting consummation of the
Mergers;
(D) all actions by or in respect of or filings with any Governmental
Authority required to permit the consummation of the Mergers shall have
been obtained, other than the filing of the requisite Certificate of Merger
with the Secretary of State of the State of Delaware;
(E) the shares of Holdco Stock issuable pursuant to this Agreement
shall have been approved for listing on NASDAQ; and
(F) the GST Stock Purchase shall have been consummated.
SECTION 8.2. Additional Conditions to the Obligations of Holdco, World
Access, Sub-1 and Sub-2. The obligations of Holdco, World Access, Sub-1 and
Sub-2 to consummate the Mergers are also subject to the satisfaction at or prior
to the Effective Time of the following further conditions, any or all of which
may be
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waived, in whole or in part, by each of the Parties intended to benefit
therefrom, to the extent permitted by applicable Law:
(A) NACT shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of NACT contained in
this Agreement and in any certificate delivered by NACT pursuant hereto
shall be true and correct in all material respects, at and as of the
Effective Time as if made at and as of such time, except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, and World
Access shall have received a certificate signed by the chief executive
officer and the principal financial officer of NACT to the foregoing
effect;
(B) no NACT Material Adverse Effect shall have occurred;
(C) World Access shall have received or be satisfied that it will
receive all consents and approvals contemplated by Section 4.4 of the NACT
Disclosure Schedule and any other consents of third parties necessary in
connection with the consummation of the NACT Merger if the failure to
obtain any such consent or consents would have an NACT Material Adverse
Effect;
(D) World Access shall have received all documents it may reasonably
request relating to the authority of NACT to enter into this Agreement, all
in form and substance reasonably satisfactory to World Access; and
(E) World Access shall have received from its counsel, Rogers &
Hardin LLP, an opinion based upon reasonably requested representation
letters and dated as of the Effective Time, to the effect that the World
Access Merger will be treated as a transfer of property to Holdco by
holders of World Access Stock governed by Section 351 of the Code.
SECTION 8.3. Additional Conditions to the Obligations of NACT. The
obligations of NACT to consummate the NACT Merger are also subject to the
satisfaction at or prior to the Effective Time of the following further
conditions, any or all of which may be waived, in whole or in part, by NACT to
the extent permitted by applicable Law:
(A) Holdco, World Access, Sub-1 and Sub-2 shall have performed in all
material respects all of their respective obligations required to be
performed by them at or prior to the Effective Time, the representations
and warranties of Holdco, World Access, Sub-1 and Sub-2 contained in this
Agreement and in any certificate delivered by them pursuant hereto shall be
true and correct in all material respects at and as of the Effective Time
as if made at and as of such time, except that those representations and
warranties which address matters only as of a particular date shall remain
true and correct as of such date, and NACT shall have received a
certificate signed by the chief executive officer and chief financial
officer of World Access to the foregoing effect;
(B) no World Access Material Adverse Effect should have occurred;
(C) NACT shall have received or be satisfied that it will receive all
consents and approvals contemplated by Section 5.4 of the World Access
Disclosure Schedule and any other consents of third parties necessary in
connection with the consummation of the World Access Merger if the failure
to obtain any such consent or consents would have a World Access Material
Adverse Effect;
(D) NACT shall have received all documents it may reasonably request
relating to the authority of Holdco, World Access Sub-1 and Sub-2 to enter
into this Agreement, all in form and substance reasonably satisfactory to
NACT; and
(E) NACT shall have received from its counsel, Van Cott, Bagley,
Cornwall & McCarthy, an opinion based upon reasonably requested
representation letters and dated as of the Effective Time, to the effect
that the NACT Merger will be treated as a transfer of property to Holdco by
holders of NACT Stock governed by Section 351 of the Code.
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ARTICLE 9.
TERMINATION
SECTION 9.1. Termination. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of NACT):
(A) by mutual written consent of NACT and World Access;
(B) by either NACT or World Access, if the Mergers have not been
consummated by August 1, 1998, unless the failure to consummate the Mergers
is the result of a willful and material breach of this Agreement by the
Party seeking to terminate this Agreement;
(C) by either NACT or World Access, if there shall be any Law that
makes consummation of the Mergers illegal or otherwise prohibited or if any
Order enjoining World Access or NACT from consummating the Mergers is
entered and such Order shall become final and nonappealable;
(D) by either NACT or World Access, if this Agreement and the NACT
Merger shall fail to be approved and adopted by the stockholders of NACT at
a duly called meeting of its stockholders called for such purpose as set
forth in Section 7.3 hereof; or
(E) by World Access in accordance with Section 2.2(b) hereof.
SECTION 9.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.1 hereof, then this Agreement shall become void and of no
effect with no liability on the part of any Party, except that the agreements
contained in Section 10.5 shall survive the termination hereof; provided
however, that, except as otherwise specifically provided, nothing herein shall
relieve any Party of liability for any breach of this Agreement.
ARTICLE 10.
MISCELLANEOUS
SECTION 10.1. Definitions. As used in this Agreement, the following terms
have the following respective meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"AFFILIATE" means, with respect to a Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such given Person.
"CLOSING DATE MARKET PRICE" means the average of the daily closing price of
World Access Stock as reported on NASDAQ on each of the twenty consecutive
trading days ending with the third trading day immediately preceding the
Effective Time.
"GAAP" means United States generally accepted accounting principles
consistently applied.
"GOVERNMENTAL AUTHORITY" means any federal, state, county, local, foreign,
or other governmental or public agency, instrumentality, commission, authority,
board, or body, and any court, arbitrator, mediator, or tribunal.
"LAW" means any code, law, ordinance, regulation, rule, or statute of any
Governmental Authority.
"LIEN" means any security interest, lien, mortgage, deed to secure debt,
deed of trust, pledge, charge, conditional sale, or other title retention
agreement, or other encumbrance of any kind.
"MERGER CONSIDERATION" means the World Access Consideration and the NACT
Consideration.
"NACT MATERIAL ADVERSE EFFECT" means any matter that would reasonably be
expected to affect materially and adversely the business, condition (financial
or otherwise), or results of operations of NACT.
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"NASDAQ" means The NASDAQ National Market.
"ORDER" means any administrative decision or award, decree, injunction,
judgment, order, quasi-judicial decision or award, ruling, or writ of any
federal, state, local or foreign or other court, arbitrator, mediator, tribunal,
administrative agency, or other Governmental Authority.
"PARTY" means any of Holdco, NACT, World Access, Sub-1 or Sub-2.
"PERSON" means an individual, a corporation, a partnership, an association,
a trust, a limited liability company or any other entity or organization,
including a government or political subdivision, or any agency or
instrumentality thereof.
"SUB-1 STOCK" means all of the authorized capital stock of Sub-1.
"SUB-2 STOCK" means all of the authorized capital stock of Sub-2.
"SUBSIDIARY" OR "SUBSIDIARIES" of any Person means any corporation,
partnership, joint venture or other legal entity of which such other Person
(either alone or through or together with any other subsidiary) owns, directly
or indirectly, 50% or more of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the board of directors
or other governing body of such corporation or other legal entity.
"WORLD ACCESS MATERIAL ADVERSE EFFECT" means any matter that would
reasonably be expected to affect materially and adversely the business,
condition (financial or otherwise), or results of operations of World Access and
its Subsidiaries taken as a whole.
"WORLD ACCESS STOCK" means all of the authorized common stock, $.01 par
value per share, of World Access.
SECTION 10.2. Notices. Unless otherwise specifically provided herein, any
notice, demand, request, or other communication herein requested or permitted to
be given shall be in writing and may be personally served, sent by overnight
courier service, or sent by facsimile with a confirming copy sent by United
States first-class mail, each with any postage or delivery charge prepaid. For
the purposes hereof, the addresses of the Parties (until notice of a change is
delivered as provided in this Section) shall be as follows:
If to NACT:
NACT Telecommunications, Inc.
191 West 5200
North Provo, Utah 84604
Attention: Chief Executive Officer
Facsimile: (801) 802-3010
If to World Access, Holdco, Sub-1 or Sub-2:
World Access, Inc.
945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
Facsimile: (404) 365-9847
Any notice provided hereunder shall be deemed to have been given on
the date delivered in person, or on the next business day after
deposit with an overnight courier service, or on the date received by
facsimile transmission.
SECTION 10.3. No Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate delivered
shall not survive the Effective Time or the termination of this Agreement.
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SECTION 10.4. Amendments; No Waivers.
10.4.1. Any provision of this Agreement may be amended or waived prior to
the Effective Time if, and only if, such amendment or waiver is in writing and
signed by all Parties hereto, or in the case of a waiver, by the Party against
whom the waiver is to be effective; and provided, further, that after the
adoption of this Agreement by the stockholders of NACT, no such amendment or
waiver shall, without the further approval of such stockholders, alter or change
(i) the Merger Consideration or (ii) any of the terms or conditions of this
Agreement if such alteration or change would adversely affect the Public
Stockholders.
10.4.2. No failure or delay by any Party in exercising any right, power,
or privilege hereunder shall operate as a waiver nor shall any single or partial
exercise preclude any other or further exercise or the exercise of any other
right, power or privilege. The rights and remedies of the Parties shall be
cumulative and not exclusive of any rights or remedies provided by Law.
SECTION 10.5. Fees and Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the Party incurring such cost or
expense.
SECTION 10.6. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the Parties and their
respective successors and assigns, provided that no Party may assign, delegate,
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other Parties hereto except that Sub-1 or Sub-2 may
transfer or assign, in whole or from time to time in part, to one or more of its
Affiliates, its rights under this Agreement, but any such transfer or assignment
will not relieve Sub-1 or Sub-2, as the case may be, of any of its obligations
under this Agreement or prejudice the rights of any Person to receive the
appropriate Merger Consideration contemplated by this Agreement. This Agreement
shall not be construed so as to confer any right or benefit upon any Person
other than the Parties to this Agreement and their respective successors and
assigns.
SECTION 10.7. Governing Law. Regardless of the place or places where this
Agreement may be executed, delivered or consummated, this Agreement shall be
governed by and construed in accordance with the Laws of the State of Delaware,
without regard to any applicable conflicts of Laws.
SECTION 10.8. Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, then the provision shall be
interpreted to be only so broad as is enforceable.
SECTION 10.9. Interpretations. Neither this Agreement nor any uncertainty
or ambiguity shall be construed or resolved against any Party, whether under any
rule of construction or otherwise. No Party to this Agreement shall be
considered the drafter. The Parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all Parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all the
Parties.
SECTION 10.10. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures were upon the same instrument. This Agreement shall
become effective when each Party has received a counterpart signed by all of the
other Parties.
SECTION 10.11. Construction. When a reference is made in this Agreement
to a Section or Exhibit, such reference shall be to a Section of, or an Exhibit
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. The words
"include," "includes" and "including", as used in this Agreement, shall be
deemed to be followed by the phrase "without limitation." Whenever the context
may require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words "herein," "hereof" and "hereunder" and words of similar
import as used herein refer to this Agreement in its entirety and not to any
part hereof unless the context shall otherwise require.
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IN WITNESS WHEREOF, the Parties has caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the day and year first above written.
WAXS INC.
BY: /s/ MARK A. GERGEL
------------------------------------
ITS:
---------------------------------
WORLD ACCESS, INC.
BY: /s/ MARK A. GERGEL
------------------------------------
ITS:
---------------------------------
WAXS ACQUISITION CORP.
BY: /s/ MARK A. GERGEL
------------------------------------
ITS:
---------------------------------
NACT TELECOMMUNICATIONS, INC.
BY: /s/ A. LINDSAY WALLACE
------------------------------------
ITS:
---------------------------------
NACT ACQUISITION CORP.
BY: /s/ MARK A. GERGEL
------------------------------------
ITS:
---------------------------------
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EXHIBIT A
AFFILIATE AGREEMENT
WAXS Inc.
945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Attention: Chief Executive Officer
Gentlemen:
The undersigned is a stockholder of ("Target"), a
corporation organized under the laws of the State of Delaware, and will become a
stockholder of WAXS Inc. ("Holdco") pursuant to the transactions described in
the Agreement and Plan of Merger and Reorganization, dated as of February ,
1988 (the "Agreement"), by and among Target, Holdco and certain affiliated
parties. Under the terms of the Agreement, a subsidiary of Holdco will be merged
with and into Target (the "Merger"), with Target becoming a wholly-owned
subsidiary of Holdco, and the shares of the $.01 par value common stock of
Target ("Target Common Stock") will be converted into and exchanged for shares
of the $.01 par value common stock of Holdco ("Holdco Common Stock"). This
Affiliate Agreement represents an agreement between the undersigned and Holdco
regarding certain rights and obligations of the undersigned in connection with
the shares of Holdco Common Stock to be received by the undersigned as a result
of the Merger.
In consideration of the Merger and the mutual covenants contained herein,
the undersigned and Holdco hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that as to
Target the undersigned is an "affiliate" under Rule 145(c) as defined in Rule
405 of the Rules and Regulations of the Securities and Exchange Commission
("SEC") promulgated under the Securities Act of 1933, as amended ("1933 Act"),
and the undersigned anticipates that the undersigned will be such an "affiliate"
at the time of the Merger.
2. Covenants and Warranties of Undersigned. The undersigned represents,
warrants and agrees that:
(a) The Holdco Common Stock received by the undersigned as a result of
the Merger will be taken for the undersigned's own account and not for
others, directly or indirectly, in whole or in part.
(b) Holdco has informed the undersigned that any distribution by the
undersigned of Holdco Common Stock has not been registered under the 1933
Act and that shares of Holdco Common Stock received pursuant to the Merger
can only be sold by the undersigned (i) following registration under the
1933 Act, or (ii) in conformity with the volume and other requirements of
Rule 145(d) promulgated by the SEC as the same now exist or may hereafter
be amended, or (iii) to the extent some other exemption from registration
under the 1933 Act might be available. The undersigned understands that
Holdco is under no obligation to file a registration statement with the SEC
covering the disposition of the undersigned's shares of Holdco Common
Stock.
3. Restrictions on Transfer.
(a) The undersigned understands and agrees that stop transfer
instructions with respect to the shares of Holdco Common Stock received by
the undersigned pursuant to the Merger will be given to Holdco's Transfer
Agent and that there will be placed on the certificates for such shares, or
shares issued in substitution thereof, a legend stating in substance:
"The shares represented by this certificate may not be sold,
transferred or otherwise disposed of except or unless (i) covered by an
effective registration statement under the Securities Act of 1933, as
amended, (ii) in accordance with (x) Rule 145(d) (in the case of shares
issued to an individual who is not an affiliate of the issuer) or (y)
Rule 144 (in the case of shares issued to an individual who is an
affiliate of the issuer) of the Rules and Regulations of such Act, or
(iii) in accordance with
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a legal opinion satisfactory to counsel for the issuer that such sale or
transfer is otherwise exempt from the registration requirements of such
Act."
(b) Such legend will also be placed on any certificate representing
Holdco securities issued subsequent to the original issuance of the Holdco
Common Stock pursuant to the Merger as a result of any stock dividend,
stock split, or other recapitalization as long as the Holdco Common Stock
issued to the undersigned pursuant to the Merger has not been transferred
in such manner to justify the removal of the legend therefrom. If the
provisions of Rules 144 and 145 are amended to eliminate restrictions
applicable to the Holdco Common Stock received by the undersigned pursuant
to the Merger, or at the expiration of the restrictive period set forth in
Rule 145(d), Holdco, upon the request of the undersigned, will cause the
certificates representing the shares of Holdco Common Stock issued to the
undersigned in connection with the Merger to be reissued free of any legend
relating to the restrictions set forth in Rules 144 and 145(d) upon receipt
by Holdco of an opinion of its counsel to the effect that such legend may
be removed.
4. Understanding of Restrictions on Dispositions. The undersigned has
carefully read the Agreement and this Affiliate Agreement and discussed their
requirements and impact upon the undersigned's ability to sell, transfer, or
otherwise dispose of the shares of Holdco Common Stock received by the
undersigned in connection with the Merger, to the extent the undersigned
believes necessary, with counsel for the undersigned or for Target.
5. Filing of Reports by Holdco. Holdco agrees, for a period of two years
after the effective date of the Merger, to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), so that the public information provisions
of Rule 145(d) promulgated by the SEC, as the same are presently in effect, will
be available to the undersigned in the event the undersigned desires to transfer
any shares of Holdco Common Stock issued to the undersigned pursuant to the
Merger.
6. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of Holdco Common Stock received by the undersigned
in connection with the Merger at any time during the restrictive period set
forth in Rule 145(d), the undersigned will provide the necessary representation
letter to the Transfer Agent for Holdco Common Stock, together with such
additional information as the Transfer Agent may reasonably request. If Holdco's
counsel concludes that such proposed sale or transfer complies with the
requirements of Rule 145(d), Holdco shall cause such counsel, at Holdco's
expense, to provide such opinions as may be necessary to Holdco's Transfer Agent
so that the undersigned may complete the proposed sale or transfer.
7. Acknowledgments. The undersigned recognizes and agrees that the
foregoing provisions also apply with respect to Target Common Stock held by, and
Holdco Common Stock issued in connection with the Merger to, (a) the
undersigned's spouse, (b) any relative of the undersigned or of the
undersigned's spouse who has the same home as the undersigned, (c) any trust or
estate in which the undersigned, the undersigned's spouse, and any such relative
collectively own at least a 10% beneficial interest or of which any of the
foregoing serves as trustee, executor or in any similar capacity, and (d) any
corporation or other organization in which the undersigned, the undersigned's
spouse and any such relative collectively own at least 10% of any class of
equity securities or of the equity interest. The undersigned further recognizes
that, in the event that the undersigned is a director or executive officer of
Holdco or becomes a director or executive officer of Holdco upon consummation of
the Merger, then, among other things, any sale of Holdco Common Stock by the
undersigned within a period of less than six months following the effective time
of the Merger may subject the undersigned to liability pursuant to Section 16(b)
of the 1934 Act.
8. Miscellaneous. This Affiliate Agreement is the complete agreement
between Holdco and the undersigned concerning the subject matter hereof. Any
notice required to be sent to any party hereunder shall be sent by registered or
certified mail, return receipt requested, using the addresses set forth herein
or such other address as shall be furnished in writing by the parties. This
Affiliate Agreement shall be governed by the laws of the State of Delaware.
G-55
<PAGE> 506
This Affiliate Agreement is executed as of the day of ,
1998.
Very truly yours,
Signature
Print Name
Address
Telephone No.
AGREED TO AND ACCEPTED as of
, 1998
WAXS INC.
By:
Its:
G-56
<PAGE> 507
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NACT Telecommunications, Inc.:
We consent to the inclusion of our report dated December 4, 1997, with
respect to the balance sheets of NACT Telecommunications, Inc. as of September
30, 1997 and 1996, and the related statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1997, which report appears in the Form 8-K of World Access, Inc. dated March
13, 1998. We also consent to incorporation by reference in the registration
statements on Form S-8 (Nos. 33-77918, 33-47752 and 333-17741) and Form S-3 (No.
333-43497) of World Access, Inc. to the above referenced report which appears in
the aforementioned Form 8-K.
/s/ KPMG PEAT MARWICK LLP
Salt Lake City, Utah
March 13, 1998
G-57
<PAGE> 508
[WORLD ACCESS, INC. LOGO]
NEWS RELEASE
SUMMARY: WORLD ACCESS, INC. AND NACT TELECOMMUNICATIONS, INC. SIGN DEFINITIVE
MERGER AGREEMENT
<TABLE>
<S> <C> <C>
CONTACT: Steven A. Odom Chairman & CEO
Hensley E. West President & COO
Mark A. Gergel Exec. VP & CFO
(404) 231-2025
</TABLE>
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- February 25, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS)
announced today that it has signed a definitive merger agreement with NACT
Telecommunications, Inc. (NASDAQ: NACT) to acquire approximately 2.7 million
shares of NACT common stock currently held by public stockholders. Pursuant to
the terms of the merger agreement, World Access will pay $17.50 per share of
NACT common stock, or approximately $46.6 million, through the issuance of new
shares of World Access common stock.
The merger agreement provides that each share of NACT common stock will be
converted into shares of World Access common stock having a value of $17.50 per
share based on the average of the daily closing price of World Access common
stock as reported on the Nasdaq National Market System on each of the 20
consecutive trading days ending with the 3rd day immediately preceding the
effective time of the merger (the "Closing Price"). If the Closing Price is more
than $25.52, then each share of NACT common stock will be converted into 0.6857
shares of World Access common stock. If the Closing Price is less than $20.88
per share, then World Access may terminate the merger agreement.
The merger agreement was negotiated on behalf of NACT by a Special
Committee of the NACT Board and has been approved by the Boards of Directors of
NACT and World Access. In addition, NACT has received a fairness opinion with
respect to the merger from NationsBanc Montgomery Securities LLC. The merger is
subject to, among other things, the consummation of the GST Stock Purchase,
approval of the NACT stockholders, and the satisfaction of other customary
conditions.
World Access previously announced that it had entered into a definitive
agreement with GST Telecommunications, Inc. ("GST") and GST USA, Inc., a wholly
owned subsidiary of GST ("GST USA"), to acquire shares of NACT common stock held
by GST USA for $17.50 per share, or approximately $89.5 million (the "GST Stock
Purchase"). Upon completion of the GST Stock Purchase, which is currently
scheduled for early March, and the above merger transaction, World Access will
own 100% of NACT. The total consideration paid to acquire NACT will be
approximately $141 million.
Steven A. Odom, Chairman and Chief Executive Officer, said "The acquisition
of NACT, which is expected to be accretive to World Access' 1998 earnings, is in
line with the Company's strategy to broaden its offering of switching, transport
and access products and fully support its customers as they build new and/or
upgrade existing telecommunications networks. NACT has been providing its
customers comprehensive telecommunications network equipment and services since
1982. It has enjoyed considerable growth and success in recent years since the
introduction of its STX tandem switch in February 1996. The STX switch, when
combined with NACT's multi-tasking billing systems, provide a turnkey package
for the emerging interexchange carrier industry. We believe that the STX switch
represents today's benchmark for the fast growing, specialty application
switching systems industry."
"We are particularly pleased that Lindsay Wallace, President and Chief
Executive Officer of NACT, will continue to manage NACT as a majority owned
subsidiary of World Access. Under the leadership of Mr. Wallace, and his
outstanding team of engineering, sales and operations professionals, NACT
reported record revenues of $27.7 million and pre-tax income of $6.3 million in
its most recently completed fiscal year.
G-58
<PAGE> 509
We are optimistic that World Access' financial strength, extensive customer
base, engineering capabilities and broad range of manufacturing and support
services will further support NACT's existing business and provide additional
sales and profit growth opportunities for both companies."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales, the Company also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services.
# # #
G-59
<PAGE> 510
[WORLD ACCESS, INC. LOGO]
NEWS RELEASE
SUMMARY: WORLD ACCESS, INC. ACQUIRES MAJORITY STAKE IN NACT TELECOMMUNICATIONS,
INC.
<TABLE>
<S> <C> <C>
CONTACT: Steven A. Odom Chairman & CEO
Hensley E. West President & COO
Mark A. Gergel Exec. VP & CFO
(404) 231-2025
</TABLE>
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- February 27, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that it has acquired 5,113,712 shares of NACT
Telecommunications, Inc. (NASDAQ: NACT) common stock from GST USA, Inc., a
wholly owned subsidiary of GST Telecommunications, Inc. (AMEX: GST) for $17.50
per share, or approximately $89.5 million. The purchase price consisted of $59.6
million in cash and 1,429,907 shares of World Access common stock. World Access
now directly owns 67.3% of NACT.
Earlier this week, World Access announced that it had signed a definitive
merger agreement with NACT to acquire the remaining 32.7% of NACT common shares
currently held by public stockholders. Pursuant to the terms of the merger
agreement, World Access will pay $17.50 per share of NACT common stock, or
approximately $46.6 million, through the issuance of new shares of World Access
common stock. The merger is subject to, among other things, approval of the NACT
stockholders and the satisfaction of other customary conditions.
NACT Telecommunications, Inc., based in Provo Utah, is a leading
single-source provider of advanced telecommunications switching platforms with
integrated telephony software applications and network telemanagement
capabilities. NACT's products include the STX tandem switching system, the NTS
billing system and Facilities Management Services (FMS). NACT's customers
include national and international long distance carriers, prepaid debit and
prepaid cellular network operators, international callback/reorigination
providers and other specialty telecommunications service providers.
World Access, Inc. develops, manufactures and markets wireline and wireless
OPswitching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company
offers digital switches, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. To
support and complement its product sales, the Company also provides its
customers with a broad range of design, engineering, manufacturing, testing,
installation, repair and other value-added services.
# # #
G-60
<PAGE> 511
APPENDIX H
<PAGE> 512
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
AS AMENDED ON APRIL 23, 1998
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 22, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD,
SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 513
ITEM 5. OTHER EVENTS
On April 22, 1998, William P. O'Reilly notified World Access, Inc. (the
"Company") that, due to other demands on his time, he has decided to resign from
the Company's Board of Directors effective immediately. The Company accepted Mr.
O'Reilly's resignation.
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Steven A. Odom
Its Chairman of the Board and
Chief Executive Officer
Dated as of April 23, 1998
H-1
<PAGE> 514
APPENDIX I
<PAGE> 515
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
AS AMENDED ON SEPTEMBER 2, 1998
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE THREE MONTHS ENDED MARCH 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-19998
WORLD ACCESS, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
945 E. PACES FERRY ROAD,
SUITE 2240,
ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
(404) 231-2025
(Registrant's telephone number)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at May 20, 1998 was 21,915,043.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 516
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents........................................ $ 63,278,252 $118,065,045
Marketable securities....................................... 3,500,000 --
Accounts receivable......................................... 39,683,071 20,263,971
Notes receivable............................................ 6,908,270 2,050,000
Inventories................................................. 28,340,209 22,426,918
Other current assets........................................ 7,153,447 8,873,723
------------ ------------
Total Current Assets.............................. 148,863,249 171,679,657
Property and equipment...................................... 13,940,900 5,704,585
Investment in affiliate..................................... -- 5,002,000
Goodwill.................................................... 73,651,856 31,660,201
Other assets................................................ 12,165,155 11,236,298
------------ ------------
Total Assets...................................... $248,621,160 $225,282,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............................................. $ 1,883,877 $ 81,739
Accounts payable............................................ 17,592,293 9,339,588
Accrued payroll and benefits................................ 2,338,117 2,589,461
Purchase price payable...................................... -- 3,700,000
Other accrued liabilities................................... 8,895,260 2,219,237
------------ ------------
Total Current Liabilities......................... 30,709,547 17,930,025
Long-term debt.............................................. 115,527,707 115,263,984
Noncurrent liabilities...................................... 1,686,026 333,802
Minority interests.......................................... 11,593,650 --
------------ ------------
Total Liabilities................................. 159,516,930 133,527,811
------------ ------------
Stockholders' equity Common Stock........................... 217,059 193,062
Capital in excess of par value.............................. 130,289,184 84,162,478
Retained earnings (deficit)................................. (41,402,013) 7,399,390
------------ ------------
Total Stockholders' Equity........................ 89,104,230 91,754,930
------------ ------------
Total Liabilities and Stockholders' Equity........ $248,621,160 $225,282,741
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-1
<PAGE> 517
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Sales of products........................................... $ 28,228,956 $15,470,050
Service revenues............................................ 7,502,089 4,781,374
------------ -----------
Total Sales............................................... 35,731,045 20,251,424
Cost of products sold....................................... 16,772,449 9,969,627
Cost of services............................................ 7,427,684 4,083,481
------------ -----------
Total Cost of Sales....................................... 24,200,133 14,053,108
------------ -----------
Gross Profit.............................................. 11,530,912 6,198,316
Engineering and development................................. 788,184 316,410
Selling, general and administrative......................... 3,255,854 1,917,563
Amortization of goodwill.................................... 863,997 284,131
In-process research and development......................... 50,000,000 --
Special charges............................................. 3,240,000 --
------------ -----------
Operating Income (Loss)................................... (46,617,123) 3,680,212
Interest and other income................................... 1,269,284 367,186
Interest expense............................................ (1,514,913) (28,930)
------------ -----------
Income (Loss) Before Income Taxes and Minority
Interests.............................................. (46,862,752) 4,018,468
Income taxes................................................ 1,255,000 1,406,000
------------ -----------
Income (Loss) Before Minority Interests................... (48,117,752) 2,612,468
Minority interests in earnings of subsidiary................ 683,651 --
------------ -----------
Net Income (Loss)......................................... $(48,801,403) $ 2,612,468
============ ===========
Net Income (Loss) Per Common Share:
Basic..................................................... $ (2.52) $ .16
============ ===========
Diluted................................................... $ (2.52) $ .15
============ ===========
Weighted Average Shares Outstanding:
Basic..................................................... 19,342,627 16,399,548
============ ===========
Diluted................................................... 19,342,627 17,320,714
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-2
<PAGE> 518
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN RETAINED
COMMON EXCESS OF EARNINGS
STOCK PAR VALUE (DEFICIT) TOTAL
-------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at January 1, 1998................. $193,062 $ 84,162,478 $ 7,399,390 $ 91,754,930
Net loss................................... (48,801,403) (48,801,403)
Issuance of 1,429,907 shares for NACT
acquisition.............................. 14,299 26,867,953 26,882,252
Issuance of stock options for NACT
acquisition.............................. 8,359,737 8,359,737
Issuance of 633,982 shares for ATI
acquisition.............................. 6,340 6,508,200 6,514,540
Issuance of 334,252 shares for stock
options and warrants..................... 3,343 1,691,516 1,694,859
Tax benefit from exercises of stock options
and warrants............................. 2,662,400 2,662,400
Issuance of 1,511 shares for matching
contribution to 401K plan................ 15 36,900 36,915
-------- ------------ ------------ ------------
Balance at March 31, 1998.................. $217,059 $130,289,184 $(41,402,013) $ 89,104,230
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-3
<PAGE> 519
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................... $(48,801,403) $ 2,612,468
Adjustments to reconcile net income (loss) to net cash from
(used by) operating activities:
Depreciation and amortization............................. 1,545,009 503,439
Income tax benefit from stock warrants and options........ 2,662,400 --
Special charges........................................... 55,992,766 --
Minority interests in earnings of subsidiary.............. 683,651 --
Provision for inventory reserves.......................... 77,500 60,000
Stock contributed to employee benefit plan................ 36,915 13,201
Changes in operating assets and liabilities, net of effects
from businesses acquired:
Accounts receivable....................................... (9,993,053) (3,554,300)
Notes receivable.......................................... (1,092,946) --
Inventories............................................... (3,101,070) (3,521,014)
Accounts payable.......................................... 3,606,024 2,087,347
Other assets and liabilities.............................. 423,374 462,255
------------ -----------
Net Cash From (Used By) Operating Activities................ 2,039,167 (1,336,604)
------------ -----------
Cash Flows From Investing Activities:
Acquisitions of businesses.................................. (57,406,573) (4,099,852)
Loan repayments by affiliate................................ -- 582,500
Expenditures for property and equipment..................... (1,919,355) (725,793)
------------ -----------
Net Cash Used By Investing Activities....................... (59,325,928) (4,243,145)
------------ -----------
Cash Flows From Financing Activities:
Short-term debt borrowings.................................. 1,771,651 4,024,000
Proceeds from exercise of stock warrants and options........ 1,694,859 160,548
Long-term debt repayments................................... (966,542) --
Issuance of long-term debt for capital lease................ -- 291,500
------------ -----------
Net Cash From Financing Activities.......................... 2,499,968 4,476,048
------------ -----------
Decrease in Cash and Equivalents............................ (54,786,793) (1,103,701)
Cash and Equivalents at Beginning of Period................. 118,065,045 22,480,082
------------ -----------
Cash and Equivalents at End of Period....................... $ 63,278,252 $21,376,381
============ ===========
Supplemental Schedule of Noncash Financing and Investing
Activities:
Issuance of common stock for businesses acquired............ $ 33,396,792 $ 2,088,118
Issuance of stock options for businesses acquired........... 8,359,737
Conversion of note receivable to investment in ATI.......... 4,484,534
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
I-4
<PAGE> 520
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiary companies, all of which are
wholly-owned except for 67.3% ownership in NACT Telecommunications, Inc.
("NACT"). Minority interests represent the minority stockholders proportionate
share of NACT's equity. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods covered have been included.
For further information, refer to the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results expected for the full year. Certain
reclassifications have been made to the prior period's financial information to
conform with the presentations used in 1998.
NOTE 2. ACQUISITIONS
ATI Acquisition
On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for short and
long haul voice, data and/or video applications. On January 29, 1998, the
transaction was completed in its final form whereby ATI was merged with and into
Cellular Infrastructure Supply, Inc. ("CIS"), a wholly-owned subsidiary of the
Company (the "ATI Merger").
In connection with the ATI Merger, the stockholders of ATI received
approximately $300,000 in cash and 424,932 restricted shares of the Company's
common stock. These shares had an initial fair value of approximately $6.5
million. The Company's policy is to value restricted stock issued in
acquisitions at the average market price of its common stock for the three
trading days prior and the three trading days subsequent to the date economic
terms of the acquisition are announced less a discount to reflect the lack of
marketability caused by trading restrictions, size of the share issuances and
other relevant factors. A discount factor of 30% was used to value the 424,932
restricted shares, which was based on previous sales of restricted Company
common stock and independent studies regarding discount attributable to lack of
marketability. Management believes the discount rate used to value these
restricted shares was appropriate and reasonable.
In addition to the shares noted above, the stockholders of ATI were issued
209,050 restricted shares of the Company's common stock. These shares were
immediately placed into escrow and will be released to the stockholders of ATI
contingent upon the realization of predefined levels of pre-tax income from
ATI's operations during calendar years 1998 and 1999. Upon issuance, the 209,050
escrowed shares were valued by the Company at par value only, or $2,091. As it
becomes probable that the conditions for release from escrow will be met, the
fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity, respectively.
I-5
<PAGE> 521
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of ATI has been accounted for using the purchase method of
accounting. Accordingly, the results of ATI's operations have been included in
the accompanying consolidated financial statements from February 1, 1998. The
purchase price was allocated to net assets acquired and to approximately $5.4
million of purchased in-process research and development (R&D). The excess of
purchase price over the fair value of net assets acquired and purchased
in-process R&D, currently estimated at approximately $2.7 million, has been
recorded as goodwill and is being amortized over a 15 year period.
Purchased in-process R&D, which consisted of the value of ATI products in
the development stage that were not considered to have reached technological
feasibility as of the date of the ATI Merger, was expensed in the first quarter
of 1998 in accordance with applicable accounting rules. See Management's
Discussion and Analysis.
NACT Acquisition
In the fourth quarter of 1997, the Company began a three phase acquisition
of NACT, a Provo, Utah based single-source provider of advanced
telecommunications switching platforms with integrated telephony software
applications and network telemanagement capabilities. During November and
December 1997, the Company purchased 355,000 shares of NACT common stock in the
open market for approximately $5.0 million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 63% of the outstanding shares of NACT (the "NACT Acquisition"). On
February 27, 1998, the NACT Acquisition was completed with GST USA receiving
$59.7 million in cash and 1,429,907 restricted shares of the Company's common
stock valued at approximately $26.9 million. These shares were valued at $18.80
per share, a 20% discount to the closing market price of Company common stock on
February 26, 1998. Management believes this valuation was appropriate and
reasonable based on the fact GST USA sold all 1,429,907 restricted shares at
$18.80 per share to an independent third party in a private transaction
completed on February 27, 1998.
In addition, the Company issued 740,543 non-qualified options to purchase
Company common stock at $11.15 per share and 106,586 non-qualified options to
purchase Company common stock at $16.25 per share in exchange for substantially
all the options held by NACT employees, which became immediately vested in
connection with the NACT Acquisition. These options had an initial fair value of
approximately $8.4 million.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA. Pursuant to the terms of the
merger agreement, each share of NACT common stock will be converted into shares
of Company common stock having a value of $17.50 per share based on the average
of the daily closing price of Company common stock on the Nasdaq National Market
for a pre-defined period prior to the closing (the "Closing Price"), provided
that if the Closing Price is more than $25.52, then each share of NACT common
stock will be converted into 0.6857 shares of Company common stock. If the
Closing Price is less than $20.88, then the Company may elect to terminate the
agreement. The merger is subject to, among other things, the approval of the
NACT stockholders and the satisfaction of certain other customary conditions.
This merger is expected to be consummated in September 1998.
The acquisition of the 67.3% majority interest in NACT has been accounted
for using the purchase method of accounting. Accordingly, the results of NACT's
operations have been included in the accompanying consolidated financial
statements from March 1, 1998. The purchase price of the majority interest in
NACT was allocated to the net assets acquired and to approximately $66.5 million
of purchased in-process R&D. The excess of purchase price over 67.3% of the fair
value of net assets acquired and purchased in-
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
process R&D, currently estimated at approximately $40.8 million, has been
recorded as goodwill and is being amortized over a 20 year period.
During the first quarter of 1998, 67.3%, or $44.6 million, of purchased
in-process R&D, which consists of the value of NACT products in the development
stage that are not considered to have reached technological feasibility as of
the date of the NACT Acquisition, was expensed in accordance with the applicable
accounting rules. See Management's Discussion and Analysis.
Pro Forma Results of Operations
On a pro forma, unaudited basis, as if the acquisitions of ATI and NACT had
occurred as of January 1, 1997, total sales, operating income, net income and
diluted net income per common share for the three months ended March 31, 1998
and 1997 would have been approximately $38,893,000 and $32,220,000; $1,129,000
and $3,699,000; $42,000 and $2,244,000; and $0.12 and $0.0, respectively.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
date indicated. In addition, the portion of the purchase price allocated to
in-process R&D expensed in accordance with applicable accounting rules of $50.0
million will not recur, therefore, the pro forma results have been prepared
excluding this charge.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
Switching systems, frames and related circuit
boards............................................ $15,940,114 $13,445,770
Transport and access products....................... 598,418 779,674
Electronic components............................... 6,948,217 4,879,213
Pay telephone parts................................. 1,542,754 1,332,835
Work in progress.................................... 2,971,689 1,744,368
Other finished goods................................ 339,017 245,058
----------- -----------
$28,340,209 $22,426,918
=========== ===========
</TABLE>
NOTE 4. GOODWILL
Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired, is as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
NACT................................................ $40,802,140 $ --
CIS................................................. 12,485,239 12,485,239
AIT................................................. 10,657,917 11,557,917
Galaxy.............................................. 5,089,265 5,089,265
ATI................................................. 2,953,512 --
Other............................................... 5,034,062 5,034,062
----------- -----------
77,022,135 34,166,483
Accumulated amortization............................ (3,370,279) (2,506,282)
----------- -----------
$73,651,856 $31,660,201
=========== ===========
</TABLE>
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill is being amortized on a straight-line basis over a 15 to 20 year
period. The Company reviews the net carrying value of goodwill on a regular
basis, and if deemed necessary, charges are recorded against current operations
for any impairment in the value of these assets. No significant impairment
charges have been recorded to date. Goodwill is removed from the books when
fully amortized.
NOTE 5. DEBT
The Company has a $10.0 million revolving line of credit with a large
European bank. As of March 31, 1998, the Company had borrowings of $1.8 million
outstanding under this facility. These borrowing were repaid to the bank in
April 1998.
The bank agreement, which expires in March 2001, contains standard lending
covenants including financial ratios, restrictions on dividends and limitations
on additional debt and the disposition of Company assets. Interest is paid at
the rate of prime plus 1 and 1/4% or Libor plus 2 and 1/2%, at the option of
the Company.
NOTE 6. SPECIAL CHARGES
Special charges in the first quarter of 1998 included $6.6 million for
costs related to the consolidation of several operations and the Company's exit
from the contract manufacturing business. The Company's AIT and circuit board
repair operations have been consolidated into a new facility in Orlando,
Florida; the Company's manufacturing operations have moved from Orlando to a new
facility in Alpharetta, Georgia; and the Company's Scottsdale, Arizona
operations are being integrated into ATI's facility in Wilmington,
Massachusetts.
The special charges included $3,360,000 to cost of sales for obsolete
contract manufacturing inventories and inventories deemed obsolete or redundant
as a result of the consolidation activities. The additional charges consisted
of:
<TABLE>
<S> <C>
Severance and termination benefits.......................... $ 550,000
Idle facility costs......................................... 1,340,000
Idle equipment costs........................................ 1,350,000
----------
$3,240,000
==========
</TABLE>
The consolidated program began in the first quarter of 1998 and was
completed as of June 30, 1998. No costs were included in the special charges
that are expected to derive future economic benefit to the Company. As of March
31, 1998, approximately $1.8 million of accrued special charges is included in
Other current liabilities on the Company's March 31, 1998 balance sheet. See
Management's Discussion and Analysis.
NOTE 7. EARNINGS PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. Potential common stock shares of 921,166
were included in computing diluted earnings per share for the first quarter of
1997. A total of 1,204,000 and 1,246,000 shares of common stock held in escrow
from certain acquisitions and a license agreement were excluded from the
earnings per share calculations for the three months ended March 31, 1998 and
1997, respectively, because the conditions for release of shares from escrow had
not been satisfied.
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<PAGE> 524
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common stock issued and outstanding at March 31, 1998 and 1997 was
21,705,887 and 17,663,007 shares, respectively.
NOTE 8. LEGAL PROCEEDINGS
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A. Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, alleging that telephone
systems manufactured and sold by NACT incorporating prepaid debit card features
infringe upon Aerotel's patent which was issued in November 1987 (the "Aerotel
Patent"). The initial complaint further alleged defamation and unfair
competition as a result of a communication disseminated by NACT to its customers
and tortious interference with prospective business relations, alleging that
NACT induced third parties to abandon licensing negotiations with Aerotel.
Aerotel sought injunctive relief, damages in an unspecified amount, damages of
up to three times damages found for willful infringement of the Aerotel Patent
and an order requiring NACT to publish a written apology to Aerotel. NACT filed
an answer and Counterclaim in which it denied infringement of the Aerotel Patent
and sought judgement that the Aerotel patent is invalid and unenforceable and
that Aerotel has misused its patent in violation of antitrust laws. NACT has
denied that it has committed defamation, unfair competition and tortious
interference with prospective business relations. In August 1997, Aerotel
amended its complaint to include as defendants GST, GST USA, and two former
executive officers of NACT. The amended pleadings seek in excess of $18.7
million in damages and allege that GST and GST USA have infringed the Aerotel
patent, aided and abetted infringement by others, including NACT, and
participated in, and aided and abetted alleged tortious conduct by NACT. GST,
GST USA and the two former executive officers of NACT have served answers
denying all material allegations.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST have agreed to share evenly the costs of any judgement against
NACT as a result of the Aerotel litigation, including NACT's legal fees.
Subsequent to the NACT Acquisition, the Company has been actively engaged in
settlement negotiations. On July 9, 1998, the Company, GST and Aerotel entered
into a Memorandum of Understanding with respect to the settlement of this
action, and as of the date of this Report, the parties are negotiating the terms
and conditions of a final settlement agreement.
The Company currently estimates that its portion of the total settlement
costs, including legal fees, will be approximately $3.3 million. Any payment
made to Aerotel is expected to be paid through the issuance of Company common
stock. The settlement costs expected to be incurred by the Company as a result
of the Aerotel litigation have been accounted for as additional NACT purchase
price as of March 31, 1998.
Management expects a final Aerotel settlement agreement to be executed in
the near future. If a settlement does not occur, NACT's patent counsel believes
that NACT has valid defenses to the Aerotel claims (which, if upheld, would be
valid for all defendants), and the defendants intend to vigorously defend.
However, no assurances can be given as to the outcome of this action. An
unfavorable decision in this action, however, could have a material adverse
effect on the Company's business, financial condition and results of operations.
NOTE 9. PENDING ACQUISITIONS
RESURGENS ACQUISITION
On February 12, 1998, the Company executed a letter of intent to acquire
Cherry Communications Incorporated, d/b/a Resurgens Communications Group
("RCG"), and Cherry Communications U.K. Limited ("Cherry U.K., and together with
RCG, "Resurgens"). On May 12, 1998, the Company signed definitive agreements to
acquire Resurgens. The agreement to acquire RCG is subject to the approval of
the
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<PAGE> 525
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bankruptcy Court. The transactions, which will be accounted for under the
purchase method of accounting, are currently expected to close in August 1998.
Pursuant to the terms of the agreements, the creditors of RCG and the
shareholders of Cherry U.K. will receive approximately 3.7 million restricted
shares of Company common stock in the aggregate, with an estimated fair value of
approximately $90 million. In addition, the RCG creditors and Cherry U.K.
shareholders have the right to receive additional consideration of up to 7.5
million restricted shares of Company common stock over the next two and one-half
years, contingent upon the achievement of certain EBITDA levels by Resurgens
during this timeframe. The transaction is subject to, among other things,
Resurgens exceeding pre-defined levels of monthly revenues and gross margin, the
receipt of the requisite corporate and regulatory approvals, the confirmation of
RCG's Plan of Reorganization and the approval of Company stockholders.
RCG, currently operating under the protection of Chapter 11 of the United
States Bankruptcy Code, and Cherry U.K. are facilities-based providers of
international network access, commonly referred to in the industry as carriers'
carrier. In October 1997, John D. ("Jack") Phillips, a director of the Company,
entered into a series of agreements whereby, among other things, he became the
new Chairman and Chief Executive Officer of Resurgens. RCG filed for bankruptcy
protection shortly thereafter. WorldCom, Inc. ("WorldCom"), a major customer and
vendor of Resurgens, has subsequently provided Resurgens approximately $26
million of direct financial support through a debtor in possession facility and
additional financial support, primarily through trade credits. Upon completion
of the Resurgens acquisition, WorldCom is expected to own approximately 15% of
Company on a fully diluted basis.
NOTE 10. COMPREHENSIVE INCOME.
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. For
the three months ended March 31, 1998 and 1997, respectively, comprehensive and
net income were the same for the Company.
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<PAGE> 526
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Disclosure Regarding Forward-Looking Statements
Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. The Company believes that it is
in the best interest of its stockholders to use these provisions in discussing
future events in this Form 10-Q and other communications. These forward-looking
statements include the Company's plans for growth, the potential for
development, acceptance of the Company's products and other factors that could
affect the Company's future operations or financial position.
The Company's ability to achieve its goals depends on many known and
unknown risks and uncertainties, as well as changes in general economic and
business conditions. These factors could cause the anticipated performance and
results of the Company to differ materially from those described or implied in
such forward-looking statements.
Factors that could cause or contribute to such differences include the
risks and uncertainties described in the Company's SEC reports, including the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1997 and the Company's Registration Statement on Form S-3 (No. 333-43497).
Overview
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The products offered by the Company include those manufactured by the
Company as well as those manufactured by other telecommunications equipment
manufacturers. To support and complement its product sales, the Company also
provides its customers with a broad range of design, engineering, manufacturing,
testing, installation, repair and other value-added services.
During 1995 and 1996, the Company completed strategic and financial
restructuring programs to strengthen its management team, reposition the Company
as a provider of telecommunications products, improve its financial condition,
reduce its operating costs and position the Company for future growth. These
programs were undertaken following the significant losses incurred by the
Company in the early 1990s, primarily due to a discontinued smart pay telephone
business, and to take advantage of the significant growth opportunities within
the Company's existing customer base and related markets. In November 1994, the
Company began to rebuild its management team and change its strategic focus. The
Company strengthened its management team by appointing a new Chief Executive
Officer and by recruiting and hiring a new President and Chief Operating
Officer, Executive Vice President of Business Development and experienced
product development and manufacturing professionals. These individuals, together
with other key managers recruited into the Company, have brought significant
experience in manufacturing and marketing telecommunications equipment to the
Company.
The Company acquired five businesses during 1995 to 1997 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, Inc. ("AIT"), a full service provider of
Northern Telecom switching systems, add-on frames and related circuit boards;
effective October 1995, the Company acquired Westec Communications, Inc.
("Westec"), a provider of wireless products and services primarily to the cable
television industry; effective January 1996, the Company acquired Sunrise
Sierra, Inc. ("Sunrise"), a developer and manufacturer of intelligent transport
and access products; effective January 1997, the Company acquired Cellular
Infrastructure Supply, Inc. ("CIS"), a provider of mobile network equipment and
related design, installation and technical support services to cellular, PCS and
other wireless service providers; and effective August 1997, the Company
acquired Galaxy Personal Communication Services ("Galaxy"), a RF engineering
firm that provide system design, implementation, optimization and other
value-added radio engineering and consulting services to the wireless service
markets. The markets served by CIS and Galaxy complement the Company's
traditional telephone service provider and private network operator markets.
In the first quarter of 1998, the Company acquired ATI, a manufacturer of
digital point-to-point microwave radio systems for short and long haul
applications and a majority stake in NACT, a provider of
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<PAGE> 527
advanced telecommunications switching platforms with integrated applications
software. In May 1998, the Company signed definitive agreements to acquire
Resurgens, a facilities-based provider of international network access, commonly
referred to in the industry as carriers' carrier. These acquisitions have
positioned the Company to offer its customers a complete telecommunications
network solution, including proprietary equipment, planning and engineering
services and access to international long distance.
The Company realized significant improvements in its sales and operating
results since 1994 as a result of the acquisitions and internal growth
initiatives. The Company's total sales increased by 82.3% in 1997, 69.2% in 1996
and 97.2% in 1995. Total sales for the first quarter of 1998 increased by 68.0%
over the fourth quarter of 1997. As the Company increased its product sales from
18.2% of total sales in 1994 to 79.0% of total sales in the first quarter of
1998, its gross profit margin before special charges increased from 12.9% in
1994 to 21.1% in 1995, 29.4% in 1996, 34.6% in 1997 and 41.7% in the first
quarter of 1998. As a percentage of total sales, the Company's operating income
(loss) before special charges increased from (8.5%) in 1994 to 5.0% in 1995,
14.4% in 1996, 21.0% in 1997 and 27.9% in the first quarter of 1998. The Company
will continue to seek further improvements in gross profit margin over time as
product offerings include more internally developed, acquired and licensed
products containing proprietary technology.
Although the Company has aggressively pursued acquisitions in recent years,
over 60 percent of the Company's total sales growth since 1994 has come from
internal growth initiatives. The Company has had considerable success in growing
businesses post acquisition, most notably AIT and CIS, as a result of its
ability to provide working capital, an extensive base of telecommunications
customers and a broad range of support services.
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity
offering, proceeds from stock warrant and option exercises, and a five-year
$10.0 million credit facility. The Company has used this capital for
acquisitions and to support the working capital requirements associated with the
Company's growth. The Company's working capital and stockholders' equity have
increased from $2.3 million and $1.2 million, respectively, at December 31, 1994
to $118.2 million and $89.1 million, respectively, at March 31, 1998.
Fluctuations in Quarterly Operating Results
The Company's operating results have fluctuated significantly in the past.
As the Company increases its number of telecommunications product offerings, its
future operating results may vary significantly depending on factors such as the
timing and shipment of significant orders, new product offerings by the Company
and its competitors, market acceptance of new and enhanced versions of the
Company's products, changes in pricing policies by the Company and its
competitors, the availability of new technologies, the mix of distribution
channels through which the Company's products are sold, the inability to obtain
sufficient supplies of sole or limited source components for the Company's
products, gains or losses of significant customers, the timing of customers'
upgrade and expansion programs, changes in the level of operating expenses, the
timing of acquisitions, seasonality and general economic conditions.
The Company's sales during the first three months of 1998 included
approximately $13.5 million from its AIT and CIS subsidiaries. AIT sells new and
used Northern Telecom switching systems, add-on frames and circuit cards. CIS
sells re-engineered cellular base stations and related mobile network equipment.
These operations depend on a consistent supply of equipment to sustain their
revenue levels. Additionally, individual sales by AIT and CIS are relatively
large ($500,000 to $2.0 million), which subjects the Company to the risk of
revenue fluctuations in the event that customers adjust the timing of their
orders.
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<PAGE> 528
Results of Operations
The following table sets forth certain financial data, representing each
line item in the Company's consolidated statements of operations expressed as a
percentage of total sales, except other data, which is expressed as a percentage
of the applicable revenue type:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------
1998 1997
------ -----
<S> <C> <C>
Statement of Operations Data:
Sales of products........................................... 79.0% 76.4%
Service revenues............................................ 21.0 23.6
------ -----
Total sales....................................... 100.0 100.0
Cost of products sold....................................... 46.9 49.2
Cost of services............................................ 20.8 20.2
------ -----
Total cost of sales............................... 67.7 69.4
------ -----
Gross profit.............................................. 32.3 30.6
Engineering and development................................. 2.2 1.6
Selling, general and administrative......................... 9.1 9.4
Amortization of goodwill.................................... 2.4 1.4
In-process research and development......................... 140.0 --
Special charges............................................. 9.1 --
------ -----
Operating income (loss)................................... (130.5) 18.2
Interest and other income................................... 3.5 1.6
Interest expense............................................ (4.2) --
------ -----
Income (loss) before income taxes and minority
interests.............................................. (131.2) 19.8
Income taxes................................................ 3.5 6.9
------ -----
Income (loss) before minority interests................... (134.7) 12.9
Minority interests in earnings of subsidiary................ 1.9 --
------ -----
Net income (loss)......................................... (136.6)% 12.9%
------ -----
Other Data:
Gross margin (before special charges):
Products.................................................. 45.3% 35.6%
Services.................................................. 28.1 14.6
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Sales. Total sales increased $15.5 million, or 76.4%, to $35.7 million in
the first quarter of 1998 from $20.3 million in the first quarter of 1997.
Product sales increased to 79.0% of total sales in the first quarter of 1998
from 76.4% in the first quarter of 1997.
Product sales increased $12.8 million, or 82.5%, to $28.2 million in the
first quarter of 1998 from $15.5 million in the first quarter of 1997. The
increase related to sales generated by NACT and ATI, which were acquired
effective March 1, 1998 and February 1, 1998, respectively, and an increase of
mobile network equipment sold by CIS.
Service revenues increased $2.7 million, or 56.9%, to $7.5 million in the
first quarter of 1998 from $4.8 million in the first quarter of 1997. The
increase related to engineering services performed by Galaxy, which was acquired
effective July 1, 1997, and additional pay telephone refurbishment revenues.
Gross Profit. Gross profit increased $5.3 million, or 86.0%, to $11.5
million in the first quarter of 1998 from $6.2 million in the first quarter of
1997. Gross profit margin increased to 32.3% in the first quarter of 1998 from
30.6% in the first quarter of 1997. Gross profit margin excluding the special
charge of approximately $3.4 million (see Note 6 to "Financial Statements") was
41.7% in the first quarter of 1998. The improved
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<PAGE> 529
performance resulted from economies of scale associated with the 76.4% increase
in total sales and the change in sales mix to products, which generally carry a
higher gross profit margin than service revenues.
Gross profit margin on products sold increased to 40.6% in the first
quarter of 1998 from 35.6% in the first quarter of 1997. Gross profit margin
excluding the special charge was 45.3% in the first quarter of 1998. The
improved margins related to the NACT and ATI sales of proprietary equipment and
systems and the increase in sales of CIS mobile network equipment, all of which
generally carry margins in excess of 40.0%. The Company's switching products
experienced declines in gross margin during the first quarter of 1998 primarily
related to margin pressure on sales of Northern Telecom add-on frames and
related circuit boards.
Gross profit margin on service revenues was 1.0% in the first quarter of
1998 as compared to 14.6% in the first quarter of 1997. Gross profit margin
excluding the special charge was 28.1% in the first quarter of 1998. The
improvement was due to the addition of consulting revenues from Galaxy, which
was acquired effective July 1, 1997, and improved margins on pay telephone
refurbishment revenues.
Engineering and Development. Engineering and development expenses
increased $472,000, or 149.1%, to $788,000 in the first quarter of 1998 from
$316,000 in the first quarter of 1997. The increase in expenses was attributable
to the acquisitions of NACT and ATI and the continued expansion of the Company's
development group. Engineering and development expenses increased to 2.2% of
total sales in the first quarter of 1998 from 1.6% of total sales in the first
quarter of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 69.8%, to $3.3 million in the
first quarter of 1998 from $1.9 million in the first quarter of 1997. The
increase related primarily to expenses associated with the operations of NACT,
ATI and Galaxy, which were acquired subsequent to the first quarter of 1997. As
a percentage of total sales, selling, general and administrative expenses
decreased to 9.1% in the first quarter of 1998 from 9.5% in the first quarter of
1997.
Amortization of Goodwill. Amortization of goodwill increased $580,000 to
$864,000 in the first quarter of 1998 from $284,000 in the first quarter of
1997, primarily as a result of goodwill recorded in connection with the NACT,
ATI and Galaxy acquisitions and additional goodwill recorded related to earnout
performances for the CIS, AIT and Galaxy acquisitions.
Operating Income Before Special Charges. Operating income before special
charges increased $6.3 million, or 171.3%, to $10.0 million in the first quarter
of 1998 from $3.7 million in the first quarter of 1997. Operating income margin
increased to 27.9% in the first quarter of 1998 from 18.2% in the first quarter
of 1997.
Interest and Other Income. Interest and other income increased $902,000 to
$1.3 million in the first quarter of 1998 from $367,000 in the first quarter of
1997 due to a significant increase in invested cash balances of the Company,
resulting primarily from the sale of $115.0 million convertible subordinated
notes in October 1997.
Interest and Other Expense. Interest expense increased to $1.5 million in
the first quarter of 1998 from $29,000 in the first quarter of 1997. The
increase is primarily due to the interest recorded on the $115.0 million
convertible subordinated notes sold in October 1997, which bear interest at 4.5%
and the related debt issuance cost amortization.
Income Taxes. The Company's effective income tax rate increased to 40.0%
in the first quarter of 1998 from 35.0% in the first quarter of 1997. The
Company's 1998 effective rate is unfavorably impacted by the significant
increase in non-deductible goodwill amortization resulting from acquisitions.
Purchased In-Process R&D
Special charges in the first quarter of 1998 included $50.0 million for
in-process research and development related to the first quarter 1998
acquisitions of ATI and a 67.3% interest in NACT (see Note 2 to the "Financial
Statements"). Purchased in-process research and development, which consists of
the value of NACT and ATI products in the development stage that are not
considered to have reached technological feasibility, were expensed in
accordance with applicable accounting rules. The Company expects to record an
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<PAGE> 530
additional in-process research and development charge of approximately $22.0
million in the third quarter of 1998 in connection with the acquisition of the
remaining 32.7% of NACT.
The Income Approach was utilized to value the acquired research and
development technologies in the NACT Acquisition. The Income Approach values
technologies by projecting the potential cash flows related to those
technologies and discounting the cash flows to their present values using a
discount rate reflective of the risk of achieving the cash flows. The projected
cash flows include estimates of the remaining costs to complete the in-process
technologies.
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained as of the date of Acquisition.
Failure to attain technological feasibility, especially given the high degree of
customization required for complete integration into the NACT solution, would
have rendered partially designed hardware and software useless for other
applications. Incomplete design of hardware and software coding would create a
non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite.
NACT had nine principal projects in the development pipeline at the time of
acquisition. Most major projects had several ongoing sub-projects (e.g., a
hardware design project and a software design project). These projects include
significant redevelopment of some existing products and the creation of new
products. The research and development projects were at various stages of
development. Most new or redeveloped products were scheduled for release in
1998, while several other were scheduled for release in 1999. None of the
in-process projects considered in the write-off had attained technological
feasibility.
For all in-process technologies, management estimated remaining costs to
complete. These estimates were $3.3 million for 1998, and $1 million for 1999.
The expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
The Income Approach was also used to value the acquired research and
development technologies in the ATI acquisition.
ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained as of the date of Acquisition. Failure to attain technological
feasibility would have rendered partially designed equipment useless for other
applications. ATI's products are designed for specific frequency bandwidths and,
as such, are highly customized to those bandwidths and the needs of customers
wishing to operate in them. Product is only partially completed for certain
bandwidths cannot be used in other bandwidths.
At the time of acquisition, ATI's primary product lines were FSK+, Compact,
and QAM. ATI's management determined the following percentages of each product
line were in-process technologies:
<TABLE>
<S> <C>
FSK+: 15.0% of units in development
Compact: 95.0% of units in development
QAM: 100.0% of units in development
</TABLE>
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility.
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<PAGE> 531
For all in-process products, management estimated remaining costs to
complete to be $3.1 million for 1998, $7.2 million for 1999, $7.6 million for
2000, $5.1 million for 2001, and $1.1 million for 2002. The expected sources of
funding were scheduled R&D expenses from the operating budget of ATI provided by
the operating assets and liabilities of ATI.
SPECIAL CHARGES
In January 1998, the Company's senior management decided that the following
actions were necessary to streamline operations and position the Company to
service anticipated sales growth:
- Close down the existing Orlando, Florida manufacturing and repair
facility. Move the manufacturing of certain World Access products to the
Company's Alpharetta, Georgia manufacturing facility.
- Exit the contract manufacturing business.
- Close down the four Lakeland, Florida facilities and move AIT operations
to a new facility in Orlando, Florida. Repair operations would be
integrated with AIT in this new facility.
- Close down Westec's facility in Scottsdale, Arizona and integrate its
operations into ATI's facility in Wilmington, Massachusetts.
Shortly thereafter, senior management informed the operating management of
the applicable divisions. All Orlando and Lakeland employees were informed in
January and Westee employees were informed in February (subsequent to the
closing of the ATI acquisition).
Management carefully reviewed the provisions of EITF 94-3 in determining
which costs related to the above actions should be included in a first quarter
special charge. No costs were included in the charge that would derive future
economic benefit to the Company, e.g., relocation of existing employees,
recruiting and training of new employees and facility start-up costs. The
special charge consisted of:
<TABLE>
<S> <C>
Obsolete and redundant inventories.......................... $3,360,000
Severance and termination benefits.......................... 550,000
Idle facility costs......................................... 1,340,000
Idle equipment costs........................................ 1,350,000
----------
$6,600,000
==========
</TABLE>
Severance and termination benefits were clearly communicated up front to
the approximately 60 employees who lost their jobs as a direct result of the
consolidations. Affected employees were notified shortly after the January and
February employee meetings. Benefits were determined consistent with the
Company's severance policy of one week of pay for each full year of service
(minimum of two weeks) and continued benefits through the month severance pay is
exhausted. Approximately 10 of these employees were involuntarily terminated in
February and March, approximately 40 employees were involuntarily terminated in
April and approximately 10 employees were involuntarily terminated in June. The
Orlando and Lakeland facilities were closed in April and the Scottsdale facility
was closed in June. The actual severance and termination benefit costs incurred
by the Company were not materially different from the $550,000 recorded in the
special charge.
The idle facility and equipment portion of the special charge included the
write-off of "old Orlando", Lakeland and Scottsdale leasehold improvements,
provisions for the estimated costs to terminate idle facility and equipment
leases, the write-off of Orlando manufacturing equipment not relocated to the
Company's Alpharetta facility and certain phase-down expenses associated with
the six facilities closed down. As of the date of this Report, the Company does
not expect the actual costs for these items to be materially different from
amounts recorded in the special charge.
As previously noted, all activities that resulted in the first quarter
special charge were completed by the Company as of June 30, 1998. Of the
$3,240,000 special charge, approximately $1.4 million related to assets directly
written-off of amounts charged to the reserve in the first quarter. As of March
31, 1998, approximately
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<PAGE> 532
$1.8 million of accrued special charges is included in Other current liabilities
on the Company's March 31, 1998 balance sheet.
Liquidity and Capital Resources
Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of March 31, 1998, the Company had $63.3
million of cash and equivalents and $8.2 million in borrowings available under
its credit line to support its current working capital requirements and
strategic growth initiatives.
Operating Activities. Cash provided from operating activities was $2.0
million in the first quarter of 1998 as compared to cash used by operations of
$1.3 million in the first quarter of 1997.
Accounts receivable increased $19.4 million, or 95.8%, to $39.7 million at
March 31, 1998 from $20.3 million at December 31, 1997. This was due to the
acquisitions of NACT, ATI and Galaxy and increased sales activity at the Company
(first quarter 1998 sales were $35.7 million as compared to fourth quarter 1997
sales of $21.3 million). Average days sales outstanding at March 31, 1998 were
approximately 90 days as compared to 81 days at December 31, 1997.
Inventories increased $5.9 million, or 26.4%, to $28.3 million at March 31,
1998 from $22.4 million at December 31, 1997. This increase was due to the
acquisitions of NACT and ATI and the planned build-up of CDX switching and
WX-5501 inventories related to the closure of the Company's Orlando
manufacturing facility. The increases above were offset by the $3.4 million
provision for obsolete and redundant inventories related to the consolidation
program initiated in the first quarter of 1998 (see Note 6 to "Financial
Statements").
Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, was $59.3 million and $4.2 million for the first
quarters of 1998 and 1997, respectively.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST and GST USA to acquire 5,113,712 shares of NACT common stock owned by
GST USA, representing approximately 63% of the outstanding shares of NACT common
stock (the "NACT Stock Acquisition"). On February 27, 1998 the NACT Stock
Acquisition was completed with GST USA receiving $59.7 million in cash and
1,429,907 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $26.9 million. This transaction increased
the Company's ownership of NACT to 67.3%.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. Pursuant to the terms of
the merger agreement, each share of NACT common stock will be converted into
shares of Company common stock having a value of $17.50 per share based on the
average of the daily closing price of Company common stock on the NASDAQ
National Market for a pre-defined period prior to the closing (the "Closing
Price"), provided that if the Closing Price is more than $25.52, then each share
of NACT common stock will be converted into 0.6857 shares of Company common
stock. If the Closing Price is less than $20.88, then the Company may elect to
terminate the agreement. This merger is expected to be consummated in July 1998.
On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and 424,932
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $6.5 million.
In addition to the 424,932 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be
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<PAGE> 533
released to the stockholders of ATI contingent upon the realization of
predefined levels of pre-tax net income from ATI's operations during calendar
years 1998 and 1999.
In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.6 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.
During the first quarter of 1998, the note receivable was included in the
Company's purchase price of ATI.
During the first quarter of 1998 and 1997, the Company invested $1.9
million and $726,000, respectively, in capital expenditures. These expenditures
were primarily for new manufacturing and test equipment, computer network and
related communications equipment designed to upgrade the Company's management
information systems and facilitate the integration of acquisitions, and facility
improvements required in connection with the Company's growth.
Financing Activities. Cash provided from financing activities was $2.5
million and $4.5 million for the first quarter of 1998 and 1997, respectively.
On October 1, 1997, the Company sold $100.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year, commencing on April 1, 1998. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all existing and senior indebtedness. The Company received $97.0 million from
the sale of the Notes, after the initial purchasers' discount fees of $3.0
million.
In addition to the Notes sold on October 1, 1997, the Company granted the
initial purchasers an option to purchase up to an additional $15.0 million in
Notes to cover over-allotments. On October 28, 1997, the initial purchasers
exercised the over-allotment option in full and the Company received an
additional $14.6 million, after the application of the initial purchasers'
discount fees.
The total discount fees of $3,450,000, along with approximately $550,000 of
legal, accounting, printing and other expenses (the "Debt issuance costs") are
being amortized to expense over the five year term of the Notes. Debt issuance
costs of approximately $3.2 million, net of amortization, are included in Other
assets on the Company's March 31, 1998 balance sheet.
As of March 31, 1998 and 1997, the Company had borrowings of $1.8 million
and $4.5 million, respectively, outstanding under its $10.0 revolving line of
credit. Borrowings under the Company's line of credit are secured by a first
lien on substantially all the assets of the Company. The bank agreement, which
expires in March 2001, contains standard lending covenants, including financial
ratios, restrictions on dividends and limitations on additional debt and the
disposition of Company assets. Interest is paid at the rate of prime plus 1 1/4%
or LIBOR plus 2 1/2%, at the option of the Company. As of the date of this
Report, there were no amounts outstanding under the Company's line of credit.
During the first quarter of 1998, the Company received approximately $4.4
million in cash, including related federal income tax benefits, from the
exercises of incentive and non-qualified stock options and warrants by the
Company's directors and employees.
Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company has realized
a federal income tax benefit of approximately $2.7 million for the first quarter
of 1998. Although this tax benefit does not have any effect on the Company's
provision for income tax expense for 1998, it represents a significant cash
benefit to the Company. This tax benefit is accounted for as a decrease in
current income taxes payable and an increase in capital in excess of par value.
Summary. The Company's improved operating performance and completion of
the sale of $115.0 million of Notes in 1997 has significantly enhanced its
financial strength and improved its liquidity. As of the date of this Report,
the Company has approximately $60.0 million of cash and a $10.0 million
revolving line of credit available. The Company believes that existing cash
balances, available borrowings under the Company's
I-18
<PAGE> 534
line of credit and cash projected to be generated from operations will provide
the Company with sufficient capital resources to support its current working
capital requirements and business plans for at least the next 12 months.
YEAR 2000
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
systems that have date sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This
could result in a system failure or miscalculations causing disruptions,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company is in the process of evaluating its computer systems to
determine what modifications (if any) are necessary to make such systems
compatible with the year 2000 requirements. However, because many of the
Company's computer systems have been put into service within the last several
years, the Company does not expect any such modifications to have a material
adverse effect on the Company's consolidated results of operations, liquidity
and capital resources.
In addition, the Company is in the process of developing a plan whereby it
will review the year 2000 readiness of its customers and suppliers. In doing so,
the Company will undertake appropriate internal reviews and will contact certain
of its significant customers to assess, to the extent possible, Year 2000 Issues
related to the Company's products. In that regard, the Company has identified
that certain of its products, including NACT's NTS 1000 billing System, are not
year 2000 compliant. The Company is in the process of releasing new versions of
such products and making necessary modifications to existing products to address
the Year 2000 Issue. These new and revised products are expected to be available
commencing in the first quarter of 1999. The Company expects that many of its
customers will upgrade to the new products. However, there can be no assurance
that the Company's customers will upgrade to the new year 2000 compliant
products or that the modifications planned to certain of the existing products
will be successful or completed in a timely manner. Although, the Company
believes that it can address year 2000 readiness issues related to products,
there may still be disruptions and or product failures that are unforeseen.
The Company also intends to request assurances from its major suppliers
that they are addressing the Year 2000 Issue and that the products and services
procured or used by the Company will function properly or be available without
interruption in the year 2000. Nevertheless, it will be impossible for the
Company to fully assess the potential consequences if service interruptions
occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, the Company
also intends to develop a business continuity plan to minimize the impact of
such external events.
While the Company's efforts to address year 2000 issues will involve
additional costs and the time and effort of a number of Company employees, the
Company believes, based on currently available information, that it will be able
to manage its total year 2000 exposure.
There can be no assurance, however, that the Company will be successful in
its effort or that the computer systems of other companies on which World Access
will rely will be timely modified, or that a failure to modify such systems by
another company, or modifications that are incompatible with the Company's
systems, would not have a material adverse effect on the Company's consolidated
results of operations, liquidity and capital resources.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable
I-19
<PAGE> 535
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On January 29, 1998, the Company completed the acquisition of Advanced
TechCom, Inc., a Delaware corporation ("ATI"), pursuant to that certain
Agreement and Plan of Merger dated as of December 24, 1998 by and among the
Company, ATI, Cellular Infrastructure Supply, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company, and Ernest H. Lin (the "Merger
Agreement"). Pursuant to the Merger Agreement, (i) the issued and outstanding
shares of ATI's Series A Preferred Convertible Preferred Stock, $.10 par value
per share (the "ATI Preferred Stock"), were converted into the right to receive
(the "Merger Stock Consideration") an aggregate of 424,932 shares of the
Company's common stock, $.01 par value (the "Common Stock"); (ii) holders of the
issued and outstanding shares of ATI's common stock, $.10 par value, were given
a choice to convert their ATI common stock into ATI Preferred Stock on a
one-for-one basis and thereupon receive the Merger Stock Consideration to the
same extent as holders of ATI Preferred Stock or (b) receive $.01 in cash for
each share of ATI common stock not so converted; and (iii) except for Dr. Lin,
who received cash and shares of Common Stock, each holder of an option to
acquire ATI common stock that was vested as of December 31, 1997 was paid cash
in the amount equal to the difference (if any) between $1.00 and the exercise
price of such ATI option multiplied by the number shares of ATI common stock
underlying such option.
In addition, the persons entitled to receive the Merger Stock Consideration
are also entitled to receive up to an aggregate of 209,050 shares of Common
Stock payable upon the achievement of certain earnings targets during 1998 and
1999 (the "Contingent Merger Stock"). The Contingent Merger Stock has been
issued and placed into escrow pending its release to the persons entitled to
receive the Merger Stock Consideration.
The sale of the shares of Common Stock issued in connection with the Merger
Agreement was not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On February 27, 1998, the Company completed the acquisition (the "NACT
Stock Acquisition") of 5,113,712 shares of the common stock of NACT
Telecommunications, Inc. from GST Telecommunications, Inc., a federally
chartered Canadian corporation ("GST"), and GST USA, Inc., a Delaware
corporation and a wholly-owned subsidiary of GST ("GST USA"), pursuant to that
certain Stock Purchase Agreement by and between the Company, GST and GST USA
dated as of December 31, 1997. In connection with the NACT Stock Acquisition,
the Company issued to GST USA 1,429,907 shares of Common Stock. The sale of the
shares of Common Stock issued in connection with the NACT Stock Acquisition was
not registered under the Securities Act in reliance on the exemption provided by
Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Restated Financial Data Schedule
(b) Reports on Form 8-K
On February 13, 1998, the Company filed a report on Form 8-K, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on April 14, 1998, announcing that
on January 29, 1998 the merger of ATI with and into CIS, a wholly-owned
subsidiary of the Company was consummated.
On February 20, 1998, the Company filed a report on Form 8-K announcing
that the Company signed a letter of intent to acquire Cherry Communications
Incorporated d/b/a Resurgens Communications Group ("RCG"). On May 18, 1998, the
filed a report on Form 8-K announcing that the Company signed definitive
agreements to acquire RCG and Cherry Communications U.K. Limited.
On February 20, 1998, the Company filed a report on Form 8-K, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on February 25, 1998, announcing
that on December 31, 1997 the Company signed a Stock Purchase Agreement pursuant
to which the Company agreed to acquire 5,113,712 shares of
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<PAGE> 536
common stock of NACT from GST Telecommunications, Inc. (the "Acquisition"). On
March 13, 1998, the Company filed a report on Form 8-K announcing that on
February 27, 1998 the Acquisition was consummated and that on February 24, 1998
the Company agreed to acquire all of the shares of NACT Common Stock not already
then owned by the Company or GST USA, Inc.
On April 23, 1998, the Company filed a report on Form 8-K, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on April 24, 1998, announcing the
resignation of William P. O'Reilly from the Company's Board of Directors.
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<PAGE> 537
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Mark A. Gergel
Executive Vice President and
Chief Financial Officer
Dated: September 2, 1998
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<PAGE> 538
APPENDIX J
<PAGE> 539
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
Date of Report (Date of earliest event reported): MAY 12, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 540
ITEM 5. OTHER EVENTS.
On May 12, 1998, World Access, Inc. (the "Company") announced that it had
entered into (i) a definitive Agreement and Plan of Merger and Reorganization
(the "Merger Agreement") with Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("RCG") pursuant to which the Company will
acquire RCG in a merger transaction (the "Merger"), and (ii) a Share Exchange
Agreement and Plan of Reorganization (the "Exchange Agreement") with the sole
shareholder (the "Shareholder") of Cherry Communications U.K. Limited ("Cherry
U.K.") pursuant to which the Company will acquire Cherry U.K. in a share
exchange transaction (the "Exchange").
In connection with the Merger, the creditors of RCG will receive an
aggregate of 9,375,000 shares of common stock of WAXS INC. ("New World Access").
New World Access is a wholly-owned subsidiary of the Company that will become
the parent of the Company upon the completion of the previously reported
acquisition of the shares of NACT Telecommunications, Inc. not already owned by
the Company and the holding company reorganization to be effective in connection
therewith (the "Holding Company Reorganization"). Of the shares of New World
Access common stock to be issued to the RCG creditors, two-thirds will be held
in escrow and will be released to the RCG creditors over the two and one-half
years following the consummation of the Merger subject to the attainment of
certain earnings levels for the combined business of RCG and Cherry U.K.
In connection with the Exchange, the Shareholder will receive an aggregate
of 1,875,000 shares of New World Access common stock, of which one-third will be
issued to the Shareholder at closing and the remaining two-thirds will be issued
and held in escrow and will be released to the Shareholder over the two and
one-half year period following the consummation of the Exchange subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K. The Exchange Agreement provides, however, that the number of shares
of New World Access common stock to be received by the Shareholder will be
reduced to the extent that New World Access is required to convert options to
acquire shares of Cherry U.K. capital stock, which options may only be granted
with the permission of New World Access, into options to acquire New World
Access common stock.
Each of the Merger and the Exchange is subject to the satisfaction of
certain conditions customary in similar transactions, including the approval of
the Company's stockholders and the consummation of the Holding Company
Reorganization. The consummation of the Merger is also subject to the Bankruptcy
Court's approval and confirmation of RCG's Plan of Reorganization which is
expected to be filed by June 5, 1998. In addition, the Merger Agreement is
subject to the approval of the Bankruptcy Court. Finally, the consummation of
the Merger is a condition to the consummation of the Exchange, and the Exchange
is a condition to the consummation of the Merger.
The foregoing description of the Merger and the Exchange is qualified in
its entirety by reference to the Merger Agreement and the Exchange Agreement
which are filed as exhibits herewith.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
99.1 Agreement and Plan of Merger and Reorganization dated as of May 12,
1998 by and among World Access, Inc., WAXS INC., WA Merger Corp. and Cherry
Communications Incorporated (d/b/a Resurgens Communications Group).
99.2 Share Exchange Agreement and Plan of Reorganization dated as of May
12, 1998 by and among World Access, Inc., WAXS INC., Cherry Communications U.K.
Limited and Renaissance Partners II.
99.3 Press Release issued on May 12, 1998 (regarding execution of
definitive agreements to acquire RCG and Cherry U.K.).
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<PAGE> 541
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of May 18, 1998
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<PAGE> 542
EXHIBIT 99.1
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
WORLD ACCESS, INC.,
WAXS INC.,
WA MERGER CORP.
AND
CHERRY COMMUNICATIONS INCORPORATED D/B/A
RESURGENS COMMUNICATIONS GROUP
MAY 12, 1998
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<PAGE> 543
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS.......................................................... J-10
Section 1.1. "Acquisition Proposal"...................................... J-10
Section 1.2. "Administrative Expense Claims"............................. J-10
Section 1.3. "Adverse Consequences"...................................... J-10
Section 1.4. "Affiliate"................................................. J-10
Section 1.5. "Agreement"................................................. J-10
Section 1.6. "Allowed Claims"............................................ J-10
Section 1.7. "Applicable Bankruptcy Law"................................. J-11
Section 1.8. "Articles of Merger"........................................ J-11
Section 1.9. "Bankruptcy Code"........................................... J-11
Section 1.10. "Bankruptcy Court".......................................... J-11
Section 1.11. "Business Day".............................................. J-11
Section 1.12. "Certificate of Merger"..................................... J-11
Section 1.13. "Change of Control"......................................... J-11
Section 1.14. "Chapter 11 Case"........................................... J-12
Section 1.15. "Cherry U.K."............................................... J-12
Section 1.16. "Closing"................................................... J-12
Section 1.17. "Closing Date".............................................. J-12
Section 1.18. "Code"...................................................... J-12
Section 1.19. "Communications Act"........................................ J-12
Section 1.20. "Confidential Information".................................. J-12
Section 1.21. "Consent"................................................... J-12
Section 1.22. "Contingent Payment Stock".................................. J-12
Section 1.23. "Controlled Group Liability"................................ J-12
Section 1.24. "Debtor's Schedules"........................................ J-12
Section 1.25. "DGCL"...................................................... J-12
Section 1.26. "DIP Financing"............................................. J-12
Section 1.27. "Disbursed Stock"........................................... J-12
Section 1.28. "Disbursing Agent".......................................... J-12
Section 1.29. "Disputed Claims"........................................... J-12
Section 1.30. "District Court"............................................ J-12
Section 1.31. "EBITDA".................................................... J-13
Section 1.32. "Effective Date"............................................ J-13
Section 1.33. "Effective Time"............................................ J-13
Section 1.34. "Employee Benefit Plan"..................................... J-13
Section 1.35. "Employee Pension Benefit Plan"............................. J-13
Section 1.36. "Employee Welfare Benefit Plan"............................. J-13
Section 1.37. "Environmental, Health, and Safety Laws".................... J-13
Section 1.38. "ERISA"..................................................... J-13
Section 1.39. "ERISA Affiliate"........................................... J-13
Section 1.40. "Exchange Act".............................................. J-13
Section 1.41. "Expenses".................................................. J-13
Section 1.42. "Extremely Hazardous Substance"............................. J-13
Section 1.43. "FCC"....................................................... J-13
Section 1.44. "Fiduciary"................................................. J-13
Section 1.45. "Final Order"............................................... J-13
Section 1.46. "GAAP"...................................................... J-14
Section 1.47. "HSR Act"................................................... J-14
Section 1.48. "Holding Company Reorganization"............................ J-14
</TABLE>
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<TABLE>
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Section 1.49. "IBCA"...................................................... J-14
Section 1.50. "Intellectual Property"..................................... J-14
Section 1.51. "Knowledge"................................................. J-14
Section 1.52. "Losses".................................................... J-14
Section 1.53. "Merger".................................................... J-14
Section 1.54. "Merger Consideration"...................................... J-14
Section 1.55. "Merger Sub"................................................ J-14
Section 1.56. "Merger Sub Stock".......................................... J-14
Section 1.57. "Multi-employer Plan"....................................... J-14
Section 1.58. "Multiple Employer Plan".................................... J-14
Section 1.59. "NACT"...................................................... J-14
Section 1.60. "NASDAQ".................................................... J-14
Section 1.61. "New World Access".......................................... J-14
Section 1.62. "New World Access Stock".................................... J-15
Section 1.63. "Order"..................................................... J-15
Section 1.64. "Ordinary Course" or "Ordinary Course of Business".......... J-15
Section 1.65. "PBGC"...................................................... J-15
Section 1.66. "Parties"................................................... J-15
Section 1.67. "Party"..................................................... J-15
Section 1.68. "Performance Period"........................................ J-15
Section 1.69. "Person".................................................... J-15
Section 1.70. "Petition Date"............................................. J-15
Section 1.71. "Plan"...................................................... J-15
Section 1.72. "Plan Disclosure Statement"................................. J-15
Section 1.73. "Prohibited Transaction".................................... J-15
Section 1.74. "Proxy Statement"........................................... J-15
Section 1.75. "PUC"....................................................... J-15
Section 1.76. "Qualified RCG Plan"........................................ J-15
Section 1.77. "RCG"....................................................... J-15
Section 1.78. "RCG Disclosure Schedule"................................... J-15
Section 1.79. "RCG Financial Statements".................................. J-15
Section 1.80. "RCG Intellectual Property Rights".......................... J-15
Section 1.81. "RCG Material Adverse Effect"............................... J-15
Section 1.82. "RCG Most Recent Balance Sheet"............................. J-15
Section 1.83. "RCG Most Recent Financial Statements"...................... J-15
Section 1.84. "RCG Most Recent Fiscal Month End".......................... J-15
Section 1.85. "RCG Most Recent Fiscal Year End"........................... J-16
Section 1.86. "RCG Plans"................................................. J-16
Section 1.87. "RCG Stock"................................................. J-16
Section 1.88. "Regulatory Authority"...................................... J-16
Section 1.89. "Reportable Event".......................................... J-16
Section 1.90. "Required Consents"......................................... J-16
Section 1.91. "SEC"....................................................... J-16
Section 1.92. "Securities Act"............................................ J-16
Section 1.93. "Security Interest"......................................... J-16
Section 1.94. "Subsidiary"................................................ J-16
Section 1.95. "Surviving Corporation"..................................... J-16
Section 1.96. "Tax Returns"............................................... J-16
Section 1.97. "Taxes"..................................................... J-16
Section 1.98. "Termination Fee"........................................... J-17
Section 1.99. "Third-Party Intellectual Property Rights".................. J-17
</TABLE>
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<TABLE>
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Section 1.100. "Trading Day"............................................... J-17
Section 1.101. "U.K. Acquisition Agreement"................................ J-17
Section 1.102. "U.K. Acquisition".......................................... J-17
Section 1.103. "WNSI"...................................................... J-17
Section 1.104. "World Access".............................................. J-17
Section 1.105. "World Access Disclosure Schedule".......................... J-17
Section 1.106. "World Access Material Adverse Effect"...................... J-17
Section 1.107. "World Access Most Recent Balance Sheet".................... J-17
Section 1.108. "World Access Most Recent Financial Statements"............. J-17
Section 1.109. "World Access Most Recent Fiscal Month End"................. J-17
Section 1.110. "World Access Most Recent Fiscal Year End".................. J-17
Section 1.111. "World Access SEC Documents"................................ J-17
Section 1.112. "World Access Stock"........................................ J-17
ARTICLE 2. THE MERGER........................................................... J-17
Section 2.1. The Merger.................................................. J-17
Section 2.2. Closing..................................................... J-17
Section 2.3. Effective Time.............................................. J-18
Section 2.4. Effect of Merger............................................ J-18
Section 2.5. Charter and Bylaws.......................................... J-18
Section 2.6. Directors and Officers...................................... J-18
ARTICLE 3. CONVERSION OF STOCK.................................................. J-18
Section 3.1. Conversion of Merger Sub Stock and RCG Stock................ J-18
ARTICLE 4. ADJUSTMENTS.......................................................... J-18
Section 4.1. Adjustments................................................. J-18
ARTICLE 5. PLAN OF REORGANIZATION AND PAYMENT OF CLAIMS......................... J-19
Section 5.1. Plan of Reorganization...................................... J-19
Section 5.2. Deposit of New World Access Stock........................... J-19
Section 5.3. Payment of Claim............................................ J-19
Section 5.4. Contingent Payment of Claims................................ J-19
ARTICLE 6. RELEASE OF CONTINGENT PAYMENT STOCK AND TRANSFER RESTRICTIONS........ J-20
Section 6.1. Release Criteria............................................ J-20
Section 6.2. Subsequent Performance...................................... J-20
Section 6.3. Accelerated Release......................................... J-20
Section 6.4. Transfer Restrictions....................................... J-21
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS, NEW WORLD ACCESS AND
MERGER SUB..................................................................... J-21
Section 7.1. Organization, Qualification, and Corporate Power............ J-21
Section 7.2. Capitalization.............................................. J-21
Section 7.3. Non-contravention........................................... J-21
Section 7.4. Brokers' Fees............................................... J-22
Section 7.5. World Access SEC Documents.................................. J-22
Section 7.6. Events Subsequent to World Access Most Recent Fiscal Year
End......................................................... J-22
Section 7.7. Undisclosed Liabilities..................................... J-23
Section 7.8. Opinion of Financial Advisor................................ J-24
Section 7.9. Litigation.................................................. J-24
Section 7.10. Exemption from Registration................................. J-24
ARTICLE 8. REPRESENTATIONS AND WARRANTIES OF RCG................................ J-24
Section 8.1. Organization, Qualification, and Corporate Power............ J-24
Section 8.2. Capitalization.............................................. J-24
</TABLE>
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<TABLE>
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Section 8.3. Non-contravention........................................... J-24
Section 8.4. Brokers' Fees............................................... J-25
Section 8.5. Title to Assets............................................. J-25
Section 8.6. Subsidiaries................................................ J-25
Section 8.7. Financial Statements........................................ J-25
Section 8.8. Events Subsequent to RCG Most Recent Fiscal Year End........ J-26
Section 8.9. Undisclosed Liabilities..................................... J-27
Section 8.10. Legal Compliance............................................ J-27
Section 8.11. Tax Matters................................................. J-27
Section 8.12. Real Property............................................... J-28
Section 8.13. Intellectual Property....................................... J-28
Section 8.14. Tangible Assets............................................. J-29
Section 8.15. Inventory................................................... J-29
Section 8.16. Contracts................................................... J-29
Section 8.17. Notes and Accounts Receivable............................... J-30
Section 8.18. Insurance................................................... J-30
Section 8.19. Litigation.................................................. J-30
Section 8.20. Employees................................................... J-30
Section 8.21. Employee Benefits........................................... J-30
Section 8.22. Guaranties.................................................. J-31
Section 8.23. Environment, Health, and Safety............................. J-31
Section 8.24. Proxy Statement............................................. J-31
ARTICLE 9. COVENANTS............................................................ J-32
Section 9.1. Conduct of the Business of RCG and its Subsidiaries......... J-32
Section 9.2. Conduct of Business of World Access and its Subsidiaries.... J-33
Section 9.3. Access to Books and Records................................. J-33
Section 9.4. Approval of Stockholders of New World Access................ J-34
Section 9.5. Preparation of Proxy Statement.............................. J-34
Section 9.6. Affiliates.................................................. J-34
ARTICLE 10. ADDITIONAL AGREEMENTS............................................... J-34
Section 10.1. Best Efforts; Cooperation................................... J-34
Section 10.2. Regulatory Matters.......................................... J-35
Section 10.3. Indemnification Regarding the Proxy Statement............... J-35
Section 10.4. Notice of Developments...................................... J-35
Section 10.5. Notices and Consents........................................ J-35
Section 10.6. Indemnity................................................... J-35
Section 10.7. Offers of Employment........................................ J-36
Section 10.8. Exclusive Dealing........................................... J-36
Section 10.9. Bankruptcy Court Approval................................... J-36
ARTICLE 11. MUTUAL CONDITIONS TO CLOSING........................................ J-37
Section 11.1. Stockholder Approval........................................ J-37
Section 11.2. Regulatory Approvals........................................ J-37
Section 11.3. Litigation.................................................. J-37
Section 11.4. Proxy Statement............................................. J-37
Section 11.5. Consummation of Holding Company Reorganization.............. J-37
Section 11.6. Resignations................................................ J-37
Section 11.7. Material Condition.......................................... J-37
Section 11.8. Consents.................................................... J-37
Section 11.9. Bankruptcy Court Approval................................... J-37
Section 11.10. NASDAQ Listing.............................................. J-37
Section 11.11. U.K. Acquisition Transaction................................ J-38
</TABLE>
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ARTICLE 12. CONDITIONS TO THE OBLIGATIONS OF NEW WORLD ACCESS................... J-38
Section 12.1. Representations and Warranties.............................. J-38
Section 12.2. Performance of Obligations.................................. J-38
Section 12.3. Certificate Representing Satisfaction of Conditions......... J-38
Section 12.4. Material Adverse Change..................................... J-38
Section 12.5. Tax Opinion................................................. J-38
Section 12.6. Legal Opinion............................................... J-38
Section 12.7. Carrier Service Agreement................................... J-38
Section 12.8. Operating Performance of RCG................................ J-38
Section 12.9. Approval of Plan and Order.................................. J-38
Section 12.10. Net Operating Losses........................................ J-38
Section 12.11. Net Worth................................................... J-38
ARTICLE 13. CONDITIONS TO OBLIGATIONS OF RCG.................................... J-39
Section 13.1. Representations and Warranties.............................. J-39
Section 13.2. Performance of Obligations.................................. J-39
Section 13.3. Certificate Representing Satisfaction of Conditions......... J-39
Section 13.4. Material Adverse Change..................................... J-39
Section 13.5. Approval of Plan and Order.................................. J-39
ARTICLE 14. TERMINATION......................................................... J-39
Section 14.1. Termination of Agreement.................................... J-39
Section 14.2. Effect of Termination and Breach............................ J-40
Section 14.3. Confidentiality Upon Termination............................ J-40
Section 14.4. Specific Performance........................................ J-40
ARTICLE 15. GENERAL PROVISIONS.................................................. J-40
Section 15.1. Nonsurvival of Representations and Warranties............... J-40
Section 15.2. Press Releases and Public Announcements..................... J-40
Section 15.3. No Third-Party Beneficiaries................................ J-41
Section 15.4. Entire Agreement............................................ J-41
Section 15.5. Succession and Assignment................................... J-41
Section 15.6. Counterparts................................................ J-41
Section 15.7. Notices..................................................... J-41
Section 15.8. Governing Law; Jurisdiction................................. J-41
Section 15.9. Amendments and Waivers...................................... J-42
Section 15.10. Severability................................................ J-42
Section 15.11. Construction................................................ J-42
Section 15.12. Incorporation of Exhibits and Schedules..................... J-42
Section 15.13. Transaction Costs........................................... J-42
</TABLE>
EXHIBITS:
Exhibit A -- Form of Affiliate Agreement
Exhibit B -- Form of Employment Agreement
Exhibit C -- Carrier Service Agreement
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<PAGE> 548
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (as amended,
supplemented or otherwise modified from time to time, the "Agreement"), dated as
of the 12th day of May, 1998, is entered into by and among WORLD ACCESS, INC., a
Delaware corporation ("World Access"), WAXS INC., a Delaware corporation and a
wholly-owned subsidiary of World Access ("New World Access"), WA MERGER CORP., a
Delaware corporation and a wholly-owned subsidiary of New World Access ("Merger
Sub"), and CHERRY COMMUNICATIONS INCORPORATED d/b/a RESURGENS COMMUNICATIONS
GROUP, an Illinois corporation ("RCG").
WITNESSETH:
WHEREAS, on October 24, 1997 (the "Petition Date"), RCG filed its petition,
Case No. 97 B 32873 (the "Chapter 11 Case"), with the United States Bankruptcy
Court for the Northern District of Illinois, Eastern Division (the "Bankruptcy
Court"), under Chapter 11 of the Bankruptcy Code, 11 U.S.C. ss.ss. 101-1330 (as
modified or amended, the "Bankruptcy Code"), and RCG has since continued in
possession of its assets and in the management of its business pursuant to
Sections 1107 and 1108 of the Bankruptcy Code;
WHEREAS, RCG intends to file with the Bankruptcy Court its Plan of
Reorganization on or before May 31, 1998 (as amended, supplemented or otherwise
modified from time to time, the "Plan");
WHEREAS, RCG, intends to seek an order or orders of the Bankruptcy Court
pursuant to Section 1129 of the Bankruptcy Code (i) confirming the Plan and (ii)
approving this Agreement and each of the agreements and other documents
contemplated hereby (such order or orders as approved and entered by the
Bankruptcy Court being hereinafter referred to collectively as the "Order");
WHEREAS, Merger Sub, upon the terms and subject to the conditions of this
Agreement, will be merged with and into RCG (the "Merger");
WHEREAS, on February 24, 1998, World Access, New World Access, WAXS
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of New
World Access, NACT Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of New World Access, and NACT Telecommunications, Inc., a Delaware
corporation and a majority-owned subsidiary of World Access ("NACT"), entered
into that certain Agreement and Plan of Merger and Reorganization, pursuant to
which, among other things, each of World Access and NACT will become
wholly-owned subsidiaries of New World Access (the "Holding Company
Reorganization");
WHEREAS, the respective boards of directors of World Access, New World
Access, RCG and Merger Sub deem it to be advisable, consistent with their
respective long-term business strategies and in the best interests of their
respective stockholders to consummate the Merger upon the terms and conditions
set forth herein and in accordance with the Illinois Business Corporation Act
(the "IBCA");
WHEREAS, the respective boards of directors of all of the Parties have
unanimously approved this Agreement, the board of directors of New World Access
has directed that this Agreement be submitted to its stockholders for approval
and adoption immediately following the consummation of the Holding Company
Reorganization and the board of directors of RCG has directed that this
Agreement be submitted to the Bankruptcy Court for approval;
WHEREAS, the stockholder of Merger Sub has approved this Agreement prior to
its execution;
WHEREAS, World Access, New World Access, Cherry Communications U.K.
Limited, a limited liability company organized under the laws of England
("Cherry U.K."), and certain affiliated parties have entered into that certain
Stock Exchange Agreement and Plan of Reorganization of even date herewith (the
"U.K. Acquisition Agreement") pursuant to which Cherry U.K. will become a
wholly-owned subsidiary of New World Access (the "U.K. Acquisition");
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WHEREAS, the consummation of the transactions contemplated hereby is a
condition to the consummation of the U.K. Acquisition, and the consummation of
the U.K. Acquisition is a condition to the consummation of the transactions
contemplated hereby;
WHEREAS, RCG, World Access and New World Access desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions thereto; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Code.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the warranties and covenants herein
contained, the Parties agree as follows:
ARTICLE 1.
DEFINITIONS
Capitalized terms used in this Agreement shall have the definitions set
forth in this Article 1.
SECTION 1.1 "Acquisition Proposal" means any acquisition or purchase (or
any inquiry or proposal with respect thereto) of all or any substantial portion
of the assets of RCG or of over 10% of any class of equity securities of RCG, or
any merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving RCG other than the transactions
contemplated by this Agreement, or any other transaction the consummation of
which would reasonably be expected to impede, interfere with, prevent or
materially delay the Merger or which would reasonably be expected to dilute
materially the benefits to World Access or New World Access of the Merger.
SECTION 1.2 "Administrative Expense Claims" shall mean and be the
collective reference to all costs and expenses of administration of the Chapter
11 Case entitled to priority and payment under Sections 503(b) and 507(a)(1) of
the Bankruptcy Code and quarterly fees payable to the Office of the United
States Trustee pursuant to 28 U.S.C. ss. 1930, including, (a) the actual and
necessary costs and expenses incurred after the Petition Date of preserving the
bankruptcy estate and operating the business of RCG (such as wages, salaries or
commissions for services and payments for services or goods), and (b)
compensation for legal, financial advisory, accounting and other services and
reimbursement of expenses awarded or allowed under Sections 330(a) or 331 of the
Bankruptcy Code.
SECTION 1.3 "Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including reasonable court costs and reasonable attorneys'
fees and expenses.
SECTION 1.4 "Affiliate" means (a), with respect to each Party, an officer
or director of such Party or any Person owning an equity interest of 10% or more
of such Party, any direct or indirect wholly owned subsidiary of such Party, any
other subsidiary owned directly or indirectly by a direct or indirect parent
company of such Party or any other Person in which such Party has at least a 10%
equity interest and (b) with respect to any Person not a Party, any Person who
controls, is controlled by or is under common control with such Person and any
officer or director of such Person or any other Person owning at least a 10%
equity interest in such Person.
SECTION 1.5 "Agreement" has the meaning set forth in the preamble to this
Agreement.
SECTION 1.6 "Allowed Claims" shall, with respect to a particular claim,
mean: (a) if the holder of such claim has not timely filed a proof of claim
within the applicable period of limitations fixed by the Bankruptcy Court
pursuant to Bankruptcy Rule 3003(c)(3), and such claim either is not listed in
the Debtor's Schedules or such claim is listed in the Debtor's Schedules as
disputed, contingent or unliquidated, the amount of zero; (b) if the holder of a
claim has duly filed a proof of claim within the applicable period of
limitations fixed by the Bankruptcy Court pursuant to the Bankruptcy Rule
3003(c)(3), then (i) the amount stated in such proof of claim, if no objection
thereto has been interposed within any applicable period of
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<PAGE> 550
limitation fixed by applicable bankruptcy rules or as otherwise fixed by the
Bankruptcy Court, or (ii) in the case of a claim to which a timely objection has
been or may be made, such amount as shall be fixed by Final Order; or (c) with
respect to a fee request by an employed professional pursuant to Bankruptcy Code
Section 327 or 1103, such amount as shall be fixed by Final Order of the
Bankruptcy Court.
SECTION 1.7 "Applicable Bankruptcy Law" means the Bankruptcy Code and the
Federal Rules of Bankruptcy Procedure (as the same may be modified or amended)
and the interpretation thereof by a court of competent jurisdiction.
SECTION 1.8 "Articles of Merger" has the meaning set forth in Section 2.3
hereof.
SECTION 1.9 "Bankruptcy Code" has the meaning set forth in the recitals
hereto.
SECTION 1.10 "Bankruptcy Court" has the meaning set forth in the recitals
hereto.
SECTION 1.11 "Business Day" means each day on which national banks in the
Atlanta, Georgia, area are open for business.
SECTION 1.12 "Certificate of Merger" has the meaning set forth in Section
2.3 hereof."
SECTION 1.13 "Change of Control" shall be deemed to have occurred if:
(a) any Person (including any syndicate or group deemed to be a
"person" under Section 13(d) (3) of the Exchange Act), other than New World
Access, any subsidiary of New World Access, or any employee benefit plan of
New World Access or any such subsidiary, is or becomes the beneficial
owner, directly or indirectly, through a purchase or other acquisition
transaction or series of transactions (other than a merger or consolidation
involving New World Access), of shares of capital stock of New World Access
entitling such Person to exercise in excess of 50% of the total voting
power of all shares of capital stock of New World Access entitled to vote
generally in the election of directors;
(b) there occurs any consolidation of New World Access with, or merger
of New World Access into, any other Person, any merger of another Person
into New World Access, or any sale or transfer of the assets of New World
Access, as an entirety or substantially as an entirety, to another Person
(other than either (i) any such transaction pursuant to which the holders
of the New World Access Stock immediately prior to such transaction have,
directly or indirectly, shares of capital stock of the continuing or
surviving corporation immediately after such transaction which entitle such
holders to exercise in excess of 50% of the total voting power of all
shares of capital stock of the continuing or surviving corporation entitled
to vote generally in the election of directors or (ii) any merger (A) which
does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of New World Access Stock or (B) which
is effected solely to change the jurisdiction of incorporation of New World
Access and results in a reclassification, conversion or exchange of
outstanding shares of New World Access Stock solely into shares of common
stock and separate series of common stock carrying substantially the same
relative rights as the New World Access Stock); or
(c) a change in the Board of Directors of New World Access in which
the individuals who constituted the Board of Directors of New World Access
at the beginning of the one-year period immediately preceding such change
(together with any other director whose election by the Board of Directors
of New World Access or whose nomination for election by the stockholders of
New World Access was approved by a vote of at least a majority of the
directors then in office either who were directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason (other than death or resignation) to
constitute at least a two-thirds majority of the directors then in office.
Notwithstanding the foregoing, any Change of Control that results from (i)
WorldCom, Inc. ("WorldCom") or any of its Affiliates soliciting proxies or
becoming a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) in opposition to the recommendation of
the majority of the members of the Board of Directors of New World Access on any
matter or (ii) the merger, share exchange, consolidation or similar transaction
between New World Access and WorldCom or any of its
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<PAGE> 551
Affiliates, without the prior written consent of New World Access, shall not be
deemed a Change of Control for purposes of this Agreement.
SECTION 1.14 "Chapter 11 Case" has the meaning set forth in the recitals
hereto.
SECTION 1.15 "Cherry U.K." has the meaning set forth in the recitals
hereto.
SECTION 1.16 "Closing" has the meaning set forth in Section 2.2 hereof.
SECTION 1.17 "Closing Date" has the meaning set forth in Section 2.2
hereof.
SECTION 1.18 "Code" means the Internal Revenue Code of 1986, as amended,
together with the rules and regulations promulgated thereunder.
SECTION 1.19 "Communications Act" means the Federal Communications Act of
1934, as amended, together with the rules and regulations promulgated
thereunder.
SECTION 1.20 "Confidential Information" means and includes written data,
reports, interpretations, analyses, trade secrets, processes, drawings,
photographs, records, specifications, designs, programs, product development
activities, software packages and related documentation, technical know-how,
concepts, theories, ideas, methods and procedures of operation, business or
marketing plans, proposals, financial information, compiled data,
communications, customer lists and data and equipment, as well as the nature and
results of a Party's development activities and all other information and/or
materials related to the business or activities of a Party, but excluding such
information that is (a) generally available to the public, or (b) available, or
becomes available, to a Party on a non-confidential basis prior to its
disclosure from a Person authorized to disclose the same.
SECTION 1.21 "Consent" means a consent, approval or authorization, waiver,
clearance, exemption or similar affirmation by any Person pursuant to any
contract, permit, law, regulation or order.
SECTION 1.22 "Contingent Payment Stock" has the meaning set forth in
Section 5.2 hereof.
SECTION 1.23 "Controlled Group Liability" means any and all liabilities
under (a) Title IV of ERISA, (b) Section 302 of ERISA, (c) Sections 412 and 4971
of the Code, (d) the continuation coverage requirements of section 601 et seq.
of ERISA and Section 4980B of the Code, and (e) corresponding or similar
provisions of foreign laws or regulations, in each case other than pursuant to
the World Access Plans with respect to World Access and its Subsidiaries, or the
RCG Plans with respect to RCG.
SECTION 1.24 "Debtor's Schedule" shall mean the schedules and statement of
financial affairs of RCG, as amended, modified or supplemented from time to
time, on file in the Chapter 11 Case.
SECTION 1.25 "DGCL" means Title 8 of the Delaware Code, as amended.
SECTION 1.26 "Dip Financing" shall mean post-petition financing provided
to RCG by WNSI pursuant to an order of the Bankruptcy Court.
SECTION 1.27 "Disbursed Stock" has the meaning set forth in Section 5.2
hereof.
SECTION 1.28 "Disbursing Agent" shall have the meaning set forth in
Section 5.2 hereof.
SECTION 1.29 "Disputed Claims" shall mean a claim as to which a proof of
claim has been filed or deemed filed under applicable law, as to which an
objection has been or may be timely filed and which objection, if timely filed,
has not been withdrawn on or before any date fixed for filing such objections by
the Plan or Final Order of the Bankruptcy Court and which objection has not been
overruled or denied by a Final Order. Prior to the time that an objection has
been or may be timely filed, for purposes of the Plan, a claim shall be Disputed
Claim if (a) no corresponding claim has been listed in the Debtor's Schedules;
or (b) the amount of the claim exceeds the amount thereof set forth in the
Debtor's Schedules.
SECTION 1.30 "District Court" means the United States District Court for
the Northern District of Illinois, Eastern Division.
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SECTION 1.31 "EBITDA" means the sum of income before net interest and
provision for income taxes, plus depreciation and amortization expense
determined consistent with RCG's audited consolidated statement of income for
the RCG Most Recent Fiscal Year End. Notwithstanding the foregoing, any change
in the policies or procedures employed in determining the EBITDA of the
Surviving Corporation shall be approved by a majority vote of the members of the
audit committee of the Board of Directors of New World Access who are not
Affiliates of WorldCom, Inc.
SECTION 1.32 "Effective Date" means the date upon which the Plan shall
become effective in accordance with the terms of the Plan.
SECTION 1.33 "Effective Time" has the meaning set forth in Section 2.3
hereof.
SECTION 1.34 "Employee Benefit Plan" means any (a) non-qualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multi-Employer Plan), or (d) Employee Welfare Benefit Plan (or
material fringe benefit plan or program).
SECTION 1.35 "Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
SECTION 1.36 "Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(l).
SECTION 1.37 "Environmental, Health, and Safety Laws" means the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Resource Conservation and Recovery Act of 1976, and the Occupational Safety
and Health Act of 1970, each as amended, together with all other laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof) concerning pollution or protection of the
environment, public health and safety, or employee health and safety, including
laws relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
or waste into ambient air, surface water, ground water, or lands or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or waste.
SECTION 1.38 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
SECTION 1.39 "ERISA Affiliate" means, with respect to any entity, trade or
business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1)
of ERISA that includes the first entity, trade or business, or that is a member
of the same "controlled group" as the first entity, trade or business pursuant
to Section 4001(a)(14) of ERISA.
SECTION 1.40 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
SECTION 1.41 "Expenses" has the meaning set forth in Section 10.8 hereof.
