<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
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[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
WORLD ACCESS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
World Access Convertible Preferred Stock, Series C
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
369,400 shares of World Access Convertible Preferred Stock, Series C.
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The
underlying value of the transaction was computed based on the issuance
of 369,400 shares of Convertible Preferred Stock, Series C, of World
Access with a fair value of approximately $720.00 per share or an
aggregate fair value of approximately $266,000,000 as computed using
the Black-Scholes Option Pricing Model and a 10% discount for the lack
of liquidity in a private security; $56,000,000 in cash; and 520,000
options that each may be exercised for one share of World Access
Common Stock at an average exercise price of $3.06 per share with an
aggregate fair value of approximately $6,400,000 as computed using the
Black-Scholes Option Pricing Model, for an aggregate underlying value
of the transaction of approximately $328,400,000.
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$328,400,000.00
------------------------------------------------------------------------
(5) Total fee paid:
$65,687.00
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
----------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
WORLD ACCESS, INC.
945 E. PACES FERRY ROAD, SUITE 2200
ATLANTA, GEORGIA 30326
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Special Meeting") of World Access, Inc. ("World Access" or the "Company") to be
held at the Company's principal executive offices located at 945 E. Paces Ferry
Road, Suite 2200, Atlanta, Georgia 30326, on December 7, 1999, at 11:00 a.m.,
local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the adoption of an Agreement and Plan of Merger, dated as of
August 17, 1999 (the "Merger Agreement"), among World Access, FaciliCom
International, Inc., a Delaware corporation ("FaciliCom"), Armstrong
International Telecommunications, Inc., a Delaware corporation, Epic Interests,
Inc., a Pennsylvania corporation, and BFV Associates, Inc., a Delaware
corporation. The Merger Agreement provides, among other things, for the merger
of FaciliCom with and into World Access (the "Merger"), pursuant to which all
issued and outstanding shares of common stock, par value $.01 per share, of
FaciliCom ("FaciliCom Common Stock") will be converted into the right to
receive, and certain outstanding options to purchase FaciliCom Common Stock will
be exchanged for, in the aggregate, (i) an amount in cash and/or shares of
common stock, par value $.01 per share, of World Access ("World Access Common
Stock") equal in value to $56.0 million, (ii) approximately $369.4 million in
aggregate liquidation preference of Convertible Preferred Stock, Series C, of
World Access and (iii) approximately 520,000 vested options that each may be
exercised for one share of World Access Common Stock at an average exercise
price of $3.06 per share as more fully described in the accompanying Proxy
Statement.
You are urged to read carefully the accompanying Proxy Statement for more
detailed information concerning the Merger.
THE BOARD OF DIRECTORS OF WORLD ACCESS HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS FAIR TO AND IN THE BEST INTERESTS OF WORLD ACCESS AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
Whether or not you plan to attend the Special Meeting in person, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. You may revoke your proxy in the manner described in
the accompanying Proxy Statement at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting in person, you may vote your
shares personally on all matters even if you have previously returned a proxy
card. Your prompt cooperation will be greatly appreciated.
We look forward to seeing you on December 7, 1999.
Sincerely,
/s/ John D. Phillips
John D. Phillips
Chairman and Chief
Executive Officer
November 5, 1999
<PAGE> 3
WORLD ACCESS, INC.
945 E. PACES FERRY ROAD, SUITE 2200
ATLANTA, GEORGIA 30326
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 7, 1999
TO THE STOCKHOLDERS OF WORLD ACCESS, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Special
Meeting") of World Access, Inc., a Delaware corporation ("World Access"), will
be held at the principal executive offices of World Access located at 945 E.
Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, on December 7, 1999, at
11:00 a.m., local time, for the purposes described below.
The purposes of the Special Meeting are as follows:
1. To consider and vote upon a proposal to approve the adoption of an
Agreement and Plan of Merger, dated as of August 17, 1999 (the "Merger
Agreement"), among World Access, FaciliCom International, Inc., a Delaware
corporation ("FaciliCom"), Armstrong International Telecommunications,
Inc., a Delaware corporation, Epic Interests, Inc., a Pennsylvania
corporation, and BFV Associates, Inc., a Delaware corporation. The Merger
Agreement provides, among other things, for the merger of FaciliCom with
and into World Access (the "Merger"), pursuant to which all issued and
outstanding shares of common stock, par value $.01 per share, of FaciliCom
("FaciliCom Common Stock") will be converted into the right to receive, and
certain outstanding options to purchase FaciliCom Common Stock will be
exchanged for, in the aggregate, (i) an amount in cash and/or shares of
common stock, par value $.01 per share, of World Access ("World Access
Common Stock") equal in value to $56.0 million, (ii) approximately $369.4
million in aggregate liquidation preference of Convertible Preferred Stock,
Series C, of World Access ("Series C Preferred Stock") and (iii)
approximately 520,000 vested options that each may be exercised for one
share of World Access Common Stock at an average exercise price of $3.06
per share and as more fully described in the accompanying Proxy Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
A copy of the Merger Agreement is attached as Appendix A to the
accompanying Proxy Statement.
Only holders of record of World Access Common Stock, World Access 4.25%
Cumulative Senior Perpetual Convertible Preferred Stock, Series A, and World
Access 4.25% Cumulative Junior Convertible Preferred Stock, Series B, on October
22, 1999 are entitled to notice of and to vote at the Special Meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the Special Meeting.
However, to ensure your representation at the Special Meeting, you are urged to
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. You may revoke your proxy in the manner described in
the accompanying Proxy Statement at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting in person, you may vote your
shares personally on all matters even if you have previously returned a proxy
card. If you sign, date and mail your proxy card without indicating how you want
to vote, World Access will vote your proxy in favor of adopting the Merger
Agreement. If you do not return your card, the effect will be a vote against the
Merger Agreement. If your shares are held in "street name" by your broker or
other nominee, only that holder can vote your shares. You should follow the
directions provided by your broker or nominee regarding how to instruct them to
vote your shares.
BY ORDER OF THE BOARD
OF DIRECTORS
/s/ W. Tod Chmar
W. Tod Chmar
Executive Vice
President and Secretary
November 5, 1999
<PAGE> 4
WORLD ACCESS, INC.
PROXY STATEMENT
This Proxy Statement is being furnished to stockholders of World Access,
Inc., a Delaware corporation ("World Access"), in connection with the
solicitation of proxies by the board of directors of World Access (the "Board of
Directors") for use at a special meeting of stockholders (the "Special Meeting")
of World Access to be held at the principal offices of World Access located at
945 E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, on December 7,
1999, at 11:00 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 World Access.
This Proxy Statement is being furnished to the stockholders of World Access
for use at the Special Meeting for the purpose of considering and voting upon a
proposal to approve the adoption of an Agreement and Plan of Merger, dated as of
August 17, 1999 (the "Merger Agreement"), among World Access, FaciliCom
International, Inc., a Delaware corporation ("FaciliCom"), Armstrong
International Telecommunications, Inc., a Delaware corporation ("Armstrong"),
Epic Interests, Inc., a Pennsylvania corporation ("Epic"), and BFV Associates,
Inc., a Delaware corporation ("BFV" and, together with Armstrong and Epic, the
"FaciliCom Shareholders"). The Merger Agreement provides, among other things,
for the merger (the "Merger") of FaciliCom with and into World Access pursuant
to which all issued and outstanding shares of common stock, par value $.01 per
share, of FaciliCom (the "FaciliCom Common Stock") will be converted into the
right to receive, and certain outstanding options to purchase FaciliCom Common
Stock will be exchanged for, in the aggregate, (i) an amount of cash and/or
shares of common stock, par value $.01 per share, of World Access ("World Access
Common Stock") equal in value to $56.0 million, (ii) approximately 369,400
shares, or $369.4 million in liquidation preference, of Convertible Preferred
Stock, Series C, of World Access ("Series C Preferred Stock") and (iii)
approximately 520,000 vested options that each may be exercised for one share of
World Access Common Stock at an average exercise price of $3.06 per share. In
connection with the Merger, FaciliCom has also granted new stock options to its
employees under the FaciliCom 1999 Stock Option Plan which will convert upon
consummation of the Merger into non-qualified options to purchase approximately
1.9 million shares of World Access Common Stock at an exercise price of $15.00
per share.
The Series C Preferred Stock will rank (i) as to dividends, on parity with
the World Access Common Stock and junior to the Series A Preferred Stock and
Series B Preferred Stock (as each such term is defined below) and (ii) as to
liquidation preference, senior to the World Access Common Stock, on parity with
the Series B Preferred Stock and junior to the Series A Preferred Stock. The
Series C Preferred Stock has a liquidation preference of $1,000 per share and is
convertible, at any time in whole or in part, into shares of World Access Common
Stock at a conversion rate of one share of World Access Common Stock per $20.38
of liquidation preference, subject to potential adjustments, as more fully
described herein. Any Series C Preferred Stock still outstanding on the third
anniversary of the consummation of the Merger will automatically be converted
into shares of World Access Common Stock at a conversion rate of one share of
World Access Common Stock per each amount of liquidation preference as is equal
to the current market price of the World Access Common Stock at such time;
provided that such conversion rate shall not be below one share of World Access
Common Stock per $11.50 of liquidation preference and is subject to other
potential adjustments. The holders of the Series C Preferred Stock will be
entitled to elect, and the initial holders of the World Access Common Stock
issued upon conversion of the Series C Preferred Stock will be entitled to
designate for recommendation by the World Access Board of Directors for election
by the World Access stockholders, up to four members of the Board of Directors,
in each case, subject to maintaining specified levels of stock ownership.
Holders of the Series C Preferred Stock will be entitled to vote on an as
converted basis on all matters voted on by holders of World Access Common Stock,
other than for the election of directors. Upon consummation of the Merger and
certain related transactions, the holders of the Series C Preferred Stock will
control approximately 24.1% of the total voting power of World Access Voting
Stock (as hereinafter defined), and four out of the twelve members of the Board
of Directors will be representatives of the holders of the Series C Preferred
Stock. See "THE MERGER -- Consideration to be Received in the
Merger -- Description of the Series C Preferred Stock."
<PAGE> 5
Holders of record of World Access Common Stock, World Access 4.25%
Cumulative Senior Perpetual Convertible Preferred Stock, Series A ("Series A
Preferred Stock"), and World Access 4.25% Cumulative Junior Convertible
Preferred Stock, Series B ("Series B Preferred Stock" and, together with the
World Access Common Stock and the Series A Preferred Stock, and, after the
consummation of the Merger, the Series C Preferred Stock, the "World Access
Voting Stock"), on October 22, 1999 (the "Record Date") are entitled to notice
of and to vote at the Special Meeting and any adjournments or postponements
thereof. The proposed Merger is contingent upon, among other things, the
approval of the holders of a majority in voting power of the World Access Voting
Stock voting together as a single class. John D. Phillips, Chairman of the
Board, President and Chief Executive Officer of World Access, WorldCom Network
Services, Inc. ("WNS") and The 1818 Fund III, L.P. ("The 1818 Fund") have
entered into a voting agreement with FaciliCom and the FaciliCom Shareholders in
which they have each agreed to vote their shares, which as of the Record Date
represent in the aggregate approximately 24.1% of the voting power of the World
Access Voting Stock, in favor of adopting the Merger Agreement.
Consummation of the Merger is subject to the satisfaction or waiver of
certain conditions, including, among other things, receipt of (i) consent from
the holders of a majority in interest of FaciliCom's $300.0 million aggregate
principal amount of 10 1/2% Series B Senior Notes due 2008 (the "FaciliCom
Notes") issued under the indenture between FaciliCom, as issuer, and State
Street Bank and Trust Company, as trustee, dated as of January 28, 1998, as
amended (the "FaciliCom Indenture"), to amend the terms of the FaciliCom
Indenture eliminating such holders' rights pursuant to the FaciliCom Indenture
to require FaciliCom to repurchase their FaciliCom Notes at 101% of the
principal amount of such FaciliCom Notes in connection with the change of
control of FaciliCom resulting from the consummation of the Merger and (ii)
certain other amendments of the provisions of the FaciliCom Indenture required
to consummate the Merger or as is agreed to by World Access and FaciliCom
(collectively, the "FaciliCom Notes Consent").
Pursuant to the terms of an Agreement to Exchange and Consent, dated
October 12, 1999 (the "Exchange Agreement"), World Access agreed, under certain
circumstances, to make an exchange offer (the "Exchange Offer") in connection
with the Merger for the outstanding FaciliCom Notes, and the holders of a
majority in interest of the FaciliCom Notes (the "Majority Holders") agreed to
consent to the amendments constituting the FaciliCom Notes Consent, subject to
the consummation of the Merger and the Exchange Offer. The Exchange Agreement
provides that holders of FaciliCom Notes will be entitled to tender their
FaciliCom Notes and accept in exchange for each $1,000 in principal amount of
such FaciliCom Notes (i) $1,000 principal amount of World Access' 13.25% Senior
Notes due 2008 (the "Exchange Notes"), (ii) $10 in cash, and (iii) World Access
Common Stock having a market value of $50, as measured at the time of the
exchange (the "Stock Consideration"). In the event World Access subsequently
generates cash or cash equivalents from certain asset sales and is required to
make an offer to repurchase the Exchange Notes at 100% of principal, the
repurchase price will be reduced by the then current market value of the Stock
Consideration. The closing of the Exchange Offer is expected to occur
immediately after the closing of the Merger.
On August 16, 1999, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, and November 3, 1999, the
last reported sale prices on The Nasdaq National Market ("Nasdaq") of World
Access Common Stock were $13.69 and $13.19, respectively.
All information contained in this Proxy Statement relating to World Access
and its subsidiaries has been supplied by World Access. All information
contained in this Proxy Statement relating to FaciliCom and its subsidiaries has
been supplied by FaciliCom.
This Proxy Statement and the form of proxy are first being mailed to
stockholders of World Access on or about November 5, 1999.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 5, 1999
<PAGE> 6
TABLE OF CONTENTS
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SUMMARY..................................................... 1
The Companies............................................. 1
The Special Meeting....................................... 1
Voting Agreement.......................................... 2
Risk Factors.............................................. 2
Recommendation of the World Access Board of Directors..... 2
Opinion of World Access Financial Advisor................. 2
Ownership of World Access After the Merger................ 3
The Merger................................................ 3
The Private Placement..................................... 7
Exchange Offer for FaciliCom Notes........................ 7
MARKETS AND MARKET PRICES................................... 8
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..... 9
World Access Selected Historical Financial Information.... 9
FaciliCom Selected Historical Financial Information....... 11
Unaudited Selected Pro Forma Financial Information........ 13
COMPARATIVE PER SHARE DATA.................................. 15
RISK FACTORS................................................ 17
Risk Factors Concerning the Merger........................ 17
Risk Factors Concerning the Business and Operations of the
Surviving Corporation.................................. 19
Forward-Looking Statements................................ 23
THE SPECIAL MEETING......................................... 24
General................................................... 24
Matters to Be Considered.................................. 24
Board of Directors' Recommendations....................... 24
Record Date............................................... 24
Stockholders Entitled to Vote............................. 24
Quorum; Vote Required..................................... 24
Security Ownership by Certain Beneficial Owners and
Management............................................. 25
Voting Agreement.......................................... 25
Solicitation and Revocability of Proxies.................. 25
THE MERGER.................................................. 27
Purpose and Effects of the Merger......................... 27
Background of the Merger.................................. 27
Recommendation of the World Access Board of Directors..... 28
World Access' Reasons for the Merger...................... 28
Opinion of World Access' Financial Advisor................ 29
Closing; Effective Time of the Merger..................... 34
Management of the Surviving Corporation................... 34
Consideration to be Received in the Merger................ 36
Certain Material Federal Income Tax Consequences of the
Merger................................................. 38
Limitations on Resales by Affiliates...................... 40
Accounting Treatment...................................... 40
Appraisal or Dissenters' Rights........................... 40
Regulatory Approvals...................................... 40
Interests of Certain Persons in the Merger................ 41
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THE MERGER AGREEMENT........................................ 45
The Merger................................................ 45
Certificate of Incorporation and Bylaws of Surviving
Corporation............................................ 45
Directors of the Surviving Corporation.................... 45
Merger Consideration...................................... 45
Treatment of FaciliCom Stock Options...................... 46
Representations and Warranties............................ 46
Covenants of the Parties.................................. 47
Conditions to the Consummation of the Merger.............. 50
Termination............................................... 52
Amendment................................................. 53
RELATED AGREEMENTS.......................................... 54
Voting Agreement.......................................... 54
Letter Agreement.......................................... 54
Registration Rights Agreement............................. 54
Agreement to Exchange and Consent......................... 55
Private Placement Agreements.............................. 56
RELATED TRANSACTIONS........................................ 57
Exchange Offer for FaciliCom Notes........................ 57
Private Placement......................................... 59
Release of Escrowed Shares................................ 59
PRINCIPAL STOCKHOLDERS...................................... 60
BUSINESS OF WORLD ACCESS.................................... 63
Telecommunications Group.................................. 63
Equipment Group........................................... 63
Recent Developments....................................... 64
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 67
FACILICOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 77
Overview.................................................. 77
Results of Operations..................................... 78
Liquidity and Capital Resources........................... 81
Impact of the Year 2000 Issue............................. 82
Quantitative and Qualitative Disclosures about Market
Risk................................................... 84
BUSINESS OF FACILICOM....................................... 85
Overview.................................................. 85
Strengths................................................. 86
Operating Markets......................................... 87
Network................................................... 89
Services.................................................. 92
Customers................................................. 93
Sales and Marketing....................................... 94
Management Information Systems............................ 94
Competition............................................... 96
Licenses and Regulation................................... 97
Employees................................................. 100
Intellectual Property..................................... 100
Properties................................................ 100
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Legal Proceedings........................................... 101
Capital Stock............................................. 101
Recent Developments....................................... 101
ACCOUNTANTS................................................. 102
OTHER MATTERS............................................... 102
STOCKHOLDER PROPOSALS....................................... 103
AVAILABLE INFORMATION....................................... 103
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 104
FACILICOM CONSOLIDATED FINANCIAL STATEMENTS................. F-1
APPENDICES:
APPENDIX A: Agreement and Plan of Merger, dated as of August
17, 1999, by and among World Access, Inc.,
FaciliCom International, Inc., Armstrong
International Telecommunications, Inc., Epic
Interests, Inc. and BFV Associates, Inc......... A-1
APPENDIX B: Opinion of Donaldson, Lufkin & Jenrette
Securities Corporation Regarding the Merger..... B-1
APPENDIX C: Voting Agreement, dated as of August 17, 1999,
by and among FaciliCom International, Inc.,
Armstrong International Telecommunications,
Inc., BFV Associates, Inc., Epic Interests,
Inc., WorldCom Network Services, Inc., The 1818
Fund III, L.P. and John D. Phillips............. C-1
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary is not, and is not intended to be, a complete
description of the matters covered in this Proxy Statement and is subject to and
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement, including the appendices hereto and
the documents incorporated herein by reference. Stockholders of World Access are
urged to read carefully the entire Proxy Statement, including the appendices
hereto and the documents incorporated by reference herein, and particularly the
matters set forth in this Proxy Statement under "RISK FACTORS."
THE COMPANIES
World Access, Inc. World Access provides international long distance
services and proprietary network equipment to the global telecommunications
markets. The World Access Telecommunications Group terminates international long
distance voice and data traffic in more than 200 countries through a combination
of owned or leased international network facilities, various international
termination agreements and resale arrangements with other international long
distance service providers. The World Access Equipment Group develops,
manufactures and markets intelligent multiplexers, digital microwave radio
systems, digital switches, billing and network telemanagement systems, cellular
base stations, fixed wireless local loop systems, and other telecommunications
network products.
The principal executive offices of World Access are located at 945 E. Paces
Ferry Road, Suite 2200, Atlanta, Georgia 30326, and its telephone number at that
location is (404) 231-2025.
FaciliCom International, Inc. FaciliCom is a multinational,
facilities-based telecommunications carrier. It provides international long
distance services to other carriers worldwide and offers international and
domestic long distance voice, internet access, data and other value-added
services to business and residential customers in select European markets.
FaciliCom provides these services over its carrier-grade international network,
which consists of 17 gateway switches and 18 additional points of presence in
the U.S. and in 13 European countries, as well as a satellite earth station. The
FaciliCom network is connected primarily by fiber optic cable capacity that
FaciliCom owns or leases. In addition to these facilities, FaciliCom has 12
interconnection agreements, ten of which are with the dominant national carriers
in its markets, and 21 operating agreements, 16 of which are with the dominant
national carriers in its markets.
The principal executive offices of FaciliCom are located at 1401 New York
Avenue, N.W., 9th Floor, Washington, D.C. 20005, and its telephone number at
this location is (202) 496-1100.
THE SPECIAL MEETING
Time, Date and Place of the Meeting. The Special Meeting will be held at
the principal offices of World Access located at 945 E. Paces Ferry Road, Suite
2200, Atlanta, Georgia 30326, on December 7, 1999, at 11:00 a.m., local time.
Record Date. The Record Date for determination of holders of World Access
Voting Stock entitled to vote at the Special Meeting is October 22, 1999.
Stockholders Entitled to Vote. As of the close of business on the Record
Date, 45,205,424 shares of World Access Common Stock were outstanding, held by
approximately 661 holders of record. Each share of outstanding World Access
Common Stock is entitled to one vote.
World Access has 50,000 shares of Series A Preferred Stock issued and
outstanding. Each share of Series A Preferred Stock is convertible at the option
of the holder into World Access Common Stock in accordance with a conversion
formula contained in the Certificate of Incorporation of the Company (the "World
Access Certificate"). The Series A Preferred Stock is entitled to vote on the
approval and adoption of the Merger Agreement on an as converted basis with the
World Access Common Stock as a single class. Therefore, the holder of the Series
A Preferred Stock may vote with the holders of World Access Common Stock on the
proposal described herein as if it held 4,347,826 shares of World Access Common
Stock.
1
<PAGE> 10
World Access also has 23,174 shares of Series B Preferred Stock issued and
outstanding. Each share of Series B Preferred Stock is convertible at the option
of the holder into World Access Common Stock in accordance with a conversion
formula contained in the World Access Certificate. The Series B Preferred Stock
is entitled to vote on the approval and adoption of the Merger Agreement on an
as converted basis with the World Access Common Stock as a single class.
Therefore, the holders of the Series B Preferred Stock may vote with the holders
of World Access Common Stock on the proposal described herein as if they held
1,448,375 shares of World Access Common Stock.
Only holders of record of World Access Voting Stock as of the close of
business on the Record Date are entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof.
Purpose of the Meeting. The purpose of the Special Meeting is to consider
and vote upon proposals (i) to approve and adopt the Merger Agreement and the
transactions contemplated thereby and (ii) to transact such other business as
may properly come before the Special Meeting or any adjournments or
postponements thereof.
Vote Required. The approval of the adoption of the Merger Agreement and
the transactions contemplated thereby will require the affirmative vote of a
majority in voting power of the outstanding shares of World Access Voting Stock
entitled to vote and voting as a single class. See "THE SPECIAL MEETING --
Quorum; Vote Required."
Shares of World Access Voting Stock that are voted "FOR" or "AGAINST" at
the Special Meeting will be treated as being present at such meeting for
purposes of establishing a quorum. 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. Because adoption of the
Merger Agreement requires the affirmative vote of a majority in voting power of
outstanding shares of World Access Voting Stock, abstentions and broker
non-votes will have the same effect as negative votes.
VOTING AGREEMENT
John D. Phillips, WNS and The 1818 Fund have entered into a voting
agreement with FaciliCom and the FaciliCom Shareholders in which they have
agreed to vote their shares of World Access Voting Stock, which as of the Record
Date represent in the aggregate approximately 24.1% of the total voting power of
the World Access Voting Stock, in favor of adopting the Merger Agreement. See
"RELATED AGREEMENTS -- Voting Agreement."
RISK FACTORS
World Access stockholders should consider carefully the matters set forth
in this Proxy Statement under "RISK FACTORS."
RECOMMENDATION OF THE WORLD ACCESS BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF WORLD ACCESS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. See "THE
MERGER -- Recommendation of the World Access Board of Directors" and "-- World
Access' Reasons for the Merger."
OPINION OF WORLD ACCESS FINANCIAL ADVISOR
In making its recommendation with respect to the Merger, the Board of
Directors of World Access considered, among other things, the written opinion,
dated as of August 17, 1999, of Donaldson, Lufkin &
2
<PAGE> 11
Jenrette Securities Corporation ("DLJ"), financial advisor to World Access, 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 consideration to
be paid by World Access pursuant to the Merger Agreement was fair, from a
financial point of view, to World Access. A copy of such opinion is attached to
this Proxy Statement as Appendix B. DLJ's opinion, which sets forth the
assumptions made, procedures followed and matters considered by DLJ, and the
scope of its review, should be read carefully in its entirety. DLJ's opinion
does not take into account the specific consideration offered in the Exchange
Offer. See "THE MERGER -- Opinion of World Access' Financial Advisor."
OWNERSHIP OF WORLD ACCESS AFTER THE MERGER
Upon consummation of the Merger, Armstrong, BFV and Epic will hold 309,977,
38,320 and 19,160 shares of Series C Preferred Stock, respectively. The
remaining 1,934 shares of Series C Preferred Stock to be issued in the Merger
will be held by other individuals who are stockholders of FaciliCom. Management
of FaciliCom and BFV anticipate that BFV will merge with and into FaciliCom
prior to the consummation of the Merger with the result that the shareholders of
BFV, Walter J. Burmeister, the Chief Executive Officer and President of
FaciliCom, and Juan Carlos Valls, will hold shares of FaciliCom Common Stock and
receive shares of Series C Preferred Stock in the Merger. On an as converted
basis, using the conversion rate of one share of World Access Common Stock per
$20.38 of liquidation preference, and taking into account the 7,500,000 shares
of World Access Common Stock to be released from escrow (the "Escrowed Shares")
in connection with World Access' prior acquisitions of Cherry Communications
U.K. Limited ("Cherry U.K.")and Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) ("Cherry U.S."), the issuance by World Access of
$75.0 million of new shares of World Access Common Stock in connection with the
Merger and the issuance by World Access of up to $15.0 million of new shares of
World Access Common Stock in the Exchange Offer, these shares held by Armstrong,
BFV (or Messrs. Burmeister and Valls in the aggregate), and Epic will represent
approximately 20.2%, 2.5% and 1.3%, respectively, of the total voting power of
the World Access Voting Stock. In addition, Armstrong, BFV and Epic could
receive additional shares of World Access Common Stock in the Merger to the
extent that World Access pays the $56.0 million portion of the Merger
consideration in shares of World Access Common Stock in lieu of cash. See "THE
MERGER AGREEMENT -- Merger Consideration."
As part of the release of the Escrowed Shares, (i) entities controlled by
John D. Phillips will receive 1,250,000 additional shares of World Access Common
Stock which, together with his current stockholdings, will represent upon
consummation of the Merger 2.5% of the total voting power of the World Access
Voting Stock, and (ii) it is estimated that WNS will receive approximately
4,200,000 additional shares of World Access Common Stock which, together with
its current stockholdings, will represent upon consummation of the Merger 8.1%
of the total voting power of the World Access Voting Stock. See "THE MERGER --
Interests of Certain Persons in the Merger," "RELATED TRANSACTIONS -- Release of
Escrowed Shares" and "PRINCIPAL STOCKHOLDERS."
THE MERGER
Purpose of the Merger. The purpose of the Merger is to combine World
Access and FaciliCom. The directors and management of World Access believe the
Merger will provide World Access with extensive switching and transport networks
in Europe, allowing it to leverage its long distance volume and to aggressively
pursue its strategy to be a leader in the wholesale and retail international
long distance markets. After the Merger, the Surviving Corporation (as defined
below) intends to take advantage of growth opportunities in international long
distance services by leveraging its substantial wholesale volume and
international relationships to develop a strong retail presence in selected
international markets.
Description of the Merger. Pursuant to the Merger Agreement, (i) FaciliCom
will be merged with and into World Access, with World Access continuing as the
surviving corporation (the "Surviving Corporation"), and (ii) all of the
outstanding capital stock of FaciliCom will be converted into the right to
receive, and certain outstanding options to purchase FaciliCom Common Stock will
be exchanged for, in the aggregate, (A) approximately 369,400 shares, or $369.4
million in aggregate liquidation preference, of Series C Preferred
3
<PAGE> 12
Stock, (B) an amount of cash and/or World Access Common Stock equal in value to
$56.0 million and (C) approximately 520,000 options that each may be exercised
for one share of World Access Common Stock at an average exercise price of $3.06
per share. Any cash payments made by World Access are expected to be funded by
the proceeds from the issuance and sale of World Access Common Stock prior to
the consummation of the Merger. World Access has received commitments from a
group of institutional and sophisticated investors to purchase $75.0 million of
World Access Common Stock in a private transaction (the "Private Placement")
that is conditioned upon, among other things, and will close simultaneously
with, the Merger. World Access will use the majority of the proceeds from the
Private Placement to fund the cash portion of the Merger consideration,
including related fees and expenses. In connection with the closing of the
Private Placement, Massimo Prelz Oltramonti, a Managing Director of Gilbert
Global Equity Partners, and John P. Rigas, Managing Partner of Zilkha Capital
Partners, have agreed to join the World Access Board of Directors. See "RELATED
AGREEMENTS -- Private Placement Agreements."
Series C Preferred Stock. The Series C Preferred Stock will rank (i) as to
dividends, on parity with the World Access Common Stock and junior to the Series
A Preferred Stock and Series B Preferred Stock and (ii) as to liquidation
preference, senior to the World Access Common Stock, on parity with the Series B
Preferred Stock and junior to the Series A Preferred Stock. The Series C
Preferred Stock has a liquidation preference of $1,000 per share and is
convertible, at any time in whole or in part, into shares of World Access Common
Stock at a conversion rate of one share of World Access Common Stock per $20.38
of liquidation preference, subject to potential adjustments, as more fully
described herein. Any Series C Preferred Stock still outstanding on the third
anniversary of the consummation of the Merger will automatically be converted
into shares of World Access Common Stock at a conversion rate of one share of
World Access Common Stock per each amount of liquidation preference as is equal
to the current market price of the World Access Common Stock at such time;
provided that such conversion rate shall not be below one share of World Access
Common Stock per $11.50 of liquidation preference and is subject to other
potential adjustments. The holders of the Series C Preferred Stock will be
entitled to elect, and the initial holders of the World Access Common Stock
issued upon conversion of the Series C Preferred Stock will be entitled to
designate for recommendation by the World Access Board of Directors for election
by the World Access stockholders, up to four members of the World Access Board
of Directors, in each case, subject to maintaining specified levels of stock
ownership. Holders of the Series C Preferred Stock will be entitled to vote on
an as converted basis on all matters voted on by holders of World Access Common
Stock, other than for the election of directors. Upon consummation of the Merger
and certain related transactions, the holders of the Series C Preferred Stock
will control approximately 24.1% of the total voting power of the World Access
Voting Stock and four out of the twelve members of the World Access Board of
Directors will be representatives of the holders of the Series C Preferred
Stock. See "THE MERGER -- Consideration to be Received in the
Merger -- Description of the Series C Preferred Stock."
Interests of Certain Persons. In considering the recommendations of the
World Access Board of Directors with respect to the Merger, World Access
stockholders should be aware that certain directors and executive officers of
World Access, including certain of the new directors and executive officers to
be appointed in connection with the Merger, have interests in the Merger that
may be in addition to the interests of other holders of World Access Voting
Stock.
In consideration for the agreement by John D. Phillips not to sell or
transfer shares of World Access Common Stock he holds for a specified time
pursuant to a Letter Agreement, dated August 17, 1999, by and between Mr.
Phillips and Armstrong (the "Letter Agreement"), the Board of Directors of World
Access has agreed to accelerate the exercisability of options for 1,000,000
shares of World Access Common Stock held by Mr. Phillips upon consummation of
the Merger. See "RELATED AGREEMENTS -- Letter Agreement."
Pursuant to World Access' acquisition of Cherry U.K. and Cherry U.S.
completed in December 1998, the consummation of the Merger will trigger the
release from escrow of (i) 1,250,000 Escrowed Shares to entities controlled by
John D. Phillips, (ii) approximately 4,200,000 Escrowed Shares to WNS and (iii)
approximately 2,050,000 Escrowed Shares to certain former creditors of Cherry
U.S. Of the 1,250,000 Escrowed Shares to be released to entities controlled by
John D. Phillips; John D. Phillips, Carl E. Sanders
4
<PAGE> 13
and John P. Imlay, Jr., who are directors of World Access and will continue as
directors of the Surviving Corporation after the Merger, will be entitled to
receive the economic benefit of approximately 416,667 shares, 40,000 shares and
26,667 shares, respectively. Lawrence C. Tucker, who is a director of World
Access and will continue as a director of the Surviving Corporation after the
Merger, is a member of the Board of Directors of MCI WorldCom, Inc., the parent
of WNS. WNS is also the largest customer of World Access accounting for revenues
of $138.2 million, or 43.0%, of total revenues during the first six months of
1999. The Escrowed Shares were subject to release or forfeiture based on whether
Cherry U.K. and Cherry U.S. would meet certain future financial performance
criteria. While it cannot be determined at this time whether the relevant
financial criteria would have been in fact satisfied, the World Access Board of
Directors, in approving the Merger Agreement, considered the release of the
Escrowed Shares in the context of the overall Merger transaction and believed
that the relevant performance criteria would have been satisfied and that the
Escrowed Shares would have been released in February 2000 and 2001 irrespective
of the Merger. In addition, in reaching its opinion that the consideration to be
paid by World Access pursuant to the Merger Agreement was fair, from a financial
point of view, to World Access, DLJ also considered the release of the Escrowed
Shares.
Walter J. Burmeister, President and Chief Executive Officer of FaciliCom,
and Bryan Cipoletti, an executive officer of AHI (as defined below), two of the
four persons designated as representatives of the holders of the Series C
Preferred Stock on the board of directors of the Surviving Corporation, are,
directly or indirectly, a stockholder and optionholder and an optionholder,
respectively, of FaciliCom and will be entitled to receive a portion of the
consideration payable in the Merger for the shares of FaciliCom Common Stock
and/or FaciliCom stock options held by them. Three of the representatives of the
Series C Preferred Stock are also executive officers of Armstrong Holdings, Inc.
("AHI"), a Delaware corporation and the sole stockholder of Armstrong, and hold
other executive and board positions with AHI and affiliated companies and will
continue to do so after the consummation of the Merger.
AHI and one of its affiliates provide certain management information and
financial accounting services to FaciliCom for specified fees based on the
extent and type of services performed. AHI and its affiliate are expected to
continue to provide such services after the consummation of the Merger. The
terms and conditions of the agreements governing these arrangements after the
Merger have not yet been determined.
AHI serves as guarantor for FaciliCom under its $35.0 million credit
facility with Key Corporate Capital, Inc., and an affiliate of AHI has issued
letters of credit on behalf of FaciliCom totaling $6.9 million as of September
30, 1999. The termination of this guarantee and these letters of credit on terms
and conditions reasonably satisfactory to FaciliCom are conditions to the
obligations of FaciliCom and the FaciliCom Shareholders to complete the Merger.
Walter J. Burmeister, President and Chief Executive Officer of FaciliCom
and a designee of the holders of the Series C Preferred Stock to the board of
directors of the Surviving Corporation, is a co-founder, stockholder and
director of Telecommunications Management Group, an international
telecommunications consulting company ("TMG"). TMG has provided certain limited
consulting services to FaciliCom in the past and may continue to provide
comparable services to the Surviving Corporation after the closing of the
Merger.
See "THE MERGER -- Interests of Certain Persons in the Merger" and "RELATED
AGREEMENTS -- Letter Agreement."
Appraisal and Dissenters' Rights. The stockholders of World Access are not
entitled to dissenters' rights of appraisal or other dissenters' rights in
connection with the Merger. Stockholders of FaciliCom representing 99.5% of the
outstanding FaciliCom Common Stock have adopted the Merger Agreement and the
transactions contemplated thereby and are not entitled to dissenters' rights of
appraisal or other dissenters' rights. The remaining FaciliCom stockholders are
entitled to such rights. See "THE MERGER -- Appraisal or Dissenters' Rights."
Federal Income Tax Consequences. World Access believes that the Merger
should qualify as a "reorganization" within the meaning of Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as
5
<PAGE> 14
amended (the "Code"), and will report the Merger as a "reorganization" on its
consolidated federal income tax return. If the Merger qualifies as a
reorganization under the Code, no gain or loss will be recognized by World
Access or FaciliCom as a result of the Merger. Even in the event the Merger does
not qualify as a reorganization under the Code, no gain or loss would be
recognized by World Access as a result of the Merger or, if applicable, the sale
by World Access of World Access Common Stock for cash to fund World Access'
payment of the cash portion of the Merger consideration. World Access has not
requested a ruling from the Internal Revenue Service (the "IRS") with respect to
the federal income tax consequences of the Merger. It is not a condition to the
Merger that the parties receive such a ruling or an opinion of tax counsel to
FaciliCom or World Access concerning such tax consequences. For a summary of
these matters, see "THE MERGER -- Certain Material Federal Income Tax
Consequences of the Merger."
Accounting Treatment. The Merger will be accounted for by World Access
under the purchase method of accounting for business combinations. See "THE
MERGER -- Accounting Treatment."
Regulatory Matters. Under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and the rules promulgated thereunder, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the Federal Trade Commission (the "FTC") and
the Antitrust Division of the United States Justice Department (the "Antitrust
Division"), and the specified waiting period requirements have been satisfied or
terminated. The FTC granted early termination of the HSR Act waiting period
relating to the Merger, effective October 19, 1999. The consummation of the
Merger is also subject to the satisfaction of other various antitrust and
telecommunications regulatory requirements. See "THE MERGER -- Regulatory
Approvals."
Conditions to the Merger. Consummation of the Merger is subject to the
satisfaction or waiver of certain conditions, including, among other things, (i)
the approval of the Merger and the Merger Agreement by the requisite vote of the
stockholders of World Access; (ii) the termination or expiration of the waiting
period (and any extension thereof) applicable to the Merger under the HSR Act;
(iii) no court or governmental authority can have passed a law or entered an
injunction that prohibits the Merger or that would have a Material Adverse
Effect (as defined in the Merger Agreement) on the Surviving Corporation after
giving effect to the Merger; and (iv) receipt of the FaciliCom Notes Consent.
World Access is seeking the FaciliCom Notes Consent through the Exchange Offer.
See "-- Exchange Offer for FaciliCom Notes" and "RELATED
TRANSACTIONS -- Exchange Offer for FaciliCom Notes."
Additional conditions must be met or waived for World Access to complete
the Merger, including the receipt by World Access from Simpson Thacher &
Bartlett, counsel to FaciliCom and the FaciliCom Shareholders, of an opinion,
dated the closing date of the Merger, in a form reasonably satisfactory to World
Access.
Additional conditions must be met or waived for FaciliCom and the FaciliCom
Shareholders to complete the Merger, including the following:
(i) the receipt by FaciliCom from Long Aldridge & Norman LLP, counsel
to World Access, of an opinion, dated the closing date of the Merger, in a
form reasonably satisfactory to FaciliCom and the FaciliCom Shareholders;
(ii) the execution and delivery by World Access to the stockholders of
FaciliCom of a registration rights agreement with respect to shares of
World Access Common Stock issued upon conversion or exchange of the Series
C Preferred Stock;
(iii) to the extent that World Access Common Stock is issued to
stockholders or option holders of FaciliCom as consideration in the Merger
in lieu of cash, World Access shall have filed with the Securities and
Exchange Commission (the "Commission") a registration statement in
connection with the resale of such World Access Common Stock;
(iv) the Certificate of Designation for the Series C Preferred Stock
shall have been duly filed by World Access with the Secretary of State of
the State of Delaware;
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<PAGE> 15
(v) any required approval of the Merger Agreement and the transactions
contemplated thereby by the holders of the Series A Preferred Stock of
World Access shall have been obtained;
(vi) the guarantee by AHI of FaciliCom's obligations under its credit
facility with Key Corporate Capital, Inc. shall have been terminated
without any liability on the part of AHI and on terms reasonably
satisfactory to FaciliCom; and
(vii) certain letters of credit issued by an affiliate of AHI on
behalf of FaciliCom shall have been terminated without any liability on the
part of such affiliate and on terms reasonably satisfactory to FaciliCom.
See "THE MERGER AGREEMENT -- Conditions to the Consummation of the Merger."
Termination and Amendment of the Merger Agreement. The Merger Agreement
may be terminated and the Merger and the Merger Agreement may be abandoned prior
to the effective time of the Merger notwithstanding approval by the stockholders
of World Access under the circumstances specified in the Merger Agreement,
including by mutual written agreement of World Access, FaciliCom and the
FaciliCom Shareholders. In addition, the Merger Agreement may be terminated by
World Access or FaciliCom and the FaciliCom Shareholders if the Merger is not
consummated by February 28, 2000. The Merger Agreement may be amended by World
Access and FaciliCom by written agreement at any time prior to the effective
time (the "Effective Time") of the Merger; provided that no amendment may be
made after the adoption of the Merger Agreement by the stockholders of World
Access which by law or in accordance with the rules of any relevant stock
exchange or automatic quotations system requires further approval by such
stockholders without such further approval. See "THE MERGER
AGREEMENT -- Termination" and "THE MERGER AGREEMENT -- Amendment."
Registration Rights Agreement. World Access has agreed to enter into a
registration rights agreement (the "Registration Rights Agreement") with certain
of the stockholders of FaciliCom pursuant to which World Access will grant
certain rights to such persons to cause World Access to register their shares of
World Access Common Stock, including World Access Common Stock issued or
issuable upon conversion of the Series C Preferred Stock so that such shares may
be resold to the public in compliance with applicable securities laws. For a
more detailed description of the Registration Rights Agreement, see "RELATED
AGREEMENTS -- Registration Rights Agreement."
Additional World Access Options. In connection with the Merger, FaciliCom
has granted additional stock options to certain of its employees which are to be
exchanged for new World Access stock options with respect to approximately 1.9
million shares of World Access Common Stock at an exercise price of $15.00 per
share. See "THE MERGER -- Consideration to be Received in the Merger Treatment
of FaciliCom Stock Options."
THE PRIVATE PLACEMENT
World Access has received commitments from a group of institutional and
sophisticated investors to purchase $75.0 million of World Access Common Stock
in a private transaction that is conditioned upon, among other things, and will
close simultaneously with, the Merger. World Access will use the majority of the
proceeds from the Private Placement to fund the cash portion of the Merger,
including related fees and expenses. The World Access Common Stock to be issued
will be priced at the average trading value of the World Access Common Stock
during a five day period prior to the closing of the Merger, with the purchase
price to be no lower than $13.00 per share and no higher than $17.00 per share.
Brown Brothers Harriman & Co. acted as an advisor to World Access on this
transaction.
EXCHANGE OFFER FOR FACILICOM NOTES
Pursuant to the terms of the Exchange Agreement, World Access agreed, under
certain circumstances, to make the Exchange Offer in connection with the Merger
for the outstanding FaciliCom Notes, and the Majority Holders agreed to consent
to the waivers and amendments constituting the FaciliCom Notes Consent, subject
to the consummation of the Merger and the Exchange Offer. The Exchange Agreement
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<PAGE> 16
provides that holders of FaciliCom Notes will be entitled to receive in exchange
for each $1,000 in principal amount of their FaciliCom Notes tendered (i) $1,000
principal amount of the Exchange Notes, (ii) $10 in cash, and (iii) the Stock
Consideration. In the event World Access subsequently generates cash or cash
equivalents from certain asset sales and is required to make an offer to
repurchase the Exchange Notes at 100% of principal, the repurchase price will be
reduced by the then current market value of the Stock Consideration. The closing
of the Exchange Offer is expected to occur immediately after the closing of the
Merger.
For a description of the Exchange Notes to be issued by World Access in the
Exchange Offer, see "RELATED TRANSACTIONS -- Exchange Offer for FaciliCom
Notes."
MARKETS AND MARKET PRICES
The World Access Common Stock is traded on Nasdaq under the symbol "WAXS."
The following table shows the high and low sales prices for the World Access
Common Stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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 21 5/8
Second Quarter............................................ 40 25 3/8
Third Quarter............................................. 30 15/16 18 3/4
Fourth Quarter............................................ 24 3/4 12
CALENDAR YEAR 1999
First Quarter............................................. 22 3/4 6 3/8
Second Quarter............................................ 14 1/8 7 7/8
Third Quarter............................................. 16 3/16 10 5/16
Fourth Quarter (through November 3, 1999)................. 14 1/16 10 13/16
</TABLE>
World Access has not paid or declared any cash 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 the World Access
Board of Directors or the Surviving Corporation's board of directors, as
applicable, and will depend upon future earnings, the success of business
activities, regulatory and capital requirements, the financial condition of
World Access, or the Surviving Corporation, as applicable, general business
conditions and other factors. World Access is currently restricted from paying
dividends on the World Access Common Stock under its revolving credit facility
and the Surviving Corporation will also be restricted from paying dividends
under the Exchange Notes.
The holders of Series A Preferred Stock and Series B Preferred Stock, in
preference to the holders of shares of World Access Common Stock, are entitled
to receive, when, as and if declared by the World Access Board of Directors or
the Surviving Corporation's board of directors, as applicable, cash dividends at
an annual rate on the respective liquidation preferences equal to 4.25%.
Dividends payable on the Series A Preferred Stock and Series B Preferred Stock
are cumulative and accrue, whether or not declared, on a daily basis from the
respective dates of issuance. The current annual dividend payments required to
be made by World Access on the Series A Preferred Stock and Series B Preferred
Stock are approximately $3.1 million in the aggregate.
The FaciliCom Common Stock is not publicly traded.
8
<PAGE> 17
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
WORLD ACCESS SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial data presented below for the five years ended
December 31, 1998 have been derived from the audited consolidated financial
statements of World Access. The financial data for the six month periods ended
June 30, 1998 and 1999 have been derived from unaudited consolidated financial
statements of World Access, which, in the opinion of World Access' management,
include all the significant normal and recurring adjustments necessary for fair
presentation of the financial position and results of operations for such
unaudited periods.