SECTION 1.42 "Extremely Hazardous Substance" has the meaning set forth in
Section 302 of the Emergency Planning and Community Right to Know Act of 1986,
as amended.
SECTION 1.43 "FCC" means the Federal Communications Commission.
SECTION 1.44 "Fiduciary" has the meaning set forth in ERISA Section 3(21).
SECTION 1.45 "Final Order" shall mean an order of the Bankruptcy Court,
the District Court, or any other court as to which (a) the time to appeal,
petition for certiorari or to seek reargument or rehearing has expired and no
appeal, reargument, certiorari petition or rehearing is pending; or (b) if any
appeal, reargument, writ of certiorari or rehearing thereof has been sought, the
order has been affirmed by the highest court to which such order was appealed or
from which the reargument, certiorari, or rehearing was sought, and the time to
take any further appeal or to seek certiorari or further reargument or rehearing
has expired. (In the
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case of an order of the Bankruptcy Court, the time for appeal, for the purposes
of this definition, shall be the time permitted for an appeal to the District
Court.)
SECTION 1.46 "GAAP" means United States generally accepted accounting
principles as in effect from time to time. The requirement that such principles
be consistently applied and applied on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period.
SECTION 1.47 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, together with the rules and regulations promulgated
thereunder.
SECTION 1.48 "Holding Company Reorganization" has the meaning set forth in
the recitals hereto.
SECTION 1.49 "IBCA" has the meaning set forth in the recitals hereto.
SECTION 1.50 "Intellectual Property" means (a) all inventions (whether
patentable or unpatentable), all improvements thereto, and all patents, patent
applications, and patent disclosures, together with all reissuances,
continuations, continuations in part, revisions, extensions, and reexaminations
thereof, (b) all trademarks, service marks, trade drafts, logos, trade names,
and corporate names, together with all translations, adaptations, derivations,
and combinations thereof and including all goodwill associated therewith, and
all applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connections therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier list, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights and (h) all copies and tangible
embodiments thereof in whatever form or medium.
SECTION 1.51 "Knowledge" means either (a) that an individual is actually
aware of a particular fact or other matter or (b) a prudent individual could be
expected to discover or otherwise become aware of such fact or other matter in
the course of performing the duties which are normally performed by an
individual acting in a similar capacity. A Person (other than an individual)
will be deemed to have "Knowledge" of a particular fact or other matter if any
individual who is serving as a director, executive officer, partner, executor or
trustee of such Person (or in any similar capacity) has, or at any time had,
knowledge of such fact or other matter.
SECTION 1.52 "Losses" means any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and attorneys' fees and disbursements.
SECTION 1.53 "Merger" has the meaning set forth in the recitals hereto.
SECTION 1.54 "Merger Consideration" has the meaning set forth in Section
3.1 hereof.
SECTION 1.55 "Merger Sub" has the meaning set forth in the preamble to
this Agreement.
SECTION 1.56 "Merger Sub Stock" means any share of the common stock, $.01
par value per share, of Merger Sub.
SECTION 1.57 "Multi-employer Plan" has the meaning set forth in Section
3(37) of ERISA.
SECTION 1.58 "Multiple Employer Plan" has the meaning set forth in Section
4063 of ERISA.
SECTION 1.59 "NACT" has the meaning set forth in the recitals hereto.
SECTION 1.60 "NASDAQ" means The Nasdaq National Market.
SECTION 1.61 "New World Access" has the meaning set forth in the preamble
to this Agreement.
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SECTION 1.62 "New World Access Stock" means any share of the common stock,
$.01 par value per share, of New World Access.
SECTION 1.63 "Order" has the meaning set forth in the recitals hereto.
SECTION 1.64 "Ordinary Course" means any action taken by a Person only if
(a) such action is consistent with the past practices of such Person and is
taken in the ordinary course of the normal day-to-day operations of such Person,
or (b) such action is similar in nature and magnitude to actions customarily
taken, without any authorization by the board of directors (or by any Person or
group of Persons exercising similar authority), in the ordinary course of the
normal day-to-day operations of other Persons that are in the same line of
business as such Person.
SECTION 1.65 "PBGC" means the Pension Benefit Guaranty Corporation.
SECTION 1.66 "Parties" means collectively, or any two or more of, World
Access, New World Access, RCG and Merger Sub.
SECTION 1.67 "Party" means any one of the Parties.
SECTION 1.68 "Performance Period" has the meaning set forth in Section 6.1
hereof.
SECTION 1.69 "Person" means an individual, a partnership, a corporation,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or association, a limited liability company, a
limited liability partnership, or a governmental entity (or any department,
agency, or political subdivision thereof, including a Regulatory Authority).
SECTION 1.70 "Petition Date" has the meaning set forth in the recitals
hereto.
SECTION 1.71 "Plan" has the meaning set forth in the recitals hereto.
SECTION 1.72 "Plan Disclosure Statement" has the meaning set forth in
Section 5.1 hereof.
SECTION 1.73 "Prohibited Transaction" has the meaning set forth in ERISA
Section 406 and Code Section 4975.
SECTION 1.74 "Proxy Statement" has the meaning set forth in Section 9.5
hereof.
SECTION 1.75 "PUC" has the meaning set forth in Section 10.2 hereof.
SECTION 1.76 "Qualified RCG Plan" has the meaning set forth in Section
8.21 hereof.
SECTION 1.77 "RCG" has the meaning set forth in the preamble to this
Agreement.
SECTION 1.78 "RCG Disclosure Schedule" has the meaning set forth in
Article 8 hereof.
SECTION 1.79 "RCG Financial Statements" has the meaning set forth in
Section 8.7 hereof.
SECTION 1.80 "RGC Intellectual Property Rights" has the meaning set forth
in Section 8.13 hereof.
SECTION 1.81 "RCG Material Adverse Effect" shall mean any change in or
effect on the business of RCG and its Subsidiaries that is, or could reasonably
be expected to be, materially adverse to the business, prospects, assets
(including intangible assets), liabilities (contingent or otherwise), condition
(financial or otherwise) or results of operations of RCG and its Subsidiaries
taken as a whole.
SECTION 1.82 "RCG Most Recent Balance Sheet" means the consolidated
balance sheet of RCG as of March 31, 1998 included in the RCG Most Recent
Financial Statements.
SECTION 1.83 "RCG Most Recent Financial Statements" has the meaning set
forth in Section 8.7 hereof.
SECTION 1.84 "RCG Most Recent Fiscal Month End" has the meaning set forth
in Section 8.7 hereof.
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SECTION 1.85 "RCG Most Recent Fiscal Year End" has the meaning set forth
in Section 8.7 of this Agreement.
SECTION 1.86 "RCG Plans" means all Employee Benefit Plans, programs,
policies, practices, and other arrangements providing benefits to any employee
or former employee or beneficiary or dependent thereof, whether or not written,
and whether covering one Person or more than one Person, sponsored or maintained
by RCG or any of its Subsidiaries, or to which RCG, or any of its Subsidiaries,
contributes or is obligated to contribute. Without limiting the generality of
the foregoing, the term "RCG Plans" includes all employee welfare benefit plans
within the meaning of Section 3(1) of ERISA and all employee pension benefit
plans within the meaning of Section 3(2) of ERISA.
SECTION 1.87 "RCG Stock" means any share of the common stock, no par value
per share, of RCG.
SECTION 1.88 "Regulatory Authority" means, collectively, the FCC, PUCs,
the Federal Trade Commission, the United States Department of Justice, the SEC,
the National Association of Securities Dealers, Inc., and all national and state
securities exchanges and any other governmental or regulatory body, agency,
instrumentality or authority.
SECTION 1.89 "Reportable Event" has the meaning set forth in ERISA Section
4043.
SECTION 1.90 "Required Consents" has the meaning set forth in Section 7.3
hereof.
SECTION 1.91 "SEC" means the Securities and Exchange Commission.
SECTION 1.92 "Securities Act" means the Securities Act of 1933, as
amended, together with the rules and regulations promulgated hereunder.
SECTION 1.93 "Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialman's, and similar liens for work done on the property to the extent
that such liens arise in the Ordinary Course of Business and are not yet due and
payable, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, in each case, where there exists no default in World Access's or
any Subsidiary's obligations with respect to the underlying agreements, and (d)
other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
SECTION 1.94 "Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns (directly or indirectly) a
majority of the common stock or has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
SECTION 1.95 "Surviving Corporation" has the meaning set forth in Section
2.1 hereof.
SECTION 1.96 "Tax Returns" means, collectively, (a) all reports,
declarations, estimates, returns, information statements, and similar documents
relating to, or required to be filed in respect of any Taxes, and (b) all
information statements, returns, reports or similar documents required to be
filed with respect to payments to (or from) third parties or with respect to
transactions in which any Party or any of its Subsidiaries participates. The
term "Tax Return" shall mean any one of the foregoing Tax Returns.
SECTION 1.97 "Taxes" means, collectively, (a) all net income, gross
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
lease, service, service use, withholding, employment, payroll, excise,
severance, transfer, documentary, mortgage, registration, stamp, occupation,
environmental, premium, property, windfall, profits, customs, duties, and other
taxes, fees, assessments or charges of any kind whatever, including any
estimates thereof, together with any interest, penalties and other additions
with respect thereto, imposed by any federal, territorial, state, local or
foreign government; and (b) any penalties, interest, or other additions to tax
for the failure to collect, withhold, or pay over any of the foregoing, or to
accurately file any Tax Return. The term "Tax" shall mean any one of the
foregoing Taxes. When used with reference to a specified Person, the terms
"Taxes" and "Tax" shall include only amounts of, or in respect of, Taxes for
which such Person is, or could become, liable in whole or part (including any
obligation in connection with a duty to collect, withhold, or pay over any Tax,
any obligation to contribute to the payment of any Taxes determined on
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a consolidated, combined, or unitary basis, any liability as a transferee, or
any liability as a result of any express or implied obligation to indemnity or
pay the Tax obligations of another Person).
SECTION 1.98 "Termination Fee" has the meaning set forth in Section 10.8.3
hereof.
SECTION 1.99 "Third-Party Intellectual Property Rights" means, with
respect to each of World Access and RCG, all licenses, sublicenses and other
agreements as to which it is a party and pursuant to which it is authorized to
use any third-party patents, trademarks, service marks or copyrights.
SECTION 1.100 "Trading Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day on which securities are not traded on
NASDAQ.
SECTION 1.101 "U.K. Acquisition Agreement" has the meaning set forth in
the recitals hereto.
SECTION 1.102 "U.K. Acquisition" has the meaning set forth in the recitals
hereto.
SECTION 1.103 "WNSI" means WorldCom Network Services, Inc., a Delaware
corporation.
SECTION 1.104 "World Access" has the meaning set forth in the preamble to
this Agreement.
SECTION 1.105 "World Access Disclosure Schedule" has the meaning set forth
in Article 7 hereof.
SECTION 1.106 "World Access Material Adverse Effect" shall mean (a) prior
to the consummation of the Holding Company Reorganization, any change in or
effect on the business of World Access and its Subsidiaries that is, or could
reasonably be expected to be, materially adverse to the business, prospects,
assets (including intangible assets), liabilities (contingent or otherwise),
condition (financial or otherwise) or results of operations of World Access and
its Subsidiaries taken as a whole, and (b) after the consummation of the Holding
Company Reorganization, any change in or effect on the business of New World
Access and its Subsidiaries that is, or could reasonably be expected to be,
materially adverse to the business, prospects, assets (including intangible
assets), liabilities (contingent or otherwise), condition (financial or
otherwise) or results of operations of New World Access and its Subsidiaries
taken as a whole.
SECTION 1.107 "World Access Most Recent Balance Sheet" means the
consolidated balance sheet of World Access as of December 31, 1997 included in
the World Access SEC Documents.
SECTION 1.108 "World Access Most Recent Financial Statements" means the
consolidated financial statements for the year ended December 31, 1997 included
in the World Access SEC Documents.
SECTION 1.109 "World Access Most Recent Fiscal Month End" means December
31, 1997.
SECTION 1.110 "World Access Most Recent Fiscal Year End" means December
31, 1997.
SECTION 1.111 "World Access SEC Documents" has the meaning set forth in
Section 7.5 hereof.
SECTION 1.112 "World Access Stock" means any share of the common stock,
$0.01 par value per share, of World Access.
ARTICLE 2.
THE MERGER
SECTION 2.1. The Merger. Upon the terms and subject to the conditions
contained in this Agreement, and in accordance with the IBCA and the DGCL,
Merger Sub shall be merged with and into RCG at the Effective Time. As a result
of the Merger, the separate corporate existence of Merger Sub shall cease and
RCG, as the surviving corporation (the "Surviving Corporation"), shall continue
to exist and be governed by the IBCA.
SECTION 2.2. Closing. Upon the terms and subject to the conditions
hereof, unless otherwise agreed upon by the Parties, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Rogers & Hardin, 2700 International Tower, 229 Peachtree Street,
Atlanta, Georgia 30303, commencing at 10:00 a.m. local time, as soon as
practicable following the satisfaction or
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waiver of the conditions set forth in Articles 11 through 13 hereof, but in no
event later than two business days thereafter (the date of such being referred
to herein as the "Closing Date"), unless otherwise mutually agreed to by the
Parties.
SECTION 2.3. Effective Time. If all the conditions to the Merger set
forth in Article 11 through 13 hereof shall have been satisfied or, if
permissible, waived in accordance herewith and this Agreement shall not have
been terminated as provided in Article 14 hereof, the Parties hereto shall cause
the Merger to be consummated by filing on the Closing Date (i) articles of
merger meeting the requirements of the IBCA ("Articles of Merger") with the
Secretary of State of the State of Illinois in such form as required by, and
executed in accordance with such requirements of, the IBCA and (ii) a
certificate of merger meeting the requirements of the DGCL (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in such form as
required by, and executed in accordance with such requirements of, the DGCL. The
Merger shall become effective at the later of the time of filing of the Articles
of Merger with the Secretary of State of the State of Illinois in accordance
with the IBCA or of the Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the DGCL, or at such other time which the
parties hereto shall have agreed upon and designated in such filings as the
effective time of the Merger (the "Effective Time").
SECTION 2.4. Effect of Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the IBCA and the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, except as otherwise provided herein, the separate existence
of Merger Sub will cease and the Surviving Corporation shall succeed, without
other transfer, to all the rights, privileges, powers, franchises and property
of Merger Sub and, subject to the Plan and the Order, shall be subject to all
the debts, duties and liabilities of Merger Sub in the same manner as if the
Surviving Corporation had itself incurred them.
SECTION 2.5. Charter and Bylaws. At the Effective Time, the Articles of
Incorporation and Bylaws of RCG, as in effect on the date hereof and otherwise
amended prior to the Effective Time, shall be the Articles of Incorporation and
Bylaws of the Surviving Corporation until further amended as provided therein
and in accordance with applicable law.
SECTION 2.6. Directors and Officers. From and after the Effective Time,
the directors and officers of RCG shall be the directors and officers of the
Surviving Corporation.
ARTICLE 3.
CONVERSION OF STOCK
SECTION 3.1. Conversion of Merger Sub Stock and RCG Stock. Subject to the
terms and conditions of this Agreement, as of the Effective Time and by virtue
of the Merger and without any further action on the part of the holder of any
Merger Sub Stock or RCG Stock:
(a) all shares of RCG Stock which are held by RCG as treasury stock,
if any, shall be canceled and retired, and no consideration shall be paid
or delivered in exchange therefor;
(b) the shares of RCG Stock outstanding immediately prior to the
Effective Time shall be canceled and retired and will cease to exist
without the payment of any consideration therefor; and
(c) each share of Merger Sub Stock issued and outstanding immediately
prior to the Effective Time shall be converted into one fully paid and
nonassessable share of common stock without par value of the Surviving
Corporation.
ARTICLE 4.
ADJUSTMENTS
SECTION 4.1. Adjustments. In the event of any change in the New World
Access Stock after the date hereof by reason of any stock dividend, stock split,
subdivision, reclassification, recapitalization,
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combination, exchange of shares or the like, then the New World Access Stock to
be issued pursuant to Article 5 of this Agreement shall be adjusted
appropriately on the Closing Date.
ARTICLE 5.
PLAN OF REORGANIZATION AND PAYMENT OF CLAIMS
Section 5.1. Plan of Reorganization. RCG shall file and use its best
efforts to obtain the Bankruptcy Court's confirmation of the Plan, which shall
provide, inter alia, for the consummation of the Merger in accordance with the
terms and conditions of this Agreement. RCG shall also file and use its best
efforts to obtain the Bankruptcy Court's approval of RCG's Disclosure Statement
with respect to the Plan (the "Plan Disclosure Statement"). Both the Plan and
the Plan Disclosure Statement, as filed and as confirmed and approved by the
Bankruptcy Court, must in form and substance be acceptable to New World Access
and RCG. World Access and its Affiliates shall cooperate in connection with
preparing, filing and obtaining the approval of the Plan and the Plan Disclosure
Statement. The Plan shall provide, inter alia, for (a) a pro-rata distribution
of Disbursed Stock and Contingent Payment Stock as provided herein to holders of
Allowed Claims and Administrative Expense Claims (including the Administration
Expense Claim of WNSI arising in connection with the DIP Financing), and the
approval of this Agreement; (b) except as otherwise provided in the Plan, the
discharge of all indebtedness of and claims against RCG arising before
confirmation of the Plan; and (c) certain transfer restrictions on the shares of
New World Access Stock to be issued pursuant to this Agreement as set forth in
Section 6.4 hereof. RCG estimates that the aggregate amount of Allowed Claims
will be approximately $300,000,000 to $350,000,000.
SECTION 5.2. Deposit of New World Access Stock. At the Closing, New World
Access and the Person appointed by the Bankruptcy Court pursuant to the Plan and
the Order to act as "Disbursing Agent" under the Plan (the "Disbursing Agent")
shall each execute a Disbursement Agreement reasonably acceptable to the Parties
hereto and, in accordance therewith, New World Access shall deposit with the
Disbursing Agent, immediately following the Effective Time, 3,125,000 shares of
New World Access Stock ("Disbursed Stock") and 6,250,000 shares of New World
Access Stock (the "Contingent Payment Stock").
SECTION 5.3. Payment of Claims. In accordance with the terms and
provisions of the Plan and unless otherwise provided therein, the Disbursing
Agent under the Disbursement Agreement shall issue to each holder of an Allowed
Claim and an Administrative Expense Claim (including the Administrative Expense
Claim of WNSI arising in connection with the DIP Financing), its pro-rata share
of Disbursed Stock based upon the amount of such claim.
SECTION 5.4. Contingent Payments of Claims. The Disbursing Agent shall
release to holders of Allowed Claims and Administrative Expense Claims
(including the Administrative Expense Claim of WNSI arising in connection with
the DIP Financing) their pro-rata share of Contingent Payment Stock, if, as,
when and to the extent that the Contingent Payment Stock (or any portion
thereof) is released pursuant to the terms of Article 6 hereof, in accordance
with the terms and provisions of the Plan.
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ARTICLE 6.
RELEASE OF CONTINGENT PAYMENT STOCK AND TRANSFER RESTRICTIONS
SECTION 6.1. Release Criteria. The Contingent Payment Stock will be
released by the Disbursing Agent pursuant to the terms and provisions of the
Plan in the amounts and on the dates specified below if the sum of the EBITDA
for (i) the Surviving Corporation and (ii) Cherry U.K. for the performance
periods set forth below equals or exceeds the Target EBITDA for such performance
period as set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF
CONTINGENT PAYMENT
PERFORMANCE PERIOD RELEASE DATE STOCK TO BE RELEASED TARGET EBITDA
- ------------------ ------------ -------------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period")............... February 15, 1999 25% $ 7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period")............... February 15, 2000 37.5% $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)................ February 15, 2001 37.5% $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Closing Date is (a) on or after July
15, 1998 but prior to August 16, 1998, then the First Performance Period shall
commence on August 1, 1998 and shall terminate on (and including) December 31,
1998 and the Target EBITDA with respect thereto shall be reduced to $7,100,000,
(b) on or after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (c) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Closing occurs and shall terminate on (and including) the last day
of the sixth calendar month following the month in which the Closing occurs, the
release date shall be forty-five (45) days after the end of such period and the
Target EBITDA shall be equal to the sum of (i) $2,100,000 for each calendar
month of 1998 included in the First Performance Period and (ii) $2,400,000 for
each calendar month of 1999 included in the First Performance Period.
SECTION 6.2. Subsequent Performance. If the EBITDA for the Surviving
Corporation and Cherry U.K. is less than the Target EBITDA required for the
release of Contingent Payment Stock in either of the First or Second Performance
Periods (and with respect to the Second Performance Period is no less than
zero), then, notwithstanding the table above, the Contingent Payment Stock shall
be released if the actual cumulative EBITDA for the Surviving Corporation and
Cherry U.K. for such Performance Period and any subsequent Performance Periods
equals or exceeds the cumulative Target EBITDA for such Performance Periods.
SECTION 6.3. Accelerated Release. Notwithstanding anything to the
contrary, (a) if during any calendar quarter of the Second Performance Period,
the closing price per share of the New World Access Stock as reported by NASDAQ
equals or exceeds $65.00 for any five consecutive Trading Days during such
calendar quarter, then 25% of all of the shares of Contingent Payment Stock
shall be released on February 15, 2000, provided that if no shares of Contingent
Payment Stock are eligible for release during any such calendar quarter, then
such shares of Contingent Payment Stock shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the New World Access Stock as reported by NASDAQ equals or
exceeds $65.00 for a total number of consecutive Trading Days during such
subsequent calendar quarter equal to or exceeding the total number of Trading
Days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which such shares of Contingent Payment
Stock were not eligible for release; (b) if the combined EBITDA for the
Surviving Corporation and Cherry U.K. for the Second Performance Period equals
or exceeds $52,775,000, then the Contingent Payment Stock
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related to the Third Performance Period shall be released on February 15, 2000;
and (c) all of the shares of Contingent Payment Stock shall be released upon a
Change of Control (except to the extent that the ability to earn such shares has
been lost under this Article 6) and the restrictions set forth in Section 6.4
shall not apply.
Section 6.4 Transfer Restrictions. Notwithstanding anything to the contrary
contained herein, (a) no holder of Disbursed Stock may, until the 365th day
following the Closing Date, without the prior written consent of New World
Access, offer, sell, contract to sell or otherwise dispose of, directly or
indirectly, any such Disbursed Stock or any security convertible into or
exchangeable or exercisable therefor, either publicly or privately, and (b) no
holder of Contingent Payment Stock upon its release pursuant to Section 6.1
above may, until the 180th day following the release date thereof, without the
prior written consent of New World Access, offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, any shares of the Contingent
Payment Stock so released or any security convertible into or exchangeable or
exercisable therefor, either publicly or privately.
ARTICLE 7.
REPRESENTATIONS AND WARRANTIES OF
WORLD ACCESS, NEW WORLD ACCESS AND MERGER SUB
In order to induce RCG to enter into this Agreement, World Access, New
World Access and Merger Sub, jointly and severally, represent and warrant to RCG
that, except as set forth in the World Access SEC Documents or the Disclosure
Schedule to be delivered by World Access to RCG within ten (10) Business Days of
the date hereof (the "World Access Disclosure Schedule"), which World Access
Disclosure Schedule shall identify exceptions by specific Section references:
SECTION 7.1. Organization, Qualification, and Corporate Power. Each of
World Access and its Subsidiaries is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation. Each of World Access and its Subsidiaries is duly authorized and
qualified to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification would not have a World Access Material Adverse Effect. Each of
World Access and its Subsidiaries has full corporate power and authority to
carry on the businesses in which it is engaged and to own, lease, use and
operate the properties owned, leased used and operated by it. The copies of the
Certificate of Incorporation and the Bylaws of World Access and the equivalent
organizational documents of each of its Subsidiaries, which have previously been
made available to RCG, are true, complete and correct copies of such documents
as in effect as of the date of this Agreement.
SECTION 7.2. Capitalization. The entire authorized common capital stock
of World Access consists of 40,000,000 shares of World Access Stock, of which
21,848,701 shares were issued and outstanding as of May 8, 1998. The entire
authorized common capital stock of New World Access consists of 40,000,000
shares of New World Access Stock, of which 1,000 were issued and outstanding as
of May 8, 1998. No shares of World Access Stock or New World Access Stock are
held in treasury. All of the issued and outstanding shares of World Access Stock
have been duly authorized and are validly issued, fully paid, and nonassessable.
Except as disclosed in the World Access SEC Documents, there are no outstanding
or authorized options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
require World Access or any of its Subsidiaries to issue, sell, or otherwise
cause to become outstanding any of its capital stock. There are no outstanding
or authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to World Access and its Subsidiaries. World Access
and its Subsidiaries have no outstanding bonds, debentures, notes or similar
obligations the holders of which have the right to vote generally with holders
of World Access Stock or New World Access Stock.
SECTION 7.3. Non-contravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which World Access or any of its Subsidiaries
is subject or any provision of the charter or bylaws of any of World Access or
any of its Subsidiaries; or (b) except with respect to those
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agreements for which Consent shall be obtained prior to Closing, conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which World Access or any of its Subsidiaries is a party
or by which it is bound or to which any of its assets is subject (or result in
the imposition of any Security Interest upon any of its assets), except where
the violation, conflict, breach, default, acceleration, termination,
modification, cancellation, failure to give notice, or Security Interest would
not have a World Access Material Adverse Effect. Except for Consents required
under or in relation to the (a) HSR Act, (b) the Communications Act and any
rates, regulations, practices and policies of the FCC, (b) state securities or
"blue sky" laws, (d) the Securities Act, (e) the Exchange Act, (f) the IBCA with
respect to the filing of the Articles of Merger, (g) laws, rules, regulations,
practices and orders of any PUC, foreign telecommunications regulatory agencies
or similar state or foreign regulatory bodies, (h) rules and regulations of
NASDAQ, and (i) such Consents and filings the failure of which to make or obtain
would not have a World Access Material Adverse Effect, neither World Access nor
any of its Subsidiaries is required to give any notice to, make any filing with,
or obtain any Consent of any Regulatory Authority in order for the Parties to
consummate the transactions contemplated by this Agreement. All consents,
approvals, orders, authorizations, registrations, declarations and filings
required under or in relation to any of the foregoing clauses (a) through (h)
are hereinafter referred to collectively as the "Required Consents."
SECTION 7.4. Brokers' Fees. None of World Access or any of its
Subsidiaries has any liability or obligation, contingent or otherwise, to pay
any fees or commissions or similar payments to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement, except to The
Robinson-Humphrey Company, Inc., whose fees and expenses will be paid by World
Access in accordance with its agreement with such firm based upon arrangements
made by or on behalf of World Access and previously disclosed to RCG.
SECTION 7.5. World Access SEC Documents. Each of World Access and its
Subsidiaries has timely filed with the SEC all forms, reports, schedules,
statements, exhibits and other documents required to be filed by it since
December 31, 1995 with the SEC (such documents, as supplemented and amended
since the time of filing, collectively, the "World Access SEC Documents"). The
World Access SEC Documents, including any financial statements or schedules
included therein, at the time filed (and, in the case of registration statements
and proxy statements, on the dates of effectiveness and the dates of mailing,
respectively) (a) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be. The consolidated financial statements (including the related notes)
of World Access included in the World Access SEC Documents comply as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with GAAP (except, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), and fairly present
(subject in the case of unaudited statements to the absence of footnotes and to
normal, recurring and year-end audit adjustments which will not be material
individually or in the aggregate) the consolidated financial position of World
Access as of the dates thereof and the consolidated results of its operations
and cash flows for the periods then ended.
SECTION 7.6. Events Subsequent to World Access Most Recent Fiscal Year
End. Since the World Access Most Recent Fiscal Year End, there has not been any
World Access Material Adverse Effect. Without limiting the generality of the
foregoing, since that date:
(a) none of World Access or any of its Subsidiaries has sold, leased,
transferred, or assigned any material assets, tangible or intangible,
outside the Ordinary Course of Business;
(b) none of World Access or any of its Subsidiaries has entered into
any material agreement, contract, lease, or license outside the Ordinary
Course of Business;
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(c) no party (including World Access or any of its Subsidiaries) has
accelerated, terminated, made material modifications to, or canceled any
material agreement, contract, lease, or license to which any of World
Access or any of its Subsidiaries is a party or by which any of them is
bound;
(d) none of World Access or any of its Subsidiaries has imposed any
Security Interest upon any of its assets, tangible or intangible;
(e) none of World Access or any of its Subsidiaries has made any
material capital expenditures outside the Ordinary Course of Business;
(f) none of World Access or any of its Subsidiaries has made any
material capital investment in, or any material loan to, any other Person
outside the Ordinary Course of Business;
(g) World Access and its Subsidiaries have not created, incurred,
assumed, or guaranteed more than $10,000,000 in aggregate indebtedness
(other than internal debt between World Access and/or its Subsidiaries) for
borrowed money and capitalized lease obligations;
(h) other than is normal and customary with respect to their
respective businesses, none of World Access or any of its Subsidiaries has
granted any license or sublicense of any material rights under or with
respect to any Intellectual Property;
(i) there has been no change made or authorized in the charter or
bylaws of World Access or any of its Subsidiaries;
(j) none of World Access or any of its Subsidiaries has issued, sold,
or otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon conversion,
exchange or exercise) any of its capital stock;
(k) none of World Access or any of its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution with respect to its
capital stock (whether in cash or in kind) or redeemed, purchased, or
otherwise acquired any of its capital stock;
(l) none of World Access or any of its Subsidiaries has experienced
any material damage, destruction, or loss (whether or not covered by
insurance) to its property;
(m) none of World Access or any of its Subsidiaries has made any loan
to, or entered into any other transaction with, any of its directors,
officers, and employees outside the Ordinary Course of Business;
(n) none of World Access or any of its Subsidiaries has entered into
any employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(o) none of World Access or any of its Subsidiaries has granted any
increase in the base compensation of any of its directors, officers or
employees outside the Ordinary Course of Business;
(p) none of World Access or any of its Subsidiaries has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of any of
its directors, officers, and employees (or taken any such action with
respect to any other Employee Benefit Plan);
(q) none of World Access or any of its Subsidiaries has made any other
material change in employment terms for any of its directors, officers or
employees outside the Ordinary Course of Business; and
(r) none of World Access or any of its Subsidiaries has committed to
any of the foregoing.
SECTION 7.7. Undisclosed Liabilities. None of World Access or any of its
Subsidiaries has any material liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, and whether due or to
become due, including any liability for taxes), except for (a) liabilities set
forth in the World Access Most Recent Balance Sheet and (b) liabilities which
have arisen since the date of the World Access Most Recent Balance Sheet in the
Ordinary Course of Business.
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SECTION 7.8. Opinion of Financial Advisor. World Access has received the
opinion of The Robinson-Humphrey Company, Inc., dated the date of this
Agreement, that, as of such date, the consideration to be paid to the
shareholders and creditors of RCG hereunder is fair, from a financial point of
view, to World Access.
SECTION 7.9. Litigation. Neither World Access nor any of its Subsidiaries
(a) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (b) is a party or, to the Knowledge of World Access, is threatened
to be made a party to any action, suit, proceeding, hearing, or investigation
of, in, or before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator, and, to
the Knowledge of World Access, no reasonable basis therefor exists.
SECTION 7.10. Exemption from Registration. The New World Access Stock to
be issued pursuant to this Agreement is being issued without registration under
the Securities Act in reliance on the exemption therefrom afforded by Section
1145(a) of the Bankruptcy Code and, subject to the certain transfer restrictions
contained herein, each holder of the New World Access Stock issued pursuant to
this Agreement, other than any holder who shall be deemed (a) an "underwriter"
within the meaning of Section 1145(b) of the Bankruptcy Code or (b) an Affiliate
of New World Access, may resell such stock without registration under the
Securities Act.
ARTICLE 8.
REPRESENTATIONS AND WARRANTIES OF RCG
In order to induce World Access to enter into this Agreement, RCG
represents and warrants to World Access and New World Access that, except as set
forth in the Disclosure Schedule to be delivered by RCG to World Access within
ten (10) Business Days of the date hereof (the "RCG Disclosure Schedule"), which
shall identify exceptions by specific Section references:
SECTION 8.1. Organization, Qualification, and Corporate Power. Each of
RCG and its Subsidiaries is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction of its incorporation. Each
of RCG and its Subsidiaries is duly authorized and qualified to conduct business
and is in good standing under the laws of each jurisdiction where such
qualification is required, except where the lack of such qualification would not
have an RCG Material Adverse Effect. Each of RCG and its Subsidiaries has full
corporate power and authority to carry on the businesses in which it is engaged
and to own, lease, use, and operate the properties owned, leased, used, and
operated by it. The copies of the articles of incorporation and the bylaws of
RCG and the equivalent organizational documents of each of its Subsidiaries,
which have previously been made available to World Access, are true, complete
and correct copies of such documents as in effect as of the date of this
Agreement.
SECTION 8.2. Capitalization. The entire authorized common capital stock
of RCG consists of 10,000 shares of RCG Stock, of which 1,249 shares of RCG
Stock are issued and outstanding. No shares of RCG Stock are held in treasury.
All of the issued and outstanding shares of RCG Stock have been duly authorized
and are validly issued, fully paid, and nonassessable. There are no outstanding
or authorized options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
require RCG or any of its Subsidiaries to issue, sell, or otherwise cause to
become outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights with respect to RCG and its Subsidiaries. RCG and its Subsidiaries have
no outstanding bonds, debentures, notes or other similar obligations the holders
of which have the right to vote generally with holders of RCG Stock.
SECTION 8.3. Non-contravention. Subject to Applicable Bankruptcy Law and
to the entry of the Order by the Bankruptcy Court, neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (a) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which any of RCG is subject
or any provision of the charter or bylaws of RCG or any of its Subsidiaries; or
(b) except with respect to those agreements for which Consent shall be obtained
prior to
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Closing, conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which RCG or any
of its Subsidiaries is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon any
of its assets), except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, failure to give notice,
or Security Interest would not have an RCG Material Adverse Effect. Except as
required by Applicable Bankruptcy Law and except for the Required Consents and
such Consents and filings the failure of which to make or obtain would have an
RCG Material Adverse Effect, neither RCG nor any of its Subsidiaries is required
to give any notice to, make any filing with, or obtain any Consent of any
Regulatory Authority in order for the Parties to consummate the transactions
contemplated by this Agreement.
SECTION 8.4. Brokers' Fees. RCG has no liability or obligation,
contingent or otherwise, to pay any fees or commissions or similar payments to
any broker, finder, or agent with respect to the transactions contemplated by
this Agreement.
SECTION 8.5. Title to Assets. Each of RCG and its Subsidiaries has good
and marketable title to all of its material properties and assets, real and
personal, tangible and intangible, used by it, located on its premises, or shown
on the RCG Most Recent Balance Sheet or acquired after the date thereof, free
and clear of all Security Interests, except for properties and assets disposed
of in the Ordinary Course of Business since the date of the RCG Most Recent
Balance Sheet. All leases pursuant to which RCG or any of its Subsidiaries
leases from other Persons material amounts of real or personal property are in
good standing, valid and effective in accordance with their respective terms,
and there is not, to the Knowledge of RCG, under any of such leases, any
existing material default or event of default (or event which, with notice or
lapse of time, or both, would constitute a material default) except where lack
of such good standing, validity and effectiveness or the existence of such
default or event of default would not reasonably be expected to have an RCG
Material Adverse Effect.
SECTION 8.6. Subsidiaries. The RCG Disclosure Schedule sets forth for
each Subsidiary of RCG (a) its name and jurisdiction of incorporation, (b) the
number of shares of authorized capital stock of each class of its capital stock,
(c) the number of issued and outstanding shares of each class of its capital
stock, the names of the holders thereof, and the number of shares held by each
such holder, and (d) the number of shares of its capital stock held in treasury.
All of the issued and outstanding shares of capital stock of each Subsidiary of
RCG have been duly authorized and are validly issued, fully paid, and
nonassessable and were issued in accordance with applicable federal and state
securities laws. RCG holds of record and owns beneficially all of the
outstanding shares of each Subsidiary of RCG, free and clear of any restrictions
on transfer (other than restrictions under the Securities Act and state
securities laws), taxes, Security Interests, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. There are no outstanding
or authorized options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
require RCG to sell, transfer, or otherwise dispose of any capital stock of any
of its Subsidiaries or that could require any such Subsidiary to issue, sell, or
otherwise cause to become outstanding any of its own capital stock. There are no
outstanding stock appreciation, phantom stock, profit participation, or similar
rights with respect to any Subsidiary of RCG. There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of any
capital stock of any Subsidiary of RCG. None of RCG and its Subsidiaries
controls directly or indirectly, or has any direct or indirect equity
participation in, any corporation, partnership, trust, or other business
association which is not a Subsidiary of RCG.
SECTION 8.7. Financial Statements. The RCG Disclosure Schedule includes
the following financial statements of RCG (collectively, the "RCG Financial
Statements"): (a) audited consolidated balance sheets and statements of income,
changes in stockholders' equity, and cash flows as of and for the fiscal year
ended December 31, 1996; (b) audited consolidated balance sheets and statements
of income, changes in stockholders' equity, and cash flows as of and for the
fiscal year ended December 31, 1997 (the "RCG Most Recent Fiscal Year End"); and
(c) unaudited consolidated balance sheets and statements of income and cash
flows (the "RCG Most Recent Financial Statements") as of and for the three
months and year to date period
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ended March 31, 1998 (the "RCG Most Recent Fiscal Month End"). The RCG Financial
Statements (including the notes thereto) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby and
present fairly the consolidated financial condition of RCG as of such dates and
the consolidated results of operations of RCG for such periods; provided,
however, that the RCG Most Recent Financial Statements are subject to normal
recurring adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items. Without limiting the
generality of the foregoing, the RCG Most Recent Financial Statements accurately
reflect anticipated material costs to complete all contracts or services
pursuant to which RCG or any of its Subsidiaries has agreed to furnish products
and services in accordance with GAAP applied on a basis consistent with the RCG
Financial Statements for the RCG Most Recent Fiscal Year End.
SECTION 8.8. Events Subsequent to RCG Most Recent Fiscal Year End. Since
the RCG Most Recent Fiscal Year End, there has not been any RCG Material Adverse
Effect. Without limiting the generality of the foregoing, since that date:
(a) none of RCG or any of its Subsidiaries has sold, leased,
transferred, or assigned any material assets, tangible or intangible,
outside the Ordinary Course of Business;
(b) none of RCG or any of its Subsidiaries has entered into any
material agreement, contract, lease, or license outside the Ordinary Course
of Business;
(c) no party (including RCG or any of its Subsidiaries) has
accelerated, terminated, made material modifications to, or canceled any
material agreement, contract, lease, or license to which RCG or any of its
Subsidiaries is a party or by which any of them is bound;
(d) none of RCG or any of its Subsidiaries has imposed any Security
Interest upon any of its material assets, tangible or intangible;
(e) none of RCG or any of its Subsidiaries has made any material
capital expenditures outside the Ordinary Course of Business;
(f) none of RCG or any of its Subsidiaries has made any material
capital investment in, or any material loan to, any other Person outside
the Ordinary Course of Business;
(g) none of RCG or any of its Subsidiaries has created, incurred,
assumed, or guaranteed more than $50,000 in aggregate indebtedness for
borrowed money (other than amounts outstanding under the DIP Financing) and
capitalized lease obligations;
(h) other than is normal and customary with respect to their
respective businesses, none of RCG or any of its Subsidiaries has granted
any license or sublicense of any material rights under or with respect to
any Intellectual Property;
(i) there has been no change made or authorized in the charter or
bylaws of RCG or any of its Subsidiaries;
(j) none of RCG or any of its Subsidiaries has issued, sold, or
otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon conversion,
exchange or exercise) any of its capital stock;
(k) none of RCG or any of its Subsidiaries has declared, set aside, or
paid any dividend or made any distribution with respect to its capital
stock (whether in cash or in kind) or redeemed, purchased, or otherwise
acquired any of its capital stock;
(l) none of RCG or any of its Subsidiaries has experienced any
material damage, destruction, or loss (whether or not covered by insurance)
to its property;
(m) none of RCG or any of its Subsidiaries has made any loan to, or
entered into any other transaction with, any of its directors, officers,
and employees outside the Ordinary Course of Business;
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(n) none of RCG or any of its Subsidiaries has entered into any
material employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement
outside the Ordinary Course of Business;
(o) none of RCG or any of its Subsidiaries has granted any increase in
the base compensation of any of its directors, officers or employees
outside the Ordinary Course of Business;
(p) none of RCG or any of its Subsidiaries has adopted, amended,
modified, or terminated any bonus, profit-sharing, incentive, severance, or
other plan, contract, or commitment for the benefit of any of its
directors, officers, and employees (or taken any such action with respect
to any other Employee Benefit Plan);
(q) none of RCG or any of its Subsidiaries has made any other material
change in employment terms for any of its directors, officers, and
employees outside the Ordinary Course of Business; and
(r) none of RCG or any of its Subsidiaries has committed to any of the
foregoing.
SECTION 8.9. Undisclosed Liabilities. None of RCG or any of its
Subsidiaries has any material liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, and whether due or to
become due, including any liability for taxes), except for (a) liabilities set
forth in the RCG Most Recent Balance Sheet, (b) liabilities which have arisen
since the date of RCG Most Recent Balance Sheet in the Ordinary Course of
Business, and (c) liabilities disclosed or provided for in the Plan to the
extent and in the amounts so disclosed or provided for.
SECTION 8.10. Legal Compliance. Each of RCG and its Subsidiaries has
complied with all applicable laws (including rules, regulations, codes,
ordinances, plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof), and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced or, to the
Knowledge of RCG, threatened against it alleging any failure so to comply,
except where the failure to comply would not have an RCG Material Adverse
Effect.
SECTION 8.11. Tax Matters. Except with respect to any such matters that
would not, in the aggregate, have an RCG Material Adverse Effect, (a) each of
RCG and its Subsidiaries has duly filed all federal and state income Tax Returns
and all other material Tax Returns (including those filed on a consolidated,
combined or unitary basis) required to have been filed by RCG or any of its
Subsidiaries prior to the date hereof and will file, on or before the Effective
Time, all such returns which are required to be filed after the date hereof and
on or before the Effective Time, (b) all of the foregoing returns and reports
are true and correct in all material respects, and each of RCG and its
Subsidiaries has paid or, prior to the Effective Time, will pay all Taxes
required to be paid in respect of the periods covered by such returns or reports
to any federal, state, foreign, local or other taxing authority, (c) each of RCG
and its Subsidiaries has paid or made adequate provision in the RCG Financial
Statements for all Taxes payable in respect of all periods ending on or prior to
December 31, 1997, (d) neither RCG nor any of its Subsidiaries will have any
material liability for any Taxes in excess of the amounts so paid or reserves so
established or is delinquent in the payment of any material Tax, assessment or
governmental charge, and none of them has requested any extension of time within
which to file any returns in respect of any fiscal year which have not since
been filed, (e) no deficiencies for any tax, assessment or governmental charge
have been proposed, asserted or assessed in writing (tentatively or definitely),
in each case, by any taxing authority, against RCG or any of its Subsidiaries
for which there are not adequate reserves in the RCG Most Recent Balance Sheet,
(f) as of the date of this Agreement, there are no extensions or waivers or
pending requests for extensions or waivers of the time to assess or collect any
such Tax, (g) the federal income Tax Returns of RCG have not been audited, (h)
neither RCG nor any of its Subsidiaries is nor has been a party to any tax
sharing agreement with any corporation which is not currently a member of the
affiliated group of which RCG is currently a member, (i) there are no liens for
Taxes on any assets of RCG or any of its Subsidiaries (other than statutory
liens for taxes not yet due or liens for which adequate reserves have been
established in the RCG Financial Statements, (j) each of RCG and its
Subsidiaries has withheld and paid (and until the Effective Time will withhold
and pay) all income, social security, unemployment, and all other material
payroll Taxes required to be withheld
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(including pursuant to Sections 1441 and 1442 of the Code or similar provisions
under foreign law) and paid by it in connection with amounts paid to any
employee, independent contractor, stockholder, creditor or other third party,
and (k) RCG has not filed an election under Section 341(f) of the Code to be
treated as a consenting corporation.
SECTION 8.12. Real Property
8.12.1. Neither RCG nor any of its Subsidiaries owns any real property.
8.12.2. To the knowledge of RCG, the RCG Disclosure Schedule lists and
describes briefly all real property leased or subleased to RCG or its
Subsidiaries. RCG shall deliver to World Access concurrent with the delivery of
the RCG Disclosure Schedule correct and complete copies of the leases and
subleases listed on the RCG Disclosure Schedule (as amended to date). With
respect to each material lease and sublease listed on the RCG Disclosure
Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect in all material respects;
(b) no party to the lease or sublease is in material breach or
default, and no event has occurred which, with notice or lapse of time,
would constitute a material breach or default or permit termination,
modification, or acceleration thereunder;
(c) no party to the lease or sublease has repudiated any material
provision thereof;
(d) there are no material disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(e) neither RCG nor any of its Subsidiaries has assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
(f) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including material licenses and
permits) required in connection with the operation thereof, and have been
operated and maintained in accordance with applicable laws, rules, and
regulations in all material respects.
SECTION 8.13. Intellectual Property
8.13.1. Each of RCG and its Subsidiaries owns, or is licensed or otherwise
possesses legally enforceable rights to use, all patents, trade secrets,
trademarks, trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or applications, and
tangible or intangible proprietary information or material that are used in its
business as currently conducted, except as would not reasonably be expected to
have an RCG Material Adverse Effect.
8.13.2. Except as would not reasonably be expected to have an RCG Material
Adverse Effect (a) neither RCG nor any of its Subsidiaries is or will be, as a
result of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any Third-Party Intellectual Property
Rights; (b) no claims with respect to the patents, registered and material
unregistered trademarks and service marks, registered copyrights, trade names
and any applications therefor owned by RCG or any of its Subsidiaries (the "RCG
Intellectual Property Rights"), any trade secret material to RCG, or Third Party
Intellectual Property Rights to the extent arising out of any use, reproduction
or distribution of such Third Party Intellectual Property Rights by or through
RCG or any of its Subsidiaries, are currently pending or, to the Knowledge of
RCG, are overtly threatened by any Person; and (c) RCG does not know of any
valid ground for any bona fide claims (i) to the effect that the manufacture,
sale, licensing or use of any product as now used, sold or licensed or proposed
for use, sale or license by RCG or any of its Subsidiaries infringes on any
copyright, patent, trademark, service mark or trade secret, (ii) against the use
by RCG or any of its Subsidiaries of any trademarks, trade names, trade secrets,
copyrights, patents, technology, know-how or computer software programs and
applications used in the business of RCG or any of its Subsidiaries as currently
conducted or as proposed to be conducted, (iii) challenging the ownership,
validity or effectiveness of the RCG Intellectual
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Property Rights or other trade secret material to RCG, or (iv) challenging the
license or legally enforceable right to use of the Third Party Intellectual
Rights by RCG or any of its Subsidiaries.
8.13.3. To the Knowledge of RCG, all material patents, registered
trademarks, service marks and copyrights held by RCG and its Subsidiaries are
valid and subsisting. To the knowledge of RCG, there is no material unauthorized
use, infringement or misappropriation of the RCG Intellectual Property by any
third party, including any employee or former employee of RCG or any of its
subsidiaries.
SECTION 8.14. Tangible Assets. The buildings, machinery, equipment, and
other tangible assets that RCG and its Subsidiaries own and lease are free from
material defects (patent and latent), have been maintained in accordance with
normal industry practice, and are in good operating condition and repair
(subject to normal wear and tear).
SECTION 8.15. Inventory. Neither RCG nor any of its Subsidiaries owns any
inventory.
SECTION 8.16. Contracts. The RCG Disclosure Schedule lists the following
contracts and other agreements to which RCG or any of its Subsidiaries is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $25,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of
which will extend over a period of more than one year or involve
consideration in excess of $25,000;
(c) any agreement concerning a partnership or joint venture;
(d) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in excess of $100,000 or under
which it has imposed a Security Interest on any of its assets, tangible or
intangible;
(e) any material agreement concerning confidentiality or
noncompetition;
(f) any material agreement with any Affiliates of RCG or any of its
Subsidiaries;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers,
and employees;
(h) any agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis providing annual compensation in
excess of $150,000 or providing material severance benefits;
(i) any agreement under which it has advanced or loaned any amount to
any of its directors, officers, and employees outside the Ordinary Course
of Business;
(j) any agreement under which the consequences of a default or
termination could have an RCG Material Adverse Effect not identified on any
other Schedule hereto; and
(k) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $25,000.
RCG shall deliver to World Access concurrent with the delivery of the RCG
Disclosure Schedule or make available for World Access's review a correct and
complete copy of each written agreement listed in the RCG Disclosure Schedule
(as amended to date), which shall be deemed to be Schedules for purposes of
Section 15.12 hereof, and a written summary setting forth the material terms and
conditions of each oral agreement referred to in the RCG Disclosure Schedule.
Except as set forth on the RCG Disclosure Schedule, to the Knowledge of RCG,
with respect to each such agreement: (a) the agreement is legal, valid, binding,
enforceable, and in full force and effect in all material respects; (b) no party
is in material breach or default, and no event has occurred which with notice or
lapse of time would constitute a material breach or default, or
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permit termination, modification, or acceleration, under the agreement; and (c)
no party has repudiated any material provision of the agreement.
SECTION 8.17. Notes and Accounts Receivable. All notes and accounts
receivable of each of RCG and its Subsidiaries are reflected properly on its
books and records, are valid receivables, are current and collectible, and will
be collected in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the RCG Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for operations and
transactions through the Closing Date in the Ordinary Course of Business of RCG.
SECTION 8.18. Insurance. Each of RCG and its Subsidiaries has been and is
insured with respect to its properties and conduct of its business in such
amounts and against such risks as are reasonable in relation to its business and
will maintain such insurance at least through the Effective Time.
SECTION 8.19. Litigation. Except for the Chapter 11 Case and the
proceedings brought to enforce or determine the Allowed Claims and the Disputed
Claims and other than orders of the Bankruptcy Court, neither RCG nor any of its
Subsidiaries (a) is subject to any outstanding injunction, judgment, order,
decree, ruling, or charge or (b) is a party or, to the Knowledge of RCG, is
threatened to be made a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator, and to the Knowledge of RCG, no reasonable basis therefor exists.
SECTION 8.20. Employees. To the Knowledge of RCG, no executive, key
employee, or significant group of employees plans to terminate employment with
RCG or its Subsidiaries during the next six months. Neither RCG nor any of its
Subsidiaries is a party to or bound by any collective bargaining agreement, nor
has it experienced any strike or material grievance, claim of unfair labor
practices, or other collective bargaining dispute within the past three years.
SECTION 8.21. Employee Benefits
8.21.1. The RCG Disclosure Schedule lists all RCG Plans. With respect to
each RCG Plan, RCG has made available to World Access a true, correct and
complete copy of: (a) each writing constituting a part of such RCG Plan,
including all plan documents, benefit schedules, trust agreements, and insurance
contracts and other funding vehicles; (b) the most recent Annual Report (Form
5500 Series) and accompanying schedule, if any; (c) the current summary plan
description, if any; (d) the most recent annual financial report, if any; and
(e) the most recent determination letter from the Internal Revenue Service, if
any.
8.21.2. The Internal Revenue Service has issued a favorable determination
letter or opinion letter with respect to each RCG Plan that is intended to be a
"qualified plan" within the meaning of Section 401(a) of the Code (a "Qualified
RCG Plan") and there are no existing circumstances nor any events that have
occurred that could adversely affect the qualified status of any Qualified RCG
Plan or the related trust.
8.21.3. All contributions required to be made to any RCG Plan by applicable
Law or by any plan document or other contractual undertaking, and all premiums
due or payable with respect to insurance policies funding any RCG Plan, for any
period through the date hereof have been timely made or paid in full and through
the Closing Date will be timely made or paid in full or, to the extent not
required to be made or paid on or before the date hereof or the Closing Date, as
applicable, have been or will be fully reflected in the RCG Financial
Statements.
8.21.4. Each of RCG and its Subsidiaries has complied, and is now in
compliance, in all material respects, with all provisions of ERISA, the Code and
all laws and regulations applicable to the RCG Plans. There is not now, and
there are no existing circumstances that standing alone could give rise to, any
requirement for the posting of security with respect to an RCG Plan or the
imposition of any lien on the assets of RCG under ERISA or the Code.
8.21.5. No RCG Plan is subject to Title IV or Section 302 of ERISA or
Section 412 or 4971 of the Code. No RCG Plan is Multi-employer Plan or a
Multiple Employer Plan, nor has RCG, nor any of its ERISA
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Affiliates, at any time within five years before the date hereof, contributed to
or been obligated to contribute to any Multi-employer Plan or Multiple Employer
Plan.
8.21.6. There does not now exist, and there are no existing circumstances
that could result in, any Controlled Group Liability that would be a liability
of RCG or any of its Subsidiaries following the Closing, other than normal
funding responsibilities. Without limiting the generality of the foregoing,
neither RCG nor any of its ERISA Affiliates, has engaged in any transaction
described in Section 4069 or Section 4204 of ERISA.
8.21.7. Except for health continuation coverage as required by Section
4980B of the Code or Part 6 of Title I of ERISA, neither RCG nor any of it
Subsidiaries has any liability for life, health, medical or other welfare
benefits to former employees or beneficiaries or dependents thereof.
8.21.8. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in, cause the
accelerated vesting or delivery of, or increase the amount or value of, any
payment or benefit to any employee or director or former employee or former
director of RCG or any of its Subsidiaries, pursuant to a "change in control" or
"change of control" or otherwise. Without limiting the generality of the
foregoing, no amount paid or payable by RCG or any of its Subsidiaries in
connection with the transactions contemplated hereby either solely as a result
thereof or as a result of such transactions in conjunction with any other events
will be an "excess parachute payment" within the meaning of Section 280G of the
Code.
8.21.9. There are no pending or, to the Knowledge of RCG, threatened claims
(other than claims for benefits in the ordinary course), lawsuits or
arbitrations which have been asserted or instituted against the RCG Plans, any
fiduciaries thereof with respect to their duties to the RCG Plans or the assets
of any of the trusts under any of the RCG Plans which could reasonably be
expected to result in any material liability of RCG to the PBGC, the Department
of Treasury, the Department of Labor or any Multi-employer Plan.
SECTION 8.22. Guaranties. Other than claims against RCG in the Bankruptcy
Case, neither RCG nor any of its Subsidiaries is a guarantor or otherwise is
responsible for any liability or obligation (including indebtedness) of any
other Person.
SECTION 8.23. Environment, Health, and Safety
8.23.1. Each of RCG and its Subsidiaries: (a) has complied with the
Environmental, Health, and Safety Laws in all material respects, and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or
notice has been filed or commenced against any of them alleging any such failure
to comply; (b) has obtained and has at all times been and is in substantial
compliance with all of the terms and conditions of all permits, licenses, and
other authorizations, certifications and training which are required under any
of the Environmental, Health, and Safety Laws; (c) has complied in all material
respects with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules, and timetables which are
contained in the Environmental, Health, and Safety Laws; and (d) will provide
World Access within ten Business Days hereof, with copies within its possession
or control of all environmental assessments, complaints, claims, consent orders
or agreements, notices of violations, governmental inquiries and permits issued
or arising under or subject or relating or pursuant to any Environmental, Health
and Safety Laws for any property owned, now or in the past or to be acquired
prior to Closing, by RCG or any of its Subsidiaries, and such copies shall be
deemed to be Schedules for purposes of Section 15.12 hereof.
8.23.2. Neither RCG nor any of its Subsidiaries has any material liability,
and neither RCG nor any of its Subsidiaries or any of their respective
predecessors has handled or disposed of any substance, arranged for the disposal
of any substance, exposed any employee or other individual to any substance or
condition, or owned or operated any property or facility in any manner that
could give rise to any material liability, for contamination or damage to any
site, location, or body of water (surface or subsurface), for any illness of or
personal injury to any employee or other individual, or for any reason under any
Environmental, Health, and Safety Law.
SECTION 8.24. Proxy Statement. None of the information supplied or to be
supplied by or on behalf of RCG or any of its Subsidiaries for inclusion or
incorporation by reference in the Proxy Statement will, at
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the date mailed to the stockholders of New World Access, and at the time of the
meeting of stockholders of New World Access to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE 9.
COVENANTS
SECTION 9.1. Conduct of Business of RCG and its Subsidiaries. During the
period from the date of this Agreement to the Effective Time, except as
expressly contemplated by any other provision of this Agreement or except as
authorized by Bankruptcy Court order, each of RCG and its Subsidiaries shall (a)
conduct its business in the Ordinary Course or as permitted by the Bankruptcy
Court; (b) use its best efforts to maintain and preserve intact its business
organization, employees, goodwill with customers and advantageous business
relationships and retain the services of its officers and key employees; and (c)
except as required by law, regulation or Bankruptcy Court order, take no action
which would adversely affect or delay the ability of any Party to obtain any
Consent from any Regulatory Authorities or other approvals required for the
consummation of the transactions contemplated hereby or to perform its covenants
and agreements under this Agreement. By way of amplification and not limitation,
except as expressly contemplated by any other provision of this Agreement or
except as authorized by Bankruptcy Court order, neither RCG nor any of its
Subsidiaries shall, between the date of this Agreement and the Effective Time,
directly or indirectly, do, or agree to do, any of the following without the
prior written consent of World Access, which consent shall not be unreasonably
withheld or delayed:
(a) amend or otherwise change its charter or bylaws or equivalent
organizational documents;
(b) issue, sell, pledge, dispose of, grant, transfer, lease, license,
guarantee or encumber, or authorize the issuance, sale, pledge,
disposition, grant, transfer, lease, license or encumbrance of (i) any
shares of capital stock of RCG or any of its Subsidiaries of any class, or
securities convertible into or exchangeable or exercisable for any shares
of such capital stock, or any options, warrants or other rights of any kind
to acquire any shares of such capital stock, or any other ownership
interest of RCG or any of its Subsidiaries, or (ii) other than in the
Ordinary Course, any property or assets of RCG or any of its Subsidiaries;
(c) (i) except for amounts of DIP Financing not in excess of
$25,000,000, incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any Person for
borrowed money or make any loans or advances, (ii) other than in the
Ordinary Course, terminate, cancel or request any material change in, or
agree to any material change in, any contract or agreement listed in the
RCG Disclosure Schedule or enter into any contract or agreement material to
its business, results of operations or financial condition, (iii) make or
authorize any capital expenditure, other than capital expenditures in the
Ordinary Course that have been budgeted for calendar year 1998 and
disclosed to World Access that are not, in the aggregate, in excess of
$2,500,000, or (iv) enter into or amend any contract, agreement, commitment
or arrangement that, if fully performed, would not be permitted under this
Section 9.1;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(f) amend the terms of, repurchase, redeem or otherwise acquire any of
its securities or propose to do any of the foregoing;
(g) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than pursuant to Bankruptcy Court order or the payment,
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discharge or satisfaction in the Ordinary Course of Business of liabilities
reflected or reserved against on the RCG most recent Balance Sheet and only
to the extent of such reserves;
(h) take any action with respect to accounting policies or procedures,
other than actions in the ordinary course of business consistent with past
practice or as required by GAAP;
(i) make any tax election or settle or compromise any material
federal, state or local United States income tax liability, or any income
tax liability of any other jurisdiction, other than those made in the
Ordinary Course of Business consistent with past practice and those for
which specific reserves have been recorded on the RCG Most Recent Balance
Sheet and only to the extent of such reserves;
(j) enter into or amend any contract, agreement, commitment or
arrangement with, or enter into any transaction with, or make any payment
to or on account or behalf of, any Affiliate of RCG or any of its
Subsidiaries; or
(k) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of RCG
contained in this Agreement untrue or incorrect or prevent RCG from
performing or cause RCG not to perform its covenants hereunder or result in
any of the conditions to the Merger set forth herein not being satisfied.
SECTION 9.2. Conduct of World Access and its Subsidiaries. During the
period from the date of this Agreement to the Effective Time, except for any
actions taken by World Access or New World Access relating to any other
acquisitions or business combinations with a non-Affiliate or as expressly
contemplated by any other provision of this Agreement, each of World Access and
its Subsidiaries shall (a) conduct its business in the Ordinary Course, (b) use
its best efforts to maintain and preserve intact its business organization,
employees, goodwill with customers and advantageous business relationships and
retain the services of its officers and key employees, and (c) except as
required by law or regulation, take no action which would adversely affect or
delay the ability of any Party to obtain any Consent from any Regulatory
Authorities or other approvals required for the consummation of the transactions
contemplated hereby or to perform its covenants and agreements under this
Agreement. By way of amplification and not limitation, except for any actions
taken by World Access relating to any other acquisitions or business
combinations with a non-Affiliate or as expressly contemplated by any other
provision of this Agreement, neither World Access nor any of its Subsidiaries
shall, between the date of this Agreement and the Effective Time, directly or
indirectly, do, or agree to do, any of the following without the prior written
consent of RCG, which consent shall not be unreasonably withheld or delayed:
(a) amend or otherwise change its charter or bylaws or equivalent
organizational documents;
(b) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except that (i) any Subsidiary may pay
dividends or make other distributions to World Access or any other
Subsidiary and (ii) World Access or New World Access may adopt a rights
plan or "poison pill";
(c) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) sell, transfer, license, sublicense or otherwise dispose of any
material assets having a value in excess of $10,000,000; or
(e) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of World
Access contained in this Agreement untrue or incorrect or prevent World
Access from performing or cause World Access not to perform its covenants
hereunder or result in any of the conditions to the Merger set forth herein
not being satisfied.
SECTION 9.3. Access to Books and Records. Each of the Parties will, and
World Access and RCG will cause each of their respective Subsidiaries to, permit
representatives of the other Parties to have
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reasonable access at all reasonable times, and in a manner so as not to
interfere with the normal business operations, to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to each of the Parties and their Subsidiaries in accordance with
reasonable procedures required by the Parties that are designed to minimize the
impact on each Party's business. Each of the Parties will treat and hold as such
any Confidential Information it receives from any of the Parties and their
Subsidiaries in the course of the reviews contemplated by this Section, will not
use any of the Confidential Information except in connection with this
Agreement, and, if this Agreement is terminated for any reason whatsoever,
agrees to return all tangible embodiments (and all copies thereof), to whichever
of the Parties that originally disclosed such embodiments, which are in its
possession.
SECTION 9.4. Approval of Stockholders of New World Access. Promptly
following the consummation of the Holding Company Reorganization, New World
Access will take all steps necessary under applicable law and its certificate of
incorporation and bylaws to call, give notice of, convene and hold a meeting of
its stockholders for the purpose of approving this Agreement and the Merger and
for such other purposes consistent with the complete performance of this
Agreement as may be necessary or desirable. Unless the Board of Directors of New
World Access determines in good faith, based upon advice of its outside counsel,
that such recommendation would violate its fiduciary duties to its stockholders,
the Board of Directors of New World Access will recommend to its stockholders
the approval of this Agreement, the Merger and the transactions contemplated
hereby and will use its best efforts to obtain the necessary approvals by its
stockholders of this Agreement, the Merger and the transactions contemplated
hereby.
SECTION 9.5. Preparation of Proxy Statement. In connection with the
meeting of its stockholders to be held pursuant to Section 9.4 hereof, New World
Access shall promptly prepare a proxy statement for submission to its
stockholders (the "Proxy Statement"). RCG shall promptly furnish New World
Access with all information concerning its business and financial statements and
affairs which, in the reasonable judgment of New World Access or its counsel,
may be required or appropriate for inclusion in the Proxy Statement and shall
take such other action as they may reasonably request in connection with the
Proxy Statement. New World Access shall provide, and is responsible for, all
such information related to New World Access and Merger Sub, and RCG shall
provide, and is responsible for, all such information related to RCG. Once the
Proxy Statement has been authorized for mailing either by notice from the SEC or
by the lapse of time for review and comment by the SEC, New World Access shall
thereafter promptly mail to its stockholders the Proxy Statement in definitive
form (as amended or supplemented). Each of New World Access and RCG shall also
take such other reasonable actions as may be required to be taken under any
applicable state securities laws in connection with the issuance of shares of
New World Access Stock and the transactions contemplated by this Agreement.
SECTION 9.6. Affiliates. Prior to the Closing Date, RCG shall deliver to
New World Access a letter identifying all Persons who are, at the time this
Agreement is submitted for approval to the stockholders of New World Access,
"affiliates" of RCG for purposes of Rule 145 under the Securities Act. RCG shall
use its best efforts to cause each such "affiliate" to deliver to New World
Access on or prior to the Closing Date a written agreement substantially in the
form attached as Exhibit "A."
ARTICLE 10.
ADDITIONAL AGREEMENTS
SECTION 10.1. Best Efforts; Cooperation. Subject to the terms and
conditions herein provided, each of the Parties agrees to use its best efforts
promptly to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, or otherwise, including attempting to obtain all necessary
Consents, to consummate and make effective, as soon as practicable, the
transactions contemplated by this Agreement. Nothing in this Section 10.1 or
elsewhere in this Agreement shall be construed to require RCG, its shareholders
or agents to act in any manner inconsistent with Applicable Bankruptcy Law or
any of their respective duties thereunder.
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SECTION 10.2. Regulatory Matters
10.2.1. Following the execution and delivery of this Agreement, World
Access and RCG shall cause to be prepared and filed all required applications
and filings with the Regulatory Authorities which are necessary or contemplated
for the obtaining of the Consents of the Regulatory Authorities and the
consummation of the Merger, including any Consents required to be obtained under
the HSR Act or the Communications Act or from any state public service
commission ("PUC"). Such applications and filings shall be in such form as may
be prescribed by the respective government agencies and shall contain such
information as they may require. The Parties hereto will cooperate with each
other and use reasonable efforts to prepare and execute all necessary
documentation, to effect all necessary or contemplated filings and to obtain all
necessary or contemplated Consents of the Regulatory Authorities and third
parties which are necessary or contemplated to consummate the transactions
contemplated by this Agreement, including the stockholders of New World Access.
Each of the Parties shall have the right to review and approve in advance, which
approval shall not be unreasonably withheld, any filing made with, or written
material submitted to, any Regulatory Authority in connection with the
transactions contemplated by this Agreement.
10.2.2. Each Party will furnish the other Parties with all information
concerning itself, its Subsidiaries, directors, officers and stockholders, as
applicable, and such other matters as may be necessary or advisable in
connection with any statement or application made by or on behalf of any such
Party to any governmental body in connection with the transactions, applications
or filings contemplated by this Agreement. Upon request, the Parties hereto will
promptly furnish each other with copies of written communications received by
them or their respective Subsidiaries from, or delivered by any of the foregoing
to, any governmental body in respect of the transactions contemplated hereby.
SECTION 10.3. Indemnification Regarding the Proxy Statement. New World
Access, with respect to RCG, and RCG, with respect to New World Access, agree to
indemnify, defend and hold harmless the other, their respective Subsidiaries,
and each of their respective present and former officers, directors, employees
and agents, from and against all losses, expenses, claims, damages or
liabilities to which any of them may become subject under applicable laws
(including the Exchange Act), and will reimburse each of them for any legal,
accounting or other expenses reasonably incurred in connection with
investigating or defending any such actions, whether or not resulting in
liability, insofar as such losses, expenses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of material fact provided by the indemnifying Party and contained in the Proxy
Statement or arise out of or are based upon the omission or alleged omission by
the indemnifying Party to state therein a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 10.4. Notice of Developments. Each of the Parties will give
prompt written notice to other Parties of any material adverse development that
causes or is likely to cause a material breach of any of its representations and
warranties contained in this Agreement. Such disclosure by any Party pursuant to
this Section shall be deemed to amend or supplement any disclosure contained in
the Schedules attached hereto to prevent or cure any misrepresentation, breach
of warranty, or breach of covenant.
SECTION 10.5. Notices and Consents. Each of the Parties will give any
notices (and will cause each of the Parties within their control to give any
notices) to third parties, and will use their reasonable efforts to obtain (and
will cause each of the Parties within their control to use their reasonable
efforts to obtain) any third-party consents that may be required to consummate
the transactions contemplated hereby.
SECTION 10.6. Indemnity
10.6.1. New World Access shall cause the Surviving Corporation to keep in
effect provisions of its articles of incorporation and bylaws providing for
exculpation of director and officer liability and its indemnification of each
Person who is now an officer or director of RCG to the fullest extent permitted
under the IBCA which provisions shall not be amended except as required by
applicable law or except to make changes permitted by law that would enlarge
such Persons' right of indemnification. The provisions of this
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Section shall survive the consummation of the Merger and expressly are intended
to benefit each Person who is now an officer or director of RCG.
SECTION 10.7. Offers of Employment. At the Closing, New World Access
shall execute and deliver to each of Steven A. Odom, John D. Phillips, Hensley
E. West, Mark A. Gergel and W. Tod Chmar an executive employment agreement in
substantially the form attached hereto as Exhibit "B".
SECTION 10.8. Exclusive Dealing
10.8.1. RCG shall not, nor shall it authorize or permit any officer,
director of employee of, or any attorney or other advisor or representative of,
RCG to, (i) solicit or initiate, or encourage the submission of, any Acquisition
Proposal or (ii) participate in any discussions or negotiations regarding, or
furnish to any Person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal.
10.8.2. The Board of Directors of RCG shall not (i) approve or recommend,
or propose to approve or recommend, any Acquisition Proposal or (ii) enter into
any type of agreement or letter of intent with respect to any Acquisition
Proposal.
10.8.3. If an Acquisition Proposal shall have been made prior to the
termination of this Agreement and RCG at any time thereafter consummates a
transaction contemplated by or resulting from such Acquisition Proposal, then
RCG shall pay, or cause to be paid, in same day funds, to World Access, upon
demand, all of the costs and expenses incurred by World Access in connection
with this Agreement, including fees and expenses of its financial advisors,
accountants and counsel (the "Expenses"), plus the sum of $5,000,000 (the
"Termination Fee"). The Parties acknowledge that damages in the event of a
breach of this Section 10.8 will be difficult to ascertain and that the Expenses
and the Termination Fee are intended to be full liquidated damages and such
damages represent the Parties' best estimate of such damages. RCG will recommend
that the Bankruptcy Court approve the payment of the Expenses and the
Termination Fee. The parties expressly acknowledge that the foregoing liquidated
damages are intended not as a penalty but as full liquidated damages in the
event of a breach of this Section 10.8, and World Access acknowledges the
Expenses and the Termination Fee are its sole and exclusive remedy for a breach
of this Section 10.8.
10.8.4. In addition to the obligations of RCG set forth in Sections 10.8.1,
10.8.2 and 10.8.3 above, RCG shall immediately advise World Access orally and in
writing of any request for information or of any Acquisition Proposal, or any
inquiry with respect to or which could lead to any Acquisition Proposal, the
material terms and conditions of such request, Acquisition Proposal or inquiry,
and the identity of the Person making any Acquisition Proposal or inquiry. RCG
shall keep World Access fully informed of the status and details (including
amendments or proposed amendments) of any such request, Acquisition Proposal or
inquiry.
10.8.5. Notwithstanding anything in Sections 10.8.1 and 10.8.2 to the
contrary, nothing contained in this Section 10.8 shall prohibit the Board of
Directors of RCG from furnishing information to, or entering into discussions or
negotiations or an agreement with, any Person or entity who has made an
unsolicited Acquisition Proposal if the Board of Directors of RCG determines in
its good faith judgment, based upon a written opinion of its independent
counsel, that such action is required for it to comply with its fiduciary duties
to RCG shareholders under applicable law or to otherwise comply with Applicable
Bankruptcy Law or any order of the Bankruptcy Court.
SECTION 10.9. Bankruptcy Court Approval. Subject to Applicable Bankruptcy
Law, RCG shall use its best efforts to obtain Bankruptcy Court approval of the
Plan. Notwithstanding the foregoing, neither RCG nor any of its directors,
officers, attorneys or agents shall have any liability to World Access or New
World Access if the Plan is not confirmed other than as provided in Section
10.8.3 above.
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ARTICLE 11.
MUTUAL CONDITIONS TO CLOSING
The obligations of the Parties to consummate the transactions provided for
herein shall be subject to the satisfaction of the following conditions, unless
any of the following are waived by the Parties:
SECTION 11.1. Stockholder Approval. The Merger shall have been approved
by the requisite vote of the stockholders of New World Access.
SECTION 11.2. Regulatory Approvals. All necessary Consents of the
Regulatory Authorities (including the FCC and the PUCs) shall have been obtained
and all notice and waiting periods required by law (including any waiting period
applicable to the Merger under the HSR Act) to pass after receipt of such
Consents shall have been terminated or shall have expired, and all conditions to
consummation of the Merger set forth in such Consents shall have been satisfied.
New World Access shall have received all permits or other authorizations or
confirmations as to the availability of exemptions from registration
requirements under all federal and state securities laws as may be necessary to
issue shares of New World Access Stock pursuant to this Agreement.
SECTION 11.3. Litigation. There shall be no actual or threatened causes
of action, investigations or proceedings (a) challenging the validity or
legality of this Agreement or the consummation of the transactions contemplated
by this Agreement; (b) seeking damages in connection with the transactions
contemplated by this Agreement; or (c) seeking to restrain or invalidate the
transactions contemplated by this Agreement, which, in the case of (a) through
(c), and in the reasonable judgment of New World Access and RCG, based upon
advice of counsel, would have a material adverse effect with respect to the
interests of New World Access and RCG, as the case may be.
SECTION 11.4. Proxy Statement. The Proxy Statement shall have been filed
with the SEC for review and comment and shall have been authorized for mailing,
either by notice from the SEC or the lapse of time for review and comment by the
SEC.
SECTION 11.5. Consummation of Holding Company Reorganization. The Holding
Company Reorganization shall have been consummated.
SECTION 11.6. Resignations. New World Access shall have received the
resignations, effective as of the Closing, of each director and officer of RCG,
other than those whom shall have been agreed upon by the Parties as specified in
writing at least 30 days prior to the Closing.
SECTION 11.7. Material Condition. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger by any Regulatory Authority which, in connection with
the grant of any Consent by any Regulatory Authority, imposes, in the judgment
of the Parties any material adverse requirement upon the Parties, or any one of
them, provided that no such term or condition imposed by any Regulatory
Authority in connection with the grant of any Consent by any Regulatory
Authority shall be deemed to be a material adverse requirement unless it
materially differs from terms and conditions customarily imposed by any such
entity in connection with the acquisition of corporations under similar
circumstances.
SECTION 11.8. Consents. All Consents of third parties required in
connection with the transactions contemplated hereby shall have been obtained,
except where the failure to obtain such Consents, in the aggregate, would not
reasonably be expected to result in a World Access Material Adverse Effect or an
RCG Material Adverse Effect, provided that a Party which has not used all
reasonable efforts to obtain a Consent may not assert this condition with
respect to such Consent.
SECTION 11.9. Bankruptcy Court approval. The Bankruptcy Court shall have
entered the Order, and the Order shall have become a Final Order.
SECTION 11.10 NASDAQ Listing. The shares of New World Access Stock to be
issued hereunder shall have been approved upon official notice of issuance for
quotation on NASDAQ or listing on a national securities exchange agreed upon by
the Parties in writing prior to the Closing.
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SECTION 11.11. U.K. Acquisition Transaction. The U.K. Acquisition shall
have been consummated.
ARTICLE 12.
CONDITIONS TO THE OBLIGATIONS OF NEW WORLD ACCESS
The obligations of New World Access to consummate the Merger are subject to
the fulfillment of each of the following conditions, unless waived by World
Access or New World Access:
SECTION 12.1. Representations and Warranties. The representations and
warranties of RCG set forth in this Agreement and in any certificate or document
delivered pursuant hereto shall be true and correct in all material respects as
of the date of this Agreement and as of all times up to and including the
Effective Time (as though made on and as of the Effective Time except to the
extent such representations and warranties are by their express provisions made
as of a specified date and except for changes therein contemplated by this
Agreement).
SECTION 12.2. Performance of Obligations. RCG shall have performed all
covenants, obligations and agreements required to be performed by it under this
Agreement prior to the Effective Time.
SECTION 12.3. Certificate Representing Satisfaction of Conditions. RCG
shall have delivered to New World Access a certificate dated as of the Closing
Date as to the satisfaction of the matters described in Sections 12.1 and 12.2
hereof, and such certificate shall be deemed to constitute additional
representations, warranties, covenants, and agreements of RCG under this
Agreement.
SECTION 12.4. Material Adverse Change. Since the date of this Agreement,
there shall not have been any RCG Material Adverse Effect.
SECTION 12.5. Tax Opinion. New World Access shall have received an
opinion, dated the Closing Date, from Rogers & Hardin LLP, based upon customary
representations and warranties, to the effect that no gain or loss will be
recognized by New World Access, RCG or Merger Sub as a result of the Merger.
SECTION 12.6. Legal Opinion. New World Access shall have received an
opinion, dated the Closing Date, from Katten Muchin & Zavis, bankruptcy counsel
to RCG, covering such matters relating to the Chapter 11 Case as shall be
reasonably requested by New World Access.
SECTION 12.7. Carrier Service Agreement. RCG shall have entered into a
Carrier Service Agreement with WNSI in substantially the form attached hereto as
Exhibit "C".
SECTION 12.8. Operating Performance of RCG. RCG's gross revenues for the
calendar month immediately preceding the Closing Date shall be no less than
$25.0 million, and its gross profit margin for such month shall be no less than
5.0%.
SECTION 12.9. Approval of Plan and Order. Each of the Plan and the Order
(which shall have become a Final Order) shall be acceptable to New World Access.
SECTION 12.10. Net Operating Losses. There shall have been no
determination by New World Access that facts, events or conditions arising or
occurring, or of which New World Access becomes aware, after the date of this
Agreement could reasonably be expected to materially limit the Surviving
Corporation's ability to utilize net operating losses of RCG incurred before the
Effective Time to offset, for federal income tax purposes, at least $125,000,000
of otherwise taxable income of the Surviving Corporation after the Effective
Time.
SECTION 12.11. Net Worth. At the Effective Time, RCG shall have a
positive tangible net worth.
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ARTICLE 13.
CONDITIONS TO OBLIGATIONS OF RCG
The obligations of RCG to consummate the Merger are subject to the
fulfillment of each of the following conditions, unless waived by RCG:
SECTION 13.1. Representations and Warranties. The representations and
warranties of the other Parties set forth in this Agreement and in any
certificate or document delivered pursuant hereto shall be true and correct in
all material respects as of the date of this Agreement and as of all times up to
and including the Effective Time (as though made on and as of the Effective Time
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for changes therein
contemplated by this Agreement).
SECTION 13.2. Performance of Obligations. Each of the other Parties shall
have performed all covenants, obligations and agreements required to be
performed by it under this Agreement prior to the Effective Time.
SECTION 13.3. Certificate Representing Satisfaction of Conditions. All
other Parties shall each have delivered to RCG a certificate dated as of the
Closing Date as to the satisfaction of the matters described in Sections 13.1
and 13.2 hereof, and such certificates shall be deemed to constitute additional
representations, warranties, covenants, and agreements of the other Parties
under this Agreement.
SECTION 13.4. Material Adverse Change. Since the date of this Agreement,
there shall not have been any World Access Material Adverse Effect.
SECTION 13.5. Approval of Plan and Order. Each of the Plan and the Order
(which shall have become a Final Order) shall be reasonably acceptable to RCG.
ARTICLE 14.
TERMINATION
SECTION 14.1. Termination of Agreement. This Agreement may be terminated
at any time prior to the Closing:
(a) by mutual written consent duly authorized by the Boards of
Directors of New World Access and RCG at any time prior to the Effective
Time; or
(b) by World Access or New World Access at any time prior to the
Effective Time, if (i) there has been a breach of a representation,
warranty, covenant or agreement of RCG, and such breach has not been cured
or is incapable of being cured within 15 days of notice of such breach;
(ii) the Chapter 11 Case shall be dismissed or converted to a case under
Chapter 7 of the Bankruptcy Code or a trustee for RCG shall be appointed by
the Bankruptcy Court, or (iii) either World Access or New World Access
determines in its sole good faith judgment, within thirty (30) days of the
delivery of the RCG Disclosure Schedule, that the exceptions set forth
therein are materially adversely different from the representations and
warranties of RCG in Article 8 hereof, provided that World Access or New
World Access shall inform RCG upon such termination as to the reasons for
its determination; or
(c) by RCG at any time prior to the Effective Time, if (i) there has
been a breach of a representation, warranty, covenant, or agreement of
World Access or New World Access, and such breach has not been cured or is
incapable of being cured within 15 days of notice of such breach; or (ii)
RCG determines, in its sole good faith judgment, within thirty (30) days of
the delivery of the World Access Disclosure Schedule, that the exceptions
set forth therein are materially adversely different from the
representations and warranties of World Access, New World Access and Merger
Sub in Article 7 hereof, provided that RCG shall inform World Access and
New World Access upon such termination as to the reasons for its
determination; or
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(d) by New World Access or RCG if the Closing has not occurred by
November 1, 1998, unless extended by mutual written consent duly authorized
by the boards of directors of New World Access and RCG (provided that the
right to terminate this Agreement under this Section shall not be available
to any Party whose failure to perform any material covenant or obligation
or whose breach of a representation or warranty under this Agreement has
been the cause of or resulted in the failure of the Closing to occur on or
before such date); or
(e) by New World Access or RCG if at the meeting of New World Access
stockholders held for such purpose (including any adjournment or
postponement thereof) the requisite vote of the New World Access
stockholders to approve the Merger shall not have been obtained; or
(f) by New World Access or RCG if the Plan is not confirmed by
September 15, 1998 or such later date as the Parties may mutually agree
upon in writing; or
(g) by New World Access or RCG if the U.K. Acquisition Agreement is
terminated pursuant to its terms.
SECTION 14.2. Effect of Termination and Breach. In the event of
termination of this Agreement as provided in Section 14.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of any Party, other than any liability or obligation arising under the
provisions of this Section 14.2 and Sections 10.8.3, 15.3 and 15.13; provided,
however, that in no event shall such termination relieve any Party of liability
for any breach by such Party of any of its covenants and agreements set forth
herein; and further provided, that no Party shall have any liability hereunder
for any breach of a representation or warranty of such Party except to the
extent that such breach shall have been the result of common law fraud,
intentional omission, deliberate concealment or gross negligence.
SECTION 14.3. Confidentiality Upon Termination. In the event of any
termination of this Agreement for any reason, including any breach by any of the
Parties, each Party shall treat as confidential and shall not disclose, or use
directly or indirectly for their benefit or any third party's benefit or to the
detriment of any other Party in any manner whatsoever, or permit others under
their control to disclose, or to use, Confidential Information concerning the
other Parties obtained pursuant to or in connection with the Merger which is not
generally known to the trade or a matter of public knowledge, except as required
by a court of competent jurisdiction, including, without limitation, the
Bankruptcy Court.
SECTION 14.4. Specific Performance. The Parties hereto agree that money
damages or other remedy at law would not be a sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement by them and that
in addition to all other remedies available to them, each of them shall be
entitled to the fullest extent permitted by law to an injunction restraining
such breach, violation or default or threatened breach, violation or default and
to any other equitable relief, including specific performance, without bond or
other security being required.
ARTICLE 15.
GENERAL PROVISIONS
SECTION 15.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Time, except for Section 8.9 hereof to the extent it applies to the period
commencing on the date of the confirmation of the Plan and ending at the
Effective Time which shall survive for a one year period following the Effective
Time. Notwithstanding anything contained herein to the contrary, New World
Access shall be entitled, if it so elects, to set-off any Losses incurred as a
result of the breach of the representations and warranties set forth in Section
8.9 hereof against the shares of Contingent Payment Stock as its sole and
exclusive remedy for any such breach. This Section shall not limit any covenant
or agreement of the Parties which by its terms contemplates performance after
the Effective Time.
SECTION 15.2. Press Releases and Public Announcements. No Party shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement without the prior written
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approval of all of the other Parties; provided, however, that any Party may make
any public disclosure it believes in good faith is required by applicable law
(in which case the disclosing Party will use its best efforts to advise the
other Parties at the earliest possible time prior to making such disclosure).
SECTION 15.3. No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns; provided, however, that the
provisions in Articles 3, 4 and 6 hereof concerning payment of the Merger
Consideration contemplated by this Agreement and certain additional agreements
are intended for the benefit of the stockholders of New World Access and the
creditors of RCG.
SECTION 15.4. Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
SECTION 15.5. Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of all of the other Parties.
SECTION 15.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
SECTION 15.7. Notices. Notices to be given to RCG hereunder shall be in
writing and delivered personally to the designated officer of RCG, transmitted
by facsimile, or deposited in the United States mail, certified and return
receipt requested, postage prepaid, and addressed as follows (or to such other
address as may be specified by RCG in writing):
Resurgens Communications Group 2210 Resurgens Plaza 945 East Paces
Ferry Road Atlanta, Georgia 30326 Attention: Chief Executive Officer
Telephone: (404) 261-6190 Facsimile: (404) 233-2280
with a copy to (which will not constitute notice to RCG):
Long, Aldridge & Norman Suite 5300 One Peachtree Center 303 Peachtree
Street Atlanta, Georgia 30308-3201 Attention: Clay C. Long, Esq. Telephone:
(404) 527-4050 Facsimile: (404) 527-4198
and
Katten Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago,
Illinois 60661-3693 Attention: Mark K. Thomas, Esq. Telephone: (312)
902-5200 Facsimile: (312) 902-1061
Notices to be given to New World Access or Merger Sub hereunder shall
be in writing and delivered personally to the designated officer of New
World Access, transmitted by facsimile, or deposited in the United States
mail, certified and return receipt requested, postage prepaid, and
addressed as follows (or to such other address as may be specified by New
World Access in writing):
WAXS Inc. c/o World Access, Inc. 945 E. Paces Ferry Road Suite 2240
Atlanta, Georgia 30326 Attention: Chief Executive Officer Telephone: (404)
231-2025 Facsimile: (404) 365-9847
with a copy to (which will not constitute notice to New World Access
or Merger Sub):
Rogers & Hardin LLP 2700 International Tower 229 Peachtree Street,
N.E. Atlanta, Georgia 30303 Attention: Steven E. Fox, Esq. Telephone: (404)
420-4603 Facsimile: (404) 525-2224
Notices delivered personally shall be effective upon delivery. Notices
transmitted by facsimile shall be effective when receipt is confirmed.
Notices delivered by mail shall be effective upon the acceptance or
rejection by the Person to whom they are addressed.
SECTION 15.8. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the domestic laws of the State of
Georgia without giving effect to any choice or conflict of law
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<PAGE> 581
provision or rule (whether of the State of Georgia or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Georgia. The Parties hereto agree that (a) any disputes or
disagreements arising from or related to this Agreement arising prior to the
Effective Date shall be submitted to and decided by the Bankruptcy Court, which
shall be the sole and exclusive tribunal and forum for presentation and
resolution of any such matters; and (b) any disputes or disagreements arising
from or related to this Agreement arising on or after the Effective Date shall
be submitted to and decided by any court of competent jurisdiction.
Notwithstanding anything herein to the contrary, the terms, provisions and
conditions hereof and the respective duties of the Parties hereunder are subject
to Applicable Bankruptcy Law.
SECTION 15.9. Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to the approval of this Agreement by the
stockholders of New World Access will be subject to the restrictions contained
in the DGCL. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
SECTION 15.10. Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
SECTION 15.11. Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires.
"Herein", "hereby", "hereunder", "hereof", "hereinbefore, "hereinafter" and
other equivalent words refer to this Agreement as a whole and not solely to the
particular Article or Section in which such word is used. When a reference is
made in this Agreement to a Section or Exhibit, such reference shall be to a
Section of, or an Exhibit to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever any of the words "include", "includes" or "including"
is used in this Agreement, it shall be deemed to be followed by the words
"without limitation".
SECTION 15.12. Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
SECTION 15.13. Transaction Costs. Each of the Parties shall be
responsible for its own expenses in connection with the negotiation of this
Agreement and the consummation of the transactions contemplated hereby,
including those expenses incurred in connection with the Proxy Statement,
attorneys' fees and disbursements, accounting fees and disbursements and
investment banking fees and disbursements.
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<PAGE> 582
IN WITNESS WHEREOF, each of the Parties hereto has caused its duly
authorized officer to execute and deliver this Agreement as of the date first
above written.
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
--------------------------------------
Name: Steven A. Odom
Its: Chairman and CEO
WAXS INC.
By: /s/ STEVEN A. ODOM
--------------------------------------
Name: Steven A. Odom
Its: Chairman and CEO
WA MERGER CORP.
By: /s/ STEVEN A. ODOM
--------------------------------------
Name: Steven A. Odom
Its: Chairman and CEO
CHERRY COMMUNICATIONS
INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP
By: /s/ JOHN D. PHILLIPS
--------------------------------------
Name: John D. Phillips
Its: Chairman and CEO
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EXHIBIT 99.2
SHARE EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION
by and among
WORLD ACCESS, INC.,
WAXS INC.,
CHERRY COMMUNICATIONS U.K. LIMITED
and
RENAISSANCE PARTNERS II
May 12, 1998
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<PAGE> 584
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS........................................................ J-50
Section 1.1. "ACT"....................................................... J-50
Section 1.2. "Acquisition"............................................... J-50
Section 1.3. "Acquisition Proposal"...................................... J-51
Section 1.4. "Adverse Consequences"...................................... J-51
Section 1.5. "Affiliate"................................................. J-51
Section 1.6. "Agreement"................................................. J-51
Section 1.7. "Ancillary Documents"....................................... J-51
Section 1.8. "Business".................................................. J-51
Section 1.9. "Business Day".............................................. J-51
Section 1.10. "Change of Control"......................................... J-51
Section 1.11. "Cherry U.K."............................................... J-52
Section 1.12. "Cherry U.K. Group"......................................... J-52
Section 1.13. "Cherry U.K. Intellectual Property Rights".................. J-52
Section 1.14. "Cherry U.K. Financial Statements".......................... J-52
Section 1.15. "Cherry U.K. Material Adverse Effect"....................... J-52
Section 1.16. "Cherry U.K. Most Recent Balance Sheet"..................... J-52
Section 1.17. "Cherry U.K. Most Recent Financial Statements".............. J-52
Section 1.18. "Cherry U.K. Most Recent Fiscal Month End".................. J-52
Section 1.19. "Cherry U.K. Most Recent Fiscal Year End"................... J-52
Section 1.20. "Cherry U.K. Option"........................................ J-52
Section 1.21. "Cherry U.K. Optionholder".................................. J-52
Section 1.22. "Cherry U.K. Plans"......................................... J-52
Section 1.23. "Cherry U.K. Stock"......................................... J-52
Section 1.24. "Closing"................................................... J-52
Section 1.25. "Closing Date".............................................. J-52
Section 1.26. "Closing Shares"............................................ J-52
Section 1.27. "Code"...................................................... J-53
Section 1.28. "Communications Act"........................................ J-53
Section 1.29. "Companies Act"............................................. J-53
Section 1.30. "Competent Authority"....................................... J-53
Section 1.31. "Confidential Information".................................. J-53
Section 1.32. "Consent"................................................... J-53
Section 1.33. "Consideration"............................................. J-53
Section 1.34. "Contingent Escrowed Option Shares"......................... J-53
Section 1.35. "Controlled Group Liability"................................ J-53
Section 1.36. "DGCL"...................................................... J-53
Section 1.37. "EBITDA".................................................... J-53
Section 1.38. "Effective Time"............................................ J-53
Section 1.39. "Employee Benefit Plan"..................................... J-53
Section 1.40. "Employee Pension Benefit Plan"............................. J-53
Section 1.41. "Employee Welfare Benefit Plan"............................. J-53
Section 1.42. "Environment"............................................... J-54
Section 1.43. "Environmental, Health, and Safety Laws".................... J-54
Section 1.44. "Environmental Laws"........................................ J-54
Section 1.45. "Environmental Matters"..................................... J-54
Section 1.46. "Environmental Permits"..................................... J-54
Section 1.47. "Equivalent Exchange Ratio"................................. J-54
Section 1.48. "ERISA"..................................................... J-54
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1.49. "ERISA Affiliate"........................................... J-54
Section 1.50. "Escrow Agent".............................................. J-54
Section 1.51. "Escrow Agreement".......................................... J-55
Section 1.52. "Escrowed Shares"........................................... J-55
Section 1.53. "Escrowed Option Shares".................................... J-55
Section 1.54. "Exchange Act".............................................. J-55
Section 1.55. "Expenses".................................................. J-55
Section 1.56. "Extra Shares".............................................. J-55
Section 1.57. "FCC"....................................................... J-55
Section 1.58. "Fiduciary"................................................. J-55
Section 1.59. "GAAP"...................................................... J-55
Section 1.60. "HSR Act"................................................... J-55
Section 1.61. "Hazardous Substances"...................................... J-55
Section 1.62. "Holding Company Reorganization"............................ J-55
Section 1.63. "Indemnified Party" and "Indemnified Parties"............... J-55
Section 1.64. "Intellectual Property"..................................... J-55
Section 1.65. "Knowledge"................................................. J-55
Section 1.66. "Losses".................................................... J-55
Section 1.67. "Liens"..................................................... J-55
Section 1.68. "Multi-employer Plan"....................................... J-55
Section 1.69. "Multiple Employer Plan".................................... J-56
Section 1.70. "NACT"...................................................... J-56
Section 1.71. "NASDAQ".................................................... J-56
Section 1.72. "New World Access".......................................... J-56
Section 1.73. "New World Access Option"................................... J-56
Section 1.74. "New World Access Stock".................................... J-56
Section 1.75. "Option Escrow Agent"....................................... J-56
Section 1.76. "Option Escrow Agreement"................................... J-56
Section 1.77. "Ordinary Course" or "Ordinary Course of Business".......... J-56
Section 1.78. "Parties"................................................... J-56
Section 1.79. "Party"..................................................... J-56
Section 1.80. "Performance Period"........................................ J-56
Section 1.81. "Person".................................................... J-56
Section 1.82. "Planning Acts"............................................. J-56
Section 1.83. "Properties"................................................ J-56
Section 1.84. "Proxy Statement"........................................... J-56
Section 1.85. "PUC"....................................................... J-56
Section 1.86. "Qualified Cherry U.K. Plan"................................ J-56
Section 1.87. "Relevant Accounting Standard".............................. J-56
Section 1.88. "Remedial Action"........................................... J-56
Section 1.89. "Regulatory Authority"...................................... J-57
Section 1.90. "Required Consents"......................................... J-57
Section 1.91. "SEC"....................................................... J-57
Section 1.92. "Securities Act"............................................ J-57
Section 1.93. "Security Interest"......................................... J-57
Section 1.94. "Shareholder"............................................... J-57
Section 1.95. "Shareholder Disclosure Schedule"........................... J-57
Section 1.96. "Share Consideration"....................................... J-57
Section 1.97. "Shares".................................................... J-57
Section 1.98. "Subsidiary"................................................ J-57
Section 1.99. "TCGA"...................................................... J-57
</TABLE>
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Section 1.100. "Target EBITDA"............................................. J-57
Section 1.101. "Tax Returns"............................................... J-57
Section 1.102. "Taxes"..................................................... J-57
Section 1.103. "Third-Party Intellectual Property Rights".................. J-58
Section 1.104. "Trading Day"............................................... J-58
Section 1.105. "U.K. GAAP"................................................. J-58
Section 1.106. "U.S. Merger"............................................... J-58
Section 1.107. "U.S. Merger Sub"........................................... J-58
Section 1.108. "VATA"...................................................... J-58
Section 1.109. "Waste"..................................................... J-58
Section 1.110. "World Access".............................................. J-58
Section 1.111. "World Access Disclosure Schedule".......................... J-58
Section 1.112. "World Access Financial Statements"......................... J-58
Section 1.113. "World Access Material Adverse Effect"...................... J-58
Section 1.114. "World Access Most Recent Balance Sheet".................... J-58
Section 1.115. "World Access Most Recent Financial Statements"............. J-58
Section 1.116. "World Access Most Recent Fiscal Month End"................. J-58
Section 1.117. "World Access Most Recent Fiscal Year End".................. J-58
Section 1.118. "World Access SEC Documents"................................ J-58
Section 1.119. "World Access Stock"........................................ J-58
ARTICLE 2. EXCHANGE AND RECEIPT OF CHERRY U.K. STOCK.......................... J-59
Section 2.1. Exchange and Receipt of Shares.............................. J-59
Section 2.2. Consideration for Shares.................................... J-59
Section 2.3. Cherry U.K. Options......................................... J-59
Section 2.4. Escrowed Shares............................................. J-60
Section 2.5. Escrowed Option Shares...................................... J-60
Section 2.6. Adjustments................................................. J-60
ARTICLE 3. EXCHANGE OF CERTIFICATES........................................... J-60
Section 3.1. Exchange of Certificates.................................... J-60
ARTICLE 4. RELEASE OF ESCROWED SHARES......................................... J-61
Section 4.1. Release Criteria............................................ J-61
Section 4.2. Subsequent Performance...................................... J-61
Section 4.3. Accelerated Release......................................... J-61
Section 4.4. Transfer Restrictions....................................... J-62
Section 4.5. Contingent Escrowed Option Shares........................... J-62
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF WORLD ACCESS AND NEW WORLD
ACCESS............................................................. J-62
Section 5.1. Authority................................................... J-62
Section 5.2. Organization, Qualification, and Corporate Power............ J-62
Section 5.3. Capitalization.............................................. J-62
Section 5.4. Non-contravention........................................... J-63
Section 5.5. Brokers' Fees............................................... J-63
Section 5.6. World Access SEC Documents.................................. J-63
Section 5.7. Events Subsequent to World Access Most Recent Fiscal Year
End......................................................... J-64
Section 5.8. Undisclosed Liabilities..................................... J-65
Section 5.9. Opinion of Financial Advisor................................ J-65
Section 5.10. Litigation.................................................. J-65
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER...................... J-65
Section 6.1. Authority................................................... J-65
Section 6.2. Organization, Qualification, and Corporate Power............ J-65
</TABLE>
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<TABLE>
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Section 6.3. Capitalization; Title to Shares............................. J-66
Section 6.4. Non-contravention........................................... J-66
Section 6.5. Brokers' Fees............................................... J-67
Section 6.6. Title to Assets............................................. J-67
Section 6.7. Subsidiaries................................................ J-67
Section 6.8. Financial Statements........................................ J-67
Section 6.9. Events Subsequent to Cherry U.K. Most Recent Fiscal Year
End......................................................... J-68
Section 6.10. Undisclosed Liabilities..................................... J-69
Section 6.11. Legal Compliance............................................ J-69
Section 6.12. Tax Matters................................................. J-69
Section 6.13. Real Property............................................... J-72
Section 6.14. Intellectual Property....................................... J-72
Section 6.15. Tangible Assets............................................. J-73
Section 6.16. Inventory................................................... J-73
Section 6.17. Contracts................................................... J-73
Section 6.18. Notes and Accounts Receivable............................... J-74
Section 6.19. Insurance................................................... J-74
Section 6.20. Litigation.................................................. J-74
Section 6.21. Employees................................................... J-74
Section 6.22. Employee Benefits........................................... J-74
Section 6.23. Guaranties.................................................. J-76
Section 6.24. Environment, Health, and Safety............................. J-76
Section 6.25. Licenses, Permits, Consents and Authorities................. J-76
Section 6.26. Proxy Statement............................................. J-76
ARTICLE 7. COVENANTS.......................................................... J-77
Section 7.1. Conduct of the Business of Cherry U.K and its
Subsidiaries................................................ J-77
Section 7.2. Conduct of Business of World Access and its Subsidiaries.... J-78
Section 7.3. Access to Books and Records................................. J-78
Section 7.4. Preparation of Proxy Statement.............................. J-79
ARTICLE 8. ADDITIONAL AGREEMENTS.............................................. J-79
Section 8.1. Best Efforts; Cooperation................................... J-79
Section 8.2. Regulatory Matters.......................................... J-79
Section 8.3. Indemnification Regarding the Proxy Statement............... J-79
Section 8.4. Notice of Developments...................................... J-80
Section 8.5. Notices and Consents........................................ J-80
Section 8.6. Indemnity................................................... J-80
Section 8.7. Exclusive Dealing........................................... J-81
Section 8.8. Investment Representations.................................. J-81
ARTICLE 9. EFFECTIVE TIME; CLOSING; DELIVERIES AT CLOSING..................... J-82
Section 9.1. Effective Time; Closing Section............................. J-82
Section 9.2. Deliveries by Shareholder................................... J-82
Section 9.3. Deliveries by New World Access.............................. J-83
ARTICLE 10. MUTUAL CONDITIONS TO CLOSING...................................... J-83
Section 10.1. Board Meeting of Cherry U.K. and Subsidiaries............... J-83
Section 10.2. Regulatory Approvals........................................ J-84
Section 10.3. Litigation.................................................. J-84
Section 10.4. Proxy Statement............................................. J-84
Section 10.5. Consummation of Holding Company Reorganization.............. J-84
Section 10.6. Resignations................................................ J-84
Section 10.7. Escrow Agreement............................................ J-84
</TABLE>
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Section 10.8. Option Escrow Agreement..................................... J-84
Section 10.9. Material Condition.......................................... J-84
Section 10.10. Consents.................................................... J-85
Section 10.11. NASDAQ Listing.............................................. J-85
Section 10.12. U.S. Merger Transaction..................................... J-85
ARTICLE 11. CONDITIONS TO THE OBLIGATIONS OF NEW WORLD ACCESS................. J-85
Section 11.1. Representations and Warranties.............................. J-85
Section 11.2. Performance of Obligations.................................. J-85
Section 11.3. Certificate Representing Satisfaction of Conditions......... J-85
Section 11.4. Tax Opinion................................................. J-85
Section 11.5. Material Adverse Change..................................... J-85
ARTICLE 12. CONDITIONS TO OBLIGATIONS OF SHAREHOLDER.......................... J-85
Section 12.1. Representations and Warranties.............................. J-85
Section 12.2. Performance of Obligations.................................. J-86
Section 12.3. Certificate Representing Satisfaction of Conditions......... J-86
Section 12.4. Tax Opinion................................................. J-86
Section 12.5. Material Adverse Change..................................... J-86
ARTICLE 13. TERMINATION....................................................... J-86
Section 13.1. Termination of Agreement.................................... J-86
Section 13.2. Effect of Termination and Breach............................ J-87
Section 13.3. Confidentiality Upon Termination............................ J-87
Section 13.4. Specific Performance........................................ J-87
ARTICLE 14. GENERAL PROVISIONS................................................ J-87
Section 14.1. Nonsurvival of Representations and Warranties............... J-87
Section 14.2. Press Releases and Public Announcements..................... J-87
Section 14.3. No Third-Party Beneficiaries................................ J-87
Section 14.4. Entire Agreement............................................ J-87
Section 14.5. Succession and Assignment................................... J-87
Section 14.6. Counterparts................................................ J-87
Section 14.7. Notices..................................................... J-88
Section 14.8. Governing Law............................................... J-88
Section 14.9. Amendments and Waivers...................................... J-88
Section 14.10. Severability................................................ J-88
Section 14.11. Construction................................................ J-88
Section 14.12. Incorporation of Exhibits and Schedules..................... J-89
Section 14.13. Transaction Costs........................................... J-89
</TABLE>
EXHIBITS:
Exhibit A -- Escrow Agreement
Exhibit B -- Option Escrow Agreement
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<PAGE> 589
SHARE EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION
THIS SHARE EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION (as amended,
supplemented or otherwise modified from time to time, the "Agreement"), dated as
of the 12th day of May, 1998, is entered into by and among WORLD ACCESS, INC., a
Delaware corporation ("World Access"), WAXS INC., a Delaware corporation and a
wholly-owned subsidiary of World Access ("New World Access"), CHERRY
COMMUNICATIONS U.K. LIMITED, a corporation organized and existing under and by
virtue of the laws of England and Wales ("Cherry U.K."), and RENAISSANCE
PARTNERS II, a Georgia general partnership (the "Shareholder"), the partners of
which are JOHN D. PHILLIPS and W. TOD CHMAR, each an individual resident of the
State of Georgia, United States of America.
W I T N E S S E T H:
WHEREAS, on February 24, 1998, World Access, New World Access, WAXS
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of New
World Access, NACT Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of New World Access, and NACT Telecommunications, Inc., a Delaware
corporation and a majority-owned subsidiary of World Access ("NACT"), entered
into that certain Agreement and Plan of Merger and Reorganization, pursuant to
which, among other things, each of World Access and NACT will become
wholly-owned subsidiaries of New World Access (the "Holding Company
Reorganization");
WHEREAS, Shareholder is the sole shareholder of Cherry U.K. and is the
registered holder and beneficial owner of all of the issued and outstanding
ordinary shares (the "Shares"), (pound)1 each, of Cherry U.K. (the "Cherry U.K.
Stock");
WHEREAS, Shareholder desires to exchange with New World Access, and New
World Access desires to receive from Shareholder, the Shares (the "Acquisition")
upon the terms and conditions set forth herein;
WHEREAS, World Access, New World Access, WA Merger Corp., a Delaware
corporation and a wholly-owned subsidiary of New World Access ("U.S. Merger
Sub"), and Cherry Communications Incorporated d/b/a Resurgens Communications
Group, an Illinois corporation ("RCG"), have entered into that certain Agreement
and Plan of Merger and Reorganization dated of even date herewith (the "U.S.
Merger Agreement"), pursuant to which U.S. Merger Sub will be merged with and
into RCG and RCG will become a wholly-owned subsidiary of New World Access (the
"U.S. Merger");
WHEREAS, the consummation of the transactions contemplated hereby is a
condition to the consummation of the U.S. Merger, and the consummation of the
U.S. Merger is a condition to the consummation of the transactions contemplated
hereby;
WHEREAS, the Shareholder, Cherry U.K., World Access and New World Access
desire to make certain representations, warranties and agreements in connection
with the Acquisition and also to prescribe various conditions thereto; and
WHEREAS, for Federal income tax purposes, it is intended that the
Acquisition shall qualify as a reorganization under the provisions of Section
368(a)(1)(B) of the Code.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the warranties and covenants herein
contained, the Parties agree as follows:
ARTICLE 1.
DEFINITIONS
Capitalized terms used in this Agreement shall have the definitions set
forth in this Article 1.
SECTION 1.1. "ACT" has the meaning set forth in Section 16.12.15 hereof.
SECTION 1.2. "Acquisition" has the meaning set forth in the recitals
hereto.
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SECTION 1.3. "Acquisition Proposal" means any acquisition or purchase (or
any inquiry or proposal with respect thereto) of all or any substantial portion
of the assets of Cherry U.K. or of over 10% of any class of equity share capital
of Cherry U.K., or any merger, purchase, exchange, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving Cherry U.K. other than the transactions contemplated by this
Agreement, or any other transaction the consummation of which would reasonably
be expected to impede, interfere with, prevent or materially delay the
Acquisition or which would reasonably be expected to dilute materially the
benefits to World Access or New World Access of the Acquisition.
SECTION 1.4. "Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including reasonable court costs and reasonable attorneys'
fees and expenses.
SECTION 1.5. "Affiliate" means, (a) with respect to each Party, an officer
or director of such Party or any Person owning an equity interest of 10% or more
of such Party, any direct or indirect wholly owned subsidiary of such Party, any
other subsidiary owned directly or indirectly by a direct or indirect parent
company of such Party or any other Person in which such Party has at least a 10%
equity interest in the equity securities or equity share capital, and (b) with
respect to any Person not a Party, any Person who controls, is controlled by or
is under common control with such Person and any officer or director of such
Person or any other Person owning at least a 10% equity interest in such Person.
SECTION 1.6. "Agreement" has the meaning set forth in the preamble to this
Agreement.
SECTION 1.7. "Ancillary Documents" means all of the documents and
instruments attached hereto as exhibits or attachments or required to be
delivered by the terms of this Agreement.
SECTION 1.8. "Business" has the meaning set forth in the recitals hereto.
SECTION 1.9. "Business Day" means each day on which national banks in the
Atlanta, Georgia area are open for business.
SECTION 1.10. "Change of Control" shall be deemed to have occurred if:
(a) any Person (including any syndicate or group deemed to be a
"person" under Section 13(d) (3) of the Exchange Act), other than New World
Access, any subsidiary of New World Access, or any employee benefit plan of
New World Access or any such subsidiary, is or becomes the beneficial
owner, directly or indirectly, through a purchase or other acquisition
transaction or series of transactions (other than a merger or consolidation
involving New World Access), of shares of capital stock of New World Access
entitling such Person to exercise in excess of 50% of the total voting
power of all shares of capital stock of New World Access entitled to vote
generally in the election of directors;
(b) there occurs any consolidation of New World Access with, or merger
of New World Access into, any other Person, any merger of another Person
into New World Access, or any sale or transfer of the assets of New World
Access, as an entirety or substantially as an entirety, to another Person
(other than either (i) any such transaction pursuant to which the holders
of the New World Access Stock immediately prior to such transaction have,
directly or indirectly, shares of capital stock of the continuing or
surviving corporation immediately after such transaction which entitle such
holders to exercise in excess of 50% of the total voting power of all
shares of capital stock of the continuing or surviving corporation entitled
to vote generally in the election of directors or (ii) any merger (A) which
does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of New World Access Stock or (B) which
is effected solely to change the jurisdiction of incorporation of New World
Access and results in a reclassification, conversion or exchange of
outstanding shares of New World Access Stock solely into shares of common
stock and separate series of common stock carrying substantially the same
relative rights as the New World Access Stock); or
(c) a change in the Board of Directors of New World Access in which
the individuals who constituted the Board of Directors of New World Access
at the beginning of the one-year period
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immediately preceding such change (together with any other director whose
election by the Board of Directors of New World Access or whose nomination
for election by the stockholders of New World Access was approved by a vote
of at least a majority of the directors then in office either who were
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason (other than
death or resignation) to constitute at least a two-thirds majority of the
directors then in office.
Notwithstanding the foregoing, any Change of Control that results from (i)
WorldCom, Inc. ("WorldCom") or any of its Affiliates soliciting proxies or
becoming a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) in opposition to the recommendation of
the majority of the members of the Board of Directors of New World Access on any
matter or (ii) the merger, share exchange, consolidation or similar transaction
between New World Access and WorldCom or any of its Affiliates, without the
prior written consent of New World Access, shall not be deemed a Change of
Control for purposes of this Agreement.
SECTION 1.11. "Cherry U.K." has the meaning set forth in the preamble
hereto.
SECTION 1.12. "Cherry U.K. Group" means Cherry U.K. and its Subsidiaries.
SECTION 1.13. "Cherry U.K. Intellectual Property Rights" has the meaning
set forth in Section 6.14 hereof.
SECTION 1.14. "Cherry U.K. Financial Statements" has the meaning set forth
in Section 6.8 hereof.
SECTION 1.15. "Cherry U.K. Material Adverse Effect" shall mean any change
in or effect on the business of Cherry U.K. and its Subsidiaries that is, or
could reasonably be expected to be, materially adverse to the business,
prospects, assets (including intangible assets), liabilities (contingent or
otherwise), condition (financial or otherwise) or results of operations of
Cherry U.K. and its Subsidiaries taken as a whole.
SECTION 1.16. "Cherry U.K. Most Recent Balance Sheet" means the
consolidated balance sheet of Cherry U.K. as of December 31, 1997 included in
the Cherry U.K. Most Recent Financial Statements.
SECTION 1.17. "Cherry U.K. Most Recent Financial Statements" has the
meaning set forth in Section 6.8 hereof.
SECTION 1.18. "Cherry U.K. Most Recent Fiscal Month End" has the meaning
set forth in Section 6.8 hereof.
SECTION 1.19. "Cherry U.K. Most Recent Fiscal Year End" has the meaning
set forth in Section 6.8 hereof.
SECTION 1.20. "Cherry U.K. Option" has the meaning set forth in Section
2.3 hereof.
SECTION 1.21. "Cherry U.K. Optionholder" has the meaning set forth in
Section 2.3 hereof.
SECTION 1.22. "Cherry U.K. Plans" means all Employee Benefit Plans,
programs, policies, practices, and other arrangements providing benefits to any
employee or former employee or beneficiary or dependent thereof, whether or not
written, and whether covering one Person or more than one Person, sponsored or
maintained by Cherry U.K. or any of its Subsidiaries, or to which Cherry U.K.,
or any of its Subsidiaries, contributes or is obligated to contribute. Without
limiting the generality of the foregoing, the term "Cherry U.K. Plans" includes
all employee welfare benefit plans within the meaning of Section 3(1) of ERISA
and all employee pension benefit plans within the meaning of Section 3(2) of
ERISA.
SECTION 1.23. "Cherry U.K. Stock" has the meaning set forth in the
recitals hereto.
SECTION 1.24. "Closing" has the meaning set forth in Section 9.1 hereof.
SECTION 1.25. "Closing Date" has the meaning set forth in Section 9.1
hereof.
SECTION 1.26. "Closing Shares" has the meaning set forth in Section 2.2
hereof.
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SECTION 1.27. "Code" means the Internal Revenue Code of 1986, as amended,
together with the rules and regulations promulgated thereunder.
SECTION 1.28. "Communications Act" means the Federal Communications Act of
1934, as amended, together with the rules and regulations promulgated
thereunder.
SECTION 1.29. "Companies Act" means the Companies Act 1985 (as amended or
reenacted the Companies Act 1989).
SECTION 1.30. "Competent Authority" means any national or local government
or national or local governmental agency or any EC body or agency having
regulatory or administrative authority under Environmental Laws.
SECTION 1.31. "Confidential Information" means and includes written data,
reports, interpretations, analyses, trade secrets, processes, drawings,
photographs, records, specifications, designs, programs, product development
activities, software packages and related documentation, technical know-how,
concepts, theories, ideas, methods and procedures of operation, business or
marketing plans, proposals, financial information, compiled data,
communications, customer lists and data and equipment, as well as the nature and
results of a Party's development activities and all other information and/or
materials related to the business or activities of a Party, but excluding such
information that is (a) generally available to the public, or (b) available, or
becomes available, to a Party on a non-confidential basis prior to its
disclosure from a Person authorized to disclose the same.
SECTION 1.32. "Consent" means a consent, approval or authorization,
waiver, clearance, exemption or similar affirmation by any Person pursuant to
any contract, permit, law, regulation or order.
SECTION 1.33. "Consideration" means the Share Consideration and the New
World Access Options.
SECTION 1.34. "Contingent Escrowed Option Shares" has the meaning set
forth in Section 2.5 hereof.
SECTION 1.35. "Controlled Group Liability" means any and all liabilities
under (a) Title IV of ERISA, (b) Section 302 of ERISA, (c) Sections 412 and 4971
of the Code, (d) the continuation coverage requirements of section 601 et seq.
of ERISA and Section 4980B of the Code, and (e) corresponding or similar
provisions of foreign laws or regulations, in each case other than pursuant to
the World Access Plans with respect to World Access and its Subsidiaries, or the
Cherry U.K. Plans with respect to Cherry U.K.
SECTION 1.36. "DGCL" means Title 8 of the Delaware Code, as amended
SECTION 1.37. "EBITDA" means the sum of income before net interest and
provision for income taxes, plus depreciation and amortization expense
determined consistent with Cherry U.K.'s unaudited consolidated statement of
income for the Cherry U.K. Most Recent Fiscal Year. Notwithstanding the
foregoing, any change in the policies or procedures employed in determining the
EBITDA of Cherry U.K. shall be approved by a majority vote of the members of the
audit committee of the Board of Directors of New World Access who are not
Affiliates of WorldCom, Inc.
SECTION 1.38. "Effective Time" has the meaning set forth in Section 9.1
hereof.
SECTION 1.39. "Employee Benefit Plan" means any (a) non-qualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multi-Employer Plan), or (d) Employee Welfare Benefit Plan (or
material fringe benefit plan or program).
SECTION 1.40. "Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
SECTION 1.41. "Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(l).
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SECTION 1.42. "Environment" means all or any of the following media,
namely air, water or land, including such media within buildings or other
natural or man made structures above or below ground and any living organisms or
ecosystems.
SECTION 1.43. "Environmental, Health, and Safety Laws" means, with respect
to New World Access and World Access, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, and the Occupational Safety and Health Act of 1970, each as
amended, and with respect to Cherry U.K., the Town and Country Planning Act
1990, the Planning (Listed Buildings and Conservation Areas) Act 1990, the
Planning (Hazardous Substances) Act 1990, the Planning (Consequential
Provisions) Act 1990 and the Planning and Compensation Act 1991 and the Rules,
Regulations and Orders made under them or continued by them as they apply from
time to time, together with the Environmental Laws and all other laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof) concerning public health and safety, or
employee health and safety.
SECTION 1.44. "Environmental Laws" means all or any applicable law
(whether civil, criminal or administrative), common law, statute, statutory
instrument, treaty, regulation, directive, decision, by-law, circular, code,
plan, order, notice, demand, decree, injunction, resolution or judgment which
relate to Environmental Matters and which are in force from time to time.
SECTION 1.45. "Environmental Matters" means any or all of the following:
(a) protection of the Environment;
(b) pollution or contamination;
(c) the generation, manufacture, processing, handling, storage,
distribution, use, treatment, removal, transport, importation, exportation,
disposal, release, spillage, deposit, escape, discharge, leak, emission,
leaching or migration of Hazardous Substances or Waste;
(d) exposure of any person to Hazardous Substances or Waste;
(e) the creation of any noise, vibration, radiation, common law or
statutory nuisance, or other impact on the Environment;
(f) any other matters relation to the condition, protection,
maintenance, restoration or replacement of the Environment or any part of
it arising directly or indirectly out of the manufacturing, processing,
treatment, storage, keeping, handling, use (including as a building
material), possession, supply, receipt, sale, purchase, import, export,
transportation or presence of Hazardous Substances or Waste;
(g) human health and safety; and
(h) town and country planning.
SECTION 1.46. "Environmental Permits" means all or any authorizations,
certificates, approvals, permits, licenses, or consents (and all conditions
attaching thereto) required under any Environmental Laws for the operation of
the business of Cherry U.K. or the occupation or use of the Properties.
SECTION 1.47. "Equivalent Exchange Ratio" means the ratio, expressed as a
fraction, obtained by dividing (i) 1,875,000 by (ii) all of the Shares plus all
of the shares of Cherry U.K. Stock underlying the Cherry U.K. Options.
SECTION 1.48. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
SECTION 1.49. "ERISA Affiliate" means, with respect to any entity, trade
or business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1)
of ERISA that includes the first entity, trade or business, or that is a member
of the same "controlled group" as the first entity, trade or business pursuant
to Section 4001(a)(14) of ERISA.
SECTION 1.50. "Escrow Agent" has the meaning set forth in Section 2.3
hereof.
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SECTION 1.51. "Escrow Agreement" has the meaning set forth in Section 2.3
hereof.
SECTION 1.52. "Escrowed Shares" has the meaning set forth in Section 2.2
hereof.
SECTION 1.53. "Escrowed Option Shares" has the meaning set forth in
Section 2.5 hereof.
SECTION 1.54. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
SECTION 1.55. "Expenses" has the meaning set forth in Section 8.7 hereof.
SECTION 1.56. "Extra Shares" has the meaning set forth in Section 2.2
hereof.
SECTION 1.57. "FCC" means the Federal Communications Commission.
SECTION 1.58. "Fiduciary" has the meaning set forth in ERISA Section
3(21).
SECTION 1.59. "GAAP" means United States generally accepted accounting
principles as in effect from time to time. The requirement that such principles
be consistently applied and applied on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period.
SECTION 1.60. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, together with the rules and regulations promulgated
thereunder.
SECTION 1.61. "Hazardous Substances" means any noxious, dangerous,
hazardous, toxic or flammable materials or substances or any mixture thereof
which are or maybe present in such quantities and concentrations as (a) may
cause harm to the Environment, (b) are regulated under any Environmental Law or
(c) may require investigation or remediation under any Environmental Law.
SECTION 1.62. "Holding Company Reorganization" has the meaning set forth
in the recitals hereto.
SECTION 1.63. "Indemnified Party" have the meanings set forth in Section
10.6 hereof.
SECTION 1.64. "Intellectual Property" means (a) all inventions (whether
patentable or unpatentable), all improvements thereto, and all patents, patent
applications, and patent disclosures, together with all reissuances,
continuations, continuations in part, revisions, extensions, and reexaminations
thereof, (b) all trademarks, service marks, trade drafts, logos, trade names,
and corporate names, together with all translations, adaptations, derivations,
and combinations thereof and including all goodwill associated therewith, and
all applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connections therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier list, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights and (h) all copies and tangible
embodiments thereof in whatever form or medium.
SECTION 1.65. "Knowledge" means either (a) that an individual is actually
aware of a particular fact or other matter or (b) a prudent individual could be
expected to discover or otherwise become aware of such fact or other matter in
the course of performing the duties which are normally performed by an
individual acting in a similar capacity. A Person (other than an individual)
will be deemed to have "Knowledge" of a particular fact or other matter if any
individual who is serving as a director, executive officer, partner, executor or
trustee of such Person (or in any similar capacity) has, or at any time had,
knowledge of such fact or other matter.
SECTION 1.66. "Losses" means any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and attorneys' fees and disbursements.
SECTION 1.67. "Liens" means all liens, claims, charges and other
encumbrances and restrictions of any kind or nature.
SECTION 1.68. "Multi-employer Plan" has the meaning set forth in Section
3(37) of ERISA.
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SECTION 1.69. "Multiple Employer Plan" has the meaning set forth in
Section 4063 of ERISA.
SECTION 1.70. "NACT" has the meaning set forth in the recitals hereto.
SECTION 1.71. "NASDAQ" means The Nasdaq National Market."
SECTION 1.72. "New World Access" has the meaning set forth in the preamble
hereto.
SECTION 1.73. "New World Access Option" has the meaning set forth in
Section 2.3 hereof.
SECTION 1.74. "New World Access Stock" means any share of the common
stock, $.01 par value per share, of New World Access.
SECTION 1.75. "Option Escrow Agent" has the meaning set forth in Section
2.5 hereof.
SECTION 1.76. "Option Escrow Agreement" has the meaning set forth in
Section 2.5 hereof.
SECTION 1.77. "Ordinary Course" or "Ordinary Course of Business" means any
action taken by a Person only if (a) such action is consistent with the past
practices of such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person, or (b) such action is similar in nature
and magnitude to actions customarily taken, without any authorization by the
board of directors (or by any Person or group of Persons exercising similar
authority), in the ordinary course of the normal day-to-day operations of other
Persons that are in the same line of business as such Person.
SECTION 1.78. "Parties" means collectively, or any two or more of, World
Access, New World Access, Cherry U.K., the Shareholder and the Cherry U.K.
Optionholders (if any).
SECTION 1.79. "Party" means any one of the Parties.
SECTION 1.80. "Performance Period" has the meaning set forth in Section
4.1 hereof.
SECTION 1.81. "Person" means an individual, a partnership, a corporation,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or association, a limited liability company, a
limited liability partnership, or a governmental entity (or any department,
agency, or political subdivision thereof, including a Regulatory Authority).
SECTION 1.82. "Planning Acts" means the Town and Country Planning Act
1990, the Planning (Listed Buildings and Conservation Areas) Act 1990, the
Planning (Hazardous Substances) Act 1990, the Planning (Consequential
Provisions) Act 1990 and the Planning and Compensation Act 1991 and the rules,
regulations and orders made under them or continued by them as they apply from
time to time.
SECTION 1.83. "Properties" has the meaning set forth in Section 6.13.2
hereof.
SECTION 1.84. "Proxy Statement" has the meaning set forth in Section 7.4
hereof.
SECTION 1.85. "PUC" means any state public service commission.
SECTION 1.86. "Qualified Cherry U.K. Plan" has the meaning set forth in
Section 6.21 hereof.
SECTION 1.87. "Relevant Accounting Standard" means any applicable
Statement of Standard Accounting Practice, Financial Reporting Standard,
Consensus or Statement of Recommended Practice issued by the Accounting
Standards Board in the United Kingdom, or any committee of it or body recognized
by it in force on the date of the Cherry U.K. Most Recent Balance Sheet.
SECTION 1.88. "Remedial Action" means:
(a) removing, remedying, cleaning up, making good, modifying,
restoring, improving, abating, containing or ameliorating the presence in
or effect on the Environment, the Properties or any organism (including
humans) of any Hazardous Substances or Waste, including the removal from
any structure of Hazardous Substances or Waste incorporated into that
structure (whether above or below ground, natural or man made and including
all pipes and tanks); or
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(b) securing compliance of the business of Cherry U.K. with all
Environmental Laws and Environmental Permits, including any and all
investigative activities, sampling, monitoring or analyzing any pollution
or contamination of the Environment and obtaining expert technical and
legal advice required in relation thereto); or
(c) such other action or steps as are considered necessary by New
World Access to avoid, mitigate, abate or prevent any nuisance, pollution
or contamination of the Environment.
SECTION 1.89. "Regulatory Authority" means, collectively, the FCC, PUCs,
the Federal Trade Commission, the United States Department of Justice, the SEC,
the National Association of Securities Dealers, Inc., and all national and state
securities exchanges, as well as all regulatory agencies and authorities
organized under the laws of England and Wales and the European Community,
including the European Commission, and any other governmental or regulatory
body, agency, instrumentality or authority.
SECTION 1.90. "Required Consents" has the meaning set forth in Section 5.3
hereof.
SECTION 1.91. "SEC" means the United States Securities and Exchange
Commission.
SECTION 1.92. "Securities Act" means the Securities Act of 1933, as
amended, together with the rules and regulations promulgated hereunder.
SECTION 1.93. "Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialman's, and similar liens for work done on the property to the extent
that such liens arise in the Ordinary Course of Business and are not yet due and
payable, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, in each case, where there exists no default in World Access's or
any Subsidiary's obligations with respect to the underlying agreements, and (d)
other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
SECTION 1.94. "Shareholder" has the meaning set forth in the preamble
hereto.
SECTION 1.95. "Shareholder Disclosure Schedule" has the meaning set forth
in Article 6 hereof.
SECTION 1.96. "Share Consideration" has the meaning set forth in Section
2.2 hereof.
SECTION 1.97. "Shares" has the meaning set forth in the recitals hereto.
SECTION 1.98. "Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns (directly or indirectly) a
majority of the common stock and share capital or has the power to vote or
direct the voting of sufficient securities to elect a majority of the directors
and, in respect of Cherry U.K., includes the meaning given such term in Part
XXVI of the Companies Act.
SECTION 1.99. "TCGA" has the meaning set forth in Section 6.12.17 hereof.
SECTION 1.100. "Target EBITDA" has the meaning set forth in Section 4.1
hereof.
SECTION 1.101. "Tax Returns" means, collectively, (a) all reports,
declarations, estimates, returns, information statements, and similar documents
relating to, or required to be filed in respect of any Taxes, and (b) all
information statements, returns, reports or similar documents required to be
filed with respect to payments to (or from) third parties or with respect to
transactions in which any Party or any of its Subsidiaries participates. The
term "Tax Return" shall mean any one of the foregoing Tax Returns.
SECTION 1.102. "Taxes" means, collectively, (a) all net income, gross
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
lease, service, service use, withholding, employment, payroll, excise,
severance, transfer, documentary, mortgage, registration, stamp, occupation,
environmental, premium, property, windfall, profits, customs, duties, and other
taxes, fees, assessments or charges of any kind whatever, including any
estimates thereof, together with any interest, penalties and other additions
with respect thereto, imposed by any federal, territorial, state, local or
foreign government; and (b) any penalties, interest, or other additions to tax
for the failure to collect, withhold, or pay over any of the foregoing, or to
accurately file any
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Tax Return. The term "Tax" shall mean any one of the foregoing Taxes. When used
with reference to a specified Person, the terms "Taxes" and "Tax" shall include
only amounts of, or in respect of, Taxes for which such Person is, or could
become, liable in whole or part (including any obligation in connection with a
duty to collect, withhold, or pay over any Tax, any obligation to contribute to
the payment of any Taxes determined on a consolidated, combined, or unitary
basis, any liability as a transferee, or any liability as a result of any
express or implied obligation to indemnity or pay the Tax obligations of another
Person).
SECTION 1.103. "Third-Party Intellectual Property Rights" means, with
respect to each of World Access and Cherry U.K., all licenses, sublicenses and
other agreements as to which it is a party and pursuant to which it is
authorized to use any third-party patents, trademarks, service marks or
copyrights.
SECTION 1.104. "Trading Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day on which securities are not traded on
NASDAQ.
SECTION 1.105. "U.K. GAAP" means generally accepted accounting principles
and practices in the United Kingdom as in effect from time to time. The
requirement that such principles be consistently applied and applied on a
consistent basis shall mean that the accounting principles observed in a current
period are comparable in all material respects to those applied in a preceding
period.
SECTION 1.106. "U.S. Merger" has the meaning set forth in the recitals
hereto.
SECTION 1.107. "U.S. Merger Sub" has the meaning set forth in the recitals
hereto.
SECTION 1.108. "VATA" has the meaning set forth in Section 6.12.23 hereof.
SECTION 1.109. "Waste" means any waste as defined in Section 75 of the
Environmental Protection Act 1990.
SECTION 1.110. "World Access" has the meaning set forth in the preamble
hereto.
SECTION 1.111. "World Access Disclosure Schedule" has the meaning set
forth in Article 5 hereof.
SECTION 1.112. "World Access Financial Statements" has the meaning set
forth in Section 5.5 hereof.
SECTION 1.113. "World Access Material Adverse Effect" shall mean (a) prior
to the consummation of the Holding Company Reorganization, any change in or
effect on the business of World Access and its Subsidiaries that is, or could
reasonably be expected to be, materially adverse to the business, prospects,
assets (including intangible assets), liabilities (contingent or otherwise),
condition (financial or otherwise) or results of operations of World Access and
the its Subsidiaries taken as a whole, and (b) after the consummation of the
Holding Company Reorganization, any change in or effect on the business of New
World Access and its Subsidiaries that is, or could reasonably be expected to
be, materially adverse to the business, prospects, assets (including intangible
assets), liabilities (contingent or otherwise), condition (financial or
otherwise) or results of operations of New World Access and its Subsidiaries
taken as a whole.
SECTION 1.114. "World Access Most Recent Balance Sheet" means the
consolidated balance sheet of World Access as of December 31, 1997 included in
the World Access SEC Documents.
SECTION 1.115. "World Access Most Recent Financial Statements" means the
consolidated financial statements for the year ended December 31, 1997 included
in the World Access SEC Documents.
SECTION 1.116. "World Access Most Recent Fiscal Month End" means December
31, 1997.
SECTION 1.117. "World Access Most Recent Fiscal Year End" means December
31, 1997.
SECTION 1.118. "World Access SEC Documents" has the meaning set forth in
Section 7.5 hereof.
SECTION 1.119. "World Access Stock" means any share of the common stock,
$0.01 par value per share,of World Access.
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ARTICLE 2.
EXCHANGE AND RECEIPT OF CHERRY U.K. STOCK
SECTION 2.1. Exchange and Receipt of Shares. Upon the terms and subject
to the conditions set forth in this Agreement, at the Effective Time,
Shareholder shall exchange, convey, assign, transfer and deliver to New World
Access the legal and beneficial ownership of the Shares, and New World Access
shall receive from Shareholder, all of Shareholder's right, title and interest
in and to the Shares, including all rights now or hereafter attaching to them to
any dividend or other distribution declared, made or paid after the date hereof,
for an amount equal to the Share Consideration. Shareholder covenants that (a)
it has full power and the right to transfer the legal and beneficial title to
the Shares; (b) the Shares shall at Closing be free from any Liens or Security
Interests of any kind and from all other rights exercisable by third parties;
and (c) it will execute at its own cost and expense such documents as New World
Access reasonably considers necessary to transfer the legal and beneficial
ownership of the Shares to New World Access and secure to New World Access the
rights attaching thereto.
SECTION 2.2. Consideration for Shares. The consideration payable for the
Shares (the "Share Consideration") shall be equal to an aggregate of (a)
1,875,000 shares of New World Access Stock less (b) any shares of New World
Access Stock issuable upon the exercise of options or warrants to purchase
Cherry U.K. Stock granted after the date hereof and converted by New World
Access in accordance with Section 2.3 below prior to the Closing plus (c) any
Escrowed Option Shares delivered to Shareholder pursuant to Section 2.5 below.
The number of shares of New World Access Stock to be issued to Shareholder at
Closing (the "Closing Shares") shall be equal to (a) one-third of the Share
Consideration (excluding the Escrowed Option Shares) plus (b) the number of
Option Shares (the "Extra Shares") underlying New World Access Options to the
extent that less than one-third of such shares may be acquired upon exercise
without regard to the conditions set forth in Article 4 hereof relating to the
release of Escrowed Shares. The remaining number of shares of New World Access
Stock (excluding the Escrowed Option Shares) comprising the Share Consideration
shall be issued and held in escrow pursuant to Section 2.4 below.
Notwithstanding anything to the contrary contained herein, no holder of the
Closing Shares may, until the 365th day following the Closing Date, without the
prior written consent of New World Access, offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, any such shares or any security
convertible into or exchangeable or exercisable therefor, either publicly or
privately.
SECTION 2.3. Cherry U.K. Options. From and after the date hereof, Cherry
U.K. may grant and award options or warrants to acquire Cherry U.K. Stock (each
a "Cherry U.K. Option") on the terms and conditions set forth in a Cherry U.K.
Option Agreement in a form to be mutually acceptable to Cherry U.K. and New
World Access, provided that the grantee of any such option or warrant (each a
"Cherry U.K. Optionholder") shall execute a counterpart of this Agreement and
thereupon become a Party hereto, and further provided, that the number of shares
of New World Access Stock issuable upon the exercise of such Cherry U.K. Options
(determined in accordance with this Section 2.3) does not exceed 937,500. Each
Cherry U.K. Option granted in accordance with the foregoing shall be assumed by
New World Access at the Effective Time and shall be converted into an option to
acquire New World Access Stock (each New World Access option or warrant granted
hereunder, a "New World Access Option") in such number and at such exercise
price as provided below and otherwise having the same terms and conditions as in
effect immediately prior to the Effective Time except to the extent provided
herein:
(a) the number of shares of New World Access Stock to be subject to
each New World Access Option (the "Option Shares") shall be equal to (i)
the number of shares of Cherry U.K. Stock subject to such Cherry U.K Option
so converted multiplied by (ii) the Equivalent Exchange Ratio;
(b) the exercise price per share of New World Access Stock for each
New World Access Stock Option issued pursuant hereto shall be equal to (i)
the product obtained by multiplying the number of shares of Cherry U.K.
Stock subject to the Cherry U.K. Option converted pursuant to this
Agreement by the exercise price per share thereunder, divided by (ii) the
number of shares of New World Access Stock issuable upon the exercise of
such New World Access Option determined pursuant to clause (a) above;
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(c) upon each exercise of the New World Access Options by a holder
thereof, the aggregate number of shares of New World Access Stock
deliverable upon such exercise shall be rounded up or down, if necessary,
to the nearest whole share and the aggregate exercise price shall be
rounded up or down, if necessary, to the nearest cent; and
(d) notwithstanding anything herein to the contrary, a Cherry U.K.
Optionholder may only exercise the New World Access Option to the extent of
one-third of the Option Shares unless the Escrowed Shares are eligible for
release pursuant to Article 4 hereof, in which event the New World Access
Option may be exercised to the same extent as Escrowed Shares may be
released and shall be subject to the same restrictions as provided in
Section 4.4 hereof.
Notwithstanding anything herein to the contrary, no Shares or Cherry U.K.
Options may be distributed or granted, without the prior written consent of New
World Access, if New World Access determines in its good faith judgment that
such actions would have a material adverse effect on the financial condition or
results of operations of New World Access and its Subsidiaries, taken as a
whole, for financial reporting purposes.
SECTION 2.4. Escrowed Shares. Immediately following the Effective Time,
the Escrowed Shares shall be issued by New World Access and deposited with an
escrow agent mutually acceptable to New World Access and Shareholder (the
"Escrow Agent") pursuant to the terms of an Escrow Agreement substantially in
the form attached hereto as Exhibit "A" (the "Escrow Agreement"). The Escrow
Agent will release the Escrowed Shares to the Shareholder as set forth in
Article 4 hereof.
SECTION 2.5. Escrowed Option Shares. Immediately following the Effective
Time, New World Access shall issue and deposit with an escrow agent mutually
acceptable to New World Access and Shareholder (the "Option Escrow Agent") an
aggregate number of shares of New World Access Stock equal to the aggregate
number of Option Shares (the "Escrowed Option Shares") pursuant to the terms of
an Escrow Agreement substantially in the form attached hereto as Exhibit "B"
(the "Option Escrow Agreement"). The Escrowed Option Shares shall be released
and delivered to New World Access for cancellation to the extent that the New
World Access Options (or any portion thereof) vest and become exercisable in
accordance with their terms. The Escrowed Option Shares shall be released and
delivered to Shareholder upon the forfeiture of any of the New World Access
Options (or any portion thereof) in accordance with the terms thereof as
follows: (a) an amount equal to (i) one-third of such shares less (ii) the
number of Extra Shares shall be released and delivered to Shareholder upon such
forfeiture, and (b) the balance of such shares (the "Contingent Escrowed Option
Shares") shall be released as set forth in Article 4 hereof.
SECTION 2.6. Adjustments. In the event of any change in the New World
Access Stock after the date hereof by reason of any stock dividend, stock split,
subdivision, reclassification, recapitalization, combination, exchange of shares
or the like, then the New World Access Stock to be issued pursuant to this
Agreement (including pursuant to any New World Access Option) shall be adjusted
appropriately on the Closing Date.
ARTICLE 3.
EXCHANGE OF CERTIFICATES
SECTION 3.1. Exchange of Certificates. At the Closing, Shareholder shall
surrender all certificates representing the Shares to New World Access and
comply with the provisions of Section 9.2, and New World Access shall issue to
Shareholder a certificate or certificates representing the Closing Shares and
shall issue to the Escrow Agent the Escrowed Shares, in each case rounded to the
nearest whole share. All certificates, documents and instruments representing
the Shares so surrendered shall be properly forwarded or otherwise in proper
form for transfer. At the Closing, New World Access shall deliver to each Cherry
U.K. Optionholder an option agreement representing the New World Access Option
into which such Cherry U.K. Optionholder's Cherry U.K. Option was converted.
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ARTICLE 4.
RELEASE OF ESCROWED SHARES
SECTION 4.1. Release Criteria. The Escrowed Shares will be released in
the amounts and on the dates specified below if the sum of the EBITDA for (i)
Cherry U.K. and (ii) the surviving corporation of the U.S. Merger for the
performance periods set forth below equals or exceeds the Target EBITDA for such
performance period as set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF
ESCROWED MERGER
PERFORMANCE PERIOD RELEASE DATE SHARES TO BE RELEASED TARGET EBITDA
- ------------------ ------------ --------------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period").............. February 15, 1999 25% $ 7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period").............. February 15, 2000 37.5% $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)............... February 15, 2001 37.5% $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Closing Date is (a) on or after July
15, 1998 but prior to August 16, 1998, then the First Performance Period shall
commence on August 1, 1998 and shall terminate on (and including) December 31,
1998 and the Target EBITDA with respect thereto shall be reduced to $7,100,000,
(b) on or after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (c) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Closing occurs and shall terminate on (and including) the last day
of the sixth calendar month following the month in which the Closing occurs, the
release date shall be forty-five (45) days after the end of such period and the
Target EBITDA shall be equal to the sum of (i) $2,100,000 for each calendar
month of the 1998 included in the First Performance Period and (ii) $2,400,000
for each calendar month of 1999 included in the First Performance Period.
SECTION 4.2. Subsequent Performance. If, after the Acquisition, the
combined EBITDA of Cherry U.K. and the surviving corporation of the U.S. Merger
is less than the Target EBITDA required for the release of Escrowed Shares in
either of the First or Second Performance Periods (and with respect to the
Second Performance Period is no less than zero), then, notwithstanding anything
to the contrary in Section 4.1, the Escrowed Shares shall be released if the
actual cumulative combined EBITDA for Cherry U.K. and the surviving corporation
of the U.S. Merger for such Performance Period and any subsequent Performance
Periods equals or exceeds the cumulative Target EBITDA for such Performance
Periods.
SECTION 4.3. Accelerated Release. Notwithstanding anything to the
contrary, (a) if during any calendar quarter of the Second Performance Period,
the closing price per share of the New World Access Stock as reported by NASDAQ
equals or exceeds $65.00 for any five consecutive Trading Days during such
calendar quarter, then 25% of all of the shares of Escrowed Shares shall be
released on February 15, 2000, provided that if no Escrowed Shares are eligible
for release during any such calendar quarter, then such Escrowed Shares shall
become eligible for release in a subsequent calendar quarter of the Second
Performance Period if the closing price per share of the New World Access Stock
as reported by NASDAQ equals or exceeds $65.00 for a total number of consecutive
Trading Days during such subsequent calendar quarter equal to or exceeding the
total number of Trading Days which such closing price was required to equal or
exceed for (i) such subsequent calendar quarter and (ii) each of the previous
calendar quarters beginning with the calendar quarter for which such Escrowed
Shares were not eligible for release; (b) if the combined EBITDA of Cherry U.K.
and the surviving corporation of the U.S. Merger for the Second Performance
Period equals or exceeds $52,775,000, then the Escrowed Shares related to the
Third Performance Period
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shall be released on February 15, 2000; and (c) all of the Escrowed Shares shall
be released upon a Change of Control (except to the extent that the ability to
earn such shares has been lost under this Article 4) and the transfer
restrictions set forth in Sections 2.2 and 4.4 shall not apply.
SECTION 4.4. Transfer Restrictions. Notwithstanding anything to the
contrary contained herein, no holder of the Escrowed Shares upon their release
may, until the 180th day following the release date thereof, without the prior
written consent of New World Access, offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any such shares or any security convertible
into or exchangeable or exercisable therefor, either publicly or privately.
SECTION 4.5. Contingent Escrowed Option Shares. The provisions of Section
4.1 through 4.4 shall apply mutatis mutandis to the Contingent Escrowed Option
Shares.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF
WORLD ACCESS AND NEW WORLD ACCESS
In order to induce Shareholder to enter into this Agreement, World Access
and New World Access, jointly and severally, represent and warrant to
Shareholder that, except as set forth in the World Access SEC Documents or the
Disclosure Schedule to be delivered by World Access to Shareholder within ten
(10) Business Days of the date hereof (the "World Access Disclosure Schedule"),
which World Access Disclosure Schedule shall identify exceptions by specific
Section references:
SECTION 5.1. Authority. Each of World Access and New World Access has all
requisite corporate power and authority to execute, deliver and perform this
Agreement and the Ancillary Documents to be executed by them and to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement by World Access and New World Access and the consummation of the
transactions contemplated on their part hereby have been duly authorized by all
necessary corporate action, and, other than the approval of New World Access's
stockholders contemplated by Section 7.4 hereof, no other corporate proceedings
on the part of either World Access or New World Access are necessary to
authorize the consummation of the transactions contemplated on their part. This
Agreement has been duly executed and delivered by World Access and New World
Access and constitutes, and each of the Ancillary Documents to be signed at
Closing, when executed and delivered by World Access or New World Access (as the
case may be) will constitute, a valid and binding obligation of World Access and
New World Access (as the case may be), enforceable against them in accordance
with their respective terms, except to the extent that such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or other law
affecting the enforcement of creditors' rights generally or by general equity
principles.
SECTION 5.2. Organization, Qualification, and Corporate Power. Each of
World Access and its Subsidiaries is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation. Each of World Access and its Subsidiaries is duly authorized and
qualified to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification would not have a World Access Material Adverse Effect. Each of
World Access and its Subsidiaries has full corporate power and authority to
carry on the businesses in which it is engaged and to own, lease, use and
operate the properties owned, leased, used and operated by it. The copies of the
Certificate of Incorporation and the Bylaws of World Access and the equivalent
organizational documents of each of its Subsidiaries, which have previously been
made available to Shareholder, are true, complete and correct copies of such
documents as in effect as of the date of this Agreement.
SECTION 5.3. Capitalization. The entire authorized common capital stock
of World Access consists of 40,000,000 shares of World Access Stock, of which
21,848,701 shares were issued and outstanding as of May 8, 1998. The entire
authorized common capital stock of New World Access consists of 40,000,000
shares of New World Access Stock, of which 1,000 were issued and outstanding as
of May 8, 1998. No shares of World Access Stock or New World Access Stock are
held in treasury. All of the issued and outstanding
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shares of World Access Stock have been duly authorized and are validly issued,
fully paid, and nonassessable. Except as disclosed in the World Access SEC
Documents, there are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require World Access or any of its
Subsidiaries to issue, sell, or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to World
Access and its Subsidiaries. World Access and its Subsidiaries have no
outstanding bonds, debentures, notes or similar obligations the holders of which
have the right to vote generally with holders of World Access Stock or New World
Access Stock.
SECTION 5.4. Non-contravention. Neither the execution and the delivery of
this Agreement or the Ancillary Documents, nor the consummation of the
transactions contemplated hereby or thereby, will (a) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
World Access or any of its Subsidiaries is subject or any provision of the
charter or bylaws of any of World Access or any of its Subsidiaries; or (b)
except with respect to those agreements for which Consent shall be obtained
prior to Closing, conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
World Access or any of its Subsidiaries is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets), except where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice, or Security Interest would not have a World Access Material Adverse
Effect. Except for Consents required under or in relation to the (a) HSR Act,
(b) the Communications Act and any rates, regulations, practices and policies of
the FCC, (b) state securities or "blue sky" laws, (d) the Securities Act, (e)
the Exchange Act, (f) the DGCL, (g) laws, rules, regulations, practices and
orders of any PUC, foreign telecommunications regulatory agencies or similar
state or foreign regulatory bodies, (h) rules and regulations of NASDAQ, and (i)
such Consents and filings the failure of which to make or obtain would not have
a World Access Material Adverse Effect, neither World Access nor any of its
Subsidiaries is required to give any notice to, make any filing with, or obtain
any Consent of any Regulatory Authority in order for the Parties to consummate
the transactions contemplated by this Agreement and the Ancillary Documents. All
consents, approvals, orders, authorizations, registrations, declarations and
filings required under or in relation to any of the foregoing clauses (a)
through (h) are hereinafter referred to collectively as the "Required Consents."
SECTION 5.5. Brokers' Fees. None of World Access or any of its
Subsidiaries has any liability or obligation, contingent or otherwise, to pay
any fees or commissions or similar payments to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement and the Ancillary
Documents, except to The Robinson-Humphrey Company, Inc., whose fees and
expenses will be paid by World Access in accordance with its agreement with such
firm based upon arrangements made by or on behalf of World Access and previously
disclosed to Cherry U.K.
SECTION 5.6. World Access SEC Documents. Each of World Access and its
Subsidiaries has timely filed with the SEC all forms, reports, schedules,
statements, exhibits and other documents required to be filed by it since
December 31, 1995 with the SEC (such documents, as supplemented and amended
since the time of filing, collectively, the "World Access SEC Documents"). The
World Access SEC Documents, including any financial statements or schedules
included therein, at the time filed (and, in the case of registration statements
and proxy statements, on the dates of effectiveness and the dates of mailing,
respectively) (a) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be. The consolidated financial statements (including the related notes)
of World Access included in the World Access SEC Documents (the "World Access
Financial Statements") comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with GAAP (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a
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consistent basis during the periods involved (except as may be indicated in the
notes thereto), and fairly present (subject in the case of unaudited statements
to the absence of footnotes and to normal, recurring and year-end audit
adjustments which will not be material individually or in the aggregate) the
consolidated financial position of World Access as of the dates thereof and the
consolidated results of its operations and cash flows for the periods then
ended.
SECTION 5.7. Events Subsequent to World Access Most Recent Fiscal Year
End. Since the World Access Most Recent Fiscal Year End, there has not been any
World Access Material Adverse Effect. Without limiting the generality of the
foregoing, since that date:
(a) none of World Access or any of its Subsidiaries has sold, leased,
transferred, or assigned any material assets, tangible or intangible,
outside the Ordinary Course of Business;
(b) none of World Access or any of its Subsidiaries has entered into
any material agreement, contract, lease, or license outside the Ordinary
Course of Business;
(c) no party (including World Access or any of its Subsidiaries) has
accelerated, terminated, made material modifications to, or canceled any
material agreement, contract, lease, or license to which any of World
Access or any of its Subsidiaries is a party or by which any of them is
bound;
(d) none of World Access or any of its Subsidiaries has imposed any
Security Interest upon any of its assets, tangible or intangible;
(e) none of World Access or any of its Subsidiaries has made any
material capital expenditures outside the Ordinary Course of Business;
(f) none of World Access or any of its Subsidiaries has made any
material capital investment in, or any material loan to, any other Person
outside the Ordinary Course of Business;
(g) World Access and its Subsidiaries have not created, incurred,
assumed, or guaranteed more than $10,000,000 in aggregate indebtedness
(other than internal debt between World Access and/or its Subsidiaries) for
borrowed money and capitalized lease obligations;
(h) other than is normal and customary with respect to their
respective businesses, none of World Access or any of its Subsidiaries has
granted any license or sublicense of any material rights under or with
respect to any Intellectual Property;
(i) there has been no change made or authorized in the charter or
bylaws of World Access or any of its Subsidiaries;
(j) none of World Access or any of its Subsidiaries has issued, sold,
or otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon conversion,
exchange or exercise) any of its capital stock;
(k) none of World Access or any of its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution with respect to its
capital stock (whether in cash or in kind) or redeemed, purchased, or
otherwise acquired any of its capital stock;
(l) none of World Access or any of its Subsidiaries has experienced
any material damage, destruction, or loss (whether or not covered by
insurance) to its property;
(m) none of World Access or any of its Subsidiaries has made any loan
to, or entered into any other transaction with, any of its directors,
officers, and employees outside the Ordinary Course of Business;
(n) none of World Access or any of its Subsidiaries has entered into
any employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(o) none of World Access or any of its Subsidiaries has granted any
increase in the base compensation of any of its directors, officers or
employees outside the Ordinary Course of Business;
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(p) none of World Access or any of its Subsidiaries has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of any of
its directors, officers, and employees (or taken any such action with
respect to any other Employee Benefit Plan);
(q) none of World Access or any of its Subsidiaries has made any other
material change in employment terms for any of its directors, officers or
employees outside the Ordinary Course of Business; and
(r) none of World Access or any of its Subsidiaries has committed to
any of the foregoing.
SECTION 5.8. Undisclosed Liabilities. None of World Access or any of its
Subsidiaries has any material liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, and whether due or to
become due, including any liability for taxes), except for (a) liabilities set
forth in the World Access Most Recent Balance Sheet and (b) liabilities which
have arisen since the date of the World Access Most Recent Balance Sheet in the
Ordinary Course of Business.
SECTION 5.9. Opinion of Financial Advisor. World Access has received the
opinion of The Robinson-Humphrey Company, Inc., dated the date of this
Agreement, that, as of such date, the Consideration to be paid hereunder and in
connection with the U.S. Merger is fair, from a financial point of view, to
World Access.
SECTION 5.10. Litigation. Neither World Access nor any of its
Subsidiaries (a) is subject to any outstanding injunction, judgment, order,
decree, ruling, or charge or (b) is a party or, to the Knowledge of World
Access, is threatened to be made a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator, and, to the Knowledge of World Access, no reasonable
basis therefor exists.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
In order to induce World Access and New World Access to enter into this
Agreement, Shareholder represents and warrants to World Access and New World
Access that, except as set forth in the Disclosure Schedule to be delivered by
Shareholder to World Access within ten (10) Business Days of the date hereof
(the "Shareholder Disclosure Schedule"), which shall identify exceptions by
specific Section references:
SECTION 6.1. Authority. Shareholder has all requisite power and authority
and has full legal capacity and is competent to execute, deliver and perform
this Agreement and the Ancillary Documents to be executed by it and to
consummate the transactions contemplated hereby and thereby. Cherry U.K. has all
requisite corporate power and authority to execute, deliver and perform this
Agreement and the Ancillary Documents to be executed by it and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement by Cherry U.K. and the consummation of the transactions contemplated
on its part hereby have been duly authorized by all necessary corporate action
and no other corporate proceedings on its part is necessary to authorize the
consummation of the transactions contemplated on its part. This Agreement has
been duly executed and delivered by Shareholder and Cherry U.K. and constitutes,
and each of the Ancillary Documents to be signed at Closing, when executed and
delivered by Shareholder or Cherry U.K. (as the case may be) will constitute, a
valid and binding obligation of Shareholder and Cherry U.K. (as the case may
be), enforceable against them in accordance with their respective terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other law affecting the enforcement of creditors'
rights generally or by general equity principles.
SECTION 6.2. Organization, Qualification, and Corporate Power. Each of
Cherry U.K. and its Subsidiaries is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation. Each of Cherry U.K. and its Subsidiaries is duly authorized and
qualified to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is
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required, except where the lack of such qualification would not have a Cherry
U.K. Material Adverse Effect. Each of Cherry U.K. and its Subsidiaries has full
corporate power and authority to carry on the businesses in which it is engaged
and to own, lease, use and operate the properties owned, leased, used and
operated by it. The copy of the Memorandum and Articles of Cherry U.K. to be set
forth in the Shareholder Disclosure Schedule is complete, accurate and up to
date and has embodied in or annexed to it copies of all Resolutions referred to
in Section 380 Companies Act passed prior to the date of this Agreement. No such
Resolutions have been passed since the date of the Cherry U.K. Most Recent
Balance Sheet and the Shareholder shall procure that no such Resolutions shall
be passed by Cherry U.K. after the date of this Agreement without the prior
written consent of New World Access. The Register of Members and all other
Statutory Books of Cherry U.K. have been properly kept and contain a true,
accurate and complete record of the business affairs and financial position of
and all material transactions entered into and material liabilities incurred by
Cherry U.K. or to which it has become a party and all matters with which they
should deal. No notice or allegation that any of such documents are incorrect or
should be rectified has been received and such documents have been retained by
Cherry U.K. for such periods as may be required by all applicable laws.
SECTION 6.3. Capitalization. The entire authorized capital stock of
Cherry U.K. consists of 50,000 shares of Cherry U.K. Stock, of which 50,000
shares of Cherry U.K. Stock are issued and outstanding. All of the issued and
outstanding shares of Cherry U.K. have been duly authorized and are validly
issued and fully paid. There are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments that could require Cherry U.K. or any of its
Subsidiaries to issue, sell, or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to Cherry
U.K. and its Subsidiaries. Cherry U.K. and its Subsidiaries have no outstanding
bonds, debentures, notes or other similar obligations the holders of which have
the right to vote generally with holders of Cherry U.K. Stock. Shareholder is
the legal and beneficial owner of the Shares, and the Shares will be transferred
to New World Access with full legal and beneficial title, free and clear of all
Liens and Security Interests. Shareholder has the power, authority, right and
capacity to transfer and deliver legal and beneficial title to the Shares
pursuant to this Agreement and, except as set forth in the Shareholder
Disclosure Schedule, is not a party to or bound by any agreement, arrangement or
option restricting in any manner the sale and transfer of any of the Shares. No
power of attorney given by Cherry U.K. or any of its Subsidiaries is now in
force or effect.
SECTION 6.4. Non-contravention. Neither the execution and the delivery of
this Agreement or the Ancillary Documents, nor the consummation of the
transactions contemplated hereby or thereby, will (a) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
Shareholder, Cherry U.K. or any of its Subsidiaries are subject or any provision
of the memorandum and articles of association and any other organizational
documents of Cherry U.K. or any of its Subsidiaries; or (b) except with respect
to those agreements for which Consent shall be obtained prior to Closing,
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which Shareholder, Cherry U.K. or any of its
Subsidiaries is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets), except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, failure to give notice, or Security
Interest would not have a Cherry U.K. Material Adverse Effect. Except for the
Required Consents and such Consents and filings the failure of which to make or
obtain would have a Cherry U.K. Material Adverse Effect, neither Shareholder,
Cherry U.K., nor any Subsidiary of Cherry U.K. is required to give any notice
to, make any filing with, or obtain any Consent of any Regulatory Authority in
order for the Parties to consummate the transactions contemplated by this
Agreement or the Ancillary Documents. None of Cherry U.K. nor any of its
Subsidiaries has, directly or indirectly, provided any financial assistance for
the purpose of the acquisition of shares in it or for the purpose of reducing or
discharging any liability incurred in such an acquisition. No member of the
Cherry U.K. Group has in the previous five years been party to any transactions
to which Sections 238 to 246 (inclusive) of the Insolvency Act 1986 may be
applicable.
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SECTION 6.5. Brokers' Fees. Neither Shareholder nor Cherry U.K. has any
liability or obligation, contingent or otherwise, to pay any fees or commissions
or similar payments to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement or the Ancillary Documents.
SECTION 6.6. Title to Assets. Each of Cherry U.K. and its Subsidiaries
has good and marketable title to all of its material properties and assets, real
and personal, tangible and intangible, used by it, located on its premises, or
shown on the Cherry U.K. Most Recent Balance Sheet or acquired after the date
thereof, free and clear of all Security Interests, except for properties and
assets disposed of in the Ordinary Course of Business since the date of the
Cherry U.K. Most Recent Balance Sheet. All leases pursuant to which Cherry U.K.
or any of its Subsidiaries leases from other Persons material amounts of real or
personal property are in good standing, valid and effective in accordance with
their respective terms, and there is not, to the Knowledge of Shareholder, under
any of such leases, any existing material default or event of default (or event
which, with notice or lapse of time, or both, would constitute a material
default) except where lack of such good standing, validity and effectiveness or
the existence of such default or event of default would not reasonably be
expected to have a Cherry U.K. Material Adverse Effect. All title deeds relating
to the assets of Cherry U.K. and its Subsidiaries and an executed copy of all
material agreements to which it or any of its Subsidiaries is a party are in the
possession of Cherry U.K. or the relevant Subsidiary.
SECTION 6.7. Subsidiaries. The Shareholder Disclosure Schedule sets forth
for Cherry U.K. and each Subsidiary of Cherry U.K. true, complete and accurate
details of (a) its name and the jurisdiction of incorporation, (b) the number of
shares of authorized capital stock of each class of its capital stock, (c) the
number of issued and outstanding shares of each class of its capital stock, the
names of the holders thereof, and the number of shares held by each such holder,
(d) the number of shares of its capital stock held in treasury, (e) the names of
its directors and secretary and (f) its accounting reference date. All of the
issued and outstanding shares of capital stock of each Subsidiary of Cherry U.K.
have been duly authorized and are validly issued, fully paid, and nonassessable
and were issued in accordance with applicable United States federal and state
securities laws or the Companies Acts and laws of England and Wales, as the case
may be. Cherry U.K. holds of record and owns legally and beneficially all of the
outstanding shares of each Subsidiary of Cherry U.K., free and clear of any
Liens, restrictions on transfer (other than restrictions under the Securities
Act and state securities laws), taxes, Security Interests, options, warrants,
purchase rights, contracts, commitments, equities and demands. Other than the
Cherry U.K. Options, there are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments that could require Cherry U.K. to sell, transfer,
or otherwise dispose of any capital stock of any of its Subsidiaries or that
could require any such Subsidiary to issue, sell, or otherwise cause to become
outstanding any of its own capital stock. There are no outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to any Subsidiary of Cherry U.K. There are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of any capital
stock of any Subsidiary of Cherry U.K. None of Cherry U.K. and its Subsidiaries
controls directly or indirectly, or has any direct or indirect equity
participation in, any corporation, partnership, trust, or other business
association which is not a Subsidiary of Cherry U.K.
SECTION 6.8. Financial Statements. The Shareholder Disclosure Schedule
includes true and complete copies of the following financial statements of
Cherry U.K. (collectively, the "Cherry U.K. Financial Statements"): (a) the
unaudited consolidated balance sheet and the unaudited consolidated profit and
loss account and cash flow statement and statement of changes in shareholders
funds for the fiscal years ended December 31, 1996 and 1997 (the "Cherry U.K.
Most Recent Fiscal Year End") and in relation to each of Cherry U.K. and its
Subsidiaries the unaudited balance sheet and the unaudited profit and loss
account for the Cherry U.K. Most Recent Fiscal Year End; and (b) unaudited
consolidated balance sheets and profit and loss account and cash flow statement
(the "Cherry U.K. Most Recent Financial Statements") as of and for the three
months and year to date period ended March 31, 1998 (the "Cherry U.K. Most
Recent Fiscal Month End"). The Cherry U.K. Financial Statements (including the
notes thereto) comply with all requirements of the Companies Act, all other
relevant statutes and all Relevant Accounting Standards and in all other
respects have been prepared in accordance with U.K. GAAP applied on a consistent
basis throughout the periods covered thereby and present fairly the consolidated
financial condition of Cherry U.K. as of such dates and the
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consolidated results of operations of Cherry U.K. for such periods; provided,
however, that the Cherry U.K. Most Recent Financial Statements are subject to
normal recurring adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items. Without limiting the
generality of the foregoing, the Cherry U.K. Most Recent Financial Statements
accurately reflect anticipated material costs to complete all contracts or
services pursuant to which Cherry U.K. or any of its Subsidiaries has agreed to
furnish products and services in accordance with U.K. GAAP applied on a basis
consistent with the Cherry U.K. Financial Statements for the Cherry U.K. Most
Recent Fiscal Year End.
SECTION 6.9. Events Subsequent to Cherry U.K. Most Recent Fiscal Year
End. Since the Cherry U.K. Most Recent Fiscal Year End, there has not been any
Cherry U.K. Material Adverse Effect. Without limiting the generality of the
foregoing, since that date:
(a) none of Cherry U.K. or any of its Subsidiaries has sold, leased,
transferred, or assigned any material assets, tangible or intangible,
outside the Ordinary Course of Business;
(b) none of Cherry U.K. or any of its Subsidiaries has entered into
any material agreement, contract, lease, or license outside the Ordinary
Course of Business;
(c) no party (including Cherry U.K. or any of its Subsidiaries) has
accelerated, terminated, made material modifications to, or canceled any
material agreement, contract, lease, or license to which Cherry U.K. or any
of its Subsidiaries is a party or by which any of them is bound;
(d) none of Cherry U.K. or any of its Subsidiaries has imposed any
Security Interest upon any of its material assets, tangible or intangible;
(e) none of Cherry U.K. or any of its Subsidiaries has made any
material capital expenditures outside the Ordinary Course of Business;
(f) none of Cherry U.K. or any of its Subsidiaries has made any
material capital investment in, or any material loan to, any other Person
outside the Ordinary Course of Business;
(g) none of Cherry U.K. or any of its Subsidiaries has created,
incurred, assumed, or guaranteed more than $50,000 in aggregate
indebtedness for borrowed money and capitalized lease obligations;
(h) other than is normal and customary with respect to their
respective businesses, none of Cherry U.K. or any of its Subsidiaries has
granted any license or sublicense of any material rights under or with
respect to any Intellectual Property;
(i) there has been no change made or authorized in the memorandum and
articles of association of Cherry U.K. or the memorandum and articles of
association, charter, bylaws or other organizational documents of any of
its Subsidiaries and no resolution of Cherry U.K. or any of its
Subsidiaries has been passed in general meeting;
(j) none of Cherry U.K. or any of its Subsidiaries has issued, sold,
or otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon conversion,
exchange or exercise) any of its capital stock;
(k) none of Cherry U.K. or any of its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its capital
stock or reduced its capital stock;
(l) none of Cherry U.K. or any of its Subsidiaries has experienced any
material damage, destruction, or loss (whether or not covered by insurance)
to its property;
(m) none of Cherry U.K. or any of its Subsidiaries has made any loan
to, or entered into any other transaction with, any of its directors,
officers, and employees outside the Ordinary Course of Business;
(n) none of Cherry U.K. or any of its Subsidiaries has entered into
any material employment contract or collective bargaining agreement,
written or oral, or modified the terms of any existing such contract or
agreement outside the Ordinary Course of Business;
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(o) none of Cherry U.K. or any of its Subsidiaries has granted any
increase in the base compensation of any of its directors, officers or
employees outside the Ordinary Course of Business;
(p) none of Cherry U.K. or any of its Subsidiaries has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of any of
its directors, officers, and employees (or taken any such action with
respect to any other Employee Benefit Plan);
(q) none of Cherry U.K. or any of its Subsidiaries has made any other
material change in employment terms for any of its directors, officers, and
employees outside the Ordinary Course of Business; and
(r) none of Cherry U.K. or any of its Subsidiaries has committed to
any of the foregoing.
SECTION 6.10. Undisclosed Liabilities. None of Cherry U.K. or any of its
Subsidiaries has any material liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, and whether due or to
become due, including any liability for taxes), except for (a) liabilities set
forth in the Cherry U.K. Most Recent Balance Sheet and (b) liabilities which
have arisen since the date of Cherry U.K. Most Recent Balance Sheet in the
Ordinary Course of Business. Cherry U.K. has not applied for and is not in
receipt of any grant, subsidy or other financial assistance from any government
department, local authority or other body.
SECTION 6.11. Legal Compliance. Each of Shareholder, Cherry U.K. and its
Subsidiaries has complied with all applicable laws (including rules,
regulations, codes, ordinances, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder) of the United States federal, state and local,
and any foreign governments (and all agencies thereof) and with the Companies
Act, the European Communities Act and all European Community legislation, and no
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand, or notice has been filed or commenced or, to the Knowledge of
Shareholder, threatened against it alleging any failure so to comply, except
where the failure to comply would not have a Cherry U.K. Material Adverse
Effect. All dividends and distributions declared, made or paid by Cherry U.K. or
any of its Subsidiaries at any time were, when declared, made or paid, in
accordance with the requirements of the general law and the Articles of
Association of the relevant company.
SECTION 6.12. Tax Matters. The Shareholder Disclosure Schedule contains a
list of the countries and jurisdictions (whether the United Kingdom or
otherwise) to which any Taxes are properly payable by any of Cherry U.K. and its
Subsidiaries. Except with respect to any such matters that would not, in the
aggregate, have a Cherry U.K. Material Adverse Effect: 6.12.1. Cherry U.K. and
its Subsidiaries have duly and punctually paid all Taxes which they are or have
been liable to pay or account for prior to the date of this Agreement and has
made proper provision in the Cherry U.K. Financial Statements in respect of all
Taxes which they will or may become liable to pay or account for in respect of
all accounting and other periods ending on or before the date of this Agreement.
6.12.2. The amount of deferred taxation contained in the Cherry U.K.
Financial Statements was at the Cherry U.K. Most Recent Fiscal Year End adequate
and in accordance with generally accepted accountancy practices and, in
particular, was calculated in accordance with SSAP 15. If the Cherry U.K.
Financial Statements were to be drawn as at the date of this Agreement, the
provision for deferred taxation that would be made in them would be no greater
than that stated in the Cherry U.K. Financial Statements.
6.12.3. Cherry U.K. and its Subsidiaries have properly and punctually
deducted and accounted for Taxes which they have been required to deduct or for
which they have been required to account in respect of any payments made (or
deemed to have been made) by them. In particular, Cherry U.K. and its
Subsidiaries have properly operated the PAYE system and have duly made all
deductions and payments required to be made in respect of National Insurance
contributions (including employer's contributions).
6.12.4. Cherry U.K. and its Subsidiaries have duly and punctually made all
returns and given or delivered all notices and accounts and information and have
made all claims, disclaimers and elections which on or
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before the date of this Agreement ought to have been made, given or delivered
for the purposes of Taxes or which have been assumed for the purposes of the
Cherry U.K. Financial Statements.
6.12.5. There is no material dispute or disagreement outstanding nor is any
contemplated at the date of this Agreement with any Tax authority regarding: (a)
the computation of any gains profits or losses of Cherry U.K. or its
Subsidiaries for the purposes of Taxes; or (b) any liability or potential
liability to Taxes (including penalties or interest) recoverable from any of
Cherry U.K. or any of its Subsidiaries; or (c) the availability to any of Cherry
U.K. or its Subsidiaries of any relief from Taxes.
6.12.6. Each of Cherry U.K. and its Subsidiaries is not and will not become
liable to pay, reimburse or indemnify any person in respect of Taxes in
consequence of failure by that or any other person to discharge those Taxes
(whether within any specified period or otherwise) where such Taxes relate to a
profit, income, gain, transaction, event, omission or circumstance arising,
occurring or deemed to arise or occur (whether wholly or partly) on or before
the date of this Agreement.
6.12.7. The Shareholder Disclosure Schedule lists all concessions,
agreements and other formal or informal arrangements with any Tax authority
(other than such as are published by a Tax authority in the United Kingdom) from
which any of Cherry U.K. and its Subsidiaries has or will benefit, or by which
it is bound, and (in either case) which are extant on the date of this
Agreement.
6.12.8. Each of Cherry U.K. and its Subsidiaries maintains complete and up
to date information accounts and records of all transactions and activities in
which it has been involved and of its Taxes affairs which will or may be
relevant for calculating any Taxes liability of each of Cherry U.K. and its
Subsidiaries: (a) for any accounting or other period ending on or before the
date of this Agreement or in respect of any event occurring on or before this
date as to which no final agreement relating to Taxes has yet been reached with
the relevant Tax authority; (b) for any such period ending or event occurring
after the date of this Agreement; and (c) as required by law.
6.12.9. Each of Cherry U.K. and its Subsidiaries has not in the past six
years ending on the date of this Agreement been a party to any scheme or
arrangement: (a) in respect of which the main purpose or one of the main
purposes was the avoidance, reduction or deferral of a liability to Taxes; (b)
in respect of which any Taxes clearance has been or should have been obtained;
or (c) which was or included a reorganization or reduction of the share capital
of any of Cherry U.K. or its Subsidiaries.
6.12.10. Each of Cherry U.K. and its Subsidiaries has not been party to any
scheme or arrangement as a result of which on the future disposal of any asset
owned on the date of this Agreement the allowable loss or chargeable gain
otherwise arising or any liability to Taxes is liable to be adjusted by any Tax
authority.
6.12.11. Each of Cherry U.K. and its Subsidiaries has not in the six years
ending on the date of this Agreement carried out or been engaged in any
transaction or arrangement in respect of which there has been or may be
substituted for the consideration given or received by any of Cherry U.K. and
its Subsidiaries (including a nil consideration) a different consideration for
Taxes purposes, and none of Cherry U.K. and its Subsidiaries has an obligation
to enter into any such transaction or arrangement in the future.
6.12.12. Each of Cherry U.K. and its Subsidiaries has not since the Cherry
U.K. Most Recent Fiscal Year End made or incurred and is not liable to make or
incur any payments or expenditure in excess of $100,000 in aggregate which will
not be wholly deductible in computing its taxable profits or which will not be a
charge on income or otherwise allowable for the purposes of corporation tax
whether on the grounds of being a dividend or distribution or for any other
reason.
6.12.13. Each of Cherry U.K. and its Subsidiaries has not since the Cherry
U.K. Most Recent Fiscal Year End disposed of any asset otherwise than in the
Ordinary Course.
6.12.14. Otherwise than Cherry U.K. and its Subsidiaries taken together,
each of Cherry U.K. and its Subsidiaries has not at any time in the six years
ending on the Cherry U.K.. Most Recent Fiscal Year End been a member of a group
of companies for Taxes purposes.
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6.12.15. The Shareholder Disclosure Schedule details all relevant
surrenders of or claims for group relief or Advance Corporation Tax ("ACT")
which affect each of Cherry U.K. and its Subsidiaries for accounting periods in
respect of which no final agreement has been reached with the relevant Tax
authority as to its Taxes affairs or which were made in the six years ending
with the date of this Agreement. All such surrenders and claims are valid and
have been or will be allowed by the relevant Tax authority. None of Cherry U.K.
and its Subsidiaries has made or received any payment in respect of a claim for
or surrender of group relief or ACT which could in any circumstances be liable
to be refunded.
6.12.16. None of Cherry U.K. and its Subsidiaries owns any asset which it
acquired within the period of six years ending on the date of this Agreement
from another company which was at the date of acquisition a member of the same
group of companies as Cherry U.K. and its Subsidiaries.
6.12.17. No asset of any company shall be deemed under Section 178 or 179
Taxation of Chargeable Gains Act 1992 ("TCGA") to have been disposed of and
reacquired by virtue of or in consequence of the entering into or performance of
this Agreement or any other event after the Cherry U.K. Most Recent Fiscal Year
End.
6.12.18. All expenditures which any of Cherry U.K. and its Subsidiaries
have incurred or is liable to incur under any subsisting commitment on the
provision of machinery or plant has qualified or will qualify (if not deductible
as a trading expense) for capital allowances.
6.12.19. All allowances available to any of Cherry U.K. and its
Subsidiaries in respect of capital expenditure incurred prior to the date of
this Agreement or to be incurred under any subsisting commitment will be
available in taxing the trade of the relevant company.
6.12.20. None of the assets of any of Cherry U.K. and its Subsidiaries is
or may be a long-life asset within the meaning of Chapter IV A of Part II
Capital Allowances Act 1990.
6.12.21. None of Cherry U.K. and its Subsidiaries is in dispute with any
Person as to any entitlement to capital allowances under Section 51 Capital
Allowances Act 1990, nor at the date of this Agreement are there any
circumstances which might give rise to such a dispute.
6.12.22. All documents which each of Cherry U.K. and its Subsidiaries may
be interested in the enforcement of have been duly stamped, and there is no
liability to any fine or penalty in respect thereof nor are there any
circumstances which may result in any of Cherry U.K. or its Subsidiaries
becoming liable to any such fine or penalty.
6.12.23. Each of Cherry U.K. and its Subsidiaries has duly registered for
VAT purposes and has complied with all relevant provisions of the Value Added
Tax Act 1994 ("VATA") and regulations made or notices issued under any
legislation relating to VAT.
6.12.24. Each of Cherry U.K. and its Subsidiaries has not applied to
become, nor is it treated as, a member of a group of companies for VAT purposes.
6.12.25. The Shareholder Disclosure Schedule contains particulars
(including the date of the acquisition) of all capital items to which Part XV
Value Added Tax Regulations 1995 may be applied.
6.12.26. Neither Cherry U.K. and its Subsidiaries nor any relevant
associate of any of them (within the meaning of paragraph 3(7) of Schedule 10 to
VATA) has made an election in accordance with paragraphs 2 and 3 of Schedule 10
to VATA.
6.12.27. In respect of any loan relationship (within the meaning of Section
81 Finance Act 1996) to which any of Cherry U.K. and its Subsidiaries is a
party, the relevant company used a basis of accounting in the Cherry U.K.
Financial Statements which is an authorized accounting method under Section 85
of that Act.
6.12.28. None of Cherry U.K. and its Subsidiaries has been a party to a
loan relationship which had an unallowable purpose within the meaning of
paragraph 13 of Schedule 9 to the Finance Act 1996.
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SECTION 6.13. Real Property
6.13.1. Neither Cherry U.K. nor any of its Subsidiaries owns any real or
freehold property.
6.13.2. To the Knowledge of Shareholder, the Shareholder Disclosure
Schedule lists and describes briefly all real property leased or subleased to or
occupied or used by Cherry U.K. or its Subsidiaries (the "Properties"). Cherry
U.K. has been in possession of and shall deliver to World Access concurrent with
the delivery of the Shareholder Disclosure Schedule correct and complete copies
of the leases and subleases together with all other relevant documents of title
listed on the Shareholder Disclosure Schedule (as amended to date). With respect
to each material lease and sublease listed on the Shareholder Disclosure
Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect in all material respects;
(b) no party to the lease or sublease is in material breach or
default, and no event has occurred which, with notice or lapse of time,
would constitute a material breach or default or permit termination,
modification, or acceleration thereunder;
(c) no party to the lease or sublease has repudiated any material
provision thereof;
(d) there are no material disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(e) neither Cherry U.K. nor any of its Subsidiaries has charged,
assigned, leased, transferred, conveyed, mortgaged, deeded in trust, or
encumbered any interest in the leasehold or subleasehold and the Properties
are free from any options or agreements to do the same;
(f) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including material licenses and
permits) required in connection with the operation thereof, and have been
operated and maintained in accordance with applicable laws, rules, and
regulations in all material respects, including health and safety
provisions and provisions relating to safety from fire.
SECTION 6.14. Intellectual Property
6.14.1. Each of Cherry U.K. and its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, trade
secrets, trademarks, trade names, service marks, copyrights, and any
applications therefor, technology, know-how, computer software programs or
applications, and tangible or intangible proprietary information or material
that are used in its business as currently conducted, except as would not
reasonably be expected to have a Cherry U.K. Material Adverse Effect.
6.14.2. Except as would not reasonably be expected to have a Cherry U.K.
Material Adverse Effect (a) neither Cherry U.K. nor any of its Subsidiaries is
or will be, as a result of the execution and delivery of this Agreement or the
performance of its obligations hereunder, in violation of any Third-Party
Intellectual Property Rights; (b) no claims with respect to the patents,
registered and material unregistered trademarks and service marks, copyrights,
registered designs, trade names and any applications therefor owned by Cherry
U.K. or any of its Subsidiaries (the "Cherry U.K. Intellectual Property
Rights"), any trade secret material to Cherry U.K., or Third Party Intellectual
Property Rights to the extent arising out of any use, reproduction or
distribution of such Third Party Intellectual Property Rights by or through
Cherry U.K. or any of its Subsidiaries, are currently pending or, to the
Knowledge of Shareholder, are overtly threatened by any Person; and (c) Cherry
U.K. does not know of any valid ground for any bona fide claims (i) to the
effect that the manufacture, sale, licensing or use of any product as now used,
sold or licensed or proposed for use, sale or license by Cherry U.K. or any of
its Subsidiaries infringes on any copyright, patent, trademark, service mark,
registered design or trade secret, (ii) against the use by Cherry U.K. or any of
its Subsidiaries of any trademarks, trade names, trade secrets, copyrights,
patents, technology, know-how or computer software programs and applications
used in the business of Cherry U.K. or any of its Subsidiaries as currently
conducted or as proposed to be conducted, (iii) challenging the ownership,
validity or effectiveness of the Cherry U.K. Intellectual Property Rights or
other trade secret material to Cherry U.K., or (iv) challenging
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the license or legally enforceable right to use of the Third Party Intellectual
Rights by Cherry U.K. or any of its Subsidiaries.
6.14.3. To the Knowledge of Shareholder, all material patents, registered
trademarks, registered designs, service marks and copyrights held by Cherry U.K.
and its Subsidiaries are valid and subsisting. To the Knowledge of Shareholder,
there is no material unauthorized use, infringement or misappropriation of the
Cherry U.K. Intellectual Property by any third party, including any employee or
former employee of Cherry U.K. or any of its subsidiaries. Cherry U.K. and each
of its Subsidiaries has complied with all requirements of the Data Protection
Act 1984 and in particular: (a) has registered as a data user under that Act for
all purposes for which registration is required by the business as carried on by
Cherry U.K.; and (b) has complied with the data protection principles. No member
of the Cherry U.K. Group has received any notice letter or complaint alleging a
breach by it of the provisions of the Data Protection Act 1984 and has no reason
to believe that circumstances exist which may give rise to such a notice letter
or complaint.
SECTION 6.15. Tangible Assets. The buildings, machinery, equipment, and
other tangible assets that Cherry U.K. and its Subsidiaries own and lease are
free from material defects (patent and latent), have been maintained in
accordance with normal industry practice, and are in good operating condition
and repair (subject to normal wear and tear).
SECTION 6.16. Inventory. Neither Cherry U.K. nor any of its Subsidiaries
owns any inventory.
SECTION 6.17. Contracts. The Shareholder Disclosure Schedule lists the
following contracts and other agreements to which Cherry U.K. or any of its
Subsidiaries is a party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $25,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of
which will extend over a period of more than one year or involve
consideration in excess of $25,000;
(c) any agreement concerning a partnership or joint venture;
(d) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in excess of $100,000 or under
which it has imposed a Security Interest on any of its assets, tangible or
intangible;
(e) any material agreement concerning confidentiality or non-
competition;
(f) any material agreement with any Affiliates of Cherry U.K. or any
of its Subsidiaries or any other Connected Person (as defined in Section
839 Income and Corporation Taxes Act 1988);
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers,
and employees;
(h) any agreement under which any other Person is entitled to act as
agent for Cherry U.K. or any of its Subsidiaries;
(i) any agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis providing annual compensation in
excess of $100,000 or providing material severance benefits;
(j) any agreement under which it has advanced or loaned any amount to
any of its directors, officers, and employees or any other Connected Person
outside the Ordinary Course of Business;
(k) any agreement under which the consequences of a default or
termination could have a Cherry U.K. Material Adverse Effect not identified
on any other Schedule hereto; and
(l) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $25,000.
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Cherry U.K. shall deliver to World Access concurrent with the delivery of
the Shareholder Disclosure Schedule or make available for World Access's review
a correct and complete copy of each written agreement listed in the Shareholder
Disclosure Schedule (as amended to date), which shall be deemed to be Schedules
for purposes of Section 14.12 hereof, and a written summary setting forth the
material terms and conditions of each oral agreement referred to in the
Shareholder Disclosure Schedule. Except as set forth on the Shareholder
Disclosure Schedule, to the Knowledge of Shareholder, with respect to each such
agreement: (a) the agreement is legal, valid, binding, enforceable, and in full
force and effect in all material respects; (b) no party is in material breach or
default, and no event has occurred which with notice or lapse of time would
constitute a material breach or default, or permit termination, modification, or
acceleration, under the agreement; and (c) no party has repudiated any material
provision of the agreement.
SECTION 6.18. Notes and Accounts Receivable. All notes and accounts
receivable of each of Cherry U.K. and its Subsidiaries are reflected properly on
its books and records, are valid receivables, are current and collectible, and
will be collected in accordance with their terms at their recorded amounts,
subject only to the reserve for bad debts set forth on the face of the Cherry
U.K. Most Recent Balance Sheet (rather than in any notes thereto) as adjusted
for operations and transactions through the Closing Date in the Ordinary Course
of Business of Cherry U.K.
SECTION 6.19. Insurance. Each of Cherry U.K. and its Subsidiaries has
been and is insured with respect to its properties and conduct of its business
in such amounts and against such risks as are reasonable in relation to its
business and will maintain such insurance at least through the Effective Time.
SECTION 6.20. Litigation. Neither Cherry U.K. nor any of its Subsidiaries
(a) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (b) is a party or, to the Knowledge of Shareholder, is threatened
to be made a party to any action, suit, proceeding, hearing, or investigation
of, in, or before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator, and to
the Knowledge of Shareholder, no reasonable basis therefor exists. No order has
been made, petition presented or resolution passed for the winding up of Cherry
U.K. or any of its Subsidiaries.
SECTION 6.21. Employees. To the Knowledge of Shareholder, no executive,
key employee, or significant group of employees plans to terminate employment
with Cherry U.K. or its Subsidiaries during the next six months. Neither Cherry
U.K. nor any of its Subsidiaries is a party to or bound by any collective
bargaining agreement or any agreement with any trade union or any other body
representing employees and neither Cherry U.K. nor any of its Subsidiaries has
done anything that might result in such an agreement or arrangement being
implied, nor has it experienced any strike or material grievance, claim of
unfair labor practices, or other organized labor or collective bargaining
dispute within the past three years.
SECTION 6.22. Employee Benefits
6.22.1. The Cherry U.K. Plans are the only arrangements under which Cherry
U.K. and its Subsidiaries have or may have any obligation (whether or not
legally binding) to provide or contribute towards pension, lump sum, death,
ill-health, disability or accident benefits in respect of their past or present
officers and employees.
6.22.2. True and complete details of the Cherry U.K. Plans are set out in
the Shareholder Disclosure Schedule, including in particular: (a) copies of all
documentation governing the Cherry U.K. Plans and of any announcements,
valuations or accounts relating to them; (b) details of all officers and
employees of Cherry U.K. and its Subsidiaries who are members of the Cherry U.K.
Plans, and of any other members of the Plans; (c) details of the exercise of any
powers under the Cherry U.K. Plans to provide additional benefits in respect of
any members of the Plans; and (d) details of the Cherry U.K. Plans' assets and
liabilities.
6.22.3. The Cherry U.K. Plans are exempt approved schemes within the
meaning of Section 592 of the Income and Corporation Taxes Act 1988, and there
is no reason why approval may be withdrawn.
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6.22.4. If any Cherry U.K. Plan is a contracted-out scheme within the
meaning of the Pension Schemes Act 1993, there is in force a contracting out
certificate covering Cherry U.K. and its Subsidiaries, and there is no reason
why the certificate might be cancelled.
6.22.5. No proposal or announcement has been made to any officer or
employee of Cherry U.K. or its Subsidiaries about the introduction, continuance,
increase or improvement of any pension, lump sum, death, ill-health, disability
or accident benefit.
6.22.6. The respective assets of the Cherry U.K. Plans are sufficient to
satisfy their respective liabilities (current and contingent) as at the date of
this Agreement.
6.22.7. All contributions due to the Cherry U.K. Plans, all insurance
premiums due in respect of the Cherry U.K. Plans and all taxes and expenses in
respect of the Cherry U.K. Plans have been duly paid. The contributions in
respect of each Cherry U.K. Plan have been paid at the rates recommended in the
last actuarial valuation of such Plan.
6.22.8. Cherry U.K., its Subsidiaries and the trustees of the Cherry U.K.
Plans have complied in all material respects with their obligations under and in
respect of the Cherry U.K. Plans.
6.22.9. No discrimination on grounds of sex is or has at any stage been
made in the provision of pension, lump sum, death, ill-health, disability or
accident benefits by Cherry U.K. or its Subsidiaries.
6.22.10. No claims (other than routine claims for benefits), complaints to
the Pensions Ombudsman or reports to the Occupational Pensions Regulatory
Authority have been made or are pending or threatened in respect of the
provision of (or failure to provide) pension, lump sum, death, ill-health,
disability or accident benefits by Cherry U.K. or its Subsidiaries. There is no
fact or circumstance likely to give rise to such claims or complaints.
6.22.11. Full and accurate particulars in relation to each officer and
employee of the Cherry U.K. Group, including full name, age, sex, marital
status, date of commencement of employment (including employment with a previous
employer which counts as continuous employment for the purposes of the
Employment Rights Act 1996 or any similar enactment in the jurisdiction in which
Cherry U.K. is incorporated) and terms and conditions of employment are given in
the Shareholder Disclosure Schedule (if appropriate by reference to disclosed
standard terms and conditions of employment) and the officers and employees
listed in the Shareholder Disclosure Schedule are all the officers and employees
of Cherry U.K.
6.22.12. Since the date of the Cherry U.K. Most Recent Balance Sheet: (a)
there have been no changes in the remuneration of any officer or employee of
Cherry U.K. whose remuneration as at the Cherry U.K. Most Recent Balance Sheet
Date was in excess of $50,000 per annum; (b) other than normal annual increases,
there have been no changes in the rate of remuneration of any other officer or
employee of Cherry U.K.; and (c) there has been no change in the terms and
conditions of employment (other than remuneration) of any officer or employee of
Cherry U.K.
6.22.13. Cherry U.K. has complied with, and fulfilled all the requirements
of, its Memorandum and Articles of Association and of any statutes, regulations
and general law in relation to its employees.
6.22.14. The Cherry U.K. Group does not operate, nor has it proposed or
agreed to operate, for any of its officers or employees any incentive scheme or
arrangement, option scheme or bonus or profit sharing scheme whether or not
share based, nor are any of the Cherry U.K. Group's officers or employees
participating in or entitled (now or at any time) to participate in or otherwise
receive benefit from any such incentive scheme or arrangement, option scheme or
bonus or profit sharing scheme.
6.22.15. All subsisting contracts of service to which Cherry U.K. is a
party are determinable on not more than three months' notice without
compensation (other than compensation in accordance with the Employment Rights
Act 1996, as amended).
6.22.16. Details of those former officers or employees of Cherry U.K. whose
employment has been terminated by Cherry U.K. within the twelve months before
this Agreement have been included in the Shareholder Disclosure Schedule and in
respect of such persons: (a) Cherry U.K. has not paid and has no
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liability to pay any sums to such persons in respect of the termination of their
employment; and (b) no notice of the intention of any of such persons to assert
any statutory or other claim for reinstatement of, or compensation for loss of,
their employment has been received.
6.22.17. Except as disclosed in the Shareholder Disclosure Schedule, there
are no subsisting contracts for the provision by any person of any consultancy
or other similar services.
6.22.18. Except to the extent (if any) to which provision or allowance has
been made in the Cherry U.K. Financial Statements: (a) no member of the Cherry
U.K. Group has any liability in respect of any contract of service or for
services for redundancy payments (including protective awards) or for
compensation for wrongful dismissal or unfair dismissal or for failure to comply
with any order for the reinstatement or re-engagement of any employees; and (b)
no gratuitous payment has been made or promised by any member of the Cherry
Group in connection with the actual or proposed termination or suspension of
employment or variation of any contract of employment of any present or former
director or employee.
SECTION 6.23. Guaranties. Neither Cherry U.K. nor any of its Subsidiaries
is a guarantor or otherwise is responsible for any liability or obligation
(including indebtedness) of any other Person.
SECTION 6.24. Environment, Health, and Safety
6.24.1. Each of Cherry U.K. and its Subsidiaries: (a) has complied with the
Planning Acts and all other Environmental Laws, health, and safety laws of
England and Wales in all material respects, and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any such failure to comply; (b)
has obtained and has at all times been and is in substantial compliance with all
of the terms and conditions of all permits, licenses, and other authorizations,
certifications and training which are required under Environmental Laws and all
other environmental, health, and safety laws of England and Wales; (c) has
complied in all material respects with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules, and
timetables which are contained in Environmental Laws and all other
environmental, health, and safety laws of England and Wales; and (d) will
provide World Access within ten Business Days hereof, with copies within its
possession or control of all environmental assessments, complaints, claims,
consent orders or agreements, notices of violations, governmental inquiries and
permits issued or arising under or subject or relating or pursuant to
Environmental Laws and all other environmental, health and safety laws of
England and Wales for any property owned, now or in the past or to be acquired
prior to Closing, by Cherry U.K. or any of its Subsidiaries, and such copies
shall be deemed to be Schedules for purposes of Section 14.12 hereof.
6.24.2. either Cherry U.K. nor any of its Subsidiaries has any material
liability, and neither Cherry U.K. nor any of its Subsidiaries or any of their
respective predecessors has handled or disposed of any substance, arranged for
the disposal of any substance, exposed any employee or other individual to any
substance or condition, or owned or operated any property or facility in any
manner that could give rise to any material liability, for contamination or
damage to any site, location, or body of water (surface or subsurface), for any
illness of or personal injury to any employee or other individual, or for any
reason under the Planning Acts and all other environmental, health, and safety
law of England and Wales.
SECTION 6.25. Licenses, Permits, Consents, and Authorities. Cherry U.K.
and each of its Subsidiaries has all necessary licenses (including statutory
licenses), permits, consents and authorities (public and private) for the proper
and effective carrying on of its business in the manner in which such business
is now carried on. All such licenses, permits, consents and authorities are
valid and subsisting and, to the Knowledge of Shareholder, there is no reason
why any of them should be suspended, cancelled or revoked. Cherry U.K. does not
carry on or purport to carry on in the United Kingdom any investment business
within the meaning of the Financial Services Act 1986 and has never done so.
SECTION 6.26. Proxy Statement. None of the information supplied or to be
supplied by or on behalf of Cherry U.K. or any of its Subsidiaries for inclusion
or incorporation by reference in the Proxy Statement will, at the date mailed to
the stockholders of New World Access, and at the time of the meeting of
stockholders of New World Access to be held in connection with the Acquisition,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in
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order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
ARTICLE 7.
COVENANTS
SECTION 7.1. Conduct of Business of Cherry U.K. and its
Subsidiaries. During the period from the date of this Agreement to the
Effective Time, except as expressly contemplated by any other provision of this
Agreement, Shareholder shall use his best efforts to cause each of Cherry U.K.
and its Subsidiaries to (a) conduct its business in the Ordinary Course; (b) use
its best efforts to maintain and preserve intact its business organization,
employees, goodwill with customers and advantageous business relationships and
retain the services of its officers and key employees; and (c) except as
required by law or regulation, take no action which would adversely affect or
delay the ability of any Party to obtain any Consent from any Regulatory
Authorities or other approvals required for the consummation of the transactions
contemplated hereby or to perform its covenants and agreements under this
Agreement. By way of amplification and not limitation, except as expressly
contemplated by any other provision of this Agreement, Shareholder shall use his
best efforts to ensure that neither Cherry U.K. nor any of its Subsidiaries
shall, between the date of this Agreement and the Effective Time, directly or
indirectly, do, or agree to do, any of the following without the prior written
consent of World Access, which consent shall not be unreasonably withheld or
delayed:
(a) amend or otherwise change its memorandum and articles of
association, charter or bylaws or equivalent organizational documents or
pass any shareholders' resolutions (other than as contemplated by this
Agreement);
(b) other than the issuance of Cherry U.K. Options, issue, sell,
pledge, dispose of, grant, transfer, lease, license, guarantee or encumber,
or authorize the issuance, sale, pledge, disposition, grant, transfer,
lease, license or encumbrance of (i) any shares of capital stock of Cherry
U.K. or any of its Subsidiaries of any class, or securities convertible
into or exchangeable or exercisable for any shares of such capital stock,
or any options, warrants or other rights of any kind to acquire any shares
of such capital stock, or any other ownership interest of Cherry U.K. or
any of its Subsidiaries, or (ii) any property or assets of Cherry U.K. or
any of its Subsidiaries;
(c) (i) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any Person for
borrowed money or make any loans or advances, (ii) other than in the
Ordinary Course, terminate, cancel or request any material change in, or
agree to any material change in, any contract or agreement listed in the
Shareholder Disclosure Schedule or enter into any contract or agreement
material to its business, results of operations or financial condition,
(iii) make or authorize any capital expenditure, other than capital
expenditures in the Ordinary Course that have been budgeted for calendar
year 1998 and disclosed to World Access that are not, in the aggregate, in
excess of $2,500,000, or (iv) enter into or amend any contract, agreement,
commitment or arrangement that, if fully performed, would not be permitted
under this Section 7.1;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(f) amend the terms of, repurchase, redeem or otherwise acquire any of
its securities or propose to do any of the foregoing;
(g) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
Ordinary Course of Business of liabilities reflected or reserved against on
the Cherry U.K. Most Recent Balance Sheet and only to the extent of such
reserves;
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(h) take any action with respect to accounting policies or procedures,
other than actions in the ordinary course of business consistent with past
practice or as required by GAAP or U.K. GAAP, as the case may be;
(i) make any tax election or settle or compromise any material
federal, state or local income tax liability, or any income tax liability
of any other jurisdiction, other than those made in the Ordinary Course of
Business consistent with past practice and those for which specific
reserves have been recorded on the Cherry U.K. Most Recent Balance Sheet
and only to the extent of such reserves;
(j) enter into or amend any contract, agreement, commitment or
arrangement with, or enter into any transaction with, or make any payment
to or on account or behalf of, any Affiliate of Cherry U.K. or any of its
Subsidiaries; or
(k) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of Cherry
U.K. contained in this Agreement untrue or incorrect or prevent Cherry U.K.
from performing or cause Cherry U.K. not to perform its covenants hereunder
or result in any of the conditions to the Acquisition set forth herein not
being satisfied.
SECTION 7.2. Conduct of Business of World Access and its
Subsidiaries. During the period from the date of this Agreement to the
Effective Time, except for any actions taken by World Access or New World Access
relating to any other acquisitions or business combinations with a non-Affiliate
or as expressly contemplated by any other provision of this Agreement, each of
World Access and its Subsidiaries shall (a) conduct its business in the Ordinary
Course, (b) use its best efforts to maintain and preserve intact its business
organization, employees, goodwill with customers and advantageous business
relationships and retain the services of its officers and key employees, and (c)
except as required by law or regulation, take no action which would adversely
affect or delay the ability of any Party to obtain any Consent from any
Regulatory Authorities or other approvals required for the consummation of the
transactions contemplated hereby or to perform its covenants and agreements
under this Agreement. By way of amplification and not limitation, except for any
actions taken by World Access relating to any other acquisitions or business
combinations with a non-Affiliate or as expressly contemplated by any other
provision of this Agreement, neither World Access nor any of its Subsidiaries
shall, between the date of this Agreement and the Effective Time, directly or
indirectly, do, or agree to do, any of the following without the prior written
consent of Cherry U.K., which consent shall not be unreasonably withheld or
delayed:
(a) amend or otherwise change its charter or bylaws or equivalent
organizational documents;
(b) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except that (i) any Subsidiary may pay
dividends or make other distributions to World Access or any other
Subsidiary and (ii) World Access or New World Access may adopt a rights
plan or "poison pill";
(c) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) sell, transfer, license, sublicense or otherwise dispose of any
material assets having a value in excess of $10,000,000; or
(e) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of World
Access contained in this Agreement untrue or incorrect or prevent World
Access from performing or cause World Access not to perform its covenants
hereunder or result in any of the conditions to the Acquisition set forth
herein not being satisfied.
SECTION 7.3. Access to Books and Records. Each of the Parties will, and
each of Cherry U.K. and World Access shall use its best efforts to cause each of
its respective Subsidiaries to, permit representatives of the other Parties to
have reasonable access at all reasonable times, and in a manner so as not to
interfere with the normal business operations, to all premises, properties,
personnel, books, records (including tax records),
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contracts, and documents of or pertaining to each of the Parties and their
Subsidiaries in accordance with reasonable procedures required by the Parties
that are designed to minimize the impact on each Party's business. Each of the
Parties will treat and hold as such any Confidential Information it receives
from any of the Parties and their Subsidiaries in the course of the reviews
contemplated by this Section, will not use any of the Confidential Information
except in connection with this Agreement, and, if this Agreement is terminated
for any reason whatsoever, agrees to return all tangible embodiments (and all
copies thereof), to whichever of the Parties that originally disclosed such
embodiments, which are in its possession.
SECTION 7.4. Preparation of Proxy. In connection with the meeting of its
stockholders to be held to approve the U.S. Merger and the transactions
contemplated hereby, New World Access shall prepare a proxy statement for
submission to its stockholders (the "Proxy Statement"). Cherry U.K. shall
promptly furnish, and Shareholder shall use his best efforts to cause Cherry
U.K. to promptly furnish, to New World Access all information concerning its
business and financial statements and affairs which, in the reasonable judgment
of New World Access or its counsel, may be required or appropriate for inclusion
in the Proxy Statement and shall take such other action as they may reasonably
request in connection with the Proxy Statement.
ARTICLE 8.
ADDITIONAL AGREEMENTS
SECTION 8.1. Best Efforts; Cooperation. Subject to the terms and
conditions herein provided, each of the Parties agrees to use its best efforts
promptly to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, or otherwise, including attempting to obtain all necessary
Consents, to consummate and make effective, as soon as practicable, the
transactions contemplated by this Agreement.
SECTION 8.2. Regulatory Matters
8.2.1. Following the execution and delivery of this Agreement, World
Access, Shareholder and Cherry U.K. shall cause to be prepared and filed all
required applications and filings with the Regulatory Authorities which are
necessary or contemplated for the obtaining of the Consents of the Regulatory
Authorities and the consummation of the Acquisition, including any Consents
required to be obtained under the HSR Act. Such applications and filings shall
be in such form as may be prescribed by the respective government agencies and
shall contain such information as they may require. The Parties hereto will
cooperate with each other and use reasonable efforts to prepare and execute all
necessary documentation, to effect all necessary or contemplated filings and to
obtain all necessary or contemplated Consents of the Regulatory Authorities and
third parties which are necessary or contemplated to consummate the transactions
contemplated by this Agreement, including the stockholders of New World Access.
Each of the Parties shall have the right to review and approve in advance, which
approval shall not be unreasonably withheld, any filing made with, or written
material submitted to, any Regulatory Authority in connection with the
transactions contemplated by this Agreement.
8.2.2. Each Party will furnish the other Parties with all information
concerning itself, its Subsidiaries, directors, officers and stockholders, as
applicable, and such other matters as may be necessary or advisable in
connection with any statement or application made by or on behalf of any such
Party to any governmental body in connection with the transactions, applications
or filings contemplated by this Agreement. Upon request, the Parties hereto will
promptly furnish each other with copies of written communications received by
them or their respective Subsidiaries from, or delivered by any of the foregoing
to, any governmental body in respect of the transactions contemplated hereby.
SECTION 8.3. Indemnification Regarding the Proxy Statement
8.3.1. New World Access and World Access agree to indemnify, defend and
hold harmless Shareholder and Cherry U.K. and each of their respective present
and former officers, directors, employees, agents and
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representatives, as the case may be, from and against all losses, expenses,
claims, damages or liabilities to which any of them may become subject under
applicable laws (including the Exchange Act), and will reimburse each of them
for any legal, accounting or other expenses reasonably incurred in connection
with investigating or defending any such actions, whether or not resulting in
liability, insofar as such losses, expenses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of material fact provided by the indemnifying Party and contained in the Proxy
Statement or arise out of or are based upon the omission or alleged omission by
the indemnifying Party to state therein a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
8.3.2. Shareholder agrees to indemnify, defend and hold harmless World
Access and New World Access and each of their respective present and former
officers, directors, employees, agents and representatives, as the case may be,
from and against all losses, expenses, claims, damages or liabilities to which
any of them may become subject under applicable laws (including the Exchange
Act), and will reimburse each of them for any legal, accounting or other
expenses reasonably incurred in connection with investigating or defending any
such actions, whether or not resulting in liability, insofar as such losses,
expenses, claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of material fact provided by
Shareholder and contained in the Proxy Statement or arise out of or are based
upon the omission or alleged omission by Shareholder to state therein a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
8.3.3. Cherry U.K. agrees to indemnify, defend and hold harmless World
Access and New World Access and each of their respective present and former
officers, directors, employees, agents and representatives, as the case may be,
from and against all losses, expenses, claims, damages or liabilities to which
any of them may become subject under applicable laws (including the Exchange
Act), and will reimburse each of them for any legal, accounting or other
expenses reasonably incurred in connection with investigating or defending any
such actions, whether or not resulting in liability, insofar as such losses,
expenses, claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of material fact provided by Cherry
U.K. and contained in the Proxy Statement or arise out of or are based upon the
omission or alleged omission by Cherry U.K. to state therein a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 8.4. Notice of Development. Each of the Parties will give prompt
written notice to other Parties of any material adverse development that causes
or is likely to cause a material breach of any of its representations and
warranties contained in this Agreement. Such disclosure by any Party pursuant to
this Section shall be deemed to amend or supplement any disclosure contained in
the Schedules attached hereto to prevent or cure any misrepresentation, breach
of warranty, or breach of covenant.
SECTION 8.5. Notices and Consents. Each of the Parties will give any
notices (and will cause each of the Parties within their control to give any
notices) to third parties, and will use their reasonable efforts to obtain (and
will cause each of the Parties within their control to use their reasonable
efforts to obtain) any third-party consents that may be required to consummate
the transactions contemplated hereby.
SECTION 8.6. Indemnity. Subject to the provisions of laws of England and
Wales, New World Access shall cause Cherry U.K. to keep in effect provisions of
its memorandum and articles of association and other organizational documents
under the laws of England and Wales providing for exculpation of director and
officer liability and its indemnification of each Person who is now an officer
or director of Cherry U.K. (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties") to the fullest extent permitted under
the provisions of the laws of England and Wales, which provisions shall not be
amended except as required by applicable law or except to make changes permitted
by law that would enlarge the Indemnified Parties' right of indemnification. The
provisions of this Section shall survive the consummation of the Acquisition and
expressly are intended to benefit each of the Indemnified Parties.
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SECTION 8.7. Exclusive Dealing
8.7.1. Shareholder shall not, nor shall Shareholder authorize or permit
Cherry U.K. or any officer, director of employee of, or any attorney or other
advisor or representative of, Cherry U.K. to, (i) solicit or initiate, or
encourage the submission of, any Acquisition Proposal or (ii) except in
connection with fulfilling its duties described in Section 10.8.5 in the U.S.
Merger Agreement, participate in any discussions or negotiations regarding, or
furnish to any Person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal.
8.7.2. Shareholder shall cause the Board of Directors of Cherry U.K. not to
(i) approve or recommend, or propose to approve or recommend, any Acquisition
Proposal or (ii) enter into any type of agreement or letter of intent with
respect to any Acquisition Proposal.
8.7.3. If, (i) prior to the termination of this Agreement, Cherry U.K.
enters into or proposes to enter into an agreement or letter of intent with
respect to any Acquisition Proposal, Shareholder shall concurrently with Cherry
U.K. entering into such agreement or letter of intent or the receipt of such
approval pay, or cause to be paid, in same day funds to World Access, all of the
costs and expenses incurred by World Access in connection with this Agreement,
including fees and expenses of its financial advisors, accountants and counsel
(the "Expenses"), or (ii) an Acquisition Proposal shall have been made prior to
the termination of this Agreement and within one year of such termination Cherry
U.K. enters into an agreement or letter of intent with respect to, or approves
or recommends or takes any action to facilitate such Acquisition Proposal,
Shareholder shall pay, or cause to be paid, in same day funds upon demand, the
Expenses, provided that, so long as Cherry U.K. is not then in breach of any of
its obligations herein, no payment shall be due to World Access under subpart
(ii) above if, (A) at the time of the termination of this Agreement, Shareholder
shall desire in good faith to proceed with the transactions contemplated hereby,
and World Access shall elect not to do so, (B) any Regulatory Authority
prohibits the consummation of the transactions contemplated hereby or refuses to
give any required Consent, or (C) the conditions to Closing set forth in Article
10 hereof are not satisfied, provided that Shareholder has used all reasonable
efforts to satisfy such conditions, or the conditions to Closing set forth in
Article 13 hereof are not satisfied. The Parties acknowledge that damages in the
event of a breach of this Section 8.7 will be difficult to ascertain and that
the Expenses are intended to be full liquidated damages and such damages
represent the Parties' best estimate of such damages. The parties expressly
acknowledge that the foregoing liquidated damages are intended not as a penalty
but as full liquidated damages in the event of a breach of this Section 8.7, and
World Access acknowledges the Expenses are its sole and exclusive remedy for a
breach of this Section 8.7.
8.7.4. In addition to the obligations set forth in Sections 8.7.1, 8.7.2
and 8.7.3 above, Shareholder shall immediately advise World Access orally and in
writing of any request for information or of any Acquisition Proposal, or any
inquiry with respect to or which could lead to any Acquisition Proposal, the
material terms and conditions of such request, Acquisition Proposal or inquiry,
and the identity of the Person making any Acquisition Proposal or inquiry.
Shareholder shall keep World Access fully informed of the status and details
(including amendments or proposed amendments) of any such request, Acquisition
Proposal or inquiry.
Section 8.8. Investment Representations. Shareholder and each Cherry U.K.
Optionholder covenants and agrees that he is (i) acquiring the New World Access
Stock or the New World Access Option (as the case may be) to be issued in
connection herewith for his own account and not with a view to, or for resale in
connection with, any distribution thereof; (ii) understands and acknowledges
that such New World Access Stock or the New World Access Option (as the case may
be) has not been registered under the Securities Act or any state securities
laws by reason of certain exemptions from the registration provisions thereof
which depend upon, among other things, the bona fide nature of his investment
intent as expressed herein; (iii) is able to bear the economic risk of an
investment in such New World Access Stock or the New World Access Option (as the
case may be) and has such knowledge and experience in financial and business
matters that he is capable of evaluating the risks and merits of such New World
Access Stock or the New World Access Option (as the case may be); (iv) has been
provided with all information or been given access to all information with
respect to New World Access which he believes might affect its decision whether
to effect
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the transactions contemplated hereby; and (v) understands and acknowledges that
such New World Access Stock or New World Access Options issued pursuant to this
Agreement (as the case may be) will be "restricted securities" (as that term is
defined in Rule 144 under the Securities Act) and that the certificate
representing such New World Access Stock or the New World Access Option (as the
case may be) will bear a legend restricting transfer unless (A) the transfer is
exempt from the registration requirements under the Securities Act and any
applicable state securities law and an opinion of counsel reasonably
satisfactory to New World Access that such transfer is exempt therefrom is
delivered to New World Access or (B) the transfer is made pursuant to an
effective registration statement under the Securities Act and any applicable
state securities law. In determining to proceed with the transactions
contemplated hereby, Shareholder and each Cherry U.K. Optionholder has relied
solely on the results of his own independent investigation with respect to World
Access and New World Access and the shares of New World Access Stock or the New
World Access Option (as the case may be), upon the representations and
statements of World Access and New World Access set forth herein and upon the
World Access SEC Reports. Shareholder and each Cherry U.K. Optionholder
acknowledges that the representations and statements to it by World Access and
New World Access set forth herein and by World Access in the World Access SEC
Reports constitute the sole and exclusive representations, warranties, covenants
and statements of World Access and New World Access or any of its officers,
directors, shareholders or other affiliates in connection with the transactions
contemplated hereby, and Shareholder and each Cherry U.K. Optionholder
understands, acknowledges and agrees that all other representations, warranties,
covenants and statements of any kind or nature, whether oral or contained in any
writing other than this Agreement and each of the other documents contemplated
hereby, are specifically disclaimed by World Access and New World Access.
ARTICLE 9.
EFFECTIVE TIME; CLOSING; DELIVERIES AT CLOSING
SECTION 9.1. Effective Time; Closing Section. The transactions
contemplated by this Agreement shall be effective for all purposes upon the
execution and delivery of this Agreement by all of the Parties and the
satisfaction by all Parties of the terms and conditions of Articles 9 through 12
hereof (the "Effective Time"). Unless otherwise agreed upon in writing by the
Parties, the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Rogers & Hardin, 2700
International Tower, 229 Peachtree Street, Atlanta, Georgia 30303, commencing at
10:00 a.m. local time, as soon as practicable following the satisfaction or
waiver of the conditions set forth in Articles 10 through 12 hereof, but in no
event later than two business days thereafter (the date of such being referred
to herein as the "Closing Date"), unless otherwise mutually agreed to by the
Parties.
SECTION 9.2. Deliveries by Shareholder. At the Closing, Shareholder shall
deliver, or cause Cherry U.K. to deliver, as the case may be, to New World
Access each of the following:
(a) duly executed share transfers in respect of the Shares in favor of
New World Access, or as it may direct, together with the relative share
certificates and any power of attorney or other authority under which such
transfers have been executed;
(b) written resignations and releases executed as Deeds under hand or
under seal, in the agreed form, from the Secretary of Cherry U.K. and the
Directors (except from those persons expressly exempted from this
requirement by New World Access on or before the Closing Date), resigning
their offices and releasing Cherry U.K. and the Subsidiaries from all
claims and rights of action whatsoever, whether in respect of breach of
contract, compensation for loss of office, unfair dismissal, redundancy or
in respect of any loan or other indebtedness, or on any other account
whatsoever;
(c) the Common Seal, Certificate of Incorporation and all the
statutory books of Cherry U.K. and the Subsidiaries properly written up to
the day prior to the Closing Date, namely the Register of Members, Register
of Mortgages, Register of Directors and Secretaries, Register of Directors'
Interests, the Books of Account and the Minute Books of Meetings of Cherry
U.K. and the Subsidiaries and of their Boards of Directors;
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(d) share certificates in respect of all the issued shares in the
capital of the Subsidiaries and duly executed transfers of any share or
shares in the Subsidiaries not registered in the name of Cherry U.K. or any
of the Subsidiaries in favor of such Persons as New World Access shall
direct;
(e) irrevocable powers of attorney (in such form as New World Access
may require) executed by Shareholder in favor of New World Access, or its
nominees, enabling New World Access, or its nominees, pending registration
of the transfers of the Shares, to exercise all voting and other rights
attaching to the Shares and to appoint proxies for such purpose;
(f) The Escrow Agreement;
(g) The Option Escrow Agreement; and
(h) Such other separate instruments or documents that New World Access
may reasonably deem necessary or appropriate in order to consummate the
transactions contemplated by this Agreement, including all regulatory and
contractual consents of third parties.
SECTION 9.3. Deliveries by New World Access. At the Closing, New World
Access shall deliver to Shareholder each of the following:
(a) Resolutions of the Board of Directors of New World Access
authorizing the execution and delivery of this Agreement and the Ancillary
Documents by New World Access and the performance of its obligations
hereunder and thereunder, certified by the Secretary of New World Access;
(b) A certificate of the Secretary of State of Delaware dated as of a
recent date as to the good standing of New World Access in such state;
(c) A certificate of the Secretary of State of each jurisdiction of
incorporation or organization of each New World Access Subsidiary dated as
of a recent date as to the due organization and existence of such
Subsidiary in each such jurisdiction;
(d) The certificates representing the Share Consideration in
accordance with Section 2.2 hereof and the option agreements representing
the New World Access Options;
(e) The Escrow Agreement;
(f) The Option Escrow Agreement; and
(g) Such other separate instruments or documents that Shareholder may
reasonably deem necessary or appropriate in order to consummate the
transactions contemplated by this Agreement, including all regulatory and
contractual consents of third parties.
ARTICLE 10.
MUTUAL CONDITIONS TO CLOSING
The obligations of the Parties to consummate the transactions provided for
herein shall be subject to the satisfaction of the following conditions, unless
waived as hereinafter provided for:
SECTION 10.1. Board Meeting of Cherry U.K. and Subsidiaries. Shareholder
shall cause to be duly held a meeting of Cherry U.K. and, where necessary, of
its Subsidiaries and of the Board of Cherry U.K. and of its Subsidiaries validly
to effect or execute or validly to resolve to effect or execute:
(a) the approval of the said transfers of the Shares to New World
Access, its nominees, the issue to New World Access, its nominees of share
certificates in respect of those shares and the registration of New World
Access or its nominees as holders of those shares (subject only to those
transfers being represented duly stamped);
(b) the appointment as Directors and Secretary of Cherry U.K. and the
Subsidiaries of such persons as New World Access may nominate, subject to
such persons consenting to such appointment
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and not being disqualified in law or under the Articles of Association of
Cherry U.K. or the relevant Subsidiary from holding such offices;
(c) the revocation of all existing bank mandates and the issue of new
mandates in relation to Cherry U.K. and the Subsidiaries to such bank or
banks and in such form as New World Access may direct;
(d) the sealing of the certificates representing the Shares in favor
of New World Access;
(e) any other business which may be necessary or desirable to give
full and valid effect to the sale and purchase provided for in this
Agreement or as New World Access may reasonably require; and
(f) the Shareholder shall supply duly signed minutes of all such
meetings to New World Access at the Closing.