On October 28, 1999, World Access reported financial results of its third
quarter ended September 30, 1999. Net sales, income from continuing operations
and income from continuing operations per diluted share for the three and nine
months ended September 30, 1999 were $203.0 million and $524.3 million; $14.3
million and $22.6 million; and $0.33 and $0.56, respectively. For additional
information relating to these financial results see "BUSINESS OF WORLD
ACCESS -- Recent Developments."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CONTINUING
OPERATIONS DATA(1):
Equipment sales......... $ 6,014 $12,612 $17,131 $ 48,614 $ 138,990 $ 56,684 $122,360
Carrier service
revenues.............. -- -- -- -- 13,143 1,263 198,891
------- ------- ------- -------- --------- -------- --------
Total sales........ 6,014 12,612 17,131 48,614 152,133 57,947 321,251
Gross profit............ 135 1,802 3,055 21,087 56,031 27,477 64,929
In-process research and
development........... -- -- -- -- 100,300 35,400 --
Goodwill impairment..... -- -- -- -- 6,200 -- --
Restructuring and other
charges............... -- -- -- -- 17,240 590 --
Income (loss) from
continuing
operations............ (2,079) (389) (1,041) 8,350 (114,645) (27,690) 8,393
Income (loss) from
continuing operations
per share (2)......... $ (0.45) $ (0.04) $ (0.07) $ 0.45 $ (5.19) $ (1.39) $ 0.22
Weighted average shares
outstanding (2)....... 4,631 9,083 14,530 18,708 22,073 19,960 38,446
OTHER FINANCIAL DATA:
EBITDA from continuing
operations(3)......... $(1,261) $ 288 $ (632) $ 13,709 (106,950) $(19,489) $ 34,903
Cash flows from
operating
activities............ (1,247) (6,189) 1,995 (1,602) (13,038) 2,952 4,288
Cash flows from
investing
activities............ (240) (2,687) (1,793) (18,240) (66,527) (69,774) (4,102)
Cash flows from
financing
activities............ 1,616 10,010 20,391 115,427 16,676 6,410 43,634
Capital expenditures.... 240 280 1,176 3,591 12,216 5,859 4,163
</TABLE>
9
<PAGE> 18
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
-------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (4):
Cash and equivalents....... $ 753 $ 1,887 $22,480 $118,065 $ 55,176 $ 57,653 $ 98,996
Working capital............ 2,267 10,222 37,961 153,750 125,586 112,465 180,061
Total assets............... 8,943 28,515 60,736 225,283 613,812 268,518 693,146
Long-term debt............. 4,328 3,750 -- 115,264 137,864 115,529 140,728
Total liabilities.......... 7,783 14,181 8,362 133,528 253,229 169,944 267,354
Stockholders' equity....... 1,160 14,334 52,374 91,755 360,583 98,574 425,792
</TABLE>
- ---------------
(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: AIT, Inc. -- May 1995; Cellular
Infrastructure Supply, Inc. -- January 1997; Galaxy Personal Communications
Services, Inc. -- July 1997; Advanced TechCom, Inc. -- January 1998; NACT
Telecommunications, Inc. -- February 1998; Telco Systems, Inc.
("Telco") -- November 1998; and Cherry U.S. and Cherry U.K. -- December
1998.
(2) Net income (loss) per share and weighted average shares outstanding are
presented on a diluted basis. The calculations exclude 8,307,000; 995,000;
401,000 and 896,000 shares of World Access Common Stock for 1998, 1997, 1996
and 1995, respectively, that are held in escrow accounts. See Notes A and B
to the World Access Consolidated Financial Statements which are incorporated
by reference. See also "THE MERGER -- Interests of Certain Persons in the
Merger" and "RELATED TRANSACTIONS -- Release of Escrowed Shares."
(3) EBITDA from continuing operations consists of earnings (losses) before
interest expense, income taxes, depreciation and amortization. EBITDA should
not be considered as a substitute for operating earnings, net income (loss),
cash flow or other combined statement of operations or cash flow data
computed in accordance with generally accepted accounting principles or as a
measure of World Access' results of operations or liquidity. EBITDA is
widely used as a measure of a company's operating performance and its
ability to service its indebtedness because it assists in comparing
performance on a consistent basis across companies, which can vary
significantly. EBITDA from continuing operations before special charges
excludes charges for in-process research and development, goodwill
impairment, provision for doubtful accounts, restructuring and other charges
and inventory write-downs. The following table reconciles income (loss) from
continuing operations to EBITDA from continuing operations and EBITDA from
continuing operations before special charges:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------ ------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations...................... $(2,079) $ (389) $(1,041) $ 8,350 $(114,645) $(27,690) $ 8,393
Interest expense (income),
net........................... 511 308 (230) (1,426) 3,413 988 3,098
Income taxes (benefit).......... -- -- (114) 4,792 (1,387) 5,906 9,357
Income tax related to minority
interests..................... -- -- -- -- (1,663) (1,021) --
Depreciation and amortization... 307 369 753 1,993 7,332 2,328 14,055
------- ------ ------- ------- --------- -------- -------
EBITDA from continuing
operations.................... (1,261) 288 (632) 13,709 (106,950) (19,489) 34,903
Special charges:
In-process research and
development................... -- -- -- -- 100,300 35,400 --
Write-down of inventories....... -- -- -- -- 9,292 465 --
Goodwill impairment............. -- -- -- -- 6,200 -- --
Provision for doubtful
accounts...................... -- -- -- -- 10,674 -- --
Restructuring and other
charges....................... 80 980 -- -- 17,240 590 --
------- ------ ------- ------- --------- -------- -------
EBITDA from continuing
operations before special
charges....................... $(1,181) $1,268 $ (632) $13,709 $ 36,756 $ 16,966 $34,903
======= ====== ======= ======= ========= ======== =======
</TABLE>
10
<PAGE> 19
(4) In October 1997, World Access sold $115.0 million of convertible
subordinated notes. See Note I to the World Access Consolidated Financial
Statements which are incorporated by reference.
FACILICOM SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial data presented below for the period from January 1,
1995 to June 30, 1995 are from FaciliCom's predecessor (the "Predecessor"), the
period from FaciliCom's inception on May 5, 1995 to September 30, 1995 and for
the fiscal years ended September 30, 1996, 1997 and 1998 have been derived from
the audited consolidated financial statements of FaciliCom. The selected
financial data for FaciliCom for the nine month periods ended June 30, 1998 and
1999 have been derived from the unaudited consolidated financial statements of
FaciliCom which, in the opinion of FaciliCom's management, include all
significant normal and recurring adjustments necessary for fair presentation of
the financial position and results of operations for such unaudited periods.
On November 4, 1999, FaciliCom reported financial results of its fourth
quarter ended September 30, 1999. Revenues and net loss for the three and twelve
months ended September 30, 1999 were $124.1 million and $403.8 million and $22.6
million and $74.5 million, respectively. For additional information relating to
these financial results see "BUSINESS OF FACILICOM -- Recent Developments."
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, MAY 5, 1995 NINE MONTHS ENDED
1995 TO TO YEAR ENDED SEPTEMBER 30, JUNE 30,
JUNE 30, 1995 SEPTEMBER 30, ---------------------------- -------------------
FOR THE PREDECESSOR(1) 1995 1996 1997 1998 1998 1999
---------------------- ------------- ------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
U.S. originated.......... $ -- $ -- $ 7,838 $53,821 $116,383 $ 80,755 $121,591
European originated...... 367 547 4,053 16,366 67,863 36,391 158,104
------- ------- ------- ------- -------- -------- --------
Total Revenues......... 367 547 11,891 70,187 184,246 117,146 279,695
Cost of revenues......... 938 1,022 12,742 65,718 178,952 114,473 257,253
------- ------- ------- ------- -------- -------- --------
Gross profit (deficit)... (571) (475) (851) 4,469 5,294 2,673 22,442
Operating loss........... (1,305) (1,560) (9,576) (11,360) (43,886) (30,181) (35,171)
Net loss................. (1,341) (1,725) (9,662) (14,031) (46,595) (32,515) (51,879)
OTHER FINANCIAL DATA:
EBITDA(2)................ $(1,108) $(1,418) $(8,433) $(9,042) $(35,070) $(24,867) $(18,276)
Cash flows from operating
activities............. 563 (1,624) (5,413) (8,361) (36,115) (26,304) (30,290)
Cash flows from investing
activities............. (545) (1,055) (1,074) (1,664) (184,692) (185,462) (18,232)
Cash flows from financing
activities............. -- 2,788 8,572 7,914 285,154 290,622 (742)
Capital expenditures..... 1,213 1,105 8,404 12,282 101,910 72,460 94,771
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
------------------------------------- --------------------
1995 1996 1997 1998 1998 1999
------ ------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.................. $ 109 $ 2,198 $ 1,016 $ 68,129 $ 80,433 $ 18,696
Marketable securities-unrestricted.... -- -- -- 38,698 56,864 --
Marketable securities-restricted(3)... -- -- -- 74,518 87,131 61,280
Net property and equipment............ 2,661 10,144 20,244 115,748 84,338 185,768
Total assets.......................... 5,664 21,008 44,017 378,884 375,701 384,765
Total long-term obligations........... 1,906 9,194 20,973 305,137 305,429 304,166
Total capital accounts................ 1,109 (1,715) (9,421) (38,575) (22,170) (106,137)
</TABLE>
- ---------------
(1) Data for periods prior to January 1, 1995 have not been presented because
amounts were insignificant and not meaningful. Cumulative revenue and net
losses from inception through December 31, 1994 were $35,758 and $287,564,
respectively, and both total assets and liabilities at December 31, 1994
were $2.6 million.
11
<PAGE> 20
(2) EBITDA consists of earnings (losses) before interest expense, income taxes,
depreciation, amortization and foreign exchange (loss) gain. EBITDA should
not be considered as a substitute for operating earnings, net income (loss),
cash flow or other combined statement of income or cash flow data computed
in accordance with generally accepted accounting principles or as a measure
of results of operations or liquidity. EBITDA is widely used as a measure of
a company's operating performance and its ability to service its
indebtedness because it assists in comparing performance on a consistent
basis across companies, which can vary significantly. The following table
reconciles net loss to EBITDA:
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MAY 5, 1995 NINE MONTHS ENDED
JANUARY 1, 1995 TO YEAR ENDED SEPTEMBER 30, JUNE 30,
TO JUNE 30, 1995 SEPTEMBER 30, ----------------------------- -------------------
(PREDECESSOR) 1995 1996 1997 1998 1998 1999
---------------- ------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss.................... $(1,341) $(1,725) $(9,662) $(14,031) $(46,595) $(32,515) $(51,879)
Foreign exchange (loss)
gain...................... (8) 85 (226) 1,335 391 655 1,346
Interest expense (income),
net....................... 44 80 312 1,336 14,460 8,945 22,044
Gain on settlement
agreement................. -- -- -- -- (791) (791) --
Income tax benefit.......... -- -- -- -- (11,351) (6,475) (6,682)
Depreciation and
amortization.............. 197 142 1,143 2,318 8,816 5,314 16,895
------- ------- ------- -------- -------- -------- --------
EBITDA...................... $(1,108) $(1,418) $(8,433) $ (9,042) $(35,070) $(24,867) $(18,276)
======= ======= ======= ======== ======== ======== ========
</TABLE>
(3) Comprises amounts deposited in 1998 which are required to be used to fund
interest payments on the FaciliCom Notes.
12
<PAGE> 21
UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION
The unaudited selected pro forma balance sheet data of World Access as of
June 30, 1999 set forth below give effect to the Merger, the Private Placement
and the Exchange Offer as if consummated on such date. The unaudited selected
pro forma statement of operations data of World Access for the year ended
December 31, 1998 and the six months ended June 30, 1999 set forth below give
effect to the Merger and certain transactions that World Access has completed in
1998 and 1999, as if consummated at the beginning of 1998. 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,
FaciliCom, NACT, Telco and Cherry U.S. and Cherry U.K., which in the case of
FaciliCom, are included in this document and, in the case of World Access, NACT,
Telco and Cherry U.S. and Cherry U.K., are incorporated herein by reference.
The selected pro forma financial 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, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Carrier service revenues.................................... $ 322,353 $ 367,808
Equipment sales............................................. 236,532 122,360
--------- ---------
Total sales............................................... 558,885 490,168
Cost of carrier services.................................... 340,234 350,785
Cost of equipment sold...................................... 138,783 68,690
Write-down of inventories................................... 9,292 --
Amortization of acquired technology......................... 4,806 2,400
--------- ---------
Total cost of sales....................................... 493,115 421,875
--------- ---------
Gross profit.............................................. 65,770 68,293
Engineering and development................................. 22,611 8,773
Selling, general and administrative......................... 120,455 52,205
Amortization of goodwill.................................... 40,585 20,473
In-process research and development......................... 20,985 --
Goodwill impairment......................................... 6,200 --
Provision for doubtful accounts............................. 18,939 4,270
Restructuring and other charges............................. 17,240 --
--------- ---------
Operating loss from continuing operations................. (181,245) (17,428)
Foreign exchange loss....................................... (391) (1,290)
Interest and other income................................... 14,556 4,268
Interest and other expense.................................. (58,908) (26,051)
--------- ---------
Loss from continuing operations before income taxes....... (225,988) (40,501)
Income taxes (benefit)...................................... (21,498) 1,781
--------- ---------
Loss from continuing operations........................... (204,490) (42,282)
Preferred stock dividends................................... -- 413
--------- ---------
Loss from continuing operations available to common
stockholders........................................... $(204,490) $ (42,695)
========= =========
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Loss from continuing operations per common share(1):
Basic..................................................... $ (4.22) $ (0.85)
Diluted................................................... $ (4.22) $ (0.85)
Weighted average shares outstanding(1):
Basic..................................................... 48,460 50,102
Diluted................................................... 48,460 50,102
</TABLE>
- ---------------
(1) Represents basic and diluted earnings per share including shares of World
Access Common Stock issued in connection with the Merger and certain other
transactions that World Access has completed as if consummated on January 1,
1998, calculated in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128. Due to the pro forma loss from continuing
operations for the year ended December 31, 1998 and the six months ended
June 30, 1999, potential common stock shares related to stock options, stock
warrants, convertible notes and convertible preferred stock have been
excluded from the weighted average shares outstanding as the inclusion of
these potential common stock shares would be anti-dilutive.
<TABLE>
<CAPTION>
AT
JUNE 30, 1999
-------------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:
Current Assets
Cash and equivalents...................................... $ 123,442
Accounts receivable....................................... 195,884
Restricted marketable securities.......................... 31,755
Inventories............................................... 45,216
Other current assets...................................... 60,996
----------
Total Current Assets.............................. 457,293
Property and equipment...................................... 248,093
Goodwill and other intangibles.............................. 874,149
Restricted marketable securities............................ 29,525
Other assets................................................ 25,348
----------
Total Assets...................................... $1,634,408
==========
Current Liabilities
Short-term debt............................................. $ 34,122
Accounts payable............................................ 184,816
Other accrued liabilities................................... 84,220
----------
Total Current Liabilities......................... 303,158
Long-term debt.............................................. 429,894
Noncurrent liabilities...................................... 10,204
----------
Total Liabilities................................. 743,256
----------
Stockholders' Equity
Common and preferred stock................................ 517
Capital in excess of par value............................ 1,009,773
Accumulated deficit....................................... (119,138)
----------
Total Stockholders' Equity........................ 891,152
----------
Total Liabilities and Stockholders' Equity........ $1,634,408
==========
</TABLE>
14
<PAGE> 23
COMPARATIVE PER SHARE DATA
(UNAUDITED)
Set forth below are historical income (loss) per share from continuing
operations and book value per common share data of World Access and FaciliCom
and the income (loss) per share from continuing operations and book value per
common share data of World Access on a pro forma basis to give effect to the
Merger, the Private Placement, the Exchange Offer, the acquisition of a majority
interest in NACT Telecommunications, Inc. in February 1998 and subsequent merger
with NACT in October 1998, the acquisition of Telco (the "Telco Acquisition") in
November 1998 and the acquisition of Cherry U.S. and Cherry U.K. (the "Cherry
Acquisition") in December 1998. No common stock dividends were paid by World
Access during the periods presented below.
The pro forma information assumes the issuance of (i) 5,308,000 shares of
World Access Common Stock in connection with the Private Placement expected to
close simultaneously with the Merger; (ii) 1,062,000 shares of World Access
Common Stock expected to be paid to holders of FaciliCom Notes in connection
with the Exchange Offer; and (iii) the release of 7,500,000 shares of World
Access Common Stock held in escrow in connection with the Cherry Acquisition,
which will be released upon consummation of the Merger. It does not assume the
conversion of the Series C Preferred Stock (conversion price of $20.38 per
share) due to its anti-dilutive effect. World Access issued 1,430,000,
2,790,000, 7,042,000 and 3,687,500 shares of World Access Common Stock as part
of the consummation of the acquisition of a majority interest in NACT, the
merger with NACT, the Telco Acquisition and the Cherry Acquisition,
respectively. Equivalent pro forma information for FaciliCom is not meaningful
and therefore not presented due to the Merger consideration being in the form of
cash and/or World Access Common Stock and Series C Preferred Stock. The pro
forma per share data is not necessarily indicative of actual results had the
Merger, the Private Placement and the Exchange Offer occurred on such dates or
of future expected results.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
World Access -- Historical
Income (loss) per share from continuing operations
Basic.................................................. $(5.19) $ 0.22
Diluted................................................ (5.19) 0.22
Book value per common share(1)............................ 10.06 9.85
World Access -- Pro Forma
Loss per share from continuing operations(2)
Basic.................................................. $(4.22) $(0.85)
Diluted................................................ (4.22) (0.85)
Book value per common share(3)............................ 10.41 11.13
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1998 JUNE 30, 1999
------------------ -------------
<S> <C> <C>
FaciliCom -- Historical
Net loss per share(4)
Basic.................................................. $(206.41) $(229.55)
Diluted................................................ (206.41) (229.55)
Book value per common share(1)............................ (170.88) (467.72)
</TABLE>
15
<PAGE> 24
- ---------------
(1) Calculated by dividing historical stockholders' equity by the number of
outstanding common shares. Historical stockholders' equity for World Access
at June 30, 1999 does not include the issuance of preferred stock. The
outstanding common shares do not include shares issuable upon exercise of
stock options, stock warrants, conversion of outstanding convertible
securities, or outstanding shares which have been placed in escrow in
connection with previous acquisitions.
(2) Pro forma income (loss) per share from continuing operations is presented on
a basic and diluted basis computed as pro forma income (loss) from
continuing operations divided by the weighted average number of shares
outstanding, assuming shares issued in each of the transactions were
outstanding since the beginning of each period presented. The outstanding
common shares do not include shares issuable upon exercise of stock options,
stock warrants, or conversion of outstanding convertible securities.
(3) Calculated by dividing pro forma stockholders' equity by the number of
outstanding shares of World Access Common Stock expected to be outstanding
as of the consummation of the Merger, and does not include shares issuable
upon the exercise of stock options, stock warrants, the conversion of
outstanding convertible securities, or outstanding shares which have been
placed in escrow in connection with previous acquisitions. Pro forma
stockholders' equity at June 30, 1999 does not include the issuance of
preferred stock.
(4) The calculation of net loss per share assumes FaciliCom's reorganization
occurred on October 1, 1997. See FaciliCom's Consolidated Financial
Statements included elsewhere in this Proxy Statement.
16
<PAGE> 25
RISK FACTORS
You should carefully consider the following factors, in addition to the
other information contained in this Proxy Statement. For additional risk factors
concerning World Access, see its Registration Statement on Form S-3 (No.
333-79097) incorporated herein by reference.
RISK FACTORS CONCERNING THE MERGER
The Surviving Corporation may not achieve anticipated benefits from
integration of operations. The Merger is expected to create a more competitive
company. This requires the integration in a timely manner of two companies that
previously operated independently. The workforce will have to be combined and
offices consolidated. Some employees may be required to relocate as part of this
process. World Access and FaciliCom expect that the Surviving Corporation will,
as a result of its increased size and requirements, be able to consolidate its
purchasing and obtain more favorable prices from suppliers. However, its ability
to do so may be limited by changes in the purchasing power or practices of its
competitors and other market dynamics. No assurance can be given that the
companies will be able to integrate their operations without encountering
difficulties or experiencing the loss of key employees or that the cost savings
and synergies expected from such integration will be realized. The consolidation
of operations will require substantial attention from management. The diversion
of management's attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on the revenues, levels
of expenses and operating results of the Surviving Corporation and damage its
relationship with its key customers and employees.
The Surviving Corporation may not be able to achieve profitability. World
Access and FaciliCom believe that certain efficiencies will be achieved by
combining their operations following the Merger. After the Effective Time, World
Access anticipates that its cost of transmission will decrease as it will be
able to transmit a portion of its long distance traffic on FaciliCom's existing
transmission networks. In addition, following consummation of the Merger, World
Access plans to integrate the existing World Access and FaciliCom networks,
which should result in a reduction in the Surviving Corporation's cost of
providing telecommunication services. There also will be reductions in operator
service expenses, elimination of duplicative network switching centers and
reductions in selling, general and administrative expenses as a result.
Notwithstanding these anticipated benefits, there can be no assurance that the
anticipated changes in the operations of the Surviving Corporation described
above will result in profitable operations in the future. On a pro forma basis,
after giving effect to the Merger and certain other transactions, the Surviving
Corporation would have had a loss from continuing operations for the six months
ended June 30, 1999 of $0.85 per diluted share as compared to income of $0.22
per diluted share from continuing operations for the same period for World
Access on a stand alone basis.
World Access and FaciliCom will incur significant Merger-related
charges. World Access and FaciliCom estimate that, as a result of the Merger,
the Surviving Corporation will incur significant consolidation and integration
expenses. In addition, it is expected that World Access and FaciliCom will incur
Merger-related expenses (including expenses related to the Exchange Offer) of
approximately $12.5 million, consisting of investment banking, legal and
accounting fees and financial printing and other related charges. The foregoing
amounts are preliminary and the actual amounts may be higher or lower. Moreover,
the Surviving Corporation may incur additional unanticipated expenses in
connection with the integration of World Access' and FaciliCom's businesses.
The Surviving Corporation may not be able to meet its obligations on
outstanding indebtedness because of its increased financial leverage and will be
subject to significant operating and financial restrictions. Immediately
subsequent to the consummation of the Merger, the Surviving Corporation will
have a higher degree of financial leverage than World Access. At June 30, 1999,
World Access had $140.7 million of long-term debt and a total debt to equity
ratio of 62.8%, and FaciliCom had $304.2 million of long-term debt and negative
stockholders' equity. Based on the Surviving Corporation's pro forma balance
sheet at June 30, 1999, as a result of the consummation of the Merger, the
Exchange Offer and certain other transactions, the Surviving Corporation would
have had long-term debt of $429.9 million and a total debt to equity ratio of
83.4%.
17
<PAGE> 26
The indenture that will govern the Exchange Notes and FaciliCom's revolving
credit facility will limit the Surviving Corporation's ability to incur
additional indebtedness and contains other significant operating and financial
restrictions, such as limits on the Surviving Corporation's ability to create
liens, sell assets, engage in mergers or consolidations, make investments and
pay dividends. A change of control of the Surviving Corporation would also
require it to offer to repurchase the Exchange Notes at a price of 101% of the
original principal amount thereof. See "RELATED TRANSACTIONS -- Exchange Offer
for FaciliCom Notes." In addition, World Access' $75.0 million revolving line of
credit contains provisions which will also limit the Surviving Corporation's
operations. For example, the Surviving Corporation will need to obtain the
lender's consent and sometimes prepay a portion of the outstanding debt under
this credit facility before it can issue securities, enter into acquisitions for
cash or securities, dispose of its assets or incur additional debt. Under this
line of credit, the Surviving Corporation must also maintain certain operating
ratios and achieve specified financial thresholds.
The Surviving Corporation's substantial indebtedness could have important
consequences. For example, it could:
- limit the Surviving Corporation's ability to obtain additional financing
for working capital, capital expenditures or other purposes or to obtain
such financing on terms favorable to the Surviving Corporation;
- require the Surviving Corporation to dedicate a substantial portion of
its cash flow from operations to service payments on the Surviving
Corporation's debt, which will reduce the funds that would otherwise be
available to the Surviving Corporation for operations and future business
opportunities;
- make it difficult for the Surviving Corporation to meet its debt service
requirements or force it to modify its operations if there is a
substantial decrease in operating income and cash flows or an increase in
expenses; and
- limit the Surviving Corporation's flexibility to react to changes in its
business and the industry in which it operates and make the Surviving
Corporation more vulnerable to downturns and competitive pressures in its
businesses.
There is no assurance that the Surviving Corporation will be able to meet
the obligations on its outstanding indebtedness. The Surviving Corporation
anticipates that its 1999 pro forma debt service payments will be approximately
$61.0 million. If the Surviving Corporation is unable to generate sufficient
cash flow or to otherwise obtain funds necessary to meet its obligations, or if
it does not comply with the various covenants under its indebtedness, the
Surviving Corporation will be in default under the terms of that debt. If the
Surviving Corporation defaults, the holders of the Surviving Corporation's
indebtedness can accelerate the maturity of the indebtedness that is owed to
them, and this could cause defaults under other indebtedness of the Surviving
Corporation.
Increased cash flow will be necessary to fund capital expenditures. If
available cash flow of the Surviving Corporation substantially decreases as a
result of lower telecommunications prices or otherwise, the Surviving
Corporation may have limited ability to continue to make capital expenditures
for the acquisition and development of its international telecommunications
network. Historically, World Access and FaciliCom have financed these
expenditures primarily with cash flow from operations and proceeds from debt and
equity financings, asset sales and sales of partial interests in foreign
concessions. If the Surviving Corporation's cash flow from operations is not
sufficient to satisfy its capital expenditure requirements, there can be no
assurance that additional debt or equity financing or other sources of capital
will be available to meet these requirements. If the Surviving Corporation is
not able to fund its capital expenditures, its interests in some of its
properties may be reduced or forfeited.
Voting interests of World Access stockholders will be substantially
diluted. Following the consummation of the Merger, including the issuance of
additional World Access Common Stock in the Private Placement, the issuance of
the Series C Preferred Stock, the issuance of the Stock Consideration in the
Exchange Offer, the release of the Escrowed Shares and the grant of World Access
stock options to purchase approximately 520,000 shares of World Access Common
Stock, the current World Access stockholders (i) will own shares
18
<PAGE> 27
representing approximately 67.9% of the total voting power of the Surviving
Corporation and (ii) will own 60.6% of the total number of outstanding shares of
World Access Common Stock on a fully diluted basis. The consummation of the
Merger and related transactions will result in a substantial dilution of the
voting and equity interests of current World Access stockholders.
Holders of Series C Preferred Stock may be able to materially influence the
outcome of stockholder votes in a manner adverse to the interests of other
stockholders. Following the consummation of the Merger, including the issuance
of additional World Access Common Stock in the Private Placement, the issuance
of the Stock Consideration in the Exchange Offer and the release of the Escrowed
Shares, the holders of the Series C Preferred Stock will collectively own shares
representing approximately 24.1% of the voting power of World Access Voting
Stock. In addition, the holders of the Series C Preferred Stock, voting as a
separate series, will be entitled to elect up to four members of the board of
directors of the Surviving Corporation, subject to maintaining specified levels
of stock ownership, and will have approval rights, voting as a separate series,
with respect to certain reorganizations, consolidations or mergers of the
Surviving Corporation. Such concentration of voting power may enable these
holders to materially influence the outcome of matters submitted to a vote of
the stockholders of the Surviving Corporation and may have the effect of
delaying, deferring or preventing a change of control of the Surviving
Corporation pursuant to a transaction which might otherwise be beneficial to
stockholders.
Sale of shares by FaciliCom Shareholders could adversely affect the trading
price of the World Access Common Stock. The Series C Preferred Stock is freely
convertible into World Access Common Stock at any time, and the holders of such
World Access Common Stock issuable upon conversion of the Series C Preferred
Stock are not contractually prohibited from selling all or any portion of such
stock at any time. In addition, the FaciliCom Shareholders have demand and
piggyback registration rights with respect to the World Access Common Stock
issuable upon conversion of the Series C Preferred Stock which would permit a
public resale of such stock. If World Access is unable to pay all or any portion
of the $56.0 million of the Merger consideration in cash, World Access will be
required to issue to the stockholders and certain optionholders of FaciliCom at
the closing of the Merger and thereafter such number of shares of World Access
Common Stock as will result upon resale by such persons in net proceeds of $56.0
million. There can be no assurance that the FaciliCom Shareholders will not
resell a substantial portion of their stockholdings after the consummation of
the Merger resulting in an adverse effect on the trading price of the World
Access Common Stock.
RISK FACTORS CONCERNING THE BUSINESS AND OPERATIONS OF THE SURVIVING CORPORATION
Future acquisitions may significantly decrease the Surviving Corporation's
stockholders' percentage ownership in it, reduce its profitability and hinder
its ability to raise capital. The Surviving Corporation may issue securities in
future acquisitions that could significantly reduce its stockholders' equity
ownership in the Surviving Corporation and reduce its earnings on a per share
basis. The Surviving Corporation also may incur additional debt and amortization
expense related to goodwill and other intangible assets acquired in future
acquisitions. This additional debt and amortization expense may reduce
significantly its profitability and hinder its ability to raise capital in the
future.
If the Surviving Corporation is unable to attract and retain qualified
management and technical personnel, it may not be able to successfully operate
its business. The Surviving Corporation will be highly dependent on the
services of several key executive officers and technical employees, particularly
John D. Phillips, World Access' Chairman of the Board, President and Chief
Executive Officer, and Walter J. Burmeister, FaciliCom's President and Chief
Executive Officer. In addition, the Surviving Corporation will need to hire
additional skilled personnel to support the continued growth of its business.
Neither FaciliCom nor World Access maintains "key person" insurance, and none of
FaciliCom's current executive officers are bound by an employment agreement. The
market for skilled personnel, especially those with the technical abilities
World Access and FaciliCom require, is currently very competitive, and the
Surviving Corporation will have to compete with much larger companies with
significantly greater resources to attract and retain these persons. If it is
unable to retain the services of Mr. Phillips, Mr. Burmeister and other key
management
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and technical personnel, or to attract such personnel in the future, the
Surviving Corporation may not be able to successfully operate its business.
The Surviving Corporation's significant reliance on international sales
could adversely affect its financial condition because of international
regulatory changes, political and economic instability and collection efforts.
On a pro forma basis giving effect to the Merger and certain other transactions,
international sales would have represented approximately 22.4% of the Surviving
Corporation's total revenues for the six months ended June 30, 1999 and 15.9% of
its total revenues in the year ended December 31, 1998. The Surviving
Corporation intends to increase its international sales, which are subject to
inherent risks, including:
- unexpected changes in legal or regulatory requirements, tariffs, exchange
rates, or other barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- unstable political and economic environments;
- greater difficulty in accounts receivable collection;
- potentially adverse tax consequences;
- dependence on foreign partners; and
- difficulties in staffing international operations.
The Surviving Corporation may not be able to lease transmission facilities
at historical rates. The future profitability of the Surviving Corporation will
be based in part upon its ability to transmit long distance telephone calls over
transmission facilities (also referred to in the industry as network facilities)
leased from others on a cost-effective basis. As a result of the Merger, the
Surviving Corporation will be able to utilize both World Access' network
facilities and FaciliCom's network facilities. However, a substantial portion of
transmission capacity used by World Access and FaciliCom is obtained on a
variable, per minute and short-term basis, subjecting the Surviving Corporation
to the possibility of unanticipated price increases and service cancellations.
Since the Surviving Corporation will not generally have long-term arrangements
for the purchase or resale of international long distance services, and since
rates fluctuate significantly over short periods of time, the Surviving
Corporation's gross margins are subject to significant fluctuations over short
periods of time. The Surviving Corporation's gross margins also may be
negatively impacted in the longer term by competitive pricing pressures.
Termination of the Surviving Corporation's carrier service agreement with
WNS could materially adversely affect its revenues. The Carrier Service
Agreement with WNS pursuant to which WNS purchases international long distance
services on a wholesale basis will continue in effect for the Surviving
Corporation. WNS presently provides a significant portion of World Access'
service revenues. Termination of the Carrier Service Agreement, or any reduction
in services provided thereunder, could materially decrease the Surviving
Corporation's revenues. WNS is obligated to purchase from the Surviving
Corporation at least $25 million a month of such services, provided the services
are of acceptable quality and the rates quoted are at least equal to the rates
WNS is obtaining from other third party providers. The Carrier Service Agreement
is for a one-year term but automatically renews each month, subject to a one
year termination notice. On a pro forma basis after giving effect to the Merger
and certain other transactions, revenues attributable to the Carrier Service
Agreement for the first six months of 1999 would have comprised approximately
28.2% of total revenues of the Surviving Corporation for this period.
Technical difficulties with or failures in the Surviving Corporation's
network could result in dissatisfied customers and loss of revenue. Technical
difficulties with or failures in the Surviving Corporation's telecommunications
network could result in dissatisfied customers and lost revenue. For example, a
failure in a portion of its network could prevent the Surviving Corporation from
delivering telephone calls initiated by its customers. Additionally, technical
difficulties with the network could cause the loss of call detail record
information, which is the basis for the Surviving Corporation's ability to
process and substantiate customer billings. Components of World Access'
Telecommunications Group's network have failed in the past, which
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have had a material adverse effect on its Telecommunications Group's operating
results. There can be no assurance that similar or other failures will not occur
in the future.
Regulation of customers may materially adversely affect the Surviving
Corporation's revenues by decreasing the volume of traffic it receives from
major customers. The Surviving Corporation's customers will also be subject to
actions taken by domestic or foreign regulatory authorities that may affect the
ability of customers to deliver traffic to the Surviving Corporation. Regulatory
sanctions have been imposed on certain of World Access' and FaciliCom's
customers in the past. Future regulatory actions could materially adversely
affect the volume of traffic received from a major customer, which could
materially decrease the Surviving Corporation's revenues.
Existing and future governmental regulation in the U.S. and in the other
countries in which it operates or in which it may operate could increase the
Surviving Corporation's costs or restrict its operations in a manner that would
reduce its profitability. National and local laws and regulations governing
telecommunications services differ significantly among the countries in which
the Surviving Corporation currently operates and in which it may operate. In the
United States, the Surviving Corporation's business is subject to the
Communications Act of 1934, as amended (the "Communications Act"), and the rules
promulgated thereunder by the Federal Communications Commission (the "FCC"),
including regulations which limit the conditions under which a carrier may
connect international private lines to the telephone network and which limit the
arrangements U.S. international carriers may enter into with foreign carriers
for exchanging telecommunications traffic. To the extent it provides intrastate
services, the Surviving Corporation's business is also subject to the applicable
laws and regulations of the individual states. The Surviving Corporation is also
subject to the laws and regulations of the various foreign countries in which it
operates. The interpretation and enforcement of these laws and regulations
varies and could limit the Surviving Corporation's ability to provide
communications services in some of the markets in which it operates, or make it
more costly for the Surviving Corporation to conduct its operations. In
addition, future regulatory, judicial and legislative changes may have a
material adverse effect on the Surviving Corporation. While each of World Access
and FaciliCom believes it is in substantial compliance with all applicable U.S.
and foreign laws and regulations, U.S. or foreign regulators or third parties,
including the Surviving Corporation's competitors, may allege that the Surviving
Corporation has failed to comply with applicable laws and regulations. If the
Surviving Corporation fails to comply with national, local or foreign
regulations, whether existing or future, it could become subject to fines,
penalties, the forfeiture of its authorizations, the termination of its
arrangements with foreign carriers, or other adverse actions. These penalties
could substantially increase the Surviving Corporation's costs or prevent the
Surviving Corporation from providing its services.
Governments of many countries exercise substantial influence over various
aspects of the telecommunications market. In some cases, the government owns or
controls companies that are or may become competitors of the Surviving
Corporation or companies, such as national telephone companies, upon which the
Surviving Corporation and its foreign partners may depend for required
interconnections to local telephone networks and other services. Accordingly,
government actions in the future could have a material adverse effect on the
Surviving Corporation's operations. In highly regulated countries in which the
Surviving Corporation is not dealing directly with the dominant local exchange
carrier, the dominant carrier may have the ability to route service to the
Surviving Corporation or its foreign partner and, if this occurs, the Surviving
Corporation may have limited or no recourse. In countries where competition is
not yet fully established and the Surviving Corporation is dealing with an
alternative operator, foreign laws may prohibit or impede new operators from
offering services in these markets.
The Surviving Corporation currently plans to expand its foreign operations
as these markets increasingly permit competition. The nature, extent and timing
of the Surviving Corporation's foreign operations, however, will be determined,
in part, by the actions taken by foreign governments to permit competition and
the response of incumbent carriers to these efforts. The regulatory authorities
in these countries may not provide the Surviving Corporation with practical
opportunities to compete in the near future, or at all, and the Surviving
Corporation may not be able to take advantage of any such liberalization in a
timely manner.
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Recent FCC actions may adversely affect the Surviving Corporation by
increasing competition, which may increase pricing pressures and decrease demand
for the Surviving Corporation's services. Recent FCC rulemaking orders and
other actions have lowered the entry barriers for new carriers and resale
international carriers by streamlining the processing of new applications and by
eliminating the international settlements policy for arrangements with foreign
carriers that lack market power and on other selected routes. In addition, the
FCC's rules implementing the World Trade Organization Basic Telecommunications
Agreement (the "WTO Agreement") presume that competition will be advanced by the
U.S. entry of carriers and resale carriers from World Trade Organization ("WTO")
member countries, thus further increasing the number of potential competitors in
the U.S. market and the number of carriers which may also offer end-to-end
services.
In addition, the Telecommunications Act of 1996 permits the FCC to forbear
enforcement of the tariff provisions in such act, which apply to all interstate
and international carriers, and the U.S. Court of Appeals for the District of
Columbia Circuit is currently reviewing an FCC order directing all domestic
interstate carriers to de-tariff their offerings. The FCC's order, which is
stayed pending the court's review, only applies to the Surviving Corporation's
domestic services. However, subject to the court's decision, the FCC may also
forbear from enforcing its current tariff rules for U.S. international carriers,
or order these carriers to de-tariff their services. In that event, the
Surviving Corporation would have greater flexibility in pricing its
international service offerings and to compete, although any such FCC action
likely would grant other non-dominant international carriers equivalent freedom.
The FCC also routinely reviews the contribution rate for various levels of
regulatory fees, including the rate for fees levied to support universal
service, which fees may be increased in the future for various reasons,
including the need to support the universal service programs mandated by the
Telecommunications Act of 1996, the total costs for which are still under review
by the FCC. The Surviving Corporation expects that competition will continue to
intensify as a result of the new competitive opportunities created by the
Telecommunications Act of 1996 and the implementation of the WTO Agreement. Such
increased competition may increase pricing pressures, reduce the Surviving
Corporation's margins and decrease demand for its services.
World Access' Telecommunications Group also competes with MCI WorldCom,
Pacific Gateway Exchange, Inc. and other foreign and U.S.-based long distance
providers, including the regional Bells, which presently have FCC authority to
resell and route international telecommunication services originating outside of
their respective in-region states. Many of the long distance providers and
telecommunications equipment manufacturers with whom World Access and FaciliCom
compete have significantly more extensive engineering, manufacturing, marketing,
financial and technical resources than World Access and FaciliCom. World Access
and FaciliCom are uncertain whether the Surviving Corporation can continue to
compete successfully with its competitors.
FCC intervention regarding the settlement rates charged by foreign carriers
may disrupt the Surviving Corporation's transmission arrangements to certain
countries. The FCC recently has sought to reduce the foreign routing costs of
U.S. international carriers by prescribing maximum or benchmark settlement rates
which foreign carriers may charge U.S. carriers for routing telecommunications
traffic. The FCC's benchmarks order was recently upheld by the U.S. Court of
Appeals for the District of Columbia Circuit. The FCC's action may reduce the
Surviving Corporation's settlement costs, although the costs of other U.S.
international carriers also may be reduced in a similar fashion. The FCC has not
stated how it will enforce the new settlement benchmarks if U.S. carriers are
unsuccessful in negotiating settlement rates at or below the prescribed
benchmarks. Any future FCC intervention could disrupt the Surviving
Corporation's transmission arrangements to certain countries or require the
Surviving Corporation to modify its existing arrangements.
Delays and inconsistencies in implementation of the WTO Agreement and other
competitive directives may adversely affect the Surviving Corporation's business
in some foreign countries. Under the WTO Agreement, the U.S. and 68 other
countries agreed to open their telecommunications markets to competition and
foreign ownership effective February 5, 1998. These WTO member countries (which
have increased to 72) represent approximately 90% of worldwide
telecommunications traffic. Although the WTO Agreement has been implemented, to
some degree, by most of the 72 signatory countries, some signatory countries
have not yet fully implemented their WTO commitments. The Surviving
Corporation's ability to expand its operations internationally will be limited
if any signatory countries to the WTO Agreement fail to implement
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their obligations on a timely basis. These factors and other obstacles which
could develop in connection with the deregulation of telecommunications services
could have a material adverse effect on the Surviving Corporation's operations
by slowing down the rate of any expansion by the Surviving Corporation.
The national governments of the European Union ("EU") member states in
which the Surviving Corporation currently operates, and in which it may operate
in the future, were required to pass legislation to liberalize the
telecommunications markets within their countries to implement European
Commission directives. Most of the member states have now implemented the
required legislation. In certain cases this has been done on an inconsistent,
and sometimes unclear, basis. In addition, the legislation and/or its
implementation have, in certain circumstances, imposed significant obstacles on
the ability of carriers to proceed with the licensing process. These barriers
include requirements that carriers:
- post significant bonds or make significant capital commitments to build
infrastructure;
- complete extensive application documentation; and
- pay substantial license fees.
Implementation has also been slow in certain member states as a result of
their failure to dedicate the resources necessary to have a functioning
regulatory body in place. These factors and other obstacles which could develop
in connection with deregulation of telecommunications services could have a
material adverse effect on the Surviving Corporation's operations by slowing
down the rate of any expansion by the Surviving Corporation.
As the Surviving Corporation expands its focus on retail customers and
emerging carriers, its level of uncollectible debt may increase. As a wholesale
provider of international long distance services, the Surviving Corporation will
depend upon traffic from other long distance providers, and upon the collection
of receivables from these customers. If the Surviving Corporation experiences
difficulties in the collection of its accounts receivable from its major
customers, its cash flow may be substantially reduced. In addition, the
Surviving Corporation may expend considerable resources to collect receivables
from customers who fail to make timely payments.
In the experience of World Access and FaciliCom, a higher percentage of the
revenues generated by retail customers and from emerging carriers is
uncollectible. Therefore, if the percentage of the Surviving Corporation's
revenues derived from retail operations and from sales to emerging carriers
increases, the Surviving Corporation's level of uncollectible debt is likely to
increase.
FORWARD-LOOKING STATEMENTS
This Proxy Statement and the documents incorporated by reference in this
Proxy Statement contain certain information regarding World Access', FaciliCom's
and the Surviving Corporation's plans and strategies that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). When used in this Proxy Statement or in
the documents incorporated by reference, the words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and
similar terms and/or expressions are intended to identify forward-looking
statements. These statements reflect these companies' assessment of a number of
risks and uncertainties and their actual results could differ materially from
the results anticipated in these forward-looking statements. Any forward-
looking statement speaks only as of the date of this Proxy Statement or the
documents incorporated by reference, and none of World Access, FaciliCom or the
Surviving Corporation undertake any obligation to update any forward-looking
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of an unanticipated event.
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THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to stockholders of World Access in
connection with the Special Meeting to be held at the principal executive
offices of World Access located at 945 E. Paces Ferry Road, Suite 2200, Atlanta,
Georgia 30326, on December 7, 1999, at 11:00 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 World Access.
MATTERS TO BE CONSIDERED
At the Special Meeting, stockholders of record of World Access as of the
close of business on the Record Date will be asked to consider and vote upon
proposals (i) to approve and adopt the Merger Agreement and the transactions
contemplated thereby and (ii) to transact such other business as may properly
come before the Special Meeting or any adjournments or postponements thereof.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of World Access unanimously approved the Merger
Agreement and the transactions contemplated thereby and unanimously recommends
that the stockholders of World Access vote "FOR" the approval and adoption of
the Merger Agreement and the transactions contemplated thereby.
RECORD DATE
The Board of Directors of World Access has fixed October 22, 1999 as the
Record Date for determination of holders of World Access Voting Stock entitled
to notice of and to vote at the Special Meeting.
STOCKHOLDERS ENTITLED TO VOTE
As of the close of business on the Record Date, 45,205,424 shares of World
Access Common Stock were outstanding, held by approximately 661 holders of
record. Each share of outstanding World Access Common Stock is entitled to one
vote.
World Access has 50,000 shares of Series A Preferred Stock issued and
outstanding. Each share of Series A Preferred Stock is convertible at the option
of the holder into World Access Common Stock in accordance with a conversion
formula contained in the World Access Certificate. The Series A Preferred Stock
is entitled to vote on the approval and adoption of the Merger Agreement on an
as converted basis with the World Access Common Stock as a single class.
Therefore, the holder of the Series A Preferred Stock may vote with the holders
of World Access Common Stock on the proposal described herein as if it held
4,347,826 shares of World Access Common Stock.
World Access also has 23,174 shares of Series B Preferred Stock issued and
outstanding. Each share of Series B Preferred Stock is convertible at the option
of the holder into World Access Common Stock in accordance with a conversion
formula contained in the World Access Certificate. The Series B Preferred Stock
is entitled to vote on the approval and adoption of the Merger Agreement on an
as converted basis with the World Access Common Stock as a single class.
Therefore, the holders of the Series B Preferred Stock may vote with the holders
of World Access Common Stock on the proposal described herein as if they held
1,448,375 shares of World Access Common Stock.
Only holders of record of World Access Voting Stock as of the close of
business on the Record Date are entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof.
QUORUM; VOTE REQUIRED
A majority of the shares of World Access Common Stock entitled to vote at
the Special Meeting will constitute a quorum for the transaction of business at
the Special Meeting. The approval of the adoption of the
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Merger Agreement and the transactions contemplated thereby will require the
affirmative vote of a majority in voting power of the outstanding shares of
World Access Voting Stock entitled to vote and voting as a single class. The
total outstanding shares of World Access Common Stock for purposes of
calculating the number of shares constituting a quorum includes the number of
shares of World Access Common Stock issuable upon conversion of the Series A
Preferred Stock and the Series B Preferred Stock.
Shares of World Access Voting Stock that are voted "FOR" or "AGAINST" at
the Special Meeting will be treated as being present at such meeting for
purposes of establishing a quorum. 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. Because adoption of the
Merger Agreement requires the affirmative vote of a majority in voting power of
outstanding shares of World Access Voting Stock, abstentions and broker
non-votes will have the same effect as negative votes.
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the close of business on the Record Date, directors and executive
officers of World Access and their respective affiliates may be deemed to be the
beneficial owners of shares of World Access Voting Stock representing
approximately 12.4% of the total voting power of World Access. See "PRINCIPAL
STOCKHOLDERS."
VOTING AGREEMENT
John D. Phillips, WNS and The 1818 Fund have entered into a voting
agreement pursuant to which they have agreed to vote all of their shares of
World Access Voting Stock, which as of the Record Date represent in the
aggregate approximately 24.1% of the voting power of World Access Voting Stock,
as well as any other shares of which they acquire beneficial ownership after the
date of such agreement in favor of the adoption of the Merger Agreement and the
transactions contemplated thereby. See "RELATED AGREEMENTS -- Voting Agreement."