SECTION 10.2. Regulatory Approvals. All necessary Consents of the
Regulatory Authorities (including the FCC and the PUCs) shall have been obtained
and all notice and waiting periods required by law (including any waiting period
applicable to the Acquisition under the HSR Act) to pass after receipt of such
Consents shall have been terminated or shall have expired, and all conditions to
consummation of the Acquisition set forth in such Consents shall have been
satisfied. New World Access shall have received all permits or other
authorizations or confirmations as to the availability of exemptions from
registration requirements under all federal, state and foreign securities laws
as may be necessary to issue shares of New World Access Stock pursuant to this
Agreement.
SECTION 10.3. Litigation. There shall be no actual or threatened causes
of action, investigations or proceedings (a) challenging the validity or
legality of this Agreement or the consummation of the transactions contemplated
by this Agreement; (b) seeking damages in connection with the transactions
contemplated by this Agreement; or (c) seeking to restrain or invalidate the
transactions contemplated by this Agreement, which, in the case of (a) through
(c), and in the reasonable judgment of New World Access and Shareholder, based
upon advice of counsel, would have a material adverse effect with respect to the
interests of New World Access and Shareholder, as the case may be.
SECTION 10.4. Proxy Statement. The Proxy Statement with respect to the
transaction contemplated hereby and the U.S. Merger shall have been filed with
the SEC and any other Regulatory Authorities for review and comment and shall
have been authorized for mailing, either by notice from the SEC or the lapse of
time for review and comment by the SEC or such Regulatory Authority.
SECTION 10.5. Consummation of Holding Company Reorganization. The Holding
Company Reorganization shall have been consummated.
SECTION 10.6. Resignations. New World Access shall have received the
resignations, effective as of the Closing, of each director and officer of
Cherry U.K., other than those whom shall have been agreed upon by the Parties as
specified in writing at least 30 days prior to the Closing.
SECTION 10.7. Escrow Agreement. The Escrow Agent shall have executed and
delivered the Escrow Agreement.
SECTION 10.8. Option Escrow Agreement. The Option Escrow Agent shall have
executed and delivered the Option Escrow Agreement.
SECTION 10.9. Material Condition. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Acquisition by any Regulatory Authority which, in connection
with the grant of any Consent by any Regulatory Authority, imposes, in the
judgment of the Parties any material adverse requirement upon the Parties, or
any one of them, provided that no such term or condition imposed by any
Regulatory Authority in connection with the grant of any Consent by any
Regulatory Authority shall be deemed to be a material adverse requirement unless
it materially differs from terms and conditions customarily imposed by any such
entity in connection with the acquisition of corporations under similar
circumstances.
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SECTION 10.10. Consents. All Consents of third parties required in
connection with the transactions contemplated hereby shall have been obtained,
except where the failure to obtain such Consents, in the aggregate, would not
reasonably be expected to result in a World Access Material Adverse Effect or a
Cherry U.K. Material Adverse Effect, provided that a Party which has not used
all reasonable efforts to obtain a Consent may not assert this condition with
respect to such Consent.
SECTION 10.11. NASDAQ Listing. The shares of New World Access Stock to be
issued hereunder shall have been approved upon official notice of issuance for
quotation on NASDAQ or listing on a national securities exchange agreed upon by
the Parties in writing prior to the Closing.
SECTION 10.12. U.S. Merger Transaction. The U.S. Merger shall have been
consummated.
ARTICLE 11.
CONDITIONS TO THE OBLIGATIONS OF NEW WORLD ACCESS
The obligations of New World Access to consummate the Acquisition are
subject to the fulfillment of each of the following conditions, unless waived by
World Access or New World Access:
SECTION 11.1. Representations and Warranties. The representations and
warranties of Cherry U.K. set forth in this Agreement and in any certificate or
document delivered pursuant hereto shall be true and correct in all material
respects as of the date of this Agreement and as of all times up to and
including the Effective Time (as though made on and as of the Effective Time
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for changes therein
contemplated by this Agreement).
SECTION 11.2. Performance of Obligations. Shareholder and Cherry U.K.
shall have performed all covenants, obligations and agreements required to be
performed by them under this Agreement prior to the Effective Time.
SECTION 11.3. Certificate Representing Satisfaction of Conditions.
Shareholder and Cherry U.K. shall have delivered to New World Access a
certificate dated as of the Closing Date as to the satisfaction of the matters
described in Sections 11.1 and 11.2 hereof, and such certificate shall be deemed
to constitute additional representations, warranties, covenants, and agreements
of Shareholder and Cherry U.K. under this Agreement.
SECTION 11.4. Tax Opinion. New World Access shall have received an
opinion, dated the Closing Date, from Rogers & Hardin LLP, based upon customary
representations and warranties, to the effect that no gain or loss will be
recognized by New World Access as a result of the transactions contemplated
hereby.
SECTION 11.5. Material Adverse Change. Since the date of this Agreement,
there shall not have been any Cherry U.K. Material Adverse Effect.
ARTICLE 12.
CONDITIONS TO OBLIGATIONS OF SHAREHOLDER
The obligations of Shareholder to consummate the Acquisition are subject to
the fulfillment of each of the following conditions, unless by Shareholder:
SECTION 12.1. Representations and Warranties. The representations and
warranties of the other Parties set forth in this Agreement and in any
certificate or document delivered pursuant hereto shall be true and correct in
all material respects as of the date of this Agreement and as of all times up to
and including the Effective Time (as though made on and as of the Effective Time
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for changes therein
contemplated by this Agreement).
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SECTION 12.2. Performance of Obligations. New World Access and World
Access shall have performed all covenants, obligations and agreements required
to be performed by them under this Agreement prior to the Effective Time.
SECTION 12.3. Certificate Representing Satisfaction of Conditions. New
World Access and World Access shall each have delivered to Shareholder a
certificate dated as of the Closing Date as to the satisfaction of the matters
described in Sections 12.1 and 12.2 hereof, and such certificates shall be
deemed to constitute additional representations, warranties, covenants, and
agreements of New World Access and World Access under this Agreement.
SECTION 12.4. Tax opinion. Shareholder shall have received an opinion,
dated the Closing Date, from Long, Aldridge & Norman, based on customary
representations and warranties, to the effect that no gain or loss will be
recognized by Shareholder as a result of the transactions contemplated hereby.
SECTION 12.5. Material Adverse Change. Since the date of this Agreement,
there shall not have been any World Access Material Adverse Effect.
ARTICLE 13.
TERMINATION
SECTION 13.1. Termination of Agreement. This Agreement may be terminated
at any time prior to the Closing:
(a) by mutual written consent duly authorized by the Boards of
Directors of New World Access, World Access and Cherry U.K. and Shareholder
at any time prior to the Effective Time; or
(b) by World Access or New World Access at any time prior to the
Effective Time, if (i) there has been a material breach of a
representation, warranty, covenant or agreement of Shareholder and Cherry
U.K., and such breach has not been cured or is incapable of being cured
within 15 days of notice of such breach; or (ii) either World Access or New
World Access determines in their respective sole good faith judgment,
within thirty (30) days of the delivery of the Shareholder Disclosure
Schedule, that the exceptions set forth therein are materially adversely
different from the representations and warranties of Shareholder and Cherry
U.K. in Article 6 hereof, provided that World Access or New World Access
shall inform Cherry U.K. upon such termination as to the reasons for its
determination; or
(c) by Shareholder and Cherry U.K. at any time prior to the Effective
Time, if (i) there has been a material breach of a representation,
warranty, covenant, or agreement of World Access or New World Access, and
such breach has not been cured or is incapable of being cured within 15
days of notice of such breach; or (ii) Shareholder and Cherry U.K.
determine, in their respective sole good faith judgment, within thirty (30)
days of the delivery of the World Access Disclosure Schedule, that the
exceptions set forth therein are materially adversely different from the
representations and warranties of New World Access and World Access in
Article 5 hereof, provided that Shareholder and Cherry U.K. shall inform
New World Access and World Access upon such termination as to the reasons
for its determination; or
(d) by New World Access, World Access or Shareholder if the Closing
has not occurred by November 1, 1998, unless extended by mutual written
consent of New World Access, World Access and Shareholder, duly authorized
by the board of director of New World Access (provided that the right to
terminate this Agreement under this Section shall not be available to any
Party whose failure to perform any material covenant or obligation or whose
breach of a representation or warranty under this Agreement has been the
cause of or resulted in the failure of the Closing to occur on or before
such date); or
(e) by New World Access, World Access or Shareholder if the U.S.
Merger is terminated for any reason in accordance with its terms.
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SECTION 13.2. Effect of Termination and Breach. In the event of
termination of this Agreement as provided in Section 13.1, this Agreement and
the Ancillary Documents shall forthwith become void and have no effect, without
any liability or obligation on the part of any Party, other than any liability
or obligation arising under the provisions of this Section 13.2 and Sections
8.7.3, 14.3 and 14.13; provided, however, that in no event shall such
termination relieve any Party of liability for any breach by such Party of any
of its covenants and agreements set forth herein and in the Ancillary Documents,
and further provided, that no Party shall have any liability hereunder for any
breach of a representation or warranty of such Party except to the extent that
such breach shall have been the result of common law fraud, intentional
omission, deliberate concealment or gross negligence.
SECTION 13.3. Confidentiality Upon Termination. In the event of any
termination of this Agreement for any reason, including any breach by any of the
Parties, each Party shall treat as confidential and shall not disclose, or use
directly or indirectly for their benefit or any third party's benefit or to the
detriment of any other Party in any manner whatsoever, or permit others under
their control to disclose, or to use, Confidential Information concerning the
other Parties obtained pursuant to or in connection with the Acquisition which
is not generally known to the trade or a matter of public knowledge.
SECTION 13.4. Specific Performance. The Parties hereto agree that money
damages or other remedy at law would not be a sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement and the Ancillary
Documents by them and that in addition to all other remedies available to them,
each of them shall be entitled to the fullest extent permitted by law to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including specific
performance, without bond or other security being required.
ARTICLE 14.
GENERAL PROVISIONS
SECTION 14.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Time. This Section shall not limit any covenant or agreement of the Parties
which by its terms contemplates performance after the Effective Time.
SECTION 14.2. Press Releases and Public Announcements. No Party shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement without the prior written approval of all of the other
Parties; provided, however, that any Party may make any public disclosure it
believes in good faith is required by applicable law (in which case the
disclosing Party will use its best efforts to advise the other Parties at the
earliest possible time prior to making such disclosure).
SECTION 14.3. No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns; provided, however, that the
provisions in Articles 2, 3, and 4 hereof concerning payment of the
Consideration contemplated by this Agreement and certain additional agreements
are intended for the benefit of the stockholders of New World Access,
Shareholder and the Cherry U.K. Optionholders.
SECTION 14.4. Entire Agreement. This Agreement (including the Ancillary
Documents) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
SECTION 14.5. Succession and Assignment. This Agreement and the Ancillary
Documents shall be binding upon and inure to the benefit of the Parties named
herein and their respective successors and permitted assigns. No Party may
assign either this Agreement or the Ancillary Documents or any of its rights,
interests, or obligations hereunder or thereunder without the prior written
approval of all of the other Parties.
SECTION 14.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE> 627
SECTION 14.7. Notices. Notices to be given to Shareholder or Cherry U.K.
hereunder shall be in writing and delivered personally to Shareholder or the
designated officer of Cherry U.K., transmitted by facsimile, or deposited in the
United States mail, certified and return receipt requested, postage prepaid, and
addressed as follows (or to such other address as may be specified by
Shareholder or Cherry U.K. in writing):
Cherry Communications U.K. Limited c/o Resurgens Communications Group 2210
Resurgens Plaza 945 East Paces Ferry Road Atlanta, Georgia 30326 Attention:
Chief Executive Officer Telephone: (404) 261-6190 Facsimile: (404) 233-2280
with a copy to (which will not constitute notice to Shareholder or Cherry
U.K.):
Long, Aldridge & Norman Suite 5300 One Peachtree Center 303 Peachtree
Street Atlanta, Georgia 30308-3201 Attention: Clay C. Long, Esq. Telephone:
(404) 527-4050 Facsimile: (404) 527-4198
Notices to be given to New World Access or World Access hereunder shall be
in writing and delivered personally to the designated officer of New World
Access, transmitted by facsimile, or deposited in the United States mail,
certified and return receipt requested, postage prepaid, and addressed as
follows (or to such other address as may be specified by New World Access
or World Access in writing):
WAXS Inc. c/o World Access, Inc. 945 E. Paces Ferry Road, Suite 2240
Atlanta, Georgia 30326 Attention: Chief Executive Officer Telephone: (404)
231-2025 Facsimile: (404) 365-9847
with a copy to (which will not constitute notice to New World Access or
World Access):
Rogers & Hardin LLP 2700 International Tower 229 Peachtree Street, N.E.
Atlanta, Georgia 30303 Attention: Steven E. Fox, Esq. Telephone: (404)
420-4603 Facsimile: (404) 525-2224
Notices delivered personally shall be effective upon delivery. Notices
transmitted by facsimile shall be effective when receipt is confirmed.
Notices delivered by mail shall be effective upon the acceptance or
rejection by the Person to whom they are addressed.
SECTION 14.8. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of Georgia without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Georgia or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Georgia.
SECTION 14.9. Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence. Notwithstanding the foregoing, a Cherry U.K. Optionholder shall
become a Party hereto without the consent of any other Party hereto by executing
and delivering to New World Access a counterpart of the signature page hereto.
SECTION 14.10. Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
SECTION 14.11. Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any federal, state, local
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires.
"Herein", "hereby", "hereunder", "hereof", "hereinbefore, "hereinafter" and
other equivalent words refer to this Agreement as a whole and not solely to the
particular Article or Section in which such word is used. When a reference is
made in this
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<PAGE> 628
Agreement to a Section or Exhibit, such reference shall be to a Section of, or
an Exhibit to, this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever any of the words "include", "includes" or "including" is used in this
Agreement, it shall be deemed to be followed by the words "without limitation".
SECTION 14.12. Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
SECTION 14.13. Transaction Costs. Each of the Parties shall be
responsible for its own expenses in connection with the negotiation of this
Agreement and the consummation of the transactions contemplated hereby,
including those expenses incurred in connection with the Proxy Statement,
attorneys' fees and disbursements, accounting fees and disbursements and
investment banking fees and disbursements.
IN WITNESS WHEREOF, each of the Parties hereto has caused its duly
authorized officer to execute and deliver this Agreement as of the date first
above written.
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
---------------------------------------
Name: Steven A. Odom
Its: Chairman and CEO
WAXS, INC.
By: /s/ STEVEN A. ODOM
---------------------------------------
Name: Steven A. Odom
Its: Chairman and CEO
Executed as a Deed
By: /s/ JOHN D. PHILLIPS (DIRECTOR)
---------------------------------------
Name: John D. Phillips
By: /s/ W. TOD CHMAR
(DIRECTOR/SECRETARY)
---------------------------------------
Name: W. Tod Chmar
For and on behalf of
CHERRY COMMUNICATIONS U.K. LIMITED
RENAISSANCE PARTNERS II
By: /s/ JOHN D. PHILLIPS
---------------------------------------
Name: John D. Phillips
Its: Partner
By: /s/ W. TOD CHMAR
---------------------------------------
Name: W. Tod Chmar
Its: Partner
CHERRY U.K. OPTIONHOLDERS:
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EXHIBIT 99.3
News Release
SUMMARY: WORLD ACCESS, INC.
SIGNS DEFINITIVE AGREEMENTS TO ACQUIRE
RESURGENS COMMUNICATIONS GROUP
<TABLE>
<S> <C> <C> <C> <C>
CONTACT: Steven A. Odom Chairman & CEO
Hensley E. West President & COO
Mark A. Gergel Exec. VP & CFO
(404) 231-2025
</TABLE>
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- May 12, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS),
announced today that it has signed definitive agreements to acquire Cherry
Communications Incorporated, d/b/a Resurgens Communications Group ("RCG"), and
Cherry Communications U.K. Limited ("Cherry U.K.", and together with RCG,
"Resurgens"). The agreement to acquire RCG is subject to the approval of the
Bankruptcy Court.
Pursuant to the terms of the agreements, the creditors of RCG and the
shareholders of Cherry U.K. will receive approximately 3.7 million shares of
World Access common stock in the aggregate, currently valued at approximately
$140 million. In addition, the RCG creditors and Cherry U.K. shareholders have
the right to receive additional consideration of up to 7.5 million shares of
World Access common stock over the next two and one-half years, contingent upon
the achievement of certain EBITDA levels by Resurgens during this timeframe. The
transaction is subject to, among other things, Resurgens exceeding pre-defined
levels of monthly revenues and gross margin, the receipt of the requisite
corporate and regulatory approvals, the confirmation of RCG's Plan of
Reorganization and the approval of World Access shareholders.
RCG, currently operating under the protection of Chapter 11 of the United
States Bankruptcy Code, and Cherry U.K. are facilities-based providers of
international network access, commonly referred to in the industry as carriers'
carrier. In October 1997, John D. ("Jack") Phillips entered into a series of
agreements whereby, among other things, he became the new Chairman and Chief
Executive Officer of Resurgens. RCG filed for bankruptcy protection shortly
thereafter. WorldCom, Inc. ("WorldCom"), a major customer and vendor of
Resurgens, has subsequently provided Resurgens approximately $26 million of
direct financial support through a debtor in possession facility and additional
financial support, primarily through trade credits. Upon completion of the
Resurgens acquisition, WorldCom is expected to own approximately 15% of World
Access on a fully diluted basis.
Steven A. Odom, Chairman and Chief Executive Officer of World Access, said,
"The acquisition of Resurgens is expected to close in the third quarter and
positively impact World Access earnings and cash flow beginning in the fourth
quarter of 1998. The acquisition uniquely positions the Company to offer its
customers a complete telecommunications network solution, including proprietary
equipment, planning and engineering services and access to international long
distance. The international network access offered by Resurgens is a critical
element of new and expanded networks currently being planned or implemented by
many World Access customers."
"We believe the ability to offer both equipment and network access will
provide World Access with a comprehensive and cost-competitive product offering,
especially for international competitive local exchange providers ("CLECs") and
other providers of phone service in emerging growth markets. We have identified
numerous synergistic opportunities for World Access as a direct result of
Resurgens, including equipment sales to Resurgens customers, joint ventures with
international PTTs and CLECs, carrier service revenues from World Access
equipment customers and significant cost savings for the internal network of
Resurgens."
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"We are excited that Jack Phillips has agreed to serve as the Chairman of
the combined company upon consummation of the transaction. He is one of the
pioneers of the U.S alternative long distance business, having built up Advanced
Telecommunications Corporation, which merged with WorldCom in 1992, and
Resurgens Communications Group, Inc., which merged with Metromedia
Communications Corporation and WorldCom in 1993. We are also extremely pleased
that WorldCom, a recognized leader in today's telecommunications industry, will
become the largest shareholder of the combined company."
Mr. Phillips, Chairman and Chief Executive Officer of Resurgens, said "Over
the past six months, we have recruited proven industry professionals into
Resurgens and totally rebuilt the Resurgens operating network. New, reliable
billing systems have been tested and implemented, a 24 hour -- 7 day Network
Operations Center is now operational, and competitive, dedicated bandwidth and
transit agreements are in place. We currently expect Resurgens to generate
greater than $25 million in monthly revenues by July."
"Steve Odom and his management team have done a tremendous job over the
past three years of building World Access into a highly respected, fast growing
telecommunications equipment company. Steve will continue to serve as the Chief
Executive Officer of the combined company and I look forward to working with him
as we continue to work towards achieving significant long-term value for World
Access stockholders."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The Company's products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. The Company offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. To support and complement its
product sales, the Company also provides its customers with a broad range of
design, engineering, manufacturing, testing, installation, repair and other
value-added services.
Except for any historical information contained herein, the matters
discussed in this press release contain forward-looking statements that involve
risks and uncertainties which are described in the Company's SEC reports,
including the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997, and the Company's Registration Statement on Form S-3
(No. 333-43497).
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APPENDIX K
<PAGE> 632
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 8, 1998 (JUNE 4, 1998)
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD,
SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 633
ITEM 5. OTHER EVENTS.
On June 4, 1998, World Access, Inc. ("World Access") announced that it had
entered into a definitive Agreement and Plan of Merger and Reorganization (the
"Merger Agreement") with WAXS INC., a wholly-owned subsidiary of World Access
("New World Access"), Tail Acquisition Corporation, a wholly-owned subsidiary of
New World Access ("Merger Sub"), and Telco Systems, Inc. ("Telco") pursuant to
which, among other things, Merger Sub will merge with and into Telco and Telco
shall thereupon become a wholly-owned subsidiary of New World Access (the
"Merger").
As a result of the Merger, each outstanding share of Telco common stock,
$.01 par value per share ("Telco Common Stock"), shall be converted into the
right to receive that number of shares of (i) World Access common stock, $.01
par value per share ("World Access Common Stock"), or (ii) if the previously
announced holding company reorganization shall have been consummated on or
before the time of the Merger, New World Access common stock, $.01 par value per
share ("New World Access Common Stock") (in either case, the "Merger Common
Stock") equal to the quotient of $17.00 divided by the average daily closing
price of World Access Common Stock as reported on Nasdaq on each of the twenty
consecutive trading days ending on the second business day prior to the date of
the Merger (the "Average Closing Price"), provided that if the Average Closing
Price is more than $36.00 per share, then each share of Telco Common Stock will
be converted into .4722 shares of Merger Common Stock and if the Average Closing
Price is less than $29.00 per share, then each share of Telco Common Stock will
be converted into .5862 shares of Merger Common Stock.
The Merger is intended to constitute a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended, and will be accounted for as a
purchase. The consummation of the Merger is subject to (i) clearance under the
Hart-Scott-Rodino Improvements Act of 1976, as amended, (ii) the approval by the
respective stockholders of World Access (or New World Access, as the case may
be) and Telco, (iii) the approval by the stockholders of World Access or New
World Access (as the case may be) of an increase in the authorized shares of
common stock of such corporation, and (iv) the satisfaction or waiver of
customary conditions.
In connection with the Merger Agreement, Kopp Investment Advisors, Inc. and
the directors and certain executive officers of Telco entered into a
Stockholders Proxy Agreement with New World Access pursuant to which, among
other things, they agreed to vote an aggregate of approximately 8.0% of the
outstanding shares of Telco Common Stock in favor of the Merger.
The foregoing description of the Merger, the Merger Agreement and the
Stockholders Proxy Agreement is qualified in its entirety by reference to the
Merger Agreement and the Stockholders Proxy Agreement, each of which is filed as
an exhibit herewith and incorporated herein by reference. In addition, the Press
Release issued by World Access and Telco announcing the Merger is filed as an
exhibit herewith and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits. The following exhibits are filed herewith by direct transmission
via "edgar."
2.1 Agreement and Plan of Merger and Reorganization dated as of June 4, 1998
by and among World Access, Inc., WAXS INC., Tail Acquisition Corporation
and Telco Systems, Inc.
99.1 Stockholders Proxy Agreement dated as of June 4, 1998 among WAXS INC.,
Kopp Investment Advisors, Inc. and directors and certain officers of Telco
Systems, Inc.
99.2 Press Release issued on June 4, 1998 announcing the execution of the
Merger Agreement.
K-1
<PAGE> 634
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
-----------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of June 8, 1998
K-2
<PAGE> 635
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of
June 4, 1998 by and among World Access, Inc., WAXS INC.,
Tail Acquisition Corporation and Telco Systems, Inc.
99.1 Stockholders Proxy Agreement dated as of June 4, 1998 among
WAXS INC., Kopp Investment Advisors, Inc. and directors and
certain officers of Telco Systems, Inc.
99.2 Press Release issued on June 4, 1998 announcing the
execution of the Merger Agreement.
</TABLE>
K-3
<PAGE> 636
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG
WORLD ACCESS, INC.,
WAXS INC.,
TAIL ACQUISITION CORPORATION
AND
TELCO SYSTEMS, INC.
DATED AS OF JUNE 4, 1998
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TABLE OF CONTENTS
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ARTICLE I DEFINITIONS........................................................ K-7
SECTION 1.01. Certain Defined Terms....................................... K-7
ARTICLE II THE MERGER........................................................ K-13
SECTION 2.01. The Merger.................................................. K-13
SECTION 2.02. Closing..................................................... K-13
SECTION 2.03. Effective Time.............................................. K-13
SECTION 2.04. Effect of the Merger........................................ K-13
SECTION 2.05. Certificate of Incorporation; Bylaws; Directors and Officers
of Surviving Corporation.................................. K-13
ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES............... K-14
SECTION 3.01. Conversion of Securities.................................... K-14
SECTION 3.02. Exchange of Shares Other than Treasury Shares............... K-14
SECTION 3.03. Stock Transfer Books........................................ K-15
SECTION 3.04. No Fractional Share Certificates............................ K-15
SECTION 3.05. Options to Purchase Company Common Stock.................... K-16
SECTION 3.06. Certain Adjustments......................................... K-16
SECTION 3.07. Undistributed Amounts....................................... K-16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... K-16
SECTION 4.01. Organization and Qualification; Subsidiaries................ K-16
SECTION 4.02. Certificate of Incorporation and Bylaws..................... K-17
SECTION 4.03. Capitalization.............................................. K-17
SECTION 4.04. Authority Relative to this Agreement........................ K-18
SECTION 4.05. No Conflict; Required Filings and Consents.................. K-18
SECTION 4.06. Permits; Compliance with Laws............................... K-19
SECTION 4.07. SEC Filings; Financial Statements........................... K-20
SECTION 4.08. Absence of Certain Changes or Events........................ K-20
SECTION 4.09. Employee Benefit Plans; Labor Matters....................... K-21
SECTION 4.10. Certain Tax Matters......................................... K-22
SECTION 4.11. Contracts; Debt Instruments................................. K-22
SECTION 4.12. Litigation.................................................. K-23
SECTION 4.13. Environmental Matters....................................... K-23
SECTION 4.14. Intellectual Property....................................... K-23
SECTION 4.15. Taxes....................................................... K-24
SECTION 4.16. Rule 145 Affiliates......................................... K-24
SECTION 4.17. Brokers..................................................... K-24
SECTION 4.18. Certain Business Practices.................................. K-24
SECTION 4.19. Transaction Expenses........................................ K-24
SECTION 4.20. Interested Party Transactions............................... K-24
SECTION 4.21. Charter Anti-takeover Provisions and State Takeover
Statutes.................................................. K-25
SECTION 4.22. Opinion of Financial Advisor................................ K-25
ARTICLE V REPRESENTATIONS AND WARRANTIES OF WAG, PARENT AND MERGER SUB....... K-25
SECTION 5.01. Organization and Qualification; Subsidiaries................ K-25
SECTION 5.02. Certificate of Incorporation and Bylaws..................... K-25
SECTION 5.03. Capitalization.............................................. K-25
SECTION 5.04. Authority Relative to this Agreement........................ K-26
SECTION 5.05. No Conflict; Required Filings and Consents.................. K-27
SECTION 5.06. Permits; Compliance with Laws............................... K-27
SECTION 5.07. SEC Filings; Financial Statements........................... K-28
SECTION 5.08. Absence of Certain Changes or Events........................ K-28
SECTION 5.09. Employee Benefit Plans; Labor Matters....................... K-28
SECTION 5.10. Certain Tax Matters......................................... K-30
SECTION 5.11. Contracts; Debt Instruments................................. K-30
SECTION 5.12. Litigation.................................................. K-30
SECTION 5.13. Environmental Matters....................................... K-31
SECTION 5.14. Intellectual Property....................................... K-31
SECTION 5.15. Taxes....................................................... K-31
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SECTION 5.16. Brokers..................................................... K-31
SECTION 5.17. Certain Business Practices.................................. K-32
SECTION 5.18. Opinion of Financial Advisor................................ K-32
SECTION 5.19. Interested Party Transactions............................... K-32
SECTION 5.20. Ownership of Company Capital Stock.......................... K-32
ARTICLE VI COVENANTS......................................................... K-32
SECTION 6.01. Conduct of Business by the Company Pending the Closing...... K-32
SECTION 6.02. Conduct of Business by WAG and Parent Pending the Closing... K-34
SECTION 6.03. Notices of Certain Events................................... K-35
SECTION 6.04. Access to Information; Confidentiality...................... K-35
SECTION 6.05. No Solicitation of Transactions............................. K-35
SECTION 6.06. Letters of Accountants...................................... K-36
SECTION 6.07. Subsequent Financial Statements............................. K-36
SECTION 6.08. Control of Operations....................................... K-36
SECTION 6.09. Further Action; Consents; Filings........................... K-36
ARTICLE VII ADDITIONAL AGREEMENTS............................................ K-37
SECTION 7.01. Registration Statement; Proxy Statement..................... K-37
SECTION 7.02. Stockholders' Meetings...................................... K-38
SECTION 7.03. Rule 145 Affiliates......................................... K-39
SECTION 7.04. Directors' and Officers' Indemnification.................... K-39
SECTION 7.05. No Shelf Registration....................................... K-40
SECTION 7.06. Public Announcements........................................ K-40
SECTION 7.07. Nasdaq Listing.............................................. K-40
SECTION 7.08. Blue Sky.................................................... K-40
SECTION 7.09. Company Stock Options....................................... K-41
SECTION 7.10. Tax Treatment............................................... K-41
SECTION 7.11. Obligations of Parent and WAG............................... K-41
SECTION 7.12. Company Employees........................................... K-41
SECTION 7.13. Board of Directors of Parent and WAG........................ K-42
ARTICLE VIII CONDITIONS TO THE MERGER........................................ K-42
SECTION 8.01. Conditions to the Obligations of Each Party to Consummate
the Merger................................................ K-42
SECTION 8.02. Conditions to the Obligations of the Company................ K-43
SECTION 8.03. Conditions to the Obligations of WAG and Parent............. K-43
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER................................. K-44
SECTION 9.01. Termination................................................. K-44
SECTION 9.02. Effect of Termination....................................... K-45
SECTION 9.03. Amendment................................................... K-45
SECTION 9.04. Waiver...................................................... K-45
SECTION 9.05. Expenses.................................................... K-45
ARTICLE X GENERAL PROVISIONS................................................. K-46
SECTION 10.01. Non-Survival of Representations and Warranties.............. K-46
SECTION 10.02. Notices..................................................... K-46
SECTION 10.03. Severability................................................ K-47
SECTION 10.04. Assignment; Binding Effect; Benefit......................... K-47
SECTION 10.05. Incorporation of Exhibits................................... K-47
SECTION 10.06. Governing Law............................................... K-47
SECTION 10.07. Waiver of Jury Trial........................................ K-47
SECTION 10.08. Construction................................................ K-47
SECTION 10.09. Counterparts................................................ K-48
SECTION 10.10. Entire Agreement............................................ K-48
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EXHIBITS
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Exhibit 1.00(a) Form of Stockholder Proxy Agreement
Exhibit 7.03 Form of Company Affiliate Agreement
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AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of June 4, 1998
(as amended, supplemented or otherwise modified from time to time, the
"AGREEMENT"), among WORLD ACCESS, INC., a corporation organized and existing
under the laws of the State of Delaware ("WAG"), WAXS INC., a corporation
organized and existing under the laws of the State of Delaware and a
wholly-owned subsidiary of WAG ("PARENT"), TAIL ACQUISITION CORPORATION, a
corporation organized and existing under the laws of the State of Delaware
("MERGER SUB") and a direct wholly-owned subsidiary of Parent, and TELCO
SYSTEMS, INC., a corporation organized and existing under the laws of the State
of Delaware (the "COMPANY");
W I T N E S S E T H:
WHEREAS, the boards of directors of WAG, Parent, Merger Sub and the Company
have each determined that it is consistent with and in furtherance of their
respective long-term business strategies and fair to and in the best interests
of their respective stockholders to combine the respective businesses of WAG,
Parent and the Company by means of a merger (the "MERGER") of Merger Sub with
and into the Company upon the terms and subject to the conditions set forth
herein and in accordance with the General Corporation Law of the State of
Delaware;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent and Merger Sub to enter into this Agreement, Parent has
entered into a proxy agreement substantially in the form attached hereto as
Exhibit 1.00(a), dated as of the date hereof (the "STOCKHOLDERS PROXY
AGREEMENT"), with each of the Company's directors and senior executive officers
and Kopp Investment Advisors, Inc., a corporation organized and existing under
the laws of the State of Minnesota (each, a "PRINCIPAL STOCKHOLDER"), pursuant
to which each Principal Stockholder has granted to Parent a proxy to vote all of
the shares of Company Capital Stock (as hereinafter defined) held by such
Principal Stockholder, all upon the terms and subject to the conditions set
forth therein;
WHEREAS, on February 24, 1998, WAG, Parent, NACT Telecommunications, Inc.,
a Delaware corporation and a majority-owned subsidiary of WAG ("NACT"), WAXS
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent, and NACT Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent, entered into that certain Agreement and Plan of Merger
and Reorganization pursuant to which, among other things, each of WAG and NACT
will become wholly-owned subsidiaries of Parent (the "HOLDING COMPANY
REORGANIZATION"); and
WHEREAS, for United States Federal income tax purposes, it is intended that
the Merger qualify as a reorganization under the provisions of Section 368 of
the Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder, the "CODE");
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein, and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Defined Terms. Unless the context otherwise
requires, the following terms, when used in this Agreement, shall have the
respective meanings specified below (such meanings to be equally applicable to
the singular and plural number of the terms so defined, unless the context
otherwise requires):
"Affected Employee" shall have the meaning specified in Section 7.12(a).
"Affiliate" shall have the meaning specified in rule 144 promulgated under
the Securities Act.
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"Agreement" shall have the meaning specified in the preamble to this
Agreement.
"Alternative Merger" shall have the meaning specified in Section 2.01.
"Beneficial Owner" shall mean, with respect to any shares of capital stock,
a person who shall be deemed to be the beneficial owner of such shares (i) which
such person or any of its affiliates or associates (as such term is defined in
rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such person or any of its affiliates or associates has,
directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of consideration
rights, exchange rights, warrants or options, or otherwise, or (B) the right to
vote pursuant to any agreement, arrangement or understanding, or (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom such
person or any of its affiliates or associates or person with whom such person or
any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
such shares of capital stock; provided, however, that a Person shall not be
deemed the beneficial owner of, or to beneficially own, any security if the
agreement, arrangement or understanding (written or oral) to vote such security
arises solely from a revocable proxy or consent given to such person pursuant to
a definitive proxy statement filed with the SEC and otherwise in accordance with
the rules and regulations under the Exchange Act.
"Blue Sky Laws" shall mean state securities or "blue sky" laws.
"Broadview" shall mean Broadview Associates LLC.
"Business Day" shall mean any day on which the principal offices of the SEC
in Washington, D.C. are open to accept filings, or, in the case of determining a
date when any payment is due, any day on which banks are not required or
authorized by law, regulation or executive order to close in New York, New York.
"Capital Increase" shall have the meaning specified in Section 7.01(b).
"Cash Deposit" shall have the meaning specified in Section 3.04.
"Certificate of Merger" shall have the meaning specified in Section 2.03.
"Closing" shall have the meaning specified in Section 2.02.
"Closing Date Market Price" shall mean the average of the daily closing
price of the WAG Common Stock, in the event that the Holding Company
Reorganization shall not have been consummated, or Parent Common Stock, in the
event that the Holding Company Reorganization shall have been consummated, in
either case as reported on Nasdaq on each of the twenty consecutive trading days
ending on the Determination Date, provided that, in the event that the Holding
Company Reorganization shall have been consummated during such twenty-day
period, the Closing Date Market Price shall be calculated by reference to the
average of the daily closing price of the WAG Common Stock or the Parent Common
Stock, as the case may be, for the number of days such stock was traded during
such period.
"Code" shall mean the meaning specified in the recitals hereto.
"Common Exchange Ratio" shall have the meaning specified in Section
3.01(a).
"Company Fairness Opinion" shall mean the written opinion of Broadview
delivered to the board of directors of the Company (i) to the effect that the
exchange ratio to be offered the holders of the Company Common Stock in the
Merger is fair to the holders of such stock from a financial point of view, and
(ii) which has been authorized by Broadview for inclusion in the Proxy
Statement.
"Company" shall have the meaning specified in the preamble to this
Agreement.
"Company 1997 10-K" shall have the meaning specified in Section 4.02.
"Company Affiliate Agreement" shall have the meaning specified in Section
7.03(a).
"Company Benefit Plans" shall have the meaning specified in Section
4.09(a).
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"Company Capital Stock" shall mean the Company Common Stock, the Company
Junior Common Stock and the Company Preferred Stock.
"Company Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Company.
"Company Disclosure Schedule" shall mean the disclosure schedule delivered
by the Company to Parent prior to the execution of this Agreement and forming a
part hereof.
"Company Junior Common Stock" shall mean the Series A Junior Common Stock,
par value $0.01 per share, of the Company.
"Company Licenses" shall have the meaning specified in Section 4.14.
"Company Material Adverse Effect" shall mean any change in or effect on the
business of the Company and the Company Subsidiaries that is, or would
reasonably be expected to be, materially adverse to the business, assets
(including intangible assets), liabilities (contingent or otherwise), condition
(financial or otherwise) or results of operations of the Company and the Company
Subsidiaries taken as a whole, other than any change or effect relating to this
Agreement or the transactions contemplated hereby or the announcement thereof.
"Company Material Contract" shall have the meaning specified in Section
4.11.
"Company Permits" shall have the meaning specified in Section 4.06.
"Company Preferred Stock" shall mean the Series A Participating Cumulative
Preferred Stock, $0.01 per share par value, of the Company.
"Company Products" shall have the meaning specified in Section 4.06(b).
"Company Third Party Products" shall have the meaning specified in Section
4.06(b).
"Company Reports" shall have the meaning specified in Section 4.07(a).
"Company Stockholders' Meeting" shall have the meaning specified in Section
7.01(a).
"Company Stock Option" shall have the meaning specified in Section 3.05.
"Company Stock Plans" shall mean the Company's 1980 Stock Option Plan, the
Company's 1988 Non-Statutory Stock Option Plan and the Company's 1990 Stock
Option Plan.
"Company Stock Purchase Plans" shall have the meaning specified in Section
4.03.
"Company Subsidiaries" shall have the meaning specified in Section 4.01.
"Competing Transaction" shall mean any of the following involving the
Company or any Company Subsidiary whose business constitutes 30% or more of the
net revenues, net income or assets of the Company and its subsidiaries, taken as
a whole, as the case may be (other than the Merger contemplated by this
Agreement):
(i) any merger, consolidation, share exchange, business combination or
other similar transaction;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 15 percent or more of the assets of such party and its
subsidiaries, taken as a whole, in a single transaction or series of
related transactions except for the sale of inventory in the ordinary
course of business; or
(iii) any tender offer or exchange offer for 15 percent or more of the
outstanding voting securities of such party or the filing of a registration
statement under the Securities Act in connection therewith.
"Confidentiality Agreement" shall mean the Mutual Non-Disclosure and
Confidentiality agreement dated as of November 7, 1997 between WAG and the
Company.
"Costs" shall have the meaning specified in Section 7.04(b).
"Delaware General Corporation Law" shall mean the General Corporation Law
of the State of Delaware.
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"Determination Date" shall mean the second business day prior to the date
on which the Effective Time is expected to occur.
"$" shall mean United States Dollars.
"Effective Time" shall have the meaning specified in Section 2.03.
"Environmental Law" shall mean any Law and any enforceable judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to pollution or protection of the
environment or natural resources, including those relating to the use, handling,
transportation, treatment, storage, disposal, release or discharge of Hazardous
Material, as in effect as of the date hereof.
"Environmental Permit" shall mean any permit, approval, identification
number, license or other authorization required under or issued pursuant to any
applicable Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Exchange Agent" shall have the meaning specified in Section 3.02.
"Exchange Fund" shall have the meaning specified in Section 3.02.
"Expenses" shall mean, with respect to any party hereto, all reasonable
out-of-pocket expenses (including all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a party hereto and its
affiliates, but excluding any allocation of overhead) incurred by such party or
on its behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of its obligations pursuant to this
Agreement and the consummation of the Merger, the preparation, printing, filing
and mailing of the Registration Statement and the Proxy Statement, the
solicitation of stockholder approvals, the filing of HSR Act notice, if any, and
all other matters related to the closing of the Merger.
"FCC" shall have the meaning specified in Section 4.06(b).
"Governmental Entity" shall mean any United States federal, state or local
or any foreign governmental, regulatory or administrative authority, agency or
commission or any court, tribunal or arbitral body.
"Governmental Order" shall mean any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Entity.
"Hazardous Material" shall mean (i) any petroleum, petroleum products,
by-products or breakdown products, radioactive materials, asbestos-containing
materials or polychlorinated biphenyls or (ii) any chemical, material or
substance defined or regulated as toxic or hazardous or as a pollutant or
contaminant or waste under any applicable Environmental Law.
"Holding Company Reorganization" shall have the meaning specified in the
recitals to this Agreement.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, together with the rules and regulations promulgated
thereunder.
"Indemnified Parties" shall have the meaning specified in Section 7.04(b).
"IRS" shall mean the United States Internal Revenue Service.
"Law" shall mean any Federal, state, foreign or local statute, law,
ordinance, regulation, rule, code, order, judgment, decree, other requirement or
rule of law of the United States or any other jurisdiction, and any other
similar act or law.
"Listed Agreements" shall have the meaning specified in Section 7.12(c).
"Merger" shall have the meaning specified in the recitals to this
Agreement.
"Merger Sub" shall have the meaning specified in the preamble to this
Agreement.
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"Merger Sub Common Stock" shall have the meaning specified in Section
3.01(c).
"Multiemployer Plan" shall have the meaning specified in Section 4.09(b).
"Multiple Employer Plan" shall have the meaning specified in Section
4.09(b).
"NACT" shall have the meaning specified in the recitals to this Agreement.
"NASDAQ" shall mean The Nasdaq Stock Market National Market.
"Parent" shall have the meaning specified in the preamble to this
Agreement.
"Parent 1997 10-K" shall have the meaning specified in Section 5.02.
"Parent Affiliate Agreement" shall have the meaning specified in Section
7.03(b).
"Parent Benefit Plans" shall have the meaning specified in Section 5.09(a).
"Parent Common Stock" shall mean the Common Stock, par value $0.01 per
share, of Parent.
"Parent Disclosure Schedule" shall mean the disclosure schedule delivered
by Parent to the Company prior to the execution of this Agreement and forming a
part hereof.
"Parent Fairness Opinion" shall mean the written opinion of
Robinson-Humphrey delivered to the board of directors of Parent and WAG (i) to
the effect that the consideration to be paid in the Merger is fair, from a
financial point of view, to Parent and WAG, and (ii) which has been authorized
by Robinson-Humphrey for inclusion in the Proxy Statement.
"Parent Licenses" shall have the meaning specified in Section 5.14.
"Parent Material Adverse Effect" shall mean (i) prior to the consummation
of the Holding Company Reorganization, any change in or effect on the business
of WAG and the Parent Subsidiaries that is, or would reasonably be expected to
be, materially adverse to the business, assets (including intangible assets),
liabilities (contingent or otherwise), condition (financial or otherwise) or
results of operations of WAG and the Parent Subsidiaries taken as a whole, other
than any change or effect relating to this Agreement or the transactions
contemplated hereby or the announcement thereof and (ii) after the consummation
of the Holding Company Reorganization, any change in or effect on the business
of Parent and the Parent Subsidiaries that is, or would reasonably be expected
to be, materially adverse to the business, assets (including intangible assets),
liabilities (contingent or otherwise), condition (financial or otherwise) or
results of operations of Parent and the Parent Subsidiaries taken as a whole,
other than any change or effect relating to this Agreement or the transactions
contemplated hereby or the announcement thereof.
"Parent Material Contract" shall have the meaning specified in Section
5.11.
"Parent Permits" shall have the meaning specified in Section 5.06(a).
"Parent Reports" shall have the meaning specified in Section 5.07(a).
"Parent Stockholders' Meeting" shall have the meaning specified in Section
7.01(a).
"Parent Stock Plans" shall mean WAG's 1991 Stock Option Plan, WAG's 1998
Incentive Compensation Plan, WAG's Outside Directors' Warrant Plan, and WAG's
Directors Warrant Incentive Plan, all of which are to be assumed by Parent upon
consummation of the Holding Company Reorganization.
"Parent Subsidiaries" shall have the meaning specified in Section 5.01.
"Person" shall mean an individual, corporation, partnership, limited
partnership, limited liability company, syndicate, person (including a "person"
as defined in Section 13(d)(3) of the Exchange Act), trust, association, entity
or government or political subdivision, agency or instrumentality of a
government.
"Presurrender Dividends" shall have the meaning specified in Section 3.02.
"Principal Stockholder" shall have the meaning specified in the recitals
hereto.
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"Proxy Statement" shall have the meaning specified in Section 7.01(a).
"Registration Statement" shall have the meaning specified in Section
7.01(a).
"Representatives" shall have the meaning specified in Section 6.04(a).
"Restraints" shall have the meaning specified in Section 8.01(c).
"Resurgens Transaction" shall mean the pending acquisition by WAG and
Parent of (i) Cherry Communications Incorporated (d/b/a Resurgens Communications
Group) ("RCG") pursuant to that certain Agreement and Plan of Merger and
Reorganization dated as of May 12, 1998 to which WAG, Parent, RCG and certain
other persons are parties, and (ii) Cherry Communications U.K. Limited ("Cherry
U.K.") pursuant to that certain Share Exchange Agreement and Plan of
Reorganization dated as of May 12, 1998 to which WAG, Parent, the sole
shareholder of Cherry U.K. and Cherry U.K. are parties.
"Rights" shall have the meaning specified in Section 3.01(a).
"Rights Agreement" shall have the meaning specified in Section 4.03.
"Robinson-Humphrey" shall mean The Robinson-Humphrey Company, LLC.
"Rule 145 Affiliate" shall mean, with respect to any specified person, any
other persons who are "affiliates" of such specified person within the meaning
of Rule 145 (c) or (d) promulgated under the Securities Act.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Stockholders Proxy Agreement" shall have the meaning specified in the
recitals to this Agreement.
"Subsidiary" shall mean, with respect to any person, any corporation,
limited liability company, partnership, joint venture or other legal entity of
which such person (either alone or through or together with any other subsidiary
of such person) owns, directly or indirectly, a majority of the stock or other
equity interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
"Superior Proposal" shall have the meaning specified in Section 6.06.
"Surviving Corporation" shall have the meaning specified in Section 2.01.
"Taxes" shall mean any and all taxes, fees, levies, duties, tariffs,
imposts and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any Governmental Entity or taxing authority, including taxes or other
charges on or with respect to income, franchises, windfall or other profits,
gross receipts, property, sales, use, capital stock, payroll, employment, social
security, workers' compensation, unemployment compensation or net worth; taxes
or other charges in the nature of excise, withholding, ad valorem, stamp,
transfer, value-added or gains taxes; license, registration and documentation
fees; and customers' duties, tariffs and similar charges.
"Terminating Company Breach" shall have the meaning specified in Section
9.01(g).
"Terminating Parent Breach" shall have the meaning specified in Section
9.01(h).
"U.S. GAAP" shall mean United States generally accepted accounting
principles.
"Wag Common Stock" shall mean the Common Stock, par value $0.01 per share,
of WAG.
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ARTICLE II
THE MERGER
SECTION 2.01. The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the Delaware General
Corporation Law, at the Effective Time, Merger Sub shall be merged with and into
the Company. As a result of the Merger, the separate corporate existence of
Merger Sub shall cease and the Company shall continue as the surviving
corporation of the Merger (the "SURVIVING CORPORATION"). Parent may, with the
Company's consent (which will not be unreasonably withheld), elect to amend this
Agreement to provide for a merger of the Company with and into Merger Sub or
Parent or one or more other affiliates of Parent (an "ALTERNATIVE MERGER");
provided, however, that (i) any such Alternative Merger shall not alter or
change the amount or kind of consideration to be issued to holders of Company
Capital Stock or Company Stock Options as provided for in this Agreement, (ii)
any such Alternative Merger shall not adversely affect the tax or accounting
treatment provided for herein and shall not materially delay consummation of the
transactions contemplated hereby, (iii) in the event of any such election, the
Company shall have the opportunity to update the Company Disclosure Schedule to
reflect additional items that are required to be set forth therein only as a
result of any differences between the Alternative Merger structure and that of
the Merger and (iv) Parent shall waive any failure to satisfy Section 8.03(a) or
8.03(b) to the extent such non-compliance results only from any differences
between the Alternative Merger structure and that of the Merger.
SECTION 2.02. Closing. Unless this Agreement shall have been terminated
and the Merger shall have been abandoned pursuant to Section 9.01 and subject to
the satisfaction or waiver of the conditions set forth in Article VIII, the
consummation of the Merger shall take place as promptly as practicable (and in
any event within three business days) after satisfaction or waiver of the
conditions set forth in Article VIII, at a closing (the "CLOSING") to be held at
such location as is agreed to by the parties hereto, unless another date is
agreed to by the Company and Parent.
SECTION 2.03. Effective Time. At the time of the Closing, the parties
shall cause the Merger to be consummated by filing a certificate of merger (the
"CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware in
such form as required by, and executed in accordance with the relevant
provisions of, the Delaware General Corporation Law (the date and time of such
filing, or such later time as may be agreed by the parties hereto and specified
in the Certificate of Merger, being the "EFFECTIVE TIME").
SECTION 2.04. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of the Delaware
General Corporation Law. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, except as otherwise provided herein, all
the property, rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities
and duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
SECTION 2.05. Certificate of Incorporation; Bylaws; Directors and Officers
of Surviving Corporation. Unless otherwise agreed by the Company and Parent
prior to the Effective Time, at the Effective Time:
(a) the certificate of incorporation and bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the certificate of
incorporation and bylaws of the Surviving Corporation until thereafter
amended as provided by Law and such certificate of incorporation or bylaws;
(b) the officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation until their
successors are elected or appointed and qualified or until their
resignation or removal; and
(c) the directors of Merger Sub immediately prior to the Effective
Time shall be the initial directors of the Surviving Corporation until
their successors are elected or appointed and qualified or until their
resignation or removal.
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ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 3.01. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Merger Sub, the Company or
the holders of any of the following securities:
(a) Each share of Company Common Stock (together with the right to
purchase one-hundredth (1/100th) of a share of Company Preferred Stock (the
"RIGHTS")) issued and outstanding immediately prior to the Effective Time
(other than any shares of Company Common Stock to be cancelled pursuant to
Section 3.01(b)) and all rights in respect thereof shall forthwith cease to
exist and shall be converted into and become exchangeable for that number
of shares of WAG Common Stock (the "COMMON EXCHANGE RATIO") equal to the
quotient of (i) $17.00 divided by (ii) the Closing Date Market Price;
provided, however, that (x) if the Closing Date Market Price is less than
$29.00, then the Common Exchange Ratio shall be equal to .5862, and (y) if
the Closing Date Market Price is more than $36.00, then the Common Exchange
Ratio shall be equal to .4722;
(b) Each share of Company Capital Stock held in the treasury of the
Company and each share of Company Capital Stock owned by WAG or Parent (in
each case, together with any Rights) or of the Company immediately prior to
the Effective Time shall be cancelled and extinguished without any
conversion thereof and no payment shall be made with respect thereto; and
(c) Each share of common stock, par value $0.01 per share, of Merger
Sub ("MERGER SUB COMMON STOCK") issued and outstanding immediately prior to
the Effective Time and all rights in respect thereof shall forthwith cease
to exist and shall be converted into and become exchangeable for one newly
and validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation.
SECTION 3.02. Exchange of Shares Other than Treasury Shares. Subject to
the terms and conditions hereof, at or prior to the Effective Time, WAG shall
appoint an exchange agent reasonably acceptable to the Company to effect the
exchange of shares of Company Common Stock for WAG Common Stock, in accordance
with the provisions of this Article III (the "EXCHANGE AGENT"). From time to
time after the Effective Time, WAG shall deposit, or cause to be deposited,
certificates representing WAG Common Stock for conversion of shares of Company
Common Stock, in accordance with the provisions of Section 3.01 (such
certificates, together with any dividends or distributions with respect thereto,
being herein referred to as the "EXCHANGE FUND"). Commencing immediately after
the Effective Time and until the appointment of the Exchange Agent shall be
terminated, each holder of a certificate or certificates theretofore
representing shares of Company Common Stock may surrender the same to the
Exchange Agent and, after the appointment of the Exchange Agent shall be
terminated, any such holder may surrender any such certificate to WAG. Such
holder shall be entitled upon such surrender to receive in exchange therefor a
certificate or certificates representing the number of full shares of WAG Common
Stock into which the shares of Company Common Stock theretofore represented by
the certificate or certificates so surrendered shall have been converted in
accordance with the provisions of Section 3.01, together with a cash payment in
lieu of fractional shares, if any, in accordance with Section 3.04, and any such
shares of WAG Common Stock shall be deemed to have been issued at the Effective
Time. Until so surrendered and exchanged, each outstanding certificate which,
prior to the Effective Time, represented issued and outstanding shares of
Company Common Stock shall be deemed for all corporate purposes of WAG, other
than the payment of dividends and other distributions, if any, to evidence
ownership of the number of full shares of WAG Common Stock into which the shares
of Company Common Stock theretofore represented thereby shall have been
converted at the Effective Time. Unless and until any such certificate
theretofore representing shares of Company Common Stock is so surrendered, no
dividend or other distribution, if any, payable to the holders of record of WAG
Common Stock as of any date subsequent to the Effective Time shall be paid to
the holder of such certificate in respect thereof. Upon the surrender of any
such certificate theretofore representing shares of Company Common Stock,
however, the record holder of the certificate or certificates representing
shares of WAG Common Stock issued in exchange therefor shall receive from the
Exchange Agent or from WAG, as the case may be, (i) payment of the amount of
dividends and other distributions, if any, which as of any date
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subsequent to the Effective Time and until such surrender shall have become
payable with respect to such number of shares of WAG Common Stock ("PRESURRENDER
DIVIDENDS") and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of WAG Common Stock. No interest shall be payable
with respect to the payment of Presurrender Dividends upon the surrender of
certificates theretofore representing shares of Company Common Stock. After the
appointment of the Exchange Agent shall have been terminated, such holders of
WAG Common Stock which have not received payment of Presurrender Dividends shall
look only to WAG for payment thereof. Notwithstanding the foregoing provisions
of this Section 3.02, risk of loss and title to such certificates representing
shares of Company Common Stock shall pass only upon proper delivery of such
certificates to the Exchange Agent, and neither the Exchange Agent nor any part
y hereto shall be liable to a holder of shares of Company Capital Stock for any
WAG Common Stock or dividends or distributions thereon delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law
or to a transferee pursuant to Section 3.03. References in this Section 3.02 to
Company Common Stock shall be deemed to include the associated Rights.
SECTION 3.03. Stock Transfer Books. (a) At the Effective Time, each of
the stock transfer books of the Company with respect to shares of Company Common
Stock shall be closed, and there shall be no further registration of transfers
of shares of Company Common Stock thereafter on the records of any such stock
transfer books. In the event of a transfer of ownership of shares of Company
Common Stock that is not registered in the stock transfer records of the
Company, at the Effective Time, a certificate or certificates representing the
number of full shares of WAG Common Stock into which such shares of Company
Common Stock shall have been converted shall be issued to the transferee
together with a cash payment in lieu of fractional shares, if any, in accordance
with Section 3.04, and a cash payment in the amount of Presurrender Dividends,
if any, in accordance with Section 3.02, if the certificate or certificates
representing such shares of Company Capital Stock is or are surrendered as
provided in Section 3.02, accompanied by all documents required to evidence and
effect such transfer and by evidence of payment of any applicable stock transfer
tax.
(b) Notwithstanding anything to the contrary herein, certificates
surrendered for exchange by any person constituting a Rule 145 Affiliate of the
Company shall not be exchanged until Parent shall have received from such person
an executed Company Affiliate Agreement, as provided in Section 7.03.
SECTION 3.04. No Fractional Share Certificates. Unless WAG otherwise
determines, no scrip or fractional share certificates for WAG Common Stock shall
be issued upon the surrender for exchange of certificates evidencing shares of
Company Capital Stock, and an outstanding fractional share interest shall not
entitle the owner thereof to vote, to receive dividends or to any rights of a
stockholder of WAG or of the Surviving Corporation with respect to such
fractional share interest. In lieu of fractional shares, each holder of shares
of Company Common Stock who, except for the provisions of this Section 3.04,
would be entitled to receive a fractional share of WAG Common Stock shall, upon
surrender of the certificate or certificates representing shares of Company
Common Stock, be entitled to receive an amount in cash (rounded to the nearest
whole cent), without interest, equal to the product obtained by multiplying (a)
the fractional share interest to which such holder would otherwise be entitled
(after taking into account all shares of Company Capital Stock held at the
Effective Time by such holder) by (b) the closing price for a share of WAG
Common Stock reported on Nasdaq on the first business day immediately prior to
the Effective Time. At or prior to the Effective Time, Parent shall pay to the
Exchange Agent an amount in cash (the "CASH DEPOSIT") sufficient for the
Exchange Agent to pay each holder of Company Common Stock the amount of cash in
lieu of fractional shares to which such holder is entitled pursuant to this
Section 3.04. As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Company Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts, net of any required withholding, to such holders of Company Common
Stock, subject to and in accordance with the terms of Section 3.02. In no event
shall either (i) the total cash consideration paid to holders of Company Common
Stock in lieu of fractional shares exceed one percent (1%) of the value of the
total consideration issued to holders of Company Common Stock in exchange for
their Company Capital Stock or
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<PAGE> 648
(ii) any record holder of Company Common Stock, directly or indirectly, receive
cash in an amount equal to or greater than the value of one full share of WAG
Company Stock.
SECTION 3.05. Options to Purchase Company Common Stock. At the Effective
Time, each option granted by the Company to purchase shares of Company Common
Stock (each, a "COMPANY STOCK OPTION") which is outstanding and unexercised
immediately prior to the Effective Time shall be assumed by WAG and converted
into an option to purchase shares of WAG Common Stock in such number and at such
exercise price as provided below and otherwise having the same terms and
conditions as in effect immediately prior to the Effective Time (except to the
extent that such terms, conditions and restrictions may be altered in accordance
with their terms as a result of the Merger, including vesting as such shall
(except as provided in Section 6.01(b)) be accelerated at the Effective Time
pursuant to the terms of such Company Stock Options):
(a) the number of shares of WAG Common Stock to be subject to the new
option shall be equal to the product of (i) the number of shares of Company
Common Stock subject to the original option and (ii) the Common Exchange
Ratio;
(b) the exercise price per share of Parent Common Stock under the new
option shall be equal to the quotient of (i) the exercise price per share
of Company Common Stock under the original option divided by (ii) the
Common Exchange Ratio; and
(c) upon each exercise of options by a holder thereof, the aggregate
number of shares of WAG Common Stock deliverable upon such exercise shall
be rounded, if necessary, to the nearest whole share and the aggregate
exercise price shall be rounded up, if necessary, to the nearest cent.
The adjustments provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with the requirements of Section 424(a) of the
Code.
SECTION 3.06. Certain Adjustments. If between the date of this Agreement
and the Effective Time, the outstanding shares of Company Capital Stock or WAG
Common Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend payable in stock or other securities shall be declared thereon
with a record date within such period, then the exchange ratios established
pursuant to the provisions of Section 3.01 shall be adjusted accordingly to
provide to the holders of Company Capital Stock the same economic effect as
contemplated by this Agreement prior to such reclassification, recapitalization,
split-up, combination, exchange, dividend or increase. In the event the Holding
Company Reorganization is consummated prior to the Effective Time, all
references in this Article III to WAG and to WAG Common Stock shall be deemed to
be references to Parent and Parent Common Stock, respectively.
SECTION 3.07. Undistributed Amounts. Any portion of the Exchange Fund or
the Cash Deposit which remains undistributed for six months after the Effective
Time shall be delivered to WAG, and any holder of Company Common Stock who has
not theretofore complied with the provisions of this Article III shall
thereafter look only to WAG for satisfaction of their claims for WAG Common
Stock or any cash in lieu of fractional shares of WAG Common Stock and any
Presurrender Dividends.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that:
SECTION 4.01. Organization and Qualification; Subsidiaries. (a) The
Company and each directly and indirectly owned subsidiary of the Company (the
"COMPANY SUBSIDIARIES") has been duly organized and is validly existing and in
good standing (to the extent applicable) under the laws of the jurisdiction of
its incorporation or organization, as the case may be, and has the requisite
corporate power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its
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<PAGE> 649
business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power, authority and
governmental approvals would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect. The Company and each
Company Subsidiary is duly qualified or licensed to do business, and is in good
standing (to the extent applicable), in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failures to be
so qualified or licensed and in good standing that would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect.
(b) Section 4.01 of the Company Disclosure Schedule sets forth, as of the
date of this Agreement, a true and complete list of each Company Subsidiary,
together with (i) the jurisdiction of incorporation or organization of each
Company Subsidiary and the percentage of each Company Subsidiary's outstanding
capital stock or other equity interests owned by the Company or another Company
Subsidiary and (ii) an indication of whether each Company Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Except as set forth in Section 4.01 of the Company Disclosure Schedule, neither
the Company nor any Company Subsidiary owns an equity interest in any
partnership or joint venture arrangement or other business entity that is
material to the financial condition, results of operations, business or
prospects of the Company and the Company Subsidiaries, taken as a whole.
SECTION 4.02. Certificate of Incorporation and Bylaws. The copies of the
Company's certificate of incorporation and bylaws that are incorporated by
reference as exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1997 (the "COMPANY 1997 10-K") are true, complete and
correct copies thereof. Such certificate of incorporation and bylaws are in full
force and effect. The Company is not in violation of any of the provisions of
its certificate of incorporation or bylaws.
SECTION 4.03. Capitalization. The authorized capital stock of the Company
consists of 25,000,000 shares of Company Common Stock, 1,000,000 shares of which
have been designated as Company Junior Common Stock, and 5,000,000 shares of
preferred stock, 200,000 of which have been designated as Company Preferred
Stock. As of the date hereof (i) 11,036,944 shares of Company Common Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) no shares of Company Common Stock are held in the treasury
of the Company, (iii) no shares of Company Common Stock are held by the Company
Subsidiaries, (iv) 1,629,407 shares of Company Common Stock are reserved for
future issuance pursuant to employee stock options or stock incentive rights
granted under the Company Stock Plans, (v) 116,260 shares of Company Common
Stock are reserved for future issuance pursuant to the Company's 1983 Employee
Stock Purchase Plan and the Company's 1997 Foreign Employee Stock Purchase Plan
(collectively, the "Company Stock Purchase Plans"), (vi) 200,000 shares of
Company Preferred Stock are reserved for issuance pursuant to the Rights; and
(vii) no shares of Company Junior Common Stock are issued and outstanding.
Except for shares of Company Common Stock issuable pursuant to the Company Stock
Plans or pursuant to agreements or arrangements described in Section 4.03 of the
Company Disclosure Schedule or in the Company Reports and other than the Rights,
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character to which the Company is a party or by which the
Company is bound relating to the issued or unissued capital stock of the Company
or any Company Subsidiary or obligating the Company or any Company Subsidiary to
issue or sell any shares of capital stock of, or other equity interests in, the
Company or any Company Subsidiary. Section 4.03 of the Company Disclosure
Schedule sets forth a complete and correct list as of the date hereof of (w) the
number of options to purchase Company Common Stock outstanding and the number of
shares of Company Common Stock issuable thereunder, (x) the exercise price of
each such outstanding stock option, (y) the vesting schedule of each such
outstanding stock option and (z) the grantee or holder of each such option. All
shares of Company Common Stock subject to issuance as aforesaid, upon issuance
prior to the Effective Time on the terms and conditions specified in the
instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. Except as described in Section
4.03 of the Company Disclosure Schedule, there are no outstanding contractual
obligations of the Company or any Company Subsidiary to repurchase, redeem or
otherwise acquire any shares of Company Capital Stock or any capital stock of
any Company Subsidiary. Each outstanding share of capital stock of each Company
Subsidiary is duly authorized,
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validly issued, fully paid and nonassessable and each such share owned by the
Company or another Company Subsidiary is free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on the Company's or such other Company Subsidiary's voting rights,
charges and other encumbrances of any nature whatsoever, except where the
failure to own such shares free and clear would not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
Except as set forth in Section 4.03 of the Company Disclosure Schedule, there
are no outstanding contractual obligations of the Company or any Company
Subsidiary to provide funds to, or make any material investment (in the form of
a loan, capital contribution or otherwise) in, any Company Subsidiary or any
other person. Prior to the execution and delivery of this Agreement, the Company
has entered into Amendment No. 1 to that certain Rights Agreement dated as of
February 19, 1997 between the Company and The First National Bank of Boston, a
national banking association, as Rights Agent (the "RIGHTS AGREEMENT"), relating
to the Rights to amend the definition of "Acquiring Person" set forth in Section
1 of the Rights Agreement.
SECTION 4.04. Authority Relative to this Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action, and no other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate such transactions (other than the approval of this
Agreement and the Merger by the holders of a majority of the outstanding shares
of Company Common Stock entitled to vote with respect thereto at the Company
Stockholders' Meeting and the filing and recordation of the Certificate of
Merger as required by the Delaware General Corporation Law). This Agreement has
been duly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by the other parties hereto, constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
SECTION 4.05. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by the Company do not, and the
performance by the Company of its obligations hereunder and the consummation of
the Merger will not, (i) conflict with or violate any provision of the
certificate of incorporation or bylaws of the Company or any equivalent
organizational documents of any Company Subsidiary, (ii) assuming that all
consents, approvals, authorizations and permits described in Section 4.05(b)
have been obtained and all filings and notifications described in Section
4.05(b) have been made, conflict with or violate any Law applicable to the
Company or any Company Subsidiary or by which any property or asset of the
Company or any Company Subsidiary is bound or affected or (iii) except as set
forth in Section 4.05(a) of the Company Disclosure Schedule, result in any
breach of or constitute a default (or an event which with the giving of notice
or lapse of time or both would reasonably be expected to become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of the Company or any Company Subsidiary pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation, except, with respect to clauses
(ii) and (iii), for any such conflicts, violations, breaches, defaults or other
occurrences which would not reasonably be expected, individually or in the
aggregate, (A) to have a Company Material Adverse Effect or (B) to prevent or
materially delay the performance by the Company of its obligations pursuant to
this Agreement or the consummation of the Merger.
(b) The execution and delivery of this Agreement by the Company do not, and
the performance by the Company of its obligations hereunder and the consummation
of the Merger will not, require any consent, approval, authorization or permit
of, or filing by the Company with or notification by the Company to, any
Governmental Entity, except (i) pursuant to applicable requirements of the
Exchange Act, the Securities Act, Blue Sky Laws, the rules and regulations of
Nasdaq, state takeover laws, the premerger notification requirements of the HSR
Act, if any, the filing and recordation of the Certificate of Merger as required
by the Delaware General Corporation Law, and as set forth in Section 4.05(b) of
the Company Disclosure Schedule, and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not reasonably be expected, individually or in the aggregate, (A) to have
a Company
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<PAGE> 651
Material Adverse Effect or (B) to prevent or materially delay the performance by
the Company of its obligations pursuant to this Agreement or the consummation of
the Merger.
SECTION 4.06. Permits; Compliance with Laws. The Company and the Company
Subsidiaries are in possession of all franchises, grants, authorizations,
licenses, establishment registrations, product listings, permits, easements,
variances, exceptions, consents, certificates, identification and registration
numbers, approvals and orders of any Governmental Entity necessary for the
Company or any Company Subsidiary to own, lease and operate its properties or to
produce, store, distribute and market its products or otherwise to carry on its
business as it is now being conducted (collectively, the "Company Permits"),
except where the failure to have, or the suspension or cancellation of, any of
the Company Permits would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect, and, as of the date of this
Agreement, no suspension or cancellation of any of the Company Permits is
pending or, to the knowledge of the Company, threatened, except where the
failure to have, or the suspension or cancellation of, any of the Company
Permits would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. Neither the Company nor any
Company Subsidiary is in conflict with, or in default or violation of, (i) any
Law applicable to the Company or any Company Subsidiary or by which any property
or asset of the Company or any Company Subsidiary is bound or affected or (ii)
any Company Permits, except in the case of clauses (i) and (ii) for any such
conflicts, defaults or violations that would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. Except as
set forth in Section 4.06(a) of the Company Disclosure Schedule, since August
31, 1997, neither the Company nor any Company Subsidiary has received from any
Governmental Entity any written notification with respect to possible conflicts,
defaults or violations of Laws, except for written notices relating to possible
conflicts, defaults or violations that would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
(b) Except as disclosed on Section 4.06(b) of the Company Disclosure
Schedule, since August 31, 1997, there have been no written notices, citations
or decisions by any governmental or regulatory body that any product produced,
manufactured or marketed at any time by the Company or any of the Company
Subsidiaries (the "COMPANY PRODUCTS"), other than a Company Third Party Product
(as defined below), is defective or fails to meet any applicable standards
promulgated by any such governmental or regulatory body, and no senior executive
officer of the Company or any of the Company Subsidiaries knows of any such
defect or failure which has not been remedied or is in the process of being
remedied. In the case of products which are produced or manufactured by third
parties and are distributed by the Company or any of the Company Subsidiaries
(the "COMPANY THIRD PARTY PRODUCTS"), to the knowledge of any of the senior
executive officers of the Company or any of the Company Subsidiaries, since
August 31, 1997, there have been no written notices, citations or decisions by
any governmental or regulatory body that any Company Third Party Product
distributed at any time by the Company or any of the Company Subsidiaries is
defective or fails to meet any applicable standards promulgated by any such
governmental or regulatory body, and none of the senior executive officers of
the Company or any of the Company Subsidiaries knows of any such defect or
failure which has not been remedied or is in the process of being remedied. The
Company and each of the Company Subsidiaries (i) has complied with the laws,
regulations, policies, procedures and specifications applicable to the Company
with respect to the design, manufacture, testing and inspection of Company
Products in the United States and the operation of manufacturing facilities in
the United States promulgated by the United States Federal Communications
Commission (the "FCC"), and (ii) has complied with the laws, regulations,
policies, procedures and specifications applicable to the Company or such
Company Subsidiary, as applicable, in any jurisdiction outside the United States
with respect to the design, manufacture, testing and inspection of Company
Products and the operation of manufacturing facilities outside of the United
States, except in the case of clause (i) or (ii) for such non-compliance as
would not have a Company Material Adverse Effect. Except as disclosed on Section
4.06(b) of the Company Disclosure Schedule, since August 31, 1997, there have
been no recalls, field notifications or seizures ordered or, to the knowledge of
any of the senior executive officers of the Company or any of its Subsidiaries,
threatened by any such governmental or regulatory body with respect to any of
the Company Products, other than Company Third Party Products, and neither the
Company nor any of the Company Subsidiaries has independently engaged in recalls
or field notifications. In the case of Company Third Party Products distributed
by the Company or any
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of the Company Subsidiaries, neither the Company nor any of the Company
Subsidiaries has received any notices or any recalls, field notifications or
seizures ordered or threatened by any such governmental or regulatory body with
respect to any of such Company Third Party Products, and neither the Company nor
any of the Company Subsidiaries has independently engaged in recalls or field
notifications.
(c) Except as set forth on Section 4.06(c)(i) of the Company Disclosure
Schedule, the Company or one or more of the Company Subsidiaries has obtained,
in all countries where the Company or such Company Subsidiary, as applicable, is
marketing or has marketed the Company Products, all applicable licenses,
registrations, approvals, clearances and authorizations required to be obtained
by it by local, state or Federal agencies in such countries regulating the
safety, effectiveness and market clearance of the Company Products in such
countries that are currently marketed by the Company or such Company Subsidiary,
as applicable, except where the failure to obtain such licenses, registrations,
approvals, clearances and authorizations would not have a Company Material
Adverse Effect. Section 4.06(c)(ii) of the Company Disclosure Schedule sets
forth a list of all licenses, registrations, approvals, permits and device
listings relating to Company Products. Section 4.06(c)(iii) of the Company
Disclosure Schedule sets forth a description of all inspections by regulatory
authorities, recalls, product actions and audits of Company Products since
August 31, 1997.
SECTION 4.07. SEC Filings; Financial Statements. (a) Except as disclosed
in Section 4.07 of the Company Disclosure Schedule, the Company has timely filed
all forms, reports, statements and documents required to be filed by it (A) with
the SEC and Nasdaq since August 31, 1995 through the date of this Agreement
(collectively and as amended, the "COMPANY REPORTS") and (B) with any other
Governmental Entities, including state regulatory authorities. Each Company
Report (i) was prepared in accordance with the requirements of the Securities
Act, the Exchange Act or the rules and regulations of Nasdaq, as the case may
be, and (ii) did not at the time it was filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each form, report,
statement and document referred to in clause (b) of this paragraph was prepared
in all material respects in accordance with the requirements of applicable Law.
Except as disclosed in Section 4.07 of the Company Disclosure Schedule, no
Company Subsidiary is subject to the periodic reporting requirements of the
Exchange Act or required to file any form, report or other document with the
SEC, Nasdaq, any other stock exchange or any other comparable Governmental
Entity.
(b) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the Company Reports filed since August 31, 1997
was prepared in accordance with U.S. GAAP applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly, in all material respects, the consolidated
financial position of the Company and the consolidated Company Subsidiaries as
at the respective dates thereof and for the respective periods indicated
therein, except as otherwise noted therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which did not have and
would not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect and as permitted by Form 10-Q of the SEC).
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of the Company and the Company Subsidiaries as
reported in the Company Reports, including the notes thereto, none of the
Company or any Company Subsidiary has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on a balance sheet or in notes thereto prepared in
accordance with U.S. GAAP, except for liabilities or obligations incurred in the
ordinary course of business consistent with past practice since August 31, 1997
that have not had and would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
SECTION 4.08. Absence of Certain Changes or Events. Since August 31,
1997, except as contemplated by or as disclosed in this Agreement, as set forth
in Section 4.08 of the Company Disclosure Schedule or as disclosed in any
Company Report filed since August 31, 1997 and prior to the date hereof, the
Company and the Company Subsidiaries have conducted their businesses only in the
ordinary course consistent with past practice and, since such date, there has
not been (i) any Company Material Adverse Effect, excluding any changes and
effects resulting from changes in economic, regulatory or political conditions
or changes in
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conditions generally applicable to the industries in which the Company and the
Company Subsidiaries are involved, (ii) any event that would reasonably be
expected to prevent or materially delay the performance of its obligations
pursuant to this Agreement and the consummation of the Merger by the Company,
(iii) any material change by the Company in its accounting methods, principles
or practices, (iv) any declaration, setting aside or payment of any dividend or
distribution in respect of the shares of Company Capital Stock or any
redemption, purchase or other acquisition of any of the Company's securities or
(v) any increase in the compensation or benefits or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any executive officers of the
Company or any Company Subsidiary except in the ordinary course of business
consistent with past practice.
SECTION 4.09. Employee Benefit Plans; Labor Matters. (a) Section 4.09(a)
of the Company Disclosure Schedule lists all employee benefit plans (as defined
in Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans, programs
or arrangements, and all employment, termination, severance or other contracts
or agreements, whether legally enforceable or not, to which the Company or any
Company Subsidiary is a party, with respect to which the Company or any Company
Subsidiary has any obligation or which are maintained, contributed to or
sponsored by the Company or any Company Subsidiary for the benefit of any
current or former employee, officer or director of the Company or any Company
Subsidiary (collectively, the "COMPANY BENEFIT PLANS"). With respect to each
Company Benefit Plan, the Company has delivered or made available to Parent a
true, complete and correct copy of (i) such Company Benefit Plan and the most
recent summary plan description related to such Company Benefit Plan, if a
summary plan description is required therefor, (ii) each trust agreement or
other funding arrangement relating to such Company Benefit Plan, (iii) the most
recent annual report (Form 5500) filed with the IRS) with respect to such
Company Benefit Plan, (iv) the most recent actuarial report or financial
statement relating to such Company Benefit Plan and (v) the most recent
determination letter issued by the IRS with respect to such Company Benefit
Plan, if it is qualified under Section 401(a) of the Code. Neither the Company
nor any Company Subsidiary has any express or implied commitment, whether
legally enforceable or not, (i) to create, incur liability with respect to or
cause to exist any other employee benefit plan, program or arrangement, (ii) to
enter into any contract or agreement to provide compensation or benefits to any
individual or (iii) to modify, change or terminate any Company Benefit Plan,
other than with respect to a modification, change or termination required by
ERISA or the Code.
(b) None of the Company Benefit Plans is a multiemployer plan (within the
meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "MULTIEMPLOYER PLAN") or a
single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which the Company or any Company Subsidiary could incur liability
under Section 4063 or 4064 of ERISA (a "MULTIPLE EMPLOYER PLAN"). None of the
Company Benefit Plans provides for or promises retiree medical, disability or
life insurance benefits to any current or former employee, officer or director
of the Company or any Company Subsidiary.
(c) Each Company Benefit Plan has been administered in all material
respects in accordance with its terms and all contributions required to be made
under the terms of any of the Company Benefit Plans as of the date of this
Agreement have been timely made or have been reflected on the most recent
consolidated balance sheet filed or incorporated by reference in the Company
Reports prior to the date of this Agreement. Except as set forth in Section
4.09(c) of the Company Disclosure Schedule, with respect to the Company Benefit
Plans, no event has occurred and, to the knowledge of the Company, there exists
no condition or set of circumstances in connection with which the Company or any
Company Subsidiary could be subject to any liability under the terms of such
Company Benefit Plans, ERISA, the Code or any other applicable Law which would
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. No legal action, suit or claim is pending or, to the
knowledge of the Company, threatened with respect to any Company Benefit Plan
(other than claims for benefits in the ordinary course).
(d) Except as disclosed in Section 4.09(d) of the Company Disclosure
Schedule or except as would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect: (i) each
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<PAGE> 654
Company Benefit Plan which is intended to be qualified under Section 401(a) of
the Code or Section 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified and each trust established in
connection with any Company Benefit Plan which is intended to be exempt from
federal income taxation under Section 501(a) of the Code has received a
determination letter from the IRS that it is so exempt, and no fact or event has
occurred since the date of such determination letter from the IRS to adversely
affect the qualified status of any such Company Benefit Plan or the exempt
status of any such trust; (ii) each trust maintained or contributed to by the
Company or any Company Subsidiary which is intended to be qualified as a
voluntary employees' beneficiary association and which is intended to be exempt
from federal income taxation under Section 501(c)(9) of the Code has received a
favorable determination letter from the IRS that it is so qualified and so
exempt, and no fact or event has occurred since the date of such determination
by the IRS to adversely affect such qualified or exempt status; (iii) there has
been no prohibited transaction (within the meaning of Section 406 of ERISA or
Section 4975 of the Code) with respect to any Company Benefit Plan; (iv) neither
the Company nor any Company Subsidiary has incurred any liability for any
penalty or tax arising under Section 4971, 4972, 4980, 4980B or 6652 of the Code
or any liability under Section 502 of ERISA, and no fact or event exists which
could give rise to any such liability; (v) no complete or partial termination
has occurred within the five years preceding the date hereof with respect to any
Company Benefit Plan; (vi) no Company Benefit Plan is subject to Title IV of
ERISA; (vii) none of the assets of the Company or any Company Subsidiary is the
subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of
the Code; neither the Company nor any Company Subsidiary has been required to
post any security under Section 307 of ERISA or Section 401(a)(29) of the Code;
and no fact or event exists which could give rise to any such lien or
requirement to post any such security; (viii) all contributions, premiums or
payments required to be made with respect to any Company Benefit Plan have been
made on or before their due dates; and (ix) all such contributions have been
fully deducted for income tax purposes and no such deduction has been challenged
or disallowed by any government entity and no fact or event exists which could
give rise to any such challenge or disallowance.
(e) Except as set forth in Section 4.09(e) of the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary is a party to any
collective bargaining or other labor union contract applicable to persons
employed by the Company or any Company Subsidiary and no collective bargaining
agreement is being negotiated by the Company or any Company Subsidiary. As of
the date of this Agreement, there is no labor dispute, strike or work stoppage
against the Company or any Company Subsidiary pending or, to the knowledge of
the Company, threatened which may interfere with the respective business
activities of the Company or any Company Subsidiary, except where such dispute,
strike or work stoppage would not reasonably be expected to have a Company
Material Adverse Effect. As of the date of this Agreement, to the knowledge of
the Company, there is no charge or complaint against the Company or any Company
Subsidiary pending before the National Labor Relations Board or any comparable
Governmental Entity pending or threatened in writing, except where such unfair
labor practice, charge or complaint would not reasonably be expected to have a
Company Material Adverse Effect.
(f) The Company has delivered or made available to Parent true, complete
and correct copies of (i) all employment agreements with officers and all
consulting agreements of the Company and each Company Subsidiary providing for
annual compensation in excess of $100,000, (ii) all severance plans, agreements,
programs and policies of the Company and each Company Subsidiary with or
relating to their respective employees or consultants, and (iii) all plans,
programs, agreements and other arrangements of the Company and each Company
Subsidiary with or relating to their respective employees or consultants which
contain "change of control" provisions.
SECTION 4.10. Certain Tax Matters. Except as disclosed in the Company
Reports, neither the Company nor, to the knowledge of the Company, any of its
affiliates has taken or agreed to take any action that would reasonably be
expected to prevent the Merger from constituting a transaction qualifying under
Section 368 of the Code. The Company is not aware of any agreement, plan or
other circumstances that would reasonably be expected to prevent the Merger from
so qualifying under Section 368 of the Code.
SECTION 4.11. Contracts; Debt Instruments. Except as disclosed in the
Company Reports or in Section 4.11 of the Company Disclosure Schedule, there is
no contract or agreement that is material to the
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<PAGE> 655
business, financial condition or results of operations of the Company and the
Company Subsidiaries taken as a whole (each, a "COMPANY MATERIAL CONTRACT").
Except as disclosed in the Company Reports or in Section 4.11 of the Company
Disclosure Schedule, neither the Company nor any Company Subsidiary is in
violation of or in default under (nor does there exist any condition which with
the passage of time or the giving of notice would reasonably be expected to
cause such a violation of or default under) any loan or credit agreement, note,
bond, mortgage, indenture or lease, or any other contract, license, agreement,
arrangement or understanding to which it is a party or by which it or any of its
properties or assets is bound, except for violations or defaults that would not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. Set forth in Section 4.11 of the Company Disclosure
Schedule is a description of any material changes to the amount and terms of the
indebtedness of the Company and its subsidiaries as described in the notes to
the financial statements incorporated in the Company 1997 10-K.
SECTION 4.12. Litigation. Except as disclosed in the Company Reports or
in Section 4.12 of the Company Disclosure Schedule, there is no suit, claim or
action or, to the knowledge of the Company, proceeding or investigation pending
or threatened against the Company or any Company Subsidiary before any
Governmental Entity that would reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect, and, except as disclosed to
Parent, to the knowledge of the Company, there are no existing facts or
circumstances that would reasonably be expected to result in such a suit, claim,
action, proceeding or investigation. Except as disclosed to Parent, the Company
is not aware of any facts or circumstances which would reasonably be expected to
result in the denial of insurance coverage under policies issued to the Company
and the Company Subsidiaries in respect of such suits, claims, actions,
proceedings and investigations for which the Company has a reasonable
expectation of obtaining insurance coverage, except in any case as would not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect or as a result of the execution of this Agreement and
consummation of transactions hereunder. Except as disclosed in the Company
Reports or in Section 4.12 of the Company Disclosure Schedule, neither the
Company nor any Company Subsidiary is subject to any outstanding order, writ,
injunction or decree which would reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
SECTION 4.13. Environmental Matters. Except as disclosed in the Company
Reports or in Section 4.13 of the Company Disclosure Schedule, or as would not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect, (i) the Company and the Company Subsidiaries are in
compliance with all applicable Environmental Laws; (ii) all past noncompliance
of the Company or any Company Subsidiary with Environmental Laws or
Environmental Permits has been resolved without any pending, ongoing or future
obligation, cost or liability; and (iii) neither the Company nor any Company
Subsidiary has released a Hazardous Material at, or transported a Hazardous
Material to or from, any real property currently or formerly owned, leased or
occupied by the Company or any Company Subsidiary, in violation of any
Environmental Law.
SECTION 4.14. Intellectual Property. Except as set forth in Section 4.14
of the Company Disclosure Schedule, or as would not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect, (i)
the Company and the Company Subsidiaries own or possess adequate licenses or
other valid rights to use all patents, patent applications, patent rights,
trademarks, trademark rights, trade names, trade dress, trade name rights,
copyrights and copyright registrations and applications, copyright rights,
service marks, trade secrets, applications for trademarks and for service marks,
know-how and other proprietary rights and information used or held for use in
connection with the respective businesses of the Company and the Company
Subsidiaries as currently conducted, free and clear of all liens, and (ii) the
Company is unaware of any assertion or claim challenging the ownership, use or
validity of any of the foregoing. Section 4.14 of the Company Disclosure
Schedule lists all material licenses, sublicenses and other agreements to which
the Company or any Company Subsidiary is a party and pursuant to which (i) any
third party is authorized to use any intellectual property right of the Company
or any Company Subsidiary or (ii) the Company or any Company Subsidiary is
authorized to use any intellectual property rights (other than pursuant to
shrink-wrap and software licenses) of a third party (collectively, the "Company
Licenses"), and includes the identity of all parties thereto, a description of
the nature and subject matter thereof, the royalty
K-23
<PAGE> 656
provisions, if any, therein and the term thereof. The material Company Licenses
are valid and binding obligations of the Company, enforceable in accordance with
their terms, and there are no material breaches or defaults thereunder. Except
as set forth in Section 4.14 of the Company Disclosure Schedule, the conduct of
the respective businesses of the Company and the Company Subsidiaries as
currently conducted does not infringe upon any patent, patent right, license,
trademark, trademark right, trade dress, trade name, trade name right, service
mark, copyright or copyright right of any third party that would reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. To the knowledge of the Company, there are no infringements of any
proprietary rights owned by or licensed by or to the Company or any Company
Subsidiary that could reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
SECTION 4.15. Taxes. Except as set forth in Section 4.15 of the Company
Disclosure Schedule and except for such matters that would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect, (i) the Company and each of the Company Subsidiaries has timely filed or
shall timely file all returns and reports required to be filed by it with any
taxing authority, taking into account any extension of time to file granted to
or obtained on behalf of the Company and the Company Subsidiaries, (ii) all
Taxes shown to be payable on such returns or reports have been or will be paid,
(iii) as of the date hereof, no deficiencies for any amount of Tax have been
asserted or assessed by any taxing authority against the Company or any Company
Subsidiary that are not adequately reserved for and (iv) the most recent
financial statements contained in the Company Reports reflect an adequate
reserve in accordance with U.S. GAAP for all taxes payable by the Company and
the Company Subsidiaries for all taxable periods and portions thereof accrued
through the date of such financial statements. Within ten days after the date
hereof, the Company and the Company Subsidiaries will make available to Parent
or its legal counsel for inspection copies of all income and sales and use tax
returns for all periods since the date of the Company's and the Company
Subsidiaries' incorporation.
SECTION 4.16. Rule 145 Affiliates. Section 4.16 of the Company Disclosure
Schedule sets forth the name and address of each person who is, in the Company's
reasonable judgment, a Rule 145 Affiliate of the Company.
SECTION 4.17. Brokers. Except for Broadview, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of the Company.
SECTION 4.18. Certain Business Practices. None of the Company, any
Company Subsidiary or any directors, officers, agents or employees of the
Company or any Company Subsidiary (in their capacities as such) has (i) used any
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, (iii) consummated any transaction, made any
payment, entered into any agreement or arrangement or taken any other action in
violation of Section 1128B(b) of the Social Security Act, as amended, or (iv)
made any other unlawful payment.
SECTION 4.19. Transaction Expenses. Section 4.19 of the Company
Disclosure Schedule sets forth the Company's current, good faith, itemized
estimate, as of the date of this Agreement, of the fees and expenses the Company
will incur in connection with consummating the Merger and the other transactions
contemplated hereby.
SECTION 4.20. Interested Party Transactions. Except as set forth in
Section 4.20 of the Company Disclosure Schedule or in the Company Reports and
except for transactions of the type described in the Company Reports which have
occurred since August 1, 1997 in the ordinary course of business, since August
31, 1997, no executive officer, director or stockholder of the Company or any of
the Company Subsidiaries has engaged in any business dealings with the Company
or any of the Company Subsidiaries (other than any such business dealings that
would not required to be disclosed in a proxy statement satisfying the
requirements of Regulation 14A promulgated under the Exchange Act filed on the
date hereof).
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<PAGE> 657
SECTION 4.21. Charter Anti-takeover Provisions and State Takeover
Statutes. The board of directors of the Company has approved by a majority of
the Disinterested Directors (as defined in the Company's Certificate of
Incorporation) the Merger, this Agreement, the Stockholders Proxy Agreement and
the transactions contemplated hereby and thereby, and such approval is
sufficient to render inapplicable to the Merger, this Agreement, the
Stockholders Proxy Agreement, and the transactions contemplated hereby and
thereby the provisions of the Company's Certificate of Incorporation requiring
the supermajority approval of the Company's stockholders and the provisions of
Section 203 of the Delaware General Corporation Law. To the knowledge of the
Company, no other state takeover statute or similar statute or regulation
applies or purports to apply to the Merger, this Agreement, the Stockholders
Proxy Agreement or the transactions contemplated hereby or thereby.
SECTION 4.22. Opinion of Financial Advisor. The Company has received the
Company Fairness Opinion.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF WAG, PARENT AND MERGER SUB
WAG, Parent and Merger Sub hereby jointly and severally represent and
warrant to the Company that:
SECTION 5.01. Organization and Qualification; Subsidiaries. WAG, Parent,
Merger Sub and each other subsidiary of Parent or WAG (the "PARENT
SUBSIDIARIES") has been duly organized and is validly existing and in good
standing (to the extent applicable) under the laws of the jurisdiction of its
incorporation or organization, as the case may be, and has the requisite
corporate power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such power, authority and governmental approvals would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. WAG, Parent, Merger Sub and each other Parent
Subsidiary is duly qualified or licensed to do business, and is in good standing
(to the extent applicable), in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its business makes
such qualification or licensing necessary, except for such failures to be so
qualified or licensed and in good standing that would not reasonably be expected
to have, individually or in the aggregate, a Parent Material Adverse Effect.
(b) Section 5.01 of the Parent Disclosure Schedule sets forth, as of the
date of this Agreement, a true and complete list of each Parent Subsidiary,
together with (i) the jurisdiction of incorporation or organization of each
Parent Subsidiary and the percentage of each Parent Subsidiary's outstanding
capital stock or other equity interests owned by Parent or another Parent
Subsidiary and (ii) an indication of whether each Parent Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Except as set forth in Section 5.01 of the Parent Disclosure Schedule, neither
Parent nor any Parent Subsidiary owns an equity interest in any partnership or
joint venture arrangement or other business entity that is material to the
financial condition, results of operations, business or prospects of Parent and
the Parent Subsidiaries, taken as a whole.
SECTION 5.02. Certificate of Incorporation and Bylaws. The copies of
WAG's certificate of incorporation and bylaws that are incorporated by reference
as exhibits to WAG's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "PARENT 1997 10-K") are true, complete and correct copies
thereof. Parent has heretofore furnished the Company with true, complete and
correct copies of the certificate of incorporation and bylaws of each of Parent
and Merger Sub. Such certificates and bylaws are in full force and effect.
Neither Parent nor Merger Sub is in violation of any of the provisions of its
certificate or bylaws.
SECTION 5.03. Capitalization. The authorized capital stock of Parent
consists of 40,000,000 shares of Parent Common Stock and 10,000,000 shares of
preferred stock. As of the date hereof (i) 1,000 shares of Parent Common Stock
are issued and outstanding, all of which are validly issued, fully paid and
nonassessable and owned by WAG, and (ii) no shares of Parent Common Stock are
held by the Parent Subsidiaries. As of
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<PAGE> 658
the date hereof, there are no shares of preferred stock of Parent issued and
outstanding. The authorized capital stock of WAG consists of 40,000,000 shares
of WAG Common Stock and 10,000,000 shares of preferred stock. As of the date
hereof, (i) 21,878,713 shares of WAG Common Stock are issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) no shares of
WAG Common Stock are held in the treasury of WAG, (iii) no shares of WAG Common
Stock are held by the Parent Subsidiaries, (iv) 4,621,774 shares of WAG Common
Stock are reserved for future issuance pursuant to stock options under the
Parent Stock Plans, (v) 617,340 shares of WAG Common Stock are reserved for
issuance pursuant to outstanding warrants to purchase shares of WAG Common
Stock, and (vi) 3,105,485 shares of WAG Common Stock are reserved for issuance
upon conversion of WAG's 4.5% Convertible Subordinated Notes due 2002. As of the
date hereof, there are no shares of preferred stock of WAG issued and
outstanding. Upon consummation of the Holding Company Reorganization, the Parent
will succeed to the capitalization of WAG. Except for the shares of WAG Common
Stock issuable pursuant to the Parent Stock Plans, the Holding Company
Reorganization or the Resurgens Transaction or pursuant to agreements or
arrangements described in Section 5.03 of the Parent Disclosure Schedule, there
are no options, warrants or other rights, agreements, arrangements or
commitments of any character to which either WAG or Parent is a party or by
which either WAG or Parent is bound relating to the issued or unissued capital
stock of WAG, Parent, Merger Sub or any other Parent Subsidiary or obligating
Parent, Merger Sub or any other Parent Subsidiary to issue or sell any shares of
capital stock of, or other equity interests in, WAG, Parent, Merger Sub or any
other Parent Subsidiary. All shares of WAG Common Stock subject to issuance (and
all shares of Parent Common Stock upon consummation of the Holding Company
Reorganization) as aforesaid, upon issuance prior to the Effective Time on the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
Except as described in Section 5.03 of the Parent Disclosure Schedule, there are
no outstanding contractual obligations of WAG, Parent, Merger Sub or any other
Parent Subsidiary to repurchase, redeem or otherwise acquire any shares of WAG
Common Stock, Parent Common Stock or any capital stock of any Parent Subsidiary.
Each outstanding share of capital stock of each Parent Subsidiary is duly
authorized, validly issued, fully paid and nonassessable and each such share
owned by WAG, Parent or another Parent Subsidiary is free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on WAG's, Parent's or such other Parent Subsidiary's
voting rights, charges and other encumbrances of any nature whatsoever, except
where the failure to own such shares free and clear would not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect. Except as set forth in Section 5.03 of the Parent Disclosure Schedule,
there are no outstanding contractual obligations of WAG, Parent, Merger Sub or
any other Parent Subsidiary to provide funds to, or make any material investment
(in the form of a loan, capital contribution or otherwise) in, any Parent
Subsidiary or any other person.
SECTION 5.04. Authority Relative to this Agreement. WAG, Parent and
Merger Sub have all necessary corporate power and authority to execute and
deliver this Agreement, to perform their respective obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by WAG, Parent and Merger Sub and the consummation by WAG, Parent
and Merger Sub of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action, and no other corporate
proceedings on the part of WAG, Parent or Merger Sub are necessary to authorize
this Agreement or to consummate such transactions (other than the approval of
the issuance of the WAG Common Stock or the Parent Common Stock, as the case may
be, pursuant to the Merger and the increase in the authorized WAG Common Stock
or Parent Common Stock (after the Holding Company Reorganization) to 100,000,000
shares by the holders of a majority of the outstanding shares of WAG Common
Stock, in the event that the Holding Company Reorganization shall not have been
consummated by the time of the Parent Stockholders' Meeting, or Parent Common
Stock, in the event that the Holding Company Reorganization shall have been so
consummated, and the filing and recordation of the Certificate of Merger as
required by the Delaware General Corporation Law). This Agreement has been duly
executed and delivered by WAG, Parent and Merger Sub and, assuming the due
authorization, execution and delivery by the Company, constitutes the legal,
valid and binding obligation of WAG, Parent and Merger Sub, enforceable against
WAG, Parent and Merger Sub in accordance with its terms.
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<PAGE> 659
SECTION 5.05. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by WAG, Parent and Merger Sub do not,
and the performance by WAG, Parent and Merger Sub of their obligations hereunder
and the consummation of the Merger will not, (i) conflict with or violate any
provision of the certificate or articles of incorporation, as the case may be,
or bylaws of WAG, Parent or Merger Sub or any equivalent organizational
documents of any other Parent Subsidiary, (ii) assuming that all consents,
approvals, authorizations and permits described in Section 5.05(b) have been
obtained and all filings and notifications described in Section 5.05(b) have
been made, conflict with or violate any Law applicable to Parent or any other
Parent Subsidiary or by which any property or asset of WAG, Parent, Merger Sub
or any other Parent Subsidiary is bound or affected or (iii) except as set forth
in Section 5.05(a) of the Parent Disclosure Schedule, result in any breach of or
constitute a default (or an event which with the giving of notice or lapse of
time or both would reasonably be expected to become a default) under, or give to
others any right of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or other encumbrance on any property or asset
of WAG, Parent, Merger Sub or any other Parent Subsidiary pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation, except, with respect to clauses
(ii) and (iii), for any such conflicts, violations, breaches, defaults or other
occurrences which would not reasonably be expected, individually or in the
aggregate, (A) to have a Parent Material Adverse Effect or (B) to prevent or
materially delay the performance by WAG, Parent or Merger Sub of its obligations
pursuant to this Agreement or the consummation of the Merger.
(b) The execution and delivery of this Agreement by WAG, Parent and Merger
Sub do not, and the performance by WAG, Parent and Merger Sub of their
respective obligations hereunder and the consummation of the Merger will not,
require any consent, approval, authorization or permit of, or filing by WAG,
Parent or Merger Sub with or notification by WAG, Parent or Merger Sub to, any
Governmental Entity, except (i) pursuant to applicable requirements of the
Exchange Act, the Securities Act, Blue Sky Laws, the rules and regulations of
Nasdaq, state takeover laws, the premerger notification requirements of the HSR
Act, if any, and the filing and recordation of the Certificate of Merger as
required by the Delaware General Corporation Law and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not reasonably be expected, individually or in
the aggregate, (A) to have a Parent Material Adverse Effect or (B) to prevent or
materially delay the performance by WAG, Parent or Merger Sub of its obligations
pursuant to this Agreement or the consummation of the Merger.
SECTION 5.06. Permits; Compliance with Laws. WAG, Parent, Merger Sub and
each other Parent Subsidiary is in possession of all franchises, grants,
authorizations, licenses, establishment registrations, product listings,
permits, easements, variances, exceptions, consents, certificates,
identification and registration numbers, approvals and orders of any
Governmental Entity necessary for WAG, Parent, Merger Sub or any other Parent
Subsidiary to own, lease and operate its properties or to store, distribute and
market its products or otherwise to carry on its business as it is now being
conducted (collectively, the "PARENT PERMITS"), except where the failure to
have, or the suspension or cancellation of, any of the Parent Permits would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect, and, as of the date of this Agreement, no suspension or
cancellation of any of the Parent Permits is pending or, to the knowledge of
Parent or WAG, threatened, except where the failure to have, or the suspension
or cancellation of, any of the Parent Permits would not reasonably be expected
to have, individually or in the aggregate, a Parent Material Adverse Effect.
None of WAG, Parent, Merger Sub or any other Parent Subsidiary is in conflict
with, or in default or violation of, (i) any Law applicable to WAG, Parent,
Merger Sub or any other Parent Subsidiary or by which any property or asset of
WAG, Parent, Merger Sub or any other Parent Subsidiary is bound or affected or
(ii) any Parent Permits, except in the case of clauses (i) and (ii) for any such
conflicts, defaults or violations that would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. Except as
set forth in Section 5.06(a) of the Parent Disclosure Schedule, since December
31, 1997, neither WAG or Parent nor any Parent Subsidiary has received from any
Governmental Entity any written notification with respect to possible conflicts,
defaults or violations of Laws, except for written notices relating to possible
conflicts, defaults or violations that would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect.
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SECTION 5.07. SEC Filings; Financial Statements. (a) WAG has timely filed
all forms, reports, statements and documents required to be filed by it (A) with
the SEC and Nasdaq since December 31, 1995 through the date of this Agreement
(collectively and as amended, the "PARENT REPORTS") and (B) with any other
Governmental Entities, including state regulatory authorities. Except as
disclosed in Section 5.07(a) of the Parent Disclosure Schedule, each Parent
Report (i) was prepared in accordance with the requirements of the Securities
Act, the Exchange Act or the rules and regulations of Nasdaq, as the case may
be, and (ii) did not at the time it was filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each form, report,
statement and document referred to in clause (b) of this paragraph was prepared
in all material respects in accordance with the requirements of applicable Law.
Except as disclosed in Section 5.07(a) of the Parent Disclosure Schedule, no
Parent Subsidiary is subject to the periodic reporting requirements of the
Exchange Act or required to file any form, report or other document with the
SEC, Nasdaq, any other stock exchange or any other comparable Governmental
Entity.
(b) Except as is provided in Section 5.07(b) of the Parent Disclosure
Schedule, each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Parent Reports filed since December
31, 1997 was prepared in accordance with U.S. GAAP applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly, in all material respects, the consolidated
financial position of Parent and the consolidated Parent Subsidiaries as at the
respective dates thereof and for the respective periods indicated therein,
except as otherwise noted therein (subject, in the case of unaudited statements,
to normal and recurring year-end adjustments which did not have and would not be
reasonably expected to have, individually or in the aggregate, to have a Parent
Material Adverse Effect and as permitted by Form 10-Q of the SEC).
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of WAG and the Parent Subsidiaries as reported in the
Parent Reports, including the notes thereto, or as disclosed in Section 5.07(c)
of the Parent Disclosure Schedule, none of WAG, Parent or any Parent Subsidiary
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on a balance
sheet or in notes thereto prepared in accordance with U.S. GAAP, except for
liabilities or obligations incurred in the ordinary course of business
consistent with past practice since December 31, 1997 that have not had and
would not reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
SECTION 5.08. Absence of Certain Changes or Events. Since December 31,
1997, except as contemplated by or as disclosed in this Agreement, as set forth
in Section 5.08 of the Parent Disclosure Schedule or as disclosed in any Parent
Report filed since December 31, 1997 and the date hereof, WAG, Parent and the
Parent Subsidiaries have conducted their businesses only in the ordinary course
consistent with past practice and, since such date, there has not been (i) any
Parent Material Adverse Effect, excluding any changes and effects resulting from
changes in economic, regulatory or political conditions or changes in conditions
generally applicable to the industries in which WAG, Parent and the Parent
Subsidiaries are involved, (ii) any event that would reasonably be expected to
prevent or materially delay the performance of its obligations pursuant to this
Agreement and the consummation of the Merger by Merger Sub, (iii) any material
change by WAG in its accounting methods, principles or practices, (iv) any
declaration, setting aside or payment of any dividend or distribution in respect
of the shares of WAG Common Stock or Parent Common Stock or any redemption,
purchase or other acquisition of any of WAG's or Parent's securities, or (v) any
increase in the compensation or benefits or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any executive officers of Parent,
WAG or any Parent Subsidiary except in the ordinary course of business
consistent with past practice.
SECTION 5.09. Employee Benefit Plans; Labor Matters. (a) With respect to
all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or
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other benefit plans, programs or arrangements, and all employment, termination,
severance or other contracts or agreements, whether legally enforceable or not,
to which WAG, Parent or any Parent Subsidiary is a party, with respect to which
WAG, Parent or any Parent Subsidiary has any obligation or which are maintained,
contributed to or sponsored by WAG, Parent or any Parent Subsidiary for the
benefit of any current or former employee, officer or director of WAG, Parent or
any Parent Subsidiary (collectively, the "PARENT BENEFIT PLANS"), Parent has
delivered or made available to the Company a true, complete and correct copy of
(i) such Parent Benefit Plan and the most recent summary plan description
related to such Parent Benefit Plan, if a summary plan description is required
therefor, (ii) each trust agreement or other funding arrangement relating to
such Parent Benefit Plan, (iii) the most recent annual report (Form 5500) filed
with the IRS with respect to such Parent Benefit Plan, (iv) the most recent
actuarial report or financial statement relating to such Parent Benefit Plan and
(v) the most recent determination letter issued by the IRS with respect to such
Parent Benefit Plan, if it is qualified under Section 401(a) of the Code.
Neither WAG, Parent nor any Parent Subsidiary has any express or implied
commitment, whether legally enforceable or not, (i) to create, incur liability
with respect to or cause to exist any other employee benefit plan, program or
arrangement, (ii) to enter into any contract or agreement to provide
compensation or benefits to any individual or (iii) to modify, change or
terminate any Parent Benefit Plan, other than with respect to a modification,
change or termination required by ERISA or the Code.
(b) None of the Parent Benefit Plans is a Multiemployer Plan or a Multiple
Employer Plan. None of the Parent Benefit Plans provides for or promises retiree
medical, disability or life insurance benefits to any current or former
employee, officer or director of WAG, Parent or any Parent Subsidiary.
(c) Each Parent Benefit Plan has been administered in all material respects
in accordance with its terms and all contributions required to be made under the
terms of any of the Parent Benefit Plans as of the date of this Agreement have
been timely made or have been reflected on the most recent consolidated balance
sheet filed or incorporated by reference in the Parent Reports prior to the date
of this Agreement. With respect to the Parent Benefit Plans, no event has
occurred and, to the knowledge of WAG or Parent, there exists no condition or
set of circumstances in connection with which WAG, Parent or any Parent
Subsidiary could be subject to any liability under the terms of such Parent
Benefit Plans, ERISA, the Code or any other applicable Law which would
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. No legal action, suit or claim is pending or, to WAG's
and Parent's knowledge, threatened with respect to any Parent Benefit Plan
(other than claims for benefits in the ordinary course).
(d) Other than as disclosed in Section 5.09(d) of the Parent Disclosure
Schedule or except as would not reasonably be expected to have, individually or
in the aggregate, a Parent Material Adverse Effect: (i) each Parent Benefit Plan
which is intended to be qualified under Section 401(a) of the Code or Section
401(k) of the Code has received a favorable determination letter from the IRS
that it is so qualified and each trust established in connection with any Parent
Benefit Plan which is intended to be exempt from federal income taxation under
Section 501(a) of the Code has received a determination letter from the IRS that
it is so exempt, and no fact or event has occurred since the date of such
determination letter from the IRS to adversely affect the qualified status of
any such Parent Benefit Plan or the exempt status of any such trust; (ii) each
trust maintained or contributed to by WAG, Parent or any Parent Subsidiary which
is intended to be qualified as a voluntary employees' beneficiary association
and which is intended to be exempt from federal income taxation under Section
501(c)(9) of the Code has received a favorable determination letter from the IRS
that it is so qualified and so exempt, and no fact or event has occurred since
the date of such determination by the IRS to adversely affect such qualified or
exempt status; (iii) there has been no prohibited transaction (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any
Parent Benefit Plan; (iv) neither WAG, Parent nor any Parent Subsidiary has
incurred any liability for any penalty or tax arising under Section 4971, 4972,
4980, 4980B or 6652 of the Code or any liability under Section 502 of ERISA, and
no fact or event exists which could give rise to any such liability; (v) no
complete or partial termination has occurred within the five years preceding the
date hereof with respect to any Parent Benefit Plan; (vi) no reportable event
(within the meaning of Section 4043 of ERISA) has occurred or is expected to
occur with respect to any Parent Benefit Plan subject to Title IV of ERISA;
(vii) no Parent Benefit Plan had an accumulated funding deficiency (within the
meaning of Section 302 of
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ERISA or Section 412 of the Code), whether or not waived, as of the most
recently ended plan year of such Parent Benefit Plan; (viii) none of the assets
of WAG, Parent or any Parent Subsidiary is the subject of any lien arising under
Section 302(f) of ERISA or Section 412(n) of the Code; neither WAG, Parent nor
any Parent Subsidiary has been required to post any security under Section 307
of ERISA or Section 401(a)(29) of the Code; and no fact or event exists which
could give rise to any such lien or requirement to post any such security; (ix)
all contributions, premiums or payments required to be made with respect to any
Parent Benefit Plan have been made on or before their due dates; (x) all such
contributions have been fully deducted for income tax purposes and no such
deduction has been challenged or disallowed by any government entity and no fact
or event exists which could give rise to any such challenge or disallowance; and
(xi) as of the Effective Time, no Parent Benefit Plan which is subject to Title
IV of ERISA will have an "unfunded benefit liability" (within the meaning of
Section 4001(a)(18) of ERISA).