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is being furnished to holders of World Access Voting
Stock in connection with the solicitation of proxies by and on behalf of the
Board of Directors of World Access for use at the Special Meeting. All shares of
World Access Voting Stock that are entitled to vote and are represented at the
Special Meeting by properly executed proxies received prior to or at such
meeting and not duly and timely revoked will be voted at such meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such proxies will be voted "FOR" the approval and adoption of the
Merger Agreement and the transactions contemplated thereby.
If any other matters are properly presented for consideration at the
Special Meeting or any adjournments or postponements thereof, including, among
other things, consideration of a motion to adjourn or postpone such meeting to
another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the enclosed form of proxy
and voting thereunder will have discretion to vote on such matters in accordance
with their best judgment; provided, however, that proxies voting against the
proposals presented in this Proxy Statement may not be voted for an adjournment
or postponement of the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it any time before it is voted. Proxies may be revoked by (i) filing with
the Secretary of World Access at or before the taking of the vote at the Special
Meeting a written notice of revocation bearing a later date than the proxy, (ii)
duly executing a later-dated proxy relating to the same shares and delivering it
to the Secretary of World Access before the taking of the vote at the Special
Meeting, or (iii) attending the Special Meeting and voting in person (although
attendance at the Special Meeting will not in and of itself constitute a
revocation of a
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proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to World Access, Inc., at 945 E. Paces Ferry Road, Suite
2200, Atlanta, Georgia 30326, Attention: Secretary, or hand-delivered to the
Secretary of World Access at or before the taking of the vote at the Special
Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement to stockholders of World Access, will be borne by
World Access. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of World Access in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation. World
Access has retained Georgeson & Company Inc. at an estimated cost of
approximately $50,000 to assist in its solicitations of proxies from brokers,
nominees, institutions and individuals. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and World Access will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith.
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THE MERGER
PURPOSE AND EFFECTS OF THE MERGER
The purpose of the Merger is to combine World Access and FaciliCom. The
directors and management of World Access believe the Merger will provide World
Access with extensive switching and transport networks in Europe, allowing it to
leverage its long distance volume and to aggressively pursue its strategy to be
a leader in the wholesale and retail international long distance markets. The
Surviving Corporation intends to take advantage of growth opportunities in
international long distance services by leveraging its substantial wholesale
volume and international relationships to develop a strong retail presence in
selected international markets.
BACKGROUND OF THE MERGER
On or about July 16, 1999, Brown Brothers Harriman & Co. ("BBH") was
contacted regarding the possibility of an investment by BBH in FaciliCom. BBH,
the general partner of The 1818 Fund, which holds 50,000 shares of Series A
Preferred Stock, was not inclined to invest in a competitor of World Access, but
suggested that FaciliCom and World Access contact each other directly regarding
a potential strategic alliance. During the week of July 19, 1999, Clifford S.
Rees, Executive Vice President of International Business Development for the
World Access Telecommunications Group, called Walter J. Burmeister, President
and Chief Executive Officer of FaciliCom, to arrange a meeting between members
of management of World Access and FaciliCom.
On the morning of July 26, 1999, John D. Phillips and W. Tod Chmar,
Executive Vice President of World Access, met with Mr. Burmeister and Jeffrey J.
Guzy, Executive Vice President of Sales, Marketing and Product Development of
FaciliCom, at the principal executive offices of FaciliCom in Washington, D.C.
The parties determined that they shared similar views on the outlook for the
international telecommunications industry and the market strategies to be
followed in order to capitalize on the favorable trends expected to occur in the
industry. They also determined that the operating networks and customer bases of
World Access and FaciliCom were complimentary and that the possibility of a
strategic transaction should be explored. Mr. Burmeister indicated that
management of AHI, the indirect controlling stockholder of FaciliCom, should be
contacted and participate in any discussions to be held. At the request of Mr.
Phillips, a meeting between Messrs. Phillips, Chmar and Burmeister and the
senior management of AHI was immediately scheduled for that afternoon.
On the afternoon of July 26, 1999, Messrs. Phillips, Chmar and Burmeister
met with Kirby J. Campbell, Chief Executive Officer of AHI, and Bryan Cipoletti,
Vice President of Finance of AHI, at the principal executive offices of AHI in
Butler, Pennsylvania. The parties discussed the potential advantages of
combining (i) the significant international wholesale, retail and data services
revenue base and extensive carrier-grade European network of FaciliCom with (ii)
the MCI WorldCom wholesale carrier service revenues, Equipment Group and
financial strength of World Access. The parties also discussed the advantages of
the Equipment Group of World Access providing funding for the forecasted growth
of the Surviving Corporation's services business, the strategy of adding
significant retail services and the expansion of the Surviving Corporation's
network and future acquisitions in Europe.
On July 28, 1999, Messrs. Campbell, Cipoletti, Burmeister, Christopher S.
King, Chief Financial Officer of FaciliCom, and representatives of Lehman
Brothers, Inc. ("Lehman Brothers"), financial advisor to FaciliCom, met with
Messrs. Phillips and Chmar and Mark A. Gergel, Executive Vice President and
Chief Financial Officer of World Access, A. Lindsay Wallace, President of the
World Access Equipment Group, and Michael F. Mies, Vice President of Finance and
Treasurer of World Access, at the principal executive offices of World Access in
Atlanta, Georgia. On July 30, 1999, Messrs. Phillips, Chmar and Gergel met with
the same representatives of FaciliCom and AHI in Butler, Pennsylvania and
discussed the relative valuations of World Access and FaciliCom and the
alternative structures of convertible preferred stock to be used as
consideration in a potential merger transaction.
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The parties continued to discuss the terms of a possible strategic
transaction during the week of August 2, 1999, and on August 6, 1999 reached a
preliminary understanding on certain principal terms of the Merger.
During August 10 through 12, 1999, Messrs. Chmar, Gergel and Mies met with
Messrs. Cipoletti, Burmeister and King, members of FaciliCom's and World Access'
operating management, representatives of BBH, including Lawrence C. Tucker (also
a director of World Access), representatives of DLJ, financial advisor to World
Access, and representatives of Lehman Brothers at the principal executive
offices of FaciliCom in Washington, D.C. The purpose of these meetings was for
each party to conduct business due diligence and develop a combined business
model. In addition to business due diligence, counsel for World Access reviewed
publicly available documents filed by FaciliCom with the Commission and
conducted legal due diligence on materials provided to it at FaciliCom's
Washington, D.C. offices.
Throughout the week of August 9, 1999, senior management of World Access
had several telephone conferences with each of the members of the World Access
Board of Directors in order to update the Board individually on the discussions
with FaciliCom. On August 13, 1999, the Board had a telephonic conference call
during which legal counsel reviewed the terms of a draft of the Merger
Agreement, which had been provided to the Board prior to the call, and advised
the Board of its fiduciary duties in the context of the proposed Merger. DLJ
reviewed the preliminary financial terms of the proposed Merger and its analysis
thereof. During the call, the members of the Board of Directors had extensive
discussions regarding the legal and financial terms of the proposed Merger. The
Board of Directors instructed management of World Access to proceed with its
discussions with FaciliCom and the FaciliCom Shareholders to finalize the terms
of the proposed Merger Agreement.
On August 16, 1999, the Board of Directors of World Access met by
telephonic conference call to discuss the terms of the Merger, and DLJ gave its
oral opinion as to the fairness of the consideration to be paid by World Access
pursuant to the Merger Agreement. Legal counsel advised the Board with respect
to, and responded to questions regarding, the development of negotiations with
FaciliCom and the FaciliCom Shareholders. During this conference, the World
Access Board of Directors unanimously approved the Merger Agreement and the
transactions contemplated thereby and unanimously agreed to recommend its
adoption to the stockholders of World Access. On August 17, 1999, DLJ forwarded
its written opinion regarding the fairness of the consideration to be paid by
World Access pursuant to the Merger Agreement to the members of the Board of
Directors of World Access.
RECOMMENDATION OF THE WORLD ACCESS BOARD OF DIRECTORS
The Board of Directors of World Access has carefully considered the
advisability of the Merger and believes that the terms of the Merger are fair
to, and that the Merger is in the best interests of, the stockholders of World
Access. THE BOARD OF DIRECTORS OF WORLD ACCESS HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
WORLD ACCESS' REASONS FOR THE MERGER
The Board of Directors of World Access believes that the Merger is fair to
and in the best interests of World Access and its stockholders. As outlined
above under "-- Background of the Merger," after consideration of relevant
business, financial, legal and market factors, the Board of Directors
unanimously approved the Merger Agreement and the transactions contemplated
thereby and voted to recommend that the stockholders of World Access vote FOR
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
In deciding to approve the Merger Agreement and to recommend approval and
adoption of the Merger Agreement by the stockholders of World Access, the Board
of Directors considered a number of factors, including particularly the factors
listed below. In view of the number and wide variety of factors considered in
connection with its evaluation of the Merger, the Board of Directors did not
consider it practicable to, nor did
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<PAGE> 37
it attempt to, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. The Board of Directors viewed
its position and recommendation as being based on the totality of the
information and factors presented to and considered by it. In addition,
individual directors may have given different weight to different information
and factors.
The Financial Terms of the Merger. The Board of Directors of World Access
considered information concerning the business, earnings, operations, financial
condition and prospects of World Access and FaciliCom, both individually and on
a combined basis. The Board of Directors also considered the financial analyses
and other information with respect to World Access and FaciliCom presented to it
by World Access' financial advisor, as well as the directors' own knowledge of
World Access and FaciliCom and their respective businesses.
FaciliCom's Extensive Facilities-Based International Telecommunications
Network. The Board of Directors of World Access considered FaciliCom's strong
European presence and the potential for entry into additional deregulating
European countries. The Board of Directors also considered the technical
capabilities, cost effectiveness and available capacity of FaciliCom's
carrier-grade network in 14 countries and the utilization of this network to
facilitate World Access' global expansion strategy.
Industry Trend Toward Consolidation. The Board of Directors of World
Access considered the status of the international telecommunications services
industry and the likely trend toward consolidation of service providers. The
Board of Directors also considered the importance of market position in the
global telecommunications services industry. The Board of Directors considered
the potential significant cost savings to be achieved as a result of the Merger
in order to provide global retail telecommunications services at competitive
rates.
FaciliCom's Established Wholesale Customer Base. The Board of Directors of
World Access considered the compatibility of FaciliCom's established base of
wholesale customers with World Access' existing wholesale customer base. With
only approximately 20% wholesale customer overlap between World Access and
FaciliCom, the Board of Directors considered the significant expansion
possibility to be achieved with the addition of approximately 220 wholesale
carrier customers of FaciliCom.
Significant Increase in Offered Services. The Board of Directors of World
Access considered the additional services offered by FaciliCom, which would be
made available to current and future customers of World Access. Specifically,
the Board of Directors considered the potential growth opportunities for new
internet and data services that the Board of Directors believes will be
available to the Surviving Corporation.
OPINION OF WORLD ACCESS' FINANCIAL ADVISOR
The Board of Directors of World Access engaged DLJ to act as its financial
advisor in connection with the Merger. On August 16, 1999, DLJ rendered an oral
opinion to World Access' Board of Directors, subsequently confirmed in writing
as of August 17, 1999, 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 consideration to be paid by World Access pursuant to the Merger
Agreement was fair to World Access, from a financial point of view. DLJ's
opinion does not take into account the specific consideration offered in the
Exchange Offer.
THE FULL TEXT OF DLJ'S OPINION IS INCLUDED AS APPENDIX B AND SHOULD BE READ
CAREFULLY IN ITS ENTIRETY AND IS INCORPORATED HEREIN BY REFERENCE, INCLUDING
WITHOUT LIMITATION, THE DESCRIPTIONS OF THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN
ARRIVING AT SUCH OPINION. DLJ'S OPINION WAS PREPARED FOR AND ADDRESSED TO WORLD
ACCESS' BOARD OF DIRECTORS AND ONLY ADDRESSES THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY WORLD ACCESS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF WORLD ACCESS AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
DLJ's opinion DOES NOT CONSTITUTE an opinion as to the price at which World
Access' stock will actually trade at any time. The type and amount of
consideration was determined in arms-length negotiations between World Access
and FaciliCom. No restrictions or limitations were imposed by World Access upon
DLJ with respect to the investigations made or the procedures followed by DLJ in
rendering its opinion.
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<PAGE> 38
In arriving at its opinion, DLJ, among other things:
- reviewed the draft dated August 17, 1999 of the Merger Agreement and the
draft dated August 17, 1999 of the Certificate of Designation of the
Series C Preferred Stock and assumed that the final form of such
agreements would not vary in any respect that would be material to its
analysis;
- reviewed financial and other information that was publicly available or
furnished to it by World Access and FaciliCom, including information
provided during discussions with their respective managements which
included certain financial projections of each of World Access and
FaciliCom, prepared by their respective managements; and
- conducted such other financial studies, analyses and investigations as
DLJ deemed appropriate for purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by World Access and FaciliCom or
their respective representatives, or that was otherwise reviewed by it. In
particular, DLJ relied upon the estimates of the management of World Access of
the operating synergies achievable as a result of the Merger and upon DLJ's
discussion of such synergies with the management of FaciliCom. DLJ also assumed
that the financial projections of World Access and FaciliCom supplied to it were
reasonably prepared on the basis reflecting the best currently available
estimates and good faith judgments of the respective managements of World Access
and FaciliCom as to the future operating and financial performance of World
Access and FaciliCom, respectively. DLJ expressed no opinion with respect to
such forecasts or the assumptions on which they were based, DLJ did not assume
any responsibility for making any independent evaluation or appraisal of the
assets or liabilities of World Access or for making any independent verification
of any of the information reviewed by DLJ. DLJ also did not assume any
responsibility for making any independent investigation of any legal matters
affecting World Access or FaciliCom and assumed the correctness of all legal
advice given to each of them and to World Access' Board of Directors, including
advice as to the tax consequences of the Merger.
DLJ's opinion was necessarily based upon economic, market, financial and
other conditions as they existed on, and on information available to it as of,
the date of its opinion. It should be understood that, although subsequent
developments may affect its opinion, DLJ does not have any obligation to update,
revise or reaffirm its opinion as a result of changes in such conditions or
otherwise.
The following is a brief summary of the principal analyses performed by DLJ
in connection with DLJ's opinion and included in its presentation to World
Access' Board of Directors. For purposes of the following analysis, DLJ used (i)
the August 12, 1999 closing price of the World Access Common Stock of $12.875
per share, (ii) the initial conversion rate of the Series C Preferred Stock of
one share of World Access Common Stock per $20.38 of liquidation preference of
the Series C Preferred Stock and (iii) the minimum conversion rate of the Series
C Preferred Stock of one share of World Access Common Stock per $11.50 of
liquidation preference of the Series C Preferred Stock.
Each of the analyses described below was carried out in order to provide a
different perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness from a financial point of view. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of the analyses taken as a whole.
Included in the discussion below are summaries of some of the statistical
information appearing in such discussion presented in a tabular format. While
these tables are presented for the purpose of clarity and ease of reference,
they are not substitutes for, and must be read along with, all of the
information appearing under the captions immediately preceding them as well as
all of the information set forth in this document.
(i) Consideration Paid Analysis. DLJ reviewed the consideration to be
paid by World Access pursuant to the Merger Agreement by valuing the Series
C Preferred Stock at the theoretical market value as well as at the
liquidation preference value. In addition, in reviewing the consideration
to be paid by World Access, DLJ estimated a maximum value of the
consideration, which valued the Series C
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<PAGE> 39
Preferred Stock at the liquidation preference value and included as part of
the consideration the market value of the accelerated contingent payment of
World Access Common Stock in connection with a prior acquisition by World
Access. For this purpose, DLJ assumed the issuance of 7.5 million Escrowed
Shares issued at the August 12, 1999 closing price of $12.875 per share.
See "THE MERGER -- Interests of Certain Persons in the Merger -- Release of
Escrowed Shares of World Access Common Stock" and "-- Release of Contingent
Shares of World Access Common Stock."
In estimating the theoretical market value of the Series C Preferred
Stock, DLJ valued the Series C Preferred Stock using the Black-Scholes
Option Pricing Model assuming a volatility range of 30% to 60%, a risk free
rate of 6% and a 10% discount for lack of liquidity in a private security.
Based on the mid-point of such analysis, DLJ estimated a theoretical market
value of the Series C Preferred Stock to be 72% of the liquidation
preference of the Series C Preferred Stock.
(ii) Discounted Cash Flow Analysis. DLJ performed a discounted cash
flow analysis for World Access on a stand-alone basis, for FaciliCom on a
stand-alone basis and for World Access pro forma for the Merger. These
analyses were based upon financial projections prepared by the management
of each company for the five-year period ending fiscal 2003. DLJ calculated
EBITDA for each of World Access and FaciliCom. EBITDA is earnings before
interest, taxes, depreciation and amortization and other items. DLJ
performed this analysis to estimate FaciliCom's net present value of equity
and to compare World Access' net present value of equity per share on a
stand-alone basis to World Access' net present value of equity per share
pro forma for the Merger.
DLJ calculated the terminal value of World Access and FaciliCom at the
end of the forecast period, by applying a range of estimated EBITDA
multiples selected in DLJ's subjective judgment. The terminal value
estimates are a hypothetical approximation of the value of the enterprise's
cash flows beyond the end of the five year period covered by the
managements' projections.
The managements' projected EBITDA and DLJ's subjective estimate of the
terminal values based on management's projected EBITDA were then discounted
to the present using a range of discount rates selected in DLJ's subjective
judgment.
DISCOUNTED CASH FLOW ANALYSIS
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS FACILICOM WORLD ACCESS
------------------ ------------------ --------------------
<S> <C> <C> <C>
Range of EBITDA Multiples............. 7.5x to 9.5x 7.5x to 9.5x 7.5x to 9.5x
Discount Rates........................ 15.6% to 19.6% 12.6% to 16.6% 14.8% to 18.8%
Implied Net Present Value of Equity... $805.6 to $1,153.9 $596.4 to $1,023.5 $1,547.8 to $2,357.8
Implied Equity Value per Share........ $16.07 to $23.02 NM --
Implied Equity Value per Share Using
the Initial Conversion Price of
$20.38 per Share and assuming the
issuance of the Contingent Shares... -- -- $19.20 to $29.25
Implied Equity Value per Share using
the Minimum Conversion Price of
$11.50 per Share and assuming the
issuance of the Contingent Shares... -- -- $16.29 to $24.82
</TABLE>
The above analysis shows that the range of implied equity value per share
for World Access would increase from $16.07 to $23.02 on a stand-alone basis to
(i) $19.20 to $29.25 using the initial conversion rate of the Series C Preferred
Stock of one share of World Access Common Stock per $20.38 of liquidation
preference and assuming the issuance of the Escrowed Shares, and (ii) $16.29 to
$24.82 using the minimum conversion rate of the Series C Preferred Stock of one
share of World Access Common Stock per $11.50 of liquidation preference and
assuming the issuance of the Escrowed Shares.
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<PAGE> 40
(iii) Comparable Company Analysis. DLJ selected publicly traded
companies that operate businesses similar to that of FaciliCom. However, no
other company utilized in DLJ's analysis of comparable publicly traded
companies is identical to World Access or FaciliCom. Accordingly, this
analysis necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of each
of World Access and FaciliCom and other factors that could affect the
public trading value of World Access, FaciliCom or any other comparable
company included in such analysis. Mathematical analysis (such as
determining the mean or median) is not in itself a meaningful method of
using comparable company data. DLJ performed this analysis in order to
compare the ratio of FaciliCom's enterprise value to its last quarter
annualized revenues, estimated 1999 and 2000 revenues as provided by
FaciliCom, gross property, plant and equipment and net property plant and
equipment (using both the liquidation value of the Series C Preferred Stock
plus the market value of the Escrowed Shares and the theoretical market
value of the Series C Preferred Stock) to those of the comparable companies
at August 12, 1999.
DLJ analyzed the operating performance of FaciliCom relative to six
companies deemed by DLJ to be reasonably comparable to FaciliCom. These
companies were:
<TABLE>
<S> <C> <C>
(i) Destia Communications Inc.;
(ii) IDT Corp.;
(iii) Pacific Gateway Exchange, Inc.;
(iv) Primus Telecommunications Inc.;
(v) RSL Communications Ltd.; and
(vi) Viatel, Inc.
</TABLE>
Historical financial information used with respect to the comparable
companies was as of the most recent financial statements publicly available
for each company as of August 12, 1999. DLJ examined certain publicly
available financial data of the comparable companies including enterprise
value (defined as market value of common equity plus book value of total
debt and preferred stock less cash) as multiples of the latest publicly
available last quarter annualized revenues, estimated 1999 and 2000
revenues taken from various analysts research reports, gross property,
plant and equipment and net property plant and equipment.
COMPARABLE COMPANY ANALYSIS
<TABLE>
<CAPTION>
FACILICOM USING
THE LIQUIDATION
VALUE OF SERIES C
FACILICOM USING PREFERRED STOCK
THE THEORETICAL PLUS THE MARKET
MARKET VALUE OF VALUE OF THE
SERIES C CONTINGENT
HIGH MEDIAN LOW PREFERRED STOCK SHARES
---- ------ ---- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Last Quarter Annualized
Revenues...................................... 5.4x 1.1x 0.7x 1.4x 1.8x
Enterprise Value/1999 Estimated Revenues(1)... 4.8x 1.0x 0.6x 1.2x 1.7x
Enterprise Value/2000 Estimated Revenues(1)... 2.6x 0.8x 0.6x 0.7x 0.9x
Enterprise Value/Gross PP&E................... 4.2x 3.6x 3.0x 2.7x 3.7x
Enterprise Value/Net PP&E..................... 5.4x 4.5x 3.5x 3.1x 4.2x
</TABLE>
(1) Source of Projections:
(i) Destia: Lehman Brothers research report dated June 2, 1999;
(ii) IDT: Morgan Stanley research report dated June 16, 1999;
(iii) Pacific Gateway Exchange: Paine Webber research report dated
May 25, 1999;
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<PAGE> 41
(iv) Primus: CIBC Oppenheimer research report dated June 8, 1999;
(v) RSL: Morgan Stanley research report dated July 7, 1999;
(vi) Viatel: CS First Boston research report dated April 8, 1999;
and
(vii) FaciliCom: projections provided by FaciliCom management.
The comparable company analysis showed that the implied multiples of World
Access' consideration under both methodologies of valuing the Series C Preferred
Stock were either within or lower than the range of multiples implied by the
prevailing market prices of the comparable companies.
(iv) Analysis of Selected M&A Transactions. DLJ reviewed selected
mergers and acquisitions transactions of companies that operate businesses
similar to that of FaciliCom. DLJ performed this analysis in order to compare
the ratio of the implied transaction value to its last twelve months revenues,
last quarter annualized revenues and net property plant and equipment (using
both the liquidation value of the Series C Preferred Stock plus the market value
of the Escrowed Shares and the theoretical market value of the Series C
Preferred Stock) to those of the selected mergers and acquisitions transactions.
SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS
<TABLE>
<CAPTION>
FACILICOM FACILICOM USING
USING THE LIQUIDATION
THE THEORETICAL VALUE OF SERIES C
MARKET VALUE OF PREFERRED STOCK
SERIES C PLUS THE MARKET VALUE
HIGH MEDIAN LOW PREFERRED STOCK OF THE ESCROWED SHARES
----- ------ ---- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
Transaction Value/Last Twelve Months
Revenues................................. 16.5x 5.2x 1.1x 1.5x 2.0x
Transaction Value/Last Quarter Annualized
Revenues............................... 4.8x 2.1x 1.2x 1.4x 1.8x
Transaction Value/Net PP&E............... 42.0x 20.0x 5.9x 3.1x 4.2x
</TABLE>
The analysis of selected mergers and acquisitions transactions showed that
the implied multiples of World Access' consideration under both methodologies of
valuing the Series C Preferred Stock were, in each case, lower than the median
of multiples paid by the selected mergers and acquisitions transactions.
The summary set forth above is not a complete description of the analyses
performed by DLJ, but describes, in summary form, the principal elements of the
analyses made by DLJ in arriving at DLJ's opinion. The preparation of a fairness
opinion involves determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily summarized.
DLJ's conclusion involved significant elements of judgment and qualitative
analyses as well as financial and quantitative analyses. DLJ did not place
particular reliance or weight on any individual factor, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, DLJ believes that its
analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion.
In performing its analyses, DLJ made numerous assumptions with respect to
industry performance, business and regulatory, financial, economic, monetary,
political and market conditions and other matters, many of which are beyond the
control of World Access or FaciliCom. In addition, analyses relating to the
value of the businesses or securities do not purport to be appraisals, or to
reflect the prices at which such businesses or securities can actually be sold.
The analyses performed by DLJ are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. See "RISK FACTORS."
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<PAGE> 42
World Access selected DLJ to render an opinion in connection with the
Merger based upon DLJ's qualifications, expertise and reputation, including the
fact that DLJ, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Pursuant to the terms of an engagement letter dated August 12, 1999, World
Access agreed (i) to pay DLJ a fee of (a) $850,000 at the time that DLJ
delivered to the World Access Board of Directors its opinion, irrespective of
the conclusion reached therein and (b) $1.2 million less any amounts paid
pursuant to clause (a), payable in cash promptly upon consummation of a business
combination between World Access and FaciliCom in one or a series of
transactions, by merger, consolidation, or any other business combination, by
purchase involving all or a substantial amount of the business, securities or
assets of FaciliCom or otherwise, (ii) to reimburse DLJ for all of its
out-of-pocket expenses, including the reasonable fees and expenses of counsel
incurred by DLJ, and (iii) to indemnify DLJ for liabilities and expenses arising
out of a transaction, including liabilities under federal securities laws.
The terms of the fee arrangement with DLJ, which DLJ and World Access
believe are customary in transactions of this nature, were negotiated at
arms-length between World Access and DLJ. World Access' Board of Directors was
aware of such arrangement, including the fact that a significant portion of the
aggregate fee payable to DLJ is contingent upon consummation of the Merger.
DLJ provides a full range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or debt of World Access and/or
FaciliCom for its own account and for the accounts of its customers.
CLOSING; EFFECTIVE TIME OF THE MERGER
The closing of the Merger (the "Closing") will take place on the second
business day following the satisfaction or waiver of the conditions to be
fulfilled prior to such Closing set forth in the Merger Agreement, unless
another date is agreed to in writing by World Access, FaciliCom and the
FaciliCom Shareholders (the actual time and date of the Closing being referred
to herein as the "Closing Date"). On the Closing Date, World Access and
FaciliCom will file a Certificate of Merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware. The Effective Time will occur
at the time of filing of the Certificate of Merger, or at such subsequent date
or time as World Access and FaciliCom agree and specify in the Certificate of
Merger. It is anticipated that, assuming all conditions are met, the Merger will
occur prior to December 31, 1999.
MANAGEMENT OF THE SURVIVING CORPORATION
Executive Officers. Following the consummation of the Merger, John D.
Phillips, Chairman of the Board, President and Chief Executive Officer of World
Access, will serve as Chairman of the Board and Chief Executive Officer of the
Surviving Corporation, and Walter J. Burmeister, President and Chief Executive
Officer of FaciliCom, will serve as the President of the Surviving Corporation.
It is anticipated that the other current executive officers of World Access will
continue as executive officers of the Surviving Corporation with the duties and
responsibilities they currently have at World Access. At the time of mailing
this Proxy Statement, the parties have not yet determined which specific offices
will be held by the other current executive officers of FaciliCom. Mr.
Burmeister does not have an employment contract with FaciliCom. For FaciliCom's
fiscal year ended September 30, 1999, FaciliCom paid Mr. Burmeister $212,000 in
cash compensation. Mr. Burmeister's compensation arrangements with the Surviving
Corporation have not yet been determined.
Board of Directors. As of the Effective Time, the Board of Directors of
the Surviving Corporation will consist of twelve members. Six of these twelve
are the current directors of World Access who will continue as directors of the
Surviving Corporation, and four of these twelve will be designated by the
holders of the Series C Preferred Stock. The remaining two directors are the two
individuals who have agreed to join the World Access Board of Directors in
connection with the closing of the Merger and the Private Placement. The
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<PAGE> 43
current directors of World Access are John D. Phillips, Stephen J. Clearman,
Mark A. Gergel, John P. Imlay, Carl E. Sanders and Lawrence C. Tucker. The
initial designees of the holders of the Series C Preferred Stock to the Board of
Directors are Dru A. Sedwick, Kirby J. Campbell, Bryan Cipoletti and Walter J.
Burmeister. The two individuals who will join the World Access Board of
Directors in connection with the Private Placement are Massimo Prelz Oltramonti
and John P. Rigas. Of the six continuing directors, The 1818 Fund, as sole
holder of the Series A Preferred Stock, is entitled to designate one person for
recommendation for election by the World Access Board of Directors to the
stockholders of World Access. Lawrence C. Tucker was so designated by The 1818
Fund.
Information concerning the six current directors of World Access who will
continue as directors of the Surviving Corporation can be found in World Access'
Proxy Statement for its 1999 Annual Meeting held on June 15, 1999. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The initial four persons designated by the holders of the Series C
Preferred Stock to be members of the Board of Directors of the Surviving
Corporation are as follows:
Walter J. Burmeister (age 60) is one of FaciliCom's co-founders and has
been its Chief Executive Officer, President and one of its directors since it
was founded in 1995. Prior to co-founding FaciliCom, Mr. Burmeister founded TMG,
a telecommunications consulting firm, and he has served as its Chairman from
1992 to the present. Before founding this firm, Mr. Burmeister was Vice
President and Chief Financial Officer of Bell Atlantic International from 1989
to 1992. In these positions, Mr. Burmeister was responsible for overseeing
business development in Central and South America, the Middle East and Africa,
as well as managing that company's financial affairs. During his 31 years with
Bell Atlantic, Mr. Burmeister was Vice President of Bell of Pennsylvania's and
Diamond State Telephone's sales organization and headed the C&P Telephone
Operations Staff. Mr. Burmeister has served as a director of Skysat
Communications Network since 1992.
Kirby J. Campbell (age 52) has served as Treasurer, Vice President and as a
director of FaciliCom since its inception. Since June 1997, Mr. Campbell has
been the Chief Executive Officer of AHI, and he was previously since 1993
Executive Vice President of AHI. Mr. Campbell also holds various executive and
board positions with AHI's affiliated companies.
Dru A. Sedwick (age 35) has served as Secretary, Vice President and as a
director of FaciliCom since FaciliCom's inception. Since June 1997, Mr. Sedwick
has been President of AHI, and previously since 1993 he was Senior Vice
President of AHI. Mr. Sedwick also holds various executive and board positions
with AHI's affiliated companies.
Bryan Cipoletti (age 39) has been one of FaciliCom's directors since
September 1997. Since 1993, Mr. Cipoletti has been Vice President of Finance of
AHI. Mr. Cipoletti also holds various executive and board positions with AHI's
affiliated companies.
The two people who have agreed to join the World Access Board of Directors
in connection with the closing of the Merger and the Private Placement are as
follows:
Massimo Prelz Oltramonti (age 44) is a Managing Director of Gilbert Global
Equity Partners, L.L.C., a private equity firm with a diversified global
investment strategy. He previously served as Managing Director of Advent
International Corporation, the general partner of a series of global private
equity funds. In this capacity, he co-managed the media and telecom investment
activity of Advent International in Europe and was directly responsible for its
investments in Scandinavian Broadcasting Systems SA, Esat Telecom Group plc,
PrimaCom AG, Esaote S.p.A. and Jazztel SA. Prior to joining Advent International
in 1991, Mr. Prelz was a partner at Alta Berkeley Associates, a venture capital
group in London. He currently serves as Vice-Chairman of PrimaCom AG and is a
director of Esat Telecom Group plc, Jazztel SA and Iaxis N.V.
John P. Rigas (age 36) is a Managing Partner of Zilkha Capital Partners
L.P., a private equity firm involved in a wide variety of venture capital and
technology investments both in the U.S. and internationally. Mr. Rigas has been
with Zilkha Capital Partners and its predecessor firms for twelve years. He
currently
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serves as the Chairman of Advanced Interactive Systems Inc. and as a director of
New Colt Holding, Inc. and Omniglo, Inc.
CONSIDERATION TO BE RECEIVED IN THE MERGER
In the Merger, the outstanding FaciliCom Common Stock will be converted
into the right to receive, and certain outstanding options to purchase FaciliCom
Common Stock will be exchanged for, in the aggregate, (i) an amount of cash
and/or World Access Common Stock equal in value to $56.0 million, (ii)
approximately 369,400 shares, or $369.4 million in aggregate liquidation
preference, of Series C Preferred Stock and (iii) approximately 520,000 vested
options that each may be exercised for one share of World Access Common Stock at
an average exercise price of $3.06 per share.
World Access has received commitments from a group of institutional and
sophisticated investors to purchase $75.0 million of World Access Common Stock
in a private transaction that is conditioned upon, among other things, and will
close simultaneously with, the Merger. World Access will use the majority of the
proceeds from the Private Placement to fund the cash portion of the Merger,
including related fees and expenses. The World Access Common Stock to be issued
will be priced at the average trading value of the World Access Common Stock
during a five day period prior to the closing of the Merger, with the purchase
price to be no lower than $13.00 per share and no higher than $17.00 per share.
Brown Brothers Harriman & Co. acted as an advisor to World Access on this
transaction.
In the event that World Access is unable to obtain net proceeds of $56.0
million on or prior to the Closing (the "Cash Shortfall"), the FaciliCom
stockholders and certain of the FaciliCom optionholders will be entitled to
receive, in the aggregate, such number of shares of World Access Common Stock as
is equal to the Cash Shortfall divided by the market price of World Access
Common Stock on the trading day immediately preceding the Closing Date plus such
number of additional shares of World Access Common Stock as will result, upon
the resale by such persons of all such shares, in the aggregate, in net cash
proceeds to such persons equal to the Cash Shortfall. See "THE MERGER
AGREEMENT -- Merger Consideration." World Access has agreed to file a
registration statement with the Commission in connection with the resale of any
World Access Common Stock received by the stockholders of FaciliCom.
Descriptions of the Series C Preferred Stock to be received by the stockholders
of FaciliCom and the treatment of FaciliCom options in the Merger are set forth
below.
Description of the Series C Preferred Stock.
Designation. Upon the filing of a Certificate of Designation (the
"Certificate of Designation") with the Secretary of State of the State of
Delaware, approximately 369,400 shares of World Access' authorized preferred
stock will be designated as "Convertible Preferred Stock, Series C."
Ranking. The Series C Preferred Stock will rank, as to dividends, on
parity with the World Access Common Stock and junior to the Series A Preferred
Stock and the Series B Preferred Stock. The Series C Preferred Stock will rank,
as to liquidation preference, senior to the World Access Common Stock, on parity
with the Series B Preferred Stock and junior to the Series A Preferred Stock.
Voting Rights. In addition to any voting rights provided by law, except
with respect to the election of directors, the holders of shares of Series C
Preferred Stock will be entitled to vote on all matters voted on by the holders
of World Access Common Stock voting together as a single class with the holders
of World Access Common Stock, Series A Preferred Stock, Series B Preferred Stock
and other shares entitled to vote thereon. Each holder of shares of Series C
Preferred Stock will be entitled to cast the number of votes per share as is
equal to the number of votes that such holder would be entitled to cast had such
holder converted its shares of Series C Preferred Stock into World Access Common
Stock on the record date for determining the stockholders eligible to vote on
any such matters.
In addition, unless the consent or approval of a greater number of shares
is then required by law, the affirmative vote of the holders of at least 66 2/3%
of the outstanding shares of Series C Preferred Stock, voting separately as a
single series, will be required to: (i) authorize, increase the authorized
number of shares of or
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issue any shares of any class or classes of stock ranking senior to the Series C
Preferred Stock; (ii) authorize, adopt or approve an amendment to the
certificate of incorporation of the Surviving Corporation that would increase or
decrease the par value of the shares of Series C Preferred Stock, or alter or
change the powers, preferences or special rights of the shares of Series C
Preferred Stock, or would alter or change the powers, preferences or special
rights of stock ranking senior to the Series C Preferred Stock; (iii) amend or
alter the certificate of incorporation of the Surviving Corporation so as to
affect the shares of Series C Preferred Stock adversely and materially; (iv)
authorize or issue any security convertible into, exchangeable for or evidencing
the right to purchase or otherwise receive any shares of any class or classes of
stock ranking senior to the Series C Preferred Stock; and (v) subject to certain
exceptions set forth in the Certificate of Designation for the Series C
Preferred Stock, effect the voluntary liquidation, dissolution, winding up,
recapitalization or reorganization of the Surviving Corporation, or the
consolidation or merger of the Surviving Corporation with or into any other
entity (except a wholly-owned subsidiary of the Surviving Corporation), or the
sale or other distribution to another entity of all or substantially all of the
assets of the Surviving Corporation.
Board of Directors Representation. The holders of the outstanding shares
of Series C Preferred Stock will have the right, voting as a separate series, to
nominate and elect four directors to the board of directors of the Surviving
Corporation (and will not be entitled to vote with respect to the election of
any other directors); provided that on the record date for determining the
stockholders eligible to vote on such matters, at least 15% of the originally
issued shares of Series C Preferred Stock (the "Minimum Preferred Stock
Percentage") is outstanding. Notwithstanding the foregoing, if the World Access
Common Stock issuable upon conversion of the Series C Preferred Stock equals
less than 20% of the outstanding shares of capital stock of World Access
entitled to vote for the election of directors then, so long as the outstanding
shares of Series C Preferred Stock constitute at least the Minimum Preferred
Stock Percentage, the holders of Series C Preferred Stock will have the right to
elect, voting as a separate series, such number of directors which, as a
percentage of the total number of members of the board of directors of the
Surviving Corporation, is at least equal to the percentage of all outstanding
shares of capital stock entitled to vote for the election of directors held by
such holders of Series C Preferred Stock on an as converted basis.
Conversion Price. The shares of Series C Preferred Stock will be
convertible into shares of World Access Common Stock at a conversion rate equal
to one share of World Access Common Stock per $20.38 of liquidation preference
(the "Conversion Price"), subject to adjustment in the event of below market
issuances of World Access Common Stock, stock dividends, subdivisions,
combinations, reclassifications and other distributions with respect to World
Access Common Stock and in certain other instances specified in the Certificate
of Designation for the Series C Preferred Stock.
Mandatory Conversion. If for 60 consecutive trading days the Market Price
(as defined in the Certificate of Designation for the Series C Preferred Stock)
of World Access Common Stock on each such trading day exceeds the Conversion
Price in effect on each such trading day, then the outstanding shares of Series
C Preferred Stock will be automatically converted into such number of shares of
World Access Common Stock as is equal to the number of shares of Series C
Preferred Stock subject to conversion multiplied by the quotient of (i) the
liquidation preference of the Series C Preferred Stock (i.e., $1,000 per share)
(the "Liquidation Preference") divided by (ii) the Conversion Price in effect on
the last trading day of such 60-day period.
In addition, any outstanding shares of Series C Preferred Stock that have
not been converted into World Access Common Stock within three years following
the issue date of the Series C Preferred Stock (that date which is three years
following the issue date being referred to as the "Three Year Conversion Date")
will automatically be converted into such number of shares of World Access
Common Stock as is equal to the number of shares of Series C Preferred Stock
subject to conversion multiplied by the quotient of (i) the Liquidation
Preference divided by (ii) the Current Market Price (as defined in the
Certificate of Designation) (the "Three Year Conversion Price"). Notwithstanding
the foregoing, (x) the Three Year Conversion Price may not be less than $11.50,
(y) if (A) the Three Year Conversion Price is less than the Market Price on the
issue date of the Series C Preferred Stock and (B) the Nasdaq Composite Index
("IXIC") on the close of business of the Three Year Conversion Date is 85% or
less than the IXIC on the close of business on the issue date of the Series C
Preferred Stock (the difference between 100% and such percentage being referred
to as
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the "Market Correction Percentage"), then the Three Year Conversion Price will
be increased by a percentage equal to that portion of the Market Correction
Percentage in excess of 15%; and (z) the Three Year Conversion Price may not be
greater than the Conversion Price.
Treatment of FaciliCom Stock Options.
FaciliCom 1998 Stock Option Plan. FaciliCom has granted options to
approximately 70 individuals under its 1998 Stock Option Plan, representing
rights to acquire approximately 12,242 shares of non-voting FaciliCom Common
Stock. Pursuant to the provisions of the FaciliCom 1998 Stock Option Plan, in
the event of a change or exchange of the non-voting FaciliCom Common Stock, each
share of non-voting FaciliCom Common Stock subject to each outstanding option
shall be substituted with the number and kind of stock or securities into which
the non-voting FaciliCom Common Stock is changed or exchanged, with an
appropriate adjustment to the per share option exercise price. In addition,
pursuant to the provisions of the FaciliCom 1998 Stock Option Plan, each
outstanding option granted under that plan shall become fully exercisable upon a
"change in control" of FaciliCom. For that purpose, the Merger will constitute a
"change in control" of FaciliCom.
In connection with the Merger, the options to acquire 12,242 shares of
non-voting FaciliCom Common Stock are expected to be exchanged for an aggregate
of approximately $10.7 million in cash and non-qualified related options to
acquire approximately 520,000 shares of World Access Common Stock, at an average
exercise price of $3.06 per share. The cash consideration and the fair value of
the new options are part of the total consideration to be paid by World Access
in the Merger.
FaciliCom 1999 Stock Option Plan. In October 1999, FaciliCom granted stock
options under a new FaciliCom 1999 Stock Option Plan to its employees who are
expected to continue with the Surviving Corporation after the Merger. These
options were granted in contemplation of and contingent upon the Merger. Upon
consummation of the Merger, these options will convert into non-qualified
options to purchase approximately 1.9 million shares of World Access Common
Stock at an exercise price of $15.00 per share. These options generally will
become exercisable in 25% increments on each of the first four anniversaries
from the date of grant. The exercisability will not be accelerated due to the
Merger.
The exercise of all these options would result in approximately $28.5
million of capital infusion into World Access and may result in significant
income tax benefits for World Access. These options will be granted as
incentives for the FaciliCom employees to continue in their positions following
the Merger and will not result in a reduction of the number of shares of Series
C Preferred Stock to be issued in the Merger. The value of the approximately 1.9
million shares of World Access Common Stock which may be issued upon exercise of
the options is in addition to the total consideration to be paid by World Access
in the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general summary of material federal income tax
consequences of the Merger and does not purport to be a complete analysis of all
potential tax consequences. The summary is based upon current provisions of the
Code, temporary and final Treasury regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change
(possibly on a retroactive basis) and any such change could affect the
continuing validity of this summary. This summary does not address the state,
local or foreign tax aspects of the Merger.
World Access has not requested a ruling from the IRS with respect to the
federal income tax consequences of the Merger. It is not a condition to the
Merger that the parties receive such a ruling or an opinion of tax counsel to
FaciliCom or World Access concerning such tax consequences.
The Merger. World Access believes that the Merger should qualify as a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Code and will
report the Merger as a "reorganization" on its consolidated federal income tax
return. If the Merger qualifies as reorganization under the Code, no gain or
loss will be recognized by World Access or FaciliCom as a result of the Merger.
Under Section 1032 of the Code, World Access will also not recognize gain upon
the sale of World Access Common Stock for cash to
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fund World Access's payment of the cash portion of the Merger consideration.
World Access's tax basis in the FaciliCom assets acquired in the Merger
generally will be equal to the basis of such assets in the hands of FaciliCom
prior to the Merger, increased by any gain recognized by FaciliCom as a result
of the Merger. No increase in basis will result from gain recognized by
FaciliCom Shareholders or from World Access's payment of cash as part of the
Merger consideration. Because World Access will have such a "carryover" tax
basis in these assets, World Access may recognize more income and pay higher
taxes in the future than it would if the acquisition were taxable and it
received a "cost" basis in the assets. World Access's holding period for the
assets acquired will include FaciliCom's holding period for such assets.
World Access and FaciliCom have agreed in the Merger Agreement not to take
any action which could reasonably be expected to cause the Merger to fail to
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code. However, if the Merger does not qualify as a reorganization under the
Code, the Merger would be treated as a taxable acquisition of the assets of
FaciliCom by World Access in exchange for cash and Series C Preferred Stock and
World Access Common Stock, if issued as part of the Merger consideration, which
under Section 1032 of the Code, would also not result in any gain or loss
recognition to World Access. However, in such an event, FaciliCom would be
treated as selling all its assets in exchange for such Merger consideration for
federal income tax purposes and would be required to recognize gain or loss on
such asset sale transaction. World Access's tax basis in the assets deemed
purchased would be a "cost" basis, equal to the fair market value of the Merger
consideration transferred to the FaciliCom Shareholders, plus any liabilities of
FaciliCom assumed by World Access (i.e., a "stepped up" basis).
Limitation on Net Operating Losses of World Access and FaciliCom. Under
Section 382 of the Code, special limitations apply following an "ownership
change" (an "OC") to the use of (i) net operating losses ("NOLs") carryforwards
arising before the "OC" and (ii) "net unrealized built-in losses," if any, in
excess of a statutory threshold that are recognized during the five-year
recognition period (the "Recognition Period") following an OC (collectively the
"Applicable Tax Attributes"). After an OC, the amount of the loss corporation's
taxable income for a post-change taxable year that may be offset by the
Applicable Tax Attributes is limited annually to the product of an interest
factor published monthly by the IRS (the "Long-Term Tax-Exempt Rate" which for
September 1999 is 5.26%) multiplied by the fair market value of the loss
corporation's stock immediately before the OC (the "Section 382 Limitation").
However, the loss corporation's "net unrealized built-in gain," if any, in
excess of the same statutory threshold ("NUBIG") increases the Section 382
Limitation for the Recognition Period taxable year in which such NUBIG is
recognized. Section 383 of the Code also imposes an annual limitation (the
"Section 383 Limitation") after an OC on the post-change year use of the loss
corporation's capital loss carryovers, general business credits, minimum tax
credits and excess foreign tax credits (the "Section 383 Attributes") against
the loss corporation's tax liability.
FaciliCom will undergo an OC as a result of the Merger, and will be
considered to remain in existence for Section 382 purposes until its tax
attributes are used or expire. Although World Access does not believe that
FaciliCom's post-Merger applicable tax attributes or Section 383 attributes will
be material based on its quarterly report on Form 10-Q for the period ended June
30, 1999, any such attributes will be subject to the Section 382 Limitation and
Section 383 Limitation. Further, Section 384 of the Code limits World Access's
use of its consolidated NOLs against any FaciliCom NUBIG recognized during the
recognition period. Under final Treasury regulations issued in July, 1999,
although the separate return limitation year rules (the "SRLY Limitation") are
generally retained in such regulations, the SRLY Limitation is eliminated when
its application as the result of a SRLY event "overlaps" with an OC, such
"overlap" being defined as when the SRLY event occurs within six months of the
OC (the "Overlap Rule"). Under the Overlap Rule, FaciliCom's applicable tax
attributes will not be subject to the SRLY Limitation because FaciliCom will
undergo an OC at the same time as the SRLY event.
In its annual report on Form 10-K for the fiscal year ended September 30,
1998, FaciliCom reported that it had $25.3 million in NOLs attributable to its
foreign subsidiaries. Because such a determination will require a country by
country analysis, World Access has not yet determined whether and to what extent
the post-Merger utilization by World Access of such foreign subsidiaries' NOLs
may be limited under the foreign countries' tax laws equivalent to Section 382
or any other similar local foreign laws.
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Under final Treasury regulations issued in July 1999, Section 382 is
applied to World Access and its domestic subsidiaries which file a consolidated
federal income tax return (the "WAXS Consolidated Group") as though the
consolidated group were a single corporation. The "consolidated" Section 382
Limitation is calculated using the fair market value of all of the stock of
members of the WAXS consolidated group (except stock which is owned by another
member), and represents the amount of consolidated taxable income in any
post-change year that can be offset by the applicable tax attributes. Under
these regulations, the WAXS Consolidated Group undergoes an OC if World Access
itself as the common parent undergoes an OC.
If World Access did not undergo an OC in 1998, World Access believes that
the Merger will result in an OC in World Access for 1999. If so, then World
Access's Applicable Tax Attributes and Section 383 Attributes would be subject
to a consolidated Section 382 Limitation and consolidated Section 383
Limitation. Because an OC occurred with respect to Cherry U.S. in 1998 when
Cherry U.S. joined the WAXS Consolidated Group, the separate company pre-OC NOL
carryforwards of Cherry U.S. would remain subject to an existing separate
company Section 382 Limitation, but would not be subject to the existing SRLY
Limitation on such Cherry U.S. NOL carryforwards beginning with the 1999 taxable
year because the Overlap Rule would apply under the July 1999 regulations.
If, on the other hand, World Access did undergo an OC for its 1998 taxable
year, it is not clear whether World Access will undergo a second OC in 1999 as a
result of the Merger or otherwise. If World Access did undergo an OC in 1998,
then World Access's applicable tax attributes and Section 383 attributes would
currently be subject to a consolidated Section 382 Limitation and consolidated
Section 383 Limitation. The pre-OC NOL carryforwards of Cherry U.S. would still
remain subject to an existing separate company Section 382 Limitation, but would
not be subject to the existing SRLY Limitation for the 1999 taxable year as
discussed above.
LIMITATIONS ON RESALES BY AFFILIATES
All of the shares of Series C Preferred Stock issued in connection with the
Merger and shares of World Access Common Stock issued upon conversion of the
Series C Preferred Stock will be "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act, and such shares may not be sold
or transferred unless (i) the sale or transfer is exempt from the registration
requirements under the Securities Act, and any applicable state securities law
or (ii) the transfer is made pursuant to an effective registration statement
under the Securities Act and any applicable state securities law.
ACCOUNTING TREATMENT
The Merger will be accounted for by World Access under the purchase method
of accounting for business combinations.
APPRAISAL OR DISSENTERS' RIGHTS
The stockholders of World Access are not entitled to dissenters' rights of
appraisal or other dissenters' rights in connection with the Merger.
Stockholders of FaciliCom representing 99.5% of the outstanding FaciliCom Common
Stock have adopted the Merger Agreement and the transactions contemplated
thereby and are not entitled to dissenters' rights of appraisal or other
dissenters' rights. The remaining FaciliCom stockholders are entitled to such
rights.
REGULATORY APPROVALS
On September 29, 1999, World Access, the Jud L. Sedwick Grandchildren's
Trust (the ultimate parent entity of FaciliCom and AIT) and Walter J. Burmeister
(the ultimate parent entity of BFV) each filed a Pre-Merger Notification and
Report Form with the Justice Department and the Federal Trade Commission
pursuant to the HSR Act. Under the HSR Act, the Merger could not have been
consummated until at least 30 days after such filing unless earlier termination
of the waiting period was granted. The Federal Trade Commission granted early
termination of the HSR Act waiting period, effective October 19, 1999. No
further action under the HSR Act is required so long as the Merger is
consummated prior to October 18, 2000. The
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early termination of the HSR Act waiting period does not preclude the Justice
Department, the Federal Trade Commission or other parties from seeking actions
challenging the Merger based on federal antitrust statutes. World Access does
not anticipate any such challenge.
The transaction also requires notification in certain European countries.
Under the Finnish Competition Act, the Merger must be notified and cannot
be consummated until the Merger has been approved or certain waiting
periods/investigation periods have expired. FaciliCom filed for approval under
the Finnish Competition Act on October 25, 1999. The initial waiting period
lasts for 30 days from the date that the notification is considered to be
complete. If the Finnish competition authority has not issued its decision prior
to the end of the waiting period, the Merger may be consummated. During the
initial waiting period, the Finnish competition authority may decide to open a
further investigation of the transaction. If a further investigation is
instituted, the transaction may not be consummated until a further three month
period has expired, which may be extended to five months in certain cases, or
the transaction has been cleared. Furthermore, the Finnish competition authority
may decide to refer the Merger to the Finnish competition council. If the case
is referred to the Finnish competition council, the Merger may not be
consummated until the Finnish competition council has issued its decision or a
three month period has expired. The Finnish competition council has the
authority to block the Merger. There can be no assurance that a challenge to the
Merger on competition law grounds will not be made or that, if such a challenge
is made, it would not be successful in Finland.
The Merger must also be notified under the Swedish Competition Act and, if
the Merger is notified prior to consummation, it cannot be completed until it
has been approved or a 30 day waiting period has expired. FaciliCom filed for
approval under the Swedish Competition Act on October 22, 1999. The 30 day
waiting period may be extended if it is decided that the notification was
incomplete or inaccurate. During the waiting period, the Swedish competition
authority may decide to open a further investigation of the Merger, in which
case the Swedish competition authority has six months to render a final
decision. Swedish law does not require that notification be completed prior to
consummation of the Merger; however, if the filing is delayed and the Swedish
competition authority decides that the Merger creates or strengthens a dominant
position that would reduce competition in Sweden, it can declare the Merger void
with respect to Sweden or impose conditions. There can be no assurance that a
challenge to the Merger on competition law grounds will not be made or that, if
such a challenge is made, it would not be successful in Sweden.
A post-Merger informational filing must be made in Denmark.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the World Access Board of Directors
with respect to the Merger, holders of World Access Voting Stock should be aware
that certain members of World Access' management and Board of Directors,
including certain of the new directors and executive officers to be appointed in
connection with the Merger, have interests in the Merger that are in addition to
the interests of stockholders of World Access in general.
Stock Options Held by John D. Phillips. In connection with the execution
of the Merger Agreement, Armstrong, intending to ensure that John D. Phillips
devotes his full time and attention to the management and operations of the
Surviving Corporation, required Mr. Phillips to enter into a Letter Agreement,
dated August 17, 1999, under which Mr. Phillips agreed not to sell or transfer
any of his shares of World Access for a specified period of time. See "RELATED
AGREEMENTS -- Letter Agreement." In consideration for Mr. Phillips' entering
into the Letter Agreement, the Board of Directors of World Access has agreed to
accelerate the exercisability of currently outstanding options held by Mr.
Phillips under the World Access 1998 Stock Option Plan for 1,000,000 shares of
World Access Common Stock at an exercise price of $12.75 per share. The options
were originally scheduled to vest ratably over a four-year period. Upon
consummation of the Merger, all of these options will be immediately
exercisable.
Release of Escrowed Shares of World Access Common Stock. In connection
with the acquisition of Cherry U.S. and Cherry U.K. by World Access and related
transactions in December 1998, World Access
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entered into a Share Exchange Agreement and Plan of Reorganization, dated as of
May 12, 1998 ("the Share Exchange Agreement"), by and among World Access, WAXS,
Inc., Cherry U.K. and Renaissance Partners II ("Renaissance") pursuant to which
Renaissance, a Georgia general partnership and the sole shareholder of Cherry
U.K., exchanged all of the issued and outstanding ordinary shares of Cherry U.K.
for 1,875,000 shares of World Access Common Stock, of which 1,250,000 shares
were placed in escrow and constitute part of the Escrowed Shares subject to
release or forfeiture based on whether Cherry U.S. and Cherry U.K. meet certain
specified financial performance criteria. These criteria have not yet been
satisfied. Pursuant to the Operating Agreement, dated December 11, 1998, for
Resurgens Partners, LLC ("Resurgens"), of which Renaissance is the manager,
Renaissance made a capital contribution to Resurgens in the form of its interest
in 937,500 shares of World Access Common Stock, of which 625,000 shares were
part of the Escrowed Shares. Notwithstanding the performance criteria set forth
in the Share Exchange Agreement, the Share Exchange Agreement provides that all
of the Escrowed Shares shall be released and shall no longer be subject to
forfeiture upon a "Change of Control" of World Access. For the purposes of the
Share Exchange Agreement, the Merger constitutes a Change of Control of World
Access.
Mr. Phillips has sole voting and dispositive power over the shares of World
Access Common Stock owned of record by Renaissance and Resurgens. Upon
consummation of the Merger, Mr. Phillips (and his affiliates) and Carl E.
Sanders and John P. Imlay, Jr., each a director of World Access and each of whom
will be a director of the Surviving Corporation, will be entitled to receive the
economic benefit of approximately 416,667, 40,000 and 26,667, respectively, of
the released Escrowed Shares, and Mr. Phillips will have the sole voting and
dispositive power over all of the Escrowed Shares.
Release of Contingent Shares of World Access Common Stock. In connection
with the acquisition of Cherry U.S. by World Access in December 1998, pursuant
to an Agreement and Plan of Merger and Reorganization, dated May 12, 1998 (the
"Cherry Merger Agreement"), by and among World Access, WAXS, Inc., WA Merger
Corp. and Cherry U.S., WNS received 1,310,430 shares of World Access Common
Stock and is expected to receive an additional 541,902 to 822,986 shares later
in 1999 when all creditor claims against Cherry U.S. are finalized. In addition,
6,250,000 shares of World Access Common Stock were placed in escrow and
constitute part of the Escrowed Shares which are subject to release or
forfeiture based on whether Cherry U.K. and Cherry U.S. meet certain specified
financial criteria. Approximately 4,200,000 of these Escrowed Shares are owned
of record by WNS. See "PRINCIPAL STOCKHOLDERS". These performance criteria have
not yet been satisfied. Notwithstanding these performance criteria, the Cherry
Merger Agreement provides that all of these Escrowed Shares shall be released
and shall no longer be subject to forfeiture upon a "Change of Control" of World
Access. For purposes of the Cherry Merger Agreement, the Merger constitutes a
Change of Control of World Access, and WNS will be entitled to receive
approximately 4,200,000 of these Escrowed Shares. Lawrence C. Tucker, a director
of World Access and a World Access designee for director of the Surviving
Corporation, is a member of the board of directors of MCI WorldCom.
While it cannot be determined at this time whether the relevant financial
performance criteria for release of the Escrowed Shares would have been in fact
satisfied, the World Access Board of Directors, in approving the Merger
Agreement, considered the release of the Escrowed Shares in the context of the
overall Merger transaction and believed that the relevant performance criteria
would have been satisfied and that the Escrowed Shares would have been released
in February 2000 and 2001, irrespective of the Merger.
FaciliCom Director Designees. The holders of the Series C Preferred Stock
are entitled to elect up to four of the twelve members of the Board of Directors
of the Surviving Corporation after the Merger, subject to maintaining specified
levels of stock ownership. The initial designee directors of the holders of the
Series C Preferred Stock are Dru A. Sedwick, Kirby J. Campbell, Bryan Cipoletti
and Walter J. Burmeister. Each of Messrs. Sedwick, Campbell and Cipoletti are
executive officers of AHI and hold other executive and board positions
(including on FaciliCom's board of directors) with AHI affiliated companies and
will continue to do so after the consummation of the Merger. Mr. Burmeister is
the President and Chief Executive Officer, as well as a board member, of
FaciliCom and will serve as the President of the Surviving Corporation. See "THE
MERGER -- Management of the Surviving Corporation."
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Mr. Cipoletti holds FaciliCom stock options with respect to 200 shares of
FaciliCom Common Stock. In connection with the Merger, these options are
expected to be exchanged for cash or, in the event of a Cash Shortfall, World
Access Common Stock. See "THE MERGER -- Consideration to be Received in the
Merger -- Treatment of FaciliCom Stock Options".
Mr. Burmeister is the beneficial owner of 24,067 shares of FaciliCom Common
Stock, representing 10.6% of the outstanding FaciliCom Common Stock, and will be
entitled to receive approximately $5.6 million in cash or, in the event of a
Cash Shortfall, World Access Common Stock and approximately 38,300 shares of
Series C Preferred Stock pursuant to the Merger. Mr. Burmeister also holds
FaciliCom stock options with respect to 2,502 shares of FaciliCom Common Stock
and, in connection with the Merger, these options are expected to be exchanged
for $587,000 in cash and non-qualified options to acquire 195,474 shares of
World Access Common Stock. In the event of a Cash Shortfall, Mr. Burmeister
would receive additional non-qualified options to acquire World Access Common
Stock in exchange for his FaciliCom stock options. See "THE
MERGER -- Consolidation to be Received in the Merger -- Treatment of FaciliCom
Stock Options".
Management Information Services Agreement Between FaciliCom and
AHI. FaciliCom has an agreement with AHI through which AHI provides billing and
management information support services, including call collection, processing,
rating and reporting for FaciliCom and its subsidiaries. AHI also provides
FaciliCom with access to experienced management information professionals and
computer programmers on an as-needed basis. This service agreement expires on
September 30, 2002, and the parties anticipate that AHI will continue to render
services to the Surviving Corporation. The terms of the billing and management
information support services that AHI will provide to the Surviving Corporation
have not been determined. The costs for such services currently are as follows:
- professional services are billed at a rate of $65.00 per hour;
- call detail record processing including data center management,
operations and hardware services are billed at a rate per minute of use
dependent upon call volumes;
- AS/400 disk storage services are billed at a rate of $25.00 per gigabyte;
- software applications and direct hardware FaciliCom purchases are billed
at actual cost; and
- telecommunications facilities are billed based on the actual facilities
it uses.
AHI has the right to increase the cost of its services upon 30 days'
written notice if there is a change in the underlying cost of providing these
services. During the nine months ended June 30, 1999 and the fiscal years ended
September 30, 1998, 1997 and 1996, FaciliCom paid $2.2 million, $1.5 million,
$431,000 and $0, respectively, to AHI for the management information services
AHI provided FaciliCom under this agreement and an earlier agreement. AHI
provides similar services to other telecommunications companies with which it is
affiliated. FaciliCom believes that the terms of this agreement with AHI are
competitive with similar agreements offered by other providers of management
information services.
Financial Accounting Services Agreement Between FaciliCom and
AHI. FaciliCom also has an agreement with Judco Management Services, Inc.
("Judco"), an affiliate of AHI, for Judco to provide certain financial
accounting services to it, such as payroll, accounts payable, human resources
support services and income tax return preparation and compliance services. The
costs for these services currently are as follows:
- human resources and payroll processing is billed at $6.75 per check;
- accounts payable invoice and check processing is billed at $3.50 per
invoice; and
- income tax return preparation is billed at $80.00 per hour.
Judco has the right to increase the cost of its services upon 30 days'
written notice if there is a change in the underlying cost of providing these
services. Judco provides similar services to other telecommunications companies
with which it is affiliated at comparable prices. FaciliCom believes that the
benefits to it of this agreement with Judco are competitive with similar
agreements offered by providers of comparable financial and accounting services.
This service agreement is expected to continue in effect at the Closing. The
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agreement expires on September 30, 2000, and shall be automatically renewed for
successive terms of two years unless either party provides written notice of its
intent to terminate the agreement at least 180 days prior to the end of the
original term of any then current term. The terms of the financial accounting
services that Judco will provide to the Surviving Corporation have not been
determined.
FaciliCom's payments under this agreement for the nine months ended June
30, 1999 and for fiscal 1998, fiscal 1997 and fiscal 1996 were $43,818, $30,000,
$8,000 and $7,000, respectively.
AHI Guarantee of FaciliCom Credit Facility and Letters of Credit. AHI
serves as guarantor for any borrowings up to $35.0 million under FaciliCom's
credit facility with Key Corporate Capital, Inc. In addition, an affiliated
company of AHI has issued letters of credit on behalf of FaciliCom totaling
approximately $6.9 million as of September 30, 1999. The termination of this
guarantee and these letters of credit on terms and conditions reasonably
satisfactory to FaciliCom are conditions to the obligations of FaciliCom and the
FaciliCom Shareholders to complete the Merger.
FaciliCom Management Relationship with TMG. Mr. Burmeister is a
co-founder, stockholder and director of TMG, an international telecommunications
consulting company. During 1997, FaciliCom used the consulting services of TMG
principally for exploring business development opportunities in Latin America.
Since FaciliCom's inception, Mr. Burmeister has devoted less than 5% of his
working time to performing services for this entity. Since becoming an employee
of FaciliCom, Mr. Burmeister has not provided to FaciliCom any of the services
provided by TMG. FaciliCom paid TMG fees of $0; $60,000; $85,097 and $58,274 in
the nine months ended June 30, 1999 and the fiscal years ended September 30,
1998, 1997 and 1996, respectively. FaciliCom believes that the fees it has paid
to TMG for its services are competitive with those charged for comparable
services by other companies in the industry.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, a copy of which is attached hereto as Appendix A and is incorporated
herein by reference. The description of the Merger Agreement contained in this
Proxy Statement does not purport to be complete and is qualified in its entirety
by reference to the Merger Agreement. All stockholders of World Access are urged
to read the Merger Agreement in its entirety.
THE MERGER
Pursuant to the Merger Agreement and on the terms and subject to the
conditions set forth therein, at the Effective Time, FaciliCom will be merged
with and into World Access, with World Access continuing as the surviving
corporation.
The Closing will take place on the second business day following the
satisfaction or waiver of the conditions to Closing set forth in the Merger
Agreement, unless another time or date is agreed to in writing by the parties to
the Merger Agreement. The Merger will become effective at the time the
Certificate of Merger is filed with the Secretary of State of the State of
Delaware or at such subsequent time as is specified in the Certificate of
Merger. The Certificate of Merger will be filed on the Closing Date.
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
The Certificate of Incorporation and Bylaws of World Access, as in effect
immediately prior to the Effective Time, will be the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until amended as provided
therein or by applicable law.
DIRECTORS OF THE SURVIVING CORPORATION
As of the Effective Time, the board of directors of the Surviving
Corporation will consist of twelve members. Six of these twelve are the current
directors of World Access who will continue as directors of the Surviving
Corporation; four of these twelve will be designated by the holders of the
Series C Preferred Stock; and two of these twelve are the two individuals who
have agreed to join the World Access Board of Directors in connection with the
Private Placement. The current directors of World Access are John D. Phillips,
Stephen J. Clearman, Mark A. Gergel, John P. Imlay, Carl E. Sanders and Lawrence
C. Tucker. The initial designees of the holders of the Series C Preferred Stock
to the Surviving Corporation's board of directors are Dru A. Sedwick, Kirby J.
Campbell, Bryan Cipoletti and Walter J. Burmeister. The two individuals who will
join the World Access Board of Directors in connection with the Private
Placement are Massimo Prelz Oltramonti and John P. Rigas. See "THE
MERGER -- Management of the Surviving Corporation."
MERGER CONSIDERATION
At the Effective Time, all issued and outstanding shares of FaciliCom
Common Stock will be canceled and converted into the right to receive, in the
aggregate, (i) 380,000 shares of Series C Preferred Stock, less that number of
shares of Series C Preferred Stock (on an as converted basis) as is equal to the
number of shares of World Access Common Stock to be the subject of any stock
options granted by World Access in consideration of the cancellation of certain
of the FaciliCom stock options, and (ii), if World Access is able to issue and
sell shares of World Access Common Stock on or prior to the Closing Date as
provided below, an amount in cash equal to the net proceeds from any such sales
up to $56.0 million less the amount of any cash to be paid to holders of certain
of the FaciliCom stock options in consideration for the cancellation of such
options (as more fully described below). World Access has agreed to use its
reasonable best efforts to issue and sell, not later than such time as all other
conditions to Closing have been satisfied or waived, such number of shares of
World Access Common Stock as will result in net proceeds to World Access of
$56.0 million. If World Access is unable to obtain net proceeds of $56.0 million
on or prior to the Closing, then each of the stockholders of FaciliCom will be
entitled to receive (A) at the Closing, that number of shares of World Access
Common Stock as is equal to the amount of the Cash Shortfall that is
attributable to each of them, as determined by FaciliCom, divided by the Market
Price (as defined in the Certificate of Designation of the
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Series C Preferred Stock) on the Trading Day (as defined in the Certificate of
Designation of the Series C Preferred Stock) immediately preceding the Closing
Date and (B) at such time or times as may be requested by the stockholders of
FaciliCom, provided that such persons have contracted to sell all shares of
World Access Common Stock issued pursuant to clause (A) above, such number of
shares of World Access Common Stock for resale by such persons as will result,
together with the net proceeds from the resale by such persons of any World
Access Common Stock issued pursuant to clause (A) above or this clause (B), in
net cash proceeds to such persons equal to the Cash Shortfall attributable to
such persons and (ii) each of such optionholders of FaciliCom will be entitled
to receive at such time or times as may be requested by said optionholders, such
number of shares of World Access Common Stock for resale by such optionholders
as will result in net cash proceeds to such persons equal to the Cash Shortfall
attributable to such persons. World Access has agreed to file a registration
statement on Form S-3 (the "Registration Statement") in connection with the
resale, pursuant to open market or privately negotiated transactions, of the
World Access Common Stock to be received as Merger consideration and to maintain
the effectiveness of the registration statement until its obligation to issue
shares of World Access Common Stock under the Merger Agreement has been
satisfied and to pay certain expenses in connection with such registration. Each
of the persons entitled to receive any such shares of World Access Common Stock
shall be entitled to, and shall use its reasonable best efforts to, resell any
such shares on such terms and conditions as it may determine in its sole
discretion; provided that any such resale shall be on an arm's-length basis.
TREATMENT OF FACILICOM STOCK OPTIONS
On or prior to the Effective Time, FaciliCom will use its reasonable best
efforts to take all action necessary (including obtaining consents from
optionholders if necessary) such that each FaciliCom stock option granted by
FaciliCom under the FaciliCom 1998 Stock Option Plan will cease to represent a
right to acquire shares of non-voting FaciliCom Common Stock. At the Closing, it
is expected that FaciliCom stock options under the FaciliCom 1998 Stock Option
Plan will be cancelled and exchanged for cash and new stock options of World
Access. In connection with the Merger, FaciliCom has also granted new stock
options under the FaciliCom 1999 Stock Option Plan which will convert upon
consummation of the Merger into non-qualified options to purchase approximately
1.9 million shares of World Access Common Stock. See "THE MERGER -- Treatment of
FaciliCom Stock Options."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain mutual and customary representations
and warranties by World Access and FaciliCom relating, among other things, to
the following matters (which representations and warranties are subject, in all
cases, to disclosures made in the documents and reports filed with the
Commission by World Access and the documents and reports filed with the
Commission by FaciliCom, as applicable, and in certain cases, to materiality
qualifications): (i) corporate organization, standing, qualification and similar
corporate matters; (ii) capital structure; (iii) corporate power and authority
to enter into the Merger Agreement and the transactions contemplated thereby and
the absence of conflict of the Merger Agreement and the transactions
contemplated thereby with charter documents, laws or agreements; (iv) the filing
of required reports and documents with the Commission since January 1, 1998 and
the absence of material misstatements or omissions therein; (v) the accuracy of
information contained in the Proxy Statement and the Consent Solicitation
Statement (as defined below); (vi) approval of the Board of Directors and, in
the case of FaciliCom, approval of the FaciliCom board of directors and the
FaciliCom Shareholders; (vii) required stockholder vote; (viii) the absence of
litigation; (ix) the absence of certain changes or events that have had or would
reasonably be expected to have a Material Adverse Effect (as defined in the
Merger Agreement) on World Access or FaciliCom; (x) environmental matters; (xi)
intellectual property matters; (xii) the absence of brokers or finders except
DLJ, in the case of World Access, and Lehman Brothers, in the case of FaciliCom;
(xiii) tax matters; (xiv) contracts and commitments; and (xv) employee matters.
In addition to the foregoing, the Merger Agreement also contains a
representation and warranty by World Access that World Access has received the
opinion of DLJ, dated as of the date of the Merger Agreement, to the effect
that, as of such date, the Merger consideration is fair, from a financial point
of view, to World Access.
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Pursuant to the Merger Agreement, none of the respective representations or
warranties of World Access or FaciliCom will survive the consummation of the
Merger.
COVENANTS OF THE PARTIES
Covenants Relating to the Pre-Closing Conduct of Business. Pursuant to the
Merger Agreement, pending the consummation of the Merger, World Access and
FaciliCom have agreed to the following with respect to the conduct of their
respective businesses, except to the extent that FaciliCom or World Access, as
applicable, otherwise consents or as disclosed in their respective disclosure
schedules:
Ordinary Course. Each of World Access and FaciliCom will, and will cause
their respective Subsidiaries (as defined in the Merger Agreement) to, conduct
its business in the usual, regular and ordinary course in all material respects,
in substantially the same manner as previously conducted, and will use all
reasonable efforts to preserve intact its present lines of business, maintain
its rights and franchises and preserve its relationships with customers,
suppliers and others having significant business dealings with it.
Dividend; Changes in Share Capital. Subject to certain exceptions, neither
World Access nor FaciliCom will, and will not permit any of their Subsidiaries
to (i) declare or pay any dividends on or make other distributions in respect of
any of its capital stock, (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of, or in substitution for, shares of its capital stock, or
(iii) repurchase, redeem or otherwise acquire any shares of its capital stock or
any securities convertible into or exchangeable for any shares of such capital
stock. Neither World Access nor FaciliCom nor any of their Subsidiaries may
propose to do any of the foregoing.
Governing Documents. Unless required by the rules and regulations of
Nasdaq, neither World Access nor FaciliCom nor any of their Subsidiaries will
amend its certificate of incorporation, bylaws or other governing documents.
Acquisitions and Sales. Except for acquisitions the fair market value of
the total consideration for which does not exceed $20.0 million or sales which
are not material to World Access and its Subsidiaries or FaciliCom and its
Subsidiaries, as the case may be, taken as a whole, neither party may acquire or
sell or agree to acquire or sell by merging or consolidating with, or by
purchasing or selling a substantial equity interest in a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or sell or agree to acquire or sell any assets (other than the
acquisition or sale of assets used in the operations of the business of World
Access and its Subsidiaries or FaciliCom and its Subsidiaries, as the case may
be, in the ordinary course).
Accounting Methods; Income Tax Elections. Neither World Access nor
FaciliCom may (i) change its methods of accounting, (ii) change its fiscal year,
(iii) make any material tax election, (iv) adopt or change any tax accounting
method, (v) enter into any closing agreement, (vi) surrender any right to claim
a refund of taxes, (vii) enter or take any other action which would have the
effect of materially increasing the tax liability or materially decreasing any
Tax Asset (as defined in the Merger Agreement) of World Access or FaciliCom, as
the case may be, other than in the ordinary course of business consistent with
past practice.
Certain Agreements. Neither World Access nor FaciliCom may enter into any
agreement or arrangement that limits or otherwise restricts it or any of its
affiliates or any successor thereto from engaging or competing in any line of
business or in any geographic area which agreement or arrangement would have a
Material Adverse Effect on the Surviving Corporation after giving effect to the
Merger. World Access and FaciliCom will not permit any of their respective
Subsidiaries to enter into any such agreement or arrangement.
Other Actions. Neither World Access nor FaciliCom may take any action
which could reasonably be expected to cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
Litigation. Neither World Access nor FaciliCom nor any of their respective
Subsidiaries may settle or compromise any litigation, except where the amount
paid or payable, in each case, does not exceed $250,000.
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In addition to the foregoing, FaciliCom has agreed that neither it nor any
of its Subsidiaries will, subject to certain exceptions, issue, deliver or sell,
or authorize or propose the issuance, delivery or sale of, any shares of its
capital stock of any class, any FCI Voting Debt (as defined in the Merger
Agreement) or any securities convertible into or exercisable for, or any rights,
warrants or options to acquire, any such shares or FCI Voting Debt, or enter
into any agreement with respect to any of the foregoing.
Additional Agreements.
Preparation of Consent Solicitation Statement. World Access and FaciliCom
have agreed to cooperate and prepare a consent solicitation statement (the
"Consent Solicitation Statement") of World Access for use in connection with the
solicitation by World Access of waivers from the holders of the FaciliCom Notes
issued under the FaciliCom Indenture, of their right, pursuant to the FaciliCom
Indenture to require FaciliCom to repurchase their FaciliCom Notes at 101% of
the principal amount of such FaciliCom Notes in connection with the change of
control of FaciliCom resulting from the consummation of the Merger and any other
waivers or amendments of the FaciliCom Indenture required to consummate the
Merger or as may be agreed to by World Access and FaciliCom. World Access and
FaciliCom have agreed to cooperate and use reasonable best efforts to obtain the
FaciliCom Notes Consent as soon as reasonably practicable following the date of
the Merger Agreement. World Access is seeking the FaciliCom Notes Consent
through the Exchange Offer. See "RELATED TRANSACTIONS -- Exchange Offer for
FaciliCom Notes."
Access to Information. Subject to the provisions of the Confidentiality
Agreement, dated July 27, 1999, between FaciliCom and World Access, during the
period prior to the Effective Time, each party will have access during normal
business hours to the other party's properties, books, contracts, commitments,
records, officers and employees as the other party may reasonably request.
Reasonable Efforts. Each party agrees to use reasonable efforts to take,
or cause to be taken, all actions necessary, proper or advisable under
applicable laws and regulations to consummate the Merger and the other
transactions contemplated by the Merger Agreement as soon as practicable after
the date of the Merger Agreement, including (i) preparing and filing as promptly
as practicable all documentation to effect all necessary applications, notices,
petitions, filings and other documents and to obtain as promptly as practicable
all consents, waivers, licenses, orders, registrations, approvals, permits and
authorizations necessary or advisable to be obtained from any third party and/or
any governmental entity, including preparing and filing any notifications
required by the HSR Act and, (ii) taking all reasonable steps as may be
necessary to obtain all such material consents, waivers, licenses,
registrations, permits, authorizations, tax rulings, orders and approvals.
Acquisition Proposals. Without the prior written consent of World Access
(in the case of FaciliCom and the FaciliCom Shareholders) or FaciliCom (in the
case of World Access), pending the Closing, each of FaciliCom, the FaciliCom
Shareholders and World Access has agreed that neither it nor any of its
Subsidiaries will, and that it will use its reasonable best efforts to cause its
employees, officers, directors, affiliates, agents and representatives
(including any investment banker, financial advisor, attorney or accountant
retained by any of them) not to, directly or indirectly, initiate, solicit,
encourage or knowingly facilitate (including by way of furnishing information or
engaging in discussions or negotiations) any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar action involving FaciliCom or World Access, or any purchase or sale
of a material portion of the assets (including stock of Subsidiaries) of such
party, taken as a whole, or any purchase or sale of, or tender or exchange offer
for, a material portion of the equity securities of such party (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal").
Each of FaciliCom, the FaciliCom Shareholders and World Access has further
agreed that neither it nor any of its Subsidiaries shall, and that it shall use
its reasonable best efforts to cause it and its Subsidiaries' officers,
directors, affiliates, employees, agents and representatives (including any
investment banker, financial advisor, attorney or accountant retained by it or
any of its Subsidiaries) not to, directly or indirectly, have any discussion
with or provide any confidential information or data to any person or entity
relating to an Acquisition Proposal, or engage in any negotiations concerning an
Acquisition Proposal, or knowingly facilitate any effort or attempt to make or
implement an Acquisition Proposal or accept an
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Acquisition Proposal. Each of FaciliCom, the FaciliCom Shareholders and World
Access has agreed that it and its Subsidiaries will, and will cause its
officers, directors, affiliates, employees, agents and representatives to,
immediately cease and cause to be terminated any activities, discussions or
negotiations existing as of the date of the Merger Agreement with respect to any
Acquisition Proposal.
Fees and Expenses. All Expenses (as defined in the Merger Agreement)
incurred in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such Expenses, except
if the Merger is consummated, the Surviving Corporation will pay, or cause to be
paid, any and all Expenses incurred by FaciliCom (but not the FaciliCom
Shareholders, except with respect to such Expenses incurred for the general
benefit of both FaciliCom and the FaciliCom Shareholders). Expenses incurred by
any of the parties in connection with obtaining the FaciliCom Notes Consent will
be paid by World Access.
Public Announcements. World Access, FaciliCom and the FaciliCom
Shareholders have agreed not to issue a press release or any other public
statement with respect to the Merger Agreement or the transactions contemplated
thereby except pursuant to a joint communications plan, unless otherwise
required by applicable law or by obligations pursuant to any listing agreement
with or rules of any securities exchange.
Termination of Tax Sharing Agreements. FaciliCom will cause all Tax
Sharing Agreements (as defined in the Merger Agreement) to which FaciliCom or
any of its Subsidiaries is a party to be terminated and be of no further force
and effect after the Effective Time. Armstrong will indemnify the Surviving
Corporation from any liability for the taxes of any Person (other than FaciliCom
and its Subsidiaries) which are imposed on the Surviving Corporation either as a
transferee, or pursuant to United States Treasury Regulations Section
1.1502-6(a) or pursuant to any other provision of federal, territorial, state,
local or foreign law or regulations, together with any cost and expenses
incurred by the Surviving Corporation in connection therewith.
Indemnification. For a period of six years from the Effective Time, the
Surviving Corporation will indemnify each present or former officer or director
of FaciliCom and its Subsidiaries against all claims, losses, liabilities,
damages, judgments, fines and reasonable fees, costs and expenses, including
attorney's fees and disbursements incurred in connection with any claim, action,
suit, proceeding or investigation arising out of or pertaining to (i) the fact
that such person is or was an officer or director of FaciliCom or any of its
Subsidiaries, or (ii) 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 permitted under applicable law.
Reservation. World Access has agreed to at all times reserve and keep
available out of its authorized World Access Common Stock, solely for the
purpose of issue or delivery upon conversion or exchange of the Series C
Preferred Stock, such number of shares of World Access Common Stock as will then
be issuable or deliverable upon the conversion or exchange of all outstanding
shares of Series C Preferred Stock.
Registration and Listing. If any shares of World Access Common Stock
required to be reserved for purposes of conversion or exchange of the Series C
Preferred Stock require registration with or approval of any Governmental Entity
(as defined in the Merger Agreement) under any federal or state or other
applicable law before such World Access Common Stock may be issued or delivered
upon conversion or exchange, World Access will endeavor in good faith and as
expeditiously as possible to cause such World Access Common Stock to be duly
registered or approved, as the case may be. So long as the World Access Common
Stock is quoted on Nasdaq or listed on any national securities exchange, World
Access, if permitted by the rules of such system or exchange, will quote or list
and keep quoted or listed on such system or exchange, upon official notice of
issuance, all World Access Common Stock issuable or deliverable upon conversion
or exchange of the Series C Preferred Stock and all World Access Common Stock,
if any, issuable as part of the Merger consideration.
Board of Directors. If the Series C Preferred Stock is converted into
World Access Common Stock pursuant to the provisions of the Certificate of
Designation for the Series C Preferred Stock, the FaciliCom Shareholders and any
of their affiliates and the initial transferees holding the shares of World
Access Common Stock issued upon any such conversion (the "FaciliCom Holders")
will be entitled to designate four persons to be nominated and recommended by
the Board of Directors for election to the Board of Directors at any
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meeting of the stockholders of World Access, provided that on the record date
for determining the stockholders of World Access entitled to vote on such
matters, there are shares of World Access Common Stock held by the FaciliCom
Holders constituting at least 15% of the shares of World Access Common Stock
issued upon conversion of the Series C Preferred Stock (the "Minimum
Condition"). Notwithstanding the foregoing, if the shares of World Access Common
Stock held by the FaciliCom Holders represent less than 20% of the total of all
issued and outstanding shares of capital stock of World Access entitled to vote
for the election of directors, then, so long as the Minimum Condition is
satisfied, the FaciliCom Holders will be entitled to designate that number of
persons to be nominated and recommended by the Board of Directors for election
to the Board of Directors at any meeting of the stockholders of World Access so
that the FaciliCom Holders would have, assuming the election of such nominees,
at all times such number of persons nominated by them as members of the Board of
Directors which, as a percentage of the total number of the members of the Board
of Directors, is at least equal to the percentage of all issued and outstanding
shares of capital stock entitled to vote for the election of directors held by
such persons on the record date for determining the stockholders of World Access
entitled to vote on such matters. World Access has agreed to cause any such
designees to be included in the slate of nominees recommended by the Board of
Directors to the stockholders of World Access for election as directors and to
use its reasonable best efforts to cause the election of such designees. In the
event any such designee ceases to serve as a director for any reason, World
Access will use its reasonable best efforts to cause the vacancy resulting
thereby to be filled by a designee of the FaciliCom Holders.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligation to Effect the Merger. The respective
obligations of FaciliCom, the FaciliCom Shareholders and World Access to effect
the Merger are subject to the satisfaction or waiver at or prior to the Closing
Date of the following conditions:
No Injunctions or Restraints; Illegality. No laws have been adopted or
promulgated, and no temporary restraining order, preliminary or permanent
injunction or other order issued by a court or other Governmental Entity of
competent jurisdiction is in effect, (i) having the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger or (ii) which
otherwise would reasonably be expected to have a Material Adverse Effect on the
Surviving Corporation after giving effect to the Merger; provided, however, that
the existence of any such order or injunction will not relieve a party from
proceeding to Closing if such party, in violation of its obligations to use
reasonable best efforts to consummate the Merger, was the cause of, or whose
action or failure to act resulted in, any such order or injunction.
HSR Act. The waiting period (and any extension thereof) applicable to the
Merger under the HSR Act has been terminated or has expired.
Stockholder Approval. The affirmative vote of holders of shares of World
Access Common Stock, Series A Preferred Stock and Series B Preferred Stock,
voting together as a single class, representing a majority of the total votes
cast at a meeting of the holders of such shares, in connection with the approval
of the Merger Agreement, the Merger and the issuance of World Access Common
Stock and Series C Preferred Stock (the "Share Issuance") has been obtained.
FaciliCom Notes Consent. World Access is seeking the FaciliCom Notes
Consent through the Exchange Offer.
Conditions to Obligations of World Access. The obligations of World Access
to effect the Merger are subject to the satisfaction of, or waiver by World
Access, on or prior to the Closing Date of the following additional conditions:
Representations and Warranties. Each of the representations and warranties
of FaciliCom set forth in the Merger Agreement are true and correct as of the
date of the Merger Agreement and as of the Closing Date as though made on and as
of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any such
representations and warranties are true and correct as of such date), except
where any failures to be true and correct would not have a
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Material Adverse Effect on the Surviving Corporation or its Subsidiaries, and
World Access has received a certificate of the chief executive officer and the
chief financial officer of FaciliCom to such effect.
Performance of Obligations of FaciliCom and the FaciliCom
Shareholders. FaciliCom and the FaciliCom Shareholders have performed or
complied in all material respects with all material agreements and covenants
required to be performed by them under the Merger Agreement at or prior to the
Closing Date, and World Access has received a certificate of the chief executive
officer and the chief financial officer of FaciliCom to such effect.
Consents and Approvals. Other than (i) the filing of the Certificate of
Merger, (ii) filings pursuant to the HSR Act and (iii) any consent, approval or
waiver required under the Bank Credit Facility between Key Corporate Capital,
Inc. and FaciliCom International LLC and AHI dated May 21, 1999 (the "FaciliCom
Credit Agreement") all consents, approvals and actions of, filings with and
notices to any Governmental Entity required to consummate the Merger, the Share
Issuance and the transactions contemplated hereby, or of any other third party
required of FaciliCom or any of its Subsidiaries to consummate the Merger and
the transactions contemplated by the Merger Agreement, the failure of which to
be obtained or taken would have a Material Adverse Effect on the Surviving
Corporation after giving effect to the Merger, have been obtained; provided,
however, that the failure to obtain such consent or approval will not relieve
World Access from proceeding to Closing if World Access' action or failure to
act, in violation of its obligations to use reasonable best efforts to
consummate the Merger was the cause of, or resulted in the failure to, obtain
such consent or approval.
No Material Change. FaciliCom and its Subsidiaries, taken as a whole, have
not suffered, since the date of the Merger Agreement, a Material Adverse Effect,
other than any change, circumstance or effect relating (i) to the economy or
financial markets in general, or (ii) in general to the industries in which
FaciliCom operates and not specifically relating to FaciliCom.
Opinion of Counsel to FaciliCom. World Access has received from Simpson
Thacher & Bartlett an opinion, dated the Closing Date, in a form reasonably
satisfactory to World Access.
Conditions to Obligations of FaciliCom and the FaciliCom Shareholders. The
obligations of FaciliCom and the FaciliCom Shareholders to effect the Merger are
subject to the satisfaction of, or waiver by FaciliCom, on or prior to the
Closing Date of the following additional conditions:
Representations and Warranties. Each of the representations and warranties
of World Access set forth in the Merger Agreement are true and correct as of the
date of the Merger Agreement and as of the Closing Date as though made on and as
of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any such
representations and warranties are true and correct as of such date), except
where any failures to be true and correct would not have a Material Adverse
Effect on the Surviving Corporation or its Subsidiaries, and FaciliCom has
received a certificate of the chief executive officer and the chief financial
officer of World Access to such effect.
Performance of Obligations of World Access. World Access has performed or
complied in all material respects with all material agreements and covenants
required to be performed by it under the Merger Agreement at or prior to the
Closing Date, and FaciliCom has received a certificate of the chief executive
officer and the chief financial officer of World Access to such effect.
Consents and Approvals. Other than the filing of the Certificate of Merger
and filings pursuant to the HSR Act, all consents, approvals and actions of,
filings with and notices to any Governmental Entity required to consummate the
Merger, the Share Issuance and the transactions contemplated by the Merger
Agreement, or of any other third party required of World Access or any of its
Subsidiaries to consummate the Merger and the transactions contemplated thereby,
the failure of which to be obtained or taken would have a Material Adverse
Effect on the Surviving Corporation after giving effect to the Merger, have been
obtained; provided, however, that the failure to obtain such consent or approval
will not relieve FaciliCom from proceeding to Closing if FaciliCom's action or
failure to act, in violation of its obligations to use reasonable best efforts
to consummate the Merger, was the cause of, or resulted in, the failure to
obtain such consent or approval.
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No Material Change. World Access and its Subsidiaries, taken as a whole,
have not suffered, since the date of the Merger Agreement, a Material Adverse
Effect, other than any change, circumstance or effect relating (i) to the
economy or financial markets in general, (ii) in general to the industries in
which World Access operates and not specifically relating to World Access or
(iii) to the trading price of World Access as reported by Nasdaq.
Opinion of Counsel to World Access. FaciliCom has received from Long
Aldridge & Norman LLP an opinion, dated the Closing Date, in a form reasonably
satisfactory to FaciliCom and the FaciliCom Shareholders.
Registration Rights Agreement. World Access has executed and delivered to
the FaciliCom Shareholders a Registration Rights Agreement, a copy of which is
attached hereto as Exhibit 6.3 to Appendix A (the "Registration Rights
Agreement").
Registration Statement. Unless the FaciliCom stockholders and
optionholders receive cash in the aggregate amount of $56.0 million at the
Closing, World Access has filed the Registration Statement in connection with
the resale, pursuant to open market or privately negotiated transactions, of the
World Access Common Stock to be received by such persons under the Merger
Agreement, which Registration Statement is in a form that can be declared
effective by the staff of the Commission.
Certificate of Designation. The Certificate of Designation of the Series C
Preferred Stock has been duly filed by World Access with the Secretary of State
of the State of Delaware in accordance with the Delaware General Corporation
Law.
Approval of World Access Series A Preferred Stock. Any required approval
of the Merger Agreement and the transactions contemplated thereby by the holders
of the Series A Preferred Stock has been obtained and is valid and in effect.
AHI Guarantee. The guarantee by AHI of FaciliCom's obligations under its
credit facility with Key Corporate Capital, Inc. has been terminated without any
liability on the part of AHI and on terms and conditions reasonably satisfactory
to FaciliCom.
Certain Letters of Credit. Certain letters of credit issued by an
affiliate of AHI on behalf of FaciliCom have been terminated without any
liability on the part of such affiliate and on terms and conditions reasonably
satisfactory to FaciliCom.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time:
1. By mutual written consent of World Access, FaciliCom and the
FaciliCom Shareholders;
2. By either World Access or FaciliCom and the FaciliCom Shareholders,
if FaciliCom and the FaciliCom Shareholders (in the case of World Access)
or World Access (in the case of FaciliCom and the FaciliCom Shareholders)
fail to comply in any material respect with any of its or their material
covenants or agreements contained in the Merger Agreement, which failure to
so comply has not been cured within ten business days following receipt by
such other party of written notice of such failure to comply; provided,
however, that if any such breach is curable by the breaching party through
the exercise of the breaching party's reasonable efforts and for so long as
the breaching party shall be so using its best efforts to cure such breach,
the non-breaching party may not terminate the Merger Agreement pursuant to
this provision; and provided, further, that no party will have the right to
terminate the Merger Agreement pursuant to this provision if such party is
then failing to comply in any material respect with any of its covenants or
agreements contained in the Merger Agreement;
3. By either World Access or FaciliCom and the FaciliCom Shareholders,
if there has been a breach by FaciliCom and the FaciliCom Shareholders (in
the case of World Access) or World Access (in the case of FaciliCom and the
FaciliCom Shareholders) of any representations or warranties, which breach
has not been cured within ten business days following receipt by such other
party of written notice of such
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failure to comply; provided, however, that if any such breach is curable by
the breaching party through the exercise of the breaching party's
reasonable efforts and for so long as the breaching party shall be so using
its reasonable efforts to cure such breach, the non-breaching party may not
terminate the Merger Agreement pursuant to this provision; and provided
further, that this right of termination does not apply to such breaches
which would not have a Material Adverse Effect on the Surviving Corporation
and its Subsidiaries after giving effect to the Merger;
4. By either FaciliCom and the FaciliCom Shareholders or World Access,
if the Effective Time does not occur on or before February 28, 2000 (the
"Termination Date"); provided, however, that the right to terminate the
Merger Agreement pursuant to this provision will not be available to any
party whose action or failure to fulfill any obligation under the Merger
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date and any such
action or failure constitutes a breach of the Merger Agreement;
5. By either FaciliCom and the FaciliCom Shareholders or World Access
if any Governmental Entity (i) has issued an order, decree or ruling or
taken any other action (which the parties have used their reasonable best
efforts to resist, resolve or lift, as applicable) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
Merger Agreement, and such order, decree, ruling, or other action has
become final and nonappealable or (ii) has failed to issue an order, decree
or ruling or to take any other action (which order, decree, ruling or other
action the parties have used their reasonable best efforts to obtain, in
the case of each of (i) and (ii)) which is necessary to fulfill certain
Closing conditions of one or more of the parties and such denial of a
request to issue such order, decree, ruling or take such other action has
become final and nonappealable; provided, however, that the right to
terminate the Merger Agreement will not be available to any party whose
action or failure to fulfill any obligation under the Merger Agreement has
been the cause of such action or inaction and any such action or failure
constitutes a breach of the Merger Agreement; or
6. By World Access or FaciliCom and the FaciliCom Shareholders if the
adoption of the Merger Agreement by the stockholders of World Access has
not been obtained by reason of the failure to obtain the required World
Access vote, in each case upon the taking of such vote at a duly held
meeting of stockholders of World Access, or at any adjournment thereof.