(e) Except as set forth in Section 5.09(e) of the Parent Disclosure
Schedule, neither WAG or Parent nor any Parent Subsidiary is a party to any
collective bargaining or other labor union contract applicable to persons
employed by WAG, Parent or any Parent Subsidiary and no collective bargaining
agreement is being negotiated by WAG, Parent or any Parent Subsidiary. As of the
date of this Agreement, there is no labor dispute, strike or work stoppage
against WAG, Parent or any Parent Subsidiary pending or, to the knowledge of WAG
or Parent, threatened which may interfere with the respective business
activities of WAG, Parent or any Parent Subsidiary, except where such dispute,
strike or work stoppage would not reasonably be expected to have, individually
or in the aggregate, a Parent Material Adverse Effect. As of the date of this
Agreement, to the knowledge of WAG or Parent, there is no charge or complaint
against WAG, Parent or any Parent Subsidiary pending before the National Labor
Relations Board or any comparable Governmental Entity pending or threatened in
writing, except where such unfair labor practice, charge or complaint would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
SECTION 5.10. Certain Tax Matters. Except as disclosed in the Parent
Reports, neither WAG or Parent nor, to the knowledge of WAG or Parent, any of
its affiliates has taken or agreed to take any action that would reasonably be
expected to prevent the Merger from constituting a transaction qualifying under
Section 368 of the Code. Neither WAG nor Parent is aware of any agreement, plan
or other circumstances that would reasonably be expected to prevent the Merger
from so qualifying under Section 368 of the Code.
SECTION 5.11. Contracts; Debt Instruments. Except as disclosed in the
Parent Reports or in Section 5.11 of the Parent Disclosure Schedule, there is no
contract or agreement that is material to the business, financial condition or
results of operations of WAG, Parent and the Parent Subsidiaries taken as a
whole (each, a "PARENT MATERIAL CONTRACT"). Except as disclosed in the Parent
Reports, neither WAG or Parent nor any Parent Subsidiary is in violation of or
in default under (nor does there exist any condition which with the passage of
time or the giving of notice would reasonably be expected to cause such a
violation of or default under) any loan or credit agreement, note, bond,
mortgage, indenture or lease, or any other contract, license, agreement,
arrangement or understanding to which it is a party or by which it or any of its
properties or assets is bound, except for violations or defaults that would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. Set forth in Section 5.11 of the Parent Disclosure
Schedule is a description of any material changes to the amount and terms of the
indebtedness of WAG, Parent and the Parent Subsidiaries as described in the
notes to the financial statements incorporated in the Parent 1997 10-K.
SECTION 5.12. Litigation. Except as disclosed in the Parent Reports or in
Section 5.12 of the Parent Disclosure Schedule, there is no suit, claim or
action or, to the knowledge of WAG or Parent, proceeding or investigation
pending or threatened against WAG, Parent or any Parent Subsidiary before any
Governmental Entity that would reasonably be expected to have, individually or
in the aggregate, a Parent Material Adverse Effect, and, except as disclosed to
the Company, to the knowledge of WAG or Parent, there are no existing facts or
circumstances that would reasonably be expected to result in such a suit, claim,
action, proceeding or investigation. Except as disclosed to the Company, neither
WAG nor Parent is aware of any facts or circumstances which would reasonably be
expected to result in the denial of insurance coverage under policies issued to
WAG, Parent and the Parent Subsidiaries in respect of such suits, claims,
actions, proceedings and investigations, except in any case as would not
reasonably be expected to have, individually or in the aggregate,
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a Parent Material Adverse Effect or as a result of the execution of this
Agreement and consummation of transactions hereunder. Except as disclosed in the
Parent Reports, neither WAG or Parent nor any Parent Subsidiary is subject to
any outstanding order, writ, injunction or decree which would reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect.
SECTION 5.13. Environmental Matters. Except as disclosed in the Parent
Reports or as would not reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect, (i) WAG, Parent and the Parent
Subsidiaries are in compliance with all applicable Environmental Laws; (ii) all
past noncompliance of WAG, Parent or any Parent Subsidiary with Environmental
Laws or Environmental Permits has been resolved without any pending, ongoing or
future obligation, cost or liability; and (iii) neither WAG or Parent nor any
Parent Subsidiary has released a Hazardous Material at, or transported a
Hazardous Material to or from, any real property currently or formerly owned,
leased or occupied by WAG or Parent or any Parent Subsidiary in violation of any
Environmental Law.
SECTION 5.14. Intellectual Property. Except as would not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect, (i) WAG, Parent and the Parent Subsidiaries own or possess adequate
licenses or other valid rights to use all patents, patent applications, patent
rights, trademarks, trademark rights, trade names, trade dress, trade name
rights, copyrights and copyright registrations and applications, copyright
rights, service marks, trade secrets, applications for trademarks and for
service marks, know-how and other proprietary rights and information used or
held for use in connection with the respective businesses of WAG, Parent and the
Parent Subsidiaries as currently conducted, free and clear of all liens, and
(ii) neither WAG nor Parent is aware of any assertion or claim challenging the
ownership, use or validity of any of the foregoing. Section 5.14 of the Parent
Disclosure Schedule lists all material licenses, sublicenses and other
agreements to which WAG, Parent or any Parent Subsidiary is a party and pursuant
to which (i) any third party is authorized to use any intellectual property
right of WAG, Parent or any Parent Subsidiary or (ii) WAG, Parent or any Parent
Subsidiary is authorized to use any intellectual property rights (other than
pursuant to shrink-wrap and software licenses) of a third party (collectively,
the "Parent Licenses"), and includes the identity of all parties thereto, a
description of the nature and subject matter thereof, the royalty provisions, if
any, therein and the term thereof. The material Parent Licenses are valid and
binding obligations of Parent, enforceable in accordance with their terms, and
there are no material breaches or defaults thereunder. Except as set forth in
Section 5.14 of the Parent Disclosure Schedule, the conduct of the respective
businesses of WAG, Parent and the Parent Subsidiaries as currently conducted
does not infringe upon any patent, patent right, trademark, trademark right,
trade dress, trade name, trade name right, service mark, copyright or copyright
right of any third party that would reasonably be expected to have, individually
or in the aggregate, a Parent Material Adverse Effect. To the knowledge of WAG
or Parent, there are no infringements of any proprietary rights owned by or
licensed by or to WAG, Parent or any Parent Subsidiary that would reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect.
SECTION 5.15. Taxes. Except as set forth in Section 5.15 of the Parent
Disclosure Schedule and except for such matters that would not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect, (i) WAG, Parent, Merger Sub and each other Parent Subsidiary has timely
filed or shall timely file all returns and reports required to be filed by it
with any taxing authority, taking into account any extension of time to file
granted to or obtained on behalf of WAG, Parent, Merger Sub and the other Parent
Subsidiaries, (ii) all Taxes shown to be payable on such returns or reports have
been or will be paid, (iii) as of the date hereof, no deficiency for any amount
of Tax has been asserted or assessed by a taxing authority against WAG, Parent,
Merger Sub or any other Parent Subsidiary that have been adequately reserved
for, and (iv) the most recent financial statements contained in the Parent
Reports reflect an adequate reserve in accordance with U.S. GAAP for all Taxes
payable by WAG, Parent, Merger Sub and the other Parent Subsidiaries for all
taxable periods and portions thereof accrued through the date of such financial
statements.
SECTION 5.16. Brokers. Except for Robinson-Humphrey, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of WAG or Parent.
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SECTION 5.17. Certain Business Practices. None of WAG, Parent, any Parent
Subsidiary or any directors, officers, agents or employees of WAG, Parent or any
Parent Subsidiary (in their capacities as such) has (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, (iii) consummated any transaction, made any payment, entered
into any agreement or arrangement or taken any other action in violation of
Section 1128B(b) of the Social Security Act, as amended, or (iv) made any other
unlawful payment.
SECTION 5.18. Opinion of Financial Advisor. Parent and WAG have received
the Parent Fairness Opinion.
SECTION 5.19. Interested Party Transactions. Except as set forth in
Section 5.19 of the Parent Disclosure Schedule or in the Parent Reports, since
December 31, 1997, no executive officer, director or stockholder of Parent or
WAG or any of the Parent Subsidiaries has engaged in any business dealings with
Parent or WAG or any of the Parent Subsidiaries (other than any such business
dealings that would not required to be disclosed in a proxy statement satisfying
the requirements of Regulation 14A promulgated under the Exchange Act filed on
the date hereof).
SECTION 5.20. Ownership of Company Capital Stock. Except for the
Stockholders Proxy Agreement, none of WAG, Parent, or to WAG's or Parent's
knowledge, any of their affiliates, (i) beneficially owns (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, or (ii) is party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, shares of Company Capital Stock.
ARTICLE VI
COVENANTS
SECTION 6.01. Conduct of Business by the Company Pending the Closing. The
Company agrees that, between the date of this Agreement and the Effective Time,
except as set forth in Section 6.01 of the Company Disclosure Schedule or as
expressly contemplated by any other provision of this Agreement, unless Parent
shall otherwise agree in writing, (x) the respective businesses of the Company
and the Company Subsidiaries shall be conducted only in, and the Company and the
Company Subsidiaries shall not take any action except in, the ordinary course of
business consistent with past practice and (y) the Company shall use all
reasonable efforts to keep available the services of such of the current
officers, significant employees and consultants of the Company and the Company
Subsidiaries and to preserve the current relationships of the Company and the
Company Subsidiaries with such of the corporate partners, customers, suppliers
and other persons with which the Company or any Company Subsidiary has
significant business relations in order to preserve substantially intact its
business organization. By way of amplification and not limitation, except as set
forth in Section 6.01 of the Company Disclosure Schedule or as expressly
contemplated by any other provision of this Agreement, neither the Company nor
any Company Subsidiary shall, between the date of this Agreement and the
Effective Time, directly or indirectly, do, or agree to do, any of the following
without the prior written consent of Parent, which consent shall not be
unreasonably withheld or delayed:
(a) amend or otherwise change its certificate of incorporation or
bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, transfer, lease, license,
guarantee or encumber, or authorize the issuance, sale, pledge,
disposition, grant, transfer, lease, license or encumbrance of, (i) any
shares of capital stock of the Company or any Company Subsidiary of any
class, or securities convertible into or exchangeable or exercisable for
any shares of such capital stock, or any options, warrants or other rights
of any kind to acquire any shares of such capital stock, or any other
ownership interest (including any phantom interest), of the Company or any
Company Subsidiary except (A) pursuant to the Rights Agreement, (B)
pursuant to the Company Stock Purchase Plans, (C) for issues of Company
Common Stock pursuant to options outstanding on the date hereof and
disclosed as such pursuant to Section 4.03
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and (D) for employee stock option grants to non- executive officers and
directors of the Company; provided, however, that (v) such grants are at
fair market value, at a level consistent with past practice and have
vesting schedules consistent with past practice, (w) Parent has received
notice of the Company's intention to grant such options, (x) the aggregate
amount of such granted options does not exceed 150,000 shares of Company
Common Stock, (y) no person shall receive a grant in excess of 7,000 shares
of Company Common Stock and (z) the vesting of such granted options shall
not be accelerated as a result of the Merger, or (ii) any material property
or assets of the Company or any Company Subsidiary, except in the ordinary
course of business;
(c) (i) acquire (including by merger, consolidation, or acquisition of
stock or assets) any interest in any corporation, partnership, other
business organization or person or any division thereof; (ii) except for
borrowings under existing credit facilities, incur any indebtedness for
borrowed money or issue any debt securities or assume, guarantee or
endorse, or otherwise as an accommodation become responsible for, the
obligations of any person for borrowed money or make any loans or advances;
(iii) terminate, cancel or request any material change in, or agree to any
material change in, any Company Material Contract (other than the Rights
Agreement) or enter into any contract or agreement material to the
business, results of operations or financial condition of the Company and
the Company Subsidiaries taken as a whole; or (iv) make or authorize any
capital expenditure, other than capital expenditures in the ordinary course
of business consistent with past practice that have been budgeted for
fiscal year 1998 and disclosed to Parent or capital expenditures that are
not, in the aggregate, in excess of $750,000 for the Company and the
Company Subsidiaries taken as a whole;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except that any Company Subsidiary may pay
dividends or make other distributions to the Company or any other Company
Subsidiary;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock, except
pursuant to cashless exercise of stock options;
(f) amend or change the period (or permit any acceleration, amendment
or change not required by the terms of any of the Company Stock Plans) of
exercisability of options granted under the Company Stock Plans or
authorize cash payments in exchange for any Company Stock Options granted
under any of such plans;
(g) increase the compensation payable or to become payable to, or pay
or enter into any agreement or understanding to pay any bonus to, its
directors, officers, consultants or employees (other than increases in
compensation for non-officer employees that are in the ordinary course of
business consistent with past practice and the payment of bonuses to
non-officer employees that are in the ordinary course of business
consistent with past practice, provided that Parent has received notice of
the Company's intention to implement such increase), or grant any rights to
severance or termination pay to, or enter into any employment or severance
agreement which provides benefits upon a change in control of the Company
that would be triggered by the Merger with, any director, officer,
consultant or other employee of the Company or any Company Subsidiary who
is not currently entitled to such benefits from the Merger or establish,
adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or
other plan, agreement, trust, fund, policy or arrangement for the benefit
of any director, officer, consultant or employee of the Company or any
Company Subsidiary, except to the extent required by applicable Law or the
terms of a collective bargaining agreement;
(h) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice;
(i) take any action to change accounting policies or procedures, other
than actions in the ordinary course of business consistent with past
practice or as required by U.S. GAAP;
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(j) make any tax election or settle or compromise any material
Federal, state or local United States income tax liability, or any income
tax liability of any other jurisdiction, other than those made in the
ordinary course of business consistent with past practice and those for
which specific reserves have been recorded on the consolidated balance
sheet of the Company and the consolidated the Company Subsidiaries dated as
of August 31, 1997 included in the Company 1997 10-K and only to the extent
of such reserves;
(k) enter into or amend any contract, agreement, commitment or
arrangement with, or enter into any transaction with, or make any payment
to or on account or behalf of, other than any such transactions or payments
pursuant to the agreements set forth on Section 6.01(m) of the Company
Disclosure Schedule, any affiliate of the Company or of any Principal
Stockholder other than compensation and benefits in the ordinary course of
business;
(l) knowingly take any action that would prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368 of
the Code; or
(m) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of the
Company contained in this Agreement untrue or incorrect in any material
respect or prevent the Company from consummating the Merger or result in
any of the conditions to the Merger set forth herein not being satisfied.
SECTION 6.02. Conduct of Business by WAG and Parent Pending the
Closing. Each of WAG and Parent agrees that, between the date of this Agreement
and the Effective Time, except (i) as set forth in Section 6.02 of the Parent
Disclosure Schedule, (ii) subject to paragraph (e) below, for any actions taken
by WAG or Parent relating to any other acquisitions or business combinations
(including the Holding Company Reorganization and the Resurgens Transaction) or
(iii) as expressly contemplated by any other provision of this Agreement, unless
the Company shall otherwise agree in writing, (x) the respective businesses of
WAG, Parent and the Parent Subsidiaries shall be conducted only in, and WAG,
Parent and the Parent Subsidiaries shall not take any action except in, the
ordinary course of business consistent with past practice and (y) WAG and Parent
shall use all reasonable efforts to keep available the services of such of the
current officers, significant employees and consultants of WAG, Parent and the
Parent Subsidiaries and to preserve the current relationships of WAG, Parent and
the Parent Subsidiaries with such of the corporate partners, customers,
suppliers and other persons with which WAG, Parent or any Parent Subsidiary has
significant business relations in order to preserve substantially intact its
business organization. By way of amplification and not limitation, except (i) as
set forth in Section 6.02 of the Parent Disclosure Schedule, (ii) subject to
paragraph (e) below, for any actions taken by WAG or Parent relating to any
other acquisitions or business combinations (including the Holding Company
Reorganization and the Resurgens Transaction) or (iii) as expressly contemplated
by any other provision of this Agreement, neither WAG or Parent nor any Parent
Subsidiary shall, between the date of this Agreement and the Effective Time,
directly or indirectly, do, or agree to do, any of the following without the
prior written consent of the Company, which consent shall not be unreasonably
withheld or delayed:
(a) amend or otherwise change its certificate of incorporation or
bylaws or equivalent organizational documents;
(b) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except that any Parent Subsidiary may pay
dividends or make other distributions to Parent or any other Parent
Subsidiary;
(c) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) sell, transfer, license, sublicense or otherwise dispose of any
material assets;
(e) acquire (other than in connection with the Holding Company
Reorganization and the Resurgens Transaction) or enter into any agreement
to acquire all or substantially all of the capital stock
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or assets of any other person or business unless upon advice of counsel
such transaction would not reasonably be expected to materially delay or
impede the consummation of the Merger;
(f) knowingly take any action that would prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368 of
the Code; or
(g) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of WAG,
Parent or Merger Sub contained in this Agreement untrue or incorrect in any
material respect or prevent WAG, Parent or Merger Sub from performing or
cause WAG, Parent or Merger Sub not to perform its covenants hereunder or
result in any of the conditions to the Merger set forth herein not being
satisfied.
SECTION 6.03. Notices of Certain Events. Each of Parent, WAG and the
Company shall give prompt notice to the other of (i) any notice or other
communication from any person alleging that the consent of such person is or may
be required in connection with the Merger; (ii) any notice or other
communication from any Governmental Entity in connection with the Merger; (iii)
any actions, suits, claims, investigations or proceedings commenced or, to its
knowledge, threatened against, relating to or involving or otherwise affecting
WAG, Parent, the Company, the Parent Subsidiaries or the Company Subsidiaries
that relate to the consummation of the Merger; (iv) the occurrence of a default
or event that, with the giving of notice or lapse of time or both, will become a
default under any Company Material Contract or Parent Material Contract; and (v)
any change that would reasonably be expected to have a Company Material Adverse
Effect or a Parent Material Adverse Effect or to delay or impede the ability of
either the Company or Parent (or WAG) to perform its obligations pursuant to
this Agreement and to effect the consummation of the Merger.
SECTION 6.04. Access to Information; Confidentiality. (a) Except as
required pursuant to any confidentiality agreement or similar agreement or
arrangement to which WAG, Parent or the Company or any of the Parent
Subsidiaries or the Company Subsidiaries is a party or pursuant to applicable
Law or the regulations or requirements of any stock exchange or other regulatory
organization with whose rules a party hereto is required to comply, from the
date of this Agreement to the Effective Time, WAG and Parent shall (and shall
cause the Parent Subsidiaries to) and the Company shall (and shall cause the
Company Subsidiaries to) (i) provide to the other (and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, "REPRESENTATIVES")) access at reasonable times
upon prior notice to its and its subsidiaries' officers, employees, agents,
properties, offices and other facilities and to the books and records thereof,
and (ii) furnish promptly such information concerning its and its subsidiaries'
business, properties, contracts, assets, liabilities and personnel as the other
party or its Representatives may reasonably request. No investigation conducted
pursuant to this Section 6.04 shall affect or be deemed to modify any
representation or warranty made in this Agreement.
(b) The parties hereto shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under the
Confidentiality Agreement with respect to the information disclosed pursuant to
this Section 6.04.
SECTION 6.05. No Solicitation of Transactions. The Company shall not,
directly or indirectly, and shall instruct its officers, directors, employees,
subsidiaries, agents or advisors or other representatives (including any
investment banker, attorney or accountant retained by it), not to, directly or
indirectly, solicit, initiate or knowingly encourage (including by way of
furnishing nonpublic information), or take any other action knowingly to
facilitate, any inquiries or the making of any proposal or offer (including any
proposal or offer to its stockholders) that constitutes, or may reasonably be
expected to lead to, any Competing Transaction, or enter into or maintain or
continue discussions or negotiate with any person in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of the Company or any Company Subsidiary, or any investment banker,
financial advisor, attorney, accountant or other representative retained by the
Company or any Company Subsidiary, to take any such action; provided, however,
that (i) nothing contained in this Section 6.05 shall prohibit the board of
directors of the Company from complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a tender or exchange offer not made in violation of
this
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<PAGE> 668
Section 6.05, (ii) with regard to such an offer, after receiving the advice of
outside counsel, the board of directors of the Company determines in good faith
that it is highly probable that failing to do so would violate its fiduciary
duties, nothing contained in this Section 6.05 shall prohibit the board of
directors of the Company from considering and negotiating (including furnishing
nonpublic information) an unsolicited bona fide written acquisition proposal
which (A) was not received in violation of this Section 6.05, (B) if executed or
consummated would be a Competing Transaction and (C) is not subject to financing
or financing is, in the good faith judgment of the board of directors of the
Company after consultation with its financial advisors, highly likely of being
obtained by such third party, or (iii) if after receiving the advice of outside
counsel, the board of directors of the Company determines in good faith that it
is highly probable that failing to do so would violate its fiduciary duties,
nothing contained in this Section 6.05 shall prohibit the board of directors of
the Company from approving or recommending to the stockholders of the Company an
unsolicited bona fide written acquisition proposal which (A) was not received in
violation of this Section 6.05, (B) if executed or consummated would be a
Competing Transaction, (C) is not subject to financing or financing is, in the
good faith judgment of the board of directors of the Company after consultation
with its financial advisors, highly likely of being obtained by such third party
and (D) the board of directors of the Company determines in good faith, after
advice of its financial advisor to such effect, is more favorable to the
Company's stockholders than the transaction contemplated by this Agreement (any
such acquisition proposal, a "SUPERIOR PROPOSAL"). The Company shall notify
Parent promptly, and in no event later than one day after receipt, if any
proposal or offer, or any inquiry or contact with any person with respect
thereto, regarding a Competing Transaction is made. The Company immediately
shall cease and cause to be terminated all existing discussions or negotiations
with any parties conducted heretofore with respect to a Competing Transaction.
Subject to the fiduciary duties of the Board of Directors of the Company, the
Company shall not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which it is a party. The Company
shall use its best efforts to ensure that its officers, directors, employees,
subsidiaries, agents and advisors or other representatives (including any
investment banker, attorney or accountant retained by it) are aware of the
restrictions described in this Section 6.05.
SECTION 6.06. Letters of Accountants. Each of the Company and Parent
shall use all reasonable efforts to cause to be delivered to the other "comfort"
letters of each of Ernst & Young LLP and Price Waterhouse LLP, respectively,
each such letter dated and delivered as of the date the Registration Statement
shall have become effective and as of the Effective Time, and addressed to
Parent and the Company, respectively, in form reasonably satisfactory to the
recipient thereof and reasonably customary in scope and substance for letters
delivered by independent public accountants in connection with mergers such as
the Merger contemplated hereby.
SECTION 6.07. Subsequent Financial Statements. Prior to the Effective
Time, each of the Company and Parent (or WAG if the Holding Company
Reorganization has not yet been consummated) (i) shall consult with the other
prior to making publicly available its financial results for any period and (ii)
shall consult with the other prior to the filing of, and shall timely file with
the SEC, each Annual Report on Form 10-K, Quarterly Report on Form 10-Q and
Current Report on Form 8-K required to be filed by such party under the Exchange
Act and shall promptly deliver to the other copies of each such report filed
with the SEC.
SECTION 6.08. Control of Operations. Nothing contained in this Agreement
shall give Parent and/or WAG, directly or indirectly, the right to control or
direct the operations of the Company and the Company Subsidiaries prior to the
Effective Time. Prior to the Effective Time, each of Parent (and WAG) and the
Company shall exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision over its respective operations.
SECTION 6.09. Further Action; Consents; Filings. (a) Upon the terms and
subject to the conditions hereof, each of the parties hereto shall use all
reasonable efforts to (i) take, or cause to be taken, all appropriate action,
and do, or cause to be done, all things necessary, proper or advisable under
applicable Law or otherwise to consummate and make effective the Merger, (ii)
obtain from Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by WAG,
Parent, Merger Sub, the Company or the Surviving Corporation or any of their
respective subsidiaries
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<PAGE> 669
in connection with the authorization, execution and delivery of this Agreement
and the consummation of the Merger and (iii) make all necessary filings, and
thereafter make any other required or appropriate submissions, with respect to
this Agreement and the Merger required under (A) the rules and regulations of
Nasdaq, (B) the Securities Act, the Exchange Act and any other applicable
Federal or state securities Laws, (C) the HSR Act, and (D) any other applicable
Law. The parties hereto shall cooperate and consult with each other in
connection with the making of all such filings, including by providing copies of
all such documents to the nonfiling parties and their advisors prior to filing,
and giving due consideration to their views with respect thereto. No party shall
consent to any voluntary extension of any statutory deadline or waiting period
or to any voluntary delay of the consummation of the Merger at the behest of any
Governmental Entity without prior consultation of the other parties hereto, and
due consideration of such parties' views with respect thereto.
(b) Each of the parties hereto shall promptly give (or cause their
respective subsidiaries to give) any notices regarding the Merger, this
Agreement or the transactions contemplated hereby or thereby to third parties
required under applicable Law or by any contract, license, lease or other
agreement to which it or any of its subsidiaries is bound, and use, and cause
its subsidiaries to use, all reasonable efforts to obtain any third party
consents required under any such contract, license, lease or other agreement in
connection with the consummation of the Merger or the other transactions
contemplated by this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.01. Registration Statement; Proxy Statement. (a) As promptly as
practicable after the execution of this Agreement, WAG, Parent and the Company
shall jointly prepare, and the Company, WAG and Parent shall file with the SEC,
a document or documents that will constitute (i) the prospectus forming part of
the registration statement on Form S-4 of WAG and Parent (together with all
amendments thereto, the "REGISTRATION STATEMENT"), in connection with the
registration under the Securities Act of the WAG Common Stock or the Parent
Common Stock to be issued to the Company's stockholders pursuant to the Merger
and (ii) the proxy statement or information statement with respect to the Merger
relating to the special meeting of the Company's stockholders (the "COMPANY
STOCKHOLDERS' MEETING") and WAG's or Parent's stockholders, as the case may be
(the "PARENT STOCKHOLDERS' MEETING"), to be held to consider approval of this
Agreement and the Merger contemplated hereby, in the case of the Company
Stockholders' Meeting, and approval of the issuance of Parent Common Stock or
WAG Common Stock, as the case may be, in the Merger, and the approval of an
increase in the authorized WAG Common Stock or Parent Common Stock (after the
Holding Company Reorganization) to 100,000,000 shares (such increase, the
"Capital Increase"), in the case of the Parent Stockholders' Meeting (together
with any amendments thereto, the "PROXY STATEMENT"). Copies of the Proxy
Statement shall be provided to Nasdaq in accordance with its rules. If
applicable, each of the parties hereto shall use all reasonable efforts to cause
the Registration Statement to become effective as promptly as practicable after
the date hereof, and, prior to the effective date of the Registration Statement,
the parties hereto shall take all action required under any applicable Laws in
connection with the issuance of shares of WAG Common Stock or Parent Common
Stock pursuant to the Merger. WAG, Parent or the Company, as the case may be,
shall furnish all information concerning WAG, Parent or the Company as the other
parties may reasonably request in connection with such actions and the
preparation of the Registration Statement, if applicable, and Proxy Statement.
As promptly as practicable after the effective date of the Registration
Statement, the Proxy Statement shall be mailed to the stockholders of the
Company and of Parent or WAG, as applicable. Each of the parties hereto shall
cause the Proxy Statement to comply as to form and substance in all material
respects with the applicable requirements of (i) the Exchange Act, (ii) the
Securities Act, (iii) the rules and regulations of Nasdaq and (iv) the Delaware
General Corporation Law.
(b) The Proxy Statement shall include (i) subject to the fiduciary duties
of the Board of Directors of the Company, (A) the approval of the Merger and the
recommendation of the board of directors of the Company to the Company's
stockholders that they vote in favor of approval of this Agreement and the
Merger
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<PAGE> 670
contemplated hereby, and (B) the Company Fairness Opinion, and (ii) subject to
the fiduciary duties of the Board of Directors of WAG or Parent, as the case may
be, (A) the approval of the issuance of Parent Common Stock or WAG Common Stock,
as the case may be, in the Merger and the Capital Increase and the
recommendation of the board of directors of WAG or Parent to WAG's or Parent's
stockholders, as applicable, that they vote in favor of issuance of shares of
Parent Common Stock or WAG Common Stock, as the case may be, in the Merger and
the Capital Increase, and (B) the Parent Fairness Opinion.
(c) No amendment or supplement to the Proxy Statement, if applicable, or
the Registration Statement shall be made without providing the other parties the
opportunity to review and comment thereon. If applicable, each of the parties
hereto shall advise the other parties hereto, promptly after it receives notice
thereof, of the time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any stop order, of
the suspension of the qualification of the WAG Common Stock or the Parent Common
Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or of any request by the SEC or Nasdaq for amendment of the Proxy
Statement or the Registration Statement or comments thereon and responses
thereto or requests by the SEC for additional information.
(d) None of the information supplied by the Company for inclusion or
incorporation by reference in the Registration Statement, if applicable, or the
Proxy Statement shall, at the respective times filed with the SEC or other
regulatory agency and, in addition, (A) in the case of the Proxy Statement, at
the date it or any amendments or supplements thereto are mailed to stockholders
of WAG or Parent in connection with the Parent Stockholders' Meeting, and to
stockholders of the Company in connection with the Company Stockholders'
Meeting, at the time of the Company Stockholders' Meeting, and at the time of
the Parent Stockholders' Meeting, and (B) in the case of the Registration
Statement, when it becomes effective under the Securities Act and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any Company Subsidiary, or their
respective officers or directors, should be discovered by the Company that
should be set forth in an amendment or a supplement to the Registration
Statement, if applicable, or Proxy Statement, the Company shall promptly inform
Parent and an appropriate amendment or supplement shall promptly be filed with
the SEC. All documents that the Company is responsible for filing with the SEC
in connection with the Merger will comply as to form in all material respects
with the applicable requirements of the rules and regulations of Nasdaq, the
Delaware General Corporation Law, the Securities Act and the Exchange Act.
(e) None of the information supplied by WAG or Parent for inclusion or
incorporation by reference in the Registration Statement, if applicable, or the
Proxy Statement shall, at the respective times filed with the SEC or other
regulatory agency and, in addition, (A) in the case of the Proxy Statement, at
the date it or any amendments or supplements thereto are mailed to stockholders
of WAG or Parent in connection with the Parent Stockholders' meeting, and to
stockholders of the Company in connection with the Company Stockholders'
Meeting, at the time of the Company Stockholders' Meeting and at the time of the
Parent Stockholders' Meeting, and (B) in the case of the Registration Statement,
when it becomes effective under the Securities Act and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If, at any time prior to the Effective Time, any event or
circumstance relating to WAG or Parent or any Parent Subsidiary, or their
respective officers or directors, should be discovered by Parent that should be
set forth in an amendment or a supplement to the Registration Statement or Proxy
Statement, Parent shall promptly inform the Company and an appropriate amendment
or supplement shall promptly be filed with the SEC. All documents that WAG or
Parent is responsible for filing with the SEC in connection with the Merger will
comply as to form in all material respects with the applicable requirements of
the rules and regulations of Nasdaq, the Delaware General Corporation Law, the
Securities Act and the Exchange Act.
SECTION 7.02. Stockholders' Meetings. Subject to the fiduciary duties of
the Company's Board of Directors, in the case of the Company Stockholders'
Meeting, or the fiduciary duties of WAG's or Parent's
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<PAGE> 671
Board of Directors, in the case of the Parent Stockholders' Meeting, the Company
shall call and hold the Company Stockholders' Meeting and Parent shall call and
hold the Parent Stockholders' Meeting, as promptly as practicable after the
Registration Statement becomes effective for the purpose of voting upon the
approval of this Agreement and the transactions contemplated hereby pursuant to
the Proxy Statement, and the Company and Parent shall use all reasonable efforts
to hold the Company Stockholders' Meeting and the Parent Stockholders' Meeting
on the same day and as soon as practicable after the date on which the
Registration Statement becomes effective. If applicable and subject to the
fiduciary duties of the Board of Directors of the Company, the Company shall use
all reasonable efforts to solicit from its stockholders proxies in favor of the
approval of this Agreement and the Merger contemplated hereby pursuant to the
Proxy Statement and shall take all other action necessary or advisable to secure
the vote or consent of stockholders required by the Delaware General Corporation
Law or applicable stock exchange requirements to obtain such approval. If
applicable and subject to the fiduciary duties of the Board of Directors of
Parent or WAG, Parent or WAG, as applicable, shall use all reasonable efforts to
solicit from its stockholders proxies in favor of the issuance of Parent Common
Stock or WAG Common Stock, as the case may be, in the Merger and the Capital
Increase contemplated hereby pursuant to the Proxy Statement and shall take all
other action necessary or advisable to secure the vote of stockholders required
by the Delaware General Corporation Law or applicable stock exchange
requirements to obtain such approval, if required. Each of the parties hereto
shall, subject to the fiduciary duties of its Board of Directors, take all other
action necessary or, in the opinion of the other parties hereto, advisable to
promptly and expeditiously secure any vote or consent of stockholders required
by applicable Law and such party's certificate of incorporation, as the case may
be, and bylaws to effect the Merger.
SECTION 7.03. Rule 145 Affiliates. Not fewer than 45 days prior to the
Effective Time, the Company shall deliver to Parent a list of names and
addresses of each person who was, in the Company's reasonable judgment, at the
record date for the Company Stockholders' Meeting, a Rule 145 Affiliate of the
Company. The Company shall provide Parent such information and documents as
Parent shall reasonably request for purposes of reviewing such list. The Company
shall use all reasonable efforts to deliver or cause to be delivered to Parent,
prior to the Effective Time, an affiliate agreement in the form attached hereto
as Exhibit 7.03 (each, a "COMPANY AFFILIATE AGREEMENT"), executed by each of the
Rule 145 Affiliates of the Company identified in the above-referenced list. The
foregoing notwithstanding, Parent shall be entitled to place the legend only as
specified in the Company Affiliate Agreement on the certificates evidencing any
of the Parent Common Stock to be received by (i) any Rule 145 Affiliate of the
Company or (ii) any person Parent reasonably identifies (by written notice to
the Company) as being a person who may be deemed an "affiliate" within the
meaning of rule 145(c) or (d) promulgated under the Securities Act, and to issue
appropriate stop transfer instructions to the transfer agent for such Parent
Common Stock, consistent with the terms of the Company Affiliate Agreement,
regardless of whether such person has executed a Company Affiliate Agreement and
regardless of whether such person's name and address appear on Section 4.16 of
the Company Disclosure Schedule.
SECTION 7.04. Directors' and Officers' Indemnification. (a) The
certificate of incorporation and bylaws of the Surviving Corporation shall
contain the provisions with respect to indemnification that are set forth, as of
the date of this Agreement, in the certificate of incorporation and bylaws of
the Company, which provisions shall not be amended, repealed or otherwise
modified for a period of six years from the Effective Time in any manner that
would affect adversely the rights thereunder of individuals who at or at any
time prior to the Effective Time were directors, officers, employees,
fiduciaries or agents of the Company.
(b) From and after the Effective Time, Parent, WAG and the Surviving
Corporation shall indemnify and hold harmless each present and former director
and officer of the Company (the "INDEMNIFIED PARTIES"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "COSTS") incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining to
matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent that the Company would have been permitted under Delaware law and under
its charter documents as in effect on the date hereof to indemnify such
Indemnified Parties, and
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WAG and Parent shall also advance expenses as incurred to the fullest extent
permitted under Delaware law upon receipt from the applicable Indemnified Party
to whom expenses are to be advanced of an undertaking to repay such advances if
it is ultimately determined such person is not entitled to indemnification.
(c) In the event that either of the Surviving Corporation, Parent or WAG or
any of its successors or assigns (i) consolidates with or merges into any other
person and is not the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially all of
its properties and assets to any person, then, and in each such case, proper
provision will be made so that the successors and assigns of Parent, WAG or the
Surviving Corporation, as applicable, will assume the obligations thereof set
forth in this Section 7.04.
(d) The provisions of this Section 7.04 (i) are intended to be for the
benefit of, and will be enforceable by, each Indemnified Party, his or her heirs
and his or her representatives and (ii) are in addition to, and not in
substitution for, any other rights to indemnification or contribution that any
such person may have by contract or otherwise.
(e) For six years after the Effective Time, WAG or the Surviving
Corporation shall maintain in effect the Company's current directors' and
officers' liability insurance covering acts or omissions occurring prior to the
Effective Time with respect to those persons who are currently covered by the
Company's directors' and officers' liability insurance policy on terms with
respect to such coverage and amount no less favorable to the Company's directors
and officers currently covered by such insurance than those of such policy in
effect on the date hereof, provided that WAG may substitute therefor policies of
WAG or the Parent Subsidiaries containing terms with respect to coverage and
amount no less favorable to such directors or officers; provided, further, that
in no event shall WAG or the Surviving Corporation be required to pay aggregate
premiums for insurance under this Section 7.04(e) in excess of 150% of the
aggregate premiums paid by the Company in 1997 on an annualized basis for such
purpose; and, provided further, that if WAG or the Surviving Corporation is
unable to obtain the amount of insurance required by this Section 7.04(e) for
such aggregate premium, then WAG or the Surviving Corporation shall obtain as
much insurance as can be obtained for an annual premium equal to 150% of the
1997 premium.
(f) WAG shall cause the Surviving Corporation or any successor thereto to
comply with its obligations under this Section 7.04.
SECTION 7.05. No Shelf Registration. Parent shall not be required to
amend or maintain the effectiveness of the Registration Statement for the
purpose of permitting resale of the shares of Parent Common Stock received
pursuant hereto by the persons who may be deemed to be "affiliates" of the
Company or Parent within the meaning of rule 145 promulgated under the
Securities Act.
SECTION 7.06. Public Announcements. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Merger and shall not issue any
such press release or make any such public statement without the prior written
approval of the other, except to the extent required by applicable Law or the
requirements of the rules and regulations of Nasdaq, in which case the issuing
party shall use all reasonable efforts to consult with the other party before
issuing any such release or making any such public statement.
SECTION 7.07. Nasdaq Listing. Each of the parties hereto shall use all
reasonable efforts to obtain, prior to the Effective Time, the approval for
including in Nasdaq, effective upon official notice of issuance, of the shares
of WAG Common Stock or Parent Common Stock, as the case may be, into which the
shares of Company Capital Stock will be converted pursuant to Article III and
the shares of WAG Common Stock or Parent Common Stock, as the case may be, which
will be issuable upon exercise of Company Stock Options pursuant to Section
3.05.
SECTION 7.08. Blue Sky. Each of the parties hereto shall use all
reasonable efforts to obtain prior to the Effective Time all necessary blue sky
permits and approvals required under Blue Sky Laws to permit the distribution of
the shares of WAG Common Stock or Parent Common Stock, as the case may be, to be
issued in accordance with the provisions of this Agreement.
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SECTION 7.09. Company Stock Options. (a) At the Effective Time, Parent,
in the case the Holding Company Reorganization shall have been consummated, or
WAG, in the case the Holding Company Reorganization shall not have been
consummated, shall assume, by virtue of this Agreement and without any further
action on the part of the Company, all of the Company's obligations with respect
to each outstanding Company Stock Option, whether previously vested or unvested.
Unless otherwise elected by Parent prior to the Effective Time, Parent or WAG
shall make such assumption in such manner that Parent or WAG (i) is a
corporation "assuming a stock option in a transaction to which Section 424(a)
applies" within the meaning of Section 424 of the Code or (ii) to the extent
that Section 424 of the Code does not apply to such Company Stock Option, would
be such a corporation were Section 424 of the Code applicable to such Company
Stock Option; and, if not so otherwise elected, after the Effective Time, all
references to the Company in the Company Stock Plans and the applicable Company
Stock Option agreements shall be deemed to refer to WAG, prior to the Holding
Company Reorganization, or Parent, following the Holding Company Reorganization,
which shall have assumed the Company Stock Plans as of the Effective Time by
virtue of this Agreement and without any further action on the part of the
Company, Parent or WAG. Each Company Stock Option so assumed under this
Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the applicable Company Stock Plan and the applicable
Company Stock Option as in effect immediately prior to the Effective Time,
except as otherwise provided in Section 3.05. Parent shall use all reasonable
efforts to ensure that Company Stock Options intended to qualify as incentive
stock options under Section 422 of the Code prior to the Effective Time continue
to so qualify after the Effective Time.
(b) With respect to the Company Stock Plans, WAG or Parent, as the case may
be, shall take all corporate action necessary or appropriate to (i) reserve for
issuance the number of shares that will be subject to Company Stock Options
referred to in this Section 7.09 and (ii), no later than the Effective Time,
file a registration statement on Form S-8 (or any successor or other appropriate
form) with respect to the shares of WAG Common Stock or Parent Common Stock, as
the case may be, subject to such plan to the extent such registration statement
is required under applicable law in order for such shares of common stock to be
sold without restriction, and WAG and Parent shall use its best efforts to
maintain the effectiveness of such registration statement (and maintain the
current status of the prospectuses contained therein) for so long as such
benefits and grants remain payable and such options under such plans remain
outstanding.
SECTION 7.10. Tax Treatment. Each of Parent, WAG and the Company shall
use best efforts to cause the Merger to qualify as a reorganization under the
provisions of Section 368 of the Code and to obtain the opinions of counsel
referred to in Sections 8.02(c) and 8.03(c). In addition, following the
Effective Time, each of WAG, Parent and the Surviving Corporation agree not to
take any action that would cause the Merger to fail to so qualify.
SECTION 7.11. Obligations of Parent and WAG. Prior to consummation of the
Holding Company Reorganization, WAG will take all action necessary to cause
Parent and Merger Sub to perform their respective obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth
herein. Following consummation of the Holding Company Reorganization, Parent
will take all action necessary to cause WAG and Merger Sub to perform their
respective obligations under this Agreement and to consummate the Merger on the
terms and conditions set forth herein.
SECTION 7.12. Company Employees. (a) Individuals who are employed by the
Company or the Company Subsidiaries as of the Effective Time shall remain
employees of the Company or the Company Subsidiaries, as applicable, immediately
following the Effective Time (each such employee, "Affected Employee"). For a
period of one year immediately following the Effective Time, the annual cash
compensation for each Affected Employee shall not be reduced without such
Affected Employee's consent and the insurance coverage, benefits and vacation
and 401(k) participation benefits provided to Affected Employees shall be, in
the aggregate, not less favorable than those provided to such employees
immediately prior to the Effective Time. Following the Effective Time, for
purposes of determining eligibility, vesting and level of benefits under all
employee benefit plans (but not for pension benefit accrual purposes) and, if
applicable, for purposes of satisfying any waiting periods concerning
"preexisting conditions" and the satisfaction of any "copayment" or deductible
requirements, service with the Company or a Company Subsidiary or any
predecessor thereto prior to the Effective Time shall be treated, to the extent
permitted by law, as service with
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an "employer" to the same extent as if such persons had been employees of WAG,
Parent or a Parent Subsidiary, and provided further that this Section 7.12(a)
shall not be construed to limit the ability of the applicable employer to
terminate the employment of any Affected Employee or to review employee benefits
programs from time to time and to make such changes as they deem appropriate.
(b) WAG and the Parent agree to honor, or to cause the appropriate
subsidiary to honor, in accordance with their terms all Company Benefit Plans;
provided, however, that the foregoing shall not prevent any party from amending
or terminating any such plan, contact, agreement, arrangement or understanding
in accordance with its terms.
(c) For the purpose of all Company Benefit Plans which include the term
"change in control", WAG and Parent acknowledge that the Merger constitutes a
"change in control" for all purposes pursuant to any such Company Benefit Plans.
In addition, WAG and Parent acknowledge that, with respect to the Senior
Termination Benefits Agreements listed in Schedule 7.12(c) (the "Listed
Agreements"), in light of WAG's and Parent's plans relating to management
assignments and responsibilities with respect to the business of the Company
from and after the Effective Time, each employee who is a party to any such
contract may, following consummation of the Merger, terminate employment
thereunder and, upon such termination, be entitled to termination payments and
benefits described therein.
SECTION 7.13. Board of Directors of Parent and WAG. Immediately prior to
the Effective Time, the boards of directors of Parent and WAG shall take all
action necessary to cause an individual mutually acceptable to the boards of
directors of the Company, on the one hand, and the boards of directors of Parent
and WAG, on the other hand, to be elected to fill the vacancy on the boards of
directors of Parent and WAG at the Effective Time; provided, however, that if
the Holding Company Reorganization shall have been consummated prior to the
Effective Time, then the individual selected pursuant to the foregoing provision
shall not be elected to serve as a director of WAG.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party to Consummate
the Merger. The respective obligations of the parties hereto to consummate the
Merger, or to permit the consummation of the Merger, are subject to the
satisfaction or, if permitted by applicable Law, waiver of the following
conditions:
(a) the Registration Statement shall have been declared effective by
the SEC under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
SEC and no proceeding for that purpose shall have been initiated by the SEC
and not concluded or withdrawn;
(b) this Agreement and the Merger shall have been duly approved by the
requisite vote of stockholders of the Company and the issuance of the
shares of WAG Common Stock or Parent Common Stock in the Merger and the
Capital Increase shall have been duly approved by the requisite vote of the
stockholders of WAG or Parent, as the case may be, in any such case in
accordance with the Delaware General Corporation Law;
(c) no court of competent jurisdiction shall have issued or entered
any order, writ, injunction or decree, and no other Governmental Entity
shall have issued any order (collectively, "Restraints"), which is then in
effect and has the effect of making the Merger illegal or otherwise
prohibiting its consummation;
(d) any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or be
terminated;
(e) except with respect to the HSR Act (which is addressed in Section
8.01(d)), all consents, approvals and authorizations legally required to be
obtained to consummate the Merger shall have been obtained from all
Governmental Entities, except where the failure to obtain any such consent,
approval or
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authorization would not reasonably be expected to result in a change in or
have an effect on the business of the Company or Parent that is materially
adverse to the business, assets (including intangible assets), liabilities
(contingent or otherwise), condition (financial or otherwise) or results of
operations of WAG, Parent and the Parent Subsidiaries, taken as a whole;
and
(f) the shares of WAG Common Stock or Parent Common Stock, as the case
may be, into which the shares of Company Capital Stock will be converted
pursuant to Article III and the shares of WAG Common Stock or Parent Common
Stock, as the case may be, issuable upon the exercise of Company Stock
Options pursuant to Section 3.05 shall have been authorized for inclusion
in Nasdaq, subject to official notice of issuance.
SECTION 8.02. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger, or to permit the
consummation of the Merger, are subject to the satisfaction or, if permitted by
applicable Law, waiver of the following further conditions:
(a) each of the representations and warranties of WAG, Parent and
Merger Sub contained in this Agreement that is qualified by materiality or
Parent Material Adverse Effect shall be true, complete and correct on and
as of the Effective Time as if made at and as of the Effective Time (other
than representations and warranties which address matters only as of a
certain date which shall be true, complete and correct as of such certain
date) and each of the representations and warranties that is not so
qualified shall be true, complete and correct in all material respects on
and as of the Effective Time as if made at and as of the Effective Time
(other than representations and warranties which address matters only as of
a certain date which shall be true, complete and correct in all material
respects as of such certain date), in each case except as contemplated or
permitted by this Agreement, and the Company shall have received a
certificate of the Chairman or President and Chief Financial Officer of WAG
and of Parent to such effect;
(b) WAG and Parent shall each have performed or complied in all
material respects with all material agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time and the Company shall have received a certificate of the
Chairman or President and Chief Financial Officer of WAG and of Parent to
that effect; and
(c) Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the
Company, shall have issued its opinion, such opinion dated on or about the
date of the Closing, addressed to the Company, and reasonably satisfactory
to it, based upon certain representations of the Company and assumptions,
to the effect that the Merger will be treated for Federal income tax
purposes as a reorganization qualifying under the provisions of Section 368
of the Code and that each of the Company, Merger Sub and Parent will be a
party to the reorganization within the meaning of Section 368(b) of the
Code, which opinion shall not have been withdrawn or modified in any
material respect.
SECTION 8.03. Conditions to the Obligations of WAG and Parent. The
obligations of WAG and Parent to consummate the Merger, or to permit the
consummation of the Merger, are subject to the satisfaction or, if permitted by
applicable Law, waiver of the following further conditions:
(a) each of the representations and warranties of the Company
contained in this Agreement that is qualified by materiality or Company
Material Adverse Effect shall be true, complete and correct on and as of
the Effective Time as if made at and as of the Effective Time (other than
representations and warranties which address matters only as of a certain
date which shall be true, complete and correct as of such certain date) and
each of the representations and warranties that is not so qualified shall
be true, complete and correct in all material respects on and as of the
Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a certain
date which shall be true, complete and correct in all material respects as
of such certain date), in each case except as contemplated or permitted by
this Agreement, and Parent shall have received a certificate of the
Chairman or President and Chief Financial Officer of the Company to such
effect;
(b) the Company shall have performed or complied in all material
respects with all material agreements and covenants required by this
Agreement to be performed or complied with by it on or prior
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to the Effective Time and Parent shall have received a certificate of the
Chairman or President and Chief Financial Officer of the Company to that
effect; and
(c) Rogers & Hardin LLP, counsel to WAG and Parent, shall have issued
its opinion, such opinion dated on or about the date of the Closing,
addressed to Parent, and reasonably satisfactory to it, based upon certain
representations of Parent and assumptions, to the effect that the Merger
will be treated for Federal income tax purposes as a reorganization
qualifying under the provisions of Section 368 of the Code and that each of
Parent, Merger Sub and the Company will be a party to the reorganization
within the meaning of Section 368(b) of the Code, which opinion shall not
have been withdrawn or modified in any material respect.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, notwithstanding
any requisite adoption and approval of this Agreement, as follows:
(a) by mutual written consent duly authorized by the boards of
directors of each of Parent and the Company;
(b) by either Parent or the Company, if the Effective Time shall not
have occurred on or before November 30, 1998; provided, however, that in
the event that the Effective Time has not occurred by such time solely due
to the failure to satisfy the condition specified in Section 8.01(d) or
8.01(e), then such date may be extended, at the option of Parent or the
Company, until December 31, 1998; provided further, that the right to
terminate this Agreement under this Section 9.01(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
shall have caused, or resulted in, the failure of the Effective Time to
occur on or before such date;
(c) by either Parent or the Company, if any Restraint shall have been
entered and shall have become final and nonappealable, provided that the
party seeking to terminate this Agreement pursuant to this Section 9.01(c)
shall have used best efforts to prevent the entry of and to remove such
Restraint;
(d) by the Company, if prior to the Parent Stockholders' Meeting, the
board of directors of WAG or Parent, as the case may be, withdraws,
modifies or changes its recommendation of the issuance of the WAG Common
Stock or the Parent Common Stock, as applicable, in the Merger or the
Capital Increase in a manner adverse to the Company or its stockholders or
shall have resolved to do so;
(e) by Parent, if prior to the Company Stockholders' Meeting, (i) the
board of directors of the Company withdraws, modifies or changes its
recommendation of this Agreement or the Merger in a manner adverse to
Parent or its stockholders or shall have resolved to do so, or (ii) the
board of directors of the Company shall have recommended to the
stockholders of the Company a Competing Transaction or shall have resolved
to do so, or (iii) a tender offer or exchange offer for 15 percent or more
of the outstanding shares of capital stock of the Company shall have been
commenced and the board of directors of the Company shall have failed to
recommend against acceptance of such tender offer or exchange offer by its
stockholders (including by taking no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders);
(f) by Parent or the Company, (i) if this Agreement and the Merger
shall fail to receive the requisite votes for approval at the Company
Stockholders' Meeting or any adjournment or postponement thereof or (ii) if
the issuance of shares of WAG Common Stock or Parent Common Stock, as the
case may be, in the Merger or the Capital Increase shall fail to receive
the requisite votes for approval at the Parent Stockholders' Meeting or any
adjournment or postponement thereof;
(g) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if
any representation or warranty of the Company shall have
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become untrue, incomplete or incorrect, in either case such that the
conditions set forth in Section 8.03 would not be satisfied (a "TERMINATING
COMPANY BREACH"); provided, however, that if such Terminating Company
Breach is curable by the Company through the exercise of its reasonable
efforts within 30 days and for so long as the Company continues to exercise
such reasonable efforts, Parent may not terminate this Agreement under this
Section 9.01(g); and provided further that the preceding proviso shall not
in any event be deemed to extend any date set forth in paragraph (b) of
this Section 9.01;
(h) by the Company, upon breach of any representation, warranty,
covenant or agreement on the part of Parent, WAG and Merger Sub set forth
in this Agreement, or if any representation or warranty of Parent shall
have become untrue, incomplete or incorrect, in either case such that the
conditions set forth in Section 8.02 would not be satisfied (a "TERMINATING
PARENT BREACH"); provided, however, that if such Terminating Parent Breach
is curable by Parent through the exercise of its reasonable efforts within
30 days and for so long as Parent continues to exercise such reasonable
efforts, the Company may not terminate this Agreement under this Section
9.01(h); and provided further that the preceding proviso shall not in any
event be deemed to extend any date set forth in paragraph (b) of this
Section 9.01; or
(i) by the Company at any time prior to the Company Stockholders'
Meeting, if, as a result of a Superior Proposal by a third party, the Board
of Directors of the Company determines in good faith after consultation
with outside counsel that it is highly probable that the Board of Directors
would violate its fiduciary duties under applicable law if it failed to
accept the Superior Proposal.
SECTION 9.02. Effect of Termination. Except as provided in Section 9.05,
in the event of termination of this Agreement pursuant to Section 9.01, this
Agreement shall forthwith become void, there shall be no liability under this
Agreement on the part of any party hereto or any of its affiliates or any of its
or their officers or directors, and all rights and obligations of each party
hereto shall cease, subject to the remedies of the parties hereto set forth in
Section 9.05(b); provided, however, that nothing herein shall relieve any party
hereto from liability for the willful or intentional breach of any of its
representations and warranties or the willful or intentional breach of any of
its covenants or agreements set forth in this Agreement.
SECTION 9.03. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective boards of directors
at any time prior to the Effective Time; provided, however, that, after the
approval of this Agreement by the stockholders of the Company, WAG or Parent, as
the case may be, no amendment may be made, except such amendments that have
received the requisite stockholder approval and such amendments as are permitted
to be made without stockholder approval under the Delaware General Corporation
Law, as applicable. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
SECTION 9.04. Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for or waive compliance with the performance of
any obligation or other act of any other party hereto or (b) waive any
inaccuracy in the representations and warranties contained herein or in any
document delivered pursuant hereto. Any such extension or waiver shall be valid
if set forth in an instrument in writing signed by the party or parties to be
bound thereby.
SECTION 9.05. Expenses. (a) Except as set forth in this Section 9.05, all
Expenses incurred in connection with this Agreement and the Merger shall be paid
by the party incurring such Expenses, whether or not the Merger is consummated,
except that Parent and the Company each shall pay one-half of all Expenses
incurred solely for printing, filing and mailing the Registration Statement and
the Proxy Statement and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement and the Proxy Statement and any fees
required to be paid under the HSR Act.
(b) In the event that (i) Parent shall terminate this Agreement pursuant to
Section 9.01(e); (ii) the Company shall terminate this Agreement pursuant to
Section 9.01(i); or (iii) (A) Parent shall terminate this Agreement pursuant to
Section 9.01(f) which termination is permissible solely due to the Company's
stockholders having failed to approve and adopt this Agreement and the Merger at
the Company Stockholders' Meeting, (B) at the time of such failure to so approve
this Agreement, there shall exist or be proposed a Competing Transaction with
respect to the Company and (C) within 12 months thereafter, the Company
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shall enter into a definitive agreement with respect to any Competing
Transaction or any Competing Transaction shall be consummated; then, in the case
of clause (i), (ii) or (iii) of this Section 9.05(b), promptly (and in any event
within two business days following demand therefor) after such termination or,
in the case of clause (iii) of this Section 9.05(b), promptly after the
execution and delivery of such agreement or such consummation, the Company shall
pay to Parent an amount equal to $5,500,000 plus all of Parent's Expenses, as
evidenced by reasonable documentation, up to an aggregate of $1,000,000.
(c) In the event that the Company shall terminate this Agreement pursuant
to Section 9.01(d) or Section 9.01(f)(ii), Parent shall pay to the Company
within two business days after such termination an amount equal to $5,500,000 in
the event of termination pursuant to Section 9.01(d) or $2,000,000 in the event
of termination pursuant to Section 9.01(f)(ii), in either case, plus all of the
Company's Expenses, as evidenced by reasonable documentation, and in an amount
no greater than $1,000,000, by wire transfer of immediately available funds to
an account designated by the Company; provided, however, that, in the event both
the Company and Parent would otherwise be entitled to payments under this
Section 9.05 in connection with the termination of this Agreement pursuant to
both Sections 9.01(f)(i) and (f)(ii), neither party shall be required to make
any payment under this Section 9.05.
(d) In the event that Parent shall terminate this Agreement pursuant to
Section 9.01(f)(i) and Parent is not otherwise entitled to payment pursuant to
Section 9.05(b), the Company shall pay to Parent within two business days after
such termination an amount equal to $2,000,000 plus all of Parent's Expenses, as
evidenced by reasonable documentation, and in an amount no greater than
$1,000,000, by wire transfer of immediately available funds to an account
designated by Parent; provided, however, that, in the event both the Company and
Parent would otherwise be entitled to payments under this Section 9.05 in
connection with the termination of this Agreement pursuant to both Sections
9.01(f)(i) and (f)(ii), neither party shall be required to make any payment
under this Section 9.05.
(e) Any payment required to be made pursuant to Section 9.05(b) shall be
made to Parent not later than the date of the entry into an agreement referred
to therein and two business days after delivery to the Company of notice of
demand for payment and shall be made by wire transfer of immediately available
funds to an account designated by Parent in the notice of demand for payment
delivered pursuant to this Section 9.05(e). In no event shall the Company be
entitled to collect amounts pursuant to this Section 9.05 relating to more than
one specified event.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Non-Survival of Representations and Warranties. The
representations and warranties in this Agreement shall terminate at the
Effective Time or upon the termination of this Agreement pursuant to Section
9.01, as the case may be. This Section 10.01 shall not limit any covenant or
agreement herein which by its terms contemplates performance after the Effective
Time. Each party agrees that, except for the representations and warranties
contained in this Agreement and the Parent Disclosure Schedule and the Company
Disclosure Schedule, no party hereto has made any other representations and
warranties, and each party hereby disclaims any other representations and
warranties made by itself or any of its officers, directors, employees, agents,
financial and legal advisors or other representatives, with respect to the
execution and delivery of this Agreement or the Merger contemplated herein,
notwithstanding the delivery or disclosure to any other party or any party's
representatives of any documentation or other information with respect to any
one or more of the foregoing.
SECTION 10.02. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
or facsimile, by registered or certified mail (postage prepaid, return receipt
requested) or by a nationally recognized courier service to the respective
parties at their addresses set forth on the signature pages to this Agreement
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 10.02).
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SECTION 10.03. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner to the fullest
extent permitted by applicable Law in order that the Merger may be consummated
as originally contemplated to the fullest extent possible.
SECTION 10.04. Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of Law or otherwise)
without the prior written consent of the other parties hereto; provided,
however, that Parent may assign its rights, interests and obligations hereunder
to any successor or parent entity of Parent whose shares are registered under
Section 12 of the Exchange Act (or will be so registered at the Effective Time).
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Notwithstanding anything contained in this Agreement to
the contrary, other than Section 7.04, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and permitted assigns any rights or remedies under
or by reason of this Agreement.
SECTION 10.05. Incorporation of Exhibits. The Parent Disclosure Schedule,
the Company Disclosure Schedule and all Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part of this Agreement for all
purposes as if fully set forth herein.
SECTION 10.06. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE
(WITHOUT REFERENCE TO CONFLICT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING
DELAWARE LAW). WAG, PARENT, MERGER SUB AND THE COMPANY EACH HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY DELAWARE OR FEDERAL COURT SITTING IN THE CITY
OF WILMINGTON, DELAWARE, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT, AND WAG, PARENT, MERGER SUB AND THE COMPANY EACH HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN SUCH DELAWARE STATE COURT OR SUCH FEDERAL COURT. WAG,
PARENT, MERGER SUB AND THE COMPANY EACH HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH ACTION OR PROCEEDING.
SECTION 10.07. Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED ON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY OR THE ACTIONS OF ANY PARTY HERETO
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
SECTION 10.08. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any federal, state, local
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires.
"Herein", "hereby", "hereunder", "hereof", "hereinbefore", "hereinafter" and
other equivalent words refer to this Agreement as a whole and not solely to the
particular Article or Section in which such word is used. When a reference is
made in this Agreement to a Section or Exhibit, such reference shall be to a
Section of, or an Exhibit to, this Agreement unless otherwise indicated. ANY
INFORMATION CONTAINED IN ANY SCHEDULE OR EXHIBIT
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<PAGE> 680
TO THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN DISCLOSED IN ALL SUCH SCHEDULES
AND EXHIBITS. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever any of the words "include",
"includes" or "including" is used in this Agreement, it shall be deemed to be
followed by the words "without limitation".
SECTION 10.09. Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
SECTION 10.10. Entire Agreement. This Agreement (including the Exhibits,
the Parent Disclosure Schedule and the Company Disclosure Schedule) constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ STEVEN A. ODOM
------------------------------------------------------------
Name: Steven A. Odom
Title: Chairman and Chief Executive Officer
2240 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Telephone: (404) 231-2025
Telecopy: (404) 365-9847
Attention: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street
Atlanta, Georgia 30303
Telephone: (404) 522-4700
Telecopy: (404) 525-2224
Attention: Steven E. Fox
WAXS INC.
By: /s/ STEVEN A. ODOM
------------------------------------------------------------
Name: Steven A. Odom
Title: Chairman and Chief Executive Officer
c/o WAG
2240 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Telephone: (404) 231-2025
Telecopy: (404) 365-9847
Attention: Chief Executive Officer
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<PAGE> 682
TAIL ACQUISITION CORP.
By: /s/ STEVEN A. ODOM
------------------------------------------------------------
Name: Steven A. Odom
Title: Chairman and Chief Executive Officer
c/o WAG
2240 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Telephone: (404) 231-2025
Telecopy: (404) 365-9847
Attention: Chief Executive Officer
TELCO SYSTEMS, INC.
By: /s/ WILLIAM B. SMITH
------------------------------------------------------------
Name: William B. Smith
Title: President and Chief Executive Officer
63 Nahatan Street
Norwood, Massachusetts 02062
Telephone: (781) 551-0300
Telecopy: (781) 255-2180
Attention: Chief Executive Officer
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 735-3000
Telecopy: (212) 735-2000
Attention: Lou R. Kling and Eric J. Friedman
K-50
<PAGE> 683
EXHIBIT 99.1
STOCKHOLDERS PROXY AGREEMENT
STOCKHOLDERS PROXY AGREEMENT (this "Agreement"), dated as of June 4, 1998,
among WAXS INC., a Delaware corporation ("Parent"), and each other person and
entity listed on the signature pages hereof (each, a "Stockholder").
W I T N E S S E T H:
WHEREAS, as of the date hereof each Stockholder owns (either beneficially
or of record) the number of shares of common stock, par value $0.01 per share
("Company Common Stock"), of Telco Systems, Inc., a Delaware corporation (the
"Company"), set forth opposite such Stockholder's name on Exhibit A hereto (all
such shares of Company Capital Stock owned by the Stockholders and any shares of
Company Capital Stock hereafter acquired by the Stockholders prior to the
termination of this Agreement being referred to herein as the "Shares");
WHEREAS, (i) Kopp Investment Advisors, Inc. ("Kopp") has "investment power"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
("Rule 13d-3")) with respect to 3,614,569 Shares owned by clients who have the
right to terminate their advisory agreements with Kopp ("Client Shares"), and
(ii) Kopp has "voting power" (as defined in Rule 13d-3) with respect to 415,600
Client Shares ("Client Voting Shares") (the Client Shares that are not Client
Voting Shares are referred to herein as "Client Advisory Shares");
WHEREAS, Parent and the Company, among others, propose to enter into an
Agreement and Plan of Merger and Reorganization, dated as of the date hereof (as
the same may be amended from time to time, the "Merger Agreement"; capitalized
terms herein not otherwise defined herein shall have the meanings ascribed
thereto in the Merger Agreement), which provides, upon the terms and subject to
the conditions thereof, for the merger of a subsidiary of Parent with and into
the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Parent to enter into the
Merger Agreement, Parent has requested that each Stockholder agree, and, in
order to induce Parent to enter into the Merger Agreement, each Stockholder has
agreed, to grant Parent proxies to vote such Stockholder's Shares;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
ARTICLE I
TRANSFER AND VOTING OF SHARES
SECTION 1.01. Transfer of Shares. During the term of this Agreement, and
except as otherwise provided herein, each Stockholder (other than Kopp with
respect to the Client Shares) shall not (a) sell, pledge or otherwise dispose of
any of its Shares if such transaction would result in the Stockholder no longer
having the power to vote or cause to be voted the Shares, (b) deposit its Shares
into a voting trust or enter into a voting agreement or arrangement with respect
to such Shares or grant any proxy with respect thereto or (c) enter into any
contract, option or other arrangement or undertaking with respect to the direct
or indirect acquisition or sale, assignment, transfer or other disposition of
any of the Company Capital Stock if such transaction would result in the
Stockholder no longer having the power to vote or cause to be voted the Shares.
SECTION 1.02. Voting of Shares; Further Assurances. (a) Each Stockholder,
by this Agreement, with respect to those Shares that it owns of record, does
hereby constitute and appoint Parent, or any nominee of Parent, with full power
of substitution, during and for the term of this Agreement, as its true and
lawful attorney and proxy, for and in its name, place and stead, to vote each of
such Shares as its proxy, at every annual, special or adjourned meeting of the
stockholders of the Company (including the right to sign its name (as
stockholder) to any consent, certificate or other document relating to the
Company that the law of the State of Delaware may permit or require) (i) in
favor of the adoption of the Merger Agreement and approval
K-51
<PAGE> 684
of the Merger and the other transactions contemplated by the Merger Agreement,
(ii) against any proposal for any recapitalization, merger, sale of assets or
other business combination between the Company and any person or entity (other
than the Merger) or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or agreement
of the Company under the Merger Agreement or which could result in any of the
conditions to the Company's obligations under the Merger Agreement not being
fulfilled, and (iii) in favor of any other matter relating to consummation of
the transactions contemplated by the Merger Agreement. Each Stockholder further
agrees to cause the Shares owned by it beneficially to be voted in accordance
with the foregoing. Each Stockholder acknowledges receipt and review of a copy
of the Merger Agreement. Notwithstanding anything in this Section 1.02(a) to the
contrary, the Client Advisory Shares shall not be subject to this Section
1.02(a) and the Client Voting Shares shall cease to be subject to this Section
1.02(a) if and when the owner of such Client Voting Shares terminates its
advisory agreement with Kopp.
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Parent the power to carry out the provisions of this Agreement.
(c) Nothing contained in this Agreement shall be deemed to restrict a
Stockholder who is also a director of the Company from taking actions in his
capacity as a director as may be permitted under the Merger Agreement.
SECTION 1.03. Term of Agreement. This Agreement shall be effective as of
the date hereof and shall expire on the earlier of (a) the Effective Time and
(b) the date of the termination of the Merger Agreement pursuant to its terms.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and warrants
to Parent as follows:
SECTION 2.01. Due Organization, Etc. Such Stockholder (if it is a
corporation, partnership or other legal entity) is duly organized and validly
existing under the laws of the jurisdiction of its organization. Such
Stockholder has full power and authority (corporate or otherwise) to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action (corporate or otherwise) on the part of such Stockholder. This Agreement
has been duly executed and delivered by or on behalf of such Stockholder and,
assuming its due authorization, execution and delivery by Parent, constitutes a
legal, valid and binding obligation of such Stockholder, enforceable against
such Stockholder in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to the
effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
SECTION 2.02. No Conflicts; Required Filings and Consents. (a) The
execution and delivery of this Agreement by such Stockholder do not, and the
performance of this Agreement by such Stockholder will not, (i) conflict with or
violate the Certificate of Incorporation or ByLaws or similar organizational
documents of such Stockholder (in the case of a Stockholder that is a
corporation, partnership or other legal entity), (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to such
Stockholder or by which it or any of its properties is bound or affected, or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance on any of the property or assets of
such Stockholder or (if such Stockholder is a corporation) any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Stockholder is a party or by which such
K-52
<PAGE> 685
Stockholder or any of its properties is bound or affected, except for any such
breaches, defaults or other occurrences that would not cause or create a
material risk of non-performance or delayed performance by such Stockholder of
its obligations under this Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or foreign,
except (i) for applicable requirements, if any, of the Exchange Act, and the HSR
Act and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay the performance by such Stockholder of its obligations under
this Agreement.
SECTION 2.03. Title to Shares. Other than with respect to Kopp to the
extent described in its Schedule 13D dated May 13, 1998 and in Exhibit A hereto,
such Stockholder is the record or beneficial owner of its Shares free and clear
of any proxy or voting restriction other than pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to each Stockholder as follows:
SECTION 3.01. Due Organization, Etc. Parent is a corporation duly
organized and validly existing under the laws of the State of Delaware. Parent
has all necessary corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby by Parent have been duly authorized by all necessary
corporate action on the part of Parent. This Agreement has been duly executed
and delivered by Parent and, assuming its due authorization, execution and
delivery by the Stockholders, constitutes a legal, valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms.
SECTION 3.02. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by Parent do not, and the performance
of this Agreement by Parent will not, (i) conflict with or violate the
Certificate of Incorporation or By-laws of Parent, (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Parent or by
which Parent or any of its properties is bound or affected, or (iii) result in
any breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Parent
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Parent is
a party or by which it or any of its properties is bound or affected, except for
any such breaches, defaults or other occurrences that would not cause or create
a material risk of non-performance or delayed performance by Parent of its
obligations under this Agreement.
(b) The execution and delivery of this Agreement by Parent do not, and the
performance of this Agreement by Parent will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, domestic or foreign, except (i) for applicable
requirements, if any, of the Exchange Act and the HSR Act and (ii) where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not prevent or delay the performance
by Parent of its obligations under this Agreement.
ARTICLE IV
GENERAL PROVISIONS
SECTION 4.01. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or certified mail
K-53
<PAGE> 686
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to Parent
WAXS INC.
945 E. Paces Ferry Road, Suite 2240 Atlanta, Georgia 30326
Attention: Chief Executive Officer
Telecopier No.: (404) 365-9847
with a copy to:
Rogers & Hardin LLP 2700 International Tower 229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Steven E. Fox
Telecopier No.: (404) 525-2224
(b) If to a Stockholder, to such Stockholder's address set forth on Exhibit
A.
SECTION 4.02. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 4.03. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 4.04. Entire Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements and undertakings,
both written and oral, between the parties, or any of them, with respect to the
subject matter hereof.
SECTION 4.05. Assignment. This Agreement shall not be assigned by
operation of law or otherwise; provided, however, that Parent may assign its
rights, interests and obligations hereunder to any successor or parent entity of
Parent whose shares are registered under Section 12 of the Exchange Act (or will
be so registered at the Closing).
SECTION 4.06. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 4.07. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 4.08. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN THAT STATE. PARENT AND
EACH OF THE STOCKHOLDERS EACH HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY DELAWARE STATE OR FEDERAL COURT SITTING IN THE CITY OF WILMINGTON, DELAWARE,
IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
PARENT AND EACH OF THE STOCKHOLDERS HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH
DELAWARE STATE COURT OR
K-54
<PAGE> 687
SUCH FEDERAL COURT. PARENT AND EACH OF THE STOCKHOLDERS EACH HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING.
SECTION 4.09. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
WAXS INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Name: Steven A. Odom
Title: Chairman and Chief Executive
Officer
STOCKHOLDERS:
/s/ DEAN C. CAMPBELL
--------------------------------------
Dean C. Campbell
/s/ STEWARD A. FLASCHEN
--------------------------------------
Steward A. Flaschen
--------------------------------------
Edward J. Fontenot
/s/ SHELDON HORING
--------------------------------------
Sheldon Horing
/s/ WILLIAM B. SMITH
--------------------------------------
William B. Smith
/s/ WILLIAM J. STUART
--------------------------------------
William J. Stuart
/s/ RICHARD J. NARDONE
--------------------------------------
Richard J. Nardone
/s/ PHILIP D. WILSON
--------------------------------------
Philip D. Wilson
/s/ DAVID A. LEBEAU
--------------------------------------
David A. Lebeau
/s/ LEROY C. KOPP
--------------------------------------
LeRoy C. Kopp
K-55
<PAGE> 688
/s/ LEROY C. KOPP
--------------------------------------
LeRoy C. Kopp Individual Retirement
Account
Kopp Investment Advisors, Inc. Profit
Sharing Trust
By: /s/ LEROY C. KOPP
--------------------------------------
LeRoy C. Kopp as Trustee
Kopp Family Foundation
By: /s/ LEROY C. KOPP
--------------------------------------
LeRoy C. Kopp, Director
Kopp Investment Advisors, Inc., for
itself and as attorney-in-fact for
certain of its clients
By: /s/ LEROY C. KOPP
--------------------------------------
LeRoy C. Kopp, President
K-56
<PAGE> 689
EXHIBIT A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMPANY COMMON STOCK
NAME AND ADDRESS OF STOCKHOLDER OWNED BENEFICIALLY AND OF RECORD
------------------------------- --------------------------------
<S> <C>
LeRoy C. Kopp............................................. 100,000
c/o Kopp Investment Advisors, Inc.
7701 France Avenue South
Suite 500
Edina, MN 55435
LeRoy C. Kopp IRA......................................... 130,000
c/o Kopp Investment Advisors, Inc.
7701 France Avenue South
Suite 500
Edina, MN 55435
Kopp Investment Advisors, Inc............................. 7,000
Profit Sharing Trust
c/o Kopp Investment Advisors, Inc.
7701 France Avenue South
Suite 500
Edina, MN 55435
Kopp Family Foundation.................................... 30,000
c/o Kopp Investment Advisors, Inc.
7701 France Avenue South
Suite 500
Edina, MN 55435
Kopp Investment Advisors, Inc............................. 200,000
7701 France Avenue South
Suite 500
Edina, MN 55435
Kopp Investment Advisors, Inc............................. 3,614,569
as attorney-in-fact*
c/o Kopp Investment Advisors, Inc.
7701 France Avenue South
Suite 500
Edina, MN 55435
Dean C. Campbell.......................................... 0
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
Dr. Steward A. Flaschen................................... 51,458**
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
</TABLE>
K-57
<PAGE> 690
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMPANY COMMON STOCK
NAME AND ADDRESS OF STOCKHOLDER OWNED BENEFICIALLY AND OF RECORD
------------------------------- --------------------------------
<S> <C>
Edward J. Fontenot........................................ 0
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
Dr. Sheldon Horing........................................ 0
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
Dr. William B. Smith, President & CEO..................... 10,422
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
William J. Stuart, VP & CFO............................... 400
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
Richard J. Nardone........................................ 1,838
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
Philip D. Wilson.......................................... 0
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
David A. LeBeau........................................... 1,022
Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
(781) 551-0300
</TABLE>
- ---------------
* Kopp disclaims beneficial ownership of all Client Shares as they are managed
on behalf of clients under agreements terminable at will. Except for this
Agreement, Kopp has no agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any Shares in the
Company.
** Includes 29,958 shares held indirectly by Dr. Flaschen in the Steward S.
Flaschen Revocable Investment Trust, 16,042 shares held indirectly by Dr.
Flaschen in the Joyce D. Flaschen Revocable Investment Trust and 5,458 shares
held indirectly by Dr. Flaschen in the Steward S. Flaschen Defined Benefit
Pension Plan.
K-58
<PAGE> 691
EXHIBIT 99.2
[LOGO] WORLD ACCESS, INC. NEWS RELEASE
SUMMARY: WORLD ACCESS, INC. AND TELCO SYSTEMS, INC. TO MERGE
FOR IMMEDIATE RELEASE
ATLANTA, GEORGIA -- June 4, 1998 -- WORLD ACCESS, INC. (Nasdaq: WAXS) and
Telco Systems, Inc. (Nasdaq: TELC) announced today that they have entered into a
definitive agreement to merge the two companies. The closing of the merger is
subject to the satisfaction of customary conditions, including the receipt of
stockholder and regulatory approvals. The transaction is expected to be
accounted for as a purchase and to qualify as a tax-free reorganization. The
combined company will retain the World Access name.
Telco Systems, based in Norwood, Massachusetts, has supplied products and
related services to the telecommunications industry since 1972. The company is
well known for its asynchronous fiber optic systems and intelligent channel
banks, with an installed base of over $1 billion. Today, the company
concentrates on the integrated access, high capacity multiplexer and Frame
Relay/ATM access markets. Telco Systems has established supply contracts with
leading telecommunications service providers, including NYNEX/Bell Atlantic,
GTE, British Telecom and Concert Communications, and has recently introduced
several new products, including its Access45(TM) and EdgeLink100(TM). During its
latest fiscal year, Telco Systems generated approximately $120 million in
revenues.
The merger agreement provides that each of the approximately 11 million
shares of Telco Systems common stock will be converted into shares of World
Access common stock having a value of $17.00 per share, based on the average
daily closing price of World Access common stock as reported on the Nasdaq
National Market System for a predefined period prior to the effective time of
the merger (the "Closing Price"). If the Closing Price is more than $36.00, then
each share of Telco Systems common stock will be converted into 0.4722 shares of
World Access common stock. If the Closing Price is less than $29.00, then each
share of Telco Systems common stock will be converted into 0.5862 shares of
World Access common stock.
The merger agreement has been unanimously approved by the Boards of
Directors of both companies. The Robinson-Humphrey Company, LLC is acting as
financial advisor to World Access on this transaction and Broadview Associates
LLC is representing Telco Systems.
The companies will be sponsoring a teleconference to review the planned
merger on Friday, June 5, 1998, at 8:30 a.m., EDT. To participate in this
teleconference, interested parties should call 212-346-6404. A taped replay will
be available on Friday from 12:00 p.m. to 8:00 p.m. and on Monday from 8:00 a.m.
to 5:00 p.m. To listen to the taped replay, call 1-800-633-8284 and enter
reservation #4374730 (international callers must dial 303-248-1201 and then the
reservation number).
Steven A. Odom, Chairman and Chief Executive Officer of World Access, said,
"The combination of World Access and Telco Systems will strengthen our
competitive positioning in the global telecommunications market. The proprietary
technology, advanced product offerings and strong customer relationships
contributed by Telco Systems will significantly enhance our ability to support
and service our collective customers as they build new and/or upgrade existing
telecommunications networks. The merger is expected to be consummated in the
third quarter and positively impact World Access earnings per share for calendar
year 1999."
Hensley E. West, President and Chief Operating Officer of World Access,
added, "We are pleased that Telco's team of experienced industry professionals
will continue to manage Telco Systems as a key division of World Access. Telco
Systems will become the cornerstone of our transport and access product areas,
encompassing several other existing World Access divisions. The integration of
these divisions will provide a technology and product focus geared towards
meeting the increasing demands for value-added network access
K-59
<PAGE> 692
systems. As a result of the merger, we will provide our customers greater
network solutions capabilities, in addition to the network access services that
will be available as a result of the pending Resurgens acquisition."
Dr. William B. Smith, President and Chief Executive Officer of Telco
Systems, said, "The strong management team we've assembled at Telco Systems over
the past few years is excited to join forces with World Access. We have
concentrated on developing competitive high-speed multiplexer and integrated
access systems employed at the edge of the network and have recently released
several new products that are receiving excellent market acceptance. We look
forward to combining talents with World Access to offer our broad customer base
a more complete network solution."
While much of Telco Systems' revenue is generated through the sale of
equipment directly to approximately two dozen large service providers around the
world, the company brings to World Access a solid set of distribution partners,
including Walker and Associates, Sprint North Supply, GTE Supply, Alltel Supply
and TelSource. In addition, Telco Systems has relationships with over 40
distributors in international markets. The combined portfolio of World Access
and Telco Systems will give all of the combined company's sales channels a more
complete line of product solutions.
Each company brings to this alliance distinct competencies that will offer
immediate operational efficiencies, especially in the areas of manufacturing and
customer service. For example, World Access' manufacturing infrastructure
includes "rack 'n stack" configuration capabilities that will be available for
Telco Systems' products and customers. With this capability, many different
product configurations can be pre-assembled and tested for immediate shipment,
offering a competitive advantage in the sales process. Both companies are ISO
certified, and have well established and documented operating procedures to
assure high quality products and services are provided to their customers.
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The Company's products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. World Access offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. To support and complement its
product sales, the Company also provides its customers with a broad range of
design, engineering, manufacturing, testing, installation, repair and other
value-added services.
THIS PRESS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. ACTUAL RESULTS, INCLUDING THE LEVEL OF EARNINGS OF BOTH WORLD
ACCESS AND TELCO SYSTEMS, AND THE SUCCESS OF THE PROPOSED MERGER MAY DIFFER FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, RISKS ASSOCIATED WITH
ACQUISITIONS, SUCH AS DIFFICULTIES IN THE ASSIMILATION OF OPERATIONS,
TECHNOLOGIES AND PRODUCTS OF THE ACQUIRED COMPANIES, RISKS OF ENTERING NEW
MARKETS, COMPETITIVE RESPONSE, AND A DOWNTURN IN THE TELECOMMUNICATIONS
INDUSTRY. FOR A MORE DETAILED DESCRIPTION OF THE RISK FACTORS ASSOCIATED WITH
WORLD ACCESS AND TELCO SYSTEMS, PLEASE REFER TO THE SEC FILINGS OF THE
RESPECTIVE COMPANIES.
CONTACT: World Access, Inc. Steven A. Odom, Hensley E. West or Mark A. Gergel
(404-231-2025)
Telco Systems, Inc. William B. Smith, William J. Stuart or Betty Rock
(781-551-0300)
# # #
K-60
<PAGE> 693
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice president and Controller
Officer
Dated as of May 18, 1998
K-61
<PAGE> 694
APPENDIX L
<PAGE> 695
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
</TABLE>
COMMISSION FILE NUMBER 0-19998
WORLD ACCESS, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
945 E. PACES FERRY ROAD, SUITE 2240, 30326
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>
(404) 231-2025
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at August 18, 1998 was 22,511,422.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 696
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents...................................... $ 57,653,355 $118,065,045
Marketable securities..................................... 3,500,000 --
Accounts receivable....................................... 41,819,028 20,263,971
Inventories............................................... 34,472,593 22,426,918
Other current assets...................................... 15,428,681 10,923,723
------------ ------------
Total Current Assets.............................. 152,873,657 171,679,657
Property and equipment...................................... 17,202,608 5,704,585
Goodwill.................................................... 74,378,279 31,660,201
Other assets................................................ 24,063,136 16,238,298
------------ ------------
Total Assets...................................... $268,517,680 $225,282,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 4,408,477 $ 81,739
Accounts payable.......................................... 23,086,925 9,339,588
Other accrued liabilities................................. 12,913,105 8,508,698
------------ ------------
Total Current Liabilities......................... 40,408,507 17,930,025
Long-term debt.............................................. 115,528,565 115,263,984
Noncurrent liabilities...................................... 1,564,078 333,802
Minority interests.......................................... 12,442,337 --
------------ ------------
Total Liabilities................................. 169,943,487 133,527,811
------------ ------------
Stockholders' Equity
Common stock.............................................. 218,871 193,062
Capital in excess of par value............................ 133,286,631 84,162,478
Retained earnings (deficit)............................... (34,931,309) 7,399,390
------------ ------------
Total Stockholders' Equity........................ 98,574,193 91,754,930
------------ ------------
Total Liabilities and Stockholders' Equity........ $268,517,680 $225,282,741
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-1
<PAGE> 697
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Sales of products.......................... $41,600,854 $19,444,256 $ 69,829,810 $34,914,306
Service revenues........................... 5,906,224 4,571,822 13,408,313 9,353,196
----------- ----------- ------------ -----------
Total sales......................... 47,507,078 24,016,078 83,238,123 44,267,502
Cost of products sold...................... 22,239,271 11,525,183 39,011,720 21,494,810
Cost of services........................... 4,761,514 4,005,782 12,189,198 8,089,263
----------- ----------- ------------ -----------
Total cost of sales................. 27,000,785 15,530,965 51,200,918 29,584,073
----------- ----------- ------------ -----------
Gross profit........................ 20,506,293 8,485,113 32,037,205 14,683,429
Engineering and development................ 1,793,743 428,595 2,581,927 745,005
Selling, general and administrative........ 4,680,414 2,434,951 7,936,268 4,352,514
Amortization of goodwill................... 1,018,374 380,404 1,882,371 664,535
In-process research and development........ -- -- 50,000,000 --
Special charges............................ -- -- 3,240,000 --
----------- ----------- ------------ -----------
Operating income (loss)............. 13,013,762 5,241,163 (33,603,361) 8,921,375
Interest and other income.................. 701,454 225,091 1,970,738 592,277
Interest expense........................... (1,515,576) (24,044) (3,030,489) (52,974)
----------- ----------- ------------ -----------
Income (loss) before income taxes
and minority interests........... 12,199,640 5,442,210 (34,663,112) 9,460,678
Income taxes............................... 4,880,249 2,014,000 6,135,249 3,420,000
----------- ----------- ------------ -----------
Income (loss) before minority
interests........................ 7,319,391 3,428,210 (40,798,361) 6,040,678
Minority interests in earnings of
subsidiary............................... 848,687 -- 1,532,338 --
----------- ----------- ------------ -----------
Net income (loss)................... $ 6,470,704 $ 3,428,210 $(42,330,699) $ 6,040,678
=========== =========== ============ ===========
Net income (loss) per common share:
Basic.................................... $ .31 $ .21 $ (2.13) $ .37
=========== =========== ============ ===========
Diluted.................................. $ .30 $ .19 $ (2.13) $ .34
=========== =========== ============ ===========
Weighted average shares outstanding:
Basic.................................... 20,576,451 16,556,478 19,894,508 16,478,013
=========== =========== ============ ===========
Diluted.................................. 21,821,649 18,515,809 19,894,508 17,918,264
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-2
<PAGE> 698
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL IN RETAINED
COMMON EXCESS OF EARNINGS
STOCK PAR VALUE (DEFICIT) TOTAL
-------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998.................. $193,062 $ 84,162,478 $ 7,399,390 $91,754,930
Net loss.................................... (42,330,699) (42,330,699)
Issuance of 1,429,907 shares for NACT
acquisition............................... 14,299 26,867,953 26,882,252
Issuance of stock options for NACT
acquisition............................... 8,359,737 8,359,737
Issuance of 633,982 shares for ATI
acquisition............................... 6,340 6,508,200 6,514,540
Issuance of 513,728 shares for stock
options and warrants...................... 5,138 3,074,391 3,079,529
Tax benefit from exercises of stock
options and warrants...................... 4,222,100 4,222,100
Issuance of 3,222 shares for matching
contribution to 401K plan................. 32 91,772 91,804
-------- ------------ ------------ -----------
Balance at June 30, 1998.................... $218,871 $133,286,631 $(34,931,309) $98,574,193
======== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-3
<PAGE> 699
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(42,330,699) $ 6,040,678
Adjustments to reconcile net income (loss) to net cash from
(used by) operating activities:
Depreciation and amortization............................. 3,193,828 1,105,303
Income tax benefit from stock warrants and options........ 4,222,100 1,200,000
Special charges........................................... 55,034,046 --
Minority interests in earnings of subsidiary.............. 1,532,338 --
Provision for inventory reserves.......................... 143,500 243,001
Provision for bad debts................................... 316,360 68,755
Stock contributed to employee benefit plan................ 91,804 43,187
Changes in operating assets and liabilities, net of
effects from businesses acquired:
Accounts receivable.................................... (13,087,624) (5,474,956)
Inventories............................................ (9,294,251) (6,170,980)
Accounts payable....................................... 9,100,656 1,859,535
Other assets and liabilities........................... (5,970,061) (357,746)
------------ -----------
Net cash from (used by) operating activities...... 2,951,997 (1,443,223)
------------ -----------
Cash flows from investing activities:
Acquisitions of businesses.................................. (62,084,127) (4,099,852)
Software development costs.................................. (1,830,950) --
Loan repayments by affiliate................................ -- 582,500
Expenditures for property and equipment..................... (5,858,706) (1,115,745)
------------ -----------
Net cash used by investing activities............. (69,773,783) (4,633,097)
------------ -----------
Cash flows from financing activities:
Short-term debt borrowings.................................. 4,297,109 3,509,087
Proceeds from exercise of stock warrants and options........ 3,079,529 1,390,730
Long-term debt repayments................................... (966,542) --
Issuance of long-term debt for capital lease................ -- 291,500
------------ -----------
Net cash from financing activities................ 6,410,096 5,191,317
------------ -----------
Decrease in cash and equivalents............................ (60,411,690) (885,003)
Cash and equivalents at beginning of period................. 118,065,045 22,480,082
------------ -----------
Cash and equivalents at end of period............. $ 57,653,355 $21,595,079
============ ===========
Supplemental schedule of noncash financing and investing
activities:
Issuance of common stock for businesses acquired............ $ 33,396,792 $ 8,676,650
Issuance of stock options for businesses acquired........... 8,359,737
Conversion of note receivable to investment in ATI.......... 4,484,534
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-4
<PAGE> 700
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiary companies, all of which are
wholly-owned except NACT Telecommunications, Inc. ("NACT") of which the Company
owns 67.3%. Minority interests represent the minority stockholders proportionate
share of NACT's equity. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods covered have been included.
For further information, refer to the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the three and six months ended June 30, 1998
are not necessarily indicative of the results expected for the full year.
Certain reclassifications have been made to the prior period's financial
information to conform with the presentations used in 1998.
NOTE 2. ACQUISITIONS
ATI ACQUISITION
On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for voice,
data and/or video applications. On January 29, 1998, the transaction was
completed in its final form whereby ATI was merged with and into Cellular
Infrastructure Supply, Inc. ("CIS"), a wholly-owned subsidiary of the Company
(the "ATI Merger").
In connection with the ATI Merger, the stockholders of ATI received
approximately $300,000 in cash and 424,932 restricted shares of the Company's
common stock valued at approximately $6.5 million. The Company's policy is to
value restricted stock issued in acquisitions at the average market price of its
common stock for the three trading days prior and the three trading days
subsequent to the date economic terms of the acquisition are announced less a
discount to reflect the lack of marketability caused by trading restrictions,
size of the share issuances and other relevant factors. A discount factor of 30%
was used to value the 424,932 restricted shares, which was based on previous
sales of restricted Company common stock and independent studies regarding
discount attributable to lack of marketability. Management believes the discount
rate used to value these restricted shares was appropriate and reasonable.
In addition to the shares noted above, the stockholders of ATI were issued
209,050 restricted shares of the Company's common stock. These shares were
immediately placed into escrow and will be released to the stockholders of ATI
contingent upon the realization of predefined levels of pre-tax income from
ATI's operations during calendar years 1998 and 1999. Upon issuance, the 209,050
escrowed shares were valued by the Company at par value only, or $2,091. As it
becomes probable that the conditions for release from escrow will be met, the
fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity, respectively.
L-5
<PAGE> 701
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of ATI has been accounted for using the purchase method of
accounting. Accordingly, the results of ATI's operations have been included in
the accompanying consolidated financial statements from February 1, 1998. The
purchase price was allocated to net assets acquired and to approximately $5.4
million of purchased in-process research and development ("R&D"). The excess of
purchase price over the fair value of net assets acquired and purchased
in-process R&D, currently estimated at approximately $2.7 million, has been
recorded as goodwill and is being amortized over a 15 year period.
Purchased in-process R&D, which consisted of the value of ATI products in
the development stage that were not considered to have reached technological
feasibility as of the date of the ATI Merger, was expensed in the first quarter
of 1998 in accordance with applicable accounting rules. See Management's
Discussion and Analysis.
NACT ACQUISITION
In the fourth quarter of 1997, the Company began a three phase acquisition
of NACT, a Provo, Utah based single-source provider of advanced
telecommunications switching platforms with integrated telephony software
applications and network telemanagement capabilities. During November and
December 1997, the Company purchased 355,000 shares of NACT common stock in the
open market for approximately $5.0 million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 63% of the outstanding shares of NACT (the "NACT Acquisition"). On
February 27, 1998, the NACT Acquisition was completed with GST USA receiving
$59.7 million in cash and 1,429,907 restricted shares of the Company's common
stock valued at approximately $26.9 million. These shares were valued at $18.80
per share, a 20% discount to the closing market price of Company common stock on
February 26, 1998. Management believes this valuation was appropriate and
reasonable based on the fact GST USA sold all 1,429,907 restricted shares at
$18.80 per share to an independent third party in a private transaction
completed on February 27, 1998.
In addition, the Company issued 740,543 non-qualified options to purchase
Company common stock at $11.15 per share and 106,586 non-qualified options to
purchase Company common stock at $16.25 per share in exchange for substantially
all the options held by NACT employees, which became immediately vested in
connection with the NACT Acquisition. These options had an initial fair value of
approximately $8.4 million.
On February 24, 1998, the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA. Pursuant to the terms of the
merger agreement, each share of NACT common stock will be converted into shares
of Company common stock having a value of $17.50 per share based on the average
of the daily closing price of Company common stock on the Nasdaq National Market
for a pre-defined period prior to the closing (the "Closing Price"), provided
that if the Closing Price is more than $25.52, then each share of NACT common
stock will be converted into 0.6857 shares of Company common stock. If the
Closing Price is less than $20.88, then the Company may elect to terminate the
agreement. The merger is subject to, among other things, the approval of the
NACT stockholders and the satisfaction of certain other customary conditions.
This merger is expected to be consummated in September 1998.
The acquisition of the 67.3% majority interest in NACT has been accounted
for using the purchase method of accounting. Accordingly, the results of NACT's
operations have been included in the accompanying consolidated financial
statements from March 1, 1998. The purchase price of the majority interest in
NACT was allocated to 67.3% of the net assets acquired and purchased in-process
R&D. The excess of purchase price over 67.3% of the fair value of net assets
acquired and purchased in-process R&D, currently
L-6
<PAGE> 702
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated at approximately $42.8 million, has been recorded as goodwill and is
being amortized over a 20 year period.
During the first quarter of 1998, $44.6 million of purchased in-process
R&D, which consists of 67.3% of the value of NACT products in the development
stage that are not considered to have reached technological feasibility as of
the date of the NACT Acquisition, was expensed in accordance with applicable
accounting rules. See Management's Discussion and Analysis.
PRO FORMA RESULTS OF OPERATIONS
On a pro forma, unaudited basis, as if the acquisitions of ATI and NACT had
occurred as of January 1, 1997, total sales, operating income, net income and
diluted net income per common share for the six months ended June 30, 1998 and
1997 would have been approximately $86.4 million and $66.9 million; $14.1
million and $7.6 million; $6.4 million and $4.1 million; and $0.30 and $0.21,
respectively. The pro forma results of operations for the six months ended June
30, 1998 would not have been materially different had the acquisitions of AIT
and NACT occurred on January 1, 1998.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
date indicated. The portion of the ATI and NACT purchase prices allocated to
purchased in-process R&D expensed in accordance with applicable accounting rules
will not recur, therefore the pro forma results have been prepared excluding
these charges.
NOTE 3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Switching systems, frames and related circuit boards....... $20,960,342 $13,445,770
Transport and access products.............................. 1,343,217 779,674
Electronic components...................................... 6,364,945 4,879,213
Pay telephone parts........................................ 1,666,120 1,332,835
Work in progress........................................... 3,747,254 1,744,368
Other finished goods....................................... 390,715 245,058
----------- -----------
$34,472,593 $22,426,918
=========== ===========
</TABLE>
L-7
<PAGE> 703
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. GOODWILL
Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired and purchased in-process R&D, was as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
NACT....................................................... $42,752,140 $ --
CIS........................................................ 12,485,239 12,485,239
AIT........................................................ 10,657,917 11,557,917
Galaxy..................................................... 5,089,265 5,089,265
ATI........................................................ 2,748,309 --
Other...................................................... 5,034,062 5,034,062
----------- -----------
78,766,932 34,166,483
Accumulated amortization................................... (4,388,653) (2,506,282)
----------- -----------
$74,378,279 $31,660,201
=========== ===========
</TABLE>
Goodwill is being amortized on a straight-line basis over a 15 to 20 year
period. In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company regularly reviews the projected future cash flows
from operations of each of the acquired businesses to assess the recoverability
of goodwill. In the event that the Company deems permanent impairment of
goodwill has resulted, charges are recorded against current operations for the
impairment. No significant impairment charges have been recorded to date. See
Management's Discussion and Analysis.
NOTE 5. DEBT
The Company has a $10.0 million revolving line of credit with a large
European bank. As of June 30, 1998, the Company had borrowings of $4.3 million
outstanding under this facility. These borrowing were repaid to the bank in July
1998.
The bank agreement, which expires in March 2001, contains standard lending
covenants including financial ratios, restrictions on dividends and limitations
on additional debt and the disposition of Company assets. Interest is paid at
the rate of prime plus 1 and 1/4% or Libor plus 2 and 1/2%, at the option of the
Company.
NOTE 6. SPECIAL CHARGES
Special charges in the first quarter of 1998 included $6.6 million for
costs related to the consolidation of several operations and the Company's exit
from the contract manufacturing business. The Company's AIT and circuit board
repair operations have been consolidated into a new facility in Orlando,
Florida; the Company's manufacturing operations have moved from Orlando to a new
facility in Alpharetta, Georgia; and the Company's Scottsdale, Arizona
operations have been integrated into ATI's facility in Wilmington,
Massachusetts.
L-8
<PAGE> 704
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The special charges included $3,360,000 to cost of sales for obsolete
contract manufacturing inventories and inventories deemed obsolete or redundant
as a result of the consolidation activities. The additional charges consisted
of:
<TABLE>
<S> <C>
Severance and termination benefits.......................... $ 550,000
Idle facility costs......................................... 1,340,000
Idle equipment costs........................................ 1,350,000
----------
$3,240,000
==========
</TABLE>
The consolidated program began in the first quarter of 1998 and was
completed as of June 30, 1998. No costs were included in the special charges
that are expected to derive future economic benefit to the Company. As of June
30, 1998, approximately $600,000 of accrued special charges is included in Other
current liabilities on the Company's balance sheet, which consisted primarily of
facility lease termination losses expected to be incurred. See Management's
Discussion and Analysis.
NOTE 7. EARNINGS PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. Potential common stock shares of 1,245,198
were included in computing diluted earnings per share for the three month period
ended June 30, 1998, and potential common stock shares of 1,959,331 and
1,440,251 were included in computing diluted earnings per share for the three
and six month periods ended June 30, 1997, respectively. A total of 1,203,786
shares of common stock held in escrow from certain acquisitions and a license
agreement were excluded from the earnings per share calculations for the three
months ended June 30, 1998 because the conditions for release of shares from
escrow had not been satisfied.
Common stock issued and outstanding at June 30, 1998 and 1997 was
21,887,074 and 18,159,797 shares, respectively.
NOTE 8. LEGAL PROCEEDINGS
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A. Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, alleging that telephone
systems manufactured and sold by NACT incorporating prepaid debit card features
infringe upon Aerotel's patent which was issued in November 1987 (the "Aerotel
Patent"). Aerotel sought injunctive relief, damages in an unspecified amount and
damages of up to three times damages found for willful infringement of the
Aerotel Patent. NACT filed an answer and Counterclaim in which it denied
infringement of the Aerotel Patent and sought judgement that the Aerotel patent
is invalid and unenforceable and that Aerotel has misused its patent in
violation of antitrust laws. NACT has denied that it has committed defamation,
unfair competition and tortuous interference with prospective business
relations. In August 1997, Aerotel amended its complaint to include as
defendants GST, GST USA, and two former executive officers of NACT. The amended
pleadings seek in excess of $18.7 million in damages and allege that GST and GST
USA have infringed the Aerotel patent, aided and abetted infringement by others,
including NACT, and participated in, and aided and abetted alleged tortuous
conduct by NACT. GST, GST USA and the two former executive officers of NACT have
served answers denying all material allegations.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST have agreed to share evenly the costs of any judgement against
NACT as a result of the Aerotel litigation, including
L-9
<PAGE> 705
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NACT's legal fees. Subsequent to the NACT Acquisition, the Company has been
actively engaged in settlement negotiations. On July 9, 1998, the Company, GST
and Aerotel entered into a Memorandum of Understanding to settle the Aerotel
litigation. As of the date of this Report, the parties are negotiating the terms
and conditions of a final settlement agreement.
The Company currently estimates that its portion of the total settlement
costs, including legal fees, will be approximately $3.3 million. Any payment
made to Aerotel is expected to be paid through the issuance of Company common
stock. The settlement costs expected to be incurred by the Company as a result
of the Aerotel litigation have been accounted for as additional NACT purchase
price as of June 30, 1998.
Management expects a final Aerotel settlement agreement to be executed in
the near future. If a settlement does not occur, management believes that NACT
has valid defenses to the Aerotel claim. An unfavorable decision in this action,
however, could have a material adverse effect on the Company's financial
position.
NOTE 9. PENDING ACQUISITIONS
RESURGENS ACQUISITION
On February 12, 1998, the Company executed a letter of intent to acquire
Cherry Communications Incorporated, d/b/a Resurgens Communications Group
("RCG"), and Cherry Communications U.K. Limited ("Cherry U.K.", and together
with RCG, "Resurgens"). On May 12, 1998, the Company signed definitive
agreements to acquire Resurgens. The agreement to acquire RCG is subject to the
approval of the Bankruptcy Court. The transactions, which will be accounted for
under the purchase method of accounting, are currently expected to close in
September or October 1998.
Pursuant to the terms of the agreements, the creditors of RCG and the
shareholders of Cherry U.K. will receive approximately 3.7 million restricted
shares of Company common stock in the aggregate, with an estimated fair value of
approximately $90 million. In addition, the RCG creditors and Cherry U.K.
shareholders have the right to receive additional consideration of up to 7.5
million restricted shares of Company common stock over the next two and one-half
years, contingent upon the achievement of certain EBITDA levels by Resurgens
during this timeframe. The transaction is subject to, among other things,
Resurgens exceeding pre-defined levels of monthly revenues and gross margin, the
receipt of the requisite corporate and regulatory approvals, the confirmation of
RCG's Plan of Reorganization and the approval of Company stockholders.
RCG, currently operating under the protection of Chapter 11 of the United
States Bankruptcy Code, and Cherry U.K. are facilities-based providers of
international network access, commonly referred to in the industry as carriers'
carrier. In October 1997, John D. ("Jack") Phillips, a director of the Company,
entered into a series of agreements whereby, among other things, he became the
new Chairman and Chief Executive Officer of Resurgens. RCG filed for bankruptcy
protection shortly thereafter. WorldCom, Inc. ("WorldCom"), a major customer and
vendor of Resurgens, has subsequently provided Resurgens approximately $26
million of direct financial support through a debtor in possession facility and
additional financial support, primarily through trade credits.
In April 1998, the Company purchased approximately $3.6 million of
switching equipment which has been consigned to Resurgens. Upon its acquisition
of Resurgens, the Company will account for this equipment as part of its
investment in Resurgens. If the acquisition is not consummated, the Company
expects to negotiate an arms-length sale of the equipment to Resurgens or
another customer. This equipment is included in Other assets on the Company's
June 30, 1998 balance sheet.
L-10
<PAGE> 706
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TELCO ACQUISITION
On June 4, 1998, the Company entered into a definitive Agreement to merge
with Telco Systems, Inc. ("Telco") (the "Merger").
As a result of the Merger, each outstanding share of Telco common stock
shall be converted into the right to receive that number of shares of Company
common stock equal to the quotient of $17.00 divided by the average daily
closing price of Company common stock as reported on Nasdaq on each of the
twenty consecutive trading days ending on the second business day prior to the
date of the Merger (the "Average Closing Price"), provided that if the Average
Closing Price is more than $36.00 per share, then each share of Telco common
stock will be converted into .4722 shares of Company common stock and if the
Average Closing Price is less than $29.00 per share, then each share of Telco
common stock will be converted into .5862 shares of Company common stock. Based
on the Company's current stock price as of the date of this Report, the shares
issued in connection with the Merger will be valued at approximately $200
million.
The Merger is intended to constitute a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended, and will be accounted for as a
purchase. The purchase price will be allocated to the net assets acquired and to
approximately $65 million of purchased in-process R&D. Purchased in-process R&D,
which consists of the value of Telco's products in the development stage that
are not considered to have reached technological feasibility, will be expensed
upon completion of the Merger.
The consummation of the Merger is subject to (i) clearance under the
Hart-Scott-Rodino Improvements Act of 1976, as amended, (ii) the approval by the
respective stockholders of the Company and Telco, (iii) the approval by the
stockholders of the Company of an increase in the authorized shares of common
stock of such corporation, and (iv) the satisfaction or waiver of customary
conditions. The Merger is expected to be consummated in September or October
1998.
NOTE 10. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. For
the six months ended June 30, 1998 and 1997, respectively, comprehensive and net
income were the same for the Company.
L-11
<PAGE> 707
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. The Company believes that it is
in the best interest of its stockholders to use these provisions in discussing
future events in this Form 10-Q and other communications. These forward-looking
statements include the Company's plans for growth, the potential for
development, acceptance of the Company's products and other factors that could
affect the Company's future operations or financial position.
The Company's ability to achieve its goals depends on many known and
unknown risks and uncertainties, as well as changes in general economic and
business conditions. These factors could cause the anticipated performance and
results of the Company to differ materially from those described or implied in
such forward-looking statements.
Factors that could cause or contribute to such differences include the
risks and uncertainties described in the Company's SEC reports, including the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1997 and the Company's Registration Statement on Form S-3 (No. 333-43497).
OVERVIEW
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The products offered by the Company include those manufactured by the
Company as well as those manufactured by other telecommunications equipment
manufacturers. To support and complement its product sales, the Company also
provides its customers with a broad range of design, engineering, manufacturing,
testing, installation, repair and other value-added services.