AMENDMENT
The Merger Agreement may be amended by FaciliCom and World Access at any
time before or after approval of the matters presented in connection with the
Merger by the stockholders of FaciliCom and World Access. The Merger Agreement
may not be amended except by an instrument in writing signed on behalf of each
of FaciliCom, the FaciliCom Shareholders and World Access.
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RELATED AGREEMENTS
VOTING AGREEMENT
FaciliCom, Armstrong, BFV, Epic, WNS, The 1818 Fund and John D. Phillips
("Phillips" and, together with WNS and The 1818 Fund, the "World Access
Shareholders" and each, a "World Access Shareholder") have entered into a Voting
Agreement, dated August 17, 1999 (the "Voting Agreement"), pursuant to which
each World Access Shareholder has agreed to vote all of its or his shares of
World Access Voting Stock (whether owned beneficially or of record), as well as
any other shares such World Access Shareholder acquires beneficial ownership of
after the date of the Voting Agreement, in favor of the Merger and the adoption
and approval of the Merger Agreement and the transactions contemplated thereby.
Pursuant to the Voting Agreement, the World Access Shareholders have also agreed
to vote against (i) any action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation or agreement of World Access under the Merger Agreement, and (ii) any
action or agreement that would materially impede, interfere with, delay or
postpone or that would reasonably be expected to discourage the Merger. The
Voting Agreement, and all rights and obligations thereunder, terminate upon the
first to occur of (a) the Effective Time, (b) the termination of the Merger
Agreement, or (c) February 28, 2000. As of the date of this Proxy Statement, the
World Access Shareholders own, beneficially or of record, shares of World Access
Voting Stock representing approximately 24.1% of the World Access Voting Stock
voting together as a single class. A copy of the Voting Agreement is attached as
Appendix C to this Proxy Statement.
LETTER AGREEMENT
John D. Phillips and Armstrong have entered into the Letter Agreement,
pursuant to which Mr. Phillips has agreed not to sell or transfer, directly or
indirectly, any shares of World Access Common Stock held by him (including his
personal interest in such shares held by Renaissance and Resurgens and any
shares received upon exercise of World Access stock options or warrants) without
the prior written consent of Armstrong for so long as Armstrong or any of its
affiliates remains a stockholder of the Surviving Corporation. The provisions of
the Letter Agreement terminate upon (i) Mr. Phillips' death or disability, (ii)
any decision to remove, or to not reelect, Mr. Phillips as the Chief Executive
Officer of the Surviving Corporation in which at least 50% of the directors
elected by the holders of the Series C Preferred Stock (or, upon conversion into
or other acquisition of World Access Common Stock, by 50% of the directors
nominated, designated or elected by the FaciliCom Shareholders (or their
affiliates)) vote in favor of such removal or fail to vote in favor of such
reelection, (iii) the 5th anniversary of the Closing in the event that Mr.
Phillips is no longer Chief Executive Officer of the Surviving Corporation for
any reason, and (iv) upon a change of control of World Access.
REGISTRATION RIGHTS AGREEMENT
World Access has agreed to enter into the Registration Rights Agreement
with certain of the FaciliCom stockholders pursuant to which World Access will
grant certain rights to such persons to cause World Access to register their
shares of World Access Common Stock, including World Access Common Stock issued
or issuable upon conversion of the Series C Preferred Stock (and securities
issued or issuable with respect to such shares of World Access Common Stock by
way of dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise)
(collectively, the "Registrable Securities"). A copy of the Registration Rights
Agreement is included as Exhibit 6.3 to the Merger Agreement attached as
Appendix A to this Proxy Statement.
Demand Registration Rights. At any time after the date of the Registration
Rights Agreement, one or more holders (the "Initiating Holders") of an aggregate
of at least 25% of the total number of shares of World Access Common Stock
issued or issuable upon conversion of the Series C Preferred Stock may demand
that World Access register its or their Registrable Securities under the
Securities Act (a "Demand Registration"). Other holders of Registrable
Securities and holders of World Access securities with the right to participate
in a World Access registration statement will have the right to include their
shares in a Demand Registration;
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provided, however, that if the facilitating broker/dealer or, in an underwritten
offering, the lead managing underwriter advises that marketing factors require a
limitation on the number of shares to be sold, the number of shares to be
included in the sale or underwriting and registration will be allocated pro rata
among the Initiating Holders and the holders seeking registration on the basis
of the estimated proceeds from the sale of the securities covered by such
registration. World Access will not be required to effect (i) more than four (4)
Demand Registrations in the aggregate or (ii) more than one (1) Demand
Registration within any 12-month period occurring immediately subsequent to the
effectiveness of a Demand Registration. Notwithstanding the foregoing, a Demand
Registration will not be deemed to have been effected unless, among other
things, (x) a registration statement with respect thereto has become effective
and remains effective in compliance with the Securities Act until the earlier of
(1) such time as all of such Registrable Securities covered by the registration
statement have been disposed of and (2) 180 days after the effective date of
such registration with respect to any registration statement filed pursuant to
Rule 415 under the Securities Act or (y) if, when effective, it includes fewer
than 75% of the number of shares of Registrable Securities of the Initiating
Holders which were the subject matter of the demand.
Piggyback Registration Rights. Subject to certain exceptions set forth in
the Registration Rights Agreement, if at any time World Access proposes to
register any shares of World Access Common Stock or any securities convertible
into World Access Common Stock under the Securities Act by registration on any
form other than Forms S-4 or S-8, each holder of Registrable Securities will
have the right to include in such registration statement such number of
Registrable Securities as it requests. If the managing underwriter of any
underwritten offering informs World Access that the number of Registrable
Securities requested to be included in such registration would materially affect
such offering, then World Access will include in such offering, to the extent of
the number and type that World Access is advised can be sold in such offering,
and subject to the rights described in section 2.1(f) of the Registration Rights
Agreement, dated as of April 21, 1999, between World Access and The 1818 Fund,
first, all securities proposed to be sold by World Access for its own account,
second, such Registrable Securities requested to be included in such
registration and securities of other persons who have the right to require that
their securities be included in such registration, pro rata on the basis of the
estimated proceeds from the sale thereof, and third, all other securities
proposed to be registered.
Expenses. World Access will pay all registration expenses (except for
underwriting commissions or discounts) in connection with the first and second
Demand Registrations. Each holder of Registrable Securities whose Registrable
Securities are included in the third and fourth Demand Registrations will pay
its proportionate share of the registration expenses (including underwriting
commissions or discounts) on the basis of such holder's share of the gross
proceeds from the sale of its Registrable Securities. World Access will pay all
registration expenses in connection with any piggyback registration.
Expiration of Registration Rights. Registrable Securities will cease to be
Registrable Securities and, therefore, no longer have registration rights
pursuant to the Registration Rights Agreement when (i) a registration statement
with respect to the sale of such securities has become effective under the
Securities Act and such securities have been disposed of in accordance with the
registration statement, (ii) they have been sold as permitted by Rule 144 under
the Securities Act and the purchaser thereof does not receive "restricted
securities" as defined in Rule 144, (iii) they have been otherwise transferred,
new certificates for them not bearing a legend restricting further transfer have
been delivered by World Access and subsequent public distribution of them will
not, in the opinion of counsel for the holders, require registration under the
Securities Act or (iv) they have ceased to be outstanding.
AGREEMENT TO EXCHANGE AND CONSENT
On October 12, 1999, World Access entered into the Exchange Agreement with
FaciliCom and the Majority Holders pursuant to which World Access agreed, under
certain circumstances, to make the Exchange Offer for outstanding FaciliCom
Notes. See "RELATED TRANSACTIONS -- Exchange Offer for FaciliCom Notes." Under
the Exchange Agreement, subject to the consummation of the Merger and the
Exchange Offer, the Majority Holders agreed to consent to amendments to the
FaciliCom Indenture that would materially reduce the obligations of FaciliCom
(and the Surviving Corporation after the Merger) under
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the FaciliCom Indenture. These proposed amendments (the "Proposed Amendments")
would, among other things, remove restrictions on FaciliCom's ability to (i)
consolidate and/or merge, (ii) incur additional debt, (iii) make payments to
affiliates, (iv) make dividend payments, (v) sell capital stock of its
subsidiaries, (vi) enter into transactions with shareholders, (vii) create liens
on its property, (viii) sell assets, (ix) transfer its existing business, and
(x) enter into sale-leaseback transactions. In addition, the Proposed Amendments
would eliminate FaciliCom's obligations to (i) purchase the FaciliCom Notes in
connection with certain transactions, (ii) hold money for the payment of the
FaciliCom Notes in trust, (iii) pay taxes, (iv) maintain its properties, (v)
maintain insurance coverage, and (vi) provide the holders of FaciliCom Notes
with financial statements.
Pursuant to the Exchange Agreement, subject to the consummation of the
Merger and the FaciliCom Notes Consent and the effectiveness of a registration
statement filed with the Commission in connection with the Exchange Offer, the
Majority Holders have agreed to exchange each $1,000 principal amount of
FaciliCom Notes held by them for (i) $1,000 principal amount of Exchange Notes
(ii) the Stock Consideration, and (iii) $10 in cash.
PRIVATE PLACEMENT AGREEMENTS
In connection with the Private Placement, World Access entered into
separate agreements (each, a "Private Placement Agreement") with a group of
institutional and sophisticated investors (each, an "Investor") on October 13,
1999. The purchase and sale of the shares of World Access Common Stock pursuant
to the Private Placement (the "Private Placement Closing") will occur on the
date, and is subject to the closing, of the Merger. Additional conditions to
each Investor's obligation to proceed to the Private Placement Closing include
(i) the termination or expiration of the waiting period (and any extension
thereof) under the HRS Act related to the transactions contemplated by such
Investor's Private Placement Agreement, if applicable, and (ii) the
non-occurrence of a Material Adverse Effect (as defined in the Private Placement
Agreement) with respect to World Access. The number of shares of World Access
Common Stock to be acquired by each Investor is determined by dividing (x) the
total consideration paid by each such Investor by (y) the average of the daily
closing price of World Access Common Stock as reported on Nasdaq for the five
consecutive trading days ending at the close of trading on the trading day
before the Private Placement Closing, provided that the denominator may not be
less than $13.00 or more than $17.00. Under each Private Placement Agreement,
World Access has agreed to file with the Commission, no later than thirty (30)
days following the Private Placement Closing, a registration statement on Form
S-3 in connection with the resale of the shares of World Access Common Stock
acquired thereunder. Each Private Placement Agreement may be terminated by
either the Investor or World Access at any time prior to the Private Placement
Closing (a) upon termination of the Merger Agreement or (b) if the Private
Placement has not occurred on or before December 31, 1999.
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RELATED TRANSACTIONS
EXCHANGE OFFER FOR FACILICOM NOTES
Pursuant to the Merger Agreement, the obligations of FaciliCom, the
FaciliCom Shareholders and World Access to effect the Merger are subject to the
satisfaction or waiver on or prior to the Closing Date of certain conditions,
including the parties having obtained the FaciliCom Notes Consent. The Majority
Holders have agreed to approve the Proposed Amendments pursuant to the terms of
the Exchange Agreement, by which they, among other things, are waiving their
right to require World Access (as the Surviving Corporation) to repurchase their
FaciliCom Notes at a price of 101% of the aggregate principal amount
outstanding. The Exchange Agreement provides that, in connection with the
Merger, holders of FaciliCom Notes will be entitled to tender their notes and
receive in exchange for each $1,000 in principal amount of their FaciliCom Notes
(i) $1,000 principal amount of Exchange Notes, (ii) $10 in cash, and (iii) the
Stock Consideration. In the event World Access subsequently generates cash or
cash equivalents from certain asset sales and is required to make an offer to
repurchase the Exchange Notes at 100% of principal, the repurchase price will be
reduced by the then current market value of the Stock Consideration. The closing
of the Exchange Offer is expected to occur immediately after the closing of the
Merger.
Accrued and unpaid interest on the FaciliCom Notes validly tendered and
accepted for exchange by World Access will be paid to the person in whose name
such notes are tendered or such other person as indicated on the letter of
transmittal for tendered FaciliCom Notes. Interest on the FaciliCom Notes
tendered in the Exchange Offer will cease to accrue interest on the day prior to
the date of issue of the Exchange Notes. Payment will be made on January 15,
2000 or, if the exchange date has not occurred prior to January 1, 2000, on July
15, 2000.
The exchange offer will expire at 12:00 p.m., New York City time, on
December 7, 1999, or such later date and time to which World Access extends it.
The Exchange Offer is subject to certain conditions, which World Access may
waive, including (i) consummation of the Merger, (ii) tender by the holders of
at least a majority of the aggregate principal amount of the FaciliCom Notes in
the Exchange Offer; and (iii) consent by the holders of at least a majority of
the aggregate principal amount of the FaciliCom Notes to the proposed amendments
to the FaciliCom Indenture.
The Exchange Notes will bear interest at the rate of 13.25% per annum.
Interest on the Exchange Notes will begin to accrue on the date they are issued.
The Exchange Notes will mature on January 15, 2008, and interest on the Exchange
Notes will be payable semiannually in arrears on January 15 and July 15 of each
year, commencing January 15, 2000, or July 15, 2000 if the Exchange Notes are
issued subsequent to January 1, 2000. The Exchange Notes will be unsecured
obligations and will rank senior in right of payment to any existing and future
obligations of the Surviving Corporation expressly subordinated in right of
payment to the Exchange Notes and pari passu in right of payment with all other
existing and future unsecured and unsubordinated obligations of the Surviving
Corporation, including trade payables. The Indenture governing the Exchange
Notes (the "World Access Indenture") will limit the incurrence of certain
additional indebtedness by the Surviving Corporation and its restricted
subsidiaries, but will not limit the amount of indebtedness incurred to finance
the cost of telecommunications assets.
On the date of issuance of the Exchange Notes, a pro rata portion of the
securities and/or cash pledged in connection with the issuance of the FaciliCom
Notes will be deposited in a pledge account created for the benefit of the
holders of the Exchange Notes. The Exchange Notes will be secured by a first
priority security interest in the pledged securities and/or cash deposited in
the pledge account.
The Exchange Notes will be redeemable at the Surviving Corporation's
option, in whole or in part at any time on or after January 15, 2003, at
specified redemption prices commencing at 106.625% in 2003 and declining to 100%
in 2006 plus accrued and unpaid interest to the date of redemption. In addition,
at any time prior to January 15, 2001, the Surviving Corporation will be able to
redeem from time to time up to 35.0% of the originally issued aggregate
principal amount of the Exchange Notes at a redemption price of 110.5% of the
aggregate principal amount thereof, plus accrued and unpaid interest to the date
of redemption with the net cash proceeds of one or more public equity offerings,
provided that at least 65.0% of the originally issued aggregate principal amount
of the Exchange Notes remains outstanding after such redemption. Upon the
occurrence of a change of control of the Surviving Corporation, each holder of
the Exchange Notes will have
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the right to require the Surviving Corporation to repurchase all or any part of
its Exchange Notes at a purchase price equal to 101.0% of the principal amount
thereof, plus accrued and unpaid interest, to the date of purchase.
The terms and conditions of the Exchange Notes will provide that the
Surviving Corporation may not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets to, any person or permit any person to merge with or into it
and the Surviving Corporation may not permit any of its restricted subsidiaries
to enter into any such transaction or series of transactions if such transaction
or series or transactions, in the aggregate, would result in the sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Surviving Corporation or
the Surviving Corporation and its restricted subsidiaries, taken as a whole, to
any other person or persons, unless: (i) either the Surviving Corporation will
be the continuing person, or the person (if other than the Surviving
Corporation) formed by such consolidation or into which the Surviving
Corporation is merged or that acquired or leased such property and assets of the
Surviving Corporation will be a corporation organized and validly existing under
the laws of the United States of America or any jurisdiction thereof and shall
expressly assume all of the obligations of the Surviving Corporation with
respect to the Exchange Notes; (ii) immediately after giving effect to such
transaction on a pro forma basis, no default or event of default under the
Exchange Notes shall have occurred and be continuing; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Surviving
Corporation, or any person becoming the successor obligor of the Exchange Notes,
shall have a consolidated net worth equal to or greater than the consolidated
net worth of the Surviving Corporation immediately prior to such transaction;
and (iv) immediately after giving effect to such transaction on a pro forma
basis, the Surviving Corporation, or any person becoming the successor obligor
of the Exchange Notes, as the case may be, could incur at least $1.00 of
indebtedness under the "Limitation on Indebtedness" covenant of the Exchange
Notes.
The Exchange Notes also contain covenants which will restrict or limit the
ability of the Surviving Corporation or any of its subsidiaries to, among other
things, (i) pay any dividends or other distributions on its capital stock, (ii)
issue and sell capital stock, (iii) enter into any transactions with any
affiliate, (iv) create or incur any liens on its assets, properties or capital
stock, (v) enter into any sale-leaseback transaction, (vi) undertake any asset
sale or investment in third parties or (vii) undertake certain business
activities.
As part of the Exchange Offer, World Access is soliciting consents from the
holders of the FaciliCom Notes to some amendments to the FaciliCom Indenture
under which the FaciliCom Notes were issued. The proposed amendments materially
reduce obligations of FaciliCom (and the Surviving Corporation) under the
FaciliCom Indenture by, among other things:
(1) removing restrictions on FaciliCom's ability to:
- consolidate and/or merge;
- incur additional debt;
- make payments to affiliates;
- make dividend payments;
- sell capital stock of its subsidiaries;
- enter into transactions with shareholders;
- create liens on its property;
- sell assets;
- transfer its existing business; and
- enter into sale-leaseback transactions; and
(2) eliminating FaciliCom's obligations to:
- hold money for payment of the FaciliCom notes in trust;
- pay taxes;
- maintain its properties;
- maintain insurance coverage; and
- provide the holders of FaciliCom notes with financial statements.
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If the consents of the holders of a majority of the aggregate principal
amount of the FaciliCom notes are received, the FaciliCom indenture will be
amended in accordance with the Proposed Amendments.
PRIVATE PLACEMENT
Pursuant to the Private Placement Agreements, World Access has received
commitments from the Investors to purchase $75.0 million of World Access Common
Stock. The majority of the proceeds obtained from the Private Placement will be
used by World Access to finance the cash portion of the Merger consideration,
including related fees and expenses. The balance of such proceeds will be used
to support working capital requirements of World Access. The closing of the
Private Placement is to occur on the date, and is subject to closing, of the
Merger.
RELEASE OF ESCROWED SHARES
Prior to October 1997, Cherry U.S. and Cherry U.K. were under the
operational and financial direction and control of James R. Elliot, Chairman of
the Board and Chief Executive Officer of Cherry U.S., an 80.1% owner of the
outstanding shares of the common stock of Cherry U.S. (the "Cherry U.S. Stock"),
and the owner of all the issued and outstanding capital stock of Cherry U.K.
(the "Cherry U.K. Stock"). In the second half of 1997, Mr. Elliot sought
financial assistance from WNS, already a significant creditor of Cherry U.S. and
the owner of the remaining outstanding shares of Cherry U.S. Stock. In October
1997, Cherry U.S., WNS, Cherry U.K., Mr. Elliot and John D. Phillips entered
into a series of agreements pursuant to which Cherry U.S. retained Mr. Phillips
to engineer a turnaround and reorganization of the financially ailing Cherry
U.S. These agreements also culminated in, among other things, Mr. Phillips
obtaining the right to acquire at least 50% of the total outstanding amount of
each of the Cherry U.K. Stock and the Cherry U.S. Stock held by Mr. Elliot. In
December 1997, Mr. Elliot resigned as director, officer and employee of Cherry
U.S. and exercised his right to have all of his Cherry U.K. Stock sold to Mr.
Phillips.
As part of the Cherry Acquisition, World Access entered into the Cherry
Merger Agreement and the Share Exchange Agreement. The Cherry Merger Agreement
provided that the creditors of Cherry U.S., in satisfaction of their claims
against Cherry U.S., would receive an aggregate of 9,375,000 shares of World
Access Common Stock, of which 6,250,000 shares were to be held in escrow as part
of the Escrowed Shares and are subject to forfeiture in the event the combined
business of Cherry U.S. and Cherry U.K. failed to meet certain financial
performance criteria. As a creditor of Cherry U.S., WNS became eligible to
receive up to a total of 6,638,096 shares of World Access Common Stock. Of that
amount, 1,310,430 shares have been issued to WNS. Upon resolution of the total
amount of claims against Cherry U.S. for which shares of World Access Common
Stock are to be issued, WNS will receive a minimum of 541,902 and a maximum of
822,986 additional shares. Assuming the full amount of the Escrowed Shares are
issued to Cherry U.S. creditors, WNS could receive a minimum of 3,911,172 and a
maximum of 4,504,680 shares, depending on the resolution of the total claims
against Cherry U.S. for which shares are to be issued. At the present time, WNS
votes or has the power to direct the voting of an aggregate of 6,074,372 shares
of World Access Common Stock.
The Share Exchange Agreement provided that Renaissance, a Georgia limited
partnership formed by, among others, Mr. Phillips to be the sole shareholder of
Cherry U.K., and the manager of Resurgens, was to receive an aggregate of
1,875,000 shares of World Access Common Stock, 625,000 of which were issued upon
consummation of the Cherry Acquisition and 1,250,000 of which are held in escrow
as part of the Escrowed Shares and are subject to forfeiture in the event the
combined business of Cherry U.S. and Cherry U.K. fail to meet certain financial
performance criteria.
While it cannot be determined at this time whether the relevant financial
performance criteria for the release of the Escrowed Shares would have been in
fact satisfied, the World Access Board of Directors, in approving the Merger
Agreement, considered the release of the Escrowed Shares as a result of the
Merger and in the context of the overall Merger transaction and believed that
the relevant performance criteria would have been satisfied and that the
Escrowed Shares would have been released in February 2000 and 2001, irrespective
of the Merger. See "THE MERGER -- Interests of Certain Persons in the Merger."
59
<PAGE> 68
PRINCIPAL STOCKHOLDERS
World Access' only issued and outstanding classes of voting securities are
the World Access Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock. As of the date of this Proxy Statement, there were 45,236,057
shares of World Access Common Stock issued and outstanding, 50,000 shares of
Series A Preferred Stock issued and outstanding (convertible into 4,347,826
shares of World Access Common Stock) and 23,174 shares of Series B Preferred
Stock issued and outstanding (convertible into 1,448,375 shares of World Access
Common Stock).
The following table sets forth information regarding the beneficial
ownership of World Access Common Stock, Series A Preferred Stock and Series B
Preferred Stock as of November 3, 1999 for (i) each person known by World Access
to beneficially own more than 5% of the World Access Common Stock, Series A
Preferred Stock or Series B Preferred Stock, (ii) each director and each nominee
for director individually, (iii) each executive officer who would be a "Named
Executive Officer" of World Access under Rule 402 of Regulation S-K and (iv) all
directors and Named Executive Officers as a group.
<TABLE>
<CAPTION>
SHARES UNDER
EXERCISABLE TOTAL SHARES
SHARES OPTIONS AND BENEFICIALLY PERCENTAGE
NAME OWNED(1) WARRANTS(2) OWNED(1) OWNED
---- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
WORLD ACCESS COMMON STOCK
- -------------------------------
WorldCom Network Services, Inc.(3)
500 Clinton Center Drive
Clinton, MS 39056......................... 6,074,372 -- 6,074,372 13.4%
The 1818 Fund III, L.P.(4)
59 Wall Street
New York, NY 10005........................ 4,347,826 1,739,130 6,086,956 11.9
John D. Phillips+++(6)...................... 1,875,000 1,184,340 3,059,340 6.6
Stephen J. Clearman+++...................... 52,210 167,000 219,210 *
Mark A. Gergel+++(7)........................ 26,683 237,500 264,183 *
John P. Imlay, Jr.+......................... 19,900 179,000 198,900 *
Carl E. Sanders+............................ 10,000 179,000 189,000 *
Lawrence C. Tucker+(4)...................... 4,347,826 1,839,130 6,186,956 12.0
A. Lindsay Wallace++(7)..................... 309 122,380 122,689 *
Walter J. Burmeister#....................... -- -- -- *
Kirby J. Campbell#.......................... -- -- -- *
Bryan Cipoletti#............................ -- -- -- *
Massimo Prelz Oltramonti#................... -- -- -- *
John P. Rigas#.............................. -- -- -- *
Dru A. Sedwick#............................. -- -- -- *
All directors and executive officers as a
group (9 persons)(8)...................... 6,331,928 3,908,350 10,240,278 19.1
SERIES A PREFERRED STOCK
- --------------------------
The 1818 Fund III, L.P.(4).................. 50,000 20,000 70,000 100.0
SERIES B PREFERRED STOCK
- --------------------------
Gregory A. Somers
2301 Ohio Drive, Suite 285
Plano, TX 75093........................... 13,760 -- 13,760 59.4
Teleplus Telecommunications, Inc.
111 Main Street
Webb, IA.................................. 3,032 -- 3,032 13.1
</TABLE>
60
<PAGE> 69
<TABLE>
<CAPTION>
SHARES UNDER
EXERCISABLE TOTAL SHARES
SHARES OPTIONS AND BENEFICIALLY PERCENTAGE
NAME OWNED(1) WARRANTS(2) OWNED(1) OWNED
---- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
R. Scott Birdwell
3626 N. Hall Street, Suite 908
Dallas, TX 75219.......................... 2,276 -- 2,276 9.8
Kelli J. Somers
2301 Ohio Drive, Suite 285
Plano, TX 75093........................... 2,270 -- 2,270 9.7
</TABLE>
- ---------------
* Less than one percent
+ Director
++ Named Executive Officer
# Nominee for Director
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. 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 January 2,
2000.
(3) In connection with World Access' acquisition of Cherry U.S., World Access
issued shares of World Access Common Stock to the creditors of Cherry U.S.,
including WNS, a wholly owned subsidiary of MCI WorldCom, in satisfaction of
their claims against Cherry U.S. WNS is eligible to receive up to a total of
6,638,096 shares of World Access Common Stock. Of this amount, 1,310,430
shares have been issued to WNS. Upon resolution of the total amount of
claims against Cherry U.S. for which World Access' shares are to be issued,
WNS will receive a minimum of 541,902 and a maximum of 822,986 shares. This
distribution is expected to occur by the end of 1999. Additional shares of
World Access Common Stock were placed into escrow in connection with the
acquisition and were to be released to Cherry U.S.'s creditors in February
2000 and February 2001, subject to the attainment of certain earnings levels
by Cherry U.S. and Cherry U.K. during 1999 and 2000, respectively. Assuming
the full amount of shares held in escrow are issued to Cherry U.S.'s
creditors, WNS could receive a minimum of 3,911,172 and a maximum of
4,504,680 shares, depending on the resolution of the total claims against
Cherry U.S. for which shares are to be issued. At the present time, WNS
votes or has the power to direct the voting of an aggregate of 6,074,372
shares of World Access Common Stock. The Merger will constitute a "Change of
Control" of World Access under the Cherry Merger Agreement and as a result,
upon consummation of the Merger, all shares currently held in escrow will be
released to Cherry U.S.'s creditors. See "THE MERGER -- Interests of Certain
Persons in the Merger."
(4) Represents 4,347,826 shares of World Access Common Stock issuable upon the
conversion of 50,000 shares of Series A Preferred Stock owned of record by
The 1818 Fund, a private equity partnership, and 1,739,130 shares of World
Access Common Stock reserved for issuance upon the conversion of 20,000
shares of Series A Preferred Stock, which is subject to an option held by
The 1818 Fund. The general partner of The 1818 Fund is BBH. Mr. Tucker, a
partner at BBH, is deemed to be the beneficial owner of these shares due to
his role as co-manager of The 1818 Fund.
(5) Represents shares of World Access Common Stock issuable upon the conversion
of shares of Series B Preferred Stock.
(6) Represents 937,500 shares owned of record by Renaissance and 937,500 shares
owned of record by Resurgens. Renaissance is the manager of Resurgens and,
as such, has sole voting and dispositive power over the shares of the World
Access Common Stock owned of record by Resurgens. Mr. Phillips beneficially
owns a majority of the general partnership interests of Renaissance and, as
such, has sole voting and dispositive power over the shares of the World
Access Common Stock owned of record by Renaissance and sole indirect voting
and dispositive power over the shares of the World Access Common Stock owned
of record by Resurgens. Of the aggregate 1,875,000 shares of World Access
Common Stock owned of record by Renaissance and Resurgens, an aggregate of
1,250,000 shares (625,000 owned of
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<PAGE> 70
record by each of Renaissance and Resurgens) were placed into escrow in
connection with the acquisition of Cherry U.K. and were to be released to
Renaissance and Resurgens in February 2000 and February 2001, subject to the
attainment of certain earnings levels by Cherry U.S. and Cherry U.K. during
1999 and 2000, respectively. The Merger will constitute a "Change of
Control" of World Access under the Share Exchange Agreement and as a result,
upon consummation of the Merger, all shares currently held in escrow will be
released to Renaissance and Resurgens. SEE "THE MERGER -- Interests of
Certain Persons in the Merger."
(7) Includes the following shares of World Access Common Stock acquired through
voluntary employee contributions to World Access' 401(k) Plan and
contributed to the 401(k) Plan by World Access under a matching contribution
program offered to all 401(k) Plan participants: Mr. Gergel -- 3,933 shares;
and Mr. Wallace -- 309 shares.
(8) Includes W. Tod Chmar and Dennis E. Bay, two Named Executive Officers of
World Access that currently have no beneficial ownership of World Access
Common Stock and no stock options or warrants exercisable on or before
January 2, 2000.
62
<PAGE> 71
BUSINESS OF WORLD ACCESS
World Access provides international long distance voice and data services
and proprietary network equipment to the global telecommunications markets. The
World Access Telecommunications Group provides wholesale international long
distance service through a combination of owned and leased international network
facilities, various international termination relationships and resale
arrangements with other international long distance service providers. The World
Access Equipment Group develops, manufactures and markets intelligent
multiplexers, digital microwave radio systems, digital switches, billing and
network telemanagement systems, cellular base stations, fixed wireless local
loop systems and other telecommunications network products. To support and
complement its product sales, World Access also provides its customers with a
broad range of network design, engineering, testing, installation and other
value-added services.
TELECOMMUNICATIONS GROUP
The Telecommunications Group was established in December 1998 in connection
with the acquisition of Cherry U.S. and Cherry U.K. Cherry U.S. operated under
Chapter 11 bankruptcy protection from October 1997 to December 1998, with
debtor-in-possession financing provided by a wholly-owned subsidiary of MCI
WorldCom, its largest creditor. John D. Phillips, who was appointed President
and Chief Executive Officer of World Access in December 1998, was appointed
President and Chief Executive Officer of Cherry U.S. and Cherry U.K. in October
1997 and oversaw a restructuring program that consisted of the recruitment of an
experienced management team, a complete redesign of the operating network, the
installation of a new billing system, the establishment of a network management
center and the negotiation of new direct connectivity agreements. The monthly
revenues of Cherry U.S. and Cherry U.K. increased from a nominal amount in early
1998 to in excess of $20.0 million in December 1998 as a result of the
restructuring program.
The Telecommunications Group owns or leases gateway switching facilities in
Los Angeles, Dallas, Chicago, Newark and London, England. This internal network
consists of an international gateway switch in each city linked by leased
inter-machine trunking facilities and owned trans-Atlantic cable facilities.
These switches serve as customer "meet points" and digital routing facilities
for transmission of calls to their ultimate destination via cost efficient
routing. Additionally, the switches record call data for monitoring customer
usage, reviewing transmission route implementation, customer billing and
analysis of vendor invoices for accuracy.
The Telecommunications Group also owns an Indefeasible Right of Use ("IRU")
in Globesystem Atlantic to connect its domestic switches with the United
Kingdom. This submarine fiber optic system is composed of two cables, (i)
CANTAT-3, which links Europe with Canada, and (ii) CANUS-1, which links Canada
with the United States. This IRU allows calls to be delivered on a more cost
effective basis when compared to other short-term variable arrangements.
The Telecommunications Group's long distance traffic is terminated through
agreements with other carriers. These include agreements directly with a
wholly-owned or partially-owned government carrier such as Post Telegraph &
Telephone operators ("PTT Direct") or with a licensed alternative long-distance
carrier. Transit agreements ("Transits") are also in place with PTT Direct for
termination services in which the PTT Direct acts as an intermediary for
delivery to other destination countries. Agreements with carriers who act as
intermediaries for other carriers are also used ("Resale Agreements"). These
arrangements all provide for termination on a variable, per minute basis with
rates being set for different termination points. A combination of PTT Directs,
Transits and Resale Agreements is used to take advantage of price opportunities
available in the market.
EQUIPMENT GROUP
The Equipment Group offers wireline and wireless switching, transport and
access products for the global telecommunications marketplace. These products
allow telecommunications service providers to build and
63
<PAGE> 72
upgrade their networks to provide a wide range of voice, data and video services
to business and residential customers. Prior to 1998, a significant portion of
the products sold by the Equipment Group were Northern Telecom switching
products and reengineered cellular base stations and related mobile network
equipment. As a result of Word Access' acquisitions of Advanced TechCom, Inc.
("ATI"), NACT Telecommunications, Inc. ("NACT") and Telco during 1998, and the
strategic decision made in December 1998 to sell its wireline switch resale
business, the Equipment Group's products are now predominantly proprietary in
nature and include advanced technology platforms and software applications.
The Equipment Group markets digital telephone switching products that are
used for local, tandem, toll and cellular applications. The switching product
line consists of the STX switching system and integrated NTS billing systems.
Current users of the Equipment Group's switching products are primarily
U.S.-based local exchange carriers, inter-exchange carriers, competitive access
providers, private network operators and other telecommunications service
providers.
The Equipment Group also develops, manufactures and markets transport
products, which are used for high-capacity connectivity between points within a
communications network, and access products, which are used to provide
integrated access to subscribers for network services. These products are
primarily digital and provide for the movement of any combination of voice, data
and video traffic across wireline or wireless media. Major products offered
include broadband transmission and network access products engineered by Telco,
ATI microwave and millimeterwave radio systems and cellular base stations and
related mobile network equipment sold by World Access' subsidiary, Cellular
Infrastructive Supply, Inc. ("CIS").
Telco's products are deployed at the edge of the service providers'
networks to provide organizations with a flexible, cost-effective means of
transmitting voice, data and video traffic over public or private networks.
These products are used in a wide variety of applications by network service
providers, such as long distance carriers, regional Bell operating companies,
independent and competitive local exchange providers, as well as government
agencies, electric utilities, wireless service operators, and major
corporations. Its products, which can be found most often in telephone company
central offices and in private communications networks, perform functions that
range from basic signaling and multiplexing of low speed data and voice traffic
to digital fiber optic transmission of high-speed, high-capacity services over
SONET networks.
RECENT DEVELOPMENTS
On October 28, 1999, World Access announced the financial results of its
quarter ended September 30, 1999. The unaudited financial information of World
Access presented below, in the opinion of World Access' management, include all
the significant normal and recurring adjustments necessary for fair presentation
of the financial position and results of operations for the periods presented
(in thousands, except per share data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF CONTINUING OPERATIONS DATA:
Carrier service revenues.................................... $130,470 $ 629 $329,361 $ 1,892
Equipment sales............................................. 72,569 35,619 194,929 92,303
-------- ------- -------- --------
Total Sales........................................ 203,039 36,248 524,290 94,195
Cost of carrier services.................................... 112,508 590 287,777 1,631
Cost of services network.................................... 4,006 38 13,969 114
Cost of equipment sold...................................... 42,234 18,395 110,924 47,748
Amortization of acquired technology......................... 1,200 -- 3,600 --
-------- ------- -------- --------
Total Cost of Sales................................ 159,948 19,023 416,270 49,493
-------- ------- -------- --------
Gross Profit....................................... 43,091 17,225 108,020 44,702
Research and development.................................... 4,509 1,778 13,282 4,256
Selling, general and administrative......................... 15,596 4,938 43,105 11,493
</TABLE>
64
<PAGE> 73
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Amortization of goodwill.................................... 3,346 927 9,715 2,402
Provision for doubtful accounts............................. 1,410 166 2,840 410
In-process research and development......................... -- -- -- 35,400
Restructuring and other charges............................. -- -- -- 590
-------- ------- -------- --------
Operating Income (Loss)............................ 18,230 9,416 39,078 (9,849)
Gain on sale of securities.................................. 8,704 -- 8,704 --
Interest and other income................................... 1,123 857 2,629 2,827
Interest expense............................................ (2,790) (1,641) (7,394) (4,599)
-------- ------- -------- --------
Income (Loss) From Continuing Operations Before
Income Taxes and Minority Interests.............. 25,267 8,632 43,017 (11,621)
Income taxes................................................ 11,013 3,473 20,370 9,379
-------- ------- -------- --------
Income (Loss) From Continuing Operations Before
Minority Interests............................... 14,254 5,159 22,647 (21,000)
Minority interests in earnings of subsidiary................ -- 1,090 -- 2,623
-------- ------- -------- --------
Income (Loss) From Continuing Operations(1)........ 14,254 4,069 22,647 (23,623)
Net income (loss) from discontinued operations.............. (49) 2,962 (702) 2,922
Write-down of discontinued operations to net realizable
value..................................................... -- -- (13,662) --
-------- ------- -------- --------
Net Income (Loss).................................. 14,205 7,031 8,283 (20,701)
Preferred stock dividends................................... 784 -- 1,197 --
-------- ------- -------- --------
Net Income (Loss) Available to Common
Stockholders..................................... $ 13,421 $ 7,031 $ 7,086 $(20,701)
======== ======= ======== ========
Income (Loss) Per Common Share:
Basic:
Continuing Operations................................... $ 0.37 $ 0.19 $ 0.59 $ (1.16)
Discontinued Operations................................. -- 0.14 (0.39) 0.14
-------- ------- -------- --------
Net Income (Loss)....................................... $ 0.37 $ 0.33 $ 0.20 $ (1.02)
======== ======= ======== ========
Diluted:
Continuing Operations(1)................................ $ 0.33 $ 0.19 $ 0.56 $ (1.16)
Discontinued Operations................................. -- 0.13 (0.35) 0.14
-------- ------- -------- --------
Net Income (Loss)....................................... $ 0.33 $ 0.32 $ 0.21 $ (1.02)
======== ======= ======== ========
Weighted Average Shares Outstanding:
Basic..................................................... 36,509 21,249 36,245 20,346
======== ======= ======== ========
Diluted................................................... 43,491 25,144 40,048 20,346
======== ======= ======== ========
</TABLE>
65
<PAGE> 74
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current Assets:
Cash and equivalents...................................... $107,841 $ 55,176
Accounts receivable....................................... 123,382 70,485
Inventories............................................... 40,337 48,591
Other current assets...................................... 55,041 58,566
-------- --------
Total Current Assets.............................. 326,601 232,818
Property and equipment...................................... 63,390 63,602
Goodwill and other intangibles.............................. 306,930 298,780
Other assets................................................ 30,683 18,612
-------- --------
Total Assets...................................... $727,604 $613,812
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt........................................... $ 13,755 $ 17,989
Accounts payable.......................................... 75,438 36,418
Other accrued liabilities................................. 47,595 52,825
-------- --------
Total Current Liabilities......................... 136,788 107,232
Long-term debt.............................................. 140,926 137,864
Noncurrent liabilities...................................... 7,986 8,133
-------- --------
Total Liabilities................................. 285,700 253,229
-------- --------
Stockholders' Equity........................................ 441,904 360,583
-------- --------
Total Liabilities and Stockholders' Equity........ $727,604 $613,812
======== ========
</TABLE>
- ---------------
(1) Income from continuing operations for the three and nine months ended
September 30, 1999 includes a one-time net gain of approximately $5.3
million or $0.12 per diluted share from the sale of securities.
For more information concerning World Access, please consult and review
information filed by World Access with the Commission and listed at
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
66
<PAGE> 75
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements of World Access give
effect to several transactions World Access completed in 1998 and the pending
Merger, the Private Placement and the Exchange Offer. The Unaudited Pro Forma
Combined Balance Sheet gives effect to the pending Merger, Private Placement and
Exchange Offer as if they had been completed as of June 30, 1999. The Unaudited
Pro Forma Combined Statements of Operations give effect to the following
transactions as if each had been completed as of January 1, 1998:
- World Access' acquisition of a majority interest in NACT
Telecommunications, Inc. on February 27, 1998 and subsequent merger with
NACT on October 28, 1998;
- World Access' merger with Telco Systems, Inc. on November 30, 1998;
- World Access' merger with Cherry Communications Incorporated, d/b/a
Resurgens Communications Group, and Cherry Communications U.K. Limited on
December 15, 1998 (these companies are collectively referred to as
Resurgens in the pro forma financial statements); and
- the pending Merger, Private Placement and Exchange Offer.
The pro forma financial statements have been prepared to demonstrate how
these combined businesses might have looked if the mergers and related
transactions had been completed as of the dates or at the beginning of the
periods presented. The pro forma financial statements, while helpful in
illustrating characteristics of the combined company under one set of
assumptions, do not attempt to predict or suggest future results. The pro forma
financial statements are preliminary and subject to change based on a final
review of the fair values of FaciliCom's net assets as of the actual merger
date. Upon final review of the fair value of FaciliCom's assets and liabilities,
it is likely that certain tangible and intangible assets such as international
licenses and foreign carrier operating agreements may be recognized which
generally have lives ranging from 5-10 years. Although we do not expect these
final adjustments to be significant, they would increase the amortization
expense reflected in the unaudited pro forma financial statements as these
intangible assets would be amortized over a shorter life than goodwill.
Each of the merger transactions above has been accounted for using the
purchase method of accounting. In connection with World Access' acquisitions of
NACT and Telco, World Access recorded charges of $44.6 million and $50.3
million, respectively, representing the portion of the purchase price allocated
to in-process research and development. Since these charges were directly
related to the acquisitions and will not recur, the Unaudited Pro Forma Combined
Statement of Operations for the year ended December 31, 1998 has been prepared
excluding these one-time non-recurring charges.
Upon the completion of the Merger, World Access expects to record a
one-time restructuring charge for the estimated costs of (i) consolidating
certain of its United States gateway switching centers and related technical
support functions into existing FaciliCom operations; (ii) consolidating World
Access' United Kingdom operations into existing FaciliCom operations; (iii)
consolidating the administrative functions of World Access' Telecommunications
Group into FaciliCom's operations; and (iv) eliminating other redundant
operations and assets as a result of combining World Access' Telecommunications
Group's and FaciliCom's operations. The restructuring charge is expected to
include the write-down of World Access' switching and transmission equipment
taken out of service, the write-off of certain leasehold improvements, a
provision for lease commitments remaining on certain facilities and equipment
taken out of service and employee termination benefits. Although World Access
has not yet finalized the restructuring program, it is expected to be approved
in its final form and adopted immediately following the Merger, communicated to
World Access' employees at that time and completed within three months. World
Access has not yet determined the actual restructuring charge to be recorded but
currently estimates it to be in excess of $20.0 million. This one-time charge
has been excluded from the pro forma financial statements.
67
<PAGE> 76
As a result of the Merger and the restructuring program discussed above,
World Access expects the combined company to realize significant operational and
financial synergies. These synergies are expected to include cost reductions
resulting from traffic routing changes made to take advantage of World Access'
and FaciliCom's least cost routes, elimination of redundant leased line costs,
elimination of redundant switching centers and consolidation of certain
administrative functions. World Access currently estimates that these annualized
cost savings, which have been excluded from the pro forma financial statements,
will range from $20.0 million to $35.0 million.
The pro forma financial statements are presented for comparative purposes
only and are not intended to be indicative of the actual results had these
transactions occurred as of the dates indicated above nor do they purport to
indicate results which may be attained in the future. The pro forma financial
statements should be read in conjunction with the historical consolidated
financial statements of World Access, NACT, Telco, Resurgens and FaciliCom,
which are included herein or incorporated herein by reference.