During 1995 and 1996, the Company completed strategic and financial
restructuring programs to strengthen its management team, reposition the Company
as a provider of telecommunications products, improve its financial condition,
reduce its operating costs and position the Company for future growth. These
programs were undertaken following the significant losses incurred by the
Company in the early 1990s, primarily due to a discontinued smart pay telephone
business, and to take advantage of the significant growth opportunities within
the Company's existing customer base and related markets. In November 1994, the
Company began to rebuild its management team and change its strategic focus. The
Company strengthened its management team by appointing a new Chief Executive
Officer and by recruiting and hiring a new President and Chief Operating
Officer, Executive Vice President of Business Development and experienced
product development and manufacturing professionals. These individuals, together
with other key managers recruited into the Company, have brought significant
experience in manufacturing and marketing telecommunications equipment to the
Company.
The Company acquired five businesses during 1995 to 1997 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, Inc. ("AIT"), a full service provider of
Northern Telecom switching systems, add-on frames and related circuit boards;
effective October 1995, the Company acquired Westec Communications, Inc.
("Westec"), a provider of wireless products and services primarily to the cable
television industry; effective January 1996, the Company acquired Sunrise
Sierra, Inc. ("Sunrise"), a developer and manufacturer of intelligent transport
and access products; effective January 1997, the Company acquired Cellular
Infrastructure Supply, Inc. ("CIS"), a provider of mobile network equipment and
related design, installation and technical support services to cellular, PCS and
other wireless service providers; and effective August 1997, the Company
acquired Galaxy Personal Communication Services ("Galaxy"), a RF engineering
firm that provides system design, implementation, optimization and other
value-added radio engineering and consulting services to the wireless service
markets. The markets served by CIS and Galaxy complement the Company's
traditional telephone service provider and private network operator markets.
In the first quarter of 1998, the Company acquired ATI, a manufacturer of
digital point-to-point microwave radio systems for short and long haul
applications and a majority stake in NACT, a provider of
L-12
<PAGE> 708
advanced telecommunications switching platforms with integrated applications
software. In May 1998, the Company signed definitive agreements to acquire
Resurgens, a facilities-based provider of international network access, commonly
referred to in the industry as carriers' carrier. In June 1998, the Company
signed a definitive agreement to acquire Telco, a manufacturer of asynchronous
fiber optic systems and intelligent channel banks for the integrated access,
high capacity multiplexer and Frame Relay/ATM access markets. These acquisitions
have positioned the Company to offer its customers a complete telecommunications
network solution, including proprietary equipment, planning and engineering
services and access to international long distance.
The Company realized significant improvements in its sales and operating
results since 1994 as a result of the acquisitions and internal growth
initiatives. The Company's total sales increased by 82.3% in 1997, 69.2% in 1996
and 97.2% in 1995. Total sales for the first six months of 1998 increased by
41.5% over the last six months of 1997. As the Company increased its product
sales from 18.2% of total sales in 1994 to 79.0% of total sales in the first six
months of 1998, its gross profit margin before special charges increased from
12.9% in 1994 to 21.1% in 1995, 29.4% in 1996, 34.6% in 1997 and 44.1% in the
first six months of 1998. As a percentage of total sales, the Company's
operating income (loss) before special charges increased from (8.5%) in 1994 to
5.0% in 1995, 14.4% in 1996, 21.0% in 1997 and 27.6% in the first six months of
1998. The Company will continue to seek further improvements in gross profit
margin over time as product offerings include more internally developed,
acquired and licensed products containing proprietary technology.
Although the Company has aggressively pursued acquisitions in recent years,
approximately 50% of the Company's total sales growth since 1994 has come from
internal growth initiatives. The Company has had considerable success in growing
businesses subsequent to their acquisition, due in part to the Company's ability
to provide working capital, an extensive base of telecommunications customers
and a broad range of support services.
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity
offering, stock warrant and option exercises, and a five-year $10.0 million
credit facility. The Company has used this capital for acquisitions and to
support the working capital requirements associated with the Company's growth.
The Company's working capital and stockholders' equity have increased from $2.3
million and $1.2 million, respectively, at December 31, 1994 to $116.1 million
and $98.6 million, respectively, at June 30, 1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past.
As the Company increases its number of telecommunications product offerings, its
future operating results may vary significantly depending on factors such as the
timing and shipment of significant orders, new product offerings by the Company
and its competitors, market acceptance of new and enhanced versions of the
Company's products, changes in pricing policies by the Company and its
competitors, the availability of new technologies, the mix of distribution
channels through which the Company's product are sold, the inability to obtain
sufficient supplies of sole or limited source components for the Company's
products, gains or losses of significant customers, the timing of customers'
upgrade and expansion programs, changes in the level of operating expenses, the
timing of acquisitions, seasonality and general economic conditions.
The Company's sales during the first six months of 1998 included
approximately $30.0 million from its AIT and CIS subsidiaries. AIT sells new and
used Northern Telecom switching systems, add-on frames and circuit cards. CIS
sells re-engineered cellular base stations and related mobile network equipment.
These operations depend on a consistent supply of equipment to sustain their
revenue levels. Additionally, individual sales by AIT and CIS are relatively
large ($500,000 to $2.0 million), which subjects the Company to the risk of
revenue fluctuations in the event that customers adjust the timing of their
orders.
L-13
<PAGE> 709
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of total revenues:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ----- -----
<S> <C> <C> <C> <C>
Sales of products............................ 87.6% 81.0% 83.9% 78.9%
Service revenues............................. 12.4 19.0 16.1 21.1
----- ----- ----- -----
Total sales........................... 100.0 100.0 100.0 100.0
Cost of products sold........................ 46.8 48.0 46.9 48.5
Cost of services............................. 10.0 16.7 14.6 18.3
----- ----- ----- -----
Total cost of sales................... 56.8 64.7 61.5 66.8
----- ----- ----- -----
Gross profit.......................... 43.2 35.3 38.5 33.2
Engineering and development.................. 3.8 1.8 3.1 1.7
Selling, general and administrative.......... 9.9 10.1 9.6 9.8
Amortization of goodwill..................... 2.1 1.6 2.3 1.5
In process research and development.......... -- -- 60.0 --
Special charges.............................. -- -- 3.9 --
----- ----- ----- -----
Operating income (loss)............... 27.4 21.8 (40.4) 20.2
Interest and other income.................... 1.5 0.9 2.4 1.3
Interest expense............................. (3.2) -- (3.6) (0.1)
----- ----- ----- -----
Income (loss) before income taxes and
minority interest.................. 25.7 22.7 (41.6) 21.4
Income taxes................................. 10.3 8.4 7.4 7.8
----- ----- ----- -----
Income (loss) before minority
interests.......................... 15.4 14.3 (49.0) 13.6
Minority interests in earnings of
subsidiary................................. 1.8 -- 1.8 --
----- ----- ----- -----
Net income (loss)..................... 13.6% 14.3% 50.8% 13.6%
===== ===== ===== =====
</TABLE>
OTHER DATA:
<TABLE>
<S> <C> <C> <C> <C>
Gross margin (before special charges)
Products................................... 46.5% 40.7% 44.1% 38.4%
Services................................... 19.4 12.4 34.2 13.5
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Sales. Total sales increased $23.5 million, or 97.8%, to $47.5 million in
the second quarter of 1998 from $24.0 million in the second quarter of 1997. The
percentage of product sales to total sales increased to 87.6% in the second
quarter of 1998 from 81.0% in the second quarter of 1997.
Product sales increased $22.2 million, or 113.9%, to $41.6 million in the
second quarter of 1998 from $19.4 million in the second quarter of 1997. The
increase related to sales generated by ATI and NACT which were acquired
effective February 1, 1998 and March 1, 1998, respectively, and increases in
sales of the Company's international switching product, the Compact Digital
Exchange switch ("CDX"), and it's WX-5501 line card.
Service revenues increased $1.3 million, or 29.2%, to $5.9 million in the
second quarter of 1998 from $4.6 million in the second quarter of 1997. The
increase related to additional revenues attributable to the Galaxy acquisition,
which was acquired effective July 1, 1997. This increase was offset by a decline
in electronic manufacturing revenues resulting from a strategic decision to
begin utilizing the Company's manufacturing capacity for new World Access
products rather than service outside contract manufacturing customers.
L-14
<PAGE> 710
Gross Profit. Gross profit increased $12.0 million, or 141.7%, to $20.5
million in the second quarter of 1998 from $8.5 million in the second quarter of
1997. Gross profit margin increased to 43.2% in the second quarter of 1998 from
35.3% in the second quarter of 1997. The improved performance resulted from
economies of scale associated with the 97.8% increase in total sales and the
change in sales mix to products, which generally carry a higher gross profit
margin than service revenues.
Gross profit margin on products sold increased to 46.5% in the second
quarter of 1998 from 40.7% in the second quarter of 1997. The improved margins
related to the NACT and ATI sales of proprietary equipment and systems and the
increase in sales of CDX equipment, all of which generally carry margins in
excess of 45%. The Company's refurbished switching products experienced declines
in gross margin during the second quarter of 1998 primarily related to margin
pressure on sales of Northern Telecom add-on frames and related circuit boards.
Gross profit margin on service revenues increased to 19.4% in the second
quarter of 1998 from 12.4% in the second quarter of 1997. The improvement was
due to the addition of revenues from Galaxy.
Engineering and Development. Engineering and development expenses
increased $1.4 million, or 318.5%, to $1.8 million in the second quarter of 1998
from $429,000 in the second quarter of 1997. The increase in expenses was
attributable to the acquisitions of NACT and ATI and the continued expansion of
the Company's development group during 1998. Total engineering and development
expenses increased to 3.8% of total sales in the second quarter of 1998 from
1.8% of total sales in the second quarter of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 92.2%, to $4.7 million in the
second quarter of 1998 from $2.4 million in the second quarter of 1997. The
increase related primarily to expenses associated with the operations of NACT,
ATI and Galaxy, which were acquired subsequent to the second quarter of 1997. As
a percentage of total sales, selling, general and administrative expenses
decreased to 9.9% in the second quarter of 1998 from 10.1% in the second quarter
of 1997.
Amortization of Goodwill. Amortization of goodwill increased $638,000 to
$1.0 million in the second quarter of 1998 from $380,000 in the second quarter
of 1997, as a result of the goodwill acquired in connection with the NACT, ATI,
and Galaxy acquisitions and additional goodwill recorded related to earnout
performances for the CIS, AIT and Galaxy acquisitions.
AIT, CIS, Galaxy, ATI and NACT (collectively representing approximately 95%
of the net goodwill of the Company) are all operating at profitability levels in
excess of management's expectations and the related risk of impairment in the
foreseeable future is believed to be low. Westec and Sunrise are operating below
management's expectations and may have difficulty achieving future sales growth.
Although management believes there has been no permanent impairment in the value
of the Westec and Sunrise goodwill to date, management will continue to monitor
closely the value of Westec and Sunrise goodwill throughout 1998 and 1999.
Operating Income. Operating income increased $7.8 million, or 148.3%, to
$13.0 million in the second quarter of 1998 from $5.2 million in the second
quarter of 1997. Operating income margin increased to 27.4% in the second
quarter of 1998 from 21.8% in the second quarter of 1997.
Interest and Other Income. Interest and other income increased $476,000,
or 211.6%, to $701,000 in the second quarter of 1998 from $225,000 in the second
quarter of 1997 due to increased invested cash balances of the Company,
resulting primarily from proceeds received from a $115.0 million convertible
note offering completed in October 1997.
Interest Expense. Interest expense increased to $1.5 million in the second
quarter of 1998 from $24,000 in the second quarter of 1997. The increase is due
to the $115.0 million convertible note offering.
L-15
<PAGE> 711
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales. Total sales increased $38.9 million, or 88.0%, to $83.2 million in
the first six months of 1998 from $44.3 million in the first six months of 1997.
The percentage of product sales to total sales increased to 83.9% in the first
six months of 1998 from 78.9% in the first six months of 1997.
Product sales increased $34.9 million, or 100.0%, to $69.8 million in the
first six months of 1998 from $34.9 million in the first six months of 1997. The
increase related to sales generated by ATI and NACT which were acquired
effective February 1, 1998 and March 1, 1998, respectively, and increases in
sales of the Company's international switching product, the Compact Digital
Exchange switch ("CDX"), and it's WX-5501 line card.
Service revenues increased $4.0 million, or 43.3%, to $13.4 million in the
first six months of 1998 from $9.4 million in the first six months of 1997. The
increase related to additional revenues attributable to the Galaxy acquisition.
This increase was offset by a decline in electronic manufacturing revenues
resulting from a strategic decision to begin utilizing the Company's
manufacturing capacity for new World Access products rather than service outside
contract manufacturing customers and in the Company's circuit board repair
business.
Gross Profit. Gross profit increased $17.3 million, or 118.2%, to $32.0
million in the first six months of 1998 from $14.7 million in the first six
months of 1997. Gross profit margin increased to 38.5% in the first six months
of 1998 from 33.2% in the first six months of 1997. The improved performance
resulted from the 88.0% increase in total sales and the change in sales mix to
products, which generally carry a higher gross profit margin than service
revenues.
Gross profit margin on products sold increased to 44.1% in the first six
months of 1998 from 38.4% in the first six months of 1997. The improved margins
related to the NACT and ATI sales of proprietary equipment and systems and the
increase in sales of CDX equipment, all of which generally carry margins in
excess of 45%. The Company's refurbished switching products experienced declines
in gross margin during the first six months of 1998 primarily related to margin
pressure on sales of Northern Telecom add-on frames and related circuit boards.
Gross profit margin on service revenues was 9.1% in the first six months of
1998 as compared to 13.5% in the first six months of 1997. Gross profit margin
excluding the special charge was 34.2% in the first six months of 1998. The
improvement was due to the addition of revenues from Galaxy, which was acquired
effective July 1, 1997.
Engineering and Development. Engineering and development expenses
increased $1.8 million, or 246.6%, to $2.6 million in the first six months of
1998 from $745,000 in the first six months of 1997. The increase in engineering
and development expenses was attributable to the acquisitions of NACT and ATI
and the continued expansion of the Company's development group during 1998.
Total engineering and development expenses increased to 3.1% of total sales in
the first six months of 1998 from 1.7% of total sales in the first six months of
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.5 million, or 82.3%, to $7.9 million in the
first six months of 1998 from $4.4 million in the first six months of 1997. The
increase related primarily to expenses associated with the operations of NACT,
ATI and Galaxy, which were acquired subsequent to the second quarter of 1997. As
a percentage of total sales, selling, general and administrative expenses
decreased to 9.6% in the first six months of 1998 from 9.8% in the first six
months of 1997.
Amortization of Goodwill. Amortization of goodwill increased $1.4 million
to $2.0 million in the first six months of 1998 from $592,000 in the first six
months of 1997, as a result of the goodwill acquired in connection with the
NACT, ATI, and Galaxy acquisitions and additional goodwill recorded related to
earnout performances for the CIS, AIT and Galaxy acquisitions.
Operating Income Before Special Charges. Operating income before special
charges increased $14.1 million to $23.0 million in the first six months of 1998
from $8.9 million in the first six months of 1997.
L-16
<PAGE> 712
Operating income margin before special charges increased to 27.6% in the first
six months of 1998 from 20.2% in the first six months of 1997.
Interest and Other Income. Interest and other income increased $1.4
million, or 232.7%, to $2.0 million in the first six months of 1998 from
$592,000 in the first six months of 1997 due to increased invested cash balances
of the Company, resulting primarily from proceeds received from a $115.0 million
convertible note offering completed in October 1997.
Interest Expense. Interest expense increased to $3.0 million in the first
six months of 1998 from $53,000 in the first six months of 1997. The increase is
due to the $115.0 million convertible note offering.
PURCHASED IN-PROCESS R&D
Special charges in the first quarter of 1998 included $50.0 million for
in-process research and development related to the first quarter 1998
acquisitions of a 67.3% interest in NACT and ATI (see Note 2 to the "Financial
Statements"). Purchased in-process research and development, which consists of
the value of NACT and ATI products in the development stage that are not
considered to have reached technological feasibility, were expensed in
accordance with applicable accounting rules. The Company expects to record an
additional in-process research and development charge of approximately $22.0
million in the third quarter of 1998 in connection with the acquisition of the
remaining 32.7% of NACT.
The Income Approach was utilized to value the acquired research and
development technologies in the NACT Acquisition. The Income Approach values
technologies by projecting the potential cash flows related to those
technologies and discounting the cash flows to their present values using a
discount rate reflective of the risk of achieving the cash flows. The projected
cash flows include estimates of the remaining costs to complete the in-process
technologies.
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained as of the date of Acquisition.
Failure to attain technological feasibility, especially given the high degree of
customization required for complete integration into the NACT solution, would
have rendered partially designed hardware and software useless for other
applications. Incomplete design of hardware and software coding would create a
non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite.
NACT had nine principal projects in the development pipeline at the time of
acquisition. Most major projects had several ongoing sub-projects (e.g., a
hardware design project and a software design project). These projects included
significant redevelopment of some existing products and the creation of new
products. The research and development projects were at various stages of
development. Most new or redeveloped products were scheduled for release in
1998, while several others were scheduled for release in 1999. None of the
in-process projects considered in the write-off had attained technological
feasibility.
For all in-process technologies, management estimated remaining costs to
complete. These estimates were $3.3 million for 1998, and $1 million for 1999.
The expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
The Income Approach was also used to value the acquired research and
development technologies in the ATI acquisition.
ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The
L-17
<PAGE> 713
nature of the in-process research and development was such that technological
feasibility had not been attained as of the date of Acquisition. Failure to
attain technological feasibility would have rendered partially designed
equipment useless for other applications. ATI's products are designed for
specific frequency bandwidths and, as such, are highly customized to those
bandwidths and the needs of customers wishing to operate in them. Products only
partially completed for certain bandwidths cannot be used in other bandwidths.
At the time of acquisition, ATI's primary product lines were FSK+, Compact,
and QAM. ATI's management determined the following percentages of each product
line were in-process technologies:
<TABLE>
<S> <C>
FSK+: 15.0% of units in development
Compact: 95.0% of units in development
QAM: 100.0% of units in development
</TABLE>
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility.
For all in-process products, management estimated remaining costs to
complete to be $3.1 million for 1998, $7.2 million for 1999, $7.6 million for
2000, $5.1 million for 2001, and $1.1 million for 2002. The expected sources of
funding were scheduled R&D expenses from the operating budget of ATI provided by
the operating assets and liabilities of ATI.
SPECIAL CHARGES
In January 1998, the Company's senior management decided that the following
actions were necessary to streamline operations and position the Company to
service anticipated sales growth:
- Close down the existing Orlando, Florida manufacturing and repair
facility. Move the manufacturing of certain World Access products to the
company's Alpharetta, Georgia manufacturing facility.
- Exit the contract manufacturing business.
- Close down four Lakeland, Florida facilities and move AIT operations to a
new facility in Orlando, Florida. Repair operations would be integrated
with AIT in this new facility.
- Close down Westee's facility in Scottsdale, Arizona and integrate its
operations into ATI's facility in Wilmington, Massachusetts.
Shortly thereafter, senior management informed the operating management of
the applicable divisions. All Orlando and Lakeland employees were informed in
January and Westee employees were informed in February (subsequent to the
closing of the ATI acquisition).
Management carefully reviewed the provisions of EITF 94-3 in determining
which costs related to the above actions should be included in a first quarter
special charge. No costs were included in the charge that would derive future
economic benefit to the Company, e.g., relocation of existing employees,
recruiting and training of new employees and facility start-up costs. The
special charge consisted of:
<TABLE>
<S> <C>
Obsolete and redundant inventories........................ $3,360,000
Severance and termination benefits........................ 550,000
Idle facility costs....................................... 1,340,000
Idle equipment costs...................................... 1,350,000
----------
$6,600,000
==========
</TABLE>
Severance and termination benefits were clearly communicated up front to
the approximately 60 employees who lost their jobs as a direct result of the
consolidations. Affected employees were notified shortly after the January and
February employee meetings. Benefits were determined consistent with the
Company's severance policy of one week of pay for each full year of service
(minimum of two weeks) and continued benefits through the month severance pay is
exhausted. Approximately 10 of these employees were
L-18
<PAGE> 714
involuntarily terminated in February and March, approximately 40 employees were
involuntarily terminated in April and approximately 10 employees were
involuntarily terminated in June. The Orlando and Lakeland facilities were
closed in April and the Scottsdale facility was closed in June. The actual
severance and termination benefit costs incurred by the Company were not
materially different from the $550,000 recorded in the special charge.
The idle facility and equipment portion of the special charge included the
write-off of "old Orlando", Lakeland and Scottsdale leasehold improvements,
provisions for the estimated costs to terminate idle facility and equipment
leases, the write-off of Orlando manufacturing equipment not relocated to the
company's Alpharetta facility and certain phase-down expenses associated with
the six facilities closed down. As of the date of this Report, the Company does
not expect the actual costs for these items to be materially different from
amounts recorded in the special charge.
As previously noted, all activities that resulted in the first quarter
special charge were completed by the Company as of June 30, 1998. Of the
$3,240,000 special charge, approximately $1.4 million related to assets directly
written-off of amounts charged to the reserve in the first quarter. As of June
30, 1998, the accrual for special charges was approximately $600,000, which
consisted primarily of lease termination losses expected to be incurred.
LIQUIDITY AND CAPITAL RESOURCES
Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of June 30, 1998, the Company had $61.2
million of cash and investments and $5.7 million in borrowings available under
its credit line to support its current working capital requirements and
strategic growth initiatives.
Operating Activities. Cash provided from operating activities was $3.0
million in the first six months of 1998 as compared to cash used by operations
of $2.6 million in the first six months of 1997.
Accounts receivable increased $21.5 million, or 106.4%, to $41.8 million at
June 30, 1998 from $20.3 million at December 31, 1997. This was due to the
acquisitions of NACT, ATI and Galaxy and increased sales activity at the Company
(second quarter 1998 sales were $47.5 million as compared to fourth quarter 1997
sales of $21.3 million). Average days sales outstanding at June 30, 1998, March
31, 1998 and December 31, 1997 were approximately 80 days, 90 days and 81 days,
respectively. The Company's transition into equipment sales has caused an
increase in days sales outstanding. The Company's equipment sales tend to
include longer payment terms than the historical repair and refurbishment
businesses. In addition, the Company's sales to international customers have
increased during the last twelve months. International sales generally have
payment terms of 90 to 120 days. The Company also has recently begun to enter
into long-term notes receivable with selected customers. To maximize cash flow,
the Company sells the notes where possible on either a non-recourse or recourse
basis to a third party financing institution.
Inventories increased $12.1 million, or 53.7%, to $34.5 million at June 30,
1998 from $22.4 million at December 31, 1997. This increase was due to the
acquisitions of NACT and ATI, a planned build-up of CDX switching and WX-5501
inventories related to the closure of the Company's Orlando manufacturing
facility and an increase in AIT and CIS inventories to support future orders.
The increases above were offset by the $3.4 million provision for obsolete and
redundant inventories related to the consolidation program initiated in the
first quarter of 1998 (see Special Charges).
Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, was $69.8 million and $4.6 million for the first six
months of 1998 and 1997, respectively.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST and GST USA to acquire 5,113,712 shares of NACT common stock owned by
GST USA, representing approximately 63% of the outstanding shares of NACT common
stock (the "NACT Stock Acquisition"). On February 27, 1998 the
L-19
<PAGE> 715
NACT Stock Acquisition was completed with GST USA receiving $59.7 million in
cash and 1,429,907 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $26.9 million. This transaction
increased the Company's ownership of NACT to 67.3%.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. Pursuant to the terms of
the merger agreement, each share of NACT common stock will be converted into
shares of Company common stock having a value of $17.50 per share based on the
average of the daily closing price of Company common stock on the NASDAQ
National Market for a pre-defined period prior to the closing (the "Closing
Price"), provided that if the Closing Price is more than $25.52, then each share
of NACT common stock will be converted into 0.6857 shares of Company common
stock. If the Closing Price is less than $20.88, then the Company may elect to
terminate the agreement. This merger is expected to be consummated in September
1998.
On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and 424,932
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $6.5 million.
In addition to the 424,932 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be released to the stockholders of
ATI contingent upon the realization of predefined levels of pre-tax net income
from ATI's operations during calendar years 1998 and 1999.
In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.6 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.
During the first quarter of 1998, the note receivable was included in the
Company's purchase price of ATI.
During the first six months of 1998 and 1997, the Company invested $5.9
million and $1.1 million, respectively, in capital expenditures. The Company has
invested approximately $3.7 million during 1998 related to the establishment of
the new manufacturing facility in Alpharetta, Georgia. The remaining
expenditures during 1998 were primarily for computer network and related
communications equipment designed to upgrade the Company's management
information systems and facilitate the integration of acquisitions, and facility
improvements required in connection with the Company's growth.
The Company began capitalizing software development costs in the fourth
quarter of 1997. Software development costs are capitalized upon the
establishment of technological feasibility of the product. During the first six
months of 1998, the Company capitalized approximately $1.8 million of software
development costs.
Financing Activities. Cash provided from financing activities was $6.4
million and $5.4 million for the first six months of 1998 and 1997,
respectively.
On October 1, 1997, the Company sold $100.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year, commencing on April 1, 1998. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all existing and senior indebtedness. The Company received $97.0 million from
the sale of the Notes, after the initial purchasers' discount fees of $3.0
million.
In addition to the Notes sold on October 1, 1997, the Company granted the
initial purchasers an option to purchase up to an additional $15.0 million in
Notes to cover over-allotments. On October 28, 1997, the initial purchasers
exercised the over-allotment option in full and the Company received an
additional $14.6 million, after the application of the initial purchasers'
discount fees.
L-20
<PAGE> 716
The total discount fees of $3,450,000, along with approximately $550,000 of
legal, accounting, printing and other expenses (the "Debt issuance costs") are
being amortized to expense over the five year term of the Notes. Debt issuance
costs of approximately $3.4 million, net of amortization, are included in Other
assets on the Company's June 30, 1998 balance sheet.
As of June 30, 1998, the Company had borrowings of $4.3 million outstanding
under its $10.0 million revolving line of credit. Borrowings under the Company's
line of credit are secured by a first lien on substantially all the assets of
the Company. The bank agreement, which expires in March 2001, contains standard
lending covenants, including financial ratios, restrictions on dividends and
limitations on additional debt and the disposition of Company assets. Interest
is paid at the rate of prime plus 1 1/4% or LIBOR plus 2 1/2%, at the option of
the Company. As of the date of this Report, there were no amounts outstanding
under the Company's line of credit.
During the first six months of 1998 and 1997, the Company received
approximately $7.3 million and $2.6 million, respectively, in cash, including
related federal income tax benefits, from the exercises of incentive and
non-qualified stock options and warrants by the Company's directors and
employees.
Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company has realized
a federal income tax benefit of approximately $4.2 million for the first six
months of 1998. Although this tax benefit does not have any effect on the
Company's provision for income tax expense, it represents a significant cash
benefit to the Company. This tax benefit is accounted for as a decrease in
current income taxes payable and an increase in capital in excess of par value.
Summary. The Company's improved operating performance and completion of
the sale of $115.0 million of Notes in 1997 has significantly enhanced its
financial strength and improved its liquidity. As of the date of this Report,
the Company has approximately $60.0 million of cash and a $10.0 million
revolving line of credit available. The Company believes that existing cash
balances, available borrowings under the Company's line of credit and cash
projected to be generated from operations will provide the Company with
sufficient capital resources to support its current working capital requirements
and business plans for at least the next 12 months.
YEAR 2000
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
systems that have date sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This
could result in a system failure or miscalculations causing disruptions,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company is in the process of evaluating its computer systems to
determine what modifications (if any) are necessary to make such systems
compatible with the year 2000 requirements. However, because many of the
Company's computer systems have been put into service within the last several
years, the Company does not expect any such modifications to have a material
adverse effect on the Company's consolidated results of operations, liquidity
and capital resources.
In addition, the Company is in the process of developing a plan whereby it
will review the year 2000 readiness of its customers and suppliers. In doing so,
the Company will undertake appropriate internal reviews and will contact certain
of its significant customers to assess, to the extent possible, Year 2000 Issues
related to the Company's products. In that regard, the Company has identified
that certain of its products, including the NTS 1000 billing System available
from one of the Company's subsidiary, are not year 2000 compliant. The Company
is in the process of releasing new versions of such products and making
necessary modifications to existing products to address the Year 2000 Issue.
These new and revised products are expected to be available commencing in the
first quarter of 1999. The Company expects that many of its customers will
upgrade to the new products. However, there can be no assurance that the
Company's customers will upgrade to the new year 2000 compliant products or that
the modifications planned to the certain of the Company's existing products
L-21
<PAGE> 717
will be successful or completed in a timely manner. The Company will continue to
evaluate its other products to determine their year 2000 compliance.
The Company intends to take all reasonable efforts to make information on
the year 2000 readiness of its products available to its customers, although
this information may not reach all customers, particularly indirect purchasers
of the Company's products. Although the Company believes that it can address
year 2000 readiness issues related to its products, there may still be
disruptions and or product failures that are unforeseen.
The Company also intends to request assurances from its major suppliers
that they are addressing the Year 2000 Issue and that the products and services
procured or used by the Company will function properly or be available without
interruption in the year 2000. Nevertheless, it will be impossible for the
Company to fully assess the potential consequences if service interruptions
occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, the Company
also intends to develop a business continuity plan to minimize the impact of
such external events.
While the Company's efforts to address year 2000 issues will involve
additional costs and the time and effort of a number of Company employees, the
Company believes, based on currently available information, that it will be able
to manage its total year 2000 transition without any material adverse effect on
the Company's consolidated results of operations, liquidity and capital
resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27.1 -- Financial Data Schedule (for SEC use only).
(B) Report on Form 8-K
On February 13, 1998, the Company filed a report on Form 8-K, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on April 14, 1998, announcing that
on January 29, 1998 the merger of ATI with and into CIS, a wholly-owned
subsidiary of the Company was consummated.
On February 20, 1998, the Company filed a report on Form 8-K announcing
that the Company signed a letter of intent to acquire Cherry Communications
Incorporated d/b/a Resurgens Communications Group ("RCG"). On May 18, 1998, the
Company filed a report on Form 8-K announcing that the Company signed definitive
agreements to acquire RCG and Cherry Communications U.K. Limited. On July 27,
1998, the Company filed a report on Form 8-K which included the financial
statements of Resurgens and the pro forma financial statements of the Company.
On April 23, 1998, the Company filed a report on Form 8-K, as amended by
Amendment No. 1 thereto on Form 8-K/A filed on April 24, 1998, announcing the
resignation of William P. O'Reilly from the Company's Board of Directors.
On June 8, 1998, the Company filed a report on Form 8-K, announcing that it
had entered into a definitive agreement to acquire Telco Systems, Inc.
L-22
<PAGE> 718
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Vice President and Controller,
Secretary
Dated: August 19, 1998
L-23
<PAGE> 719
APPENDIX M
<PAGE> 720
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
AS AMENDED ON SEPTEMBER 4, 1998 AND SEPTEMBER 25, 1998
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 20, 1998
WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other Jurisdiction of (Commission File Number) (IRS Employer Identification
Incorporation) Number)
</TABLE>
<TABLE>
<S> <C>
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 721
ITEM 5. OTHER EVENTS
As previously reported, on May 12, 1998, World Access, Inc. (the "Company")
announced that it had entered into (i) a definitive Agreement and Plan of Merger
and Reorganization, as subsequently amended (as so amended, the "Merger
Agreement"), with Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) ("RCG") pursuant to which the Company will acquire RCG in
a merger transaction (the "Merger"), and (ii) a Share Exchange Agreement and
Plan of Reorganization (the "Exchange Agreement") with the sole shareholder (the
"Shareholder") of Cherry Communications U.K. Limited ("Cherry U.K.") pursuant to
which the Company will acquire Cherry U.K. in a share exchange transaction (the
"Exchange").
In connection with the Merger, the former creditors of RCG will receive an
aggregate of 9,375,000 shares of common stock of WAXS INC. ("New World Access").
New World Access is a wholly-owned subsidiary of the Company that will become
the parent of the Company upon the completion of the previously reported
acquisition of the shares of NACT Telecommunications, Inc. ("NACT") not already
owned by the Company and the holding company reorganization to be effective in
connection therewith (the "Holding Company Reorganization"). Of the shares of
New World Access common stock to be issued to the RCG creditors, two-thirds will
be held in escrow and will be released to the RCG creditors over the two and
one-half years following the consummation of the Merger subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K.
In connection with the Exchange, the Shareholder will receive an aggregate
of 1,875,000 shares of New World Access common stock, of which one-third will be
issued to the Shareholder at closing and the remaining two-thirds will be issued
and held in escrow and will be released to the Shareholder over the two and
one-half year period following the consummation of the Exchange subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K. The Exchange Agreement pursuant to which provides, however, that the
number of shares of New World Access common stock to be received by the
Shareholder will be reduced to the extent that New World Access is required to
convert options to acquire shares of Cherry U.K. capital stock, which options
may only be granted with the permission of New World Access, into options to
acquire New World Access common stock. It is currently expected that no such
options will be granted.
Each of the Merger and the Exchange is subject to the satisfaction of
certain conditions customary in similar transactions, including the approval of
the Company's stockholders and the consummation of the Holding Company
Reorganization. The consummation of the Merger is also subject to the Bankruptcy
Court's approval and confirmation of RCG's Plan of Reorganization pursuant to an
order dated September 3, 1998. Finally, the consummation of the Merger is a
condition to the consummation of the Exchange, and the Exchange is a condition
to the consummation of the Merger.
The foregoing description of the Merger and the Exchange is qualified in
its entirety by reference to the Merger Agreement and the Exchange Agreement
which have been filed as exhibits to the Company's Form 8-K filed with the
Commission on May 18, 1998; however, the First and Second Amendments to the
Merger Agreements are filed as exhibits herewith.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statement of Business Acquired. Included in this report are
the following financial statements:
(i) The combined unaudited financial statements of Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) ("RCG")
and Cherry Communications U.K. Limited ("Cherry U.K.") for the six months
ended June 30, 1998 and 1997;
(ii) The combined financial statements of RCG and Cherry U.K. for the
year ended December 31, 1997, which have been audited by the independent
accounting firm of Ernst & Young LLP, whose opinion thereon is included
herein; and
M-1
<PAGE> 722
(iii) The combined financial statements of RCG and Cherry U.K. for the
year ended December 31, 1996, which have been audited by the independent
accounting firm of Grant Thornton LLP, whose opinion thereon is included
herein.
(b) Pro Forma Financial Information. The Unaudited Pro Forma Combined
Financial Statements of New World Access give effect to the consummation of the
several transactions that World Access has completed or are currently
contemplated. The Unaudited Pro Forma Combined Statements of Operations give
effect to: (1) the acquisition of Advanced TechCom, Inc.; (2) the acquisition of
a majority interest in NACT (the "NACT Stock Purchase"); (3) the acquisition of
the remainder of NACT (the "NACT Transaction"); (4) the acquisition of RCG and
Cherry U.K. (the "Resurgens Transaction"); and (5) the acquisition of Telco
Systems, Inc. ("Telco Merger") as if each of these acquisitions had occurred on
January 1, 1997. The Unaudited Pro Forma Combined Balance Sheet gives effect to
the NACT Transaction, Resurgens Transaction and the Telco Merger as if it had
been completed on June 30, 1998.
As the fiscal year end of Telco Systems, Inc. ("Telco"), August 31, differs
from the Company's fiscal year-end by more than 93 days, Telco's results of
operations for the period from November 25, 1996 through November 30, 1997 were
used in preparing the Unaudited Pro Forma Combined Statement of Operations for
the year ended December 31, 1997. Telco's results of operations for the six
months from December 1, 1997 through May 31, 1998 were used in preparing the
Unaudited Pro Forma Combined Statement of Operations for the six months ended
June 30, 1998. Telco's May 31, 1998 balance sheet was utilized in preparing the
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that the Company's management believes are
reasonable. Each of the acquisition transactions above has been accounted for
using the purchase method of accounting. The adjustments recorded in the
Unaudited Pro Forma Combined Financial Statements represent the Company's
preliminary determination of these adjustments based upon available information.
There can be no assurance that the actual adjustments will not differ
significantly from the pro forma adjustments reflected in the Unaudited Pro
Forma Combined Financial Statements.
In connection with the consummation of the pending acquisition
transactions, the Company expects New World Access to record charges
representing the estimated portion of the purchase price allocated to in-
process research and development of $21.9 million and $73.9 million for the NACT
Transaction and Telco Merger, respectively. In addition, in the three month
period ended March 31, 1998, the Company recorded charges representing the
estimated portion of the purchase price allocated to in-process research and
development of $44.6 million and $5.4 million for the NACT Stock Purchase and
ATI acquisition, respectively. Since these charges are directly related to the
acquisitions and will not recur, the Unaudited Pro Forma Combined Statements of
Operations have been prepared excluding these one-time non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of the financial position or the future results of operations or
results that might have been achieved if the foregoing acquisition transactions
had been consummated as of the indicated dates. The Unaudited Pro Forma Combined
Financial Statements should be read in conjunction with the historical
consolidated financial statements of the Company, ATI, NACT, Resurgens and
Telco, and the related notes thereto.
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "EDGAR."
<TABLE>
<C> <C> <S>
2.1 -- First Amendment to Agreement and Plan of Merger and
Reorganization
2.2 -- Second Amendment to Agreement and Plan of Merger and
Reorganization
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Grant Thornton LLP
99.1 -- Press Release dated September 3, 1998
</TABLE>
M-2
<PAGE> 723
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President, Controller and
Secretary
Dated as of September 25, 1998
M-3
<PAGE> 724
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
The combined unaudited financial statements of RCG and
Cherry U.K. for the six months ended June 30, 1998 and
1997
Combined balance sheets as of June 30, 1998 and December
31, 1997............................................... M-5
Combined statements of operations for the three months
ended June 30, 1998 and 1997 and for the six months
ended June 30, 1998 and 1997........................... M-6
Combined statements of cash flows for the six months ended
June 30, 1998 and 1997................................. M-7
Combined statement of net stockholders' deficiency as of
June 30, 1998 and December 31, 1997.................... M-8
Notes to combined unaudited financial statements.......... M-9
The combined financial statements of RCG and Cherry U.K. for
the year ended December 31, 1997.......................... M-10
Report of independent auditors............................ M-12
Combined balance sheet as of December 31, 1997............ M-13
Combined statement of operations for the year ended
December 31, 1997...................................... M-14
Combined statement of net stockholders' deficiency for the
year ended December 31, 1997........................... M-15
Combined statement of cash flows for the year ended
December 31, 1997...................................... M-16
Notes to combined financial statements.................... M-17
The combined balance sheet of RCG and Cherry U.K. for the
year ended December 31, 1996 and the related combined
statements of operations, stockholders' equity (deficit)
and cash flows for the two years in the period ended
December 31, 1996......................................... M-28
Report of independent certified public accountants........ M-29
Combined balance sheet as of December 31, 1996............ M-30
Combined statements of operations for the years ended
December 31, 1995 and 1996............................. M-31
Combined statements of stockholder's equity (deficit) for
the two years ended December 31, 1996.................. M-32
Combined statements of cash flows for the years ended
December 31, 1995 and 1996............................. M-33
Notes to combined financial statements.................... M-34
The unaudited pro forma combined financial statements of New
World Access..............................................
Unaudited pro forma combined balance sheets as of June 30,
1998................................................... M-42 - M-46
Unaudited pro forma combined statements of operations for
the six months ended June 30, 1998..................... M-47 - M-51
Unaudited pro forma combined statements of operations for
the year ended December 31, 1997....................... M-52 - M-56
Notes to pro forma combined financial statements.......... M-57
</TABLE>
M-4
<PAGE> 725
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,637 $ 4,347
Accounts receivable, net.................................. 3,354 1,757
Prepaid expenses.......................................... 3,831 1,838
Other..................................................... 645 648
-------- --------
Total current assets.............................. 9,467 8,590
Property and equipment, net................................. 52,126 54,958
Deposits and other assets, net.............................. 152 295
-------- --------
Total assets...................................... $ 61,745 $ 63,843
======== ========
Current liabilities not subject to compromise:
Accounts payable.......................................... $ 19,731 $ 8,761
Accrued expenses.......................................... 7,243 1,719
Debtor in possession facility............................. 22,000 7,250
Current portion of capitalized lease obligations.......... 3,542 3,630
-------- --------
Total current liabilities......................... 52,516 21,360
Liabilities subject to compromise........................... 334,542 336,751
Long-term obligations not subject to compromise
Capitalized lease obligations, less current portion....... 29,050 30,820
-------- --------
Total liabilities................................. 416,108 388,931
Net stockholders' deficiency:
Common stock - Resurgens.................................. 1 1
Common stock - Cherry U.K................................. 84 84
Additional paid-in capital................................ 61,467 61,467
Accumulated deficit....................................... (415,915) (386,640)
-------- --------
Net stockholders' deficiency...................... (354,363) (325,088)
-------- --------
Total liabilities and net stockholders'
deficiency...................................... $ 61,745 $ 63,843
======== ========
</TABLE>
M-5
<PAGE> 726
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues....................................... $ 10,009 $ 60,207 $ 10,377 $131,774
Cost of services............................... 17,943 77,382 27,028 164,140
-------- -------- -------- --------
Gross margin................................... (7,934) (17,175) (16,651) (32,366)
Operating expenses:
Selling, general and administrative
expenses.................................. 4,756 9,959 7,306 16,981
Depreciation and amortization................ 1,488 1,354 3,096 2,019
Provision for doubtful accounts.............. -- 8,355 2 17,561
-------- -------- -------- --------
Total operating expenses............. 6,244 19,668 10,404 36,561
Operating loss................................. (14,178) (36,843) (27,055) (68,927)
Other income, (expense):
Interest expense............................. (1,437) (1,964) (2,631) (3,772)
Other........................................ 4 727 (1) 256
-------- -------- -------- --------
Total other income, (expense) net.... (1,433) (1,237) (2,632) (3,516)
Loss before reorganization costs............... (15,611) (38,080) (29,687) (72,443)
Reorganization items income.................... 778 -- 412 --
-------- -------- -------- --------
Net loss............................. $(14,833) $(38,080) $(29,275) $(72,443)
======== ======== ======== ========
</TABLE>
M-6
<PAGE> 727
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net loss.................................................. $(29,275) $(72,443)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts........................ 0 17,562
Depreciation and amortization.......................... 3,096 2,019
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,597) 3,918
Prepaid expenses and other........................... (1,990) (5,103)
Accounts payable..................................... 10,970 47,168
Accrued expenses and other liabilities............... 5,524 10,400
-------- --------
Net cash used in operating activities before
reorganization items............................. (13,272) 3,521
Decrease in liabilities subject to compromise............. (2,209) --
-------- --------
Net cash used in operating activities..................... (15,481) 3,521
Investing activities
Fixed asset acquisitions.................................. (264) (9,526)
Deposits and other assets................................. 143 1,356
-------- --------
Net cash used in investing activities (121) (8,170)
Financing activities
Proceeds from debtor-in-possession financing 14,750 --
Proceeds from long-term debt -- 1,309
Payments on capitalized lease obligations (1,858) (1,496)
-------- --------
Net cash provided by (used in) financing
activities....................................... 12,892 (187)
Net decrease in cash and cash equivalents................... (2,710) (4,836)
Cash and cash equivalents, beginning of year................ 4,347 4,836
-------- --------
Cash and cash equivalents, end of year...................... $ 1,637 $ --
======== ========
</TABLE>
M-7
<PAGE> 728
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CHERRY CHERRY U.K.
COMMUNICATIONS INC. LIMITED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
------- ------- ------ ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997... 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
Net loss (unaudited)........ -- -- -- -- -- (29,275) (29,275)
----- -- ------ --- ------- --------- ---------
Balance June 30, 1998
(unaudited)............... 1,249 $1 50,000 $84 $61,467 $(415,915) $(354,363)
===== == ====== === ======= ========= =========
</TABLE>
M-8
<PAGE> 729
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements include the
accounts of Cherry Communications Incorporated (d/b/a Resurgens Communications
Group) ("RCG") and Cherry Communications U.K. Limited ("Cherry U.K."). Cherry
U.K.'s financial statements are prepared on a March 31 fiscal year-end. For
combination purposes, March 31, 1998 financial statements of Cherry U.K., which
were previously included in the combined entity as of December 31, 1997, have
been combined with the March 31, 1998 financial statements of RCG. Therefore,
the statement of net stockholders' deficiency and statement of cash flows
reflect an adjustment for Cherry U.K. which was previously included in fiscal
year 1997. For combination purposes, the six months ended June 30, 1997 of
Cherry U.K. have been combined with the six months ended June 30, 1997 for RCG.
These financial statements do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods covered have been included. For further information,
refer to the audited combined financial statements and footnotes included
elsewhere in this Proxy.
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results expected for the full year. Certain
reclassifications have been made to the prior period's financial information to
conform with the presentations used in 1998.
M-9
<PAGE> 730
COMBINED FINANCIAL STATEMENTS
CHERRY COMMUNICATIONS INCORPORATED,
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND
CHERRY COMMUNICATIONS U.K. LIMITED
YEAR ENDED DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
M-10
<PAGE> 731
CHERRY COMMUNICATIONS INCORPORATED,
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
AUDITED COMBINED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-9
Audited Combined Financial Statements
Combined Balance Sheet as of December 31, 1997.............. F-10
Combined Statement of Operations for the year ended December
31, 1997.................................................. F-11
Combined Statement of Net Stockholders' Deficiency for the
year ended December 31, 1997.............................. F-12
Combined Statement of Cash Flows for the year ended December
31, 1997.................................................. F-13
Notes to Combined Financial Statements...................... F-14
</TABLE>
M-11
<PAGE> 732
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cherry Communications Incorporated,
d/b/a Resurgens Communications Group
and Cherry Communications U.K. Limited
We have audited the accompanying combined balance sheet of Cherry
Communications Incorporated (d/b/a Resurgens Communications Group), and Cherry
Communications U.K. Limited (collectively referred to as the "Companies") as of
December 31, 1997, and the related statements of operations, net stockholders'
deficiency, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the combined financial position at December 31, 1997,
of the Companies and the combined results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements have been prepared assuming
that the Companies will continue as a going concern. As more fully described in
Note 2 to the financial statements, the Companies have not complied with the
repayment schedule for several of its loan agreements and is party to
significant litigation, the outcome of which cannot be predicted. In addition,
the Companies have incurred recurring operating losses, have a working capital
deficiency and have lost virtually all of their customer base. Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) filed
voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code on
October 24, 1997, and is currently operating its business as a
debtor-in-possession under the supervision of the Bankruptcy Court. These
conditions raise substantial doubt about the Companies' ability to continue as a
going concern. Although Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) is currently operating as a Debtor-In-Possession under the
jurisdiction of the Bankruptcy Court, the continuation of the business as a
going concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of the creditors and
confirmation by the Bankruptcy Court, success of future operations, and the
ability to recover the carrying amount of assets and/or the amount and
classification of liabilities. The 1997 financial statements do not include any
adjustments to reflect the possible future effect on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of the bankruptcy proceedings and related
uncertainties.
/s/ ERNST & YOUNG LLP
June 5, 1998
Atlanta, Georgia
M-12
<PAGE> 733
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,347
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$1,062................................................ 1,757
Other.................................................. 648
---------
2,405
Prepaid expenses....................................... 1,838
---------
Total current assets.............................. 8,590
Property and equipment:
Telecommunications equipment.............................. 50,456
Furniture, fixtures and equipment......................... 10,266
Leasehold improvements.................................... 2,593
---------
63,315
Less accumulated depreciation and amortization............ (8,357)
---------
Net property and equipment................................ 54,958
Deposits and other assets, net.............................. 295
---------
Total assets...................................... $ 63,843
=========
</TABLE>
LIABILITIES AND NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<S> <C>
Current liabilities not subject to compromise:
Accounts payable.......................................... $ 8,761
Accrued expenses.......................................... 1,719
Debtor-in-possession (DIP) loan........................... 7,250
Current portion of capitalized lease obligations.......... 3,630
---------
Total current liabilities......................... 21,360
Liabilities subject to compromise (Note 3).................. 336,751
Long-term obligations not subject to compromise:
Capitalized lease obligations, less current portion....... 30,820
---------
Total liabilities................................. 388,931
Net stockholders' deficiency:
Common stock, Resurgens, no par value, authorized 10,000
shares, issued 1,249 at December 31, 1997.............. 1
Common stock, Cherry U.K., no par value, authorized and
issued 50,000 shares at December 31, 1997.............. 84
Additional paid-in capital................................ 61,467
Accumulated deficit....................................... (386,640)
---------
Net stockholders' deficiency...................... (325,088)
---------
Total liabilities and net stockholders'
deficiency........................................ $ 63,843
=========
</TABLE>
See accompanying notes
M-13
<PAGE> 734
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
Revenues.................................................... $ 165,489
Cost of services............................................ 246,494
---------
Gross margin................................................ (81,005)
Operating expenses:
Selling, general and administrative expenses.............. 34,891
Depreciation and amortization............................. 5,814
Provision for doubtful accounts........................... 33,743
---------
Total operating expenses.......................... 74,448
Operating loss.............................................. (155,453)
Other income (expense):
Interest and finance charges.............................. (11,939)
Loss on disposition of property........................... (2,977)
Litigation settlements -- non bankruptcy.................. (1,328)
Other income.............................................. 642
---------
Total other expense, net.......................... (15,602)
Loss before reorganization costs............................ (171,055)
Reorganization items (Note 4)............................... (665)
---------
Net loss.................................................... $(171,720)
=========
</TABLE>
See accompanying notes
M-14
<PAGE> 735
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CHERRY
CHERRY COMMUNICATIONS
COMMUNICATIONS INC. U.K. LIMITED
COMMON STOCK COMMON STOCK ADDITIONAL NET
-------------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
------ ------ ------ ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... 1,000 $1 50,000 $84 $61,467 $(214,920) $(153,368)
Additional shares issued
related to WorldCom
settlement (Note 3)... 249 -- -- -- -- -- --
Net loss................. -- -- -- -- -- (171,720) (171,720)
----- -- ------ --- ------- --------- ---------
Balance, December 31,
1997..................... 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
===== == ====== === ======= ========= =========
</TABLE>
See accompanying notes
M-15
<PAGE> 736
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(171,720)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts........................... 33,743
Depreciation and amortization............................. 5,814
Loss on disposition of property and equipment............. 2,977
Write-off of unrealizable deposits and other assets....... 1,450
Changes in operating assets and liabilities:
Accounts receivables................................... 6,520
Prepaid expenses and other............................. (669)
Accounts payable....................................... (181,332)
Accrued expenses and other liabilities................. (8,559)
---------
Net cash used in operating activities before
reorganization items.............................. (311,776)
Increase in liabilities subject to compromise............... 314,228
---------
Net cash provided by operating activities......... 2,452
INVESTING ACTIVITIES
Purchases of property and equipment......................... (9,545)
Deposits and other assets................................... 851
---------
Net cash used in investing activities............. (8,694)
FINANCING ACTIVITIES
Proceeds from DIP loan...................................... 7,250
Payments on capitalized lease obligations................... (1,496)
---------
Net cash provided by financing activities................... 5,754
---------
Net decrease in cash and cash equivalents................... (488)
Cash and cash equivalents, beginning of year................ 4,835
---------
Cash and cash equivalents, end of year...................... $ 4,347
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and finance charges paid........................... $ 830
=========
Supplemental schedule of noncash investing and financing
activities:
Capitalized lease obligations incurred for property and
equipment............................................. $ 13,756
=========
Deposits applied to capital lease obligations.......... $ 1,165
=========
</TABLE>
See accompanying notes
M-16
<PAGE> 737
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated (d/b/a Resurgens Communications Group)
("Resurgens") is a facilities-based international long-distance carrier
operating five long distance switch centers throughout the United States and
overseas, and has arrangements with domestic and foreign long distance carriers
for processing international calls. Resurgens primarily provides long distance
network services to U.S. based long distance carriers. Although there are a
number of domestic and foreign long distance carriers, a change in carriers
could disrupt Resurgens' ability to service its customers, which would result in
a possible loss of operating revenues. In August 1997 Resurgens began
experiencing a substantial decline in revenues, and in October 1997 Resurgens
began restructuring its network to improve quality and eliminate those costs not
necessary to implement Management's decision to focus its business efforts as a
carrier's carrier. Resurgens' bankruptcy filing (as described in Note 2) which
resulted in a substantial loss of customers and a corresponding write-off in
accounts receivable was an initial step in implementing the new business
strategy.
The combined financial statements presented herein also include financial
statements of Cherry Communications U.K. Limited ("Cherry U.K.") which is held
under common ownership. This subsidiary has licensing and operating agreements
for international telephone access in association with Resurgens. Cherry U.K.
records an administrative revenue fee derived solely from Resurgens, based on an
agreed upon percentage of operating expense, which is eliminated in these
combined financial statements.
In October 1996, WorldCom Network Services ("WorldCom") threatened to stop
providing private line services and switch services to Resurgens as a result of
Resurgens' failure to pay WorldCom. In response, Resurgens commenced a lawsuit
against WorldCom asserting various claims including substantial billing
disputes. Effective July 24, 1997 the Companies settled their litigation and
claims against WorldCom. The settlement resulted, among other things, in the
execution by Resurgens of two promissory notes in the aggregate principal amount
of $165,000 (terms of which are further described in Note 3), the issuance of
shares of Resurgens to WorldCom (representing 19.9% of outstanding shares) and
the executions of a pledge and security agreement for 51% of the outstanding
shares of Resurgens and 51% of the outstanding shares of Cherry U.K. This pledge
and security agreement gave WorldCom the ability to effectively control 71% and
51% of the voting common shares of Resurgens and Cherry U.K., respectively.
After this settlement was reached WorldCom, Resurgens, Cherry U.K., James
R. Elliott (owner of 80.1% of Resurgens and sole owner of Cherry U.K.), and John
D. Phillips entered into a series of agreements, effective October 1, 1997,
whereby John D. Phillips received an option to purchase ("call right") James R.
Elliott's common stock of the combined Companies (1,000 shares of Resurgens and
50,000 shares of Cherry U.K.) for $1,000 and James R. Elliott received the right
to require ("put right") John D. Phillips to purchase the common stock of the
companies for $1,000. John D. Phillips was also granted a revocable voting proxy
for all of the shares owned and controlled by WorldCom, thereby giving him
effective control of Resurgens and Cherry U.K. In conjunction with John D.
Phillips obtaining effective control of the Companies, Resurgens filed a
voluntary petition for relief under the provisions of Chapter 11 of the Federal
Bankruptcy Code. In addition, WorldCom agreed to provide debtor-in-possession
financing (see Note 5). Effective May 8, 1998, John D. Phillips closed on his
option and acquired all of the outstanding shares of common stock of Cherry U.K.
for $1,000. James R. Elliott's exercise of his put right related to the 1,000
shares of Resurgens stock has been enjoined by the Bankruptcy Court and the Plan
of Reorganization currently provides that Resurgens stockholders will receive no
consideration under the Plan.
M-17
<PAGE> 738
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Resurgens and
Cherry U.K. (which is commonly controlled) (collectively, the "Companies").
Cherry U.K. was purchased by the major shareholder of Resurgens in November
1995. Cherry U.K.'s financial statements are prepared on a March 31 fiscal year
end. For combination purposes, March 31, 1998 financial statements of Cherry
U.K. have been combined with the December 31, 1997 financial statements of
Resurgens. Significant intercompany accounts and transactions have been
eliminated in combination.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are generally computed using the straight-line method over the estimated useful
lives of the related assets as indicated below:
<TABLE>
<S> <C>
Telecommunications equipment.............................. 5-10 years
Furniture, fixtures and equipment......................... 4-5 years
Leasehold improvements.................................... Life of lease
</TABLE>
In the event facts and circumstances indicate the cost of any long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the assets would be compared to the carrying amount of the
assets to determine if a write down to fair value may be required.
REVENUE RECOGNITION
Revenues are derived primarily from the provision of long-distance
telecommunications services and are recognized when the services are provided.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The Companies intend to adopt the provisions of SFAS 130 in 1998 and do not
expect its application to have a material impact on the financial position or
results of operations of the Companies.
M-18
<PAGE> 739
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Companies to significant
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, accounts payable and long term debt.
The Companies maintain cash and cash equivalents and certain other
financial instruments with various financial institutions. The Companies' policy
is designed to limit exposure at any one institution by performing periodic
evaluations of the relative credit standing of those financial institutions.
Fair Value of Financial Instruments
The fair value of the Companies' financial instruments classified as
current assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable approximate carrying value, principally because
of the short maturity of these items.
The carrying amounts of the long-term debt payable approximate fair value
due to the interest rates on these agreements approximating the Companies'
incremental borrowing rates, and the fair values of capitalized lease
obligations approximate carrying value based on their effective interest rates
compared to current market rates.
SIGNIFICANT CUSTOMERS
The Companies' revenues are derived from a variety of customers including
one customer, which accounted for 19% of the Companies' revenues during 1997.
ADVERTISING COSTS
Pursuant to American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 93-7, "Reporting on Advertising Cost," the Companies
expensed advertising costs of $2,226 as incurred in 1997.
COST OF SERVICES AND PRODUCTS
Cost of services include payments primarily to local exchange carriers
("LECs") and interexchange carriers, primarily for access and transport charges.
INCOME TAXES
Due to Resurgens' conversion from a subchapter S Corporation to a C
Corporation as of August 1, 1997, Resurgens began accounting for income taxes
under the liability method. Under this method, deferred income taxes are
recorded to reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and the
amounts for income tax purposes.
For the period prior to August 1, 1997, all taxable losses were allocated
to the owners of Resurgens. Accordingly no income taxes are reflected for
Resurgens in the accompanying financial statements for the period prior to the
conversion. Cherry U.K. accounted for income taxes under the liability method
for fiscal 1997.
M-19
<PAGE> 740
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and such
differences could be material.
FOREIGN OPERATIONS
Summarized financial information for Cherry U.K. in US dollars, prior to
intercompany elimination, is:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
BALANCE SHEET
Current assets............................................ $ 792
Property and equipment.................................... 6,932
-------
Total assets...................................... 7,724
Current liabilities, including amount due to Resurgens of
$4,496.................................................... 6,337
Long-term debt.............................................. 3,996
-------
Total liabilities................................. 10,333
-------
Net deficiency.................................... $(2,609)
=======
STATEMENT OF OPERATIONS
Revenues.................................................. $ 2,848
Expenses.................................................. 3,665
=======
Net loss.......................................... $ (817)
=======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Translation adjustments arising from combining Cherry U.K. are reflected
within the statements of operations as the US dollar is the functional currency
of Cherry U.K.
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY
On October 24, 1997, Resurgens filed a voluntary petition for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code ("Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). Cherry U.K. was not included in this bankruptcy filing. Under Chapter
11, certain claims against Resurgens in existence prior to the filing for relief
under the federal bankruptcy laws are stayed while Resurgens continues business
operations as a Debtor-in-Possession subject to the supervision of the Court.
Management filed a plan of reorganization on June 15, 1998 which contemplates
emergence in the third quarter of 1998. There can be no assurance at this time
that a plan of reorganization will be approved or confirmed by the Bankruptcy
Court, or that such plan will be consummated.
After an exclusivity period, creditors of Resurgens have the right to
propose alternative plans of reorganization. Any plan of reorganization, among
other things, is likely to result in material dilution of the equity of existing
stockholders as a result of a possible issuance of equity to creditors or new
investors.
M-20
<PAGE> 741
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY -- (CONTINUED)
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 filing and circumstances relating to this event,
including Resurgens' leveraged financial structure and losses from operations,
such realization of assets and liquidation of liabilities is subject to
significant uncertainty. While under protection of Chapter 11, Resurgens may
sell or otherwise dispose of assets and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements. Further, a plan
of reorganization could materially change the amounts reported in the financial
statements. Accordingly such financial statements do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization or the inability of the
Companies to continue as a going concern.
The ability to continue as a going concern is dependent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
3. LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under the reorganization proceedings are identified below. These
amounts may be subject to future adjustment depending on the Court's action,
further developments with respect to disputed claims, determination as to the
value of any collateral securing claims, and other events. Additional claims may
arise resulting from rejection of additional executory contracts or unexpired
leases by Resurgens.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Accounts payable............................................ $136,095
Long-term debt.............................................. 168,545
Governmental entities....................................... 7,314
Former employees............................................ 2,485
Professional fees........................................... 2,098
Accrued interest............................................ 2,939
Other liabilities........................................... 17,275
--------
$336,751
========
</TABLE>
As a result of the bankruptcy filing, no principal or interest payments
will be made on any pre-petition debt without Court approval or until a
reorganization plan defining the repayment terms has been approved. Contractual
interest expense not recorded on certain pre-petition debt totaled $2,100 for
the period from October 24, 1997 through December 31, 1997.
M-21
<PAGE> 742
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIABILITIES SUBJECT TO COMPROMISE -- (CONTINUED)
LONG-TERM DEBT, SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
1997
--------
<S> <C>
WorldCom installment note due December 30, 1997, interest to
accrue at 18% for default of payment...................... $ 50,000
WorldCom installment note due July 23, 2000, bearing
interest at 10%. Interest only payments are due quarterly
beginning March 31, 1998 and payments of principal and
interest beginning October 23, 1998....................... 115,000
Illinois Capital Group installment note due September 1997,
bearing interest at 10% with monthly principal and
interest payments of $60. Penalty of $250 added to
principal for nonpayment of principal balance on due
date...................................................... 367
Esplanade at Locust Point installment note due June 1999,
with monthly payments of $100, including interest imputed
at 12.5%. Includes interest penalty of $894 added to
principal in 1998 due to nonpayments on account........... 3,008
Eastern Telecom installment note due on or before November
1, 1998 bearing interest at 8%............................ 170
--------
Total long-term debt, subject to compromise....... $168,545
========
</TABLE>
Under the two WorldCom installment notes, which are secured by
substantially all of the Companies' assets and stock of the Corporations, any
defaults allow WorldCom to charge interest at 18% annually on all outstanding
balances, and to request the entire indebtedness to become due. The Companies
have defaulted on the $50,000 note payable due December 30, 1997, and subsequent
to year end, defaulted on the March 31, 1998 interest payment due on the
$115,000 note. Remedies of default are not waived under this agreement by any
failure or delay by any party in exercising any remedy of default.
On April 2, 1996 Resurgens settled a litigation case with Illinois Capital
Group related to delinquent payments for leased switching equipment. In
connection with this settlement, a promissory note was executed for
approximately $1,300. The note required monthly payments beginning April 15,
1996 with a penalty amount of $250 if Resurgens did not make payments when due.
Resurgens ceased payment on this note in mid 1997 and therefore this penalty
amount has been added to the principal balance.
Resurgens entered into a settlement agreement with Esplanade at Locust
Point Limited Partnership ("Esplanade") on January 29, 1996 which released
Resurgens from litigation claims involving leased office space. In connection
with this settlement, a promissory note was issued in the amount of $4,000, with
monthly payments of $100 to begin in March 1996, with no interest. Resurgens
failed to remit the required monthly payments during 1997. The agreement stated
that an additional $1,000 would be assessed and due if the companies failed to
meet the required payment schedule. Esplanade filed a claim against Resurgens
for the outstanding balance of the loan plus the additional penalty amount.
Prior to December 31, 1997, a judgment was reached in this case and an
additional amount of $894 was granted to Esplanade. This amount is subject to an
interest rate of 12.5% and is included in the principal balance amount at
December 31, 1997.
The Eastern Telecom installment note was signed on August 1, 1997, based
upon judicial court settlement, for $190. The amount relates to non-performance
of a purchase agreement for switching equipment by Resurgens.
As part of the Chapter 11 reorganization process, Resurgens has attempted
to notify all known or potential creditors of the Chapter 11 filing for the
purpose of identifying all pre-petition claims against Resurgens. Generally,
creditors whose claims arose prior to the Petition Date had until February 6,
1998 ("Bar Date") to file claims or be barred from asserting claims in the
future. Claims arising from rejection of
M-22
<PAGE> 743
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIABILITIES SUBJECT TO COMPROMISE -- (CONTINUED)
executory contracts by Resurgens, and claims related to certain other items were
permitted to be filed within other dates as set by the Court.
Differences between amounts shown by Resurgens and claims filed by
creditors are being investigated and will either be resolved or adjudicated. The
ultimate amount of and settlement terms for such liabilities are subject to the
confirmed plan of reorganization and are not presently determinable. The total
amount of proofs of claims filed in Court approximate $434,000, while the amount
accrued by Resurgens at December 31, 1997 is $336,751. This difference of
approximately $95,000 pertains to claims that management believes to be
duplicate claims, amounts relating to outstanding litigation (See Note 11) and
other disputed claims for which management is unable to predict the ultimate
outcome of and therefore, no provision has been recorded in the financial
statements for this difference.
4. REORGANIZATION ITEMS
Reorganization items recorded in 1997 consisted of:
<TABLE>
<S> <C>
Rejected lease expense...................................... $ 956
Professional fees........................................... 233
Professional fees abated.................................... (524)
-----
$ 665
=====
</TABLE>
Professional fees incurred consisted of consulting and legal fees for
bankruptcy activity and restructuring efforts on behalf of Resurgens and the
creditor's committee.
5. DEBTOR-IN-POSSESSION (DIP) FINANCING
In November 1997, the Court authorized Resurgens to enter into a financing
agreement with WorldCom in order to facilitate continued operations as a
debtor-in-possession. The terms of this financing agreement originally provided
for maximum advances thereunder to $19,000 and required repayment on April 30,
1998 at 12% interest.
On April 16, 1998 the financing agreement was amended to provide for an
increased maximum amount of $25,000 and an extended term through July 31, 1998.
As of June 5, 1998, the Company had borrowed an additional $13,700.
6. CAPITALIZED LEASE OBLIGATIONS
The Companies lease telecommunications and other equipment through
capitalized lease arrangements.
M-23
<PAGE> 744
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITALIZED LEASE OBLIGATIONS -- (CONTINUED)
Future minimum lease payments on these capitalized lease obligations at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,930
1999........................................................ 10,499
2000........................................................ 10,382
2001........................................................ 9,966
2002........................................................ 5,493
--------
Net minimum lease payments........................ 43,270
Less amount representing interest........................... (8,820)
--------
Present value of minimum lease payments..................... 34,450
Less current portion of capitalized lease obligations....... (3,630)
--------
Long-term portion of capitalized lease obligations, not
subject to compromise..................................... $ 30,820
========
</TABLE>
The net carrying value of assets under capital leases was $35,900 at
December 31, 1997, and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
7. EMPLOYEE 401(K) PLAN
Effective January 1, 1997, Resurgens established a defined contribution
savings plan, intended to qualify under IRS Code Section 401(k), available to
all employees who complete six months of service and are at least age 21.
Employees may contribute up to 15% of their salary per year, subject to
statutory limitations, and Resurgens matches 100% of employee contributions up
to 5% of each employee's salary. Resurgens' matching contributions vest 20% per
year. Resurgens' expense under the plan during 1997 amounted to approximately
$98.
8. INCOME TAXES
For the period from inception through July 31, 1997, Resurgens elected to
have its income taxed directly to its individual shareholders under the
provisions of Subchapter S of the Internal Revenue Code ("the Code").
Accordingly, no deferred income taxes were established for Resurgens. Effective
August 1, 1997, the S-Corporation election was terminated due to a change in
ownership and Resurgens is now subject to federal and state income taxes. Upon
conversion to C corporation status, Resurgens recorded a net deferred tax asset
which was fully offset by the establishment of a valuation reserve. Accordingly,
no charge or benefit was made to the income tax provision to reflect the impact
of this change in tax status.
Effective August 1, 1997, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 109. With respect to
Cherry U.K., the accompanying financial statements reflect provisions for income
taxes calculated under the provisions of SFAS No. 109 since acquisition. For the
period prior to the change in tax status, the provision has been presented on a
pro forma basis as if Resurgens had been liable for federal and state income
taxes since January 1, 1997.
The Companies have generated significant net operating losses ("NOLs") both
in the United States and in the United Kingdom. These NOLs may be available to
offset future taxable income, subject to the limitations discussed below.
Resurgens has generated NOL carryforwards totaling $128,000 in the United
M-24
<PAGE> 745
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
States after the date of the conversion from S-Corporation to C-Corporation
status. Cherry U.K. has NOLs available at December 31, 1997 approximating $1,500
in the United Kingdom. The United States federal NOL generated in 1997 expires
in the year 2012, while the United Kingdom NOLs do not expire.
The significant components of the Companies' deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
AUGUST 1, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts........................... $ 2,846 $ 4,889
Net operating loss carry-forward.................. -- 48,871
Accruals.......................................... 341 319
Depreciation and amortization..................... 452 458
Contested liabilities............................. 31,064 6,825
Other............................................. 17 29
Valuation allowance............................... (29,347) (56,061)
------- -------
5,373 5,330
------- -------
Deferred tax liabilities:
Depreciation and amortization..................... 474 441
Installment sale.................................. 4,899 4,889
------- -------
5,373 5,330
------- -------
Net deferred assets....................... $ -- $ --
======= =======
</TABLE>
The pro forma reconciliation of income tax benefit attributable to
operations computed at the US federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Tax benefit at US statutory rate............................ $(58,079)
State income tax benefit.................................... (6,833)
Permanent differences....................................... 1,025
Change in valuation allowance............................... 63,887
--------
$ --
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Companies' offices, along with various equipment and property access
rights, are leased under operating leases expiring in 1998 through 2006. Certain
leases contain escalation clauses based upon increases in the consumer price
index.
M-25
<PAGE> 746
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Future minimum lease payments on noncancellable operating leases at
December 31 are as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
1998........................................................ $1,347
1999........................................................ 1,007
2000........................................................ 765
2001........................................................ 516
2002........................................................ 255
Thereafter.................................................. 568
------
Total future minimum lease payments............... $4,458
======
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately $3,538.
10. RELATED PARTY TRANSACTIONS
Effective April 1, 1997, Resurgens entered into a ten-year lease agreement
for an office building with shareholder related trusts. Until occupancy on or
about January 1, 1998, Resurgens is required to pay 50% of the monthly lease
amount or approximately $11 per month. For the year ended December 31, 1997, the
Companies recorded rent expense of $200 associated with this lease. In December
1997, Resurgens recorded a liability of $444 for rejecting the lease in
accordance with Chapter 11 provisions.
During fiscal 1997, Resurgens utilized WorldCom, a shareholder, for
transport services aggregating $27,834, which have been expensed by the
Companies in cost of service. The amount owed to WorldCom at December 31, 1997
is $188,992, of which $178,863 is recorded as liabilities subject to compromise.
Effective April 1998, Resurgens entered into a Carrier Service Agreement
with WorldCom pursuant to which WorldCom is obligated to purchase international
long distance services up to $25,000 a month provided the services are of
acceptable quality and the rates are at least equal to rates from other third
parties. The contract is for a one year initial term but automatically renews
each month, subject to a one year termination notice.
11. LITIGATION
The Companies are subject to numerous lawsuits, investigations and claims
(a number of which involve amounts that are material to these financial
statements) arising out of the conduct of its business, including those relating
to commercial transactions and regulatory matters. Such items generally relate
to claims made previous to Resurgens filing bankruptcy; therefore, the ultimate
liability of Resurgens is generally included in the liabilities subject to
compromise (see Note 3).
Resurgens is party to an action with AT&T in which AT&T filed suit against
Resurgens. Resurgens purchased long distance and international service from AT&T
from January 1996 through February 1997, and disputed the accuracy of certain
charges which prompted AT&T to terminate all services. AT&T seeks in excess of
$16,000 for alleged unpaid services. Resurgens has filed a counterclaim against
AT&T, alleging offset claims for the full amount of AT&T's claims, resulting
from alleged inaccurate billing by AT&T. Resurgens also alleges false and
deceptive advertising claims, unfair competition and deceptive business
practices claims against AT&T. Resurgens has recorded all disputed invoices
aggregating $16,528 and cannot predict the ultimate outcome of this case.
Resurgens is party to an action with MidCom Communications Inc. (MidCom).
Resurgens initially sued MidCom during 1996 and MidCom subsequently filed a case
against Resurgens. Resurgens sold a portion of its commercial customer base to
MidCom during 1995, but did not receive the full payment for the customer
M-26
<PAGE> 747
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. LITIGATION -- (CONTINUED)
base and sued MidCom for $16,200. MidCom filed a counter suit against the
Company asserting that Resurgens' actions related to the sale of the customer
base allegedly breached the contract, violated the Uniform Commercial Code, and
constituted tortious interference with the contract. MidCom filed a $36,000
proof of claim in Resurgens' bankruptcy case. The litigation of both parties has
been stayed and remanded to a bankruptcy court hearing. Given the uncertainty of
this matter, Management is unable to predict the ultimate outcome of this case
and accordingly, has not accrued any liability for this claim.
Coast to Coast Plus, Inc., a former customer, filed suit in November 1996
alleging that it suffered $10,000 in damages from Resurgens' "wrongful"
termination of its long-distance telecommunications services and overbillings
for services Resurgens did not provide. Resurgens filed an answer denying
liability and filed a counterclaim and a third party claim against the
principals of Coast to Coast which asserted four claims: two RICO claims, a
fraud claim, and a breach of contract, including $250 owed for long-distance
services. Management is unable to predict the ultimate outcome of this case and
accordingly, has not accrued any liability for this claim.
First Premier Bank asserted a claim for approximately $44,000 against
Cherry Payment Systems and Dallas Leasing Group, which are companies that were
merged into Resurgens in prior years, for non-payment on past due loans. First
Premier Bank did not file a proof of claim as of the bar date with the Court and
therefore management does not believe it is obligated for this amount. Given the
uncertainty of this asserted claim, Management can not predict the ultimate
outcome of this matter and accordingly, has not accrued any liability for this
claim.
The Companies are also involved in other claims, inquiries and litigation
arising in the ordinary course of business. The Companies believe that these
matters, taken individually or in the aggregate, would not have a material
adverse impact on the Companies' financial position or results of operations.
12. SUBSEQUENT EVENTS
On May 12, 1998 the Companies and World Access, Inc. ("World Access") entered
into a merger agreement whereby World Access will acquire the Companies. The
agreement is subject to, among other things, Bankruptcy Court approval, certain
monthly revenue and gross margin levels, confirmation of Resurgens' Plan of
Reorganization and World Access shareholder approval. Pursuant to the terms of
the agreements, the creditors of Resurgens and shareholders of Cherry U.K. will
receive 3,125,000 and 625,000 shares of World Access common stock, respectively,
in the aggregate at the closing of the mergers. In addition, Resurgens'
creditors and Cherry U.K. shareholders would have the right to receive
additional consideration of up to 6,250,000 and 1,250,000 shares of World Access
common stock, respectively, over the next two and one-half years contingent upon
the achievement of certain financial criteria by the Companies.
M-27
<PAGE> 748
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
AUDITED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... M-29
Audited Financial Statements
Combined Balance Sheet as of December 31, 1996.............. M-30
Combined Statements of Operations for the years ended
December 31, 1995 and 1996................................ M-31
Combined Statement of Stockholder's Equity (Deficit) for the
two years ended December 31, 1996......................... M-32
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996................................ M-33
Notes to Combined Financial Statements...................... M-34
</TABLE>
M-28
<PAGE> 749
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
CHERRY COMMUNICATIONS INCORPORATED AND CHERRY COMMUNICATIONS U.K. LIMITED
We have audited the accompanying balance sheet of Cherry Communications
Incorporated and Cherry Communications U.K. Limited (collectively referred to as
the "Companies") as of December 31, 1996 and the related combined statements of
operations, stockholder's equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Cherry
Communications Incorporated and Cherry Communications U.K. Limited as of
December 31, 1996, and the combined results of their operations and their
combined cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. As discussed in Notes 2 and 9 to the
financial statements, the Companies incurred substantial losses in 1995 and 1996
and have disputed significant net accounts payable balances due their primary
vendor. Although the dispute has been settled, as discussed in Note 10, and 1996
balances payable have been reduced, significant balances converted to notes
payable remain. The Companies' ability to obtain an equity infusion or
replacement financing for these notes is limited by the terms and collateral
arrangements of the settlement. The terms of the settlement agreement will
continue the Companies' dependence on this vendor as one of the Companies'
primary long distance carriers. These matters raise substantial doubt about the
Companies' ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. Continuation of the Companies is
dependent upon the Companies' ability to return to profitability and to achieve
sufficient cash flow from operations, additional debt or equity. The
accompanying combined statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Companies be
unable to continue as a going concern.
/s/ GRANT THORNTON LLP
Chicago, Illinois
July 11, 1997, except for Notes 2 and 10,
as to which the date is July 24, 1997
M-29
<PAGE> 750
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT FOR SHARE
INFORMATION)
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 4,836
Accounts receivable
Trade, net of allowance for doubtful accounts of
$41,346................................................ 42,275
Other..................................................... 392
--------
42,667
Prepaid expenses and other................................ 1,170
--------
Total current assets.............................. 48,673
Property and equipment, net................................. 40,447
Other assets
Deposits and other assets, net............................ 3,760
--------
Total assets...................................... $ 92,880
========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<S> <C>
Current liabilities
Current portion of long-term debt......................... $ 12,230
Current portion of capitalized lease obligations.......... 5,083
Accounts payable.......................................... 198,760
Accrued excise and other taxes............................ 3,967
Accrued expenses.......................................... 4,910
Accrued litigation costs.................................. 892
Other liabilities......................................... 500
--------
Total current liabilities......................... 226,342
Long-term obligations
Capitalized lease obligations, less current portion....... 18,272
Long-term debt, less current portion...................... 1,634
--------
Total liabilities................................. 246,248
Commitments and contingencies............................... --
Stockholder's equity (deficit)
Common stock, Cherry Communications Incorporated, no par
value, authorized 10,000 shares, issued and outstanding
1,000 shares........................................... 1
Common stock, Cherry Communications U.K. Limited, no par
value, authorized and issued 50,000 shares............. 84
Additional paid-in capital................................ 61,467
Accumulated deficit....................................... (214,920)
--------
Total stockholder's equity (deficit).............. (153,368)
--------
Total liabilities and stockholder's equity
(deficit)......................................... $ 92,880
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
M-30
<PAGE> 751
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues
Carrier long distance..................................... $ 41,646 $ 315,699
Commercial long distance.................................. 24,215 19,739
Residential long distance................................. 12,940 7,857
Other income.............................................. 2,868 9,710
-------- ---------
Total operating revenues.......................... 81,669 353,005
Operating expenses
Cost of services and products............................. 80,982 391,615
Selling, general and administrative expenses.............. 20,447 32,622
Provision for doubtful accounts........................... 6,032 32,004
-------- ---------
Total operating expenses.......................... 107,461 456,241
-------- ---------
Operating loss.................................... (25,792) (103,236)
Other income (expense)
Interest and finance charges.............................. (2,142) (15,299)
Gain on sale of customer base............................. 5,486 1,339
Loss on disposition of property and equipment............. -- (394)
Loss on disposition of investment securities.............. -- (643)
Other income.............................................. 278 93
-------- ---------
Total other expense, net.......................... 3,622 (14,904)
-------- ---------
Loss before income tax expense.................... (22,170) (118,140)
Income tax expense.......................................... 5 10
-------- ---------
Net loss.......................................... $(22,175) $(118,150)
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
M-31
<PAGE> 752
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE TWO YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CHERRY CHERRY
COMMUNICATIONS COMMUNICATIONS
INCORPORATED U.K. LIMITED UNREALIZED TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL GAIN ON STOCKHOLDER'S
--------------- --------------- PAID-IN ACCUMULATED INVESTMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES (DEFICIT)
------ ------ ------ ------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.............. 1,000 $1 -- $-- $35,672 $ (73,045) $ -- $ (37,372)
Stockholder's contribution of notes
payable and accrued interest payable
of $500............................. -- -- -- -- 25,795 -- -- 25,795
Stockholder's acquisition of common
stock of Cherry Communications U.K.
Limited, November 1995.............. -- -- 50,000 84 -- (1,550) -- (1,466)
Unrealized gain on investment
securities.......................... -- -- -- -- -- -- 476 476
Net loss.............................. -- -- -- -- -- (22,175) -- (22,175)
----- -- ------ --- ------- --------- ----- ---------
Balance, December 31, 1995............ 1,000 1 50,000 84 61,467 (96,770) 476 (34,742)
Change in unrealized gain on
investment securities............... -- -- -- -- -- -- (476) (476)
Net loss.............................. -- -- -- -- -- (118,150) -- (118,150)
----- -- ------ --- ------- --------- ----- ---------
Balance, December 31, 1996............ 1,000 $1 50,000 $84 $61,467 $(214,920) $ -- $(153,368)
===== == ====== === ======= ========= ===== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
M-32
<PAGE> 753
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(22,175) $(118,150)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposition of investment securities............ -- 643
Depreciation and amortization........................... 1,118 4,923
Loss on disposition of property and equipment........... -- 394
Gain on sale of customer base........................... (5,486) (1,339)
Increase in receivables................................. (25,672) (15,276)
Increase in prepaid expenses and other.................. (234) (936)
Increase in accounts payable............................ 53,996 146,311
Increase in accrued excise and other taxes.............. 1,913 1,269
Increase in accrued expenses............................ 2,359 2,308
Decrease in accrued litigation costs.................... (5,846) (2,816)
Increase in other liabilities........................... 346 154
-------- ---------
Total adjustments.................................. 22,494 135,635
-------- ---------
Net cash provided by operating activities.......... 319 17,485
Cash flows from investing activities:
Proceeds from sale of customer base....................... 2,486 1,339
Proceeds from sales of investment securities.............. 423 --
Purchases of property and equipment....................... (5,106) (8,141)
Deposits and other assets................................. (1,192) (835)
-------- ---------
Net cash used in investing activities.............. (3,389) (7,637)
Cash flows from financing activities:
Proceeds from notes payable............................... 1,378 313
Payments on notes payable................................. (698) (1,174)
Payments on capitalized lease obligations................. (1,608) (7,010)
Increase in notes payable to stockholder.................. 5,336 --
-------- ---------
Net cash provided by (used in) financing
activities........................................ 4,408 (7,871)
-------- ---------
Net increase in cash and cash equivalents.......... 1,338 1,977
Cash and cash equivalents, beginning of year................ 1,521 2,859
-------- ---------
Cash and cash equivalents, end of year...................... $ 2,859 $ 4,836
======== =========
Supplemental disclosure of cash flow information:
Interest and finance charges.............................. $ 856 $ 2,193
Income taxes paid......................................... 4 12
Supplemental schedule of noncash investing and financing
activities:
Assets received in settlement of accounts receivable...... $ 3,000 $ 1,880
Investment securities assigned to vendors................. -- 2,357
Accounts payable converted into notes payable............. 9,002 --
Capitalized lease obligations incurred.................... 6,195 24,803
Contribution of notes payable and accrued interest to
equity.................................................. 25,795 --
Unrealized gain on investment securities.................. 476 (476)
Decrease in contingency reserve through issuance of notes
payable................................................. -- (4,258)
</TABLE>
The accompanying notes are an integral part of these financial statements.
M-33
<PAGE> 754
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated ("Cherry") commenced operations in 1991
as a successor through merger of five businesses operating in the payment
processing and credit authorization industry, including leasing of bank card
processing machinery. During 1992, Cherry discontinued the operations of the
five businesses and began the new business of a non-switch-based reseller of
long distance services to residential and commercial customers throughout the
United States. In late 1994, Cherry acquired its first long distance switch. As
of December 31, 1996, Cherry is a switch-based carrier operating nine long
distance switch centers throughout the United States and overseas, and has
arrangements with foreign carriers for processing of international calls. Cherry
provides its long distance network services to resellers, agents and end users
consisting of business and residential customers. At December 31, 1996, Cherry
primarily uses one long distance carrier, WorldCom, Inc., as its major long
distance carrier. Although there are a number of long distance carriers, a
change in carriers could disrupt Cherry's ability to service its customers,
which could result in a possible loss of operating revenues.
The combined financial statements presented herein also include financial
statements of Cherry Communications U.K. Limited ("Cherry U.K.") which is held
under common ownership. This affiliate has licensing and operating agreements
for international telephone access in association with Cherry.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Cherry and Cherry
U.K. (collectively, the "Companies"). Cherry U.K. was purchased by the
shareholder of Cherry in November 1995. Cherry U.K.'s financial statements are
prepared on a March 31 fiscal year end. For combination purposes, Cherry U.K.'s
financial statements as of and for the year ended March 31, 1997 and for the
period ended March 31, 1996 have been combined with the December 31, 1996 and
1995 financial statements of Cherry, respectively. Significant intercompany
accounts and transactions have been eliminated in combination.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents
consist of money market fund investments and short-term certificates of deposit.
Exclusive of cash in banks, cash equivalents at December 31, 1996 approximate
fair value. At December 31, 1996, the Companies' certificates of deposits
approximated $2,176,000. The certificates of deposit are collateral for the
Companies' line of credit agreement (note 4).
INVESTMENTS
Short-term investments are comprised of equity securities. Investment
securities are classified as available-for-sale and are stated at fair value as
determined by quoted prices on exchanges. During the year ending December 31,
1996, all of the Companies' investment securities were transferred to the
Companies' primary vendor in partial settlement of outstanding line charges. The
fair value of these securities at the date of transfer approximated $2,357,000.
The Companies recognized a loss of $643,000 from the transfer. During the year
ending December 31, 1995, proceeds from the sale of investment securities was
$423,000 with no realized gain or loss recognized.
M-34
<PAGE> 755
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are generally computed using the straight-line method over the estimated useful
lives of the related assets.
INCOME TAXES
Income taxes on net taxable earnings are payable personally by the
stockholder, pursuant to an election under Subchapter S of the Internal Revenue
Code, which states Cherry is not taxed as a corporation. Accordingly, no
provision has been made for Federal income taxes for Cherry. Cherry U.K. income
taxes are not material to the combined financial statements.
REVENUE RECOGNITION
Revenues are recorded upon placing of calls or rendering of other related
services.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Companies to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified because the Companies' customer base includes many entities spread
across a large geographic area. The Companies routinely address the financial
strength of its customers and, as a consequence, believe that its receivable
credit risk exposure is limited.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FOREIGN OPERATIONS
Summarized financial information (in thousands of U.S. dollars) for Cherry
U.K., prior to intercompany eliminations, is:
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Current assets.............................................. $ 712
Property and equipment...................................... 1,633
-------
Total assets...................................... 2,345
Current liabilities, including amount due to Cherry of
$2,952.................................................... 4,137
-------
Net deficiency.................................... $(1,792)
=======
</TABLE>
M-35
<PAGE> 756
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1997 1996
---------- ------------
<S> <C> <C>
Revenues.................................................... $2,377 $ 809
Expenses.................................................... 2,214 1,293
------ ------
Net income (loss)................................. $ 163 $ (484)
====== ======
</TABLE>
The functional currency of Cherry U.K. is the U.S. dollar. Consequently,
gains or losses from remeasurement of Cherry U.K.'s accounts are recognized in
operations.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Companies will continue as a going concern. The Companies have sustained
significant losses in 1995 and 1996, and has a deficit in stockholder's equity
of approximately $153.4 million at December 31, 1996. As discussed in Note 9 --
Litigation, the Companies have various disputes with carriers for out-bound and
in-bound line charges which affect timing and amounts of collections and
payments. The most significant of these disputes is with WorldCom, Inc.
("WorldCom"), historically the Companies' primary carrier. As discussed in Note
10 -- Subsequent Events, the dispute with WorldCom has been settled as of July
24, 1997, resulting in, among other matters, a settlement of outstanding net
liabilities of $202,415,000 at July 15, 1997 ($175,633,000 at December 31, 1996)
for $165,000,000 in notes. The first new note of $50,000,000 is due on December
31, 1997. The second new note of $115,000,000 is due in quarterly installments
commencing October 23, 1998 through June 23, 2000, with interest payable
quarterly at 10% per annum.
Other terms of the settlement require the Companies to continue to pledge
all assets as collateral for the notes, except for equipment under capitalized
lease obligations; the Companies will issue shares representing 19.9% ownership
to WorldCom; and the sole shareholder must pledge 51% of total outstanding
shares as collateral. WorldCom will subordinate its collateral position up to
$100,000,000 for new borrowings by the Company if 75% of the proceeds from a
single new borrowing of up to $70.0 million or 50% of the proceeds from a single
new borrowing over $70.0 million are used to pay WorldCom.
These developments continue to have a material adverse effect and limit
their Companies' ability to meet their obligations as they come due and to
obtain financing or an equity infusion. The Companies' actions to address their
current liquidity constraints and their financial performance include
negotiations with potential lenders or equity participants. However, there can
be no assurances that the Companies' actions will improve their financial
performance or liquidity position or that they can avoid default on the December
31, 1997 payment of the $50,000,000 note obligation.
M-36
<PAGE> 757
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation consist of the
following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-------------
<S> <C> <C>
Equipment under capitalized lease obligations:
Telecommunications equipment.............................. $31,052 5-10 years
Other..................................................... 2,150 7 years
-------
33,202
Furniture, fixtures and equipment........................... 13,227 4-5 years
Leasehold improvements...................................... 1,457 Life of lease
-------
Total property and equipment...................... 47,886
Less accumulated depreciation and amortization.............. 7,439
-------
Net property and equipment........................ $40,447
=======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995
and 1996 was $1,068,000 and $4,226,000, respectively.
NOTE 4. LONG-TERM DEBT
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
WorldCom installment note (Note 1) due December, 1995,
bearing interest at 12%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. $ 679
WorldCom installment note (Note 2) due January, 1996,
bearing interest at 16%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. 8,323
WorldCom installment note (Note 3) due December, 1995,
bearing interest at 10%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. 1,378
Illinois Capital Group installment note due September, 1997,
bearing interest at 10% with monthly principal and
interest payments of $60,500.............................. 519
Esplanade at Locust Point installment note due June, 1999,
with monthly payments of $100,000, including interest
imputed at 12.5%.......................................... 2,565
First National Bank of Wheaton $400,000 (as of December 31,
1996) line of credit bearing interest at the prime rate
(8.5% as of December 31, 1996). The line of credit is due
upon demand and is collateralized by certificates of
deposits and general business assets...................... 400
-------
Total long-term obligations................................. 13,864
Less current portion of long-term debt...................... 12,230
-------
Long-term portion of long-term debt......................... $ 1,634
=======
</TABLE>
- ---------------
(1) See Note 10 -- Subsequent Events.
In January 1996, Cherry and Esplanade at Locust Point ("Esplanade") entered
into an agreement as a settlement on an office property lease. As part of the
$5,000,000 settlement, Cherry agreed to pay Esplanade
M-37
<PAGE> 758
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LONG-TERM DEBT -- (CONTINUED)
$1,000,000 on February 9, 1996 and then make 40 monthly payments of $100,000
beginning March 1996. Interest on the note was imputed at a rate of 12.5% as no
interest rate was explicitly stated in the agreement.
In March, 1996, Cherry entered into an agreement with Illinois Capital
Group ("ICG") as a settlement on equipment leases sold to ICG. Under the terms
of the agreement, Cherry is to make 17 equal monthly payments of $60,500,
including interest stated at 10% commencing April 15, 1996, with the final
payment of approximately $56,900 in principal and interest due on September 15,
1997. In the event Cherry or the shareholder interferes with existing leases
under the security agreement, an additional $250,000 penalty provision is due
ICG.
Principal amounts due under all of these debt arrangements at December 31,
1996 mature as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $12,230
1998........................................................ 1,055
1999........................................................ 579
-------
$13,864
=======
</TABLE>
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Companies' financial instruments classified as
current assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable and accrued expenses approximate carrying
value, principally because of the short maturity of these items.
The carrying amounts of the long-term debt payable approximates fair value
due to the interest rates on these agreements approximating Cherry's incremental
borrowing rates.
The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
NOTE 6. CAPITALIZED LEASE OBLIGATIONS
The Companies lease telecommunications and other equipment through various
equipment lease financing facilities. Such leases have been accounted for as
capitalized lease obligations in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases."
M-38
<PAGE> 759
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. CAPITALIZED LEASE OBLIGATIONS -- (CONTINUED)
Future minimum lease payments on these capitalized lease obligations (in
thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................................ $ 7,869
1998........................................................ 7,431
1999........................................................ 7,155
2000........................................................ 6,174
2001........................................................ 1,782
Thereafter.................................................. --
-------
Net minimum lease payments........................ 30,411
Less amount representing interest........................... 7,056
-------
Present value of minimum lease payments..................... 23,355
Less current portion of capitalized lease obligations....... 5,083
-------
Long-term portion of capitalized lease obligations.......... $18,272
=======
</TABLE>
The net carrying value of assets under capital leases was $30,083,000 at
December 31, 1996, and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
NOTE 7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Companies' offices, along with various equipment and roof access
rights, are leased under operating leases expiring in 1997 through 2006. Certain
leases contain escalation clauses based upon increases in the consumer price
index.
Future minimum lease payment on noncancellable operating leases (in
thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................................ $1,744
1998........................................................ 1,328
1999........................................................ 935
2000........................................................ 767
2001........................................................ 636
Thereafter.................................................. 2,170
------
$7,580
======
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996, was $972,000
and $2,062,000, respectively.
USAGE AND DEDICATED CIRCUIT AGREEMENTS
The Companies have entered into agreements with various long distance
providers which require minimum usage. The Companies have also entered into
agreements with various long distance carriers for dedicated circuits. These
agreements guarantee the provider a base monthly charge regardless of the actual
volume of usage or use of dedicated circuits by the Companies or their
customers.
M-39
<PAGE> 760
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
Effective April 1, 1997, Cherry entered into a ten-year lease agreement for
an office building with shareholder related trusts. Until occupancy on or about
January 1, 1998, Cherry is required to pay 50% of the monthly lease amount or
approximately $11,000 per month. Lease payment terms, as determined by
independent appraisers, over the ten-year period range from $265,000 to $345,000
annually. At December 31, 1996, Cherry had recorded an initial deposit of
$100,000 for the lease. Tenant finish and other improvements to the office
facility are expected to approximate $4,000,000.
NOTE 9. LITIGATION
The Companies are subject to a number of lawsuits, investigations and
claims (some of which involve substantial amounts) arising out of the conduct of
their business, including those relating to commercial transactions and
regulatory matters. One such lawsuit was brought by Cherry against Digital
Communications of America, WorldCom Network Services Inc. and WorldCom Inc.
(collectively referred to as "WorldCom"), asserting various claims including
substantial billing disputes. WorldCom asserted various counterclaims.
Subsequent to December 31, 1996, the parties reached a settlement. See Note
10 -- Subsequent Events.
Cherry is also party to an action with AT&T in which AT&T filed suit
against Cherry. Cherry purchased long distance and international service from
AT&T from January, 1996 through February, 1997. Cherry disputed the accuracy of
certain charges and AT&T terminated all services. AT&T seeks $17.2 million for
alleged unpaid services. Cherry has counterclaimed against AT&T, alleging offset
claims for the full amount of AT&T's claims, resulting from alleged inaccurate
billing by AT&T. Cherry also alleges false and deceptive advertising claims,
unfair competition and deceptive business practices claims against AT&T. The
litigation is at an early stage. Parties have not yet engaged in discovery.
Cherry has recorded all disputed invoices.
In addition, the Companies are also party to an action with a U.K.-based
carrier in which the carrier filed suit in the U.K. against the Companies. The
Companies purchased international service from this carrier from February, 1996
through April, 1997. The carrier seeks approximately $5.0 million for alleged
unpaid services and finance charges. The litigation is at an early stage. The
Companies recorded all of the carrier's invoices.
The Companies are also involved in other litigation concerning significant
collection matters, some of which have resulted in counterclaims. Based on
advice of counsel, the Companies believe such matters will be resolved within
the limits of its collection reserves.
Coast to Coast Plus, Inc., a former carrier customer, filed suit in
November, 1996 alleging that it suffered $10 million in damages from Cherry's
"wrongful" termination of its long-distance telecommunication services and
overbillings for services Cherry did not provide. Cherry filed an answer denying
liability and filed a counterclaim and a third party claim against the
principals of Coast to Coast which asserted four claims: two RICO claims, a
fraud claim, and a breach of contract, including $250,000 owed for long-distance
services. Deposition and discovery is underway. Based on advice of counsel,
Cherry believes this litigation will not have a material effect on the combined
financial position.
The Companies are also involved in other miscellaneous claims, inquiries
and litigation arising in the ordinary course of business. The Companies believe
that these matters, taken individually or in the aggregate, would not have a
material adverse impact on the Companies' combined financial position or results
of operations.
M-40
<PAGE> 761
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. SUBSEQUENT EVENTS
Effective April 1, 1997, Cherry entered into a new lease with a related
party for new office facilities. See Note 8 -- Related Party Transactions.
On July 2, 1997, Cherry entered into a letter of intent with EqualNet
Holding Corp. ("EqualNet") for a proposed business transaction expected to be a
merger of the Company into EqualNet, with Cherry's stockholder retaining 91% of
the combined entity. The transaction is expected to be treated as a reverse
purchase acquisition and is subject to due diligence, shareholder approval and
certain other preconditions.
Effective July 24, 1997, Cherry settled its litigation and claims against
WorldCom. The settlement provides for, among other matters, the following:
(1) All claims of both parties as of July 15, 1997 (estimated by
Cherry to be approximately $202.4 million net accounts, notes and interest
payable) to be converted to two notes payable in the individual amounts of
$50.0 million and $115.0 million. The first note of $50.0 million is
non-interest bearing and due December 31, 1997. The second note of $115.0
million is due in quarterly installments commencing October 23, 1998
through July 23, 2000. Interest is payable at 10% per annum and is due on
March 31, 1998, June 30, 1998, July 23, 1998 and quarterly thereafter.
(2) WorldCom is granted continued security interests in all of the
assets of Cherry, except for the limited security interest granted to
Cherry's bank up to $2.0 million.
(3) The sole shareholder executes a pledge and security agreement
granting a first-priority interest in 51% of the outstanding shares of
Cherry subject to anti-dilution provisions.
(4) On August 1, 1997, Cherry is required to issue common shares
equivalent to 19.9% of the then-outstanding shares of Cherry to WorldCom,
also subject to anti-dilution provisions.
(5) Similar pledge (51%) agreement requirement applies to the
shareholder's interest in Cherry U.K..
(6) WorldCom will subordinate its security interests up to $100.0
million for new borrowings if certain proceeds of such borrowings are
remitted to WorldCom (75% for a single borrowing up to $70.0 million or 50%
for a single borrowing over $70 million).
(7) If Cherry repays both notes by December 30, 1997, it or its
nominee may repurchase the transferred shares totaling 19.9% for $10.
Cherry has reflected the settlement reduction of net payables of
approximately $37.4 million as a reduction of disputed costs and finance charges
of $11.4 million and $26.0 million for the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively.
M-41
<PAGE> 762
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS NEW
AND NACT WORLD ACCESS
NACT MINORITY COMBINED AND
WORLD INTEREST ("NEW WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS") RESURGENS ADJUSTMENTS COMBINED
-------- ------------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable securities.................... 3,500 -- 3,500 -- -- 3,500
Accounts receivable...................... 41,819 -- 41,819 3,354 -- 45,173
Inventories.............................. 34,473 -- 34,473 -- -- 34,473
Other current assets..................... 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current Assets............... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and equipment.................... 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill.................................. 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology....................... 4,400(A) 4,400 -- -- 4,400
Other assets.............................. 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total Assets....................... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable......................... 23,087 -- 23,087 19,731 -- 42,818
Other accrued liabilities................ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current Liabilities.......... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt............................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities.................... 1,564 1,700(A) 3,264 29,050 -- 32,314
Minority interests........................ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.................. 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock............................. 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of par value........... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit...................... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity......... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................ $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
TELCO AND TELCO
TELCO ADJUSTMENTS COMBINED
-------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 11,601 $ -- $ 63,891
Marketable securities.................... 2,200 -- 5,700
Accounts receivable...................... 16,974 -- 62,147
Inventories.............................. 23,209 (4,500)(E) 53,182
Other current assets..................... 954 -- 20,859
-------- -------- ---------
Total Current Assets............... 54,938 (4,500) 205,779
Property and equipment.................... 8,383 (2,800)(E) 83,912
Goodwill.................................. 7,617 30,125(E) 192,988
Acquired technology....................... -- 56,400(E) 60,800
Other assets.............................. -- 23,400(E) 65,915
-------- -------- ---------
Total Assets....................... $ 70,938 $102,625 $ 609,394
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ -- $ -- $ 7,950
Accounts payable......................... 4,357 -- 47,175
Other accrued liabilities................ 12,635 6,650(E) 41,441
-------- -------- ---------
Total Current Liabilities.......... 16,992 6,650 96,566
Long-term debt............................ -- -- 115,529
Noncurrent liabilities.................... 991 24,900(E) 58,205
Minority interests........................ -- -- --
-------- -------- ---------
Total Liabilities.................. 17,983 31,550 270,300
Stockholders' Equity
Common stock............................. 110 (110)(F) 340
65(E)
Capital in excess of par value........... 79,017 (79,017)(F) 469,485
197,865(E)
Accumulated deficit...................... (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- ---------
Total Stockholders' Equity......... 52,955 71,075 339,094
-------- -------- ---------
Total Liabilities and Stockholders'
Equity............................ $ 70,938 $102,625 $ 609,394
======== ======== =========
</TABLE>
M-42
<PAGE> 763
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
-------- ----------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents........ $ 57,653 $ -- $57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable
securities......... 3,500 -- 3,500 -- -- 3,500
Accounts receivable... 41,819 -- 41,819 3,354 -- 45,173
Inventories........... 34,473 -- 34,473 -- -- 34,473
Other current
assets............. 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current
Assets...... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and
equipment............. 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill................ 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology..... 4,400(A) 4,400 -- -- 4,400
Other assets............ 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total
Assets...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable...... 23,087 -- 23,087 19,731 -- 42,818
Other accrued
liabilities........ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt.......... 115,529 -- 115,529 -- -- 115,529
Noncurrent
liabilities........... 1,564 1,700(A) 3,264 29,050 32,314
Minority interests...... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities... 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock.......... 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of
par value.......... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity...... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
</TABLE>
M-43
<PAGE> 764
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD TELCO TELCO
ACCESS ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
-------- ----------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents........ $ 57,653 $ -- $ 57,653 $ 11,601 $ -- $ 69,254
Marketable securities....... 3,500 -- 3,500 2,200 -- 5,700
Accounts receivable......... 41,819 -- 41,819 16,974 -- 58,793
Inventories................. 34,473 -- 34,473 23,209 (4,500)(E) 53,182
Other current assets........ 15,429 -- 15,429 954 -- 16,383
-------- -------- -------- -------- -------- --------
Total Current
Assets............. 152,874 -- 152,874 54,938 (4,500) 203,312
Property and equipment........ 17,203 -- 17,203 8,383 (2,800)(E) 22,786
Goodwill...................... 74,378 9,617(A) 83,995 7,617 30,125(E) 121,737
Acquired technology........... 4,400(A) 4,400 -- 56,400(E) 60,800
Other assets.................. 24,063 -- 24,063 -- 23,400(E) 47,463
-------- -------- -------- -------- -------- --------
Total Assets......... $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............. $ 4,408 $ -- $ 4,408 $ -- $ -- $ 4,408
Accounts payable............ 23,087 -- 23,087 4,357 -- 27,444
Other accrued liabilities... 12,913 -- 12,913 12,635 6,650(E) 32,198
-------- -------- -------- -------- -------- --------
Total Current
Liabilities........ 40,408 -- 40,408 16,992 6,650 64,050
Long-term debt................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities........ 1,564 1,700(A) 3,264 991 24,900(E) 29,155
Minority interests............ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.... 169,944 (10,743) 159,201 17,983 31,550 208,734
Stockholders' Equity
Common stock................ 219 20(A) 239 110 (110)(F) 304
65(E)
Capital in excess of par
value..................... 133,286 46,640(A) 179,926 79,017 (79,017)(F) 377,791
197,865(E)
Accumulated deficit......... (34,931) (21,900)(B) (56,831) (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- -------- -------- -------- --------
Total Stockholders'
Equity............. 98,574 24,760 123,334 52,955 71,075 247,364
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders'
Equity............. $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
</TABLE>
M-44
<PAGE> 765
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT
MINORITY NEW
WORLD INTEREST WORLD
ACCESS ADJUSTMENTS ACCESS
-------- ------------- --------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents................................... $ 57,653 $ -- $ 57,653
Marketable securities.................................. 3,500 -- 3,500
Accounts receivable.................................... 41,819 -- 41,819
Inventories............................................ 34,473 -- 34,473
Other current assets................................... 15,429 -- 15,429
-------- -------- --------
Total Current Assets........................... 152,874 -- 152,874
Property and equipment................................... 17,203 -- 17,203
Goodwill................................................. 74,378 9,617(A) 83,995
Acquired technology...................................... 4,400(A) 4,400
Other assets............................................. 24,063 -- 24,063
-------- -------- --------
Total Assets................................... $268,518 $ 14,017 $282,535
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................ $ 4,408 $ -- $ 4,408
Accounts payable....................................... 23,087 -- 23,087
Other accrued liabilities.............................. 12,913 -- 12,913
-------- -------- --------
Total Current Liabilities...................... 40,408 -- 40,408
Long-term debt........................................... 115,529 -- 115,529
Noncurrent liabilities................................... 1,564 1,700(A) 3,264
Minority interests....................................... 12,443 (12,443)(A) --
-------- -------- --------
Total Liabilities.............................. 169,944 (10,743) 159,201
Stockholders' Equity
Common stock........................................... 219 20(A) 239
Capital in excess of par value......................... 133,286 46,640(A) 179,926
Accumulated deficit.................................... (34,931) (21,900)(B) (56,831)
-------- -------- --------
Total Stockholders' Equity..................... 98,574 24,760 123,334
-------- -------- --------
Total Liabilities and Stockholders' Equity..... $268,518 $ 14,017 $282,535
======== ======== ========
</TABLE>
M-45
<PAGE> 766
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS
WORLD TELCO AND TELCO
ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.......................... $ 57,653 $11,601 $ -- $ 69,254
Marketable securities......................... 3,500 2,200 -- 5,700
Accounts receivable........................... 41,819 16,974 -- 58,793
Inventories................................... 34,473 23,209 (4,500)(E) 53,182
Other current assets.......................... 15,429 954 -- 16,383
-------- ------- --------- ---------
Total Current Assets.................. 152,874 54,938 (4,500) 203,312
Property and equipment.......................... 17,203 8,383 (2,800)(E) 22,786
Goodwill........................................ 74,378 7,617 30,125(E) 112,120
Acquired technology............................. 56,400(E) 56,400
Other assets.................................... 24,063 -- 23,400(E) 47,463
-------- ------- --------- ---------
Total Assets.......................... $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
Current Liabilities
Short-term debt............................... $ 4,408 $ -- $ -- $ 4,408
Accounts payable.............................. 23,087 4,357 -- 27,444
Other accrued liabilities..................... 12,913 12,635 6,650(E) 32,198
-------- ------- --------- ---------
Total Current Liabilities............. 40,408 16,992 6,650 64,050
Long-term debt.................................. 115,529 -- -- 115,529
Noncurrent liabilities.......................... 1,564 991 24,900(E) 27,455
Minority interests.............................. 12,443 -- -- 12,443
-------- ------- --------- ---------
Total Liabilities..................... 169,944 17,983 31,550 219,477
Stockholders' Equity
Common stock.................................. 219 110 (110)(F) 284
65(E)
Capital in excess of par value................ 133,286 79,017 (79,017)(F) 331,151
197,865(E)
Accumulated deficit........................... (34,931) (26,172) 26,172(F) (108,831)
(73,900)(G)
-------- ------- --------- ---------
Total Stockholders' Equity............ 98,574 52,955 71,075 222,604
-------- ------- --------- ---------
Total Liabilities and Stockholders'
Equity.............................. $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
</TABLE>
M-46
<PAGE> 767
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
WORLD NACT NACT NACT
ACCESS MAJORITY MAJORITY MINORITY
WORLD ATI AND ATI INTEREST INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED NACT ADJUSTMENTS COMBINED ADJUSTMENTS
-------- ------ ----------- -------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 69,830 $826... $ -- $ 70,656 $ 1,175 $ -- $71,831
Service revenues.......... 13,408 -- -- 13,408 1,160 -- 14,568 $ --
-------- ------ ------- -------- ------- -------- ------- -------
Total Sales.............. 83,238 826 -- 84,064 2,335 -- 86,399 --
Cost of products sold..... 39,012 631... -- 39,643 755 190(D) 40,588 90(H)
Cost of services.......... 12,189 -- -- 12,189 1,220 -- 13,409 --
-------- ------ ------- -------- ------- -------- ------- -------
Total Cost of Sales...... 51,201 631 -- 51,832 1,975 190 53,997 90
Gross Profit............. 32,037 195 -- 32,232 360 (190) 32,402 (90)
Engineering and
development.............. 2,582 241 -- 2,823 504 -- 3,327 --
Selling, general and
administrative........... 7,936 349 -- 8,285 1,369 -- 9,654 --
Amortization of
goodwill................. 1,882 --.... 16(A) 1,898 39 360(E) 2,297 240(I)
-- -- -- -- --
In-process research and
development.............. 50,000 -- (5,400)(B) 44,600 -- (44,600)(F) -- --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240 --
-------- ------ ------- -------- ------- -------- ------- -------
Operating Income (Loss).. (33,603) (395) 5,384 (28,614) (1,552) 44,050 13,884 (330)
Interest and other
income................... 1,971 -- -- 1,971 -- -- 1,971 --
Interest and other
expense.................. (3,031) (18) -- (3,049) -- -- (3,049) --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Income Taxes and
Minority Interests..... (34,663) (413) 5,384 (29,692) (1,552) 44,050 12,806 (330)
Income taxes.............. 6,135 -- (140)(C) 5,995 (620) -- 5,375 --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Minority Interests..... (40,798) (413) 5,524 (35,687) (932) 44,050 7,431 (330)
Minority interests in
earnings of subsidiary... 1,533 -- -- 1,533 -- (305)(G) 1,228 (1,228)(J)
-------- ------ ------- -------- ------- -------- ------- -------
Net Income (Loss)........ $(42,331) $ (413) $ 5,524 $(37,220) $ (932) $ 44,355 $ 6,203 $ 898
======== ====== ======= ======== ======= ======== ======= =======
Net Income (Loss) Per
Common Share
Basic....................