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<PAGE> 77
WORLD ACCESS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(1) FACILICOM(3) ADJUSTMENTS WORLD ACCESS
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.................. $ 98,996 $ 18,696 $ 5,750(6) $ 123,442
Accounts receivable................... 97,342 98,542 -- 195,884
Marketable securities -- restricted... -- 31,755 -- 31,755
Inventories........................... 45,216 -- -- 45,216
Other current assets.................. 54,929 6,067 -- 60,996
-------- -------- -------- ----------
Total Current Assets.......... 296,483 155,060 5,750 457,293
Property and equipment.................. 62,325 185,768 -- 248,093
Goodwill and other intangibles.......... 309,540 13,862 (13,199)(8) 874,149
460,216(5)
103,730(7)
Marketable securities -- restricted..... -- 29,525 -- 29,525
Other assets............................ 24,798 550 -- 25,348
-------- -------- -------- ----------
Total Assets.................. $693,146 $384,765 $556,497 $1,634,408
======== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....................... $ 12,285 $ 21,837 $ -- $ 34,122
Accounts payable...................... 58,393 126,423 -- 184,816
Other accrued liabilities............. 45,744 38,476 -- 84,220
-------- -------- -------- ----------
Total Current Liabilities..... 116,422 186,736 -- 303,158
Long-term debt.......................... 140,728 304,166 (15,000)(5) 429,894
Noncurrent liabilities.................. 10,204 -- -- 10,204
-------- -------- -------- ----------
Total Liabilities............. 267,354 490,902 (15,000) 743,256
-------- -------- -------- ----------
Stockholders' Equity
Preferred stock....................... 1 -- 4(5) 5
Common stock.......................... 448 2 (2)(4) 512
11(5)
53(6)
Capital in excess of par value........ 544,481 37,658 (37,658)(4) 1,009,773
287,365(5)
103,730(7)
74,197(6)
Stock-based compensation.............. -- 5,546 (5,546)(4) --
Foreign currency translation
adjustment......................... -- (5,819) 5,819(4) --
Accumulated deficit................... (119,138) (143,524) 143,524(4) (119,138)
-------- -------- -------- ----------
Total Stockholders' Equity.... 425,792 (106,137) 571,497 891,152
-------- -------- -------- ----------
Total Liabilities and
Stockholders' Equity........ $693,146 $384,765 $556,497 $1,634,408
======== ======== ======== ==========
</TABLE>
69
<PAGE> 78
WORLD ACCESS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(1) FACILICOM(3) ADJUSTMENTS WORLD ACCESS
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Carrier service revenues................... $198,891 $173,257 $ (4,340)(10) $367,808
Equipment sales............................ 122,360 -- -- 122,360
-------- -------- -------- --------
Total Sales.............................. 321,251 173,257 (4,340) 490,168
Cost of carrier services................... 185,232 169,243 (3,690)(10) 350,785
Cost of equipment sold..................... 68,690 -- -- 68,690
Amortization of acquired technology........ 2,400 -- -- 2,400
-------- -------- -------- --------
Total Cost of Sales...................... 256,322 169,243 (3,690) 421,875
-------- -------- -------- --------
Gross Profit............................. 64,929 4,014 (650) 68,293
Research and development................... 8,773 -- -- 8,773
Selling, general and administrative........ 27,486 24,719 -- 52,205
Amortization of goodwill................... 6,369 634 13,470(15) 20,473
Provision for doubtful accounts............ 1,453 2,817 -- 4,270
-------- -------- -------- --------
Operating Income (Loss).................. 20,848 (24,156) (14,120) (17,428)
Foreign exchange loss...................... -- (1,290) -- (1,290)
Interest and other income.................. 1,506 2,762 -- 4,268
Interest expense........................... (4,604) (16,907) (4,540)(9) (26,051)
-------- -------- -------- --------
Income (Loss) From Continuing Operations
Before Income Taxes................... 17,750 (39,591) (18,660) (40,501)
Income taxes (benefits).................... 9,357 (5,576) (2,000)(17) 1,781
-------- -------- -------- --------
Income (Loss) From Continuing
Operations............................ 8,393 (34,015) (16,660) (42,282)
Preferred stock dividends.................. 413 -- -- 413
-------- -------- -------- --------
Income (Loss) From Continuing Operations
Available to Common Stockholders...... $ 7,980 $(34,015) $(16,660) $(42,695)
======== ======== ======== ========
Income (Loss) From Continuing Operations
Per Common Share:
Basic.................................... $ 0.22 $ (0.85)(18)
======== ========
Diluted.................................. $ 0.22 $ (0.85)(18)
======== ========
Weighted Average Shares Outstanding:
Basic.................................... 36,232 50,102(18)
======== ========
Diluted.................................. 38,446 50,102(18)
======== ========
</TABLE>
70
<PAGE> 79
WORLD ACCESS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD PRO FORMA WORLD
ACCESS(1) NACT(2) TELCO(2) RESURGENS(2) FACILICOM(3) ADJUSTMENTS ACCESS
--------- ------- -------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Carrier service
revenues................. $ 13,143 $1,160 $126,324 $ -- $184,246 $ (2,520)(10) $ 322,353
Equipment sales.......... 138,990 1,175 -- 96,367 -- -- 236,532
--------- ------- -------- -------- -------- -------- ---------
Total Sales............ 152,133 2,335 126,324 96,367 184,246 (2,520) 558,885
Cost of carrier sales.... 12,522 1,050 145,043 -- 184,989 (2,140)(10) 340,234
(1,230)(12)
Cost of equipment sold... 73,842 925 -- 64,416 -- (400)(11) 138,783
Write-down of
inventories............ 9,292 -- -- -- -- -- 9,292
Amortization of acquired
technology............. 446 -- -- -- -- 4,360(13) 4,806
--------- ------- -------- -------- -------- -------- ---------
Total Cost of Sales.... 96,102 1,975 145,043 64,416 184,989 590 493,115
--------- ------- -------- -------- -------- -------- ---------
Gross Profit
(Deficit)............ 56,031 360 (18,719) 31,951 (743) (3,110) 65,770
Research and
development............ 6,842 504 -- 15,265 -- -- 22,611
Selling, general and
administrative......... 19,984 1,265 38,569 22,295 37,562 780(14) 120,455
Amortization of
goodwill............... 4,255 39 -- 800 961 34,530(15) 40,585
In-process research and
development............ 100,300 -- -- 15,585 -- (94,900)(16) 20,985
Goodwill impairment...... 6,200 -- -- -- -- -- 6,200
Provision for doubtful
accounts............... 11,332 104 2,294 589 4,620 -- 18,939
Restructuring and other
charges................ 17,240 -- -- -- -- -- 17,240
--------- ------- -------- -------- -------- -------- ---------
Operating Income
(Loss)............... (110,122) (1,552) (59,582) (22,583) (43,886) 56,480 (181,245)
Foreign exchange loss.... -- -- -- -- (391) -- (391)
Interest and other
income................. 3,419 -- -- 2,194 8,943 -- 14,556
Interest and other
expense................ (6,832) -- (9,457) (127) (22,612) (19,880)(9) (58,908)
--------- ------- -------- -------- -------- -------- ---------
Loss Before Income
Taxes and Minority
Interests............ (113,535) (1,552) (69,039) (20,516) (57,946) 36,600 (225,988)
Income taxes
(benefits)............. (1,387) (620) -- 300 (11,351) (8,440)(17) (21,498)
--------- ------- -------- -------- -------- -------- ---------
Loss Before Minority
Interests............ (112,148) (932) (69,039) (20,816) (46,595) 45,040 (204,490)
Minority interests in
earnings of
subsidiary............. (2,497) -- -- -- -- 2,497 --
--------- ------- -------- -------- -------- -------- ---------
Loss From Continuing
Operations........... $(114,645) $ (932) $(69,039) $(20,816) $(46,595) $ 47,537 $(204,490)
========= ======= ======== ======== ======== ======== =========
Loss From Continuing
Operations
Per Common Share:
Basic.................. $ (5.19) $ (4.22)(18)
========= =========
Diluted................ $ (5.19) $ (4.22)(18)
========= =========
Weighted Average Shares
Outstanding:
Basic.................. 22,073 48,460(18)
========= =========
Diluted................ 22,073 48,460(18)
========= =========
</TABLE>
71
<PAGE> 80
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. These columns represent the historical results of operations and
financial position of World Access. With respect to the information
included in the Unaudited Pro Forma Results of Operations for the year
ended December 31, 1998, the World Access information includes the
results for the following businesses from their respective dates of
acquisition: Advanced TechCom, Inc. -- January 1998; NACT -- February
1998; Telco -- November 1998; and Resurgens -- December 1998.
2. These columns represent the historical results of NACT for the period
January 1, 1998 to February 27, 1998; Telco for the period January 1,
1998 to November 29, 1998; and Resurgens for the period January 1,
1998 to December 14, 1998.
3. These columns represent the historical results of operations and
financial position of FaciliCom. With respect to the information
included in the Unaudited Pro Forma Combined Statements of Operations
for the year ended December 31, 1998 and the six months ended June 30,
1999, the FaciliCom information is for the twelve months ended
September 30, 1998 and the six months ended March 31, 1999,
respectively. Depreciation and amortization related to network
operations has been reclassified to costs of carrier sales to conform
with the World Access presentation.
4. Elimination of the historical FaciliCom stockholders' equity accounts.
5. The Merger will be accounted for under the purchase method of
accounting. World Access has not determined the final allocation of
the purchase price, and accordingly, the amount ultimately determined
may differ from the amounts shown below.
Under the terms of the Merger Agreement and based on the valuation of
the Series C Preferred Stock and World Access Common Stock at that
time, the purchase price was determined as follows (in thousands):
<TABLE>
<S> <C>
Purchase price:
Issuance of preferred stock(i)............................ $266,000
Cash...................................................... 56,000
Issuance of common stock(ii).............................. 15,000
Fair value of World Access options issued in exchange for
FaciliCom options(iii)................................. 6,380
Estimated fees and expenses............................... 12,500
--------
Total purchase price.............................. 355,880
--------
Allocation to fair values:
Historical stockholders' deficit.......................... 106,137
Adjust assets and liabilities:
Eliminate historical goodwill and debt issue costs........ 13,199
Discount on World Access 13.25% Senior Notes(iv).......... (15,000)
--------
Estimated goodwill................................ $460,216
========
</TABLE>
- ---------------
(i) Represents the fair value of the approximately 369,400 shares of
Series C Preferred Stock to be issued as part of the Merger
consideration. The fair value was computed using the Black-Scholes
Option Pricing Model assuming a volatility factor of 45%, a risk free
rate of 6% and a 10% discount for the lack of liquidity in a private
security. The Series C Preferred Stock bears no dividend and is
convertible into shares of World Access Common Stock at a conversion
rate of $20.38 per common share of World Access Common Stock, subject
to adjustment in the event of below market issuances of World Access
Common Stock, stock dividends, subdivisions, combinations,
reclassifications and other distributions with respect to World
Access Common Stock. If the closing trading price of World Access
Common Stock exceeds $20.38 per share for 60 consecutive trading
days, the Series C Preferred Stock will automatically convert into
World Access Common Stock at a conversion rate of $20.38 per share of
World Access Common Stock. Initially, the holders of the Series C
Preferred Stock will be entitled to elect four new directors to the
World Access Board of
72
<PAGE> 81
WORLD ACCESS, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Except for the election of directors, the holders of the
Preferred Stock will vote on an as-converted basis with the holders
of World Access Common Stock.
(ii) In connection with the Merger, holders of a majority of the aggregate
principal amount of FaciliCom's 10 1/2% Series B Senior Notes due
2008 (the "FaciliCom Notes") have agreed to tender their notes and
accept in exchange for each $1,000 in principal amount (i) $1,000
principal amount of World Access 13.25% Senior Notes due 2008 (the
"World Access Notes") having an aggregate principal amount of $300.0
million (ii) $10 in cash, and (iii) World Access Common Stock having
a market value of $50, as measured at the time of the exchange. These
pro forma statements assume that all holders of FaciliCom Notes will
exchange their notes for World Access Notes, and that therefore (i)
$300.0 million aggregate principal amount of the World Access Notes
will be issued (ii) an aggregate amount of $3.0 million cash will be
paid to holders of the FaciliCom Notes (which represents the fee paid
by World Access to obtain the consent from the FaciliCom noteholders
waiving their right to put their notes at 101% of par in connection
with the Merger) and (iii) World Access Common Stock equal in value
to an aggregate amount of $15.0 million will be issued to the holders
of the FaciliCom Notes. For purposes of these pro forma financial
statements, 1,062,000 shares of World Access Common Stock were
assumed issued based upon the closing trading price on Nasdaq on June
30, 1999 for the World Access Common Stock, which was $14.13 per
share.
(iii) Represents the fair value of approximately 520,000 options to
acquire World Access Common Stock to be issued in exchange for
certain options outstanding to acquire FaciliCom Common Stock. The
fair value has been determined using the Black-Scholes Option
Pricing Model with the following assumptions: dividend yield 0%,
volatility 70%, risk free interest rate of 5.8% and an expected life
of 5 years. The World Access options are expected to be issued at an
average exercise price of $3.06 per share and will be fully vested
upon the consummation of the Merger.
(iv) Represents the discount to face value to be recorded to adjust the
World Access Notes to their estimated fair value. The estimated fair
value was based on the quoted market price of debt with similar
characteristics. The terms of the World Access Notes were structured
to provide fair value equal to 95% of the principal amount.
6. In connection with the Merger, World Access has received commitments
from a group of institutional and sophisticated investors to purchase
$75.0 million of World Access Common Stock in a private transaction
that is conditioned upon and will close simultaneously with the
Merger. World Access will use the majority of the proceeds from this
private placement to fund the $56.0 million cash portion of the Merger
consideration, as well as fees and expenses to be incurred in
connection with the Merger. The World Access Common Stock to be issued
will be priced at the average trading value of World Access Common
Stock during a five day period prior to the closing of the Merger,
with the purchase price to be no lower than $13.00 per share and no
higher than $17.00 per share. For purposes of these pro forma
financial statements, 5,308,000 shares were assumed issued based upon
the closing trading price on Nasdaq on June 30, 1999 for the World
Access Common Stock, which was $14.13 per share.
7. In December 1998, World Access acquired Resurgens and issued
approximately 7,500,000 restricted shares of World Access Common Stock
which were placed in escrow for future release contingent upon their
future EBITDA performance. The release of these shares is accelerated
in connection with the Merger as the Merger qualifies as a "Change in
Control" as defined in the Resurgens merger agreements. The release of
the 7,500,000 shares has been accounted for as an increase in goodwill
and stockholders' equity. These shares were valued based on the
average market price on Nasdaq of World Access Common Stock for the
three days prior and the three days subsequent to the date economic
terms of the Merger were announced (August 17, 1999), or $13.83 per
share.
73
<PAGE> 82
WORLD ACCESS, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. Elimination of existing goodwill from prior FaciliCom acquisitions and
debt issue costs associated with the FaciliCom Notes.
9. Represents the adjustment to interest expense related to the exchange
of FaciliCom Notes (10 1/2% coupon) for World Access Notes (13.25%
coupon) and the amortization of the $15.0 million debt discount
related to the World Access Notes over a period of eight years. The
FaciliCom Notes were issued on January 28, 1998 and were outstanding
for approximately eight months in fiscal 1998. The pro forma
adjustment to interest expense was computed as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
---------------- -----------------
<S> <C> <C>
Interest expense on World Access Notes................ $ 19,875 $ 39,750
Debt issue cost amortization on World Access
Notes.......................................... 940 1,875
Historical FaciliCom Note interest expense....... (15,750) (21,000)
Historical FaciliCom debt issue cost
amortization................................... (525) (745)
-------- --------
$ 4,540 $ 19,880
======== ========
</TABLE>
10. Elimination of inter-company carrier service revenues and related
costs.
11. Adjustment to depreciation expense related to the write-down of certain
redundant equipment at Telco.
12. Adjustment to depreciation and amortization expense for the adjustment
to fair value of switching equipment and license agreements at
Resurgens.
13. Amortization of acquired technology relating to the NACT and Telco
acquisitions over 8 years.
14. Amortization of trademarks of Telco over 8 years.
15. Amortization of goodwill over an estimated life of 20 years. The pro
forma adjustment to goodwill for the six months ended June 30, 1999 was
computed as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENTS
-------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
FaciliCom (see Note 5).................... $460,216 $11,510 $(634) $10,876
Escrowed shares (see Note 7)......... 103,730 2,594 -- 2,594
------- ----- -------
$14,104 $(634) $13,470
======= ===== =======
</TABLE>
74
<PAGE> 83
WORLD ACCESS, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma adjustment to goodwill for the year ended December 31,
1998 was computed as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT
-------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
FaciliCom (see Note 5).................... $460,216 $ 23,010 $ (961) $22,049
Escrowed shares (see Note 7)......... 103,730 5,186 -- 5,186
NACT................................. 92,668 4,630 (2,107) 2,523
Telco................................ 39,418 1,970 (964) 1,006
Resurgens............................ 78,625 3,930 (164) 3,766
-------- ------- -------
$ 38,726 $(4,196) $34,530
======== ======= =======
</TABLE>
16. Elimination of the one-time, non-recurring in-process research and
development charges recorded in connection with the NACT and Telco
mergers.
17. Adjustment for the additional tax benefit derived from certain pro
forma adjustments. World Access has not recorded any tax benefit on a
pro forma basis that may be derived from FaciliCom's net operating
losses.
18. Represents pro forma weighted average shares and basic and diluted
earnings from continuing operations per share. The weighted average
shares are computed assuming the issuance of (i) approximately
1,430,000, 2,790,000, 7,042,000 and 3,687,500 shares of World Access
Common Stock for the acquisition of a majority interest in NACT, NACT
merger, Telco merger and Resurgens merger, respectively; (ii) an
aggregate of approximately 5,308,000 shares issued in connection with
the Private Placement of World Access Common Stock; (iii) an aggregate
of 1,062,000 shares issued to the holders of the FaciliCom Notes; and
(iv) 7,500,000 shares released from escrow related to the acceleration
of the Resurgens earn-out (see Note 7) as of the beginning of the
periods presented. Due to the pro forma loss from continuing operations
for the six months ended June 30, 1999 and the year ended December 31,
1998, potential common stock shares related to stock options, stock
warrants, convertible notes and convertible preferred stock have been
excluded from the diluted loss per share as the inclusion of these
potential common stock shares would be anti-dilutive.
19. In October 1999, FaciliCom granted stock options (contingent upon the
consummation of the Merger) to its employees who are expected to
continue with the surviving corporation after the merger with World
Access. These options, which were granted under a new FaciliCom 1999
Stock Option Plan, will have a four year vesting period. Upon
consummation of the Merger, these options will convert into
non-qualified options to purchase approximately 1.9 million shares of
World Access Common Stock at an exercise price of $15.00 per share.
Given that the conversion of the options is contingent upon the Merger,
any resulting compensation expense to be recorded over the vesting
period will be determined at the time of the Merger based on the
intrinsic value.
20. In connection with the execution of the Merger Agreement, John D.
Phillips was required to enter into a letter agreement, dated August
17, 1999, under which he agreed not to sell or transfer any of his
shares of stock of World Access for a specified period of time. In
consideration for Mr. Phillips' entering into the letter agreement, the
Board of Directors of World Access has agreed to accelerate the
exercisability of currently outstanding options held by Mr. Phillips
under the World Access 1998
75
<PAGE> 84
WORLD ACCESS, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan for 1.0 million shares of World Access Common Stock
at an exercise price of $12.75 per share. The options were originally
scheduled to vest ratably over a four-year period. Upon consummation of
the Merger, all of these options will be immediately exercisable. Since
acceleration of the options is contingent upon consummation of the
Merger, and given its one time nature, its effects have not been
included in the pro forma financial statements.
76
<PAGE> 85
FACILICOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FaciliCom is a rapidly growing multinational carrier focused on providing
international wholesale telecommunications services to other carriers worldwide.
As a facilities-based carrier, FaciliCom seeks primarily to provide service over
its facilities and international transmission capacity owned or leased on a
fixed-cost basis (commonly referred to as "on-net"). FaciliCom believes that it
is better able to control the quality and the termination costs of on-net
traffic and that increasing the proportion of on-net traffic significantly
improves its gross margins. For the nine months ended June 30, 1999, 41.7% of
FaciliCom's wholesale international traffic was terminated on-net and 58.3% was
terminated by other long distance carriers pursuant to resale and operating
agreements between FaciliCom and such carriers (commonly referred to as
"off-net"). FaciliCom's expanding facility-based network will enable it to
increase the percentage of on-net traffic.
FaciliCom provides its services over a carrier-grade international network
consisting of international gateway switches, transmission capacity owned or
leased on a fixed-cost basis and various multinational termination agreements
and resale arrangements with other long distance providers. FaciliCom began
generating revenues in July 1995 through its acquisition of FCI-Sweden, formerly
Nordiska Tele8 AB. Since that time, FaciliCom has installed or acquired 16
additional international gateway switches in the United States (New York, New
Jersey, Los Angeles and Miami) and Europe (United Kingdom, The Netherlands,
Germany, Finland, Denmark, France, Norway, Switzerland, Italy, Austria, Spain
and Belgium).
FaciliCom's strategy is to invest in network facilities as it expands its
customer base, allowing it to enhance service quality and increase gross margins
on particular routes. However, this approach also causes FaciliCom's gross
margins to fluctuate with changes in network utilization due to FaciliCom's
fixed-cost investment in its network.
Currently, FaciliCom's revenues are generated through the sale of
international long distance services on a wholesale basis to telecommunications
carriers and through the sale of domestic and international long distance
services on a retail basis in Sweden, Denmark, Norway and Finland. FaciliCom
records revenues from the sale of telecommunications services at the time of
customer usage. FaciliCom earns revenues based on the number of minutes it bills
to and collects from its customers. FaciliCom's agreements with its wholesale
customers are short-term in duration and are subject to significant traffic
variability. The rates charged to customers are subject to change from time to
time, generally requiring seven days' notice to the customer.
FaciliCom believes its services are competitively priced in each country in
which it offers its services. Prices for wholesale and retail telecommunications
services in many of FaciliCom's markets have declined in recent years as a
result of deregulation and increased competition. FaciliCom believes that
worldwide deregulation and increased competition are likely to continue to
reduce its wholesale and retail revenues per billed minute of use. FaciliCom
believes, however, that any decrease in wholesale and retail revenues per minute
will be at least partially offset by an increase in billed minutes by its
wholesale and retail customers, and by a decreased cost per billed minute.
FaciliCom has made since its inception, and expects to continue to make,
investments to expand its network. FaciliCom expects increased capital
expenditures in the future to affect its operating results due to increased
depreciation charges and interest expense in connection with borrowings to fund
such expenditures.
77
<PAGE> 86
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
unaudited financial data and related percentage of revenues (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, YEARS ENDED SEPTEMBER 30,
-------------------------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996
----------------- ----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $279,695 100.0% $117,146 100.0% $184,246 100.0% $ 70,187 100.0% $ 11,891 100.0%
Cost of revenues.......... 257,253 92.0 114,473 97.7 178,952 97.1 65,718 93.6 12,742 107.2
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Gross margin.............. 22,442 8.0 2,673 2.3 5,294 2.9 4,469 6.4 (851) (7.2)
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Operating expenses:
Selling, general and
administrative
(including related
party)................. 40,354 14.5 21,834 18.6 32,797 17.8 13,072 18.6 7,575 63.7
Stock-based
compensation
expense.............. 364 0.1 5,706 4.9 6,017 3.3 -- --
Related party
expenses............. -- -- -- -- 1,550 0.8 439 0.6 7 0.1
Depreciation and
amortization......... 16,895 6.0 5,314 4.5 8,816 4.8 2,318 3.3 1,143 9.6
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Total operating
expenses......... 57,613 20.6 32,854 28.1 49,180 26.7 15,829 22.6 8,725 73.4
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Operating loss............ (35,171) (12.6) (30,181) (25.8) (43,886) (23.8) (11,360) (16.2) (9,576) (80.6)
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Other income (expense):
Interest expense
(including related
party)............... (25,690) (9.2) (14,539) (12.4) (22,612) (12.3) (1,336) (1.9) (312) (2.6)
Interest income........ 3,646 1.3 5,594 4.8 8,152 4.4 -- -- -- --
Gain on settlement
agreement............ -- -- 791 0.7 791 0.5 -- -- --
Foreign exchange (loss)
gain................. (1,346) (0.5) (655) (0.6) (391) (0.2) (1,335) (1.9) 226 1.9
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Total other income
(expense)........ (23,390) (8.4) (8,809) (7.5) (14,060) (7.6) (2,671) (3.8) (86) (0.7)
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Loss before income
taxes.................... (58,561) (21.0) (38,990) (33.3) (57,946) (31.4) (14,031) (20.0) (9,662) (81.3)
Income tax benefit........ 6,682 2.4 6,475 5.5 11,351 6.1 -- -- -- --
-------- ------ -------- ------ -------- ------ --------- ------ -------- ------
Net loss.................. $(51,879) (18.6)% $(32,515) (27.8)% $(46,595) (25.3)% $ (14,031) (20.0)% $ (9,662) (81.3)%
======== ====== ======== ====== ======== ====== ========= ====== ======== ======
</TABLE>
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE NINE MONTHS ENDED
JUNE 30, 1998
Revenues increased by $162.5 million to $279.7 million for the nine months
ended June 30, 1999, from $117.1 million for the nine months ended June 30,
1998. The growth in revenues resulted primarily from an increase in billed
customer minutes of use generated from an increase in wholesale customers in the
U.S. and Europe. Many of the new wholesale customers relate to newly deployed
and activated switch facilities in Europe. Offsetting the growth in billed
customer minutes of use during this period was a decrease in the price per
billed minute to $0.194 for the nine months ended June 30, 1999, from $0.233 for
the nine months ended June 30, 1998. The unit revenue decrease is the combined
result of increases in the percentage of on-net traffic and increased
competition. For the nine months ended June 30, 1999, U.S. revenues totaled
$121.6 million or 43.5% of FaciliCom's consolidated revenues and European
revenues totaled $158.1 million, or 56.5% of consolidated revenues. Billed
minutes of use increased by 935.3 million, to 1,438.7 million minutes of use for
the nine months ended June 30, 1999, from 503.3 million minutes of use for the
nine months ended June 30, 1998.
Wholesale customers increased by 106 or 93.0%, to 220 wholesale customers
at June 30, 1999 from 114 wholesale customers at June 30, 1998. As of June 30,
1999, FaciliCom had approximately 52,000 retail customers in Sweden, Denmark,
Finland and Norway.
Cost of revenues increased by $142.8 million to $257.3 million for the nine
months ended June 30, 1999, from $114.5 million for the nine months ended June
30, 1998. As a percentage of revenues, cost of revenues decreased to 92.0% for
the nine months ended June 30, 1999, from 97.7% for the nine months ended June
30,
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1998, primarily as a result of increased minutes of use on FaciliCom's network,
improved efficiencies of network fiber facilities due to higher traffic volumes
and reductions in rates charged by FaciliCom's carrier suppliers. Cost of
revenues as a percentage of revenues is expected to decrease as a result of
improved efficiencies of network fiber facilities due to higher traffic volumes
as well as from an anticipated increase in the percentage of on-net traffic.
Gross margin increased by $19.8 million to $22.4 million for the nine
months ended June 30, 1999, from $2.7 million for the nine months ended June 30,
1998. As a percentage of revenues, gross margin increased to 8.0% for the nine
months ended June 30, 1999, from 2.3% for the nine months ended June 30, 1998.
Selling, general and administrative expenses increased by $13.2 million to
$40.7 million for the nine months ended June 30, 1999, from $27.5 million for
the nine months ended June 30, 1998, primarily as a result of FaciliCom's
increased sales and an increase in customer service, billing, collections and
accounting staff required to support revenues growth. Offsetting these increased
expenses was a reduction in stock-based compensation related to FaciliCom's
stock options. As a percentage of revenues, selling, general and administrative
expenses decreased to 14.6% for the nine months ended June 30, 1999, from 23.5%
for the nine months ended June 30, 1998. Bad debt expense was $4.6 million, or
1.6% of revenues for the nine months ended June 30, 1999 compared with $1.8
million, or 1.5% of revenues for the nine months ended June 30, 1998. Although
selling, general and administrative expenses are expected to increase on an
absolute basis in order to support expansion of its operations, FaciliCom
expects that selling, general and administrative expenses as a percentage of
revenues will continue to decrease over time.
Depreciation and amortization increased by $11.6 million to $16.9 million
for the nine months ended June 30, 1999, from $5.3 million for the nine months
ended June 30, 1998, primarily due to increased capital expenditures incurred in
connection with the deployment and expansion of FaciliCom's network.
Interest expense increased by $11.2 million to $25.7 million for the nine
months ended June 30, 1999, from $14.5 million for the nine months ended June
30, 1998, primarily due to interest obligations on the FaciliCom Notes which
were issued on January 28, 1998.
Interest income decreased by $1.9 million to $3.6 million for the nine
months ended June 30, 1999, from $5.6 million for the nine months ended June 30,
1998 as the proceeds from the FaciliCom Notes offering have been used to service
interest payments and fund capital expenditures.
Foreign exchange loss increased by $0.7 million to $1.3 million for the
nine months ended June 30, 1999, from $655,000 for the nine months ended June
30, 1998.
Income tax benefit of $6.7 million and $6.5 million was recorded for the
nine months ended June 30, 1999 and 1998, respectively, related principally to
the estimated tax benefits utilized by AHI.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998, AS COMPARED TO THE FISCAL YEAR
ENDED SEPTEMBER 30, 1997
Revenues increased by $114.1 million to $184.2 million for the fiscal year
ended September 30, 1998, from $70.2 million for the fiscal year ended September
30, 1997. The growth in revenue resulted primarily from an increase in billed
customer minutes of use resulting from an increase in wholesale customers in the
U.S. and Europe and an increase in retail customers in Sweden, Denmark and
Finland, as well as usage increases from existing wholesale customers.
Offsetting the growth in revenue during this period was a decrease in the price
per billed minute to $0.225 for the fiscal year ended September 30, 1998, from
$0.278 for the fiscal year ended September 30, 1997, as a result of increased
on-net traffic and competition. For the fiscal year ended September 30, 1998,
U.S. revenues totaled $116.4 million or 63.2% of FaciliCom's consolidated
revenues and European revenues totaled $67.8 million, or 36.8% of consolidated
revenues. Billed minutes of use increased by 568.1 million, to 820.3 million
minutes of use for the fiscal year ended September 30, 1998, from 252.3 million
minutes of use for the fiscal year ended September 30, 1997.
Wholesale customers increased by 86 or 162.3%, to 139 wholesale customers
at September 30, 1998, from 53 at September 30, 1997. As of September 30, 1998,
retail customers in Sweden, Denmark and Finland total approximately 43,300.
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Cost of revenues increased by $113.3 million, to $179.0 million for the
fiscal year ended September 30, 1998, from $65.7 million for the fiscal year
ended September 30, 1997. As a percentage of revenues, cost of revenues
increased to 97.1% for the fiscal year ended September 30, 1998, from 93.6% for
the fiscal year ended September 30, 1997, primarily as a result of increased
fixed costs associated with expanding inter- switch fiber capacity within the
U.S. and Europe. Cost of revenues as a percentage of revenues is expected to
decrease as a result of improved efficiencies of network fiber facilities due to
higher traffic volumes as well as from an anticipated increase in the percentage
of on-net traffic.
Gross margin increased by $825,000 to $5.3 million for the fiscal year
ended September 30, 1998, from $4.5 million for the fiscal year ended September
30, 1997. As a percentage of revenues, gross margin decreased to 2.9% for the
fiscal year ended September 30, 1998, from 6.4% for the fiscal year ended
September 30, 1997.
Selling, general and administrative expenses increased by $26.9 million to
$40.4 million for the fiscal year ended September 30, 1998, from $13.5 million
for the fiscal year ended September 30, 1997, primarily as a result of
FaciliCom's increased sales, an increase in customer service, billing,
collections and accounting staff required to support revenue growth, and
approximately $6.0 million of expenses related to stock-based compensation
arrangements. As a percentage of revenues, selling, general and administrative
expenses increased to 21.9% for the fiscal year ended September 30, 1998, from
19.3% for the fiscal year ended September 30, 1997. Bad debt expense was $3.8
million, or 2.0% of revenues for the fiscal year ended September 30, 1998
compared with $1.3 million, or 1.8% of revenues for the fiscal year ended
September 30, 1997, as a result of increased revenue and new customers.
Depreciation and amortization increased by $6.5 million to $8.8 million for
the fiscal year ended September 30, 1998, from $2.3 million for the fiscal year
ended September 30, 1997, primarily due to increased capital expenditures
incurred in connection with the deployment and expansion of FaciliCom's network.
Interest expense increased by $21.3 million to $22.6 million for the fiscal
year ended September 30, 1998, from $1.3 million for the fiscal year ended
September 30, 1997, primarily due to the offering of the FaciliCom Notes.
Interest income for the fiscal year ended September 30, 1998, was $8.2
million and related principally to interest on proceeds from the FaciliCom Notes
offering, which were invested in marketable securities and cash and cash
equivalents.
Foreign exchange loss decreased by $944,000 to $391,000 for the fiscal year
ended September 30, 1998, from $1.3 million for the fiscal year ended September
30, 1997.
Income tax benefit of $11.4 million was recorded for the fiscal year ended
September 30, 1998 related mainly to a tax benefit of $12.1 million utilized by
AHI, a $393,000 tax charge related to the change in tax status as a result of a
reorganization of FaciliCom on December 22, 1997 and approximately $302,000 tax
charge for taxes in Finland.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, AS COMPARED TO THE FISCAL YEAR
ENDED SEPTEMBER 30, 1996
Revenues increased by $58.3 million to $70.2 million in the fiscal year
ended September 30, 1997, from $11.9 million in the fiscal year ended September
30, 1996. The growth in revenue resulted primarily from an increase in billed
customer minutes of use resulting from an increased number of wholesale
customers in the U.S., the U.K. and Scandinavia and an increased number of
retail customers in Sweden, as well as usage increases from existing wholesale
customers. Offsetting the growth in revenue during this period was a decrease in
the price per billed minute of 3.5%, to $0.278 for the fiscal year ended
September 30, 1997 from $0.288 for the fiscal year ended September 30, 1996, as
a result of increased competition. In the fiscal year ended September 30, 1997,
U.S. revenues totaled $53.7 million, or 76.5% of FaciliCom's consolidated
revenues, Swedish revenues totaled $15.5 million, or 22.1% of consolidated
revenues and U.K. revenues totaled $1.0 million, or 1.4% of consolidated
revenues.
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Wholesale customers increased by 36, or 211.8%, to 53 wholesale customers
at September 30, 1997, from 17 at September 30, 1996. Retail customers in Sweden
increased by 10,750, to 12,365 retail customers at September 30, 1997, from
1,615 at September 30, 1996. Billed minutes of use increased by 211.0 million,
to 252.3 million minutes of use in the fiscal year ended September 30, 1997,
from 41.3 million minutes of use in the fiscal year ended September 30, 1996.
Cost of revenues increased by $53.0 million, to $65.7 million in the fiscal
year ended September 30, 1997, from $12.7 million in the fiscal year ended
September 30, 1996. As a percentage of revenues, cost of revenues declined to
93.6% in the fiscal year ended September 30, 1997, from 107.2% in the fiscal
year ended September 30, 1996, primarily as a result of increased minutes of use
on FaciliCom's network, improved efficiencies of network facilities due to
higher traffic volumes and reductions in rates charged by FaciliCom's carrier
suppliers.
Gross margin increased to $4.5 million in the fiscal year ended September
30, 1997, from ($851,000) in the fiscal year ended September 30, 1996. As a
percentage of revenues, gross margin increased to 6.4% in the fiscal year ended
September 30, 1997, from (7.2%) in the fiscal year ended September 30, 1996.
Selling, general and administrative expenses increased by $5.9 million to
$13.5 million in the fiscal year ended September 30, 1997, from $7.6 million in
the fiscal year ended September 30, 1996, primarily as a result of FaciliCom's
increased sales, and an increase in customer service, billing, collections and
accounting staff required to support revenue growth. Staff levels grew by 30, or
47.6%, to 93 employees at September 30, 1997, from 63 employees at September 30,
1996. As a percentage of revenues, selling, general and administrative expenses
decreased to 19.3% in the fiscal year ended September 30, 1997, from 63.8% in
the fiscal year ended September 30, 1996, as a result of improved efficiencies.
Bad debt expense was $1.3 million for the fiscal year ended September 30, 1997,
or 1.8% of revenues.
Depreciation and amortization expenses increased by $1.2 million to $2.3
million in the fiscal year ended September 30, 1997, from $1.1 million in the
fiscal year ended September 30, 1996, primarily due to increased capital
expenditures incurred in connection with the deployment and expansion of
FaciliCom's network.
Interest expense, net increased by $1.0 million to $1.3 million in the
fiscal year ended September 30, 1997, from $312,000 in the fiscal year ended
September 30, 1996, primarily due to increased levels of vendor financing and
loans from AIT.
Foreign exchange gain (loss) decreased by $1.5 million to ($1.3) million in
the fiscal year ended September 30, 1997, from $226,000 in the fiscal year ended
September 30, 1996.
Income taxes were $0 for both years, as all net operating losses from
foreign subsidiaries were fully reserved.
LIQUIDITY AND CAPITAL RESOURCES
FaciliCom has incurred significant operating losses and negative cash flows
as a result of the development and operation of its network, including the
acquisition and maintenance of switches and undersea fiber optic capacity.
FaciliCom has financed its growth primarily through equity, a credit facility
provided by Armstrong, credit facilities with two equipment vendors, capital
lease financing, the proceeds from the $300 million offering of the FaciliCom
Notes and proceeds from a line of credit.
Net cash provided by (used in) operating activities was ($30.3) million for
the nine months ended June 30, 1999 due principally to a net loss of $51.9
million offset in part by depreciation and amortization expense of $16.9
million.
Net cash provided by (used in) investing activities was ($18.2) million for
the nine months ended June 30, 1999. Net cash used in investing activities in
this period resulted from an increase in capital expenditures to expand
FaciliCom's network offset in part by the sale of marketable securities.
Net cash provided by (used in) financing activities was ($742,000) for the
nine months ended June 30, 1999. Net cash used in financing activities for the
nine months ended June 30, 1999 resulted from payments
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on existing long-term debt and capital leases offset in part by proceeds from
FaciliCom's line of credit bank facility.
In May 1999, FaciliCom obtained a one-year, $35 million credit facility
with Key Corporate Capital, Inc. FaciliCom uses the proceeds of this credit
facility for working capital and for general corporate purposes. At June 30,
1999, FaciliCom had $10.0 million in borrowings under this credit facility.
Non-cash financing activities for the nine months ended June 30, 1999
resulted from the financing of fiber circuits provided by Qwest Communications
Corporation ("Qwest").
FaciliCom's business strategy contemplates aggregate capital expenditures
of approximately $100 million during fiscal year 1999. Such capital expenditures
are expected to be used primarily for international gateway switches, points of
presence ("POPs"), transmission equipment, undersea and international fiber
circuits (including IRUs and Minimum Assignable Ownership Units ("MAOUs")) for
new and existing routes and other support systems.
In May 1998, FaciliCom entered into a Memorandum of Understanding with
Qwest. The agreement provides Qwest with international direct dial termination
service to various destinations and provides FaciliCom an IRU for domestic and
international fiber optic capacity. The IRU is for twenty-five years, for which
FaciliCom has agreed to pay $24 million within three years of delivery of the
fiber optic capacity. Delivery of the three capacity segments occurred during
the twelve months ended September 30, 1999.
In addition, FaciliCom has entered into an agreement that provides it with
an IRU for international fiber optic capacity for the Pacific Rim. Delivery of
the capacity under the agreement is expected prior to April 2000. The IRU is for
15 years, for which FaciliCom has agreed to pay $20.0 million through September
30, 2002, of which $2.5 million has already been paid as a deposit and an
additional $2.5 million is expected to be paid on April 30, 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value, with the potential effect on
operations dependent upon certain conditions being met. The statement (as
amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. FaciliCom has yet to determine any impact the
implementation of the standard will have on its financial position or results of
operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential, among other things, to recognize a
date using "00" as the year 1900 rather than the year 2000. 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 similar normal business activities, which could have
material adverse operational and financial consequences. Currently, FaciliCom
believes that a disruption in the operation of its networks, billing system and
financial and accounting systems and/or an inability to access interconnections
with other telecommunications carriers, are the major risks associated with the
inability of systems and software to process Year 2000 data correctly. If the
systems of other companies on whose services FaciliCom depends, including AHI,
or with whom its systems interface are not Year 2000 compliant, there could be a
material adverse effect on FaciliCom's business, financial position and results
of operations.
State of Readiness
FaciliCom, in conjunction with AHI, formed a task team in February 1998.
The task team's program comprised three phases: (i) assessment of Year 2000
compliance of FaciliCom's equipment, software and systems, (ii) a detailed
inventory of these items and (iii) building and implementing a workplan and
contingency plan, which includes assessing the cost in dollars and the necessary
manpower, upgrading or
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replacing the item, and scheduling the date of compliance. As of September 30,
1999, FaciliCom had substantially completed all phases of the program. Included
in the task team's assessment was a review of the Year 2000 compliance efforts
of FaciliCom's key suppliers. Below is a more detailed breakdown of their
efforts.
Internal Issues
Network elements. FaciliCom's main concern is the switching equipment and
peripherals, and other vendor components that are time and date sensitive.
FaciliCom has upgraded all of its networks with the compliant software. In
addition, FaciliCom has completed the software upgrade for its Passport
equipment which allows it to compress its traffic thereby allowing more traffic
to be carried over a single fiber optic cable. FaciliCom's transmission
equipment is currently Year 2000 "Friendly", which means the manufacturer has
represented that the software releases will not experience any service-affecting
issues upon rollover into the new millennium. Although FaciliCom expects that it
will be able to resolve Year 2000 problems with workarounds, there can be no
assurance that such workarounds will be successful.
Billing System and Accounting System. FaciliCom's billing system was
developed by AHI's programmers and operates on an IBM AS400. FaciliCom believes
that the billing system and the IBM AS400 are Year 2000 compliant. However, the
production of accurate and timely customer invoices depends upon the generation
of accurate and timely underlying data by FaciliCom's switches. Though the
switch manufacturer has represented that FaciliCom's switches are Year 2000
compliant, there can be no assurance that such billing problems will not occur.
FaciliCom is in the process of converting its accounting system. The
manufacturer has represented that this system is Year 2000 compliant and its
implementation is expected to be completed prior to December 31, 1999.
Information Systems. FaciliCom's upgrade of its information systems is in
progress. FaciliCom believes that all of its hardware equipment, including the
equipment it relies upon at AHI, is Year 2000 compliant. All of FaciliCom's
software products are Year 2000 compliant. Substantially all software
applications have been modified or upgraded for Year 2000 compliance.
Additionally, all of FaciliCom's workstations and laptops have been upgraded for
Year 2000 compliance.
Third Party Issues
Vendor Issues. In general, FaciliCom's product vendors have made available
either Year 2000 compliant versions of their products or new compliant products
as replacements for discontinued offerings. In most cases, statements made by
FaciliCom herein as to the degree of compliance of the products in question are
based on vendor-provided information, which remains subject to FaciliCom's
testing and verification activities. Testing and verification will be ongoing
through December 31, 1999. FaciliCom is in the process of requesting information
from utilities and similar service providers.
Customer Issues. FaciliCom's customers are interested in the progress of
FaciliCom's Year 2000 efforts, and FaciliCom anticipates increased demand for
information, including detailed testing data and company-specific responses.
When requested by customers, FaciliCom provides Year 2000 compliance
information. At this time, FaciliCom has not performed an analysis of its
potential liability to customers in the event of Year 2000 related problems.
Interconnecting Carriers. FaciliCom's network operations interconnect with
domestic and international networks of other carriers. If one of these
interconnecting carriers should fail or suffer adverse consequences due to a
Year 2000 problem, FaciliCom's customers could experience impairment of
services. In addition, since many of these interconnecting carriers are also
FaciliCom's customers, a Year 2000 problem by one of these customers could
result in a loss of revenues due to its inability to send traffic to its
network. FaciliCom is in the process of sending correspondence to its major
interconnecting carriers to determine the status of their Year 2000 compliance
review.
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Costs
Although total costs to implement the plan cannot be precisely estimated,
FaciliCom has not incurred costs to date in excess of those normally associated
with business planning and implementation. FaciliCom anticipates that future
costs will not be material, in as much as it began to acquire products after the
Year 2000 issue was identified and manufacturers had begun to remediate the
problem. However, there can be no assurance that material costs will not be
incurred. FaciliCom cannot estimate the future cost related to the inoperability
of third party products. These costs will be expensed as incurred, unless new
systems are purchased that should be capitalized in accordance with generally
accepted accounting principles.
Risks
The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of FaciliCom's normal business functions or
operations, which could have a material adverse effect on its business,
financial position and results of operations. Due to the uncertainty inherent in
other Year 2000 issues that are ultimately beyond FaciliCom's control,
including, for example, the Year 2000 readiness of its suppliers, customers and
interconnecting carriers, FaciliCom is unable to determine at this time the
likelihood of a material impact on its business, financial position and results
of operation, due to such Year 2000 issues. However, based upon risk assessment
work conducted thus far, FaciliCom believes that the most reasonably likely
worst case scenario of the failure by it, its suppliers or other
telecommunications carriers with which FaciliCom interconnects to resolve Year
2000 issues would be an inability by it (i) to provide telecommunications
services to its customers, (ii) to route and deliver telephone calls originating
from or terminating with other telecommunications carriers, and (iii) to timely
and accurately bill its customers. In addition to lost earnings, these failures
could also result in loss of customers due to service interruptions and billing
errors, substantial claims by customers and increased expenses associated with
Year 2000 litigation, stabilization of operations and executing mitigation and
contingency plans. While FaciliCom believes that it is taking appropriate
measures to mitigate these risks, there can be no assurance that such measures
will be successful.
Contingency Plan
FaciliCom has completed its contingency plan.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although FaciliCom's reporting currency is the U.S. dollar, FaciliCom
expects to derive an increasing percentage of its revenues from international
operations. Accordingly, changes in currency exchange rates may have a
significant effect on FaciliCom's results of operations. For example, the
accounting rate under operating agreements is often defined in monetary units
other than U.S. dollars, such as "special drawing rights" or "SDRs." To the
extent that the U.S. dollar declines relative to units such as SDRs, the dollar
equivalent accounting rate would increase. In addition, as FaciliCom expands
into foreign markets, its exposure to foreign currency rate fluctuations is
expected to increase. Although FaciliCom does not currently engage in exchange
rate hedging strategies, it may choose to limit such exposure by purchasing
forward foreign exchange contracts or other similar hedging strategies.
FaciliCom's board of directors periodically reviews and approves the overall
foreign exchange risk management policy and transaction authority limits.
Specific hedging contracts, if any, will be subject to approval by certain
specified officers of FaciliCom acting within its board of directors' overall
policies and limits. FaciliCom intends to limit its hedging activities to the
extent of its foreign currency exposure. There can be no assurance that any
currency hedging strategy would be successful in avoiding currency
exchange-related losses.
Also, FaciliCom is exposed to interest rate risk. FaciliCom maintains both
fixed rate and variable rate long-term debt. FaciliCom manages its interest rate
risk in order to balance its exposure between fixed and variable rates while
attempting to minimize its interest costs.
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BUSINESS OF FACILICOM
OVERVIEW
FaciliCom is a rapidly growing multinational, facilities-based
telecommunications carrier. FaciliCom provides international long distance
services to other carriers worldwide and offers international and domestic long
distance voice, internet access, data and other value-added services to business
and residential customers in select European markets. FaciliCom provides these
services over its carrier-grade international network which consists of 17
gateway switches and 18 additional points of presence in the U.S. and in 13
European countries, as well as a satellite earth station in Malmo, Sweden.
FaciliCom's network is connected primarily by fiber optic cable capacity which
it owns, together with additional fiber capacity that it leases, including
capacity that it leases from Hermes, CIRCE and Qwest. In addition to its
facilities, FaciliCom has 12 interconnection agreements, ten of which are with
the dominant national carriers in FaciliCom's markets, and 21 operating
agreements, 16 of which are with the dominant national carriers in these
markets. FaciliCom believes that its facilities-based network is one of the most
extensive independent telecommunications networks serving the international long
distance market in the U.S. and Europe. This network and FaciliCom's
interconnection and operating agreements enables it to offer competitively
priced, high-quality voice and data services to over 220 wholesale carriers and
approximately 52,000 retail customers.