Diluted..................
Weighted Average Shares
Outstanding
Basic....................
Diluted..................
<CAPTION>
NEW NEW
WORLD WORLD
ACCESS ACCESS,
NEW AND RESURGENS
WORLD RESURGENS RESURGENS TELCO AND TELCO
ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 71,831 $ -- $ -- $ 71,831 $54,552 $ -- $ 126,383
Service revenues.......... 14,568 10,377 -- 24,945 -- -- 24,945
-------- -------- ------- -------- ------- ------- ---------
Total Sales.............. 86,399 10,377 -- 96,776 54,552 -- 151,328
Cost of products sold..... 40,678 -- -- 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services.......... 13,409 27,028 -- 40,437 -- 40,437
-------- -------- ------- -------- ------- ------- ---------
Total Cost of Sales...... 54,087 27,028 -- 81,115 32,969 3,405 117,489
Gross Profit............. 32,312 (16,651) -- 15,661 21,583 (3,405) 33,839
Engineering and
development.............. 3,327 -- -- 3,327 7,809 -- 11,136
Selling, general and
administrative........... 9,654 10,404 620(L) 20,678 11,974 460(R) 33,112
Amortization of
goodwill................. 2,537 -- 1,780(M) 4,317 406 (160)(S) 5,363
-- -- -- 800(T)
In-process research and
development.............. -- -- -- -- 5,135 (5,135)(U) --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240
-------- -------- ------- -------- ------- ------- ---------
Operating Income (Loss).. 13,554 (27,055) (2,400) (15,901) (3,741) 630 (19,012)
Interest and other
income................... 1,971 4 -- 1,975 323 -- 2,298
Interest and other
expense.................. (3,049) (2,224) -- (5,273) -- -- (5,273)
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Income Taxes and
Minority Interests..... 12,476 (29,275) (2,400) (19,199) (3,418) 630 (21,987)
Income taxes.............. 5,375 -- (5,375)(N) -- 100 (100)(V) --
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Minority Interests..... 7,101 (29,275) 2,975 (19,199) (3,518) 730 (21,987)
Minority interests in
earnings of subsidiary... -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- ---------
Net Income (Loss)........ $ 7,101 $(29,275) $ 2,975 $(19,199) $(3,518) $ 730 $ (21,987)
======== ======== ======= ======== ======= ======= =========
Net Income (Loss) Per
Common Share
Basic.................... $ (0.67)(X)
=========
Diluted.................. $ (0.67)(X)
=========
Weighted Average Shares
Outstanding
Basic.................... 32,724(X)
=========
Diluted.................. 32,724(X)
=========
</TABLE>
M-47
<PAGE> 768
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY ACCESS AND
INTEREST INTEREST NEW WORLD RESURGENS RESURGENS
COMBINED ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
------------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products..................... $71,831 $ -- $71,831 $ -- $ -- $ 71,831
Service revenues...................... 14,568 -- 14,568 10,377 -- 24,945
------- ------- ------- -------- ------- --------
Total Sales......................... 86,399 -- 86,399 10,377 -- 96,776
Cost of products sold................. 40,588 90(H) 40,678 -- -- 40,678
Cost of services...................... 13,409 -- 13,409 27,028 -- 40,437
------- ------- ------- -------- ------- --------
Total Cost of Sales................. 53,997 90 54,087 27,028 -- 81,115
Gross Profit........................ 32,402 (90) 32,312 (16,651) -- 15,661
Engineering and development........... 3,327 -- 3,327 -- -- 3,327
Selling, general and administrative... 9,654 -- 9,654 10,404 620(L) 20,678
Amortization of goodwill.............. 2,297 240(I) 2,537 -- 1,780(M) 4,317
Special charges....................... 3,240 -- 3,240 -- -- 3,240
------- ------- ------- -------- ------- --------
Operating Income (Loss)............. 13,884 (330) 13,554 (27,055) (2,400) (15,901)
Interest and other income............. 1,971 -- 1,971 4 -- 1,975
Interest and other expense............ (3,049) -- (3,049) (2,224) -- (5,273)
------- ------- ------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests............ 12,806 (330) 12,476 (29,275) (2,400) (19,199)
Income taxes.......................... 5,375 -- 5,375 -- (5,375)(N) --
------- ------- ------- -------- ------- --------
Income (Loss) Before Minority
Interests......................... 7,431 (330) 7,101 (29,275) 2,975 (19,199)
Minority interests in earnings of
subsidiary.......................... 1,228 (1,228)(J) -- -- -- --
------- ------- ------- -------- ------- --------
Net Income (Loss)................... $ 6,203 $ 898 $ 7,101 $(29,275) $ 2,975 $(19,199)
======= ======= ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................... $ (0.73)(O)
========
Diluted............................. $ (0.73)(O)
========
Weighted Average Shares Outstanding
Basic............................... 26,220(O)
========
Diluted............................. 26,220(O)
========
</TABLE>
M-48
<PAGE> 769
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
NACT NACT NEW
MAJORITY MINORITY WORLD ACCESS
INTEREST INTEREST NEW TELCO AND TELCO
COMBINED ADJUSTMENTS WORLD ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------------- ------------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $71,831 $ -- $71,831 $54,552 $ -- $126,383
Service revenues........................ 14,568 -- 14,568 -- -- 14,568
------- ------ ------- ------- ------- --------
Total Sales........................... 86,399 -- 86,399 54,552 -- 140,951
Cost of products sold................... 40,588 90(H) 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services........................ 13,409 -- 13,409 -- 13,409
------- ------ ------- ------- ------- --------
Total Cost of Sales................... 53,997 90 54,087 32,969 3,405 90,461
Gross Profit.......................... 32,402 (90) 32,312 21,583 (3,405) 50,490
Engineering and development............. 3,327 -- 3,327 7,809 -- 11,136
Selling, general and administrative..... 9,654 -- 9,654 11,974 460(R) 22,088
Amortization of goodwill................ 2,297 240(I) 2,537 406 (160)(S) 3,583
800(T)
In-process research and development..... -- -- -- 5,135 (5,135)(U) --
Special charges......................... 3,240 -- 3,240 -- -- 3,240
------- ------ ------- ------- ------- --------
Operating Income (Loss)............... 13,884 (330) 13,554 (3,741) 630 10,443
Interest and other income............... 1,971 -- 1,971 323 -- 2,294
Interest expense........................ (3,049) -- (3,049) -- -- (3,049)
------- ------ ------- ------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 12,806 (330) 12,476 (3,418) 630 9,688
Income taxes............................ 5,375 -- 5,375 100 (1,655)(W) 3,820
------- ------ ------- ------- ------- --------
Income (Loss) Before Minority
Interests........................... 7,431 (330) 7,101 (3,518) 2,285 5,868
Minority interests in earnings of
subsidiary............................ 1,228 (1,228)(J) -- -- -- --
------- ------ ------- ------- ------- --------
Net Income (Loss)..................... $ 6,203 $ 898 $ 7,101 $(3,518) $ 2,285 $ 5,868
======= ====== ======= ======= ======= ========
Net Income Per Common Share
Basic................................. $ 0.20(X)
========
Diluted............................... $ 0.19(X)
========
Weighted Average Shares Outstanding
Basic................................. 28,974(X)
========
Diluted............................... 30,655(X)
========
</TABLE>
M-49
<PAGE> 770
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
NACT NACT
MAJORITY MINORITY NEW
INTEREST INTEREST WORLD
COMBINED ADJUSTMENTS ACCESS
------------- ----------- -------
<S> <C> <C> <C>
Sales of products......................................... $71,831 $ -- $71,831
Service revenues.......................................... 14,568 -- 14,568
------- ------- -------
Total Sales............................................. 86,399 -- 86,399
Cost of products sold..................................... 40,588 90(H) 40,678
Cost of services.......................................... 13,409 -- 13,409
------- ------- -------
Total Cost of Sales..................................... 53,997 90 54,087
Gross Profit............................................ 32,402 (90) 32,312
Engineering and development............................... 3,327 -- 3,327
Selling, general and administrative....................... 9,654 -- 9,654
Amortization of goodwill.................................. 2,297 240(I) 2,537
Special charges........................................... 3,240 -- 3,240
------- ------- -------
Operating Income........................................ 13,884 (330) 13,554
Interest and other income................................. 1,971 -- 1,971
Interest expense.......................................... (3,049) -- (3,049)
------- ------- -------
Income Before Income Taxes and Minority Interests....... 12,806 (330) 12,476
Income taxes.............................................. 5,375 -- 5,375
------- ------- -------
Income Before Minority Interests........................ 7,431 (330) 7,101
Minority interests in earnings of subsidiary.............. 1,228 (1,228)(J) --
------- ------- -------
Net Income.............................................. $ 6,203 $ 898 $ 7,101
======= ======= =======
Net Income Per Common Share
Basic................................................... $ 0.32(K)
=======
Diluted................................................. $ 0.30(K)
=======
Weighted Average Shares Outstanding
Basic................................................... 22,470(K)
=======
Diluted................................................. 23,969(K)
=======
</TABLE>
M-50
<PAGE> 771
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND WORLD
NACT MAJORITY ACCESS AND
INTEREST TELCO TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products............................... $71,831 $54,552 $ -- $126,383
Service revenues................................ 14,568 -- -- 14,568
------- ------- ------- --------
Total Sales................................... 86,399 54,552 -- 140,951
Cost of products sold........................... 40,588 32,969 (120)(P) 76,962
3,525(Q)
Cost of services................................ 13,409 -- 13,409
------- ------- ------- --------
Total Cost of Sales........................... 53,997 32,969 3,405 90,371
Gross Profit.................................. 32,402 21,583 (3,405) 50,580
Engineering and development..................... 3,327 7,809 -- 11,136
Selling, general and administrative............. 9,654 11,974 460(R) 22,088
Amortization of goodwill........................ 2,297 406 (160)(S) 3,343
800(T)
In-process research and development............. -- 5,135 (5,135)(U) --
Special charges................................. 3,240 -- -- 3,240
------- ------- ------- --------
Operating Income.............................. 13,884 (3,741) 630 10,773
Interest and other income....................... 1,971 323 -- 2,294
Interest expense................................ (3,049) -- -- (3,049)
------- ------- ------- --------
Income Before Income Taxes and Minority
Interests.................................. 12,806 (3,418) 630 10,018
Income taxes.................................... 5,375 100 (1,655)(W) 3,820
------- ------- ------- --------
Income Before Minority Interests.............. 7,431 (3,518) 2,285 6,198
Minority interests in earnings of subsidiary.... 1,228 -- -- 1,228
------- ------- ------- --------
Net Income.................................... $ 6,203 $(3,518) $ 2,285 $ 4,970
======= ======= ======= ========
Net Income Per Common Share
Basic......................................... $ 0.18(X)
========
Diluted....................................... $ 0.17(X)
========
Weighted Average Shares Outstanding
Basic......................................... 26,947(X)
========
Diluted....................................... 28,627(X)
========
</TABLE>
M-51
<PAGE> 772
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
WORLD NACT NACT
ACCESS NACT MAJORITY MAJORITY
WORLD ATI AND ATI MAJORITY INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED
------- -------- ----------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $71,392 $ 13,687 $ (150)(A) $ 84,929 $24,502 $ -- $109,431
Service revenues................. 21,593 -- -- 21,593 5,493 -- 27,086
------- -------- ------- -------- ------- ------- --------
Total Sales..................... 92,985 13,687 (150) 106,522 29,995 -- 136,517
Cost of products sold............ 43,827 13,586 (70)(A) 57,343 7,569 370(D) 65,282
Cost of services................. 17,018 -- -- 17,018 5,756 -- 22,774
------- -------- ------- -------- ------- ------- --------
Total Cost of Sales............. 60,845 13,586 (70) 74,361 13,325 370 88,056
Gross Profit.................... 32,140 101 (80) 32,161 16,670 (370) 48,461
Engineering and development...... 1,862 4,283 -- 6,145 2,761 -- 8,906
Selling, general and
administrative.................. 9,000 6,265 -- 15,265 6,913 -- 22,178
Amortization of goodwill......... 1,756 -- 200(B) 1,956 573 2,150(E) 4,679
------- -------- ------- -------- ------- ------- --------
Operating Income (Loss)......... 19,522 (10,447) (280) 8,795 6,423 (2,520) 12,698
Interest and other income........ 2,503 64 -- 2,567 734 -- 3,301
Interest and other expense....... (1,355) -- -- (1,355) (19) -- (1,374)
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests..................... 20,670 (10,383) (280) 10,007 7,138 (2,520) 14,625
Income taxes..................... 7,536 -- (3,800)(C) 3,736 2,757 -- 6,493
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Minority
Interests..................... 13,134 (10,383) 3,520 6,271 4,381 (2,520) 8,132
Minority Interests in Earnings of
Subsidiary...................... -- -- -- -- -- (1,433)(F) (1,433)
------- -------- ------- -------- ------- ------- --------
Net Income (Loss)............... $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,953) $ 6,699
======= ======== ======= ======== ======= ======= ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
NACT WORLD ACCESS
MINORITY AND
INTEREST NEW RESURGENS RESURGENS TELCO
ADJUSTMENTS WORLD ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS
----------- ------------ --------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $ -- $109,431 $ -- $ -- $ 109,431 $113,013 $ --
Service revenues................. -- 27,086 165,489 -- 192,575 -- --
------ -------- --------- ------- --------- -------- --------
Total Sales..................... -- 136,517 165,489 -- 302,006 113,013 --
Cost of products sold............ 180(G) 65,462 -- -- 65,462 72,638 (240)(O)
7,050(P)
Cost of services................. -- 22,774 246,494 1,230(K) 270,498 -- --
------ -------- --------- ------- --------- -------- --------
Total Cost of Sales............. 180 88,236 246,494 1,230 335,960 72,638 6,810
Gross Profit.................... (180) 48,281 (81,005) (1,230) (33,954) 40,375 (6,810)
Engineering and development...... -- 8,906 -- -- 8,906 14,927 --
Selling, general and
administrative.................. -- 22,178 74,448 -- 96,626 28,181 925(Q)
Amortization of goodwill......... 480(H) 5,159 -- 3,560(L) 8,719 669 (669)(R)
1,500(S)
------ -------- --------- ------- --------- -------- --------
Operating Income (Loss)......... (660) 12,038 (155,453) (4,790) (148,205) (3,402) (8,566)
Interest and other income........ -- 3,301 642 -- 3,943 692 --
Interest and other expense....... -- (1,374) (16,909) -- (18,283) -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (660) 13,965 (171,720) (4,790) (162,545) (2,710) (8,566)
Income taxes..................... -- 6,493 -- (6,493)(M) -- -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Minority
Interests..................... (660) 7,472 (171,720) 1,703 (162,545) (2,710) (8,566)
Minority Interests in Earnings of
Subsidiary...................... 1,433(I) -- -- -- -- -- --
------ -------- --------- ------- --------- -------- --------
Net Income (Loss)............... $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545) $ (2,710) $ (8,566)
====== ======== ========= ======= ========= ======== ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
AND TELCO
COMBINED
--------------
<S> <C>
Sales of products................ $ 222,444
Service revenues................. 192,575
---------
Total Sales..................... 415,019
Cost of products sold............ 144,910
Cost of services................. 270,498
---------
Total Cost of Sales............. 415,408
Gross Profit.................... (389)
Engineering and development...... 23,833
Selling, general and
administrative.................. 125,732
Amortization of goodwill......... 10,219
---------
Operating Income (Loss)......... (160,173)
Interest and other income........ 4,635
Interest and other expense....... (18,283)
---------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (173,821)
Income taxes..................... --
---------
Income (Loss) Before Minority
Interests..................... (173,821)
Minority Interests in Earnings of
Subsidiary...................... --
---------
Net Income (Loss)............... $(173,821)
=========
Net Income (Loss) Per Common
Share
Basic........................... $ (5.54)(U)
=========
Diluted......................... $ (5.54)(U)
=========
Weighted Average Shares
Outstanding
Basic........................... 31,380(U)
=========
Diluted......................... 31,380(U)
=========
</TABLE>
M-52
<PAGE> 773
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NEW
NACT NACT WORLD ACCESS
MAJORITY MINORITY AND
INTEREST INTEREST NEW RESURGENS RESURGENS
COMBINED ADJUSTMENTS WORLD ACCESS RESURGENS ADJUSTMENTS COMBINED
-------- ----------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products...................... $109,431 $ -- $109,431 $ -- $ -- $ 109,431
Service revenues....................... 27,086 -- 27,086 165,489 -- 192,575
-------- ------ -------- --------- ------- ---------
Total Sales.......................... 136,517 -- 136,517 165,489 -- 302,006
Cost of products sold.................. 65,282 180(G) 65,462 -- -- 65,462
Cost of services....................... 22,774 -- 22,774 246,494 1,230(K) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales.................. 88,056 180 88,236 246,494 1,230 335,960
Gross Profit......................... 48,461 (180) 48,281 (81,005) (1,230) (33,954)
Engineering and development............ 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative.... 22,178 -- 22,178 74,448 -- 96,626
Purchased research and development..... -- -- -- -- -- --
Amortization of goodwill............... 4,679 480(H) 5,159 -- 3,560(L) 8,719
-------- ------ -------- --------- ------- ---------
Operating Income (Loss).............. 12,698 (660) 12,038 (155,453) (4,790) (148,205)
Interest and other income.............. 3,301 -- 3,301 642 -- 3,943
Interest and other expense............. (1,374) -- (1,374) (16,909) -- (18,283)
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Income Taxes and
Minority Interests................. 14,625 (660) 13,965 (171,720) (4,790) (162,545)
Income taxes........................... 6,493 -- 6,493 -- (6,493)(M) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests.......................... 8,132 (660) 7,472 (171,720) 1,703 (162,545)
Minority Interests in Earnings of
Subsidiary........................... (1,433) 1,433(I) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss).................... $ 6,699 $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545)
======== ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................ $ (6.53)(N)
=========
Diluted.............................. $ (6.53)(N)
=========
Weighted Average Shares Outstanding
Basic................................ 24,875(N)
=========
Diluted.............................. 24,875(N)
=========
</TABLE>
M-53
<PAGE> 774
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY NEW ACCESS
INTEREST INTEREST WORLD TELCO AND TELCO
COMBINED ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
------------ ----------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $109,431 $ -- $109,431 $113,013 $ -- $222,444
Service revenues........................ 27,086 -- 27,086 -- -- 27,086
-------- ------ -------- -------- ------- --------
Total Sales........................... 136,517 -- 136,517 113,013 -- 249,530
Cost of products sold................... 65,282 180(G) 65,462 72,638 (240)(O) 144,910
7,050(P)
Cost of services........................ 22,774 -- 22,774 -- -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales................... 88,056 180 88,236 72,638 6,810 167,684
Gross Profit.......................... 48,461 (180) 48,281 40,375 (6,810) 81,846
Engineering and development............. 8,906 -- 8,906 14,927 -- 23,833
Selling, general and administrative..... 22,178 -- 22,178 28,181 925(Q) 51,284
Amortization of goodwill................ 4,679 480(H) 5,159 669 (669)(R) 6,659
1,500(S)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)............... 12,698 (660) 12,038 (3,402) (8,566) 70
Interest and other income............... 3,301 -- 3,301 692 -- 3,993
Interest and other expense.............. (1,374) -- (1,374) -- -- (1,374)
-------- ------ -------- -------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 14,625 (660) 13,965 (2,710) (8,566) 2,689
Income taxes............................ 6,493 -- 6,493 -- (3,890)(T) 2,603
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests........................... 8,132 (660) 7,472 (2,710) (4,676) 86
Minority Interests in Earnings of
Subsidiary............................ (1,433) 1,433(I) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss)..................... $ 6,699 $ 773 $ 7,472 $ (2,710) $(4,676) $ 86
======== ====== ======== ======== ======= ========
Net Income Per Common Share
Basic................................. $ 0.00(U)
========
Diluted............................... $ 0.00(U)
========
Weighted Average Shares Outstanding
Basic................................. 27,630(U)
========
Diluted............................... 29,095(U)
========
</TABLE>
M-54
<PAGE> 775
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT
MAJORITY MINORITY
INTEREST INTEREST NEW
COMBINED ADJUSTMENTS WORLD ACCESS
------------- ----------- --------------
<S> <C> <C> <C>
Sales of products..................................... $109,431 $ -- $109,431
Service revenues...................................... 27,086 -- 27,086
-------- ----- --------
Total Sales......................................... 136,517 -- 136,517
Cost of products sold................................. 65,282 180(G) 65,462
Cost of services...................................... 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................. 88,056 180 88,236
Gross Profit........................................ 48,461 (180) 48,281
Engineering and development........................... 8,906 -- 8,906
Selling, general and administrative................... 22,178 -- 22,178
Purchased research and development.................... -- -- --
Amortization of goodwill.............................. 4,679 480(H) 5,159
-------- ----- --------
Operating Income.................................... 12,698 (660) 12,038
Interest and other income............................. 3,301 -- 3,301
Interest and other expense............................ (1,374) -- (1,374)
-------- ----- --------
Income Before Income Taxes and Minority Interests... 14,625 (660) 13,965
Income taxes.......................................... 6,493 -- 6,493
-------- ----- --------
Income Before Minority Interests.................... 8,132 (660) 7,472
Minority Interests in Earnings of Subsidiary.......... (1,433) 1,433(I) --
-------- ----- --------
Net Income.......................................... $ 6,699 $ 773 $ 7,472
======== ===== ========
Net Income Per Common Share
Basic............................................... $ 0.35(J)
========
Diluted............................................. $ 0.33(J)
========
Weighted Average Shares Outstanding
Basic............................................... 21,125(J)
========
Diluted............................................. 22,591(J)
========
</TABLE>
M-55
<PAGE> 776
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT
MAJORITY WORLD ACCESS
INTEREST TELCO AND TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
-------------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Sales of products................. $109,431 $113,013 $ -- $222,444
Service revenues.................. 27,086 -- -- 27,086
-------- -------- ------- --------
Total Sales..................... 136,517 113,013 -- 249,530
Cost of products sold............. 65,282 72,638 (240)(O) 144,730
7,050(P)
Cost of services.................. 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales............. 88,056 72,638 6,810 167,504
Gross Profit.................... 48,461 40,375 (6,810) 82,026
Engineering and development....... 8,906 14,927 -- 23,833
Selling, general and
administrative.................. 22,178 28,181 925(Q) 51,284
Amortization of goodwill.......... 4,679 669 (669)(R) 6,179
1,500(S)
-------- -------- ------- --------
Operating Income (Loss)......... 12,698 (3,402) (8,566) 730
Interest and other income......... 3,301 692 -- 3,993
Interest and other expense........ (1,374) -- -- (1,374)
-------- -------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests.................... 14,625 (2,710) (8,566) 3,349
Income taxes...................... 6,493 -- (3,890)(T) 2,603
-------- -------- ------- --------
Income (Loss) Before Minority
Interests.................... 8,132 (2,710) (4,676) 746
Minority Interests in Earnings of
Subsidiary...................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)............... $ 6,699 $ (2,710) $(4,676) $ (687)
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic........................... $ (0.03)(U)
========
Diluted......................... $ (0.03)(U)
========
Weighted Average Shares
Outstanding
Basic........................... 25,602(U)
========
Diluted......................... 25,602(U)
========
</TABLE>
M-56
<PAGE> 777
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
GENERAL HISTORICAL INFORMATION:
ACQUISITIONS OF ATI AND NACT
The ATI acquisition consummated on January 29, 1998 and the NACT Stock
Purchase consummated on February 27, 1998 have been accounted for under the
purchase method of accounting. The historical consolidated financial statements
of New World Access include the results of the operations of ATI and NACT from
February 1, 1998 and March 1, 1998, respectively. The purchase price of ATI and
the majority interest in NACT was allocated to the fair values of the net assets
acquired, to in-process research and development projects and to goodwill.
During the first quarter of 1998, $5.4 million and $44.6 million of purchased
in-process research and development technologies related to the ATI acquisition
and the NACT Stock Purchase, respectively, was expensed in accordance with the
applicable accounting rules. See Note 2 to Consolidated Financial Statements in
the World Access June 30 Form 10-Q for further descriptions of these
acquisitions.
AEROTEL LITIGATION
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT alleging that
telephone systems manufactured and sold by NACT incorporating prepaid debit card
features infringe upon Aerotel's patent which was issued in November 1987. See
Note 8 to Consolidated Financial Statements in the World Access June 30 Form
10-Q for further description of this litigation.
As part of the negotiations relating to the acquisition of NACT, World
Access and GST Telecommunications, Inc. agreed to share evenly any Aerotel
judgment against NACT, including NACT's legal fees. Subsequent to the NACT Stock
Purchase, World Access has been actively engaged in settlement negotiations. On
July 9, 1998, World Access, GST and Aerotel entered into a Memorandum of
Understanding to settle the Aerotel litigation. Including legal fees, World
Access now estimates its Aerotel settlement costs will be approximately $3.3
million. The settlement costs expected to be incurred by World Access have been
accounted for as additional NACT purchase price as of June 30, 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT
Overview. The nature of the efforts required to develop the purchased
in-process technology into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were
discounted back to their net present value. The resulting projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to such projects. These estimates were based on
several assumptions, including those summarized below for each respective
acquisition.
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed the sales and profitability
of New World Access may be adversely affected in future periods. Additionally,
the value of other intangible assets may become impaired.
NACT. NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been
M-57
<PAGE> 778
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
attained. Failure to attain technological feasibility, especially given the high
degree of customization required for complete integration into the NACT
solution, would have rendered partially designed hardware and software useless
for other applications. Incomplete design of hardware and software coding would
create a non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite. The purchased in-process technology acquired in the NACT
acquisition was comprised of nine projects related to switching systems. These
projects were scheduled to be released between February 1998 and December 1999.
Most major projects had several ongoing sub-projects (e.g., a hardware design
project and a software design project). These projects included significant
redevelopment of some existing products and the creation of new products. The
research and development projects were at various stages of development. None of
the in-process projects considered in the write-off had attained technological
feasibility.
NACT had thirteen projects (the nine switching projects noted above and the
related sub projects) in development at the time of acquisition. These projects
were at multiple stages along NACT's development timeline. Some projects were
beginning testing in NACT labs; others were at earlier stages of planning and
designing. Eleven projects were scheduled for release between February and
December of 1998. The remaining two projects were scheduled for staggered
release over 1998 and 1999. Revenue projections for the in-process technologies
reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the twelve-year projection at annual rates ranging from
52.7% to 7.2%, decreasing over the remaining years at annual rates ranging from
- -2.7% to -61.2% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $6.3 million to a high of $117.2 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base, synergies as a result of the NACT acquisition, and movement into
new markets. Projected revenues from in-process technology were assumed to peak
in 2002 and decline from 2003 through 2009 as other new products are expected to
enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 119.2% to a low of 11.0% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $1.7 million to $34
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
M-58
<PAGE> 779
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $4.1 million in the
aggregate through the year 1999 ($3,249,000 in 1998 and $829,000 in 1999). The
expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
ATI. ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained. Failure to attain technological feasibility would have rendered
partially designed equipment useless for other applications. ATI's products are
designed for specific frequency bandwidths and, as such, are highly customized
to those bandwidths and the needs of customers wishing to operate in them.
Products only partially completed for certain bandwidths cannot be used in other
bandwidths.
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased-in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave/millimeter radio equipment. Each project
consists of multiple products. These projects were at multiple stages along
ATI's typical development timeline. Some projects were beginning testing in ATI
labs; others were at earlier stages of planning and designing. The majority of
the products were scheduled to be released during 1998 and 1999. Revenue
projections for the in-process technologies reflected the anticipated release
dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from -30.9% to -60.9% as other products are
released in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $10.1 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base, synergies as a result of the
ATI acquisition, and movement into new markets. Projected revenues from
in-process technology were assumed to peak in 2001 and decline from 2003 through
2004 as other new products are expected to enter the market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately a low of -$900,000 to
a high of $9.1 million within the term of the projections.
The discount rate used to value the existing technology of ATI was 23.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
Management estimates that the costs to develop the in-process technology
acquired in the ATI acquisition will be approximately $24.3 million in the
aggregate through the year 2002 ($3.3 million, $7.2
M-59
<PAGE> 780
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
million, $7.6 million, $5.1 million, and $1.1 million in 1998, 1999, 2000, 2001,
and 2002, respectively). The expected sources of funding were scheduled R&D
expenses from the operating budget of ATI provided by the operating assets and
liabilities of ATI.
Telco. Telco develops and manufactures products focused on providing
integrated access for network services. Telco's products can be separated into
three categories: (1) broadband transmission products, (2) network access
products, and (3) bandwidth optimization products. Telco's products are deployed
at the edge of the service provider's networks to provide organizations with a
flexible, cost-effective means of transmitting voice, data, video and image
traffic over public or private networks.
At the time of acquisition, Telco had eight primary projects in development
relating to next-generation telecommunication and data network hardware. These
projects were at various stages in the development process. Some were about to
enter the testing phase of the initial hardware prototype, while others were
still in the early concept and design specification stages. These eight projects
were scheduled for commercial release at various points in time from December
1998 through late 1999/early 2000.
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
None of the in-process projects at Telco considered in the write-off are
expected to achieve technological feasibility before the consummation of World
Access' acquisition of Telco. Furthermore, if the projects are not completed as
planned, the in-process research and development will have no alternative use.
Failure of the in process technologies to achieve technological feasibility may
adversely affect the future profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 195% to a low of zero growth, reflecting both the
displacement of Telco's old products by these new products as well as the
expected growth in the overall market in which Telco's products compete.
Thereafter, revenues are projected to decline over the remaining projection
period at annual rates ranging from -14% to -42%, as the acquired in process
technologies become obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $28
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
of Telco (and subsequently World Access) was projected to grow over the first
five years of the projection period at annual rates ranging from a high of 142%
to a low of 20% with one intermediate year of marginally declining operating
income. Thereafter, the contribution to operating income was projected to
decline through the projection period. The acquired in-process technology's
contribution to operating income ranged from a loss of approximately $5 million
to a high of approximately $86 million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology, and
the risk associated with the financial assumptions with respect to the
projections used in the analysis.
The discount rate used to value the in-process technologies was 25.0%. This
discount rate was selected due to several incremental inherent risks. First the
actual useful economic life of such technologies may differ
M-60
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NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
from the estimates used in the analysis. Second, risks associated with the
financial projections on the specific products that comprise the acquired
in-process research and development. The third factor is the incomplete and
unproven nature of the technologies. Finally, future technological advances that
are currently unknown may negatively impact the economic and functional
viability of the in-process R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $16 million through 2001. Over the projection
period, management expects to spend an additional aggregate $46 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes, and identified
upgrades.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET:
NACT MINORITY INTEREST ADJUSTMENTS
(A) The acquisition of the minority interest of NACT will be accounted for
under the purchase method of accounting. In addition, in accordance with
generally accepted accounting principles, the portion of the purchase price
allocable to the in-process research and development projects of NACT will be
expensed at the consummation of the NACT Transaction. The amount of the one-time
non-recurring charge is expected to approximate $21.9 million. Since this charge
is directly related to the acquisition and will not recur, the Unaudited Pro
Forma Statements of Operations have been prepared excluding this charge. New
World Access has not determined the final allocation of the purchase price, and
accordingly, the amount ultimately determined may differ significantly from the
amounts shown below.
The unallocated excess of purchase price over the net assets acquired is
determined as follows (in thousands):
Purchase price of approximately 32.7% minority interest in NACT:
<TABLE>
<S> <C>
Stock issued in exchange for NACT shares.................. $ 46,660
--------
Allocation:
Minority interest in subsidiaries......................... (12,443)
Adjust assets and liabilities.............................
In-process research and development costs(i)........... (21,900)
Acquired technology(ii)................................ (4,400)
Deferred tax liability(iii)............................ 1,700
--------
(37,043)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 9,617
========
</TABLE>
(i) The in-process research and development write-off of $21.9 million is
based on the valuation performed in connection with the NACT Stock Purchase. The
valuation report assigned a value of $66.5 million to the in-process research
and development projects as of the date of the NACT Stock Purchase, of which
67.3% or $44.6 million was expensed at the consummation of the NACT Stock
Purchase. Management estimates that an additional $21.9 million of in-process
research and development projects will be written-off in conjunction with the
consummation of the NACT Transaction. New World Access will obtain an updated
valuation of the in-process research and development projects as of the closing
of the NACT Transaction for use in determining the final purchase accounting for
the NACT Transaction.
(ii) Represents the purchase price assigned to the acquired technology of
NACT based upon the valuation performed in connection with the NACT Stock
Purchase.
(iii) Establish a deferred tax liability related to the acquired
technology.
M-61
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
RESURGENS PRO FORMA ADJUSTMENTS
(C) The Resurgens Transaction will be accounted for under the purchase
method of accounting. New World Access has not determined the final allocation
of the purchase price, and accordingly, the amount ultimately determined may
differ significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price:
Cash paid for claims(i)................................... $ 3,000
Purchase of switching equipment by World Access for use by
Resurgens prior to closing of the merger............... 4,000
Restricted stock issued to creditors(ii).................. $76,000
Restricted stock issued to Renaissance Partners(ii)....... 15,730
-------
Total stock....................................... 91,730
Fees and expenses related to the Resurgens Transaction.... 2,000
--------
Total purchase price.............................. 100,730
--------
Allocation:
Historical stockholders' equity, net of creditor
liabilities forgiven(iii).............................. (2,179)
Adjust assets and liabilities:
Adjust licenses to estimated fair market value(iv)..... (3,000)
Adjust network switching equipment to estimated fair
market value(iv)..................................... (5,000)
Record switching equipment purchased by World Access... (4,000)
Establish deferred tax asset(v)........................ (15,300)
--------
(29,479)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 71,251
========
</TABLE>
(i) Represents an estimate of $1.0 million to be paid to the creditors of
Resurgens under a cash settlement plan proposed by New World Access and
approximately $2.0 million to be paid to governmental creditors.
(ii) The value assigned to the 3,750,000 restricted New World Access shares
to be issued to the creditors and Renaissance Partners at the closing date will
be $25.17, the seven trading days average closing price of New World Access
common stock, including the three days prior and the three days subsequent to
May 12, 1998, the date economic terms of the Resurgens Transaction were
announced, less a 30% discount attributable to the restrictive nature of the
shares. New World Access consulted with an independent financial advisor
knowledgeable of the transaction in determining the appropriate discount.
Specific factors supporting the discount are (1) the length of the restriction,
(2) the number of shares subject to restriction, and (3) the volatility of New
World Access common stock [the closing price on the announcement date was $37.06
and the closing price on August 28, 1998 was $23.13, a 37.6% reduction].
Management of New World Access believes the discount rate to be used in valuing
these restricted shares is appropriate and reasonable.
In addition to the shares noted above, the creditors and Renaissance
Partners will also be issued 7,500,000 restricted New World Access shares at the
closing (the "Escrowed Shares"). These shares will be immediately placed into
escrow and will be valued at par value only, or $75,000. As it becomes probable
that
M-62
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NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the conditions for release from escrow will be met, the fair market value of the
shares as measured at that time will be recorded as additional goodwill and
stockholders' equity, respectively.
Specifically, the Escrowed Shares will be released in the amounts and on
the dates specified below if the sum of the EBITDA for Resurgens for the
performance periods set forth below equals or exceeds the Target EBITDA for such
performance period as set forth below:
<TABLE>
<CAPTION>
ESCROWED SHARES
TO BE
PERFORMANCE PERIOD RELEASE DATE RELEASED TARGET EBITDA
------------------ ------------ --------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period")............ February 15, 1999 1,875,000 $7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period")............ February 15, 2000 2,812,500 $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)............. February 15, 2001 2,812,500 $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Exchange Closing Date is (a) on or
after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (b) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Exchange Closing occurs and shall terminate on (and including) the
last day of the sixth calendar month following the month in which the Exchange
Closing occurs, the release date shall be forty-five (45) days after the end of
such period and the Target EBITDA shall be equal to the sum of (i) $2,100,000
for each calendar month of 1998 included in the First Performance Period and
(ii) $2,400,000 for each calendar month of 1999 included in the First
Performance Period.
If, after the Exchange, the EBITDA of Resurgens is less than the Target
EBITDA required for the release of Escrowed Shares in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding anything described herein, the
Escrowed Shares shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
World Access Common Stock as reported by Nasdaq equals or exceeds $65.00 for any
five consecutive trading days during such calendar quarter, then 25% of all of
the shares of Escrowed Shares shall be released on February 15, 2000, provided
that if no Escrowed Shares are eligible for release during any such calendar
quarter, then such Escrowed Shares shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Holdco Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which such Escrowed Shares were not
eligible for release; (b) if the EBITDA of Resurgens for the Second Performance
Period equals or exceeds $52,775,000, then the Escrowed Shares related to the
Third Performance Period shall be released on February 15, 2000; and (c) all of
the Escrowed Shares shall be released upon a Change of Control (as defined in
the Exchange Agreement).
M-63
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NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(iii) The combined historical accounts of Resurgens include pre-petition
creditor liabilities of $334.5 million, which are classified as "liabilities
subject to compromise," and borrowings under the WorldCom, Inc.
debtor-in-possession financing facility of $22.0 million as of June 30, 1998,
respectively. These liabilities will be satisfied in connection with the Plan of
Reorganization, which has been approved by the creditors committee and is
expected to be confirmed by the bankruptcy court in early September 1998. Upon
the confirmation of the Plan of Reorganization and the closing of the Resurgens
Transaction, the creditors will receive shares of RCG common stock in exchange
for the surrender of all of their claims against RCG. Immediately thereafter,
the creditors' shares of RCG will be cancelled and automatically converted into
the right to receive shares of New World Access Common Stock, a portion of which
will be received directly and a portion of which will be deposited into escrow
pending the satisfaction of certain conditions. All such shares of New World
Access Common Stock are subject to certain contractual restrictions.
The confirmation of the Plan of Reorganization is a condition precedent to
the closing of the Resurgens Transaction. Therefore, the combined historical
stockholders deficit of $354.4 million as of June 30, 1998 has been adjusted to
reflect a $352.6 million reduction for the liabilities subject to compromise and
the WorldCom, Inc. debtor-in-possession financing facility for purposes of the
unaudited pro forma combined balance sheet.
(iv) Estimates of fair market value of the licenses and the switching
equipment acquired have been made by management. These estimates are subject to
adjustment pending final valuations to be obtained from independent appraisers.
(v) At the time the Resurgens Transaction is consummated, Resurgens is
expected to have in excess of $125 million in net operating loss carryforwards
available to offset future federal taxable income. Based on its current
assessment of the forecasted operating results of Resurgens and other pertinent
factors, management expects at least 35% of these future tax benefits will be
realized. Accordingly, a deferred tax asset of $44 million, net of a 65%
valuation allowance of approximately $29 million, has been reflected in the Pro
Forma Combined Balance Sheet. The amount of the valuation allowance is subject
to future analysis and may be revised prior to the closing of the Resurgens
Transaction.
The pro forma loss of the combined entity is not indicative of the results
of operations that are expected to be achieved by the combined entity in the
future. The nature of Resurgens current operations are concentrated solely on
the international carriers' carrier business and an upgraded, efficient
operating network is now in place. Resurgens has a new, experienced management
team in place and has entered into several new contracts to increase its revenue
base, including a significant service contract with WorldCom Network Services,
Inc., a wholly owned subsidiary of WorldCom, Inc. Prior to the acquisition of
Resurgens, it is expected that Resurgens will be essentially debt free due to
its Chapter 11 bankruptcy proceedings. In addition, there are several closing
conditions that must be satisfied before the Resurgens Transaction is
consummated, including the achievement by Resurgens of monthly revenues of $25
million and related gross profit margin of greater than 5% for the calendar
month immediately preceding the closing date
(D) Eliminate existing stockholders' equity.
TELCO PRO FORMA ADJUSTMENTS
(E) The Telco Merger will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to the in-process
research and development projects of Telco will be expensed at the consummation
of the acquisition. The amount of the one-time non-recurring charge is expected
to approximate $73.9 million. Since this charge is directly related to the
acquisition and will not recur, the Unaudited Pro Forma Statements of Earnings
have been prepared excluding this charge. New World Access has not determined
the final allocation of the purchase price, and accordingly, the amount
ultimately determined may differ significantly from the amounts shown below.
M-64
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NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares(i).............. $188,230
Fair market value of World Access options issued in
exchange for Telco options............................. 9,700
--------
Total stock and options........................... $ 197,930
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 201,680
---------
Allocation:
Historical stockholders' equity........................... (52,955)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements, excess quantities
related to reduced demand of certain legacy products
and those that are non-strategic as a result of the
merger to net realizable value....................... 4,500
Write-down to fair market value of certain redundant
equipment resulting from the merger.................. 1,500
Write-off of leaseholds associated with Telco's current
Norwood facility which is expected to be relocated... 1,300
Accrue involuntary employee termination benefits....... 1,500
Accrue lease termination provision related to Telco's
current Norwood facility............................. 1,400
Trademarks............................................. (7,400)
Establish deferred tax asset(ii)....................... (16,000)
Acquired technology(iii)............................... (56,400)
In-process research and development costs(iv).......... (73,900)
Deferred tax liabilities(v)............................ 24,900
---------
(171,555)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 30,125
=========
</TABLE>
(i) Based on the terms of the Telco Merger Agreement and the value of World
Access Common Stock as of August 28, 1998, Telco stockholders are currently
expected to receive approximately 6.5 million freely tradeable shares of New
World Access common stock at the time of the Telco Merger. The value assigned to
these shares will be $29.26 per share, the seven trading days average closing
price of World Access Common Stock which include the three trading days prior
and the three trading days subsequent to June 4, 1998, the date economic terms
of the Telco Merger were announced.
(ii) The net deferred tax asset of $16 million is comprised primarily of
gross temporary differences arising from the differences between book and tax
basis of certain assets and liabilities and for tax credits available to Telco
and New World Access. It is the opinion of management that these tax assets are
likely to be utilized by Telco or New World Access.
(iii) The value of the acquired technology of $56.4 million is based on a
preliminary valuation report prepared by an independent appraiser and represents
the value of Telco's current technology calculated using the income approach.
(iv) The amount of in-process research and development costs of $73.9
million is based on a preliminary valuation report prepared by an independent
appraiser, based on factors considered such as the number of projects in
process, the potential alternative future uses of those projects and estimated
future projected revenues from those projects. New World Access will obtain an
updated valuation of the in-process research and development as of the closing
of the Telco Merger for use in determining the final purchase accounting for the
Telco Merger.
M-65
<PAGE> 786
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(v) Establish deferred tax liabilities related to the identifiable
intangible assets.
(F) Eliminate existing stockholders' equity.
(G) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998:
ATI PRO FORMA ADJUSTMENTS
(A) Amortization of unallocated excess purchase price over net assets
acquired over 15 years relating to the one month period ended January 31, 1998
not included in the New World Access historical statement of earnings.
(B) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the ATI merger.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of the acquired technology relating to the majority
interest portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years relating to the two month period ended February 28, 1998
not included in the New World Access historical statement of earnings.
(F) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of the majority
interest in NACT.
(G) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(H) Amortization of the acquired technology relating to the minority
interest portion of NACT over 8 years.
(I) Amortization of unallocated excess purchase price over net assets
acquired related to the purchase of the remaining minority interest in NACT over
20 years.
(J) Reverse the minority interests in earnings of NACT.
(K) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of New World Access common stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(L) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market values of the license agreements.
(M) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(N) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
M-66
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NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(P) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(Q) Amortization of acquired technology of Telco over 8 years.
(R) Amortization of trademarks of Telco over 8 years.
(S) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(T) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(U) Eliminate the one-time non-recurring in-process research and
development charge recorded by Telco in connection with its acquisition of
Jupiter Technology, Inc. which was consummated on January 26, 1998. This
write-off of in-process research and development does not relate to the
transaction between World Access and Telco, but does represent a significant one
time charge that should be eliminated for purposes of presenting pro forma
financial information.
(V) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(W) To record a reduction in tax expense related to the reduction of the
deferred tax liability established in conjunction with the allocation of
purchase price to acquired technology.
(X) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997:
ATI PRO FORMA ADJUSTMENTS
(A) Eliminate inter-company sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of acquired technology relating to the majority interest
portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(F) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(G) Amortization of acquired technology relating to the minority interest
portion of NACT over 8 years.
(H) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(I) Reverse the minority interests in earnings of NACT.
M-67
<PAGE> 788
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(J) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of New World Access common stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(K) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market value of the license agreements.
(L) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(M) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(N) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(O) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(P) Amortization of acquired technology of Telco over 8 years.
(Q) Amortization of trademarks of Telco over 8 years.
(R) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(S) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(T) Adjust tax provision for the benefit of the Telco loss and pro forma
adjustments, if applicable.
(U) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
M-68
<PAGE> 789
EXHIBIT 2.1
FIRST AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS FIRST AMENDMENT (the "Amendment") to the Agreement and Plan of Merger
and Reorganization (the "Merger Agreement;" capitalized terms used but not
defined herein shall have the meanings ascribed to them therein), dated as of
the 12th day of May, 1998, by and among WAXS INC., a Delaware corporation and a
direct wholly-owned subsidiary of World Access, Inc. ("New World Access"), WORLD
ACCESS, INC., a Delaware corporation ("World Access"), WA MERGER CORP., a
Delaware corporation and a direct wholly-owned subsidiary of New World Access
("Merger Sub"), and CHERRY COMMUNICATIONS INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP, an Illinois corporation ("RCG"), is made as of the 20th
day of July, 1998 by and among New World Access, World Access, Merger Sub and
RCG.
WITNESSETH:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendments to Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Section 5.3 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 5.3. Payment of Claims. In accordance with the terms and
provisions of the Plan and unless otherwise provided therein, the
Disbursing Agent under the Disbursement Agreement shall issue to each
holder of an Allowed Claim and an Administrative Expense Claim (including
the Administrative Expense Claim of WNSI arising in connection with the DIP
Financing), its pro-rata share of Disbursed Stock based upon the amount of
such claim. The Disbursing Agent will return to New World Access shares of
Disbursed Stock having a value that equals the dollar amount of Cash (as
defined in the Plan) that the Reorganized Debtor (as defined in the Plan)
or the Surviving Corporation must pay to holders of Allowed Priority Claims
(including the principal amount of Priority Tax Claims) pursuant to the
terms of the Plan where the value of such shares is based on $32.00 per
share."
(b) Article 5 of the Merger Agreement is hereby amended by adding the
following additional Section 5.6 thereto which reads in its entirety as
follows:
"Section 5.6 Fractional Shares. For purposes of distributions under the
Plan, the number of shares of Disbursed Stock and Contingent Payment Stock
shall, if necessary, be rounded to the next greater or lower whole number
of shares as follows: (1) fractions of 1/2 or greater shall be rounded to
the next greater whole number, and (2) fractions of less than 1/2 shall be
rounded to the next lower whole number; provided, however, that to the
extent that there are interim distributions, the numbers of shares of
Disbursed Stock or Contingent Payment Stock shall be rounded to the next
lower whole number for purposes of such distribution, and in the final
distribution shall be rounded in accordance with the preceding clause based
on the applicable aggregate number of shares of Disbursed Stock or
Continent Payment stock distributed to each holder in all distributions.
The total number of shares of Disbursed Stock or Contingent Payment stock
shall be adjusted as necessary to account for the rounding provided hereby.
No consideration shall be payment in lieu of the fractions shares that are
rounded down."
(c) Section 6.4 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 6.4. Transfer Restrictions. Notwithstanding anything to the
contrary contained herein, (a) no holder of Disbursed Stock may, until the
365th day following the Closing Date, without the prior written consent of
New World Access, offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, any shares of Disbursed Stock or security
convertible into or exchangeable or exercisable therefor, either publicly
or privately, (b) no holder of Contingent Payment Stock upon its release
pursuant to Section 6.1
M-69
<PAGE> 790
above may, until the 180th day following the release date thereof, without
the prior written consent of New World Access, offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, any shares of the
Contingent Payment Stock so released or any security convertible into or
exchangeable or exercisable therefor, either publicly or privately, and (c)
until the third anniversary of the Closing Date, no holder of Disbursed
Stock or Contingent Payment Stock may engage in any short-sale or similar
type of transaction with respect to any shares of World Access Stock,
including any shares of Disbursed Stock or Contingent Payment Stock,
without the prior written consent of New World Access; provided, however,
that holders of Claims (as defined in the Plan) may buy and sell to each
other their respective shares of Disbursed Stock or Contingent Payment
Stock, subject to applicable securities laws."
(d) The Merger Agreement is hereby amended by adding a new Section 6.5
thereto which shall read in its entirety as follows:
"Section 6.5. Waiver of Restrictions. New World Access agrees that if it
waives any of the transfer restrictions set forth in Section 6.4 with
respect to any holder of Disbursed Stock or Contingent Payment Stock,
including WNSI, or in Section 4.4 of the U.K. Acquisition Agreement with
respect to the Shareholder (as defined in the U.K. Acquisition Agreement),
then New World Access will give notice of such waiver within five (5) days
to all other holders of Disbursed Stock or Contingent Payment Stock (and
such other persons as the Plan may specify) and transfer restrictions with
respect to all such holders shall be deemed immediately waived (without any
further action) as to such other holders in the same pro rata amount as
such waiver affirmatively granted by New World Access in respect of the
holder or the Shareholder (as the case may be); provided, however, the
provisions of this Section 6.5 shall not apply with respect to any
transfers by the Shareholder or its partners to charitable institutions or
for estate planning purposes, provided that the transferee agrees to be
bound by the transfer restrictions set forth in Section 4.4 of the U.K.
Acquisition Agreement. New World Access agrees to promptly instruct its
transfer agent to reissue certificates for, or remove any stop transfer
instructions with respect to, any shares of Disbursed Stock or Contingent
Payment Stock as to which the transfer restrictions have been deemed waived
in accordance with this Section 6.5."
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Amendment are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Amendment.
SECTION 4. Counterparts. This Amendment may be executed simultaneously in
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
M-70
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IN WITNESS WHEREOF, each of the Parties has caused this Amendment to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the day and year above written.
WAXS INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WA MERGER CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
CHERRY COMMUNICATIONS
INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP
By: /s/ W. TOD CHMAR
------------------------------------
Its: Executive Vice President
------------------------------------
M-71
<PAGE> 792
EXHIBIT 2.2
SECOND AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS SECOND AMENDMENT (the "Second Amendment") to the Agreement and Plan of
Merger and Reorganization, dated as of the 12th day of May, 1998, as amended by
the First Amendment thereto dated as of July 20, 1998 (as so amended, the
"Merger Agreement;" capitalized terms used but not defined herein shall have the
meanings ascribed to them therein), by and among WAXS INC., a Delaware
corporation and a direct wholly-owned subsidiary of World Access, Inc. ("New
World Access"), WORLD ACCESS, INC., a Delaware corporation ("World Access"), WA
MERGER CORP., a Delaware corporation and a direct wholly-owned subsidiary of New
World Access ("Merger Sub"), and CHERRY COMMUNICATIONS INCORPORATED d/b/a
RESURGENS COMMUNICATIONS GROUP, an Illinois corporation ("RCG"), is made as of
the 2nd day of September, 1998, by and among New World Access, World Access,
Merger Sub and RCG.
WITNESSETH:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendments to Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Article 1 of the Merger Agreement is hereby amended by adding a
new Section 1.24 thereto and renumbering current Sections 1.24 through
1.112 as 1.25 through 1.113, respectively:
"Section 1.24. "Creditor Shares" has the meaning set forth in Section
5.1 hereof."
(b) Section 3.1 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 3.1 Conversion of Merger Sub Stock and RCG Stock. Subject
to the terms and conditions of this Agreement, as of the Effective Time
and by virtue of the Merger and without any further action on the part
of the holder of any Merger Sub Stock or RCG Stock:
(a) all shares of RCG Stock which are held by RCG as treasury
stock, if any, shall be canceled and retired, and no consideration
shall be paid or delivered in exchange therefor;
(b) each of the Creditor Shares outstanding immediately prior to
the Effective Time (being all the outstanding shares of RCG Stock at
such time as a result of the cancellation of all other shares of RCG
Stock by the Bankruptcy Court pursuant to the Plan immediately prior
to the Effective Time, as provided in Section 5.1 hereof) shall be
canceled and retired and will cease to exist and shall be converted
into the right to receive the Disbursed Stock and the Contingent
Payment Stock in accordance with the terms of this Agreement and the
Plan; and
(c) each share of Merger Sub Stock issued and outstanding
immediately prior to the Effective Time shall be converted into one
fully paid and nonassessable share of common stock without par value
of the Surviving Corporation."
(c) Article 5 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"ARTICLE 5.
PLAN OF REORGANIZATION AND PAYMENT OF CLAIMS
Section 5.1 Plan of Reorganization. RCG shall file and use its
best efforts to obtain the Bankruptcy Court's confirmation of the Plan,
which shall provide, inter alia, for the consummation of the Merger in
accordance with the terms and conditions of this Agreement. RCG shall
also file and use its best efforts to obtain the Bankruptcy Court's
approval of RCG's Disclosure Statement with respect to the Plan (the
"Plan Disclosure Statement"). Both the Plan and the Plan Disclosure
M-72
<PAGE> 793
Statement, as filed and as confirmed and approved by the Bankruptcy
Court, must in form and substance be acceptable to New World Access and
RCG. World Access and its Affiliates shall cooperate in connection with
preparing, filing and obtaining the approval of the Plan and the Plan
Disclosure Statement. The Plan shall provide, inter alia, for (a) the
cancellation of all outstanding shares of RCG Stock other than Creditor
Shares without the payment of any consideration therefor; (b) the
issuance of 3,125,000 shares of RCG Stock (collectively, the "Creditor
Shares") to holders of, and in full satisfaction of, Allowed Claims and
Administrative Expense Claims (including the Administrative Expense
Claim of WNSI arising in connection with the DIP Financing); (c) the
approval of this Agreement; (d) except as otherwise provided in the
Plan, the discharge of all other indebtedness of and claims against RCG
arising before confirmation of the Plan; (e) immediately following the
last to occur of such items (a) through (d), the consummation of the
Merger and the resulting pro-rata distribution of Disbursed Stock and
the right to receive (if released pursuant to Article 6 hereof) the
Contingent Payment Stock in exchange for all outstanding Creditor
Shares; and (f) certain transfer restrictions on the shares of New World
Access Stock to be issued pursuant to this Agreement as set forth in
Section 6.4 hereof. RCG estimates that the aggregate amount of Allowed
Claims will be approximately $300,000,000 to $350,000,000.
Section 5.2 Deposit of New World Access Stock. At the Closing, New
World Access and the Person appointed by the Bankruptcy Court pursuant
to the Plan and the Order to act as "Disbursing Agent" under the Plan
(the "Disbursing Agent") shall each execute a Disbursement Agreement
reasonably acceptable to the Parties hereto and, in accordance
therewith, New World Access shall deposit with the Disbursing Agent,
immediately following the Effective Time, an aggregate of 9,375,000
shares of New World Access Stock, of which 3,125,000 shares shall be
issued pursuant to Section 5.3 hereof (the "Disbursed Stock") and
6,250,000 shares shall be released pursuant to the terms of Article 6
hereof (the "Contingent Payment Stock").
Section 5.3 Payment of Claims. In accordance with the terms and
provisions of the Plan and unless otherwise provided therein, (a) RCG
shall be deemed to have issued to each holder of an Allowed Claim and an
Administrative Expense Claim (including the Administrative Expense Claim
of WNSI arising in connection with the DIP Financing) its pro-rata share
of the Creditor Shares based upon the amount of each such claim in
exchange for the surrender of such claims, and (b) immediately after the
cancellation of all other outstanding RCG Stock and the issuance of the
Creditor Shares, the Disbursing Agent under the Disbursement Agreement
shall issue to each holder of Creditor Shares its pro-rata share of
Disbursed Stock based upon the number of Creditor Shares held by each
such holder. The Disbursing Agent will return to New World Access shares
of Disbursed Stock equal to (x) the dollar amount of all Cash (as
defined in the Plan) that the Reorganized Debtor (as defined in the
Plan) or the Surviving Corporation must pay to holders of Allowed
Priority Claims (including the principal amount of Priority Tax Claims)
pursuant to the terms of the Plan, divided by (y) $32.00.
Section 5.4 Contingent Payment of Claims. The Disbursing Agent
shall release to holders of Creditor Shares their pro-rata share of
Contingent Payment Stock, if, as, when and to the extent that the
Contingent Payment Stock (or any portion thereof) is released pursuant
to the terms of Article 6 hereof in accordance with the terms and
provisions of the Plan.
Section 5.5 Fractional Shares. For purposes of distributions under
the Plan, the number of shares of Disbursed Stock and Contingent Payment
Stock shall, if necessary, be rounded to the next greater or lower whole
number of shares as follows: (a) fractions of 1/2 or greater shall be
rounded to the next greater whole number; and (b) fractions of less than
1/2 shall be rounded to the next lower whole number; provided, however,
that to the extent that there are interim distributions, the number of
shares of Disbursed Stock or Contingent Payment Stock shall be rounded
to the next lower whole number for purposes of such distribution and in
the final distribution shall be rounded in accordance with the
immediately preceding clause based on the applicable aggregate number of
shares of Disbursed Stock or Contingent Payment Stock distributed to
each holder in all distributions. The total number of shares of
Disbursed Stock or Contingent Payment Stock shall be adjusted as
M-73
<PAGE> 794
necessary to account for the rounding provided hereby. No consideration
shall be paid in lieu of fractional shares that are rounded down."
(d) Section 9.4 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 9.4 Approval of Stockholders of World Access. World
Access will take all steps necessary under applicable law and its
certificate of incorporation and bylaws to call, give notice of, convene
and hold a meeting of its stockholders for the purpose of approving this
Agreement and the Merger and for such other purposes consistent with the
complete performance of this Agreement as may be necessary or desirable.
Unless the Board of Directors of World Access determines in good faith,
based upon advice of its outside counsel, that such recommendation would
violate its fiduciary duties to its stockholders, the Board of Directors
of World Access will recommend to its stockholders the approval of this
Agreement, the Merger and the transactions contemplated hereby and will
use its best efforts to obtain the necessary approvals by its
stockholders of this Agreement, the Merger and the transactions
contemplated hereby. Notwithstanding anything herein to the contrary, it
is understood that the approval of this Agreement, the Merger and the
transactions contemplated hereby by the World Access stockholders is
intended to constitute the requisite approval of the New World Access
stockholders."
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Second
Amendment are for reference purposes only and will not affect in any way the
meaning or interpretation of this Second Amendment.
SECTION 4. Counterparts. This Second Amendment may be executed
simultaneously in counterparts, each of which will be deemed an original, but
all of which together will constitute one and the same instrument.
M-74
<PAGE> 795
IN WITNESS WHEREOF, each of the Parties has caused this Second Amendment to
be executed and delivered by its respective officer thereunto duly authorized,
all as of the day and year above written.
WAXS INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WA MERGER CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
CHERRY COMMUNICATIONS
INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP
By: /s/ W. TOD CHMAR
------------------------------------
Its: Executive Vice President
------------------------------------
M-75
<PAGE> 796
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated June 5, 1998 with respect
to the combined financial statements of Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) and Cherry Communications U.K. Limited
for the year ended December 31, 1997, in the Form 8-K/A Amendment No. 1 filed by
World Access, Inc. on September 4, 1998 and to the incorporation by reference of
such report in the Registration Statements on Form S-8 (Nos. 33-77918, 33-47752,
333-17741 and 333-59347) and Form S-3 (Nos. 333-43497 and 333-51199) of World
Access, Inc.
Ernst & Young LLP
Atlanta, Georgia
September 25, 1998
M-76
<PAGE> 797
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated July 11, 1997, except for Notes 2 and 10 as
to which the date is July 24, 1997, accompanying the combined financial
statements of Cherry Communications Incorporated and Cherry Communications U.K.
Limited for each of the two years in the period ended December 31, 1996 and
consent to the inclusion of said report in the World Access, Inc. Form 8-K/A,
Amendment No. 1, dated September 4, 1998. We consent to use of the
aforementioned report in this Form 8-K/A, Amendment No. 2, dated September 25,
1998. We also hereby consent to the incorporation by reference of said report in
the Registration Statements of World Access, Inc. on Forms S-3 (File No.
333-43497 and File No. 333-51199) and on Forms S-8 (File No. 333-59347, File No.
333-17741, File No. 33-377918, and File No. 33-47752).
Grant Thornton LLP
Chicago, Illinois
September 25, 1998
M-77
<PAGE> 798
EXHIBIT 99.1
NEWS RELEASE
WORLD ACCESS, INC.
SUMMARY: U.S. BANKRUPTCY COURT CONFIRMS RESURGENS REORGANIZATION PLAN
FOR IMMEDIATE RELEASE
Atlanta, Georgia -- September 3, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS)
announced today that the United States Bankruptcy Court of the Northern District
of Illinois, Eastern Division, has confirmed the Plan of Reorganization (the
"Plan") of Cherry Communications Incorporated, d/b/a Resurgens Communications
Group ("Resurgens"). The Plan incorporates the terms of the definitive agreement
entered into earlier this year by World Access to acquire Resurgens, a
facilities-based provider of international network access.
Steven A. Odom, Chairman and Chief Executive Officer, said "The confirmation of
the Plan satisfies a significant condition to the consummation of the Resurgens
acquisition, which is expected to occur in the near future. This acquisition
will uniquely position World Access to offer telecommunications service
providers a complete network solution, including proprietary equipment, planning
and engineering services and access to international long distance. The
international network access offered by Resurgens is a critical element of new
and expanded networks currently being planned or implemented by many of our
customers. World Access is beginning to realize significant synergies as a
result of the Resurgens acquisition, including equipment sales to Resurgens
customers, potential joint ventures with international PTTs and CLECs, and
carrier service revenues form World Access equipment customers."
John D. Phillips, Chairman and Chief Executive Officer of Resurgens, commented
"We are extremely pleased that Resurgens' creditors have embraced our plan of
reorganization, an integral part of which is the merger with World Access. We
have rebuilt Resurgens' operating network and implemented new, reliable billing
systems and a 24 hour-7 day Network Operations Center. Competitive, dedicated
bandwidth and transit agreements are now in place to carry traffic to all key
regions of the world and Resurgens is now carrying extensive international
traffic for WorldCom and numerous other long-distance companies."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The Company's products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. The Company offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. To support and complement its
product sales, the Company also provides its customers with a broad range of
design, engineering, manufacturing, testing, installation, repair and other
value-added services.
EXCEPT FOR ANY HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS PRESS RELEASE CONTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES WHICH ARE DESCRIBED IN THE
COMPANY'S SEC REPORTS, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM
10-K, AS AMENDED, FOR THE YEAR ENDED DECEMBER 31, 1997, THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND JUNE 30, 1998, AND THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-3 (NO. 333-43497).
COMPANY CONTACT: NANCY L. DE JONGE DIRECTOR OF INVESTOR RELATIONS
(404-231-2025)
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APPENDIX N
<PAGE> 800
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
AS AMENDED ON SEPTEMBER 25, 1998
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 9, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 801
ITEM 5. OTHER EVENTS
As previously reported, on June 4, 1998, World Access, Inc. ("World
Access") announced that it had entered into a definitive Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with WAXS INC., a
wholly-owned subsidiary of World Access ("New World Access"), Tail Acquisition
Corporation, a wholly-owned subsidiary of New World Access ("Merger Sub"), and
Telco Systems, Inc. ("Telco") pursuant to which, among other things, Merger Sub
will merge with and into Telco and Telco shall thereupon become a wholly-owned
subsidiary of New World Access (the "Merger").
As a result of the Merger, each outstanding share of Telco common stock,
$.01 par value per share ("Telco Common Stock"), shall be converted into the
right to receive that number of shares of (i) World Access common stock, $.01
par value per share ("World Access Common Stock"), or (ii) if the previously
announced holding company reorganization shall have been consummated on or
before the time of the Merger, New World Access common stock, $.01 par value per
share ("New World Access Common Stock") (in either case, the "Merger Common
Stock"), equal to the quotient of $17.00 divided by the average daily closing
price of World Access Common Stock as reported on Nasdaq on each of the twenty
consecutive trading days ending on the second business day prior to the date of
the Merger (the "Average Closing Price"), provided that if the Average Closing
Price is more than $36.00 per share, then each share of Telco Common Stock will
be converted into .4722 shares of Merger Common Stock and if the Average Closing
Price is less than $29.00 per share, then each share of Telco Common Stock will
be converted into .5862 shares of Merger Common Stock.
The Merger is intended to constitute a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, and will be
accounted for as a purchase. The consummation of the Merger is subject to (i)
clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, (ii) the approval by the respective stockholders of World Access (or
New World Access, as the case may be) and Telco, (iii) the approval by the
stockholders of World Access (or New World Access, as the case may be) of an
increase in the authorized shares of common stock of such corporation, and (iv)
the satisfaction or waiver of customary conditions.
In connection with the Merger Agreement, Kopp Investment Advisors, Inc. and
the directors and certain executive officers of Telco entered into a
Stockholders Proxy Agreement with New World Access pursuant to which, among
other things, they agreed to vote an aggregate of approximately 8.0% of the
outstanding shares of Telco Common Stock in favor of the Merger.
The foregoing description of the Merger, the Merger Agreement and the
Stockholders Proxy Agreement is qualified in its entirety by reference to the
Merger Agreement and the Stockholders Proxy Agreement, which have been filed as
exhibits to World Access' Form 8-K filed with the Securities and Exchange
Commission on June 8, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this report are
the following financial statements:
(i) The unaudited consolidated financial statements of Telco Systems,
Inc ("Telco") for the three months and nine months in each of the periods
ended May 31, 1998 and 1997; and
(ii) The audited consolidated financial statements of Telco for the
year ended August 31, 1997, which have been audited by the independent
accounting firm of Ernst & Young LLP, whose opinion thereon is included
herein.
(b) Pro Forma Financial Information. The Unaudited Pro Forma Combined
Financial Statements of New World Access give effect to the consummation of the
several transactions that World Access has completed or that are currently
contemplated. The Unaudited Pro Forma Combined Statements of Operations give
effect to: (1) the acquisition of Advanced TechCom, Inc. ("ATI"), which was
consummated on January 29, 1998; (2) the acquisition of a 67.3% majority
interest in NACT Telecommunications, Inc. ("NACT") (the "NACT Stock Purchase"),
which was consummated on February 27, 1998; (3) the
N-1
<PAGE> 802
acquisition of the remainder of NACT (the "NACT Merger"); (4) the acquisition of
Cherry Communications Incorporated (d/b/a Resurgens Communications Group) and
Cherry Communications U.K. Limited (collectively the "Resurgens Transaction");
and (5) the Merger as if each of these acquisitions had occurred on January 1,
1997. The Unaudited Pro Forma Combined Balance Sheet gives effect to: the NACT
Merger, the Resurgens Transaction and the Merger as if they had been completed
on June 30, 1998.
As Telco's fiscal year end, August 31, differs from World Access' fiscal
year-end by more than 93 days, Telco's results of operations for the period from
November 25, 1996 through November 30, 1997 were used in preparing the Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31, 1997.
Telco's results of operations for the six months from December 1, 1997 through
May 31, 1998 were used in preparing the Unaudited Pro Forma Combined Statement
of Operations for the six months ended June 30, 1998. Telco's unaudited June 30,
1998 balance sheet was utilized in preparing the Unaudited Pro Forma Combined
Balance Sheet as of June 30, 1998.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that the management of World Access believes are
reasonable. Each of the acquisition transactions above has been accounted for
using the purchase method of accounting. The adjustments recorded in the
Unaudited Pro Forma Combined Financial Statements represent the preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not differ significantly from
the pro forma adjustments reflected in the Unaudited Pro Forma Combined
Financial Statements.
In connection with the consummation of the pending acquisition
transactions, New World Access expects to record charges representing the
estimated portion of the purchase price allocated to in-process research and
development of $21.9 million and $73.9 million for the NACT Merger and the
Merger, respectively. In addition, in the three month period ended March 31,
1998, World Access recorded charges representing the estimated portion of the
purchase price allocated to in-process research and development of $44.6 million
and $5.4 million for the NACT Stock Purchase and ATI acquisition, respectively.
Since these charges are directly related to the acquisitions and will not recur,
the Unaudited Pro Forma Combined Statements of Operations have been prepared
excluding these one-time non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of the financial position or the future results of operations or
results that might have been achieved if the foregoing acquisition transactions
had been consummated as of the indicated dates. The Unaudited Pro Forma Combined
Financial Statements should be read in conjunction with the historical
consolidated financial statements of World Access, ATI, NACT, and Telco, the
historical combined financial statements of Resurgens and the related notes
thereto.
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "EDGAR".
23.1 Consent of Ernst & Young LLP
N-2
<PAGE> 803
SIGNATURE
Pursuant to the requirements 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.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President, Controller and
Secretary
Dated as of September 25, 1998
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<PAGE> 804
INDEX TO CONSOLIDATED TELCO SYSTEMS, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. N-5
Consolidated Statements of Operations for the Years Ended
August 31, 1997, 1996 and 1995............................ N-6
Consolidated Balance Sheets as of August 31, 1997 and August
25, 1996.................................................. N-7
Consolidated Statements of Shareholders' Equity for the
Years Ended August 31, 1997, 1996 and 1995................ N-8
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1997, 1996 and 1995............................ N-9
Notes to Consolidated Financial Statements.................. N-10
Consolidated Balance Sheets as of May 31, 1998 (unaudited)
and August 31, 1997....................................... N-19
Consolidated Statements of Operations for the Three Months
and Nine Months Ended May 31, 1998 and May 25, 1997
(unaudited)............................................... N-20
Consolidated Statements of Cash Flows for the Nine Months
Ended May 31, 1998 and May 25, 1997 (unaudited)........... N-21
Notes to Consolidated Financial Statements (unaudited)...... N-22
Unaudited Pro Forma Combined Balance Sheets as of June 30,
1998...................................................... N-24 to N-27
Unaudited Pro Forma Combined Statements of Operations for
the Six Months Ended June 30, 1998........................ N-28 to N-33
Unaudited Pro Forma Combined Statements of Operations for
the Year Ended December 31, 1997.......................... N-34 to N-38
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ N-39
</TABLE>
N-4
<PAGE> 805
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Telco Systems, Inc.
We have audited the accompanying consolidated balance sheets of Telco
Systems, Inc. as of August 31, 1997 and August 25, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit 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 consolidated financial position of
Telco Systems, Inc. at August 31, 1997, and August 25, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended August 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 15, 1997
N-5
<PAGE> 806
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31,
--------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net sales................................................... $117,843 $ 93,954 $89,070
Costs and expenses
Cost of products sold....................................... 74,985 57,285 48,559
Research and development.................................... 15,355 17,991 18,207
Sales, marketing and administration......................... 29,652 30,408 22,945
Restructuring costs (credit)................................ -- 4,209 (420)
Gain on investment.......................................... (1,070) -- --
Amortization of intangible assets........................... 669 752 783
Interest income............................................. (670) (1,146) (1,632)
-------- -------- -------
118,921 109,499 88,442
-------- -------- -------
Net (loss) income........................................... $ (1,078) $(15,545) $ 628
======== ======== =======
Average shares and equivalents.............................. 10,701 10,357 10,345
Net (loss) income per share................................. $ (.10) $ (1.50) $ .06
</TABLE>
See accompanying notes to consolidated financial statements.
N-6
<PAGE> 807
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 25,
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 5,406 $ 8,461
Marketable securities..................................... 7,302 6,581
Accounts receivable, less allowance for doubtful accounts
of $895 in 1997 ($676 in 1996)......................... 19,663 18,025
Refundable income taxes................................... -- 702
Inventories, net.......................................... 28,370 23,495
Other current assets...................................... 985 810
--------- ---------
Total current assets.............................. 61,726 58,074
Plant and equipment, at cost................................ 46,401 45,941
Less accumulated depreciation............................. 36,712 33,411
--------- ---------
Net plant and equipment........................... 9,689 12,530
Intangible and other assets, less accumulated amortization
of $11,651 in 1997 ($10,935 in 1996)...................... 7,184 8,900
--------- ---------
Total assets...................................... $ 78,599 $ 79,504
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,292 $ 9,758
Payroll and related liabilities........................... 3,492 3,649
Other accrued liabilities................................. 10,528 8,750
--------- ---------
Total current liabilities......................... 21,312 22,157
Restructuring and other long-term liabilities............... 1,531 3,350
Shareholders' equity:
Series A Participating Cumulative Preferred Stock, 200
shares -- authorized; no shares outstanding............ --
Preferred stock, $.01 par value, 5,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.01 par value, 24,000 shares authorized;
shares outstanding: 10,805 at August 31, 1997; (10,520
at August 25, 1996).................................... 108 105
Capital in excess of par value............................ 76,602 74,267
Accumulated deficit....................................... (20,886) (19,808)
Unearned compensation -- restricted stock................. (68) (567)
--------- ---------
Total shareholders' equity........................ 55,756 53,997
--------- ---------
Total liabilities and shareholders' equity........ $ 78,599 $ 79,504
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
N-7
<PAGE> 808
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31, 1997
----------------------------------------------------------------
COMMON STOCK
--------------- PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, August 28, 1994............. 9,649 $ 96 $66,343 $ (4,891) $61,548
------ ---- ------- -------- -------
Net income for year.................. 628 628
Issuance of common stock:
Employee stock purchase plan....... 56 1 504 505
Exercise of stock options.......... 526 5 4,719 4,724
------ ---- ------- -------- -------
Balance, August 27, 1995............. 10,231 102 71,566 (4,263) 67,405
------ ---- ------- -------- -------
Net (loss) for year.................. (15,545) (15,545)
Issuance of common stock:
Employee stock purchase plan....... 56 514 514
Exercise of stock options.......... 174 2 1,533 1,535
Restricted stock, net.............. 59 1 654 $(655)
Amortization of unearned
compensation....................... 88 88
------ ---- ------- ----- -------- -------
Balance, August 25, 1996............. 10,520 105 74,267 (567) (19,808) 53,997
Net (loss) for year.................. (1,078) (1,078)
Issuance (cancellations) of common
stock:
Employee stock purchase plan....... 43 448 448
Exercise of stock options.......... 284 3 2,360 2,363
Restricted stock, net.............. (42) (473) 473 --
Amortization of unearned
compensation....................... 26 26
------ ---- ------- ----- -------- -------
Balance, August 31, 1997............. 10,805 $108 $76,602 $ (68) $(20,886) $55,756
====== ==== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
N-8
<PAGE> 809
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31,
------------------------------
1997 1996 1995
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash Flows from Operating Activities
Net (loss) income......................................... $(1,078) $ (15,545) $ 628
Depreciation and amortization............................. 5,094 5,324 4,982
Restructuring costs (credit).............................. -- 4,209 (420)
Amortization of unearned compensation..................... 26 88 --
Change in assets and liabilities
Accounts receivable, net.................................. (1,638) (7,978) 5,017
Refundable income taxes................................... 702 549 (1,251)
Inventories, net.......................................... (4,875) (6,074) (3,229)
Other current assets...................................... (175) 1,775 320
Other assets.............................................. 1,000 25 (924)
Accounts payable and other current liabilities............ (1,512) 9,585 (4,401)
Restructuring liabilities................................. (2,192) (1,845) (469)
Long-term liabilities..................................... 536 113 (330)
------- --------- --------
Net cash (used in) provided by operating activities......... (4,112) (9,774) (77)
Cash Flows from Investing Activities
Additions to plant and equipment, net..................... (3,634) (6,336) (2,257)
Proceeds from sale -- lease back.......................... 2,601 -- --
Purchase of marketable securities......................... (11,674) (24,350) (29,665)
Maturities of marketable securities....................... 10,953 28,664 29,716
------- --------- --------
Net cash (used in) investing activities................... (1,754) (2,022) (2,206)
Cash Flows from Financing Activities
Proceeds and related tax benefits from sale of common
shares under employee stock plans...................... 2,811 2,049 5,229
------- --------- --------
Net cash provided by financing activities................. 2,811 2,049 5,229
------- --------- --------
(Decrease) increase in cash and equivalents................. (3,055) (9,747) 2,946
Cash and equivalents at beginning of year................... 8,461 18,208 15,262
------- --------- --------
Cash and equivalents at end of year......................... $ 5,406 $ 8,461 $ 18,208
======= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year Income taxes...................... $ -- $ 89 $ 1,235
</TABLE>
See accompanying notes to consolidated financial statements.
N-9
<PAGE> 810
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements consolidate the accounts of Telco Systems, Inc.,
and its subsidiaries (the Company). Intercompany accounts and transactions have
been eliminated. The Company's fiscal year ends on the last Sunday in August
which included 53 weeks in fiscal 1997 and 52 weeks in both fiscal 1996 and
fiscal 1995. Certain amounts reported in prior years have been reclassified to
be consistent with the current year's presentation.
The Company has 50% limited partnership interests in two real estate
partnerships which are accounted for by the equity method of accounting. The
aggregate net investment in these partnerships on the accompanying balance
sheets is not material (See Note 7).
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 128 (SFAS 128), "Earnings Per Share"
which will require adoption in the Company's second quarter of fiscal 1998. This
statement specifies the computation, presentation and disclosure requirements of
earnings per share. The Company believes that adoption of this statement will
have no material impact on its consolidated financial statements and related
disclosures.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 130 requires that items to be recorded in comprehensive income, which
include unrealized gains/losses on marketable securities classified as
available-for-sale and cumulative translation adjustments, be displayed with the
same prominence as other financial statement items. The Company is in the
process of determining the effect of adoption of this statement on its
consolidated financial statements and related disclosures. SFAS 130 is required
to be adopted in the Company's financial statements for the year ending August
29, 1999.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is required to be adopted in the Company's financial
statements for the year ending August 29, 1999. The adoption of SFAS 131 will
have no impact on the Company's financial results or financial condition, but
may result in certain disclosures of segment information.
Use of Estimates in the Preparation of Financial Statements
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.
Revenue Recognition
In general, the Company recognizes revenue from product sales at the time
of shipment. In certain contractual situations, revenue is recognized when the
product is accepted by the customer.
N-10
<PAGE> 811
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Product Warranty
Expected future product warranty liability is provided for when the product
is sold.
Cash Equivalents and Marketable Securities
The Company classifies all of its marketable securities as
available-for-sale securities. These securities are stated at their fair value.
There are currently no unrealized holding gains and losses. The Company
considers all highly liquid investments with maturity of 91 days or less to be
cash equivalents. Those instruments with maturities greater than 91 are
classified as marketable securities. Cash equivalents and marketable securities
are carried at market, and consist of U.S. Government securities, bank
certificates of deposit and corporate issues. All securities mature within
twelve months.
Inventories
Inventories are stated at the lower of cost or market. The cost of products
sold is based on standard costs, which approximate actual costs as determined by
the first-in, first-out method.
Inventories at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw material................................................ $12,803 $12,112
Work-in-process............................................. 5,605 5,560
Finished goods.............................................. 9,962 5,823
------- -------
$28,370 $23,495
======= =======
</TABLE>
Plant and Equipment
Additions to plant and equipment are recorded at cost. Depreciation is
determined by using the straight-line method over the estimated useful lives of
the assets -- three to eight years. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful life or the lease
term.
Plant and equipment, at cost, at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $33,313 $31,214
Furniture and leasehold improvements........................ 13,088 14,727
------- -------
$46,401 $45,941
======= =======
</TABLE>
Intangible and Other Assets
Intangible assets arising in connection with business acquisitions were
$7,122,000 and $7,791,000 at August 31, 1997 and August 25, 1996, respectively.
They are amortized over lives ranging from seven to twenty-five years using the
straight-line method, with an average remaining life of 10.7 years. The carrying
value of goodwill is reviewed periodically based on the undiscounted cash flows
of the entities acquired over the remaining amortization period. Should this
review indicate that goodwill will not be recoverable, the carrying value will
be reduced by the estimated shortfall of undiscounted cash flows.
N-11
<PAGE> 812
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, and accounts receivable. The Company's temporary cash investments,
which are principally limited to U.S. Government securities and bank
certificates of deposit, are subject to minimal risk. The Company routinely
assesses the financial strength of its customers and, as a consequence, believes
that its trade accounts receivable credit risk exposure is limited.
Earnings (loss) Per Share
Earnings (loss) per share is based on the weighted average number of common
shares outstanding and common stock equivalents, if dilutive. Fully diluted
earnings per share did not differ significantly from primary earnings per share
in any year. Net loss per share in fiscal years 1997 and 1996 did not consider
common stock equivalents as the effect would be antidilutive.
NOTE 2 DESCRIPTION OF BUSINESS
The Company is engaged in a single business segment constituting the
development, manufacturing, and marketing of broadband transmission products,
network access products, and bandwidth optimization products for the
telecommunications industry. Regional Bell Operating Companies (RBOC),
independent telephone companies, and interexchange carriers are the primary
users of the Company's products. Sales to the RBOCs accounted for 39% of sales
in fiscal 1997, 37% of sales in fiscal 1996, and 29% of sales in fiscal 1995.
RBOC sales include sales to one RBOC of 33% in fiscal 1997, 31% in fiscal 1996,
and 17% in fiscal 1995. In fiscal 1997, two additional customers each
represented 11% and 10% of sales. In fiscal 1996, two additional customers each
represented 13% and 11% of sales. In fiscal 1995, one additional customer
represented 18% of sales.
NOTE 3 INCOME TAXES
The components of the provision (benefit) for income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1997 1996 1995
----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current................................................... $ $(1,105) $(821)
Deferred.................................................. 1,105 821
----- ------- -----
$ -- $ -- $ --
===== ======= =====
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
using the statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1997 1996 1995
----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate...................... $(366) $(5,285) $ 214
Loss producing no current tax benefit....................... 123 5,024
Amortization of goodwill.................................... 243 247 267
Previously unbenefited deferred items....................... (566)
Other....................................................... 14 85
----- ------- -----
Income tax provision........................................ $ -- $ -- $ --
===== ======= =====
</TABLE>
N-12
<PAGE> 813
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities at fiscal year end
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS
Restructuring costs......................................... $ 1,863 $ 2,942
Inventory and other reserves................................ 8,049 4,384
Net operating loss carryforward............................. 2,058 3,173
Tax credit carryforward..................................... 4,019 3,543
Other....................................................... 97 187
-------- --------
16,086 14,229
Valuation reserve........................................... (15,009) (13,063)
-------- --------
Total deferred tax assets......................... 1,077 1,166
-------- --------
DEFERRED TAX LIABILITIES
Accelerated tax deduction................................... 1,261 1,188
Amortization................................................ 267 287
Depreciation................................................ (373) (250)
Other....................................................... (78) (59)
-------- --------
Total deferred tax liabilities.................... 1,077 1,166
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
SFAS 109, "Accounting for Income Taxes", requires that a valuation reserve
be established if it is "more likely than not" that realization of the tax
benefits will not occur. The valuation reserve increased by $1,946,000 in fiscal
1997. This change is due primarily to an increase in the current year of
inventory and other reserves. These items have been fully reserved.
At August 31, 1997, the Company had net operating loss carryforwards to
reduce future taxable income of $5,000,000. To the extent not utilized, the U.S.
Federal net operating loss will expire in 2011. The Company also had unused
research and development and investment tax credit carryforwards of $4,000,000
at August 31, 1997, which expire from fiscal years 1999 through 2012.
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Restructuring costs......................................... $ 2,485 $2,322
Warranty and rework......................................... 2,027 1,173
All other accrued liabilities............................... 6,016 5,255
------- ------
$10,528 $8,750
======= ======
</TABLE>
NOTE 5 LINE OF CREDIT
The Company maintains a $20.0 million secured line of credit with Fleet
Bank which is available until May 30, 1998. At August 31, 1997, $165,000 was
reserved to support various guarantees in effect at that date. Additionally, the
Company maintains a $3.5 million line of credit with Fleet Bank which is
specifically designated for the acquisition of capital equipment. This line of
credit is available until December 31, 1997.
There were no borrowings against these credit lines at August 31, 1997.
N-13
<PAGE> 814
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 LONG-TERM LIABILITIES
At August 31, 1997 and August 25, 1996, restructuring and other long-term
liabilities include $.3 million and $2.6 million, respectively, of restructuring
costs discussed in Note 8.
NOTE 7 LEASE COMMITMENTS
The Company leases a 216,000 square-foot manufacturing, research and
administration facility in Norwood, Massachusetts, from a limited partnership in
which the Company has a 50% interest. Neither the Company nor the other partners
have made or anticipate making any substantial capital contributions or advances
to the partnership. Under the partnership agreement, the Company, in addition to
its 50% interest, is entitled to a priority payment (which would proportionately
increase with an increase in the property value) out of the proceeds of any sale
or future refinancing of the property. The gross rent payable is $1.5 million
annually through January 31, 1999. For the remainder of the lease term ending
January 31, 2004, gross rent payable is $1.7 million annually.
In June 1997, the Company entered into a sale-leaseback arrangement for
certain computer and other electronic equipment which provided cash of
approximately $2.6 million. The operating leases contained in the arrangement
cover periods from two to four years. All of equipment included in the
transaction was purchased by the Company within the last eighteen months.
The Company leases other facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2005. The
Company is required to pay property taxes, insurance and normal maintenance
costs. Certain of the lease agreements provide for five-year renewal options,
and future lease payments could increase based on the Consumer Price Index.
Minimum annual lease commitments under non-cancelable operating leases for
facilities and equipment as of August 31, 1997 are set forth in the following
table. Amounts relating to excess facilities included herein have been accrued
as discussed in Note 8:
<TABLE>
<CAPTION>
GROSS LEASE SUB-LEASE NET LEASE
FISCAL YEAR PAYMENTS INCOME PAYMENTS
- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1998.................................................... $ 3,570 $ 710 $ 2,860
1999.................................................... 3,584 647 2,937
2000.................................................... 3,256 509 2,747
2001.................................................... 3,179 412 2,767
2002.................................................... 2,887 69 2,818
Beyond.................................................. 6,498 -- 6,498
------- ------ -------
$22,974 $2,347 $20,627
======= ====== =======
</TABLE>
Rent expense under operating leases was $3.1 million in fiscal 1997, $2.9
million in fiscal 1996, and $2.4 million in fiscal 1995.
N-14
<PAGE> 815
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 RESTRUCTURING COSTS
During fiscal 1996, the Company's management approved a plan to restructure
its operations and recognized the following charges:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Excess Facilities........................................... $2,225
Write-down of assets to net realizable value................ 1,589
Employee severance costs.................................... 1,034
Restructuring credit relating to 1993 excess facilities
costs..................................................... (639)
------
$4,209
======
</TABLE>
The plan included the consolidation and move of manufacturing operations
from the Company's Fremont, California facility to its facility located in
Norwood, Massachusetts. During fiscal 1997, the plan was accomplished within
original cost estimates. At August 31, 1997, the remaining reserve balance of
$1,657,000 was specifically designated for excess facility costs at the Fremont,
California location.
At August 31, 1997, the remaining fiscal 1993 restructuring reserve for
excess facility costs for the Norwood, Massachusetts location was $1,098,000
NOTE 9 STOCK PLANS
Under the Company's 1980 Stock Option Plan, the 1988 Non-Qualified Stock
Option Plan, and the 1990 Stock Option Plan (the Plans), officers, directors,
and key employees have been granted options to purchase shares of the Company's
common stock at a price equal to the market value at the date of grant. Options
normally become exercisable ratably over a 48 month period, commencing six
months from the date of grant, and expire after ten years. At August 31, 1997,
1,479,786 shares of common stock were reserved for issuance under the Plans.
On May 20, 1997, the Board of Directors approved an amendment to the
Company's 1990 Stock Option Plan and reduced the exercise price of certain stock
options granted to employees between May 15, 1996 and May 13, 1997 at exercise
prices ranging from $11.50 to $20.875 per share. The exercise price was adjusted
to be equal to the current market price on that day. Stock options granted to
the Company's Board of Directors and to employees in conjunction with a general
option grant on March 5, 1997 were excluded from this action. Approximately
388,581 shares were reduced to the new exercise price of $9.625.
On February 15, 1996, 92,000 restricted shares of the Company's common
stock were granted and issued to certain key employees. Shares were awarded in
the name of each of the participants who have all the rights of other
stockholders, subject to certain restrictions and forfeiture provisions. At
August 31, 1997, 7,500 shares carried restrictions. Restrictions on the shares
expire ratably on the anniversary date of the award over the next three years.
N-15
<PAGE> 816
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity in the stock option plans for fiscal 1996, 1995,
and 1994 is presented as follows:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS OPTION PRICE
STOCK OPTION PLANS FOR OPTIONS OUTSTANDING PER SHARE
- ------------------ ----------- ----------- ---------------
<S> <C> <C> <C>
Balance at August 28, 1994.................... 166,936 1,248,850 $ 2.13 - $15.88
-------- --------- ---------------
Grants...................................... (395,456) 395,456 $ 9.88 - $16.75
Authorized under 1990 plan.................. 250,000
Exercised................................... (525,568) $ 2.13 - $15.50
Canceled.................................... 159,439 (159,439) $ 3.38 - $16.25
Expired..................................... (1,167)
-------- --------- ---------------
Balance at August 27, 1995.................... 179,752 959,299 $ 2.25 - $16.75
-------- --------- ---------------
Authorized under 1990 Plan.................. 350,000
Grants...................................... (572,305) 572,305 $ 9.63 - $16.38
Exercised................................... (173,895) $ 3.00 - $16.25
Canceled.................................... 182,887 (182,887) $ 3.38 - $16.38
-------- --------- ---------------
Balance at August 25, 1996.................... 140,334 1,174,822 $ 2.13 - $16.75
-------- --------- ---------------
Authorized under 1990 Plan.................... 450,000
Grants...................................... (902,831) 902,831 $13.09 - $20.88
Exercised................................... (284,370) $ 2.13 - $16.38
Canceled.................................... 677,297 (677,297) $ 3.00 - $20.88
Expired..................................... (1,000) $3.00
-------- --------- ---------------
Balance at August 31, 1997.................... 363,800 1,115,986 $ 2.25 - $19.00
-------- --------- ---------------
</TABLE>
At August 31, 1997, August 25, 1996, and August 27, 1995, there were
464,589 shares, 464,767 shares, and 413,495 shares exercisable, respectively.
Under the Company's 1983 Employee Stock Purchase Plan, eligible employees
may purchase shares of common stock through payroll deductions (up to a maximum
of 10% of their salary) at a price equal to 85% of the lower of the stock's fair
market value at the beginning or at the end of each six month offering period.
There were 38,947 shares issuable under the Plan for fiscal 1997 of which 22,112
were outstanding at August 31, 1997. For fiscal 1996 and 1995, 56,010 shares and
56,005 shares, respectively, were issued under the Plan. At August 31, 1997,
59,383 shares of common stock were reserved for issuance under the Plan.
In October 1995, the Financial Accounting Standards Board issues Statement
of Financial Accounting Standard 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 requires that companies either recognize compensation
expense for grants of stock, stock options and other equity instruments based on
fair value, or provide pro forma disclosure of net income and earnings per share
in the notes to the financial statements. The Company adopted the
disclosure-only provisions of SFAS 123 in fiscal 1997 and has applied APB
Opinion No. 25 and related interpretations in accounting for its plans.
N-16
<PAGE> 817
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS EMPLOYEE STOCK
AND AWARDS PURCHASE PLANS
--------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average fair value of shares................ $ 8.36 $ 10.54 $ 6.00 $ 4.16
Shares Granted....................................... 902,831 631,305 38,947 56,010
Assumptions:
Risk-free interest rate............................ 5.9% 6.0% 5.0% 5.0%
Expected volatility................................ 146.2% 144.4% 88.0% 87.2%
Expected life of grants............................ 5.5 years 5.5 years .5 years .5 years
Dividend yield..................................... None None None None
</TABLE>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES OUTSTANDING
------------------------------------ SHARES EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 8/31/97 LIFE PRICE AT 8/31/97 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
STOCK OPTION PLAN
$ 2.25-$ 8.63............................. 125,309 5.02 $ 7.67 116,770 $ 7.61
$ 9.31-$ 9.88............................. 502,296 9.18 9.60 96,507 9.66
$10.00-$11.38............................. 279,025 8.19 10.83 129,091 10.91
$11.75-$19.00............................. 209,356 7.14 14.57 122,221 14.15
--------- ---- ------ ------- ------
$ 2.25-$19.00............................. 1,115,986 8.08 $10.62 464,589 $10.67
========= ==== ====== ======= ======
STOCK PURCHASE PLAN
$11.05.................................... $ 22,112 -- $11.05 $22,112 $11.05
========= ==== ====== ======= ======
</TABLE>
Had compensation costs for the Company's stock option plans and employee
stock purchase plans been determined on the fair market value at the grant dates
for such awards, the Company's net loss and net loss per share would approximate
the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net loss:
As reported............................................... $(1,078) $(15,545)
Pro forma................................................. (4,380) (16,787)
Net loss per share:
As reported............................................... $ (.10) $ (1.50)
Pro forma................................................. (.41) (1.62)
</TABLE>
The effects of applying SFAS 123 for the purpose of providing pro forma
disclosures may not be indicative of the effects on reported net income and net
income per share for future years, as the pro forma disclosures include the
effects of only those awards granted after August 27, 1995.
N-17
<PAGE> 818
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution savings plan under the
provisions of Internal Revenue Code Section 401(k). Under the terms of the Plan,
the Company contributes up to 3% of base pay to a fund which is held by a
trustee. All employees are eligible to participate in the Plan and are entitled,
upon termination or retirement, to receive their vested portion of the savings
fund assets. The unvested portion remains in the Plan and is used to reduce
future Plan expense. Total Plan expense was $468,000 in fiscal 1997, $547,000 in
fiscal 1996, and $525,000 in fiscal 1995.
NOTE 11 STOCKHOLDER RIGHTS PLAN
On February 19, 1997, the Board of Directors of Telco Systems, Inc. adopted
a Stockholder Rights Plan (the "Plan") and distributed one Right for each
outstanding share of the Company's Common Stock, par value $.01 per share. The
Rights were issued to holders of record of Common Stock outstanding on February
19, 1997. Each share of Common Stock issued after February 19, 1997 will also
include one Right subject to certain limitations. Each Right when it becomes
exercisable will initially entitle the registered holder to purchase from the
Company one one-hundredth (1/100th) of a share of Series A Participating
Cumulative Preferred Stock, par value $.01 per share ("Series A Preferred
Stock"), of the Company at a price of $50.00 (the "Exercise Price").
Currently, the Rights are attached to the Company's common stock. These
Rights are not now exercisable and cannot be transferred separately. The Rights
become exercisable and separately transferable when the Board learns that any
person or group (other than Kopp Investment Advisors, Inc. and its affiliates or
associates (collectively "KIA")), has acquired 15% or more of the Company's
outstanding common stock or on such date as may be designated by the Board
following the announcement of a tender or exchange offer for outstanding shares
of common stock which could result in the offeror becoming the beneficial owner
of 15% or more of the Company's outstanding common stock. Under such
circumstances, holders of the Rights will be entitled to purchase, for the
Exercise Price, that number of hundredths of a share of Series A Preferred Stock
equivalent to the number of shares of the Company's common stock (or under
certain circumstances other equity securities) having a market value of two
times the Exercise Price. 15% holders (other than KIA), however, are not
entitled to exercise their Rights under such circumstances. As a result, their
voting and equity interests in the Company would be substantially diluted should
the rights ever be exercised.
The Rights expire in February 2007, but may be redeemed earlier by the
Company in accordance with the provisions of the Rights Plan at a price of $.01
per Right.
N-18
<PAGE> 819
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 13,999 $ 5,406
Marketable securities..................................... 1,599 7,302
Accounts receivable, net.................................. 20,353 19,663
Inventories, net.......................................... 22,234 28,370
Other current assets...................................... 1,002 985
-------- --------
Total current assets.............................. 59,187 61,726
Plant and equipment, at cost................................ 48,644 46,401
Less accumulated depreciation............................. 39,688 36,712
-------- --------
Net plant and equipment........................... 8,956 9,689
Intangible and other assets, net............................ 7,680 7,184
-------- --------
Total assets...................................... $ 75,823 $ 78,599
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,818 $ 7,292
Payroll and related liabilities........................... 2,975 3,492
Other accrued liabilities................................. 9,841 10,528
-------- --------
Total current liabilities......................... 19,634 21,312
Restructuring and other long-term liabilities............... 1,056 1,531
Shareholders' equity:
Series A participating cumulative preferred stock, 200
shares authorized; no shares outstanding............... -- --
Preferred stock, $.01 par value, 5,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.01 par value, 24,000 shares authorized;
shares outstanding:
11,037 at May 31, 1998
10,805 at August 31, 1997.............................. 110 108
Capital in excess of par value............................ 78,827 76,602
Unearned compensation -- restricted stock................. (42) (68)
Accumulated deficit....................................... (23,762) (20,886)
-------- --------
Total shareholders' equity........................ 55,133 55,756
-------- --------
Total liabilities and shareholders' equity........ $ 75,823 $ 78,599
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
N-19
<PAGE> 820
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -----------------
MAY 31, MAY 25, MAY 31, MAY 25,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................................. $28,545 $27,411 $81,557 $86,541
Costs and expenses:
Cost of products sold..................................... 17,426 19,118 49,984 54,255
Research and development.................................. 3,981 3,598 11,262 11,336
Sales, marketing and administration....................... 5,854 8,705 17,884 23,510
Purchased research and development........................ -- -- 5,135 --
(Gain) on sale of investment.............................. -- -- -- (1,070)
Amortization of intangible assets......................... 222 168 573 501
Interest (income)......................................... (153) (161) (505) (504)
------- ------- ------- -------
Total costs and expenses........................ 27,330 31,428 84,333 88,028
------- ------- ------- -------
(Loss) income before income taxes......................... 1,215 (4,017) (2,776) (1,487)
Provision for income taxes 50 -- 100 --
------- ------- ------- -------
Net (loss) income............................... $ 1,165 $(4,017) $(2,876) $(1,487)
======= ======= ======= =======
Shares used in computing net income (loss) per share:
Basic................................................... 11,031 10,764 10,942 10,690
Diluted................................................. 11,094 10,764 10,942 10,690
Earnings (loss) per share:
Basic................................................... $ 0.11 $ (0.37) $ (0.26) $ (0.14)
Diluted................................................. $ 0.11 $ (0.37) $ (0.26) $ (0.14)
</TABLE>
See accompanying notes to consolidated financial statements.
N-20
<PAGE> 821
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
MAY 31, MAY 25,
1998 1997
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net (loss)................................................ $(2,876) $(1,487)
Depreciation and amortization............................. 3,644 4,043
Write-off of purchased research and development........... 5,135 --
Amortization of unearned compensation..................... 16 40
Change in assets and liabilities:
Accounts receivable.................................... (690) 500
Inventories, net....................................... 6,136 (2,651)
Other current assets................................... (17) (152)
Intangible and other assets............................ -- 1,000
Accounts payable and other current liabilities......... (1,656) (1,994)
Restructuring liabilities.............................. (1,007) (1,712)
Long-term liabilities.................................. (388) 358
------- -------
Net cash provided by (used in) operating activities....... 8,297 (2,055)
------- -------
Cash flows from investing activities:
Additions to plant and equipment, net..................... (2,308) (2,718)
Purchase of assets of Jupiter Technology, Inc............. (4,336) --
Purchase of short-term investments........................ (3,049) (5,110)
Maturities of short-term investments...................... 8,752 10,713
------- -------
Net cash (used in) provided by investing activities....... (941) 2,885
------- -------
Cash flows from financing activities:
Proceeds from sale of common shares under employee stock
plans.................................................. 1,237 2,500
------- -------
Net cash provided by financing activities................... 1,237 2,500
------- -------
Increase (decrease) in cash and equivalents................. 8,593 3,330
Cash and equivalents at beginning of period................. 5,406 8,461
------- -------
Cash and equivalents at end of period....................... $13,999 $11,791
======= =======
Supplemental schedule of non-cash investing and financing
activities:
Shares issued for assets of Jupiter Technology............ $ 1,000 $ --
======= =======
Liabilities assumed relating to Jupiter Technology........ $ 898 $ --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
N-21
<PAGE> 822
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED MAY 31, 1998
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements of Telco Systems, Inc. (the
"Company") included in this report reflect all adjustments (consisting of only
normally recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial position at May 31, 1998
and the consolidated statements of operations and cash flows for the nine months
ended May 31, 1998 and May 25, 1997. The unaudited results of operations for the
interim periods reported are not necessarily indicative of results to be
expected for the year.
Certain notes and other information have been condensed or omitted from
these interim financial statements. The statements, therefore, should be read in
conjunction with the consolidated financial statements and related notes
included in the Telco Systems, Inc. Annual Report on Form 10-K for the year
ended August 31, 1997.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 8,679 $12,803
Work-in-process............................................. 3,759 5,605
Finished goods.............................................. 9,796 9,962
------- -------
$22,234 $28,370
======= =======
</TABLE>
NOTE 3 -- SHARES OUTSTANDING
Changes in shares outstanding:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
MAY 31, MAY 25,
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of period.......................... 10,805 10,520
Shares issued for Jupiter acquisition..................... 102 --
Options exercised, net.................................... 81 250
Restricted stock option................................... 6 --
Employee stock purchase plan.............................. 43 43
------- -------
Outstanding at end of period................................ 11,037 10,813
======= =======
</TABLE>
NOTE 4 -- ACQUISITION
On January 26, 1998, the Company acquired substantially all of the assets
of Jupiter Technology, Inc., a privately held company engaged in the development
of ATM and frame relay access equipment. The transaction was accounted for using
the purchase method at a cost of $6.2 million, including issuance of 101,636
shares of common stock. The purchase price included $5.1 million which
represented the value of in-process technology that had not yet reached
technological feasibility and had no alternative use. This amount was expensed
during the third quarter of fiscal 1998. In addition, the purchase price
included $1.1 million of goodwill, which will be amortized over five years.
N-22
<PAGE> 823
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- (LOSS) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which the Company adopted in the second quarter
of fiscal 1998. The Company has restated all prior period per share amounts to
comply with the requirements of FAS 128. Under the new requirements, primary and
fully diluted earnings per share were replaced by basic and diluted earnings per
share. Basic earnings per common share is calculated by dividing net income or
loss by the weighted average number of common shares outstanding during the
periods. Diluted earnings per share is calculated by dividing net income or loss
by the sum of the weighted average number of common shares outstanding plus all
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued. Potentially dilutive common shares were
excluded from the diluted calculation for those periods in which the Company
reported a net loss. The following table reconciles the number of shares
utilized in the earnings per share calculations for the periods ended May 31,
1998 and May 25, 1997.
SHARES USED IN COMPUTING EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
MAY 31, MAY 25, MAY 31, MAY 25,
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
(basic)......................................... 11,031 10,764 10,942 10,690
Effect of dilutive securities -- stock options.... 63 0 0 0
Weighted average common shares outstanding
(diluted)....................................... 11,094 10,764 10,942 10,690
</TABLE>
NOTE 6 -- SUBSEQUENT EVENT
On June 4, 1998, the Company entered into a definitive agreement to merge
with World Access, Inc. The transaction will be subject to stockholder and
regulatory approval and is expected to be accounted for as a purchase. The
merger agreement provides that all shares of the Company's common stock will be
converted into shares of World Access common stock having a value of $17.00 per
share, based on the average daily closing price of World Access common stock as
reported on the Nasdaq National Market System for a predefined period prior to
the effective time of the merger (the "Closing Price"). If the Closing Price is
more than $36.00, then each share of the Company's common stock will be
converted into 0.4722 shares of World Access common stock. If the Closing Price
is less than $29.00, then each share of the Company's common stock will be
converted into 0.5862 shares of World Access common stock.