FaciliCom believes that its multinational, facilities-based approach and
established licensed carrier status in the U.S. and in 13 European countries
provide it with significant competitive advantages. These advantages include:
- reduced termination and network costs resulting in higher gross margins;
- increased flexibility to introduce new products and services such as
internet access, data and other value-added services;
- improved transmission quality; and
- the ability to offer high-quality local sales and customer service.
Since January 1998, FaciliCom has focused on entering key deregulating
markets, accumulating a critical mass of wholesale telecommunications traffic to
support investments in carrier-grade telecommunications facilities and migrating
customer traffic onto FaciliCom's international network. During this period,
FaciliCom has entered nine new countries, installed 14 gateway switches in 12
countries, acquired capacity in 12 additional fiber systems, and entered into 10
new interconnection and six new operating agreements. As of June 30, 1999,
FaciliCom had invested approximately $211.0 million in network facilities.
As a result of FaciliCom's infrastructure investments, it has been able to
increase the traffic volume delivered over its network (commonly referred to as
"on-net" traffic) from 26.5% for the nine months ended June 30, 1998 to 41.7%
for the nine months ended June 30, 1999, and FaciliCom's gross margin increased
from 2.3% during the nine month period ended June 30, 1998, to 8.0% during the
nine month period ended June 30, 1999.
FaciliCom was founded in May 1995 to capitalize on opportunities for
facilities-based carriers in the international telecommunications services
industry. FaciliCom has targeted deregulating markets in order to benefit from
the significant demand for international long distance services in those markets
and the relatively favorable competitive conditions there. FaciliCom expects
that worldwide demand for high-quality international telecommunications services
will continue to grow as a result of:
- the globalization of the world's economies and the worldwide trend toward
deregulation of the telecommunications sector;
- declining prices and a wider selection of products and services driven by
greater competition as a result of deregulation;
- technological advances, which have substantially increased the
transmission capacity and reduced the cost of fiber capacity;
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- increased demand for internet access, data and other value-added
services; and
- increased telephone accessibility resulting from greater investment in
telecommunications infrastructure, including the deployment of wireless
networks.
In addition, FaciliCom's industry continues to evolve away from the
traditional pricing and operations model for exchanging telecommunications
traffic between international carriers, known as the international accounting
rate mechanism ("ARM"). As the ARM model is abandoned, FaciliCom will be able to
pass cost savings to its customers, which it believes will further increase
demand for these services.
STRENGTHS
FaciliCom is positioning itself to become a leader in the rapidly growing
global market for international long distance voice, internet access, data and
other value-added services. FaciliCom enjoys competitive advantages which it
believes serve as a model for its continued successful growth as a diversified
telecommunications company, including:
Extensive Facilities-Based International Telecommunications Network.
Since 1995, FaciliCom has built a carrier-grade network in 14 countries,
including the U.S. and the top 10 Western European international long
distance markets. FaciliCom is in negotiations to complete interconnection
agreements with additional carriers. FaciliCom believes that its early
entrant approach implemented through its local management and operations
has allowed it to enter into interconnection agreements more readily than
companies without these resources and provides it with a lower cost
structure than its competitors serving these regions who do not have these
agreements. FaciliCom's network has been designed and built to allow it to
offer high-quality services, control its termination and network costs and
cost-effectively expand its service offerings. By adding relatively
inexpensive routers to its ATM network, FaciliCom can further expand its
dial-up internet access services with little additional investment.
FaciliCom believes that its existing network gives it an early entrant
advantage and positions it to continue to increase its revenues and improve
gross margins.
Strong European Presence. FaciliCom has developed a strong European
presence, with 56.5% of FaciliCom's revenue for the nine month period ended
June 30, 1999 originating from FaciliCom's European operations as compared
to 31.1% for the nine month period ended June 30, 1998. FaciliCom's
European focus enables it to capitalize on the higher prices associated
with traffic originating in Europe as compared to the U.S. Because
FaciliCom's network is concentrated in the leading European markets, it is
able to take advantage of increasing opportunities to carry cross-border
European traffic on its network, realize greater economies of scale in
network management and sales and marketing, and capitalize on strategic
opportunities to build fiber systems such as FCI One. In addition, this
geographic concentration favorably positions FaciliCom for entry into other
deregulating European markets, such as Poland, Portugal and the Czech
Republic, on a more cost-effective basis, by adding a new source of traffic
which can be terminated throughout FaciliCom's network and by reducing
termination costs of network traffic entering these newly-deregulated
markets.
Established Customer Base. FaciliCom has established a wholesale
customer base of over 220 carriers in the U.S. and 13 European countries,
including a majority of the first-tier and emerging carriers, European
wireless carriers and seven of the 10 largest global international
carriers. This significant customer base enables FaciliCom to rapidly and
cost-effectively build traffic volumes as it expands its network. Because
many of its customers are also high-quality carriers, FaciliCom is able to
use their facilities on favorable terms to carry traffic on routes where it
has no facilities, thereby lowering its network costs.
Successful Retail Operations in Scandinavia. Since its initial
investment in its Swedish subsidiary in 1995, FaciliCom has increased its
retail customer base from fewer than 2,000 to approximately 52,000 small-
to medium-sized business, and residential retail customers in Sweden,
Denmark, Norway and Finland. This customer base generated 5.0% of
FaciliCom's consolidated revenues for the nine month period ended June 30,
1999.
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Proven Record of Strong Internal Growth. FaciliCom was established in
May 1995 and has since rapidly increased its revenues and network traffic.
For the fiscal years ended September 30, 1996, 1997 and 1998, and the nine
month period ended June 30, 1999, FaciliCom's revenues were $11.9 million,
$70.2 million, $184.2 million and $279.7 million, respectively. In
addition, for the fiscal years ended 1996, 1997 and 1998, and the nine
month period ended June 30, 1999, FaciliCom's network carried 41.3 million,
252.3 million, 820.3 million and 1.4 billion minutes of traffic,
respectively. FaciliCom's growth has been derived mainly from internal
expansion. FaciliCom has managed this rapid growth in a manner that has
permitted it to increase its customer base efficiently while maintaining
high standards of network quality and customer service.
Strong Management Team. FaciliCom has a highly experienced senior
management team with, on average, over 23 years of experience in the
telecommunications industry, including experience with such industry
leaders as Bell Atlantic, British Telecom, Cable & Wireless, Global One,
Sprint, GTE, Viag Interkom and NorTel Networks. Additionally, in each
country in which FaciliCom operates, it employs a local management team
that is familiar with local legal and regulatory issues, business
practices, and cultural norms that affect FaciliCom's business. The members
of FaciliCom's team have proven their ability to obtain licenses, recruit
experienced staff, negotiate for interconnection agreements with dominant
national carriers, construct and operate a high-quality network and provide
superior customer service. FaciliCom believes that experience that it has
gained from operating in Europe over the last four years provides it with a
distinct advantage over newer entrants to these markets.
OPERATING MARKETS
FaciliCom currently terminates traffic through a combination of
interconnection and operating agreements, transit, refiling, resale and
international simple resale to over 200 countries worldwide and originates
traffic in Austria, Belgium, Denmark, Finland, France, Germany, Italy, The
Netherlands, Norway, Spain, Sweden, Switzerland, the U.K., and the U.S.
FaciliCom estimates that it has a market share of less than 1.0% of each of
these markets.
Austria. Austria has a population of approximately 8.1 million. By 1997,
the government had completed a 10-year privatization program of the
telecommunications industry. In December 1997, licenses for providing wireline
voice telephone services were issued to eight companies. At the same time, the
Supervisory Board of Post & Telekom Austria AG ("PTA") approved the separation
of its telecommunications operations from the national mail and bus services.
The new telecommunications company was named Telekom Austria AG, and Telecom
Italia purchased a 25% stake as its strategic partner.
Belgium. The population of Belgium is approximately 10.2 million. Although
Belgium liberalized its telecommunications services in accordance with the EU
directive on January 1, 1998, some barriers to entry still persist, including
significant interconnection charges that foreign carriers pay to Belgacom, the
Belgium dominant national carrier.
Denmark. With a population of approximately 5.2 million, Denmark has a
telecommunications market that generated approximately $3.6 billion in revenues
in 1996 according to the International Telecommunications Union. The Danish
Parliament approved legislation in May 1997 to liberalize its telecommunications
industry. The new law allows carriers to provide public voice services and to
build and lease networks. Most services, including voice telephony, may be
provided under a general class license. The telecommunications market in Denmark
has been historically dominated by the primary national carrier of Denmark, Tele
Denmark, which, according to TeleGeography 1999, accounted for 82.0% of
Denmark's international outgoing minutes in 1997. Since privatization, 12
companies providing facilities-based service have entered the Danish market. Key
European companies in Denmark's telecommunications service sector include Telia
(Sweden) and French Mobilix (a subsidiary of France Telecom).
Finland. With a population of approximately 5.2 million, Finland's
telecommunications services market generated approximately $2.5 billion in
revenues in 1998, according to an estimate by the U.S. Department of State.
Finland fully liberalized the provision of voice telephony services in 1994, and
has recently eliminated its licensing requirements for the construction of fixed
telecommunications networks. Since deregulation, eight
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companies providing facilities-based service have entered the Finnish market.
According to TeleGeography 1999, in 1997, the primary national carrier of
Finland, Sonera Ltd., accounted for 58.9% of Finland's international outgoing
minutes, while Finnet Group and Telia accounted for 28.2% and 9.3%,
respectively.
France. The population of France is approximately 58.8 million. As of
January 1998, all telecommunications services were open to competition in
France, including the provision of public voice telephony. Since liberalization,
33 companies have entered the French market, and compete with the national
carrier, France Telecom. Restrictions on market entry include a foreign equity
limit of 20%.
Germany. With a population of approximately 81.8 million, the German
telecommunications market is the third largest in the world with an estimated
$39 billion in revenues according to an estimate by the U.S. Department of
State. Germany is Europe's largest telecommunications market, accounting for
23.4% of the total market. Under German law, all telecommunications services,
both national and international, including public voice telephony, became open
to competition in Germany on January 1, 1998. Until January 1998, the German
national carrier, Deutsche Telekom A.G., operated the German telephony market
under a monopolistic regime. A number of new competitors have recently entered
the market. As of November 1998, Deutsche Telekom A.G. held approximately 80% of
the market for long distance services (including international calls).
Italy. With a population of approximately 57.3 million, the total 1999
telecommunications market in Italy, including both equipment and services, is
estimated at $32 billion, according to an estimate by the U.S. Department of
State. The market was liberalized on January 1, 1998, which allowed the
authorization of five new fixed-line carriers.
The Netherlands. With a population of approximately 15.9 million, the
Dutch telecommunications services market generated approximately $9.0 billion in
revenues in 1998 from public voice telephony, network and mobile telephony
services, according to the European Commission. The Dutch telecommunications
infrastructure, public switched voice telephony and telex markets were
liberalized on July 1, 1997. Since liberalization, more than 25 companies have
entered the Dutch market. The Dutch national carrier, KPN, accounted for
approximately 95% of The Netherlands' market for international outgoing minutes
in 1997, according to TeleGeography 1999.
Norway. Norway has a population of approximately 4.4 million. The
Norwegian telecommunications market for data transmission, voice telephony,
paging and other mobile services and satellite communications has been fully
liberalized since January 1, 1998. Until the liberalization in 1998, the
Norwegian national carrier, Telenor AS, accounted for 100% of Norway's market
for international outgoing minutes.
Spain. Spain has a population of approximately 39.8 million. Spain
liberalized its telecommunications market in December 1998. Prior to that time,
the government had phased in competition in basic telephony through licenses
granted to recently privatized Spanish second operator, Retevision, and to a
third operator, Lince (France Telecom), in addition to the incumbent operator
Telefonica.
Sweden. With a population of approximately 8.9 million, Sweden has a
telecommunications market that generated approximately $6.0 billion in revenues
in 1996 according to the International Telecommunications Union. Since Sweden
fully liberalized its telecommunications market in January 1998, more than 12
companies providing facilities-based service have entered the Swedish market.
Telia AB, the Swedish national carrier, and Tele-2 AB accounted for
approximately 66.0% and 22.0%, respectively, of Sweden's market for
international outgoing minutes in 1997, according to TeleGeography 1999. Telia
AB is a member of the Unisource consortium and is also authorized to provide
facilities-based services between the U.S. and Sweden.
Switzerland. Switzerland has a population of approximately 7.4 million. In
1997, the Swiss Parliament enacted legislation to liberalize and privatize the
Swiss telecommunications sector, opening the market to investment and
competition from foreign firms. This liberalization took effect on January 1,
1998. According to the WTO Agreement, the Swiss government has committed to
complete liberalization of basic telecom services (facilities-based and resale,
public and non-public) for all market segments.
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United Kingdom. With a population of approximately 58.9 million, the U.K.
has a telecommunications market that generated approximately $32.8 billion in
1998, according to an estimate by the British Office of Telecommunications
("Oftel"). According to Oftel, the U.K.'s international and domestic long
distance services market accounted for approximately $6.6 billion in revenues
for the year ended March 31, 1997, with international outgoing calls generating
$2.4 billion in revenue. The U.K. has substantially liberalized its
telecommunications market. However, the U.K. has applied to the EU for an
extension to the EU's requirements that require member states to introduce
pre-selection by January 2000. According to TeleGeography 1999, British Telecom
held 54.9% of the U.K.'s market for international outgoing minutes in 1997, and
Cable &Wireless Communications held 30.3%. In addition to British Telecom and
Cable & Wireless Communications, there are over 50 foreign carriers in the U.K.
that currently hold licenses authorizing them to interconnect with the dominant
national carrier.
United States. With a population of approximately 272.6 million, the U.S.
has a telecommunications services market that generated revenues of
approximately $231.2 billion in 1997, according to the FCC. The United States
has committed to open markets for essentially all basic telecommunications
services (facilities-based and resale) for all market segments. The U.S. long
distance market is highly deregulated and is the largest in the world. According
to the FCC, in 1997 long distance telephone revenues were approximately $100.8
billion, including approximately $17.7 billion from international services,
representing 17.5% of the total market. According to TeleGeography 1999, AT&T is
the largest international long distance carrier in the U.S. market, with
approximately 45.3% of the U.S. international outgoing minutes in 1997, while
MCI, Sprint and WorldCom had market shares of 26.0%, 12.2% and 6.2%,
respectively. AT&T, MCI WorldCom and Sprint are generally regarded as first-tier
carriers in the U.S. long distance market. Other large long distance companies
with more limited ownership of transmission capacity, including Frontier and
Qwest, are generally regarded as second-tier carriers. The remainder of the U.S.
long distance market comprises several hundred smaller companies, largely
resellers, which are generally regarded as the third-tier carriers.
NETWORK
General. FaciliCom has an extensive facilities-based international network
comprised of gateway switches, additional points of presence, an ATM
transmission backbone, owned and leased fiber capacity and a satellite earth
station. FaciliCom's facilities-based network permits it to terminate an
increasing percentage of traffic on-net, allowing it to better control both the
quality and cost of telecommunications services that FaciliCom provides to its
customers. To provide high-quality telecommunications services, FaciliCom's
network employs digital switching and fiber technologies, uses advanced
signaling protocols and is supported by comprehensive monitoring and technical
services.
FaciliCom carries international traffic historically carried between U.S.
and foreign international long distance carriers over its own network. In
addition, FaciliCom's gateway switches and European points of presence allow it
to terminate traffic within countries, ensuring quality and lowering termination
costs. FaciliCom has also established interconnection and operating agreements
with national carriers in the markets where it has facilities.
Gateway Switches. FaciliCom currently operates 15 NorTel and two Ericsson
gateway switches in the U.S. (New York, New Jersey, Los Angeles and Miami) and
in Europe (Austria, Belgium, Denmark, Finland, France, Germany, Italy, The
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom).
ATM Transmission Backbone. FaciliCom currently operates a high-capacity
ATM transmission backbone between certain of its U.S. and European gateway
switch locations. FaciliCom's ATM backbone enables it to combine switched voice,
private line and data traffic, including frame relay and internet protocol, on
the same international circuits. FaciliCom believes that its existing ATM
backbone provides a competitive networking advantage because it is able to
combine these forms of traffic onto the same network, thereby eliminating the
need to purchase capacity and related equipment for different types of traffic.
In addition, the switching technology used in an ATM system is more efficient
than traditional circuit-switched technology because an ATM network, unlike a
circuit-based network, does not require a fixed amount of bandwidth to be
reserved for each phone call or data transmission. This allows voice and data
calls to be pooled, which enables
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it to carry more calls with the same amount of bandwidth. This greater
efficiency creates network cost savings that can be passed on to FaciliCom's
customers in the form of lower rates, and provides an immediate cost advantage
for connection from FaciliCom's nearest point of presence to the chosen internet
backbone interconnect point.
Fiber. FaciliCom seeks to obtain ownership interests in fiber systems
where it believes that its customers' demand will justify the investment in
those fixed assets. FaciliCom can generally earn a higher gross margin on
traffic routed through its network's owned fiber rather than traffic routed
through its network's leased fiber. However, when it is more cost effective to
do so, FaciliCom will lease fiber capacity on a short term basis on specific
routes.
FaciliCom currently has acquired fiber capacity on an indefeasible rights
of use or minimum assignable membership units basis in 18 fiber cable systems
(including Hermes, CIRCE, Flag, Qwest, CANTAT, ODIN and Southern Cross).
FaciliCom believes that no single agreement that it has relating to
indefeasible rights of use or to minimum assignable ownership units is material
to its financial condition or its business operations. With the passage of time,
an increasing amount of fiber capacity is becoming available and the cost of
this capacity is expected to continue to decline rapidly. As a result, FaciliCom
believes that, when one or more of these agreements expires, it would be able to
replace, at similar costs and within reasonable time periods, similar capacity
on alternative competing fiber systems through purchases of minimum assignable
ownership units or indefeasible rights of use.
Ownership and Operation of Fiber Capacity/FCI One. FaciliCom purchases
fiber capacity on existing cable systems as demand for FaciliCom's services
justifies this investment. When fiber capacity is not available at reasonable
prices, FaciliCom may instead install and operate its own fiber cables.
FaciliCom's initial effort in this area consisted of FCI One, a 24-pair fiber
submarine cable that it owns and operates between Copenhagen, Denmark and Malmo,
Sweden. Currently, FaciliCom is only using one such fiber pair with a configured
capacity of STM-16.
Before Denmark granted licenses to additional facilities-based carriers,
Tele Denmark, the incumbent dominant carrier, possessed the exclusive right to
build international cables into Denmark, and fiber capacity into Denmark was
generally available only at high prices. When FaciliCom became licensed to
operate in Denmark as a facilities-based carrier, it also obtained the right to
build international cables. Given its current and forecasted capacity
requirements, FaciliCom determined it was more cost effective to build FCI One
than lease capacity from Tele Denmark at high rates. FCI One became operational
in May 1999. In addition to cost savings on capacity that it uses, FaciliCom can
sell or lease excess capacity or swap capacity on FCI One for capacity it
requires on other routes. Since May 1999, FaciliCom has sold a portion of the
capacity on FCI One, and is in discussions to sell or swap additional capacity.
Points of Presence. In addition to its switch centers, FaciliCom has
installed a number of transmission points of presence in its network that
provide additional geographic locations for FaciliCom's customers and the local
public switched telephone network to interconnect with FaciliCom's network. In
the U.S., FaciliCom operates points of presence in Washington, D.C., Tampa,
Florida, New York, New York, and in Germany it operates points of presence in
Stuttgart, Hamburg, Dusseldorf and seven other cities. FaciliCom also operates
points of presence in London, England, Helsinki, Finland, and in Stockholm and
two other cities in Sweden. These points of presence allow FaciliCom to reduce
its costs for delivering traffic to public networks and make it easier for
customers with local networks to deliver traffic to FaciliCom's network.
Interconnection and Operating Agreements. FaciliCom enters into
interconnection agreements with the national carrier in each of the countries
where it has operating facilities so that it can originate and terminate traffic
in that country. Interconnection agreements enable FaciliCom to terminate
traffic in a country by connecting the local network of that country with
FaciliCom's network. Interconnection agreements typically allow FaciliCom to
terminate traffic in the countries in which it has these agreements at the
lowest available access cost, and to originate traffic from these countries when
a customer dials FaciliCom's carrier access code.
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FaciliCom has entered into 12 interconnection agreements, including
agreements with the dominant national carrier in Austria, Denmark, Finland,
Germany, Italy, The Netherlands, Norway, Sweden, Switzerland and the U.K.
FaciliCom is currently negotiating for additional interconnection agreements
with the dominant national carriers in other European countries.
FaciliCom also has operating agreements with 16 national carriers and five
emerging carriers. An operating agreement provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries.
Satellite Facilities. FaciliCom owns and operates the Swedish
International Teleport, a 13-meter satellite earth station in Malmo, Sweden that
transmits to an INTELSAT satellite over the Indian Ocean. FaciliCom's status as
a member of INTELSAT enables it to easily expand its geographic coverage
worldwide through the acquisition of additional satellite transmission capacity
on a preferential basis. The earth station and INTELSAT satellite, which provide
coverage to Africa and most of Asia, currently connect customers on the Indian
subcontinent with locations in Europe and North America on a private line basis.
FaciliCom uses this facility to provide connectivity with carriers in developing
countries before international cable capacity becomes available there, and on
low-volume international routes. FaciliCom is also negotiating agreements with
several Asian carriers to interconnect with Sweden to transmit public
switched-voice traffic through FaciliCom's earth station.
Signaling Network. Modern carrier networks use standard protocols of the
International Telecommunications Union (CCITT-C7 and SS-7) to signal between
switches in order to set up connections and monitor call status. Most small
carriers use one channel of each trunk group to signal other carriers on what is
designated as an "F Link." This F Link signaling is adequate for call setup but
is subject to failure because it does not provide for any redundancy. If the F
Link fails the entire trunk group cannot be used. F Link signaling also does not
provide many network management features because its signal capability is
limited to one link between two switches. To overcome the drawbacks of F Link
signaling, more advanced network operators install modern and sophisticated
packet signaling switches called signal transfer points ("STPs") that enable
their switches to communicate with other switches in their network and with
customer and carrier networks. These signaling networks include redundant links
to paired STPs and are virtually failsafe. FaciliCom has installed a pair of
redundant STPs in Frankfurt and London and another pair of STPs in New Jersey
and New York. As a result, FaciliCom's network is more robust, and it is able to
provide signaling services to other carriers.
Network Reliability. FaciliCom's resilient network has diverse switching
and routing capabilities. For example, on the high-volume North America to
Europe routes, FaciliCom splits customer traffic between its U.S. based gateway
switches, over three transatlantic cable routes and over each of its European
based gateway switches. All of FaciliCom's gateway switches have backup power
systems, and each fiber cable has built-in redundancies that reroute traffic in
the event of an interruption in cable service. FaciliCom's paired STP network
with redundant signal paths also provides an additional level of network
integrity.
Network Monitoring and Technical Support. FaciliCom has technical staff
located in the U.S. and throughout its markets in Europe who provide support for
FaciliCom's network. FaciliCom's technical staff located in Europe provides
network management and operations support for FaciliCom's gateway switches. In
addition, to support its NorTel switches, FaciliCom has implemented GTE's
support system. This system provides FaciliCom with integrated proactive network
operations, network message management and a customer contact system. FaciliCom
fully supports all network management and operations and functions 24 hours a
day, seven days a week from a central location in Washington, D.C.
FaciliCom's network operations center in Washington, D.C. monitors all of
the switches and transmission links in FaciliCom's network and receives
immediate signals alerting it to any abnormal network condition. Through this
facility, FaciliCom has the capability to reroute traffic if there is a cable
cut or an equipment failure. This center also monitors the quality of any
carriers FaciliCom uses to route off-net traffic and removes any of them from
its routing if they fall below FaciliCom's performance standards.
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SERVICES
FaciliCom offers high-quality international telecommunications services
over its own international network and by interconnecting its network with the
networks of other carriers. FaciliCom provides primarily wholesale international
telecommunications voice services and internet access, data and other
value-added services in select European markets. FaciliCom recently expanded its
retail services in Scandinavia and it is offering "dial around" or "casual
dialing" service in Finland and in Sweden under the brand name Call One. For the
fiscal years ended September 30, 1997 and 1998, and the nine month period ended
June 30, 1999, wholesale services represented approximately 94.6%, 92.5% and
95.0%, respectively, of FaciliCom's consolidated revenues and retail services
represented approximately 5.4%, 7.5% and 5.0%, respectively, of FaciliCom's
consolidated revenues.
Wholesale Services. FaciliCom provides wholesale international long
distance voice services to carrier customers located in the 14 countries in
which it operates. Other carriers interconnect with FaciliCom's network by
direct circuit connections from their networks to one of FaciliCom's gateway
switches. FaciliCom also provides service to switchless resellers by enabling
their customers to access FaciliCom's network from the national public switched
telephone network by dialed access through carrier access codes. FaciliCom
provides wholesale termination to over 200 countries using a mix of owned and
leased facilities, and interconnection, operating and resale agreements.
FaciliCom also offers to certain customers internet protocol and frame relay
services over FaciliCom's ATM backbone.
Retail Services. FaciliCom provides international and domestic long
distance voice services to retail customers in Scandinavia. Retail customers
either subscribe to FaciliCom's services or access the services on a call by
call basis by dialing FaciliCom's carrier access code. In addition, FaciliCom
offers internet access and international private line service to business and
residential customers.
Voice. FaciliCom's retail customers may access its long distance voice
services in the following ways:
Direct Access. The telephone equipment used by subscribers is
directly connected to FaciliCom's switches through a private line and,
unless bill payments are overdue, the subscriber is allowed to make calls
up to a predetermined credit limit. Subscribers to this service do not have
to dial FaciliCom's access code in order to connect to FaciliCom's network.
The private line connections for FaciliCom's direct access services may be
leased from the public switched telephone network. In addition, these
connections may be radio links or digital subscriber lines. Direct access
customers are primarily small-to medium-sized businesses.
Casual Dialing. Any telephone in FaciliCom's markets which is
connected to the public switched telephone network can be used to dial
FaciliCom's access code and place domestic long distance or international
calls. The telephone user does not have to apply in advance to be
recognized as a customer. FaciliCom's gateway switch receives the calling
number from the public network and screens it in order to determine whether
it should be denied service for any reason, such as a failure to make
payments in the past. Casual dialing customers are primarily residential
users.
Indirect Access. To utilize this service, the telephone number of a
customer who satisfies FaciliCom's credit requirements is added to a list
in FaciliCom's switches. Unless the customer's payments are overdue, the
customer may place calls that have a cost up to a predetermined credit
limit. Users of this method of access must dial FaciliCom's access code to
connect to FaciliCom's network through the public switched telephone
network. If the customer is a heavy user, such as a small business,
FaciliCom may equip its telephones with an automatic dialer that will
insert FaciliCom's access code whenever the customer seeks to make a long
distance or international call. This service is available in countries that
do not require equal access.
Equal Access. This method of access resembles the service that
FaciliCom provides to customers with indirect access. However, customers
can choose to subscribe to FaciliCom's network for all of their long
distance services and do not have to dial FaciliCom's access code in order
to connect to FaciliCom's network through the public switched telephone
network. Instead, the local operator will automatically
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route the customer's calls to FaciliCom's network. The 13 European
countries in which FaciliCom operates are all scheduled to require equal
access service within the next three years.
Data. The retail data services that FaciliCom presently offers in
Scandinavia are as follows:
Internet Access. FaciliCom offers internet access service to
FaciliCom's retail customers in Finland. FaciliCom uses its own facilities
to connect customers to an internet backbone interconnect point. FaciliCom
bundles these services with its long distance and international voice
services to provide a single communications package for certain of its
customers.
Unlike in the U.S., where most local calls are free, dominant national
carriers in Europe charge retail local calling rates of as much as $0.10
per minute for a dial-up connection to an internet service provider.
FaciliCom believes that this situation has inhibited the growth of the use
of the internet in Europe. FaciliCom believes that companies like it will
stimulate internet usage by offering internet access services at lower
costs. FaciliCom's interconnection agreements allow any telephone line
where it has these agreements to dial FaciliCom's access code and be
connected with FaciliCom's network. FaciliCom pays the operator of the
public switched telephone network very low wholesale transport charges to
connect these calls to FaciliCom's network. Once the call is connected to
its network, FaciliCom can connect it to the internet through its own data
routers and its own ATM backbone. This enables FaciliCom to provide
high-quality and low-cost dial-up internet access to any home or business.
Private Data Lines. Another data service that FaciliCom provides is
private line connectivity for business customers, other data providers and
for video conferencing. These services are targeted to businesses that have
offices or operations in more than one country, and that require voice and
data connections between their locations. FaciliCom provides frame relay,
internet protocol and bandwidth connectivity between points on FaciliCom's
backbone network. Customers pay for the effective amount of bandwidth (64
kbps, 256 kbps, 2 mbps, etc.) that they purchase.
Voice Over Internet Protocol (VOIP). Technology has been developed
that enables origination and termination of voice traffic over internet
protocol networks. This is commonly referred to as VOIP. The initial
concept was to use the internet to transport this traffic for free. In
actual practice, the quality of voice transported over the internet varies
from acceptable to poor because of packet delays during high traffic
periods. It is possible to improve the voice quality of internet protocol
by routing the traffic over a dedicated intranet that utilizes private data
lines instead of the internet. FaciliCom provides VOIP intranet service on
its network. FaciliCom believes that business customers and residential
early technology adopters that have invested in technology based upon
internet protocol will be attracted to this service. No uniform approach to
VOIP's regulatory treatment has been developed, and FaciliCom cannot
predict the manner in which VOIP may be regulated in the future or the
impact of such regulation on FaciliCom's operations.
CUSTOMERS
Wholesale Customers. FaciliCom's target wholesale customer base consists
primarily of dominant national carriers, other first-tier carriers, emerging
carriers and wireless carriers with international traffic. National carriers and
other first-tier carriers generally have their own international networks, but
use carriers such as FaciliCom for overflow traffic and in order to route
traffic at lower rates. Emerging and wireless carriers are rapidly growing
industry segments that generally rely on national carriers and wholesale
carriers like FaciliCom to provide international connectivity. As of June 30,
1999, FaciliCom provided service to over 220 carriers, including seven of the
ten largest global international carriers, and 40 multinational carriers that
originate traffic in more than one of FaciliCom's existing markets, together
with five wireless carriers. For the fiscal year ended September 30, 1998,
FaciliCom's five largest customers accounted for 21.9% of FaciliCom's
consolidated revenues. For the nine month period ended June 30, 1999,
FaciliCom's five largest customers accounted for 18.4% of FaciliCom's
consolidated revenues. FaciliCom anticipates that the percentage of revenues
attributable to FaciliCom's largest customers will decrease as FaciliCom's
customer base grows. FaciliCom's agreements with its customers do not currently
establish minimum term or usage requirements.
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FaciliCom uses a comprehensive credit screening process when identifying
new wholesale customers. For the fiscal years ended September 30, 1997 and 1998,
and for the nine month period ended June 30, 1999, FaciliCom's bad debt expenses
represented 1.8%, 2.0% and 1.6%, respectively, of FaciliCom's consolidated
revenues. FaciliCom rates its potential customers' creditworthiness based on
several factors, including:
- traditional bank and trade reports, such as Dun & Bradstreet reports;
- internal assessments of FaciliCom's exposure based on the costs of
terminating international traffic in certain countries and the capacity
requested by the proposed carrier; and
- references provided by potential customers.
Depending on the results of FaciliCom's credit analysis, a customer's
payment terms and/or billing cycle may be adjusted to shorten the length of time
that FaciliCom's receivables are outstanding. In addition, FaciliCom may require
a customer to post collateral in the form of a security deposit or an
irrevocable letter of credit.
Retail Customers. FaciliCom's target retail customer base consists
primarily of small- to medium-sized businesses, and high volume residential
users of international telecommunications services. In July 1995, FaciliCom
began its retail operations in Sweden. Since that time, FaciliCom has grown its
retail customer base from fewer than 2,000 retail customers in Sweden to
approximately 52,000 retail customers in Scandinavia. Retail distribution not
only leverages FaciliCom's existing facilities but also improves profitability
through the sale of higher-margin services.
SALES AND MARKETING
Wholesale. FaciliCom's approach to marketing and selling wholesale
services consists of local sales staff, who are responsible for day-to-day
relationships with local carrier representatives and who have experience in the
industry and long standing relationships with such carriers. Additionally,
because FaciliCom has several international carrier customers which use it to
transport traffic from multiple locations, FaciliCom has a multinational global
account group, which coordinates sales to major international accounts in
multiple locations and is responsible for client relationships at the senior
management level. FaciliCom focuses on hiring and retaining experienced
marketing and sales people with extensive knowledge of the telecommunications
industry and who have existing relationships with decision makers at carrier
customers.
Retail. Although FaciliCom's main focus has been on international
wholesale service, FaciliCom has been serving retail customers since the middle
of 1995. FaciliCom reaches its retail customers through a variety of marketing
channels that are tailored to specific markets. FaciliCom targets small- to
medium-sized businesses in industry segments with high international
telecommunications needs, as well as high-volume residential users.
MANAGEMENT INFORMATION SYSTEMS
The need to bill customers timely and accurately, and to monitor and manage
network traffic profitability, requires the accurate operation of management
information systems. To meet these needs, FaciliCom contracts with AHI for its
billing and other management information services. AHI, through its subsidiary
Armstrong, owns 83.5% of the outstanding capital stock of FaciliCom.
Subsidiaries of AHI provide billing, financial accounting and specialized
information technology services to its subsidiary companies, including
FaciliCom, from its data processing center located in Butler, Pennsylvania.
AHI's subsidiaries include independent telecommunications companies and
international telecommunications companies. Based on its knowledge of billing in
the telecommunications industry, AHI has developed customized systems to provide
call detail record collection, processing, rating, reporting and bill rendering.
These systems enable FaciliCom to:
- analyze accurately its traffic, revenues and margins by customer and by
route on a daily basis;
- validate carrier settlements; and
- monitor least cost routing of customer traffic.
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FaciliCom believes that contracting with AHI for these customized systems
gives it a strategic advantage over many emerging carriers because FaciliCom
receives timely and accurate reporting of its customer traffic, revenues and
margins without incurring the significant costs associated with developing and
maintaining its own data center. The AHI data center utilizes IBM mainframe
systems with full disaster recovery and back-up facilities and provides 24 hours
per day, seven days per week data center support. AHI provides FaciliCom with
experienced professionals and programmers to further customize and support
FaciliCom's growing and changing needs for management information services. To
date, FaciliCom has not experienced any significant delays in billing customers.
FaciliCom attempts to bill its customers within five business days after a
billing cycle has been completed. FaciliCom believes that its arrangement with
AHI enables it to effectively and efficiently manage FaciliCom's growing
requirements relating to information technologies.
AHI has agreed to provide billing and management information systems
support for FaciliCom and FaciliCom's subsidiaries on terms that FaciliCom
believes are competitive with similar services offered in the industry. This
contract extends through September 30, 2002.
In consultation with AHI's staff, FaciliCom is currently implementing a
management information system to further enhance its ability to monitor its
growing operations. FaciliCom has engaged Perot Systems to develop a data
warehouse that will combine and store data from a number of information systems
and facilitate the presentation of data for management decision making.
FaciliCom uses its information technology and software for the following
purposes:
Call Detail Record Preprocess. When a customer initiates a call
through FaciliCom's network, each switch used to complete the call records
the details of the call. These details include the time of initiation, the
calling and called numbers, the type of call, called party answer and the
time of disconnect. These call detail records ("CDRs") are sent to the AHI
data center, where they are preprocessed. Copies of the CDRs and summary
information regarding the volumes of traffic are stored in the data
warehouse.
Wholesale Billing. On a predetermined billing schedule, CDRs for
completed calls are rated and wholesale bills are generated at the AHI data
center. Based on customer preference, the bills are sent to customers in
either a paper or an electronic format.
Retail Billing. FaciliCom's retail billing in Scandinavia is
currently handled by locally-developed billing software. The billing system
in Finland receives CDRs directly from FaciliCom's switch in Helsinki,
Finland. Billing data for other Scandinavian countries is preprocessed in
the AHI data center and sent to Malmo, Sweden in order to produce customer
bills. Retail billing data is sent in electronic format to local billing
companies that bill and collect.
Customer Service. FaciliCom has developed customer service systems
that record and track customer trouble reports. FaciliCom is in the process
of installing an industry standard customer service system that will allow
customers to report service failures and other technical difficulties over
the internet.
Network Management. FaciliCom has installed software developed by GTE
that monitors the status of its network components and displays network
conditions in its network operations center. This system provides real time
information that FaciliCom's staff members can use to reroute traffic and
perform corrective action, and to analyze and repair network hardware or
software problems.
Inventory and Provisioning. FaciliCom has developed software that
keeps track of the status and condition of its network hardware components.
FaciliCom's staff members use this system to assign equipment to customer
or carrier circuits and to instruct FaciliCom's staff members abroad on the
proper connection of these circuits.
In addition, all of FaciliCom's administrative and technical locations are
connected by a corporate wide area network that runs over the backbone network
FaciliCom has constructed to handle customer traffic. An authorized user with a
personal computer at any of FaciliCom's offices can access all of FaciliCom's
corporate systems and databases. FaciliCom controls access to this network
through the use of firewalls, password protection and other customary security
measures.
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FaciliCom has also installed mediation devices and software that were part
of a network monitoring system designed by GTE. These devices are located in
each of FaciliCom's switch centers and interface with major network components,
such as FaciliCom's gateway switches. These devices gather data from the network
in real time and transport it over FaciliCom's corporate wide access network to
its network operations center and to AHI's data center.
COMPETITION
The international telecommunications industry is intensely competitive and
is significantly affected by regulatory changes, marketing and pricing decisions
of the larger industry participants and the introduction of new services made
possible by technological advances. FaciliCom competes in the international
telecommunications market on the basis of price, customer service, transmission
quality and breadth of service offerings, and its carrier customers are
especially price sensitive. FaciliCom's competitors include:
- large, facilities-based, multinational carriers, and smaller
facilities-based long distance service providers that have emerged as a
result of deregulation;
- switch-based resellers of international long distance services; and
- global alliances among some of the world's largest telecommunications
carriers.
Competition in the U.S. The U.S.-based international telecommunications
services market is dominated by AT&T, MCI WorldCom, Qwest and Sprint. FaciliCom
also competes in the U.S. with second-tier international carriers, including IDT
Corporation, Pacific Gateway Exchange, Inc., Primus Telecommunications Group,
Inc. and STAR Telecommunications, Inc. Several of these companies have
considerably greater financial and other resources and more extensive domestic
and international communications networks than FaciliCom does. In addition, the
FCC's order implementing the U.S.'s open market commitments to the WTO may make
it easier for some foreign carriers to enter the U.S. market, which would
increase FaciliCom's competition.
Competition in Europe. In many international markets, a single carrier,
which is often a government-owned or a former monopoly carrier, controls access
to the local networks, enjoys better brand name recognition and customer loyalty
and possesses significant operational economies. These advantages include a
larger backbone network and operating agreements with other dominant national
carriers. These carriers generally have competitive advantages over FaciliCom
because of their close ties with the national regulatory authorities of their
home countries that may be reluctant to act in a way that fosters increased
competition for the local dominant provider. As a result, FaciliCom's ability to
increase its market share in these countries may be extremely limited.
Competition has begun to increase in the EU telecommunications markets in
connection with the deregulation of the telecommunications industry in most EU
countries, which began in January 1998. This increase in competition could
adversely affect revenue per minute and gross margins as a percentage of
revenues.
FaciliCom competes in 13 European markets by offering competitively priced
wholesale services, and it intends to offer competitively priced stand-alone and
bundled telecommunications services to retail customers. The principal
competitor in each of these markets is the dominant national carrier, such as
British Telecom, Deutsche Telekom, France Telecom, KPN (The Netherlands),
Swisscom, Tele Denmark and Telia (Sweden). Other competitors include: Cable and
Wireless, Cellnet Group, Colt, Energis, Esprit Telecom Group, RSL Communications
and Volaphone in the U.K.; O.tel.o Communications, Mannesmann ARCOR, VIAG
Interkom, MCI WorldCom in Germany; Enertel, MCI WorldCom and Telfort in The
Netherlands; diAx and Sunrise in Switzerland; and Mobilix and Telia in Denmark.
Additionally, FaciliCom may also face competition from other licensed public
telephone operators that are constructing their own facilities-based networks,
cable companies and switch-based resellers.
Competition from Global Alliances and Consolidation in the
Telecommunications Industry. FaciliCom anticipates that it will face additional
competition from global alliances among large long distance telecommu-
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nications providers. In addition, consolidation in the telecommunications
industry may create even larger competitors with greater financial and other
resources. The effect of these proposed mergers and alliances could create
increased competition in the telecommunications services market and reduce the
number of customers that purchase wholesale international long distance services
from FaciliCom.
LICENSES AND REGULATION
United States. In the U.S., the provision of telecommunications common
carrier services is subject to the provisions of the Communications Act, the FCC
regulations promulgated thereunder and the applicable laws and regulations of
the various states administered by the relevant state public service
commissions. The FCC and the state commissions continue to regulate ownership of
transmission facilities, provision of services and the terms and conditions
under which such services are provided. Non-dominant carriers are required by
federal and state law and regulations to file tariffs listing the rates, terms
and conditions of the services they provide. The FCC and some state agencies
also impose prior approval requirements on transfers of control.
Regulatory requirements imposed on U.S. telecommunications service
providers will continue to evolve as a result of the WTO Agreement, federal
legislation, court decisions and new and revised policies of the FCC and state
commissions. The FCC continues to refine its international service rules to
promote competition, reflect and encourage liberalization in foreign countries
and reduce international accounting rates toward cost. As noted above, the FCC
adopted new lower accounting rate benchmarks that became effective January 1,
1998. More recently, the FCC adopted an order eliminating its international
settlements policy on competitive routes and as applied to arrangements between
U.S. carriers and foreign carriers that lack market power. FaciliCom expects the
new rules, which went into effect on July 29, 1999, to decrease its regulatory
burden.
International Service Regulation. International common carriers, such as
FaciliCom, are required to obtain authority under Section 214 of the
Communications Act and file a tariff containing the rates, terms and conditions
applicable to their services before initiating international telecommunications
services. FaciliCom has obtained "global" Section 214 authority from the FCC to
use, on a facilities and resale basis, various transmission media for
international switched and private line services. Non-dominant international
carriers, such as FaciliCom, must file their international tariffs and any
revisions with one day's notice. FaciliCom has filed international tariffs for
switched and private line services with the FCC. Additionally, international
telecommunications service providers are required to file copies of their
contracts with other carriers, including foreign carrier operating agreements,
with the FCC within 30 days of execution. FaciliCom has filed each of its
foreign carrier agreements with the FCC. The FCC's rules also require that
FaciliCom periodically file a variety of reports regarding the volume of its
international traffic and revenues and use of international facilities.
FaciliCom has filed the required reports. Failure to comply with these
requirements could result in the imposition of fines or other penalties,
including, in an extreme case, the revocation of FaciliCom's authorizations.
FaciliCom's FCC authorization also permits it to resell international
private lines interconnected to the public switched telecommunications networks
for the provision of switched services between the U.S. and:
- WTO member countries that have been found by the FCC to offer equivalent
opportunities to U.S. carriers or in which the settlement rate for at
least 50% of the settled U.S.-billed traffic on the route in question is
at or below the settlement rate benchmark and;
- non-WTO member countries if the settlement rate for at least 50% of the
settled U.S.-billed traffic on the route in question is at or below the
settlement rate benchmark and that have been found by the FCC to offer
equivalent opportunities to U.S. carriers.
To date, the FCC has found that appropriately licensed U.S. carriers may
provide such services to more than 20 foreign markets including Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong (data and
facsimile services only), Iceland, Ireland, Israel, Italy, Japan, Luxembourg,
The Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the U.K.
The FCC has also simplified the process by which carriers may obtain FCC
approval to offer international simple resale to particular
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destinations. Carriers may now petition the FCC to authorize the services using
a streamlined procedure if the petition clearly demonstrates that the
destination is a WTO member country and that settlement rates for more than 50%
of the settled U.S.-billed traffic on that route are at or below the FCC's
benchmark settlement rate. Once a carrier makes such a showing and the FCC
approves international simple resale on a route, all carriers holding a global
Section 214 authorization will be permitted to offer international simple resale
on that route. FaciliCom anticipates that these new opportunities to engage in
international simple resale will result in reduced costs and prices, increased
competition and increased demand on these routes.
The FCC currently imposes certain restrictions upon the use of FaciliCom's
private lines between the U.S. and the countries in which international simple
resale has been authorized. FaciliCom may not route traffic to or from the U.S.
over a private line between the U.S. and one of these countries if the traffic
originates or terminates in a third country, the third country has not been
found by the FCC to offer equivalent resale opportunities and the traffic is not
routed to or from the third country and the approved country via a publicly
available service (i.e., "switched hubbing").
The FCC's Policies on Transit and Refile. FaciliCom may engage in the
practice whereby a carrier routes, through its facilities in a third country,
traffic originating from one country and destined for another country. The FCC
has permitted third country calling where all countries involved consent to the
routing arrangements. This arrangement is referred to as "transiting." Under
arrangements referred to as "refiling" or "reorigination", the carrier in the
destination country does not consent to receiving traffic from the originating
country and does not realize that the traffic it receives from the third country
is actually originating from a different country. Although this practice is
inconsistent with FCC polices, to date, the FCC has not enforced its policies
with respect to carriers engaging in refiling.
Domestic Service Regulation. FaciliCom does not currently provide domestic
interstate or intrastate telecommunication services within the U.S., although it
plans to offer such services in the future. When FaciliCom offers such services,
its provision of such services will be subject to regulation by the FCC and
relevant state commissions, which regulate interstate and intrastate rates,
respectively. The majority of the states require FaciliCom to register or apply
for certification before initiating long-distance telecommunications services
within a single state. Fines and other penalties may be imposed for violations
of these rules.
Europe. In Europe, each country regulates its telecommunications industry.
The member states of the EU are obligated to implement legislation issued by the
European Commission, which is responsible for creating pan-European policies and
developing a regulatory framework to ensure an open, competitive
telecommunications market.