N-23
<PAGE> 824
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS NEW
AND NACT WORLD ACCESS
NACT MINORITY COMBINED AND
WORLD INTEREST ("NEW WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS") RESURGENS ADJUSTMENTS COMBINED
-------- ------------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable securities.................... 3,500 -- 3,500 -- -- 3,500
Accounts receivable...................... 41,819 -- 41,819 3,354 -- 45,173
Inventories.............................. 34,473 -- 34,473 -- -- 34,473
Other current assets..................... 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current Assets............... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and equipment.................... 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill.................................. 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology....................... 4,400(A) 4,400 -- -- 4,400
Other assets.............................. 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total Assets....................... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable......................... 23,087 -- 23,087 19,731 -- 42,818
Other accrued liabilities................ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current Liabilities.......... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt............................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities.................... 1,564 1,700(A) 3,264 29,050 -- 32,314
Minority interests........................ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.................. 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock............................. 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of par value........... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit...................... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity......... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................ $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
TELCO AND TELCO
TELCO ADJUSTMENTS COMBINED
-------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 11,601 $ -- $ 63,891
Marketable securities.................... 2,200 -- 5,700
Accounts receivable...................... 16,974 -- 62,147
Inventories.............................. 23,209 (4,500)(E) 53,182
Other current assets..................... 954 -- 20,859
-------- -------- ---------
Total Current Assets............... 54,938 (4,500) 205,779
Property and equipment.................... 8,383 (2,800)(E) 83,912
Goodwill.................................. 7,617 30,125(E) 192,988
Acquired technology....................... -- 56,400(E) 60,800
Other assets.............................. -- 23,400(E) 65,915
-------- -------- ---------
Total Assets....................... $ 70,938 $102,625 $ 609,394
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ -- $ -- $ 7,950
Accounts payable......................... 4,357 -- 47,175
Other accrued liabilities................ 12,635 6,650(E) 41,441
-------- -------- ---------
Total Current Liabilities.......... 16,992 6,650 96,566
Long-term debt............................ -- -- 115,529
Noncurrent liabilities.................... 991 24,900(E) 58,205
Minority interests........................ -- -- --
-------- -------- ---------
Total Liabilities.................. 17,983 31,550 270,300
Stockholders' Equity
Common stock............................. 110 (110)(F) 340
65(E)
Capital in excess of par value........... 79,017 (79,017)(F) 469,485
197,865(E)
Accumulated deficit...................... (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- ---------
Total Stockholders' Equity......... 52,955 71,075 339,094
-------- -------- ---------
Total Liabilities and Stockholders'
Equity............................ $ 70,938 $102,625 $ 609,394
======== ======== =========
</TABLE>
N-24
<PAGE> 825
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
-------- ----------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents........ $ 57,653 $ -- $57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable
securities......... 3,500 -- 3,500 -- -- 3,500
Accounts receivable... 41,819 -- 41,819 3,354 -- 45,173
Inventories........... 34,473 -- 34,473 -- -- 34,473
Other current
assets............. 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current
Assets...... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and
equipment............. 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill................ 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology..... 4,400(A) 4,400 -- -- 4,400
Other assets............ 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total
Assets...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable...... 23,087 -- 23,087 19,731 -- 42,818
Other accrued
liabilities........ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt.......... 115,529 -- 115,529 -- -- 115,529
Noncurrent
liabilities........... 1,564 1,700(A) 3,264 29,050 32,314
Minority interests...... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities... 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock.......... 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of
par value.......... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity...... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
</TABLE>
N-25
<PAGE> 826
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD TELCO TELCO
ACCESS ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
-------- ----------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents........ $ 57,653 $ -- $ 57,653 $ 11,601 $ -- $ 69,254
Marketable securities....... 3,500 -- 3,500 2,200 -- 5,700
Accounts receivable......... 41,819 -- 41,819 16,974 -- 58,793
Inventories................. 34,473 -- 34,473 23,209 (4,500)(E) 53,182
Other current assets........ 15,429 -- 15,429 954 -- 16,383
-------- -------- -------- -------- -------- --------
Total Current
Assets............. 152,874 -- 152,874 54,938 (4,500) 203,312
Property and equipment........ 17,203 -- 17,203 8,383 (2,800)(E) 22,786
Goodwill...................... 74,378 9,617(A) 83,995 7,617 30,125(E) 121,737
Acquired technology........... 4,400(A) 4,400 -- 56,400(E) 60,800
Other assets.................. 24,063 -- 24,063 -- 23,400(E) 47,463
-------- -------- -------- -------- -------- --------
Total Assets......... $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............. $ 4,408 $ -- $ 4,408 $ -- $ -- $ 4,408
Accounts payable............ 23,087 -- 23,087 4,357 -- 27,444
Other accrued liabilities... 12,913 -- 12,913 12,635 6,650(E) 32,198
-------- -------- -------- -------- -------- --------
Total Current
Liabilities........ 40,408 -- 40,408 16,992 6,650 64,050
Long-term debt................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities........ 1,564 1,700(A) 3,264 991 24,900(E) 29,155
Minority interests............ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.... 169,944 (10,743) 159,201 17,983 31,550 208,734
Stockholders' Equity
Common stock................ 219 20(A) 239 110 (110)(F) 304
65(E)
Capital in excess of par
value..................... 133,286 46,640(A) 179,926 79,017 (79,017)(F) 377,791
197,865(E)
Accumulated deficit......... (34,931) (21,900)(B) (56,831) (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- -------- -------- -------- --------
Total Stockholders'
Equity............. 98,574 24,760 123,334 52,955 71,075 247,364
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders'
Equity............. $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
</TABLE>
N-26
<PAGE> 827
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT
MINORITY NEW
WORLD INTEREST WORLD
ACCESS ADJUSTMENTS ACCESS
-------- ------------- --------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents................................... $ 57,653 $ -- $ 57,653
Marketable securities.................................. 3,500 -- 3,500
Accounts receivable.................................... 41,819 -- 41,819
Inventories............................................ 34,473 -- 34,473
Other current assets................................... 15,429 -- 15,429
-------- -------- --------
Total Current Assets........................... 152,874 -- 152,874
Property and equipment................................... 17,203 -- 17,203
Goodwill................................................. 74,378 9,617(A) 83,995
Acquired technology...................................... 4,400(A) 4,400
Other assets............................................. 24,063 -- 24,063
-------- -------- --------
Total Assets................................... $268,518 $ 14,017 $282,535
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................ $ 4,408 $ -- $ 4,408
Accounts payable....................................... 23,087 -- 23,087
Other accrued liabilities.............................. 12,913 -- 12,913
-------- -------- --------
Total Current Liabilities...................... 40,408 -- 40,408
Long-term debt........................................... 115,529 -- 115,529
Noncurrent liabilities................................... 1,564 1,700(A) 3,264
Minority interests....................................... 12,443 (12,443)(A) --
-------- -------- --------
Total Liabilities.............................. 169,944 (10,743) 159,201
Stockholders' Equity
Common stock........................................... 219 20(A) 239
Capital in excess of par value......................... 133,286 46,640(A) 179,926
Accumulated deficit.................................... (34,931) (21,900)(B) (56,831)
-------- -------- --------
Total Stockholders' Equity..................... 98,574 24,760 123,334
-------- -------- --------
Total Liabilities and Stockholders' Equity..... $268,518 $ 14,017 $282,535
======== ======== ========
</TABLE>
N-27
<PAGE> 828
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS
WORLD TELCO AND TELCO
ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.......................... $ 57,653 $11,601 $ -- $ 69,254
Marketable securities......................... 3,500 2,200 -- 5,700
Accounts receivable........................... 41,819 16,974 -- 58,793
Inventories................................... 34,473 23,209 (4,500)(E) 53,182
Other current assets.......................... 15,429 954 -- 16,383
-------- ------- --------- ---------
Total Current Assets.................. 152,874 54,938 (4,500) 203,312
Property and equipment.......................... 17,203 8,383 (2,800)(E) 22,786
Goodwill........................................ 74,378 7,617 30,125(E) 112,120
Acquired technology............................. 56,400(E) 56,400
Other assets.................................... 24,063 -- 23,400(E) 47,463
-------- ------- --------- ---------
Total Assets.......................... $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
Current Liabilities
Short-term debt............................... $ 4,408 $ -- $ -- $ 4,408
Accounts payable.............................. 23,087 4,357 -- 27,444
Other accrued liabilities..................... 12,913 12,635 6,650(E) 32,198
-------- ------- --------- ---------
Total Current Liabilities............. 40,408 16,992 6,650 64,050
Long-term debt.................................. 115,529 -- -- 115,529
Noncurrent liabilities.......................... 1,564 991 24,900(E) 27,455
Minority interests.............................. 12,443 -- -- 12,443
-------- ------- --------- ---------
Total Liabilities..................... 169,944 17,983 31,550 219,477
Stockholders' Equity
Common stock.................................. 219 110 (110)(F) 284
65(E)
Capital in excess of par value................ 133,286 79,017 (79,017)(F) 331,151
197,865(E)
Accumulated deficit........................... (34,931) (26,172) 26,172(F) (108,831)
(73,900)(G)
-------- ------- --------- ---------
Total Stockholders' Equity............ 98,574 52,955 71,075 222,604
-------- ------- --------- ---------
Total Liabilities and Stockholders'
Equity.............................. $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
</TABLE>
N-28
<PAGE> 829
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
WORLD NACT NACT NACT
ACCESS MAJORITY MAJORITY MINORITY
WORLD ATI AND ATI INTEREST INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED NACT ADJUSTMENTS COMBINED ADJUSTMENTS
-------- ------ ----------- -------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 69,830 $826... $ -- $ 70,656 $ 1,175 $ -- $71,831
Service revenues.......... 13,408 -- -- 13,408 1,160 -- 14,568 $ --
-------- ------ ------- -------- ------- -------- ------- -------
Total Sales.............. 83,238 826 -- 84,064 2,335 -- 86,399 --
Cost of products sold..... 39,012 631... -- 39,643 755 190(D) 40,588 90(H)
Cost of services.......... 12,189 -- -- 12,189 1,220 -- 13,409 --
-------- ------ ------- -------- ------- -------- ------- -------
Total Cost of Sales...... 51,201 631 -- 51,832 1,975 190 53,997 90
Gross Profit............. 32,037 195 -- 32,232 360 (190) 32,402 (90)
Engineering and
development.............. 2,582 241 -- 2,823 504 -- 3,327 --
Selling, general and
administrative........... 7,936 349 -- 8,285 1,369 -- 9,654 --
Amortization of
goodwill................. 1,882 --.... 16(A) 1,898 39 360(E) 2,297 240(I)
-- -- -- -- --
In-process research and
development.............. 50,000 -- (5,400)(B) 44,600 -- (44,600)(F) -- --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240 --
-------- ------ ------- -------- ------- -------- ------- -------
Operating Income (Loss).. (33,603) (395) 5,384 (28,614) (1,552) 44,050 13,884 (330)
Interest and other
income................... 1,971 -- -- 1,971 -- -- 1,971 --
Interest and other
expense.................. (3,031) (18) -- (3,049) -- -- (3,049) --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Income Taxes and
Minority Interests..... (34,663) (413) 5,384 (29,692) (1,552) 44,050 12,806 (330)
Income taxes.............. 6,135 -- (140)(C) 5,995 (620) -- 5,375 --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Minority Interests..... (40,798) (413) 5,524 (35,687) (932) 44,050 7,431 (330)
Minority interests in
earnings of subsidiary... 1,533 -- -- 1,533 -- (305)(G) 1,228 (1,228)(J)
-------- ------ ------- -------- ------- -------- ------- -------
Net Income (Loss)........ $(42,331) $ (413) $ 5,524 $(37,220) $ (932) $ 44,355 $ 6,203 $ 898
======== ====== ======= ======== ======= ======== ======= =======
Net Income (Loss) Per
Common Share
Basic....................
Diluted..................
Weighted Average Shares
Outstanding
Basic....................
Diluted..................
<CAPTION>
NEW NEW
WORLD WORLD
ACCESS ACCESS,
NEW AND RESURGENS
WORLD RESURGENS RESURGENS TELCO AND TELCO
ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 71,831 $ -- $ -- $ 71,831 $54,552 $ -- $ 126,383
Service revenues.......... 14,568 10,377 -- 24,945 -- -- 24,945
-------- -------- ------- -------- ------- ------- ---------
Total Sales.............. 86,399 10,377 -- 96,776 54,552 -- 151,328
Cost of products sold..... 40,678 -- -- 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services.......... 13,409 27,028 -- 40,437 -- 40,437
-------- -------- ------- -------- ------- ------- ---------
Total Cost of Sales...... 54,087 27,028 -- 81,115 32,969 3,405 117,489
Gross Profit............. 32,312 (16,651) -- 15,661 21,583 (3,405) 33,839
Engineering and
development.............. 3,327 -- -- 3,327 7,809 -- 11,136
Selling, general and
administrative........... 9,654 10,404 620(L) 20,678 11,974 460(R) 33,112
Amortization of
goodwill................. 2,537 -- 1,780(M) 4,317 406 (160)(S) 5,363
-- -- -- 800(T)
In-process research and
development.............. -- -- -- -- 5,135 (5,135)(U) --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240
-------- -------- ------- -------- ------- ------- ---------
Operating Income (Loss).. 13,554 (27,055) (2,400) (15,901) (3,741) 630 (19,012)
Interest and other
income................... 1,971 4 -- 1,975 323 -- 2,298
Interest and other
expense.................. (3,049) (2,224) -- (5,273) -- -- (5,273)
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Income Taxes and
Minority Interests..... 12,476 (29,275) (2,400) (19,199) (3,418) 630 (21,987)
Income taxes.............. 5,375 -- (5,375)(N) -- 100 (100)(V) --
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Minority Interests..... 7,101 (29,275) 2,975 (19,199) (3,518) 730 (21,987)
Minority interests in
earnings of subsidiary... -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- ---------
Net Income (Loss)........ $ 7,101 $(29,275) $ 2,975 $(19,199) $(3,518) $ 730 $ (21,987)
======== ======== ======= ======== ======= ======= =========
Net Income (Loss) Per
Common Share
Basic.................... $ (0.67)(X)
=========
Diluted.................. $ (0.67)(X)
=========
Weighted Average Shares
Outstanding
Basic.................... 32,724(X)
=========
Diluted.................. 32,724(X)
=========
</TABLE>
N-29
<PAGE> 830
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY ACCESS AND
INTEREST INTEREST NEW WORLD RESURGENS RESURGENS
COMBINED ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
------------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products..................... $71,831 $ -- $71,831 $ -- $ -- $ 71,831
Service revenues...................... 14,568 -- 14,568 10,377 -- 24,945
------- ------- ------- -------- ------- --------
Total Sales......................... 86,399 -- 86,399 10,377 -- 96,776
Cost of products sold................. 40,588 90(H) 40,678 -- -- 40,678
Cost of services...................... 13,409 -- 13,409 27,028 -- 40,437
------- ------- ------- -------- ------- --------
Total Cost of Sales................. 53,997 90 54,087 27,028 -- 81,115
Gross Profit........................ 32,402 (90) 32,312 (16,651) -- 15,661
Engineering and development........... 3,327 -- 3,327 -- -- 3,327
Selling, general and administrative... 9,654 -- 9,654 10,404 620(L) 20,678
Amortization of goodwill.............. 2,297 240(I) 2,537 -- 1,780(M) 4,317
Special charges....................... 3,240 -- 3,240 -- -- 3,240
------- ------- ------- -------- ------- --------
Operating Income (Loss)............. 13,884 (330) 13,554 (27,055) (2,400) (15,901)
Interest and other income............. 1,971 -- 1,971 4 -- 1,975
Interest and other expense............ (3,049) -- (3,049) (2,224) -- (5,273)
------- ------- ------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests............ 12,806 (330) 12,476 (29,275) (2,400) (19,199)
Income taxes.......................... 5,375 -- 5,375 -- (5,375)(N) --
------- ------- ------- -------- ------- --------
Income (Loss) Before Minority
Interests......................... 7,431 (330) 7,101 (29,275) 2,975 (19,199)
Minority interests in earnings of
subsidiary.......................... 1,228 (1,228)(J) -- -- -- --
------- ------- ------- -------- ------- --------
Net Income (Loss)................... $ 6,203 $ 898 $ 7,101 $(29,275) $ 2,975 $(19,199)
======= ======= ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................... $ (0.73)(O)
========
Diluted............................. $ (0.73)(O)
========
Weighted Average Shares Outstanding
Basic............................... 26,220(O)
========
Diluted............................. 26,220(O)
========
</TABLE>
N-30
<PAGE> 831
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
NACT NACT NEW
MAJORITY MINORITY WORLD ACCESS
INTEREST INTEREST NEW TELCO AND TELCO
COMBINED ADJUSTMENTS WORLD ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------------- ------------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $71,831 $ -- $71,831 $54,552 $ -- $126,383
Service revenues........................ 14,568 -- 14,568 -- -- 14,568
------- ------ ------- ------- ------- --------
Total Sales........................... 86,399 -- 86,399 54,552 -- 140,951
Cost of products sold................... 40,588 90(H) 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services........................ 13,409 -- 13,409 -- 13,409
------- ------ ------- ------- ------- --------
Total Cost of Sales................... 53,997 90 54,087 32,969 3,405 90,461
Gross Profit.......................... 32,402 (90) 32,312 21,583 (3,405) 50,490
Engineering and development............. 3,327 -- 3,327 7,809 -- 11,136
Selling, general and administrative..... 9,654 -- 9,654 11,974 460(R) 22,088
Amortization of goodwill................ 2,297 240(I) 2,537 406 (160)(S) 3,583
800(T)
In-process research and development..... -- -- -- 5,135 (5,135)(U) --
Special charges......................... 3,240 -- 3,240 -- -- 3,240
------- ------ ------- ------- ------- --------
Operating Income (Loss)............... 13,884 (330) 13,554 (3,741) 630 10,443
Interest and other income............... 1,971 -- 1,971 323 -- 2,294
Interest expense........................ (3,049) -- (3,049) -- -- (3,049)
------- ------ ------- ------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 12,806 (330) 12,476 (3,418) 630 9,688
Income taxes............................ 5,375 -- 5,375 100 (1,655)(W) 3,820
------- ------ ------- ------- ------- --------
Income (Loss) Before Minority
Interests........................... 7,431 (330) 7,101 (3,518) 2,285 5,868
Minority interests in earnings of
subsidiary............................ 1,228 (1,228)(J) -- -- -- --
------- ------ ------- ------- ------- --------
Net Income (Loss)..................... $ 6,203 $ 898 $ 7,101 $(3,518) $ 2,285 $ 5,868
======= ====== ======= ======= ======= ========
Net Income Per Common Share
Basic................................. $ 0.20(X)
========
Diluted............................... $ 0.19(X)
========
Weighted Average Shares Outstanding
Basic................................. 28,974(X)
========
Diluted............................... 30,655(X)
========
</TABLE>
N-31
<PAGE> 832
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
NACT NACT
MAJORITY MINORITY NEW
INTEREST INTEREST WORLD
COMBINED ADJUSTMENTS ACCESS
------------- ----------- -------
<S> <C> <C> <C>
Sales of products......................................... $71,831 $ -- $71,831
Service revenues.......................................... 14,568 -- 14,568
------- ------- -------
Total Sales............................................. 86,399 -- 86,399
Cost of products sold..................................... 40,588 90(H) 40,678
Cost of services.......................................... 13,409 -- 13,409
------- ------- -------
Total Cost of Sales..................................... 53,997 90 54,087
Gross Profit............................................ 32,402 (90) 32,312
Engineering and development............................... 3,327 -- 3,327
Selling, general and administrative....................... 9,654 -- 9,654
Amortization of goodwill.................................. 2,297 240(I) 2,537
Special charges........................................... 3,240 -- 3,240
------- ------- -------
Operating Income........................................ 13,884 (330) 13,554
Interest and other income................................. 1,971 -- 1,971
Interest expense.......................................... (3,049) -- (3,049)
------- ------- -------
Income Before Income Taxes and Minority Interests....... 12,806 (330) 12,476
Income taxes.............................................. 5,375 -- 5,375
------- ------- -------
Income Before Minority Interests........................ 7,431 (330) 7,101
Minority interests in earnings of subsidiary.............. 1,228 (1,228)(J) --
------- ------- -------
Net Income.............................................. $ 6,203 $ 898 $ 7,101
======= ======= =======
Net Income Per Common Share
Basic................................................... $ 0.32(K)
=======
Diluted................................................. $ 0.30(K)
=======
Weighted Average Shares Outstanding
Basic................................................... 22,470(K)
=======
Diluted................................................. 23,969(K)
=======
</TABLE>
N-32
<PAGE> 833
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND WORLD
NACT MAJORITY ACCESS AND
INTEREST TELCO TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products............................... $71,831 $54,552 $ -- $126,383
Service revenues................................ 14,568 -- -- 14,568
------- ------- ------- --------
Total Sales................................... 86,399 54,552 -- 140,951
Cost of products sold........................... 40,588 32,969 (120)(P) 76,962
3,525(Q)
Cost of services................................ 13,409 -- 13,409
------- ------- ------- --------
Total Cost of Sales........................... 53,997 32,969 3,405 90,371
Gross Profit.................................. 32,402 21,583 (3,405) 50,580
Engineering and development..................... 3,327 7,809 -- 11,136
Selling, general and administrative............. 9,654 11,974 460(R) 22,088
Amortization of goodwill........................ 2,297 406 (160)(S) 3,343
800(T)
In-process research and development............. -- 5,135 (5,135)(U) --
Special charges................................. 3,240 -- -- 3,240
------- ------- ------- --------
Operating Income.............................. 13,884 (3,741) 630 10,773
Interest and other income....................... 1,971 323 -- 2,294
Interest expense................................ (3,049) -- -- (3,049)
------- ------- ------- --------
Income Before Income Taxes and Minority
Interests.................................. 12,806 (3,418) 630 10,018
Income taxes.................................... 5,375 100 (1,655)(W) 3,820
------- ------- ------- --------
Income Before Minority Interests.............. 7,431 (3,518) 2,285 6,198
Minority interests in earnings of subsidiary.... 1,228 -- -- 1,228
------- ------- ------- --------
Net Income.................................... $ 6,203 $(3,518) $ 2,285 $ 4,970
======= ======= ======= ========
Net Income Per Common Share
Basic......................................... $ 0.18(X)
========
Diluted....................................... $ 0.17(X)
========
Weighted Average Shares Outstanding
Basic......................................... 26,947(X)
========
Diluted....................................... 28,627(X)
========
</TABLE>
N-33
<PAGE> 834
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
WORLD NACT NACT
ACCESS NACT MAJORITY MAJORITY
WORLD ATI AND ATI MAJORITY INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED
------- -------- ----------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $71,392 $ 13,687 $ (150)(A) $ 84,929 $24,502 $ -- $109,431
Service revenues................. 21,593 -- -- 21,593 5,493 -- 27,086
------- -------- ------- -------- ------- ------- --------
Total Sales..................... 92,985 13,687 (150) 106,522 29,995 -- 136,517
Cost of products sold............ 43,827 13,586 (70)(A) 57,343 7,569 370(D) 65,282
Cost of services................. 17,018 -- -- 17,018 5,756 -- 22,774
------- -------- ------- -------- ------- ------- --------
Total Cost of Sales............. 60,845 13,586 (70) 74,361 13,325 370 88,056
Gross Profit.................... 32,140 101 (80) 32,161 16,670 (370) 48,461
Engineering and development...... 1,862 4,283 -- 6,145 2,761 -- 8,906
Selling, general and
administrative.................. 9,000 6,265 -- 15,265 6,913 -- 22,178
Amortization of goodwill......... 1,756 -- 200(B) 1,956 573 2,150(E) 4,679
------- -------- ------- -------- ------- ------- --------
Operating Income (Loss)......... 19,522 (10,447) (280) 8,795 6,423 (2,520) 12,698
Interest and other income........ 2,503 64 -- 2,567 734 -- 3,301
Interest and other expense....... (1,355) -- -- (1,355) (19) -- (1,374)
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests..................... 20,670 (10,383) (280) 10,007 7,138 (2,520) 14,625
Income taxes..................... 7,536 -- (3,800)(C) 3,736 2,757 -- 6,493
------- -------- ------- -------- ------- ------- --------
Income (Loss) Before Minority
Interests..................... 13,134 (10,383) 3,520 6,271 4,381 (2,520) 8,132
Minority Interests in Earnings of
Subsidiary...................... -- -- -- -- -- (1,433)(F) (1,433)
------- -------- ------- -------- ------- ------- --------
Net Income (Loss)............... $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,953) $ 6,699
======= ======== ======= ======== ======= ======= ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
NACT WORLD ACCESS
MINORITY AND
INTEREST NEW RESURGENS RESURGENS TELCO
ADJUSTMENTS WORLD ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS
----------- ------------ --------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $ -- $109,431 $ -- $ -- $ 109,431 $113,013 $ --
Service revenues................. -- 27,086 165,489 -- 192,575 -- --
------ -------- --------- ------- --------- -------- --------
Total Sales..................... -- 136,517 165,489 -- 302,006 113,013 --
Cost of products sold............ 180(G) 65,462 -- -- 65,462 72,638 (240)(O)
7,050(P)
Cost of services................. -- 22,774 246,494 1,230(K) 270,498 -- --
------ -------- --------- ------- --------- -------- --------
Total Cost of Sales............. 180 88,236 246,494 1,230 335,960 72,638 6,810
Gross Profit.................... (180) 48,281 (81,005) (1,230) (33,954) 40,375 (6,810)
Engineering and development...... -- 8,906 -- -- 8,906 14,927 --
Selling, general and
administrative.................. -- 22,178 74,448 -- 96,626 28,181 925(Q)
Amortization of goodwill......... 480(H) 5,159 -- 3,560(L) 8,719 669 (669)(R)
1,500(S)
------ -------- --------- ------- --------- -------- --------
Operating Income (Loss)......... (660) 12,038 (155,453) (4,790) (148,205) (3,402) (8,566)
Interest and other income........ -- 3,301 642 -- 3,943 692 --
Interest and other expense....... -- (1,374) (16,909) -- (18,283) -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (660) 13,965 (171,720) (4,790) (162,545) (2,710) (8,566)
Income taxes..................... -- 6,493 -- (6,493)(M) -- -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Minority
Interests..................... (660) 7,472 (171,720) 1,703 (162,545) (2,710) (8,566)
Minority Interests in Earnings of
Subsidiary...................... 1,433(I) -- -- -- -- -- --
------ -------- --------- ------- --------- -------- --------
Net Income (Loss)............... $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545) $ (2,710) $ (8,566)
====== ======== ========= ======= ========= ======== ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
AND TELCO
COMBINED
--------------
<S> <C>
Sales of products................ $ 222,444
Service revenues................. 192,575
---------
Total Sales..................... 415,019
Cost of products sold............ 144,910
Cost of services................. 270,498
---------
Total Cost of Sales............. 415,408
Gross Profit.................... (389)
Engineering and development...... 23,833
Selling, general and
administrative.................. 125,732
Amortization of goodwill......... 10,219
---------
Operating Income (Loss)......... (160,173)
Interest and other income........ 4,635
Interest and other expense....... (18,283)
---------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (173,821)
Income taxes..................... --
---------
Income (Loss) Before Minority
Interests..................... (173,821)
Minority Interests in Earnings of
Subsidiary...................... --
---------
Net Income (Loss)............... $(173,821)
=========
Net Income (Loss) Per Common
Share
Basic........................... $ (5.54)(U)
=========
Diluted......................... $ (5.54)(U)
=========
Weighted Average Shares
Outstanding
Basic........................... 31,380(U)
=========
Diluted......................... 31,380(U)
=========
</TABLE>
N-34
<PAGE> 835
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NEW
NACT NACT WORLD ACCESS
MAJORITY MINORITY AND
INTEREST INTEREST NEW RESURGENS RESURGENS
COMBINED ADJUSTMENTS WORLD ACCESS RESURGENS ADJUSTMENTS COMBINED
-------- ----------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products...................... $109,431 $ -- $109,431 $ -- $ -- $ 109,431
Service revenues....................... 27,086 -- 27,086 165,489 -- 192,575
-------- ------ -------- --------- ------- ---------
Total Sales.......................... 136,517 -- 136,517 165,489 -- 302,006
Cost of products sold.................. 65,282 180(G) 65,462 -- -- 65,462
Cost of services....................... 22,774 -- 22,774 246,494 1,230(K) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales.................. 88,056 180 88,236 246,494 1,230 335,960
Gross Profit......................... 48,461 (180) 48,281 (81,005) (1,230) (33,954)
Engineering and development............ 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative.... 22,178 -- 22,178 74,448 -- 96,626
Purchased research and development..... -- -- -- -- -- --
Amortization of goodwill............... 4,679 480(H) 5,159 -- 3,560(L) 8,719
-------- ------ -------- --------- ------- ---------
Operating Income (Loss).............. 12,698 (660) 12,038 (155,453) (4,790) (148,205)
Interest and other income.............. 3,301 -- 3,301 642 -- 3,943
Interest and other expense............. (1,374) -- (1,374) (16,909) -- (18,283)
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Income Taxes and
Minority Interests................. 14,625 (660) 13,965 (171,720) (4,790) (162,545)
Income taxes........................... 6,493 -- 6,493 -- (6,493)(M) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests.......................... 8,132 (660) 7,472 (171,720) 1,703 (162,545)
Minority Interests in Earnings of
Subsidiary........................... (1,433) 1,433(I) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss).................... $ 6,699 $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545)
======== ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................ $ (6.53)(N)
=========
Diluted.............................. $ (6.53)(N)
=========
Weighted Average Shares Outstanding
Basic................................ 24,875(N)
=========
Diluted.............................. 24,875(N)
=========
</TABLE>
N-35
<PAGE> 836
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY NEW ACCESS
INTEREST INTEREST WORLD TELCO AND TELCO
COMBINED ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
------------ ----------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $109,431 $ -- $109,431 $113,013 $ -- $222,444
Service revenues........................ 27,086 -- 27,086 -- -- 27,086
-------- ------ -------- -------- ------- --------
Total Sales........................... 136,517 -- 136,517 113,013 -- 249,530
Cost of products sold................... 65,282 180(G) 65,462 72,638 (240)(O) 144,910
7,050(P)
Cost of services........................ 22,774 -- 22,774 -- -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales................... 88,056 180 88,236 72,638 6,810 167,684
Gross Profit.......................... 48,461 (180) 48,281 40,375 (6,810) 81,846
Engineering and development............. 8,906 -- 8,906 14,927 -- 23,833
Selling, general and administrative..... 22,178 -- 22,178 28,181 925(Q) 51,284
Amortization of goodwill................ 4,679 480(H) 5,159 669 (669)(R) 6,659
1,500(S)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)............... 12,698 (660) 12,038 (3,402) (8,566) 70
Interest and other income............... 3,301 -- 3,301 692 -- 3,993
Interest and other expense.............. (1,374) -- (1,374) -- -- (1,374)
-------- ------ -------- -------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 14,625 (660) 13,965 (2,710) (8,566) 2,689
Income taxes............................ 6,493 -- 6,493 -- (3,890)(T) 2,603
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests........................... 8,132 (660) 7,472 (2,710) (4,676) 86
Minority Interests in Earnings of
Subsidiary............................ (1,433) 1,433(I) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss)..................... $ 6,699 $ 773 $ 7,472 $ (2,710) $(4,676) $ 86
======== ====== ======== ======== ======= ========
Net Income Per Common Share
Basic................................. $ 0.00(U)
========
Diluted............................... $ 0.00(U)
========
Weighted Average Shares Outstanding
Basic................................. 27,630(U)
========
Diluted............................... 29,095(U)
========
</TABLE>
N-36
<PAGE> 837
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT
MAJORITY MINORITY
INTEREST INTEREST NEW
COMBINED ADJUSTMENTS WORLD ACCESS
------------- ----------- --------------
<S> <C> <C> <C>
Sales of products..................................... $109,431 $ -- $109,431
Service revenues...................................... 27,086 -- 27,086
-------- ----- --------
Total Sales......................................... 136,517 -- 136,517
Cost of products sold................................. 65,282 180(G) 65,462
Cost of services...................................... 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................. 88,056 180 88,236
Gross Profit........................................ 48,461 (180) 48,281
Engineering and development........................... 8,906 -- 8,906
Selling, general and administrative................... 22,178 -- 22,178
Purchased research and development.................... -- -- --
Amortization of goodwill.............................. 4,679 480(H) 5,159
-------- ----- --------
Operating Income.................................... 12,698 (660) 12,038
Interest and other income............................. 3,301 -- 3,301
Interest and other expense............................ (1,374) -- (1,374)
-------- ----- --------
Income Before Income Taxes and Minority Interests... 14,625 (660) 13,965
Income taxes.......................................... 6,493 -- 6,493
-------- ----- --------
Income Before Minority Interests.................... 8,132 (660) 7,472
Minority Interests in Earnings of Subsidiary.......... (1,433) 1,433(I) --
-------- ----- --------
Net Income.......................................... $ 6,699 $ 773 $ 7,472
======== ===== ========
Net Income Per Common Share
Basic............................................... $ 0.35(J)
========
Diluted............................................. $ 0.33(J)
========
Weighted Average Shares Outstanding
Basic............................................... 21,125(J)
========
Diluted............................................. 22,591(J)
========
</TABLE>
N-37
<PAGE> 838
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT
MAJORITY WORLD ACCESS
INTEREST TELCO AND TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
-------------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Sales of products................. $109,431 $113,013 $ -- $222,444
Service revenues.................. 27,086 -- -- 27,086
-------- -------- ------- --------
Total Sales..................... 136,517 113,013 -- 249,530
Cost of products sold............. 65,282 72,638 (240)(O) 144,730
7,050(P)
Cost of services.................. 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales............. 88,056 72,638 6,810 167,504
Gross Profit.................... 48,461 40,375 (6,810) 82,026
Engineering and development....... 8,906 14,927 -- 23,833
Selling, general and
administrative.................. 22,178 28,181 925(Q) 51,284
Amortization of goodwill.......... 4,679 669 (669)(R) 6,179
1,500(S)
-------- -------- ------- --------
Operating Income (Loss)......... 12,698 (3,402) (8,566) 730
Interest and other income......... 3,301 692 -- 3,993
Interest and other expense........ (1,374) -- -- (1,374)
-------- -------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests.................... 14,625 (2,710) (8,566) 3,349
Income taxes...................... 6,493 -- (3,890)(T) 2,603
-------- -------- ------- --------
Income (Loss) Before Minority
Interests.................... 8,132 (2,710) (4,676) 746
Minority Interests in Earnings of
Subsidiary...................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)............... $ 6,699 $ (2,710) $(4,676) $ (687)
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic........................... $ (0.03)(U)
========
Diluted......................... $ (0.03)(U)
========
Weighted Average Shares
Outstanding
Basic........................... 25,602(U
========
Diluted......................... 25,602(U)
========
</TABLE>
N-38
<PAGE> 839
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
GENERAL HISTORICAL INFORMATION:
ACQUISITIONS OF ATI AND NACT
The ATI acquisition consummated on January 29, 1998 and the NACT Stock
Purchase consummated on February 27, 1998 have been accounted for under the
purchase method of accounting. The historical consolidated financial statements
of New World Access include the results of the operations of ATI and NACT from
February 1, 1998 and March 1, 1998, respectively. The purchase price of ATI and
the majority interest in NACT was allocated to the fair values of the net assets
acquired, to in-process research and development projects and to goodwill.
During the first quarter of 1998, $5.4 million and $44.6 million of purchased
in-process research and development technologies related to the ATI acquisition
and the NACT Stock Purchase, respectively, was expensed in accordance with the
applicable accounting rules. See Note 2 to Consolidated Financial Statements in
the World Access June 30 Form 10-Q for further descriptions of these
acquisitions.
AEROTEL LITIGATION
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT alleging that
telephone systems manufactured and sold by NACT incorporating prepaid debit card
features infringe upon Aerotel's patent which was issued in November 1987. See
Note 8 to Consolidated Financial Statements in the World Access June 30 Form
10-Q for further description of this litigation.
As part of the negotiations relating to the acquisition of NACT, World
Access and GST Telecommunications, Inc. agreed to share evenly any Aerotel
judgment against NACT, including NACT's legal fees. Subsequent to the NACT Stock
Purchase, World Access has been actively engaged in settlement negotiations. On
July 9, 1998, World Access, GST and Aerotel entered into a Memorandum of
Understanding to settle the Aerotel litigation. Including legal fees, World
Access now estimates its Aerotel settlement costs will be approximately $3.3
million. The settlement costs expected to be incurred by World Access have been
accounted for as additional NACT purchase price as of June 30, 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT
Overview. The nature of the efforts required to develop the purchased
in-process technology into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were
discounted back to their net present value. The resulting projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to such projects. These estimates were based on
several assumptions, including those summarized below for each respective
acquisition.
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed the sales and profitability
of New World Access may be adversely affected in future periods. Additionally,
the value of other intangible assets may become impaired.
NACT. NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been
N-39
<PAGE> 840
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
attained. Failure to attain technological feasibility, especially given the high
degree of customization required for complete integration into the NACT
solution, would have rendered partially designed hardware and software useless
for other applications. Incomplete design of hardware and software coding would
create a non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite. The purchased in-process technology acquired in the NACT
acquisition was comprised of nine projects related to switching systems. These
projects were scheduled to be released between February 1998 and December 1999.
Most major projects had several ongoing sub-projects (e.g., a hardware design
project and a software design project). These projects included significant
redevelopment of some existing products and the creation of new products. The
research and development projects were at various stages of development. None of
the in-process projects considered in the write-off had attained technological
feasibility.
NACT had thirteen projects (the nine switching projects noted above and the
related sub projects) in development at the time of acquisition. These projects
were at multiple stages along NACT's development timeline. Some projects were
beginning testing in NACT labs; others were at earlier stages of planning and
designing. Eleven projects were scheduled for release between February and
December of 1998. The remaining two projects were scheduled for staggered
release over 1998 and 1999. Revenue projections for the in-process technologies
reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the twelve-year projection at annual rates ranging from
52.7% to 7.2%, decreasing over the remaining years at annual rates ranging from
- -2.7% to -61.2% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $6.3 million to a high of $117.2 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base, synergies as a result of the NACT acquisition, and movement into
new markets. Projected revenues from in-process technology were assumed to peak
in 2002 and decline from 2003 through 2009 as other new products are expected to
enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 119.2% to a low of 11.0% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $1.7 million to $34
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
N-40
<PAGE> 841
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $4.1 million in the
aggregate through the year 1999 ($3,249,000 in 1998 and $829,000 in 1999). The
expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
ATI. ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained. Failure to attain technological feasibility would have rendered
partially designed equipment useless for other applications. ATI's products are
designed for specific frequency bandwidths and, as such, are highly customized
to those bandwidths and the needs of customers wishing to operate in them.
Products only partially completed for certain bandwidths cannot be used in other
bandwidths.
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased-in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave/millimeter radio equipment. Each project
consists of multiple products. These projects were at multiple stages along
ATI's typical development timeline. Some projects were beginning testing in ATI
labs; others were at earlier stages of planning and designing. The majority of
the products were scheduled to be released during 1998 and 1999. Revenue
projections for the in-process technologies reflected the anticipated release
dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from -30.9% to -60.9% as other products are
released in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $10.1 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base, synergies as a result of the
ATI acquisition, and movement into new markets. Projected revenues from
in-process technology were assumed to peak in 2001 and decline from 2003 through
2004 as other new products are expected to enter the market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately a low of -$900,000 to
a high of $9.1 million within the term of the projections.
The discount rate used to value the existing technology of ATI was 23.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
Management estimates that the costs to develop the in-process technology
acquired in the ATI acquisition will be approximately $24.3 million in the
aggregate through the year 2002 ($3.3 million, $7.2
N-41
<PAGE> 842
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
million, $7.6 million, $5.1 million, and $1.1 million in 1998, 1999, 2000, 2001,
and 2002, respectively). The expected sources of funding were scheduled R&D
expenses from the operating budget of ATI provided by the operating assets and
liabilities of ATI.
Telco. Telco develops and manufactures products focused on providing
integrated access for network services. Telco's products can be separated into
three categories: (1) broadband transmission products, (2) network access
products, and (3) bandwidth optimization products. Telco's products are deployed
at the edge of the service provider's networks to provide organizations with a
flexible, cost-effective means of transmitting voice, data, video and image
traffic over public or private networks.
At the time of acquisition, Telco had eight primary projects in development
relating to next-generation telecommunication and data network hardware. These
projects were at various stages in the development process. Some were about to
enter the testing phase of the initial hardware prototype, while others were
still in the early concept and design specification stages. These eight projects
were scheduled for commercial release at various points in time from December
1998 through late 1999/early 2000.
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
None of the in-process projects at Telco considered in the write-off are
expected to achieve technological feasibility before the consummation of World
Access' acquisition of Telco. Furthermore, if the projects are not completed as
planned, the in-process research and development will have no alternative use.
Failure of the in process technologies to achieve technological feasibility may
adversely affect the future profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 195% to a low of zero growth, reflecting both the
displacement of Telco's old products by these new products as well as the
expected growth in the overall market in which Telco's products compete.
Thereafter, revenues are projected to decline over the remaining projection
period at annual rates ranging from -14% to -42%, as the acquired in process
technologies become obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $28
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
of Telco (and subsequently World Access) was projected to grow over the first
five years of the projection period at annual rates ranging from a high of 142%
to a low of 20% with one intermediate year of marginally declining operating
income. Thereafter, the contribution to operating income was projected to
decline through the projection period. The acquired in-process technology's
contribution to operating income ranged from a loss of approximately $5 million
to a high of approximately $86 million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology, and
the risk associated with the financial assumptions with respect to the
projections used in the analysis.
The discount rate used to value the in-process technologies was 25.0%. This
discount rate was selected due to several incremental inherent risks. First the
actual useful economic life of such technologies may differ
N-42
<PAGE> 843
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
from the estimates used in the analysis. Second, risks associated with the
financial projections on the specific products that comprise the acquired
in-process research and development. The third factor is the incomplete and
unproven nature of the technologies. Finally, future technological advances that
are currently unknown may negatively impact the economic and functional
viability of the in-process R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $16 million through 2001. Over the projection
period, management expects to spend an additional aggregate $46 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes, and identified
upgrades.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET:
NACT MINORITY INTEREST ADJUSTMENTS
(A) The acquisition of the minority interest of NACT will be accounted for
under the purchase method of accounting. In addition, in accordance with
generally accepted accounting principles, the portion of the purchase price
allocable to the in-process research and development projects of NACT will be
expensed at the consummation of the NACT Transaction. The amount of the one-time
non-recurring charge is expected to approximate $21.9 million. Since this charge
is directly related to the acquisition and will not recur, the Unaudited Pro
Forma Statements of Operations have been prepared excluding this charge. New
World Access has not determined the final allocation of the purchase price, and
accordingly, the amount ultimately determined may differ significantly from the
amounts shown below.
The unallocated excess of purchase price over the net assets acquired is
determined as follows (in thousands):
Purchase price of approximately 32.7% minority interest in NACT:
<TABLE>
<S> <C>
Stock issued in exchange for NACT shares.................. $ 46,660
--------
Allocation:
Minority interest in subsidiaries......................... (12,443)
Adjust assets and liabilities.............................
In-process research and development costs(i)........... (21,900)
Acquired technology(ii)................................ (4,400)
Deferred tax liability(iii)............................ 1,700
--------
(37,043)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 9,617
========
</TABLE>
(i) The in-process research and development write-off of $21.9 million is
based on the valuation performed in connection with the NACT Stock Purchase. The
valuation report assigned a value of $66.5 million to the in-process research
and development projects as of the date of the NACT Stock Purchase, of which
67.3% or $44.6 million was expensed at the consummation of the NACT Stock
Purchase. Management estimates that an additional $21.9 million of in-process
research and development projects will be written-off in conjunction with the
consummation of the NACT Transaction. New World Access will obtain an updated
valuation of the in-process research and development projects as of the closing
of the NACT Transaction for use in determining the final purchase accounting for
the NACT Transaction.
(ii) Represents the purchase price assigned to the acquired technology of
NACT based upon the valuation performed in connection with the NACT Stock
Purchase.
(iii) Establish a deferred tax liability related to the acquired
technology.
N-43
<PAGE> 844
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
RESURGENS PRO FORMA ADJUSTMENTS
(C) The Resurgens Transaction will be accounted for under the purchase
method of accounting. New World Access has not determined the final allocation
of the purchase price, and accordingly, the amount ultimately determined may
differ significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price:
Cash paid for claims(i)................................... $ 3,000
Purchase of switching equipment by World Access for use by
Resurgens prior to closing of the merger............... 4,000
Restricted stock issued to creditors(ii).................. $76,000
Restricted stock issued to Renaissance Partners(ii)....... 15,730
-------
Total stock....................................... 91,730
Fees and expenses related to the Resurgens Transaction.... 2,000
--------
Total purchase price.............................. 100,730
--------
Allocation:
Historical stockholders' equity, net of creditor
liabilities forgiven(iii).............................. (2,179)
Adjust assets and liabilities:
Adjust licenses to estimated fair market value(iv)..... (3,000)
Adjust network switching equipment to estimated fair
market value(iv)..................................... (5,000)
Record switching equipment purchased by World Access... (4,000)
Establish deferred tax asset(v)........................ (15,300)
--------
(29,479)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 71,251
========
</TABLE>
(i) Represents an estimate of $1.0 million to be paid to the creditors of
Resurgens under a cash settlement plan proposed by New World Access and
approximately $2.0 million to be paid to governmental creditors.
(ii) The value assigned to the 3,750,000 restricted New World Access shares
to be issued to the creditors and Renaissance Partners at the closing date will
be $25.17, the seven trading days average closing price of New World Access
common stock, including the three days prior and the three days subsequent to
May 12, 1998, the date economic terms of the Resurgens Transaction were
announced, less a 30% discount attributable to the restrictive nature of the
shares. New World Access consulted with an independent financial advisor
knowledgeable of the transaction in determining the appropriate discount.
Specific factors supporting the discount are (1) the length of the restriction,
(2) the number of shares subject to restriction, and (3) the volatility of New
World Access common stock [the closing price on the announcement date was $37.06
and the closing price on August 28, 1998 was $23.13, a 37.6% reduction].
Management of New World Access believes the discount rate to be used in valuing
these restricted shares is appropriate and reasonable.
In addition to the shares noted above, the creditors and Renaissance
Partners will also be issued 7,500,000 restricted New World Access shares at the
closing (the "Escrowed Shares"). These shares will be immediately placed into
escrow and will be valued at par value only, or $75,000. As it becomes probable
that
N-44
<PAGE> 845
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the conditions for release from escrow will be met, the fair market value of the
shares as measured at that time will be recorded as additional goodwill and
stockholders' equity, respectively.
Specifically, the Escrowed Shares will be released in the amounts and on
the dates specified below if the sum of the EBITDA for Resurgens for the
performance periods set forth below equals or exceeds the Target EBITDA for such
performance period as set forth below:
<TABLE>
<CAPTION>
ESCROWED SHARES
TO BE
PERFORMANCE PERIOD RELEASE DATE RELEASED TARGET EBITDA
------------------ ------------ --------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period")............ February 15, 1999 1,875,000 $7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period")............ February 15, 2000 2,812,500 $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)............. February 15, 2001 2,812,500 $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Exchange Closing Date is (a) on or
after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (b) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Exchange Closing occurs and shall terminate on (and including) the
last day of the sixth calendar month following the month in which the Exchange
Closing occurs, the release date shall be forty-five (45) days after the end of
such period and the Target EBITDA shall be equal to the sum of (i) $2,100,000
for each calendar month of 1998 included in the First Performance Period and
(ii) $2,400,000 for each calendar month of 1999 included in the First
Performance Period.
If, after the Exchange, the EBITDA of Resurgens is less than the Target
EBITDA required for the release of Escrowed Shares in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding anything described herein, the
Escrowed Shares shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
World Access Common Stock as reported by Nasdaq equals or exceeds $65.00 for any
five consecutive trading days during such calendar quarter, then 25% of all of
the shares of Escrowed Shares shall be released on February 15, 2000, provided
that if no Escrowed Shares are eligible for release during any such calendar
quarter, then such Escrowed Shares shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Holdco Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which such Escrowed Shares were not
eligible for release; (b) if the EBITDA of Resurgens for the Second Performance
Period equals or exceeds $52,775,000, then the Escrowed Shares related to the
Third Performance Period shall be released on February 15, 2000; and (c) all of
the Escrowed Shares shall be released upon a Change of Control (as defined in
the Exchange Agreement).
N-45
<PAGE> 846
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(iii) The combined historical accounts of Resurgens include pre-petition
creditor liabilities of $334.5 million, which are classified as "liabilities
subject to compromise," and borrowings under the WorldCom, Inc.
debtor-in-possession financing facility of $22.0 million as of June 30, 1998,
respectively. These liabilities will be satisfied in connection with the Plan of
Reorganization, which has been approved by the creditors committee and is
expected to be confirmed by the bankruptcy court in early September 1998. Upon
the confirmation of the Plan of Reorganization and the closing of the Resurgens
Transaction, the creditors will receive shares of RCG common stock in exchange
for the surrender of all of their claims against RCG. Immediately thereafter,
the creditors' shares of RCG will be cancelled and automatically converted into
the right to receive shares of New World Access Common Stock, a portion of which
will be received directly and a portion of which will be deposited into escrow
pending the satisfaction of certain conditions. All such shares of New World
Access Common Stock are subject to certain contractual restrictions.
The confirmation of the Plan of Reorganization is a condition precedent to
the closing of the Resurgens Transaction. Therefore, the combined historical
stockholders deficit of $354.4 million as of June 30, 1998 has been adjusted to
reflect a $352.6 million reduction for the liabilities subject to compromise and
the WorldCom, Inc. debtor-in-possession financing facility for purposes of the
unaudited pro forma combined balance sheet.
(iv) Estimates of fair market value of the licenses and the switching
equipment acquired have been made by management. These estimates are subject to
adjustment pending final valuations to be obtained from independent appraisers.
(v) At the time the Resurgens Transaction is consummated, Resurgens is
expected to have in excess of $125 million in net operating loss carryforwards
available to offset future federal taxable income. Based on its current
assessment of the forecasted operating results of Resurgens and other pertinent
factors, management expects at least 35% of these future tax benefits will be
realized. Accordingly, a deferred tax asset of $44 million, net of a 65%
valuation allowance of approximately $29 million, has been reflected in the Pro
Forma Combined Balance Sheet. The amount of the valuation allowance is subject
to future analysis and may be revised prior to the closing of the Resurgens
Transaction.
The pro forma loss of the combined entity is not indicative of the results
of operations that are expected to be achieved by the combined entity in the
future. The nature of Resurgens current operations are concentrated solely on
the international carriers' carrier business and an upgraded, efficient
operating network is now in place. Resurgens has a new, experienced management
team in place and has entered into several new contracts to increase its revenue
base, including a significant service contract with WorldCom Network Services,
Inc., a wholly owned subsidiary of WorldCom, Inc. Prior to the acquisition of
Resurgens, it is expected that Resurgens will be essentially debt free due to
its Chapter 11 bankruptcy proceedings. In addition, there are several closing
conditions that must be satisfied before the Resurgens Transaction is
consummated, including the achievement by Resurgens of monthly revenues of $25
million and related gross profit margin of greater than 5% for the calendar
month immediately preceding the closing date
(D) Eliminate existing stockholders' equity.
TELCO PRO FORMA ADJUSTMENTS
(E) The Telco Merger will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to the in-process
research and development projects of Telco will be expensed at the consummation
of the acquisition. The amount of the one-time non-recurring charge is expected
to approximate $73.9 million. Since this charge is directly related to the
acquisition and will not recur, the Unaudited Pro Forma Statements of Earnings
have been prepared excluding this charge. New World Access has not determined
the final allocation of the purchase price, and accordingly, the amount
ultimately determined may differ significantly from the amounts shown below.
N-46
<PAGE> 847
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares(i).............. $188,230
Fair market value of World Access options issued in
exchange for Telco options............................. 9,700
--------
Total stock and options........................... $ 197,930
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 201,680
---------
Allocation:
Historical stockholders' equity........................... (52,955)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements, excess quantities
related to reduced demand of certain legacy products
and those that are non-strategic as a result of the
merger to net realizable value....................... 4,500
Write-down to fair market value of certain redundant
equipment resulting from the merger.................. 1,500
Write-off of leaseholds associated with Telco's current
Norwood facility which is expected to be relocated... 1,300
Accrue involuntary employee termination benefits....... 1,500
Accrue lease termination provision related to Telco's
current Norwood facility............................. 1,400
Trademarks............................................. (7,400)
Establish deferred tax asset(ii)....................... (16,000)
Acquired technology(iii)............................... (56,400)
In-process research and development costs(iv).......... (73,900)
Deferred tax liabilities(v)............................ 24,900
---------
(171,555)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 30,125
=========
</TABLE>
(i) Based on the terms of the Telco Merger Agreement and the value of World
Access Common Stock as of August 28, 1998, Telco stockholders are currently
expected to receive approximately 6.5 million freely tradeable shares of New
World Access common stock at the time of the Telco Merger. The value assigned to
these shares will be $29.26 per share, the seven trading days average closing
price of World Access Common Stock which include the three trading days prior
and the three trading days subsequent to June 4, 1998, the date economic terms
of the Telco Merger were announced.
(ii) The net deferred tax asset of $16 million is comprised primarily of
gross temporary differences arising from the differences between book and tax
basis of certain assets and liabilities and for tax credits available to Telco
and New World Access. It is the opinion of management that these tax assets are
likely to be utilized by Telco or New World Access.
(iii) The value of the acquired technology of $56.4 million is based on a
preliminary valuation report prepared by an independent appraiser and represents
the value of Telco's current technology calculated using the income approach.
(iv) The amount of in-process research and development costs of $73.9
million is based on a preliminary valuation report prepared by an independent
appraiser, based on factors considered such as the number of projects in
process, the potential alternative future uses of those projects and estimated
future projected revenues from those projects. New World Access will obtain an
updated valuation of the in-process research and development as of the closing
of the Telco Merger for use in determining the final purchase accounting for the
Telco Merger.
N-47
<PAGE> 848
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(v) Establish deferred tax liabilities related to the identifiable
intangible assets.
(F) Eliminate existing stockholders' equity.
(G) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998:
ATI PRO FORMA ADJUSTMENTS
(A) Amortization of unallocated excess purchase price over net assets
acquired over 15 years relating to the one month period ended January 31, 1998
not included in the New World Access historical statement of earnings.
(B) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the ATI merger.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of the acquired technology relating to the majority
interest portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years relating to the two month period ended February 28, 1998
not included in the New World Access historical statement of earnings.
(F) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of the majority
interest in NACT.
(G) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(H) Amortization of the acquired technology relating to the minority
interest portion of NACT over 8 years.
(I) Amortization of unallocated excess purchase price over net assets
acquired related to the purchase of the remaining minority interest in NACT over
20 years.
(J) Reverse the minority interests in earnings of NACT.
(K) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of New World Access common stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(L) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market values of the license agreements.
(M) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(N) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
N-48
<PAGE> 849
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(P) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(Q) Amortization of acquired technology of Telco over 8 years.
(R) Amortization of trademarks of Telco over 8 years.
(S) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(T) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(U) Eliminate the one-time non-recurring in-process research and
development charge recorded by Telco in connection with its acquisition of
Jupiter Technology, Inc. which was consummated on January 26, 1998. This
write-off of in-process research and development does not relate to the
transaction between World Access and Telco, but does represent a significant one
time charge that should be eliminated for purposes of presenting pro forma
financial information.
(V) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(W) To record a reduction in tax expense related to the reduction of the
deferred tax liability established in conjunction with the allocation of
purchase price to acquired technology and trademarks.
(X) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997:
ATI PRO FORMA ADJUSTMENTS
(A) Eliminate inter-company sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of acquired technology relating to the majority interest
portion of NACT over 8 years.
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(F) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(G) Amortization of acquired technology relating to the minority interest
portion of NACT over 8 years.
(H) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(I) Reverse the minority interests in earnings of NACT.
N-49
<PAGE> 850
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(J) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of New World Access common stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(K) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market value of the license agreements.
(L) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(M) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(N) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(O) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(P) Amortization of acquired technology of Telco over 8 years.
(Q) Amortization of trademarks of Telco over 8 years.
(R) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(S) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(T) Adjust tax provision for the benefit of the Telco loss and pro forma
adjustments, if applicable.
(U) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
N-50
<PAGE> 851
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Current Report (Form 8-K/A, Amendment
No. 1) of World Access, Inc. of our report dated October 15, 1997, with respect
to the consolidated financial statements of Telco Systems, Inc. for the year
ended August 31, 1997, and to the incorporation by reference of such report in
the Registration Statements (Form S-8 Nos. 33-77918, 33-47752, 333-17741 and
333-59347 and Form S-3 No. 333-43497) of World Access, Inc.
Ernst & Young LLP
Boston, Massachusetts
September 23, 1998
N-51
<PAGE> 852
APPENDIX O
<PAGE> 853
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20001
---------------------
FORM 8-A
(FOR REGISTRATION
OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934)
RESTOR INDUSTRIES, INC.
<TABLE>
<S> <C>
DELAWARE 65-0044209
(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. Number)
333 ENTERPRISE STREET 34761
OCONO, FL (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's Telephone Number, including Area Code: (407) 877-0908
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
UNITS CONSISTING OF ONE SHARE OF COMMON STOCK, $.01 PAR VALUE AND ONE WARRANT
(TWO WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK), COMMON STOCK, PAR VALUE
$.01 PER SHARE AND WARRANTS (TWO WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK)
(Title of Class)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 854
APPENDIX O
ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
A. Units
Each Unit consists of one share of Common Stock, $.01 par value and one
Warrant.
B. Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds
legally available therefor. The Company is currently precluded from paying
dividends by an agreement with its principal lender and, if this provision were
eliminated, has no intent to pay dividends in the foreseeable future. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of shares of Common Stock, as such have no conversion, preemptive or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are validly
issued, fully paid and nonassessable.
C. Warrants
Commencing August 12, 1992 and for a two-year period thereafter, each two
Warrants will entitle the registered holder to purchase one share of the
Company's Common Stock at an exercise price of $9.50 per share. No fractional
shares of Common Stock will be issued in connection with the exercise of
Warrants. Upon exercise the Company will pay the holder the value of any such
fractional shares based upon the market value of the Common Stock at such time.
The Company may redeem the Warrants at a price of $.01 per Warrant at any
time prior to their expiration by giving 30 to 60 days' written notice mailed to
the record holders at any time after one year from the Effective Date if the
average of the closing bid and asked prices of the Common Stock as quoted by
NASDAQ (or the last sale price if listed on a national securities exchange)
exceeds $11.00 per share for a period of each of 20 consecutive trading days
during a period ending within 10 trading days prior to the date of mailing of
notice of redemption.
Unless extended by the Company at its discretion, the Warrants will expire
at 4:00 p.m. New York time on August 12, 1994.
The holder of Warrants will not have any rights, privileges or liabilities
of a stockholder of the Company prior to exercise of such Warrants. The Company
shall keep available a sufficient number of unauthorized shares of Common Stock
to permit exercise of the Warrants.
ITEM 2. EXHIBITS
2. -- Restated Certificate of Incorporation*
2.1 -- Amendment No. 1 to Certificate of Incorporation*
2.2 -- Amendment No. 2 to Certificate of Incorporation*
3.1 -- Bylaws*
4. -- Form of Common Stock Certificate*
4.1 -- Form of Warrant included in the Units*
Contained in Registration Statement on Form S-18 filed with the Securities
and Exchange Commission on June 26, 1991, Registration No. 33-11255 and
incorporated by reference as an exhibit hereto pursuant to Rule 12b-32 of the
Securities Exchange Act of 1934.
O-1
<PAGE> 855
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Form 8-A to be signed on its behalf
by the undersigned, thereunto duly authorized.
RESTOR INDUSTRIES, INC.
By: /s/ STEPHEN ROTROFF
------------------------------------
Stephen Rotroff
Vice President
Date: March 26, 1992
O-2
<PAGE> 856
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL") allows a
corporation to eliminate or limit the personal liability of directors of a
corporation to the corporation or to any of its stockholders for monetary
damages for a breach of fiduciary duty as a director, except (i) for breach of
the director's duty of loyalty, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
certain unlawful dividends and stock repurchases, or (iv) for any transaction
from which the director derived an improper personal benefit.
Section 145 of the DGCL provides that in the case of any action other than
one by or in the right of the corporation, a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
in such capacity on behalf of another corporation or enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 145 of the DGCL provides that in the case of an action by or in the
right of a corporation to procure a judgment in its favor, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any action or suit by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation in such capacity on behalf of another corporation
or enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted under standards similar to those set forth in the
preceding paragraph, except that no indemnification may be made in respect of
any action or claim as to which such person shall have been adjudged to be
liable to the corporation unless a court determines that such person is fairly
and reasonably entitled to indemnification.
Articles X and XI of the Company's Certificate of Incorporation provides
for indemnification of directors, officers and employees to the fullest extent
permissible under the DGCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
2.1(1) -- Agreement and Plan of Merger and Reorganization, dated as of
February 24, 1998, among WAXS INC., World Access, Inc., WAXS
Acquisition Corp., NACT Telecommunications, Inc. and NACT
Acquisition Corp. (incorporated by reference to Appendix A
to the Prospectus/Information Statement included as part of
this registration statement).
2.1(2) -- First Amendment to Agreement and Plan of Merger and
Reorganization, dated as of June 30, 1998, among WAXS INC.,
World Access, Inc., WAXS Acquisition Corp., NACT
Telecommunications, Inc. and NACT Acquisition Corp.
(incorporated by reference to Appendix A-1 to the
Prospectus/Information Statement included as part of this
registration statement).
</TABLE>
II-1
<PAGE> 857
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
2.1(3) -- Second Amendment to Agreement and Plan of Merger and
Reorganization, dated as of September 30, 1998, among WAXS
Inc., World Access, Inc., WAXS Acquisition Corp., NACT
Telecommunications, Inc. and NACT Acquisition Corp.
(incorporated by reference to Appendix A-2 to the
Prospectus/Information Statement included as part of this
registration statement).
3.1 -- Certificate of Incorporation of WAXS INC.
3.2 -- Bylaws of WAXS INC.
5.1 -- Opinion letter of Rogers & Hardin LLP as to the legality of
the securities being registered by this registration
statement.
8.1 -- Opinion letter of Van Cott, Bagley, Cornwall & McCarthy as
to certain tax matters.
8.2 -- Opinion letter of Rogers & Hardin LLP as to certain tax
matters.
23.1 -- Consent of Rogers & Hardin LLP with respect to its opinion
as to the legality of securities being registered by this
registration statement (contained in Exhibit 5.1).
23.2 -- Consent of Van Cott, Bagley, Cornwall & McCarthy with
respect to its opinion as to certain tax matters (contained
in Exhibit 8.1).
23.3 -- Consent of Rogers & Hardin LLP with respect to its opinion
as to certain tax matters (contained in Exhibit 8.2).
23.4 -- Consent of PricewaterhouseCoopers LLP, independent auditors,
with respect to financial statements of World Access, Inc.
23.5 -- Consent of KPMG Peat Marwick LLP, independent auditors, with
respect to financial statements of NACT Telecommunications,
Inc.
23.6 -- Consent of NationsBanc Montgomery Securities LLC with
respect to its fairness opinion regarding the NACT Merger
(incorporated by reference to Appendix B to the
Prospectus/Information Statement included as part of this
registration statement).
23.7 -- Consent of Ernst & Young LLP, independent auditors, with
respect to consolidated financial statements of Telco
Systems, Inc.
23.8 -- Consent of Ernst & Young LLP, independent auditors, with
respect to consolidated financial statements of Cherry
Communications Incorporated and Cherry Communications U.K.
Limited.
23.9 -- Consent of Grant Thorton LLP, independent auditors, with
respect to financial statements of Cherry Communications
Incorporated and Cherry Communications U.K. Limited.
23.91 -- Consent of Deloitte & Touche LLP, independent auditors, with
respect to financial statements of Advanced TechCom, Inc.
23.92 -- Consent of Tedder, Grimsley & Company, P.A., independent
auditors, with respect to financial statements of Advanced
TechCom, Inc.
24.1 -- Powers of attorney (included on pages II-5).
</TABLE>
(b) Financial Statement Schedules
Financial statements and schedules not included herein have been omitted
because of the absence of conditions under which they are required or because
the required information, where material, is shown in the consolidated financial
statements or notes thereto incorporated by reference in the
Prospectus/Information Statement.
II-2
<PAGE> 858
(c) Reports, Opinions and Appraisals
The opinion of NationsBanc Montgomery Securities LLC with respect to the
NACT Merger is attached as Appendix B to the Prospectus/Information Statement
filed as a part of this registration statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes (i) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement (A) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (B) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; and (C) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (ii) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and (iii) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) (i) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(ii) The undersigned registrant hereby undertakes that every
prospectus: (A) that is filed pursuant to paragraph (c)(i) immediately
preceding or (B) that purports to meet the requirements of Section 10(a)(3)
of the Securities Act of 1933 and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that such a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
<PAGE> 859
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference in the Prospectus/Information
Statement pursuant to Item 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 860
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on October 6, 1998.
WAXS INC.
By: /s/ STEVEN A. ODOM
------------------------------------
Steven A. Odom
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Steven A. Odom and Mark A. Gergel, as his attorney-in-fact, each with
the power of substitution, to sign this Registration Statement on his behalf
individually and in the capacity stated below and to file all supplements,
amendments and post-effective amendments to this Registration Statement, and any
and all instruments or documents filed as a part of or in connection with this
Registration Statement or any amendment or supplement thereto, and any such
attorney-in-fact may make such changes and additions to this Registration
Statement as such attorney-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN A. ODOM Chairman of the Board and Chief October 6, 1998
- ----------------------------------------------------- Executive Officer
Steven A. Odom
/s/ MARK A. GERGEL Executive Vice President and October 6, 1998
- ----------------------------------------------------- Chief Financial Officer
Mark A. Gergel (Principal Financial Officer)
/s/ HENSLEY E. WEST Director and President (Chief October 6, 1998
- ----------------------------------------------------- Operating Officer)
Hensley E. West
/s/ MARTIN D. KIDDER Vice President, Controller and October 6, 1998
- ----------------------------------------------------- Secretary
Martin D. Kidder (Principal Accounting Officer)
Director
- -----------------------------------------------------
Stephen J. Clearman
/s/ JOHN D. PHILLIPS Director October 6, 1998
- -----------------------------------------------------
John D. Phillips
/s/ STEPHEN E. RAVILLE Director October 6, 1998
- -----------------------------------------------------
Stephen E. Raville
</TABLE>
II-5
<PAGE> 861
INDEX TO EXHIBITS
The Exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in Item 601 and Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
2.1(1) -- Agreement and Plan of Merger and Reorganization, dated as of
February 24, 1998, among WAXS INC., World Access, Inc., WAXS
Acquisition Corp., NACT Telecommunications, Inc. and NACT
Acquisition Corp. (incorporated by reference to Appendix A
to the Prospectus/Information Statement included as part of
this registration statement).
2.1(2) -- First Amendment to Agreement and Plan of Merger and
Reorganization, dated as of June 30, 1998, among WAXS INC.,
World Access, Inc., WAXS Acquisition Corp., NACT
Telecommunications, Inc. and NACT Acquisition Corp.
(incorporated by reference to Appendix A-1 to the
Prospectus/Information Statement included as part of this
registration statement).
2.1(3) -- Second Amendment to Agreement and Plan of Merger and
Reorganization, dated as of September 30, 1998, among WAXS
INC., World Access, Inc., WAXS Acquisition Corp., NACT
Telecommunications, Inc. and NACT Acquisition Corp.
(incorporated by reference to Appendix A-2 to the
Prospectus/Information Statement included as part of this
registration statement).
3.1 -- Certificate of Incorporation of WAXS INC.
3.2 -- Bylaws of WAXS INC.
5.1 -- Opinion letter of Rogers & Hardin LLP as to the legality of
the securities being registered by this registration
statement.
8.1 -- Opinion letter of Van Cott, Bagley, Cornwall & McCarthy as
to certain tax matters.
8.2 -- Opinion letter of Rogers & Hardin LLP as to certain tax
matters.
23.1 -- Consent of Rogers & Hardin LLP with respect to its opinion
as to the legality of securities being registered by this
registration statement (contained in Exhibit 5.1).
23.2 -- Consent of Van Cott, Bagley, Cornwall & McCarthy with
respect to its opinion as to certain tax matters (contained
in Exhibit 8.1).
23.3 -- Consent of Rogers & Hardin LLP with respect to its opinion
as to certain tax matters (contained in Exhibit 8.2).
23.4 -- Consent of PricewaterhouseCoopers LLP, independent auditors,
with respect to financial statements of World Access, Inc.
23.5 -- Consent of KPMG Peat Marwick LLP, independent auditors, with
respect to financial statements of NACT Telecommunications,
Inc.
23.6 -- Consent of NationsBanc Montgomery Securities LLC with
respect to its fairness opinion regarding the NACT Merger
(incorporated by reference to Appendix B to the
Prospectus/Information Statement included as part of this
registration statement).
23.7 -- Consent of Ernst & Young LLP, independent auditors, with
respect to consolidated financial statements of Telco
Systems, Inc.
23.8 -- Consent of Ernst & Young LLP, independent auditors, with
respect to financial statements of Cherry Communications
Incorporated and Cherry Communications U.K. Limited.
23.9 -- Consent of Grant Thorton LLP, independent auditors, with
respect to financial statements of Cherry Communications
Incorporated and Cherry Communications U.K. Limited.
23.91 -- Consent of Deloitte & Touche LLP, independent auditors, with
respect to financial statements of Advanced TechCom, Inc.
</TABLE>
II-6
<PAGE> 862
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
23.92 -- Consent of Tedder, Grimsley & Company, P.A., independent
auditors, with respect to financial statements of Advanced
TechCom, Inc.
24.1 -- Powers of attorney (included on pages II-5).
</TABLE>
II-7
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WAXS INC.
ARTICLE I
Name
The name of the corporation is WAXS INC.
ARTICLE II
Purposes
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE III
Agent for Service
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is Corporation Service Company.
ARTICLE IV
Capital Stock
The total number of shares of stock that the corporation shall have
authority to issue is fifty million (50,000,000), consisting of forty million
(40,000,000) shares of common stock, $.01 par value per share ("Common Stock"),
and ten million (10,000,000) shares of preferred stock, $.01 par value per share
("Preferred Stock").
The designation, relative rights, preferences and limitations of the
shares of each class are as follows:
The shares of Common Stock may be issued from time to time in one or
more series of any number of shares, provided that the aggregate number of
shares issued and not canceled of any and all such series shall not exceed the
total number of shares of Common Stock hereinabove authorized, and with
distinctive serial designations, all as shall hereafter be stated and expressed
in the resolution or resolutions providing for the issue of such shares of
Common Stock from time to time adopted by the Board of Directors pursuant to
authority so to do which is hereby vested in the Board of Directors, and each
series of shares of Common Stock may have such voting powers, full or limited,
or may be without voting powers as shall be stated in said resolution or
resolutions providing for the issue of such shares of Common Stock.
<PAGE> 2
The shares of Preferred Stock may be issued from time to time in one or
more series of any number of shares, provided that the aggregate number of
shares issued and not canceled of any and all such series shall not exceed the
total number of shares of Preferred Stock hereinabove authorized, and with
distinctive serial designations, all as shall hereafter be stated and expressed
in the resolution or resolutions providing for the issue of such shares of
Preferred Stock from time to time adopted by the Board of Directors pursuant to
authority so to do which is hereby vested in the Board of Directors. Each series
of shares of Preferred Stock (a) may have such voting powers, full or limited,
or may be without voting powers; (b) may be subject to redemption at such time
or times and at such prices; (c) may be entitled to receive dividends (which may
be cumulative or non-cumulative) at such rate or rates, on such conditions and
at such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or series of stock; (d) may have
such rights upon the dissolution of, or upon any distribution of the assets of,
the corporation; (e) may be made convertible into, or exchangeable for, shares
of any other class or classes or of any other series of the same or any other
class or classes of shares of the corporation at such price or prices or at such
rates of exchange and with such adjustments; (f) may be entitled to the benefit
of a sinking fund to be applied to the purchase or redemption of shares of such
series in such amount or amounts; (g) may be entitled to the benefit of
conditions and restrictions upon the creation of indebtedness of the corporation
or any subsidiary, upon the issue of any additional shares (including additional
shares of such series or of any other series) and upon the payment of dividends
or the making of other distributions on, and the purchase, redemption or other
acquisition by the corporation or any subsidiary of, any outstanding shares of
the corporation; and (h) may have such other relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof;
all as shall be stated in said resolution or resolutions providing for the issue
of such shares of Preferred Stock. Shares of Preferred Stock of any series that
have been redeemed (whether through the operation of a sinking fund or
otherwise) or that, if convertible or exchangeable, have been converted into or
exchanged for shares of any other class or classes shall have the status of
authorized and unissued shares of Preferred Stock of the same series and may be
reissued as a part of the series of which they were originally a part or may be
reclassified and reissued as part of a new series of shares of Preferred Stock
to be created by resolution or resolutions of the Board of Directors or as part
of any other series of shares of Preferred Stock, all subject to the conditions
or restrictions on issuance set forth in the resolution or resolutions adopted
by the Board of Directors providing for the issue of any series of shares of
Preferred Stock.
Subject to the provisions of any applicable law or of the Bylaws of the
corporation, as from time to time amended, with respect to the closing of the
transfer books or the fixing of a record date for the determination of
stockholders entitled to vote and except as otherwise provided by law or by the
resolution or resolutions providing for the issue of any series of shares of
Preferred Stock or any shares of a series of Common Stock as to which the voting
powers have been expressly limited by the resolution or resolutions providing
for the issuance of such series of Common Stock, the holders of outstanding
shares of Common Stock shall exclusively possess voting power for the election
of directors and for all other purposes, each holder of record of shares of
Common Stock being entitled to one vote for each share of Common Stock standing
in his or her name on the books of the corporation. Except as otherwise provided
by the resolution or resolutions providing for the issue of any series of shares
of Preferred Stock, the holders of shares of Common Stock shall be entitled, to
the exclusion of the holders of
2
<PAGE> 3
shares of Preferred Stock of any and all series, to receive such dividends as
from time to time may be declared by the Board of Directors. In the event of any
liquidation, dissolution or winding up of the corporation, whether voluntary or
involuntary, after payment shall have been made to the holders of shares of
Preferred Stock of the full amount to which they shall be entitled pursuant to
the resolution or resolutions providing for the issue of any series of shares of
Preferred Stock, the holders of shares of Common Stock shall be entitled, to the
exclusion of the holders of shares of Preferred Stock of any and all series, to
share, ratably according to the number of shares of Common Stock held by them,
in all remaining assets of the corporation available for distributions to its
stockholders.
Subject to the provisions of this Certificate of Incorporation and
except as otherwise provided by law, the stock of the corporation, regardless of
class, may be issued for such consideration and for such corporate purposes as
the Board of Directors may from time to time determine.
ARTICLE V
Incorporator
The name and mailing address of the incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
<S> <C>
Robert C. Hussle, Esq. Rogers & Hardin LLP
2700 International Tower,
Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
</TABLE>
ARTICLE VI
Directors
The powers of the incorporator shall terminate upon the filing of this
Certificate of Incorporation. The initial Board of Directors of the Corporation
shall consist of six (6) mem- bers, who shall serve as the Directors of the
Corporation until the first meeting of the stockholders or until their
successors are elected and qualified. Thereafter, the number of directors shall
be fixed as set forth in Article IX. The names and addresses of the initial
members of the Board of Directors are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C>
Steven A. Odom 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C>
Hensley E. West 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Stephen J. Clearman 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
William P. O'Reilly 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
John D. Phillips 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Steven E. Raville 945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
</TABLE>
ARTICLE VII
Duration
The corporation is to have perpetual existence.
ARTICLE VIII
Action by Stockholders
No action required or permitted to be taken by the stockholders of the
corporation at any annual or special meeting of the stockholders of the
corporation may be taken without a meeting, and the power to consent in writing,
without a meeting, to the taking of any action is specifically denied.
ARTICLE IX
Management
1. The business and affairs of the corporation shall be managed
by or under the direction of a Board of Directors.
(a) The Board of Directors shall consist of not fewer
than three (3) members and not more than twelve (12) members, the exact
number of authorized directors within such range to be fixed from time
to time by a resolution of the Board of Directors
4
<PAGE> 5
adopted by the affirmative vote of at least a majority of the total
number authorized directors most recently fixed by the Board of
Directors.
(b) The directors of the corporation shall be divided
into three classes for the purpose of determining their terms of
office. Each such class shall consist, as nearly as possible, of
one-third of the total number of directors fixed by the Board of
Directors. At the annual meeting of stockholders of the corporation
held in 1998, one class of directors (designated as Class I) shall be
elected for a term expiring at the annual meeting of stockholders of
the corporation held in 1999, one class of directors (designated as
Class II) shall be elected for a term expiring at the annual meeting of
stockholders of the corporation held in 2000, and one class of
directors (designated as Class III) shall be elected for a term
expiring at the annual meeting of stockholders of the corporation held
in 2001. At each succeeding annual meeting of stockholders of the
corporation, beginning in 1999, successors to the class of directors
whose term expires at that annual meeting shall be elected for a term
expiring at the annual meeting of stockholders of the corporation held
in the third year of their election.
(c) If the number of directors is changed, then any
increase or decrease in such number shall be apportioned by the Board
of Directors among the classes of directors so as to maintain as nearly
as possible an equal number of directors in each class. No reduction in
the authorized number of members of the Board of Directors shall have
the effect of removing any director from office before the director's
term of office expires.
(d) Vacancies on the Board of Directors and newly created
directorships resulting from an increase in the authorized number of
members of the Board of Directors may be filled only by a majority of
the directors then in office, although less than a quorum, or by a sole
remaining director.
(e) Each director, including a director elected to fill a
vacancy or a newly created directorship, shall hold office until the
next election of the class of directors to which such director belongs
and until his or her successor is elected and qualified or until his or
her earlier death, resignation, or removal from office for cause.
(f) Any director or the entire Board of Directors may be
removed from office at any time but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting
power of all outstanding shares of capital stock of the corporation
then entitled to vote in an election of directors of the corporation,
voting as a single class.
(g) A majority of total directors shall constitute a
quorum for the transaction of business.
(h) Notwithstanding the foregoing, whenever the holders
of any one or more classes or series of stock issued by the corporation
shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of
such directorships shall
5
<PAGE> 6
be governed by the terms of this Certificate of Incorporation
applicable thereto, such directors so elected shall not be divided into
classes pursuant to this Article IX, and the number of such directors
shall not be counted in determining the maximum number of directors
permitted under the foregoing provisions of this Article IX, in each
unless expressly provided by such terms.
2. Nominations of persons for election to the Board of Directors
may be made at a meeting of stockholders of the corporation either by or at the
direction of the Board of Directors or by any stockholder of record entitled to
vote in the election of directors at such meeting who has complied with the
notice procedures set forth in this Paragraph 2. A stockholder who desires to
nominate a person for election to the Board of Directors at a meeting of
stockholders of the corporation and who is eligible to make such nomination must
give timely written notice of the proposed nomination to the secretary of the
corporation. To be timely, a stockholder's notice given pursuant to this
Paragraph 2 must be received at the principal executive office of the
corporation not less than one hundred twenty (120) calendar days in advance of
the date which is one year later than the date of the proxy statement of the
corporation released to stockholders in connection with the previous year's
annual meeting of stockholders of the corporation; provided, however, that if no
annual meeting of stockholders of the corporation was held in the previous year
or if the date of the forthcoming annual meeting of stockholders has been
changed by more than thirty (30) calendar days from the date contemplated at the
time of the previous year's proxy statement or if the forthcoming meeting is not
an annual meeting of stockholders of the corporation, then to be timely such
stockholder's notice must be so received not later than the close of business on
the tenth day following the earlier of (a) the day on which notice of the date
of the forthcoming meeting was mailed or given to stockholders by or on behalf
of the corporation or (b) the day on which public disclosure of the date of the
forthcoming meeting was made by or on behalf of the corporation. Such
stockholder's notice to the secretary of the corporation shall set forth (a) as
to each person whom the stockholder proposes to nominate for election or
re-election as a director (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of capital stock of the corporation
which then are beneficially owned by such person, (iv) any other information
relating to such person that is required by law or regulation to be disclosed in
solicitations of proxies for the election of directors of the corporation, and
(v) such person's written consent to being named as a nominee for election as a
director and to serve as a director if elected and (b) as to the stockholder
giving the notice (i) the name and address, as they appear in the stock records
of the corporation, of such stockholder, (ii) the class and number of shares of
capital stock of the corporation which then are beneficially owned by such
stockholder, (iii) a description of all arrangements or understandings between
such stockholder and each nominee for election as a director and any other
person or persons (naming such person or persons) relating to the nomination
proposed to be made by such stockholder, and (iv) any other information required
by law or regulation to be provided by a stockholder intending to nominate a
person for election as a director of the corporation. At the request of the
Board of Directors, any person nominated by or at the direction of the Board of
Directors for election as a director of the corporation shall furnish to the
secretary of the corporation the information concerning such nominee which is
required to be set forth in a stockholder's notice of a proposed nomination. No
person shall be eligible for election as a director of the corporation unless
nominated in compliance with the procedures set forth in this Paragraph 2. The
chairman of a meeting of stockholders of the corporation shall
6
<PAGE> 7
refuse to accept the nomination of any person not made in compliance with the
procedures set forth in this Paragraph 2, and such defective nomination shall be
disregarded.
3. The power to adopt, amend or repeal the Bylaws of the
corporation may be exercised by the Board of Directors of the corporation.
4. Notwithstanding any provision of this Certificate of
Incorporation or the Bylaws of the corporation to the contrary, the affirmative
vote of the holders of at least seventy-five percent (75%) of the voting power
of all outstanding shares of capital stock of the corporation then entitled to
vote in an election of directors of the corporation, voting as a single class,
shall be required to alter, amend or repeal this Article IX or to adopt any
provision of this Certificate of Incorporation or the Bylaws of the corporation
which is inconsistent with this Article IX.
ARTICLE X
Limitation of Liability
The personal liability of the directors of the corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of
ss. 102 of the General Corporation Law of the State of Delaware, as the same may
be amended and supplemented.
ARTICLE XI
Indemnification
The corporation shall, to the fullest extent permitted by ss. 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any Bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
ARTICLE XII
Amendment
From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article XII.
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I, the undersigned, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts stated herein are true, and
accordingly have hereunto set my hand on the 20th day of February, 1998.
/s/ Robert C. Hussle
----------------------------------------
Robert C. Hussle, Incorporator
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EXHIBIT 3.2
BYLAWS
OF
WAXS INC.
(a Delaware corporation)
Adopted as of February 23, 1998
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates
representing stock in the Corporation shall be signed by, or in the name of, the
Corporation by the Chairman or Vice-Chairman of the Board of Directors, if any,
or by the President or a Vice-President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation. Any or
all the signatures on any such certificate may be a facsimile. in case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue.
Whenever the Corporation shall be authorized to issue more
than one class of stock or more than one series of any class of stock, and
whenever the Corporation shall issue any shares of its stock as partly paid
stock, the certificates representing shares of any such class or series or of
any such partly paid stock shall set forth thereon the statements prescribed by
the General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The Corporation may issue a new certificate of stock or
uncertificated shares in place of any certificate theretofore issued by it,
alleged to have been lost, stolen, or destroyed, and the Board of Directors may
require the owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions
imposed by the General Corporation Law, the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of the stock of the Corporation shall be uncertificated
shares. Within a reasonable time after the issuance or transfer of any
<PAGE> 2
uncertificated shares, the Corporation shall send to the registered owner
thereof any written notice prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but
shall not be required to, issue fractions of a share. If the Corporation does
not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined, or (3) issue scrip or warrants in registered form
(either represented by a certificate or uncertificated) or bearer form
(represented by a certificate) which shall entitle the holder to receive a full
share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share or an uncertificated fractional share shall,
but scrip or warrants shall not unless otherwise provided therein, entitle the
holder to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the Corporation in the event of liquidation.
The Board of Directors may cause scrip or warrants to be issued subject to the
conditions that they shall become void if not exchanged for certificates
representing the full shares or uncertificated full shares before a specified
date, or subject to the conditions that the shares for which scrip or warrants
are exchangeable way be sold by the Corporation and the proceeds thereof
distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if any,
transfers or registration of transfers of shares of stock of the Corporation
shall be made only on the stock ledger of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the secretary of the Corporation or with a transfer
agent or a registrar, if any, and, in the case of shares represented by
certificates, on surrender of the certificate or certificates for such shares of
stock properly endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting. In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion, or exchange of stock, or for the purpose of any
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other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted, and which record date shall be not more than sixty days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect
of the right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of a
meeting, as the case may be, the term "share" or "shares" or "shares of stock"
or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding
share or shares of stock and to a holder or holders of record of outstanding
shares of stock when the Corporation is authorized to issue only one class of
shares of stock, and said reference is also intended to include any outstanding
share or shares of stock and any holder or holders of record of outstanding
shares of stock of any class upon which or upon whom the certificate of
incorporation confers such rights where there are two or more classes or series
of shares of stock or upon which or upon whom a General corporation Law confers
such rights notwithstanding that the certificate of incorporation may provide
for more than one class or series of shares of stock, one or more of which are
limited or denied such rights thereunder; provided, however, that no such right
shall vest in the event of an increase or a decrease in the authorized number of
shares of stock of any class or series which is otherwise denied voting rights
under the provisions of the certificate of incorporation, except as any
provision of law may otherwise require.
7. STOCKHOLDER MEETINGS.
--TIME. The annual meeting shall be held on the date and at
the time fixed, from time to time, by the directors, provided, that the first
annual meeting shall be held on a date within thirteen months after the
organization of the Corporation, and each successive annual meeting shall be
held an a date within thirteen months after the date of the preceding annual
meeting. A special meeting shall be hold on the date and at the time fixed by
the directors.
--PLACE. Annual meetings and special meetings shall be held at
such place, within or without the State of Delaware, as the directors may, from
time to time, fix. Whenever the directors shall fail to fix such place, the
meeting shall be held at the registered office of the Corporation in the State
of Delaware.
--CALL. Annual meetings and special meetings may be called by
the directors or by any officer instructed by the directors to call the meeting.
--NOTICE OR WAIVER OF NOTICE. Written notice of all meetings
shall be given, stating the place, date, and hour of the meeting and stating the
place within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the
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meeting, and shall (if any other action which Could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the purpose or
purposes for which the meeting is called. The notice of any meeting shall also
include, or be accompanied by any additional statements, information, or
documents prescribed by the General Corporation Law. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than ten days nor more than
sixty days before the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, and directed to each stockholder at his
record address or at such other address which he may have furnished by request
in writing to the Secretary of the Corporation. Notice by mail shall be deemed
to be given when deposited, with postage thereon prepaid, in the United States
Mail. If a meeting is adjourned to another time, not more than thirty days
hence, and/or to another place, and if an announcement of the adjourned time
and/or place is made at the meeting, it shall not be necessary to give notice of
the adjourned meeting unless the directors, after adjournment, fix a new record
date for the adjourned meeting. Notice need not be given to any stockholder who
submits a written waiver of notice signed by him before or after the time stated
therein. Attendance of a stockholder at a meeting of stockholders shall
constitute a waiver of notice of such meeting, except when the stockholder
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders need be specified
in any written waiver of notice.
--STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote at any meeting of
stockholders.
--CONDUCT OF MEETING. Meetings of the Stockholders shall be
presided over by one of the following officers in the order of seniority and if
present and acting - the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, a Vice- President, or, if none of the foregoing is
in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the Chairman of the meeting shall appoint
a secretary of the meeting.
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--PROXY REPRESENTATION. Every stockholder way authorize
another person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
--INSPECTORS. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors of election to act at the meeting
or any adjournment thereof. If an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. in case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result and do such acts as are proper to
conduct the election or vote with fairness to al Stockholders. On request of the
person presiding at the meeting, the inspector or inspectors, if any, shall make
a report in writing of any challenge, question, or matter determined by him or
them and execute a certificate of any fact found by him or then.
-- QUORUM. The holders of a majority of the outstanding shares
of stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum.
-- VOTING. Except where otherwise provided by the Certificate
of Incorporation as amended, each share of stock shall entitle the holders
thereof to one vote. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Any other action shall be authorized by a
majority of the votes cast except where the General Corporation Law prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provision of the Certificate of
Incorporation and the Bylaws, as amended. In the election of directors, and for
any other action, voting need not be by ballot.
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8. STOCKHOLDER ACTION WITHOUT MEETINGS. No action
required or permitted to be taken by the stockholders of the Corporation at any
annual or special meeting of the stockholders of the Corporation may be taken
without a meeting, and the power to consent in writing, without a meeting, to
the taking of any action is specifically denied.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors of the Corporation. The Board of Directors shall have the authority to
fix the compensation of the members thereof. The use of the phrase "whole board"
herein refers to the total number of directors which the Corporation would have
if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware. The Board of Directors shall consist of not fewer than three (3)
members and not more than twelve (12) members, the exact number of authorized
directors within such range to be fixed from time to time by a resolution of the
Board of Directors adopted by the affirmative vote of at least a majority of the
total number of authorized directors most recently fixed by the Board of
Directors.
3. ELECTION AND TERM.
(a) The directors of the Corporation shall be divided into
three classes for the purpose of determining their terms of office.
Each such class shall consist, as nearly as possible, of one-third of
the total number of directors fixed by the Board of Directors. At the
annual meeting of stockholders of the Corporation held in 1998, one
class of directors (designated as Class I) shall be elected for a term
expiring at the annual meeting of stockholders of the Corporation held
in 1999, one class of directors (designated as Class II) shall be
elected for a term expiring at the annual meeting of stockholders of
the Corporation held in 2000, and one class of directors (designated as
Class III) shall be elected for a term expiring at the annual meeting
of stockholders of the Corporation held in 2001. At each succeeding
annual meeting of stockholders of the Corporation, beginning in 1999,
successors to the class of directors whose term expires at that annual
meeting shall be elected for a term expiring at the annual meeting of
stockholders of the Corporation held in the third year following the
year of their election.
(b) If the number of directors is changed, then any increase
or decrease in such number shall be apportioned by the Board of
Directors among the classes of directors so as to maintain as nearly as
possible an equal number of directors in each class. No
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reduction in the authorized number of members of the Board of directors
shall have the effect of removing any director from office before that
director's term of office expires.
(c) Vacancies on the Board of Directors and newly created
directorships resulting from an increase in the authorized number of
members of the Board of Directors may be filled only by a majority of
the directors, then in office, although less than a quorum, or by a
sole remaining director.
(d) Each director, including a director elected to fill a
vacancy or a newly created directorship, shall hold office until the
next election of the class of directors to which such director belongs
and until his or her successor is elected and qualified or until his or
her earlier death, resignation, or removal from office for cause.
(e) Any director may resign at any time upon written notice to
the Corporation
(f) Any director or the entire Board of Directors may be
removed from any office at any time but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting
power of all outstanding shares of capital stock of the Corporation
then entitled to vote in an election of directors of the Corporation,
voting as a single class.
(g) A majority of total directors shall constitute a quorum
for the transaction of business.
(h) Notwithstanding the foregoing, whenever the holders of any
one or more classes or series of stock issued by the Corporation shall
have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the
election, term of office, filing of vacancies and other features of
such directorships shall be governed by the terms of the Certificate of
Incorporation of the Corporation applicable thereto, such directors so
elected shall not be divided into classes pursuant to Article VII of
the Certificate of Incorporation, and the number of such directors
shall not be counted in determining the maximum number of directors
permitted under the foregoing provision of Article VII of the Restated
Certificate of Incorporation, in each case unless expressly provided by
such terms.
(i) Nominations of persons for election to the Board of
Directors may be made at a meeting of stockholders of the Corporation
either by or at the direction of the Board of Directors or by any
stockholder or record entitled to vote in the election of directors at
such meeting who has complied with the notice procedures set forth in
this paragraph. A stockholder who desires to nominate a person for
election to the Board of Directors at a meeting of stockholders of the
Corporation and who is eligible to make such nomination must give
timely written notice of the proposed nomination to the secretary of
the Corporation. To be timely, a stockholder's notice given pursuant to
this paragraph must be received at the principal executive office of
the Corporation not less
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than one hundred twenty (120) calendar days in advance of the date
which is one year later than the date of the proxy statement of the
Corporation released to stockholders in connection with the previous
year's annual meeting of stockholders of the Corporation; provided,
however, that if no annual meeting of stockholders of the Corporation
was held in the previous year or if the date of the forthcoming annual
meeting of stockholders has been changed by more than thirty (30)
calendar days from the date contemplated at the time of the previous
year's proxy statement or if the forthcoming meeting is not an annual
meeting of stockholders of the Corporation, then to be timely such
stockholder's notice must be so received not later than the close of
business on the tenth day following the earlier of (a) the day on which
notice of the date of the forthcoming meeting was mailed or given to
stockholders by or on behalf of the Corporation or (b) the day on which
public disclosure of the date of the forthcoming meeting was made by or
on behalf of the Corporation. Such stockholder's notice to the
secretary of the Corporation shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or re-election as a
director (i) the name, age, business address and residence address of
such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of capital stock of the
Corporation which then are beneficially owned by such person, (iv) any
other information relating to such person that is required by law or
regulation to be disclosed in solicitations of proxies for the election
of directors of the Corporation, and (v) such person's written consent
to being named as a nominee for election as a director and to serve as
a director if elected and (b) as to the stockholder giving notice (i)
the name and address, as they appear in the stock records of the
Corporation, of such stockholder, (ii) the class and number of shares
of capital stock of the Corporation which then are beneficially owned
by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each nominee for election
as director and any other person or persons (naming such person or
persons) relating to the nomination proposed to be made by such
stockholder, and (iv) any other information required by law or
regulation to be provided by a stockholder intending to nominate a
person for election as a director of the Corporation. At the request of
the Board of Directors, any person nominated by or at the direction of
the Board of Directors for election as director of the Corporation
shall furnish to the secretary of the Corporation the information
concerning such nominee which is required to be set forth in a
stockholder's notice of a proposed nomination. No person shall be
eligible for election as a director of the Corporation unless nominated
in compliance with the procedures set forth in this paragraph. The
chairman of a meeting of stockholders of the Corporation shall refuse
to accept the nomination of any person not made in compliance with the
procedures set forth in this paragraph, and such defective nomination
shall be disregarded.
4. MEETINGS.
--TIME. Meetings shall be held at such time as the Board shall
fix, except that the first meeting of a newly elected board shall be held as
soon after its election as the directors may conveniently assemble.
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--PLACE. Meetings shall be held at such place within or
without the State of Delaware as shall be fixed by the Board.
--CALL. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called by or
at the direction of the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, or of a majority of the directors in office.
--NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any director or to any member of
a committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
notice or written waiver of notice.
--QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board, or
any such committee, as the case may be, by means of conference telephone or
similar communications equipment by means or which all persons participating in
the meeting can hear each other.
--CHAIRMAN OF THE MEETING. The Chairman of the Board, if any
and if present and acting, shall preside at all meetings. otherwise, the
Vice-Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall preside.
5. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of
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one or more of the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of any member of any such committee or committees, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided in the
resolution or the Board, shall have and may exercise the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation with the exception of any authority the delegation of which is
prohibited by Section 141 of the General Corporation Law, and may authorize the
seal of the Corporation to be affixed to all papers which may require it.
6. WRITTEN ACTION. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a Meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the Corporation shall consist of a President,
a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by
the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board,
an Executive Vice-President, one or more other Vice-Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
with such titles as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board of
Directors choosing him, no officer other than the Chairman or Vice-Chairman of
the Board, if any, need be a director. Any number of offices may be held by the
same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each
officer shall be chosen for a term which shall continue until the meeting of the
Board of Directors following the next annual meeting of stockholders and until
his successor shall have been chosen and qualified.
All officers of the Corporation shall have such authority and
perform such duties in the management and operation of the Corporation as shall
be prescribed in the resolutions of the Board of Directors designating and
choosing such officers and prescribing their authority and duties, and shall
have such additional authority and duties as are incident to their office except
to the extent that such resolutions may be inconsistent therewith. The Secretary
or an Assistant Secretary of the Corporation shall record all of the proceedings
of all meetings and actions in writing of stockholders, directors, and
committees of directors, and shall exercise such additional authority and
perform such additional duties as the Board shall assign to him. Any officer may
10
<PAGE> 11
be removed, with or without cause, by the Board of Directors. Any vacancy in any
office may be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BYLAWS
Subject to the provisions of the Certificate of Incorporation
and the provisions of the General Corporation Law, the power to amend, alter, or
repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of
Directors or by the stockholders.
(SEAL)
11
<PAGE> 1
EXHIBIT 5.1
Rogers & Hardin
Attorneys At Law
A Limited Liability Partnership
2700 International Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
(404) 522-4700
FACSIMILE: (404) 525-2224
October 6, 1998
WAXS INC.
945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Gentlemen:
We have acted as counsel to WAXS INC. (the "Company") in connection with
the registration by the Company on Form S-4 (hereinafter referred to, together
with any amendments thereto, as the "Registration Statement") under the
Securities Act of 1933, as amended, of an aggregate of up to 27,000,000 shares
of common stock, $.01 par value per share, of the Company (the "Shares").
In connection with this opinion, we have examined such corporate records
and documents and have made such examinations of law as we have deemed
necessary. In rendering this opinion, we have relied, without investigation,
upon various certificates of public officials and of officers and
representatives of the Company. In our examination of documents, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals and the conformity with the originals of all documents
submitted to us as copies.
We are members of the Bar of, and are admitted to practice only in, the
State of Georgia. Accordingly, except as to the General Corporation Law of the
State of Delaware ("DGCL"), we express no opinion herein as to the laws of any
jurisdiction other than the United States and the State of Georgia. Except as to
the DGCL, to the extent that any of the opinions contained herein requires
consideration of the laws of a state other than the State of Georgia, we have
assumed, with your permission, that the laws of such states are the same as the
laws of the State of Georgia.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the opinion that the
Company has the corporate power and authority under the DGCL and its Certificate
of Incorporation and By-Laws to issue the Shares, and the Shares, when issued
against payment therefor, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and as an exhibit to applications to the securities commissioners of
the various states and other jurisdictions of the United States for registration
or qualification of the Shares in such states and other jurisdictions. We
further consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus which is a part of the Registration Statement.
Very truly yours,
ROGERS & HARDIN
<PAGE> 1
EXHIBIT 8.1
October 6, 1998
NACT Telecommunications, Inc.
191 West 5200 North
Provo, Utah 84604
Gentlemen:
Reference is made to Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (the "Registration Statement") for the
purpose of registering under the Securities Act of 1933, the shares of common
stock, $.01 par value, of WAXS INC. ("WAXS") issuable to holders of the common
stock of NACT Telecommunications, Inc. (the "Company") in the merger of a
wholly-owned subsidiary of WAXS with and into the Company (the "NACT Merger"),
and issuable to holders of the capital stock of World Access, Inc. ("World
Access") in the merger of a wholly-owned subsidiary of WAXS with and into World
Access ("World Access Merger") as described in the Registration Statement and in
the Plan and Agreement of Merger dated February 24, 1998, as amended, among the
parties (the "Merger Agreement").
In our opinion, the discussion with respect to Federal tax matters
contained under the caption "The Transaction -- Federal Income Tax
Consequences -- NACT Merger" in the Prospectus/Information Statement that is
part of the Registration Statement sets forth the material Federal income tax
consequences of the NACT Merger. The discussion does not address all aspects of
Federal income taxation that may be important to particular taxpayers in light
of their personal investment circumstances or to taxpayers who are subject to
special treatment under the Federal income tax laws (such as a life insurance
company, foreign person, tax-exempt entity, a holder who acquired his NACT
common stock pursuant to the exercise of employee stock options or otherwise as
compensation and a person who holds, directly or indirectly, 10% or more of the
common stock of NACT).
In rendering this opinion, we have relied upon the factual representations
of the parties contained in the Registration Statement and certain
representation letters. We have not independently investigated or verified any
such facts, and, we do not herein opine as to or confirm the accuracy or
completeness thereof. Furthermore, in rendering this opinion we have assumed
that the common stock of NACT will be held as a capital asset at the time of the
consummation of the NACT Merger. This opinion is based upon current law and
assumes that both the NACT Merger and the World Access Merger will be
consummated as described in the Prospectus/Information Statement that is part of
the Registration Statement and in accordance with the Merger Agreement and
related agreements in their current form.
This opinion is being provided solely for the benefit of NACT and holders
of NACT Common Stock. No other person or party shall be entitled to rely on this
opinion.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "The
Transaction -- Federal Income Tax Consequences -- NACT Merger" in the
Prospectus/Information Statement that is part of the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
Very truly yours,
VAN COTT, BAGLEY, CORNWALL & McCARTHY
By: /s/ DAVID E. SLOAN
---------------------------------------
<PAGE> 1
EXHIBIT 8.2
ROGERS & HARDIN
ATTORNEYS AT LAW
A LIMITED LIABILITY PARTNERSHIP
2700 INTERNATIONAL TOWER, PEACHTREE CENTER
229 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303
(404) 522-4700
FACSIMILE: (404) 525-2224
October 6, 1998
World Access, Inc.
945 E. Paces Ferry Road
Suite 2240
Atlanta, Georgia 30326
Ladies and Gentlemen:
We have acted as your counsel in connection with the transactions
contemplated by the Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement") dated as of February 24, 1998, as amended as of June 30,
1998 and as of September 18, 1998 among World Access, Inc., a Delaware
corporation ("World Access"), WAXS INC., a Delaware corporation and a direct
wholly owned subsidiary of World Access ("Holdco"), WAXS Acquisition Corp., a
Delaware corporation and a direct wholly owned subsidiary of Holdco ("WAXS
Merger Sub"), NACT Telecommunications, Inc., a Delaware Corporation ("NACT"),
and NACT Acquisition Corp., a Delaware corporation and a direct wholly owned
subsidiary of Holdco ("NACT Merger Sub"). Pursuant to the Merger Agreement, WAXS
Merger Sub will be merged with and into World Access and NACT Merger Sub will be
merged with and into NACT. In that connection we have participated in the
preparation of a registration statement under the Securities Act of 1993, as
amended, on Form S-4 (the "Registration Statement"), including an Information
Statement/Prospectus (the "Information Statement"). (Capitalized terms not
otherwise defined herein shall have the meanings specified in the Information
Statement.)
We have examined the Merger Agreement, the Information Statement, the
representation letters of World Access and NACT (the "Representation Letters")
delivered to us for purposes of this opinion, and such other documents and
corporate records as we have deemed necessary or appropriate for purposes of
this opinion. In addition, we have assumed that (i) the NACT Transaction will be
consummated in the manner contemplated in the Information Statement and in
accordance with the provisions of the Merger Agreement, (ii) the statements
concerning the NACT Transaction set forth in the Information Statement are
accurate and complete, and (iii) the representations made to us in the
Representation Letters are accurate and complete.
Based upon and subject to the foregoing, the description of the Federal
income tax consequences to certain holders of outstanding shares of World Access
Common Stock contained in the Information Statement under the heading (and the
subheadings thereof) "THE NACT TRANSACTION -- Federal Income Tax
Consequences -- World Access Merger" (including the discussion contained in the
second paragraph thereof), represents our opinion, subject to the qualifications
set forth therein.
Our opinion is limited to the tax matters specifically covered hereby.
This opinion is being provided solely for the benefit of World Access and
holders of World Access Common Stock. No other person or party shall be entitled
to rely on this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this Firm in the section
captioned "THE NACT TRANSACTION -- Federal Income Tax Consequences" in the
Information Statement constituting a part of the Registration Statement. In
giving this
<PAGE> 2
World Access, Inc.
October 6, 1998
Page 2
consent we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
ROGERS & HARDIN
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of WAXS INC. of our
report dated March 5, 1998 appearing on page 25 of World Access, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997, as amended on Form
10-K/A filed on April 27, 1998. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
October 5, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated December 4, 1997, with
respect to the balance sheets of NACT Telecommunications, Inc. as of September
30, 1997 and 1996, and the related statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1997, and related schedule which report appears in the Form S-4 of WAXS INC.
dated October 6, 1998, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Salt Lake City, Utah
October 5, 1998
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of WAXS INC. and to the
incorporation by reference therein of our report dated October 15, 1997, with
respect to the consolidated financial statements of Telco Systems, Inc. included
in the Current Report on Form 8-K filed by World Access, Inc. on September 9,
1998, as amended by Amendment No. 1 thereto on Form 8-K/A filed by World Access,
Inc. on September 25, 1998, both filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 1, 1998
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 5, 1998 with respect to the combined financial
statements of Cherry Communications Incorporated (d/b/a Resurgens Communications
Group) and Cherry Communications UK Limited for the year ended December 31,
1997, included in the Current Report on Form 8-K filed by World Access, Inc. on
July 20, 1998, as amended by Amendment No. 1 thereto on Forms 8-K/A filed by
World Access, Inc. on September 4, 1998, as further amended by Amendment No. 2
thereto on Form 8-K/A filed by World Access, Inc. on September 25, 1998,
incorporated by reference in the Registration Statement of WAXS INC. on Form S-4
dated October 6, 1998 for the registration of its common stock.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
October 5, 1998
<PAGE> 1
EXHIBIT 23.9
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated July 11, 1997, except for Notes 2 and 10 as
to which the date is July 24, 1997, accompanying the combined financial
statements of Cherry Communications Incorporated and Cherry Communications U.K.
Limited for each of the two years in the period ended December 31, 1996 included
in the Current Report of Form 8-K filed by World Access, Inc. on July 27, 1998,
as amended by Amendment No. 1 thereto on Form 8-K/A filed by World Access, Inc.
on September 4, 1998 and Amendment No. 2 thereto on Form 8-K/A filed by World
Access, Inc. on September 25, 1998, which are incorporated by reference in this
Registration Statement of WAXS INC. on Form S-4. We consent to the incorporation
by reference of the aforementioned report in this Form S-4 and to the use of our
name as it appears under the caption "Experts."
/s/ GRANT THORNTON LLP
Chicago, Illinois
October 5, 1998
<PAGE> 1
EXHIBIT 23.91
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement
of WAXS INC. on Form S-4 of our report on the consolidated financial statements
of Advanced TechCom, Inc. and Subsidiary dated February 26, 1997 (October 15,
1997 as to Notes 2 and 13, and the last paragraph of Note 5 and which expresses
and unqualified opinion and includes an explanatory paragraph referring to
certain subsequent events, including entering into an agreement to subcontract
certain of ATI's manufacturing, raising of additional equity and the receipt of
a commitment for additional financing) appearing in the Current Report on Form
8-K dated February 13, 1998 of World Access, Inc., and to the reference to us
under the heading "Experts" in the Prospectus which is part of such registration
statement.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 5, 1998
<PAGE> 1
EXHIBIT 23.92
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement
of WAXS INC. on Form S-4 of our report on the consolidated financial statements
of Advanced TechCom, Inc. and Subsidiaries dated March 27, 1998 appearing in the
Current Report on Form 8-K filed by World Access, Inc. on February 13, 1998, as
amended by Amendment No. 1 thereto on Form 8-K/A filed on April 14, 1998, as
further amended by Amendment No. 2 thereto on Form 8-K/A filed on September 3,
1998, and to the use of our name as it appears under the caption "Experts."
/s/ TEDDER GRIMSLEY & COMPANY, P.A.
Lakeland, Florida
October 5, 1998