In 1990, the European Commission issued the services directive requiring
each member state of the EU to abolish existing monopolies in telecommunications
services with the exception of voice telephony. The intended effect of the
services directive was to permit the competitive offering of all services, other
than voice telephony, including value-added services and voice services to
closed user groups. However, as a result of local implementation of the services
directive through the adoption of national legislation, there are differing
interpretations of the definition of prohibited voice telephony and permitted
value-added and closed user group services. Voice services accessed by customers
through leased lines are permissible in all member states of the EU. The
European Commission has generally taken a narrow view of the services classified
as voice telephony, declaring that voice services may not be reserved to the
national carriers if:
- dedicated customer access is used to provide the service;
- the service confers new value-added benefits on users, such as
alternative billing methods; or
- calling is limited by a service provider to a group having legal,
economic or professional ties.
In March 1996, the EU adopted the full competition directive containing two
provisions which required EU member states to allow the creation of alternative
telecommunications infrastructures by July 1, 1996, and which reaffirmed the
obligation of EU member states to abolish the national carriers' monopolies in
voice telephony by 1998. The full competition directive encouraged EU member
states to accelerate liberalization of voice telephony. Some EU countries may
delay the abolition of the voice telephony monopoly based on
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exemptions established in the full competition directive. These countries
include Portugal and Ireland (January 1, 2000) and Greece (December 31, 2000).
However, Luxembourg, Spain and Ireland have already implemented the full
competition directive in whole or in part.
Each EU member state in which FaciliCom currently conducts or plans to
conduct business has a different regulatory regime and these differences are
expected to continue. The requirements for FaciliCom to obtain necessary
approvals vary considerably from country to country and are likely to change as
competition is permitted in new service sectors.
Asia, Pacific Rim and Latin America. The extent and timing of
liberalization, and the scope and nature of regulation varies among the Pacific
Rim, Asian and Latin American countries. FaciliCom's ability to provide voice
telephony services is restricted in some Asian, Pacific Rim and Latin American
countries. For example, China remains largely closed to competition. FaciliCom
has a pending application to provide international telecommunications services
in Hong Kong, where the local authorities have encouraged limited competition.
On July 1, 1997, the People's Republic of China resumed sovereignty over Hong
Kong, and FaciliCom cannot be certain that China will continue the existing
licensing regime with respect to the Hong Kong telecommunications industry. In
New Zealand, regulation of FaciliCom's proposed provision of telecommunications
services is relatively permissive, and FaciliCom has been granted registration
as an international services operator.
FaciliCom's services in Japan are subject to regulation by the Ministry of
Post and Telecommunications under the Telecommunications Business Law. In Japan,
FaciliCom must obtain a license as a Type I facilities-based business before it
may provide telecommunications services over its own facilities. FaciliCom must
register as a Special Type II business before it provides telecommunications
services over international circuits leased from another carrier, or provides
domestic service in Japan over leased circuits if the volume of traffic exceeds
a set amount. A registered Special Type II business may provide over leased
lines value-added or basic telecommunications services, or services to closed
user groups. FaciliCom must notify the Japanese ministry as a General Type II
business only if it provides domestic service in Japan over leased circuits and
does not exceed the traffic threshold that would require Special Type II.
Although the Japanese government until recently prohibited greater than 33.0%
foreign ownership of a Type I business, as well as the resale of international
private lines interconnected to the public switched telephone network at both
ends, the Japanese ministry is now awarding authorizations to foreign-affiliated
carriers to provide telecommunications services using their own facilities and
to resell interconnected international private lines. The Japanese ministry also
regulates the interconnection charges imposed by Type I businesses, and must
approve intercarrier agreements between Type I carriers or between Type I and
Special Type II carriers. FaciliCom has also filed an application in Japan
requesting a Type I telecommunications license requesting authorization to allow
it to construct and operate its own network facilities, as well as to originate
and terminate traffic over resold lines. The Type I license process is onerous
and involves extensive consultation with the Japanese ministry.
Licenses. Consistent with its global strategy, FaciliCom or one of
FaciliCom's local operating subsidiaries has received facilities-based and
resale authorization to provide telecommunications services in Austria, Canada,
Sweden, Denmark, The Netherlands, Germany, El Salvador, Finland, France, Italy,
Norway, Guatemala, Spain, Switzerland and the U.K. FaciliCom also participates
in the numbering plans of Sweden, Denmark, Finland, The Netherlands, Norway,
Switzerland and the U.K. FaciliCom is also licensed in Belgium as a provider of
non-reserved services, including voice services for closed user groups and
value-added services, and it has requested additional authorization to provide
international simple resale. FaciliCom has been awarded access codes in El
Salvador, Denmark, Finland, France, Guatemala, Italy, Norway, Sweden,
Switzerland and the U.K. to allow it to operate as a facilities-based provider
of international telecommunications services. FaciliCom has been granted
registration by the New Zealand Ministry of Commerce as an operator under the
Telecommunications (International Services) Regulation 1994. FaciliCom has a
pending application for various authorizations in Hong Kong.
In the U.S., FaciliCom has obtained international facilities and resale
licenses from the FCC. In addition, FaciliCom is certified or registered to
provide intrastate interexchange telecommunications services or may provide such
services based upon FaciliCom's unregulated status in 45 states. Applications
for certification are
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pending in five states. State issued certificates of authority to provide
intrastate interexchange telecommunications services generally can be
conditioned, modified, canceled, terminated or revoked by state
telecommunications commissions for failure to comply with state law, or the
rules, regulations and policies of the state commissions.
EMPLOYEES
As of September 30, 1999, FaciliCom had 293 employees. None of FaciliCom's
U.S. employees are covered by a collective bargaining agreement; however,
certain of FaciliCom's European employees are members of labor unions. FaciliCom
believes that its relationship with its employees is good. On October 1, 1999,
as part of a corporate restructuring, FaciliCom reduced its total number of
employees to 251.
INTELLECTUAL PROPERTY
FaciliCom owns the registered service mark FaciliCom International for
international long distance telecommunications services, as well as other marks
that are used to provide some of FaciliCom's retail services in specific
countries.
PROPERTIES
FaciliCom leases office space, including its principal headquarters in
Washington, D.C., and switch location space under operating leases and subleases
that expire at various dates through January 2009. The principal properties that
FaciliCom leased or subleased as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
SQUARE LEASE
LOCATION FOOTAGE EXPIRATION
- -------- ------- --------------
<S> <C> <C>
Malmo, Sweden (Sales Office)................................ 9,218 December 1999
Oslo, Norway (Switch Location).............................. 42 February 2000
New York, NY (Switch Location).............................. 1,500 August 2000
Jersey City, NJ (Switch Location)........................... 2,404 September 2000
Sornaisten, Finland (Switch Location)....................... 1,130 June 2001
Amsterdam, The Netherlands (Sales Office)................... 3,379 December 2001
Malmo, Sweden (Switch Location)............................. 1,584 January 2002
Frankfurt, Germany (Sales Office)........................... 2,956 February 2002
London, U.K. (Switch Location).............................. 888 April 2002
Geneva, Switzerland (Sales Office).......................... 2,428 June 2002
Los Angeles, CA (Switch Location)........................... 5,350 November 2002
London, U.K. (Sales Office)................................. 3,839 January 2003
Frankfurt, Germany (Switch Location)........................ 2,798 February 2003
Amsterdam, The Netherlands (Switch Location)................ 1,161 May 2003
London, U.K. (Switch Location).............................. 546 September 2003
Helsinki, Finland (Sales Office and Switch Location)........ 3,769 October 2003
Malmo, Sweden (Sales Office and Switch Location)............ 18,458 November 2003
Milan, Italy (Sales Office and Switch Location)............. 6,297 July 2004
Paris, France (Sales Office and Switch Location)............ 5,438 January 2007
Brussels, Belgium (Sales Office and Switch Location)........ 10,253 March 2007
Copenhagen, Denmark (Sales and Switch Location)............. 6,104 August 2007
Miami, FL (Switch Location)................................. 3,578 November 2007
Washington, D.C. (Corporate Headquarters)................... 49,602 March 2008
Zurich, Switzerland (Sales Office and Switch Location)...... 7,603 June 2008
Madrid, Spain (Sales Office and Switch Location)............ 9,979 July 2008
Vienna, Austria (Sales Office and Switch Location).......... 9,775 July 2008
New York, NY (Switch Location).............................. 10,709 January 2009
</TABLE>
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FaciliCom's leases typically contain provisions that enable it to renew
them for additional terms beyond their scheduled termination date.
LEGAL PROCEEDINGS
FaciliCom makes routine filings and is a party to regulatory proceedings
with the FCC relating to its operations that FaciliCom believes are customary
for its industry. FaciliCom is not a party to any lawsuit or proceeding which,
in its opinion, is likely to have a material adverse effect on its business.
CAPITAL STOCK
The authorized capital stock of FaciliCom consists of 300,000 shares of
common stock, par value $.01 per share, including 275,000 shares of voting stock
and 25,000 shares of non-voting stock. As of the date hereof, there were 225,202
shares of voting FaciliCom Common Stock and 1,215 shares of non-voting FaciliCom
Common Stock issued and outstanding. There is no established public trading
market for the FaciliCom Common Stock. All of the voting FaciliCom Common Stock
is owned by the FaciliCom Shareholders. All of the non-voting FaciliCom Common
Stock is owned by former employees of FaciliCom. No dividends have been declared
or paid on the FaciliCom Common Stock since October 1, 1996.
Holders of shares of voting FaciliCom Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. Holders of all
FaciliCom Common Stock are entitled to receive such dividends as FaciliCom's
board of directors may declare in its discretion out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of FaciliCom,
the holders of shares of FaciliCom Common Stock are entitled to a distribution
of any remaining assets of FaciliCom. Holders of shares of FaciliCom Common
Stock have no cumulative voting or preemptive rights. All outstanding shares of
FaciliCom Common Stock are fully paid and nonassessable.
RECENT DEVELOPMENTS
FACILICOM FISCAL FOURTH QUARTER RESULTS
On November 4, 1999, FaciliCom announced the results of their fourth
quarter of fiscal 1999. The unaudited financial information of FaciliCom
presented below, in the opinion of FaciliCom management, include all the
significant normal and recurring adjustments necessary for fair presentation of
the financial position and results of operations for the periods presented (in
thousands).
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<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
1999 1998 1999 1998
-------- -------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $124,071 $ 67,100 $403,766 $184,246
Cost of revenues...................................... 111,325 64,479 368,578 178,952
-------- -------- -------- --------
Gross margin........................................ 12,746 2,621 35,188 5,294
Selling, general and administrative................... 14,676 12,514 55,030 34,347
Staff restructuring expense........................... 634 -- 634 --
Stock-based compensation expense...................... 3,247 311 3,611 6,017
Depreciation and amortization......................... 12,863 3,502 29,758 8,816
-------- -------- -------- --------
Operating loss...................................... (18,674) (13,706) (53,845) (43,886)
Interest expense...................................... (8,717) (8,073) (34,407) (22,612)
Interest income....................................... 710 2,558 4,356 8,152
Other income.......................................... -- -- -- 791
Exchange gain (loss).................................. (244) 264 (1,590) (391)
-------- -------- -------- --------
Loss before income taxes............................ (26,925) (18,957) (85,486) (57,946)
Income tax benefit.................................... 4,313 4,877 10,995 11,351
-------- -------- -------- --------
Net loss............................................ $(22,612) $(14,080) $(74,491) $(46,595)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
----------- --------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, equivalents and investments........................... $ 61,323 $181,345
Property and equipment, gross............................... 215,599 126,165
Total assets................................................ 370,166 378,884
Total long-term obligations (net of current portion)........ 328,421 305,137
Stockholders' equity (deficit).............................. (126,830) (38,575)
</TABLE>
For more information concerning FaciliCom, please consult and review
information in section "FaciliCom Consolidated Financial Statements".
ACCOUNTANTS
Ernst & Young LLP, independent auditors, has audited World Access'
consolidated financial statements and schedules included in the World Access
Annual Report on Form 10-K for the year ended December 31, 1998 and has no
relationship with World Access other than that arising from its appointment as
independent auditors. Representatives of Ernst & Young LLP are expected to be
present at the Special Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions from
stockholders.
Deloitte & Touche LLP, independent auditors, has audited FaciliCom's
consolidated financial statements included in the Proxy Statement for the year
ended September 30, 1998 and has no relationship with FaciliCom other than that
arising from its appointment as independent auditors.
OTHER MATTERS
The Board of Directors does not know of any other matters which may come
before the Special Meeting. If any another matters are properly presented at the
Special Meeting, it is the intention of the persons named in the accompanying
proxy to vote, or otherwise act, in accordance with their best judgement on such
matters.
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STOCKHOLDER PROPOSALS
Proposals of stockholders submitted pursuant to Rule 14a-8 of the
Commission for inclusion in the proxy statement for the 2000 annual meeting of
stockholders of World Access must be received by World Access at its principal
executive offices at 945 E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326
by January 7, 2000, unless the date of World Access' 2000 annual meeting is
changed by more than 30 days from the date of World Access' 1999 annual meeting,
in which case proposals are due a reasonable time before World Access begins to
print and mail the proxy materials for its 2000 annual meeting.
Under the World Access Certificate, stockholders desiring to nominate
persons for election as directors at an annual meeting must notify the Secretary
of World Access in writing not less than 120 calendar days in advance of the
date which is one year later than the date of the World Access proxy statement
released to stockholders in connection with the previous year's annual meeting
of stockholders; provided, however, that if no annual meeting of stockholders
was held in the previous year or if the date of the forthcoming annual meeting
of stockholders has been changed by more than 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, 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 World Access or (b) the day on which public disclosure of the date
of the forthcoming meeting was made by or on behalf of World Access. Any such
stockholders' notices must contain the specific information set forth in the
World Access Certificate. Stockholders will be furnished a copy of the World
Access Certificate without charge upon written request to the Secretary of World
Access.
AVAILABLE INFORMATION
World Access is subject to the information requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with 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 is 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 is included in Nasdaq.
Reports, proxy and information statements and other information filed by World
Access with Nasdaq may also be inspected at the offices of the National
Association of Securities Dealers, Inc., Market Listing Section, 1735 K Street,
N.W., Washington, D.C. 20006.
Statements in this Proxy Statement or in any document incorporated by
reference in this Proxy Statement as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
or incorporated by reference to such other document, each such statement being
qualified in all respects by such reference.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with solicitation of proxies made hereby and, if given or made, such information
or representation must not be relied upon as having been authorized by World
Access or any other person. The delivery of this Proxy Statement shall not under
any circumstances create an
103
<PAGE> 112
implication that there has been no change in the affairs of World Access or
FaciliCom since the date hereof or that the information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by World Access with the
Commission are incorporated by reference in this Proxy Statement:
(a) World Access' Annual Report on Form 10-K for the year ended
December 31, 1998, as amended on August 31, 1999, October 7, 1999 and
November 4, 1999;
(b) World Access' Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1999, as amended on August 31, 1999, and June 30, 1999 as
amended on October 7, 1999 and November 4, 1999;
(c) World Access' Current Reports on Form 8-K filed May 3, 1999 (event
date: April 21, 1999), July 14, 1999 (event date: June 30, 1999) and August
19, 1999 (event date: August 17, 1999);
(d) The combined financial statements of Cherry Communications
Incorporated (d/b/a Resurgens Communications Group) and Cherry
Communications U.K. Limited included in WA Telcom's Current Report on Form
8-K filed on July 27, 1998 (event date: July 20, 1998), as amended by
Amendment No. 1 on Form 8-K/A filed on September 4, 1998, and Amendment No.
2 on Form 8-K/A filed on September 25, 1998;
(e) The consolidated financial statements of Telco Systems, Inc.
included in World Access' Registration Statement on Form S-4 (No.
333-67025), as filed with the Commission on November 10, 1998;
(f) The consolidated financial statements of NACT Telecommunications,
Inc. included in World Access' Registration Statement on Form S-4 (No.
333-65389), filed with the Commission on October 6, 1998, as amended by
Amendment No. 1 to Form S-4 filed on October 7, 1998, and Amendment No. 2
to Form S-4 filed October 7, 1998;
(g) The consolidated financial statements of NACT Telecommunications,
Inc. included in NACT's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997 (File Number 000-22017);
(h) The combined unaudited interim financial statements of Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) and
Cherry Communications U.K. Limited included in our Report on Form S-3 (No.
333-79097), Amendment No. 3, filed on November 5, 1999;
(i) World Access' Proxy Statement for its 1999 Annual Meeting held on
June 15, 1999 contained in the Schedule 14A filed April 30, 1999;
(j) The description of the World Access Common Stock included in the
Registration Statement on Form S-4 (No. 333-67025), as filed by World
Access with the Commission on November 10, 1998; and
(k) The risk factors included in the Registration Statement on Form
S-3 (No. 333-79097), as filed by World Access with the Commission on May
21, 1999, as amended by Amendment No. 1 to Form S-3 filed with the
Commission on August 31, 1999.
All documents filed by World Access pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
in this Proxy Statement and to be a part hereof from the dates of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
104
<PAGE> 113
THIS PROXY 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 2200, ATLANTA,
GEORGIA 30326 (TELEPHONE (404) 231-2025), ATTENTION: CHIEF FINANCIAL OFFICER. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING,
ANY REQUEST SHOULD BE MADE PRIOR TO NOVEMBER 30, 1999.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT IN CONNECTION WITH THE SOLICITATIONS MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY WORLD ACCESS OR FACILICOM. THIS PROXY STATEMENT DOES NOT
CONSTITUTE A SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH A SOLICITATION.
105
<PAGE> 114
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FACILICOM INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1999 (Unaudited),
September 30, 1998 and 1997............................... F-3
Consolidated Statements of Operations and Comprehensive Loss
for the nine months ended June 30, 1999 (Unaudited) and
1998 (Unaudited) and each of the three years in the period
ended September 30, 1998.................................. F-4
Consolidated Statements of Capital Accounts for the nine
months ended June 30, 1999 (Unaudited) and each of the
three years in the period ended September 30, 1998........ F-5
Consolidated Statements of Cash Flows for the nine months
ended June 30, 1999 (Unaudited) and 1998 (Unaudited) and
each of the three years in the period ended September 30,
1998...................................................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
FaciliCom International, Inc.:
We have audited the accompanying consolidated balance sheets of FaciliCom
International, Inc. and subsidiaries (formerly FaciliCom International, LLC)
("FaciliCom") as of September 30, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, capital accounts and cash flows
for each of the three years in the period ended September 30, 1998. These
financial statements are the responsibility of FaciliCom'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 FaciliCom International, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 9, 1998
F-2
<PAGE> 116
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 18,696 $ 68,129 $ 1,016
Accounts receivable -- net of allowance for doubtful
accounts of $7,862 (Unaudited), $4,620 and $161 at June
30, 1999, September 30, 1998 and 1997, respectively..... 98,542 59,915 19,485
Marketable securities ($31,755 (Unaudited) at June 30,
1999 and $31,394 at September 30, 1998 restricted)...... 31,755 70,092 --
Prepaid expenses and other current assets................. 6,067 6,060 1,737
--------- -------- --------
Total current assets................................ 155,060 204,196 22,238
--------- -------- --------
PROPERTY AND EQUIPMENT:
Transmission and communications equipment................. 121,838 97,849 16,593
Transmission and communications equipment-leased.......... 69,178 17,162 5,419
Furniture, fixtures and other............................. 19,874 11,154 1,266
--------- -------- --------
210,890 126,165 23,278
Less accumulated depreciation and amortization............ (25,122) (10,417) (3,034)
--------- -------- --------
Net property and equipment.......................... 185,768 115,748 20,244
--------- -------- --------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$2,846
(Unaudited), $1,673 and $583 at June 30, 1999, September
30, 1998 and 1997, respectively......................... 4,949 5,630 1,535
Debt issue costs, net of accumulated amortization of
$1,527
(Unaudited) and $744 at June 30, 1999 and September 30,
1998, respectively..................................... 8,913 9,696 --
Advance to affiliate...................................... 550 490 --
Marketable securities-restricted.......................... 29,525 43,124 --
--------- -------- --------
Total other assets.................................. 43,937 58,940 1,535
--------- -------- --------
TOTAL ASSETS........................................ $ 384,765 $378,884 $ 44,017
========= ======== ========
LIABILITIES AND CAPITAL ACCOUNTS
CURRENT LIABILITIES:
Accounts payable.......................................... $ 95,269 $ 63,802 $ 24,205
Accounts payable -- transmission equipment................ 29,344 24,668 --
Accounts payable -- related party......................... 1,810 332 389
Accrued interest.......................................... 14,938 7,109 331
Other current obligations................................. 23,538 12,610 5,924
Line of credit............................................ 10,000 -- --
Capital lease obligations due within one year............. 11,490 3,407 573
Long-term debt due within one year........................ 347 394 1,043
--------- -------- --------
Total current liabilities........................... 186,736 112,322 32,465
--------- -------- --------
OTHER LIABILITIES:
Capital lease obligations................................. 4,004 4,791 1,723
Long-term debt............................................ 300,162 300,346 13,000
Loans from owners......................................... -- -- 6,250
--------- -------- --------
Total other liabilities............................. 304,166 305,137 20,973
--------- -------- --------
COMMITMENTS AND CONTINGENCIES
CAPITAL ACCOUNTS:
Common stock, $.01 par value -- 300,000 shares authorized;
226,923 and 225,741 issued and outstanding at June 30,
1999 (Unaudited) and September 30, 1998, respectively... 2 2 --
Additional paid-in capital................................ 37,658 36,534 --
Class A initial capital................................... -- -- 180
Class B initial capital................................... -- -- 60
Excess capital contributions -- Class A................... -- -- 16,296
Stock-based compensation.................................. 5,546 6,305 --
Accumulated other comprehensive (loss) income:
Holding gain on marketable securities................... -- 24 --
Foreign currency translation adjustments................ (5,819) 3,450 684
Accumulated deficit....................................... (143,524) (84,890) (26,641)
--------- -------- --------
Total capital accounts.............................. (106,137) (38,575) (9,421)
--------- -------- --------
TOTAL LIABILITIES AND CAPITAL ACCOUNTS.............. $ 384,765 $378,884 $ 44,017
========= ======== ========
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 117
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30 YEARS ENDED SEPTEMBER 30,
------------------- -----------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $279,695 $117,146 $184,246 $ 70,187 $11,891
Cost of revenues........................... 257,253 114,473 178,952 65,718 12,742
-------- -------- -------- -------- -------
Gross margin (deficit)..................... 22,442 2,673 5,294 4,469 (851)
-------- -------- -------- -------- -------
Operating expenses:
Selling, general and administrative..... 38,073 20,917 32,797 13,072 7,575
Stock-based compensation expense........ 364 5,706 6,017 -- --
Related party expense................... 2,281 917 1,550 439 7
Depreciation and amortization........... 16,895 5,314 8,816 2,318 1,143
-------- -------- -------- -------- -------
Total operating expenses........... 57,613 32,854 49,180 15,829 8,725
-------- -------- -------- -------- -------
Operating loss............................. (35,171) (30,181) (43,886) (11,360) (9,576)
-------- -------- -------- -------- -------
Other income (expense):
Interest expense-related party.......... -- (195) (195) (462) (26)
Interest expense........................ (25,690) (14,344) (22,417) (874) (286)
Interest income......................... 3,646 5,594 8,152 -- --
Gain on settlement agreement............ -- 791 791 -- --
Foreign exchange (loss) gain............ (1,346) (655) (391) (1,335) 226
-------- -------- -------- -------- -------
Total other expense................ (23,390) (8,809) (14,060) (2,671) (86)
-------- -------- -------- -------- -------
Loss before income taxes................... (58,561) (38,990) (57,946) (14,031) (9,662)
Income tax benefit......................... 6,682 6,475 11,351
-------- -------- -------- -------- -------
Net loss................................... (51,879) (32,515) (46,595) (14,031) (9,662)
Other comprehensive (loss) income:
Foreign currency translation
adjustment............................ (9,269) 561 2,766 929 4
-------- -------- -------- -------- -------
Total comprehensive loss........... $(61,148) $(31,954) $(43,829) $(13,102) $(9,658)
======== ======== ======== ======== =======
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 118
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDING
COMMON STOCK ADDITIONAL CLASS A CLASS B EXCESS CAPITAL STOCK- LOSS ON
--------------- PAID-IN INITIAL INITIAL CONTRIBUTIONS BASED MARKETABLE
SHARES AMOUNT CAPITAL CAPITAL CAPITAL CLASS A COMPENSATION SECURITIES
------ ------ ---------- ------- ------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995........ -- $ -- $ -- $ 180 $ 60 $ 2,594 $ -- $ --
Net loss.......................... -- -- -- -- -- -- -- --
Contributions..................... -- -- -- -- -- 7,083 -- --
Guaranteed return................. -- -- -- -- -- -- -- --
Contribution to excess
capital -- guaranteed return.... -- -- -- -- -- 499 -- --
Foreign currency translation
adjustments..................... -- -- -- -- -- -- -- --
--- ---- ------- ----- ---- -------- ------ ----
BALANCE, SEPTEMBER 30, 1996........ -- -- -- 180 60 10,176 -- --
Net loss.......................... -- -- -- -- -- -- -- --
Converted loans from owners....... -- -- -- -- -- 5,396 -- --
Guaranteed return................. -- -- -- -- -- -- -- --
Contribution to excess
capital -- guaranteed return.... -- -- -- -- -- 724 -- --
Foreign currency translation
adjustments..................... -- -- -- -- -- -- -- --
--- ---- ------- ----- ---- -------- ------ ----
BALANCE, SEPTEMBER 30, 1997........ -- -- -- 180 60 16,296 -- --
Net loss.......................... -- -- -- -- -- -- -- --
Contributions..................... -- -- -- -- -- 13,750 -- --
Converted loans from owners....... -- -- -- -- -- 6,250 -- --
Reorganization.................... 226 2 36,534 (180) (60) (36,296) -- --
Utilization of tax benefit of the
Company's operating loss by
AHI............................. -- -- -- -- -- -- -- --
Stock options granted............. -- -- -- -- -- -- 5,706 --
Phantom unit exchange............. -- -- -- -- -- -- 599 --
Holding gain on marketable
securities...................... -- -- -- -- -- -- -- 24
Foreign currency translation
adjustments..................... -- -- -- -- -- -- -- --
--- ---- ------- ----- ---- -------- ------ ----
BALANCE, SEPTEMBER 30, 1998........ 226 2 36,534 -- -- -- 6,305 24
Net loss (Unaudited).............. -- -- -- -- -- -- -- --
Utilization of tax benefit of the
Company's operating loss by AHI
(Unaudited)..................... -- -- -- -- -- -- -- --
Stock options granted/exercised
(Unaudited)..................... 1 1,124 (759)
Holding loss on marketable
securities (Unaudited).......... (24)
Foreign currency translation
adjustments (Unaudited)......... -- -- -- -- -- -- -- --
--- ---- ------- ----- ---- -------- ------ ----
BALANCE, JUNE 30, 1999
(Unaudited)....................... 227 $ 2 $37,658 $ -- $ -- $ -- $5,546 $ --
=== ==== ======= ===== ==== ======== ====== ====
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRANSLATION ACCUMULATED CAPITAL
ADJUSTMENTS DEFICIT ACCOUNTS
----------- ----------- ---------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995........ $ -- $ (1,725) $ 1,109
Net loss.......................... -- (9,662) (9,662)
Contributions..................... -- -- 7,083
Guaranteed return................. -- (499) (499)
Contribution to excess
capital -- guaranteed return.... -- -- 499
Foreign currency translation
adjustments..................... (245) -- (245)
------- --------- ---------
BALANCE, SEPTEMBER 30, 1996........ (245) (11,886) (1,715)
Net loss.......................... -- (14,031) (14,031)
Converted loans from owners....... -- -- 5,396
Guaranteed return................. -- (724) (724)
Contribution to excess
capital -- guaranteed return.... -- -- 724
Foreign currency translation
adjustments..................... 929 -- 929
------- --------- ---------
BALANCE, SEPTEMBER 30, 1997........ 684 (26,641) (9,421)
Net loss.......................... -- (46,595) (46,595)
Contributions..................... -- -- 13,750
Converted loans from owners....... -- -- 6,250
Reorganization.................... -- -- --
Utilization of tax benefit of the
Company's operating loss by
AHI............................. -- (11,654) (11,654)
Stock options granted............. -- -- 5,706
Phantom unit exchange............. -- -- 599
Holding gain on marketable
securities...................... -- -- 24
Foreign currency translation
adjustments..................... 2,766 -- 2,766
------- --------- ---------
BALANCE, SEPTEMBER 30, 1998........ 3,450 (84,890) (38,575)
Net loss (Unaudited).............. -- (51,879) (51,879)
Utilization of tax benefit of the
Company's operating loss by AHI
(Unaudited)..................... -- (6,755) (6,755)
Stock options granted/exercised
(Unaudited)..................... 365
Holding loss on marketable
securities (Unaudited).......... (24)
Foreign currency translation
adjustments (Unaudited)......... (9,269) -- (9,269)
------- --------- ---------
BALANCE, JUNE 30, 1999
(Unaudited)....................... $(5,819) $(143,524) $(106,137)
======= ========= =========
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 119
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
JUNE 30, SEPTEMBER 30,
-------------------- ------------------------------
1999 1998 1998 1997 1996
-------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(51,879) $ (32,515) $ (46,595) $(14,031) $(9,662)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 16,895 5,314 8,816 2,318 1,143
Non-cash stock-based compensation.......... 364 5,706 6,017 -- --
Non-cash income tax benefit................ (6,753) (6,569) (11,654) -- --
Amortization of bond discount.............. (1,789) 762 237 -- --
Loss on disposal of property and
equipment............................... -- -- -- 130 --
Changes in operating assets and
liabilities:
Accounts receivable..................... (38,627) (19,881) (40,107) (14,260) (4,356)
Prepaid expenses and other current
assets................................ (7) (7,595) (3,792) (810) (770)
Accounts payable and other current
liabilities........................... 50,224 30,720 51,510 17,903 8,731
Accounts payable -- related party....... 1,478 (228) (57) 389 --
Advance to affiliate.................... (196) (2,018) (490) -- (499)
-------- --------- --------- -------- -------
Net cash used operating activities............. (30,290) (26,304) (36,115) (8,361) (5,413)
-------- --------- --------- -------- -------
Cash flows from investing activities:
Purchase of investments in subsidiaries...... -- (4,652) (4,652) -- --
Purchase of investments in available-for-sale
securities................................. (7,407) (64,234) (77,820) -- --
Maturities of available-for-sale
securities................................. 13,378 1,769 30,582 -- --
Sales of available-for-sale securities....... 32,798 4,037 7,046 -- --
Purchase of investments in held-to-maturity
securities................................. (1,164) (86,549) (87,683) -- --
Maturities of held-to-maturity securities.... 16,120 -- 14,446 -- --
Purchases of property and equipment.......... (72,288) (35,877) (66,487) (1,897) (2,004)
Other........................................ 331 44 (124) 233 930
-------- --------- --------- -------- -------
Net cash used in investing activities........ (18,232) (185,462) (184,692) (1,664) (1,074)
-------- --------- --------- -------- -------
Cash flows from financing activities:
Advances from owners......................... -- -- -- 9,726 2,029
Excess capital contributions................. -- 13,750 13,750 -- 7,083
Proceeds from debt issuance.................. -- 300,000 300,000 -- --
Proceeds from line of credit................. 10,000 -- -- -- --
Payments of long-term debt and capital
leases..................................... (10,742) (12,823) (18,156) (1,812) (540)
Payment of debt issuance costs............... (10,305) (10,440)
-------- --------- --------- -------- -------
Net cash provided by financing activities.... (742) 290,622 285,154 7,914 8,572
-------- --------- --------- -------- -------
Effect of exchange rate changes on cash........ (169) 561 2,766 929 4
-------- --------- --------- -------- -------
Increase (decrease) in cash and cash
equivalents.................................. (49,433) 79,417 67,113 (1,182) 2,089
Cash and cash equivalents, beginning of
period....................................... 68,129 1,016 1,016 2,198 109
-------- --------- --------- -------- -------
Cash and cash equivalents, end of period....... $ 18,696 $ 80,433 $ 68,129 $ 1,016 $ 2,198
======== ========= ========= ======== =======
Supplemental cash flow information:
Interest paid................................ $ 17,861 $ 1,181 $ 15,834 $ 747 $ 201
======== ========= ========= ======== =======
</TABLE>
- ---------------
NONCASH TRANSACTIONS:
(a) For the nine months ended June 30, 1998 and the fiscal year ended September
30, 1998, the majority owner converted $6,250 of loans into capital and a
$162 receivable was forgiven as part of the purchase of minority interest
which reduced prepaid expenses and other current assets and increased
goodwill.
(b) FCI received $480 in FCI-Sweden convertible debentures during the year
ended September 30, 1997 to satisfy an advance to affiliate, which reduced
advance to affiliate and advances from owners.
F-6
<PAGE> 120
(c) During the year ended September 30, 1997, the majority owner converted
$5,396 of loans and accrued interest into capital.
(d) FCI received property and equipment under capital leases and financing
agreements, which increased property and equipment and long-term
obligations $17,807 (Unaudited) and $10,755 (Unaudited) in the nine months
ended June 30, 1999 and 1998, respectively, and $10,755, $10,385 and $6,400
in the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
In addition, for the nine months ended June 30, 1999 and 1998 and for the
fiscal year ended September 30, 1998, FCI received equipment which
increased property and equipment and accounts payable transmission
equipment by $4,676 (Unaudited), $25,744 (Unaudited) and $24,668,
respectively (of which $15,331 was not yet placed in service as of
September 30, 1998).
(e) FCI recognized a tax benefit of $6,755 (Unaudited) and $6,569 (Unaudited)
for the nine months ended June 30, 1999 and 1998, respectively, and $11,654
for the fiscal year ended September 30, 1998. In accordance with the tax
sharing agreement with AHI entered into on December 22, 1997, FCI recorded
a dividend to AHI for the amount of the benefit to be realized by AHI (See
Note 5 to the consolidated financial statements).
See notes to the consolidated financial statements.
F-7
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Organization. FaciliCom International, LLC ("FCI, LLC") is a Delaware
limited liability company that was formed on May 5, 1995 to engage in various
international telecommunications businesses. On December 22, 1997, the owners of
FCI, LLC entered into an Investment and Shareholders Agreement ("Agreement").
Under the Agreement, the owners of FCI, LLC transferred all of their respective
units in FCI, LLC and FCI (GP), LLC, a Delaware limited liability company, to
FaciliCom International, Inc. ("FCI"), a Delaware corporation, and additionally
Armstrong International Telecommunications, Inc. ("AIT") contributed $20,000,000
(in cash and assignment of indebtedness) to FCI, all in exchange for 225,741
shares of FCI's common stock. FCI was incorporated on November 20, 1997, and has
300,000 authorized shares of common stock. Since the reorganization was a
combination of entities under common control, it was accounted for by combining
the historical accounts of FCI, LLC, FCI (GP), LLC and FCI in a manner similar
to a pooling of interests. FCI is authorized by the Federal Communications
Commission (the "FCC") to provide global facilities-based services as well as
switched international services through resale of the services and facilities of
other international carriers. In addition, FCI has worldwide authorization for
private line resale of noninterconnected private line services and authorization
to resell interconnected private lines for switched services to Canada, the
United Kingdom, Sweden, and New Zealand. FCI, LLC was and FCI is a
majority-owned subsidiary of AIT, which is a wholly owned subsidiary of
Armstrong Holdings, Inc. ("Armstrong" or "AHI").
On July 21, 1995, FCI acquired 66.5% of the outstanding capital stock of
both Nordiska Tele8 AB ("Tele8" or "FCI-Sweden") and FGC, Inc. ("FGC"), entities
related through common ownership. Subsequently, FCI acquired up to 99% of
FCI-Sweden and sold all of its interest in FGC. The additional interest in
FCI-Sweden was the result of three separate transactions (see Note 8). On March
14, 1997, $1,600,000 of FCI-Sweden convertible debentures were converted into
7,400 shares of FCI-Sweden common stock, on May 15, 1997, FCI paid $3,600,000
for 14,400 shares of FCI-Sweden common stock and on October 23, 1997, FCI paid
$750,000 for substantially all of the minority interest outstanding and recorded
$750,000 of goodwill. Also, on October 23, 1997, FCI sold all of its interest in
FGC for $100 and recorded a loss of approximately $79,000 on the transaction.
FCI-Sweden is a corporation organized under the laws of Sweden to provide
national and international telecommunications services. These acquisitions were
accounted for as purchase transactions with the purchase price being allocated
to the assets and liabilities acquired based on their fair values as of the date
of acquisition. The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill and is being amortized over five years.
The following summarizes the allocation of the original 1995 purchase price
to the major categories of assets acquired and liabilities assumed (in
thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 343
Property and equipment...................................... 1,760
Excess of cost over net assets of businesses acquired....... 1,715
Other intangibles........................................... 32
------
3,850
Less liabilities assumed.................................... 3,010
------
Cash paid......................................... $ 840
======
</TABLE>
On April 27, 1998, FCI entered into an agreement to purchase 100% of the
issued and outstanding capital stock of Oy Teleykkanen AB ("Tele 1" or
"FCI-Finland"), a corporation formed under the laws of Finland, for $4.0 million
in cash. FCI Finland is a Finnish provider of local and long distance
international telecommunication services and has a carrier agreement to exchange
customer traffic with Telecom Finland, the dominant carrier in Finland. This
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
recorded as goodwill and is
F-8
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
being amortized over five years. The results of operations for Tele 1 were
included in consolidated results of operations since the date of acquisition.
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $1,017
Property and equipment...................................... 976
Excess of cost over net assets of businesses acquired....... 3,911
Other assets................................................ 126
------
6,030
Less liabilities assumed.................................... 1,966
------
Cash paid......................................... $4,064
======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation. The accompanying consolidated financial
statements include the accounts of FCI and its majority owned and wholly owned
subsidiaries (together, "FaciliCom"). All intercompany transactions and balances
have been eliminated in consolidation. Because losses applicable to the minority
interest exceeded the minority interest in the equity capital and the minority
stockholder was not obligated to provide additional funding with respect to the
losses incurred, such losses were recorded by FaciliCom prior to the purchase of
the minority interest.
b. Cash and cash equivalents. FaciliCom considers its investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest and are highly liquid debt
instruments of the U.S. government and commercial corporations and money market
funds.
c. Property and Equipment. Property and equipment is stated at cost.
Depreciation is provided for financial reporting purposes using the
straight-line method. Depreciation expense includes the amortization of capital
leases. The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Transmission and communications equipment................... 5 to 25 years
Transmission and communications equipment-leased............ 5 to 25 years
Furniture, fixtures and other............................... 5 to 7 years
</TABLE>
FaciliCom capitalizes the costs of software and software upgrades purchased
for use in its transmission and communications equipment. FaciliCom expenses the
costs of software purchased for internal use. Maintenance and repairs are
expensed as incurred. Replacements and betterments are capitalized.
Depreciation expense for the fiscal years ended September 30, 1998, 1997
and 1996 was $7,383,000, $2,053,000 and $863,000.
FaciliCom periodically evaluates its long-lived assets to confirm that the
carrying values have not been impaired using the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121.
d. Intangible Assets. Intangible assets, consisting primarily of goodwill,
are amortized using the straight-line method over 5 years.
FaciliCom periodically evaluates its intangible assets to confirm that the
carrying values have not been impaired using the provisions of SFAS No. 121.
e. Income Taxes. FCI, LLC is a limited liability company and is not
subject to income tax, while FaciliCom International, Inc., incorporated on
November 20, 1997 as a Delaware corporation is subject to income taxes.
F-9
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FaciliCom accounts for income taxes under the liability method in
accordance with the provisions set forth in SFAS No. 109, "Accounting for Income
Taxes," whereby deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
realization of deferred tax assets, FaciliCom uses judgment in considering the
relative impact of negative and positive evidence. The weight given to the
potential effect of negative and positive evidence is commensurate with the
extent to which it can be objectively verified. Based on the weight of evidence,
both negative and positive, including the lack of historical earnings, if it is
more likely than not that some portion or all of a deferred tax asset will not
be realized, a valuation allowance is established.
f. Initial and Excess Capital Contributions. Excess capital contributions
were the amounts of capital an owner had contributed in excess of the owner's
initial capital commitment. The owners were credited with a guaranteed return
through September 30, 1997 for the use of their capital, and profits and losses
were allocated, in accordance with the provisions in the FCI LLC Limited
Liability Company Agreement ("LLC Agreement").
The guaranteed return was calculated as simple interest at a rate per annum
equal to the lowest rate of interest available to AIT or any of its affiliates
from time-to-time under any of their respective existing credit facilities. Upon
liquidation of FCI LLC, allocations of annual net profits are allocated first to
the Class A and Class B owners to the extent required to adjust capital
accounts, then to the extent of cumulative net losses previously allocated in
accordance with certain capital contribution priorities set forth in the LLC
Agreement and thereafter 75% to Class A and 25% to Class B owners. Allocations
of annual net losses are allocated to the extent of cumulative net profits
previously allocated and then to the extent of owner's capital contributions and
thereafter to the Class A owner. Net losses allocated to the Class B owner may
not cause such owner's account to result in a deficit. FaciliCom may make
distributions after first paying any unpaid guaranteed return and then in
accordance with the owner's respective capital contributions and thereafter 75%
to the Class A owner and 25% to the Class B owner. Upon dissolution, the LLC
Agreement provides for liquidation of FCI LLC's assets and any distribution to
owners will be in accordance with the balance of their respective capital
accounts. Following distribution of assets, owners having a capital account with
a deficit balance shall be required to restore the account. The LLC Agreement
provides that FCI LLC shall terminate on December 31, 2025. In consideration of
all capital contributions made through September 30, 1997, the Class A and Class
B owners owned 15,390,000 and 3,610,000 membership interests in FCI LLC,
respectively, representing 81% and 19%, respectively, of such interests.
g. Foreign Currency Translation. For non-U.S. subsidiaries, the functional
currency is the local currency. Assets and liabilities of those operations are
translated into U.S. dollars using year-end exchange rates; income and expenses
are translated using the average exchange rates for the reporting period.
Translation adjustments are reported as a separate component of other
accumulated comprehensive income (loss). Exchange losses and gains resulting
from foreign currency transactions are included in the results of operations
based upon the provisions of SFAS No. 52, "Foreign Currency Translation."
h. Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
i. Revenue Recognition. FaciliCom records revenues from the sale of
telecommunications services at the time of customer usage based upon minutes of
traffic processed at contractual fees. FaciliCom has entered into, and continues
to enter into, operating agreements with telecommunications carriers in several
foreign countries under which international long distance traffic is both
delivered and received. Under these agreements, the foreign carriers are
contractually obligated to adhere to the policy of the FCC, whereby traffic from
the foreign country is routed to U.S. based international carriers, such as
FaciliCom, in the same proportion as traffic carried into the country. Mutually
exchanged traffic between FaciliCom and foreign carriers is settled through a
formal settlement policy at an agreed upon rate which allows for the offsetting
of
F-10
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivables and payables with the same carrier (settlement on a net basis).
Although FaciliCom can reasonably estimate the revenue it will receive under the
FCC's proportional share policy, there is no guarantee that FaciliCom will
receive return traffic and FaciliCom is unable to determine what impact changes
in future settlement rates will have on net payments made and revenue received.
Accordingly, FaciliCom does not record this revenue until the service is
provided and the minutes of traffic are processed. FaciliCom recognizes revenues
from prepaid calling cards when earned.
j. Cost of Revenues. Cost of revenue includes network costs which consist
of access, transport and termination costs. Such costs are recognized when
incurred in connection with the provision of telecommunication services,
including costs incurred under operating agreements.
k. Interim Financial Information. The interim financial data as of June
30, 1999, and for the nine month periods ended June 30, 1999 and 1998, is
Unaudited. The information reflects all adjustments consisting only of normal,
recurring adjustments that, in the opinion of management, are necessary to
present fairly the financial position and results of operations of FaciliCom for
the periods indicated. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full year.
l. Stock-Based Compensation. FaciliCom accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost is
measured as the excess, if any, of the market price of FaciliCom's stock at the
date of grant (determined by a valuation report) over the amount an employee
must pay to acquire the stock.
m. Financial Instruments. FaciliCom has financial instruments, which
include cash and cash equivalents, marketable securities and long-term debt
obligations. The carrying values of these instruments in the balance sheets,
except for certain marketable securities and 10 1/2% Senior Notes due 2008 (the
"Notes") (see Note 4), approximated their fair market value. See Note 16 for
disclosure of fair market value for marketable securities. The estimated fair
value of FaciliCom's Notes at September 30, 1998 was $261.0 million and was
estimated using quoted market prices.
The fair values of the instruments were based upon quoted market prices of
the same or similar instruments or on the rate available to FaciliCom for
instruments of similar maturities.
n. Fiber Optic Cable Arrangements. FaciliCom obtains capacity on certain
fiber optic cables under three types of arrangements. The Indefeasible Right of
Use ("IRU") basis provides FaciliCom the right to use a fiber optic cable, with
most of the rights and duties of ownership, but without the right to control or
manage the facility and without any right to salvage or duty to dispose of the
cable at the end of its useful life. Because of this lack of control and an IRU
term approximates the estimated economic life of the asset, FaciliCom accounts
for such leases as leased transmission and communications equipment and as
capital leases. The Minimum Assignable Ownership Units ("MAOU") basis provides
FaciliCom an ownership interest in the fiber optic cable with certain rights to
control and to manage the facility. Because of the ownership features, FaciliCom
records these fiber optic cables as owned transmission and communications
equipment and as long-term debt. The Carrier Lease Agreement basis involves a
shorter term agreement which provides FaciliCom the right to use capacity on a
cable but without any rights and duties of ownership. FaciliCom accounts for
such leases as operating leases.
o. Impact of Recently Issued Accounting Standards. In June 1997 the FASB
issued SFAS No. 130, "Reporting Comprehensive Income," which (i) establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements, and (ii) requires an enterprise to report a total for
comprehensive income in condensed financial statements of interim periods.
FaciliCom adopted SFAS No. 130 in fiscal 1999 and has elected to display the
components of Comprehensive Income within the Consolidated Statements of
Operations and Comprehensive Loss. Prior period amounts have been appropriately
disclosed.
F-11
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The statement is effective for fiscal years beginning after
December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measuring those
instruments at fair value, with the potential effect on operations dependent
upon certain conditions being met. The statement (as amended by SFAS No. 137) is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The implementation of SFAS No. 131 is not expected to have a material impact on
FaciliCom's financial position or results of operations. FaciliCom has not
determined the impact that implementing SFAS No. 133 will have on FaciliCom's
financial position or results of operations.
p. Reclassifications. Certain amounts in the September 30, 1997 and 1996
consolidated financial statements have been reclassified to conform with the
presentation of the September 30, 1998 consolidated financial statements.
3. OPERATING DEFICIT AND MANAGEMENT'S PLANS
FaciliCom had a net loss of approximately $46.6 million for the year ended
September 30, 1998. On January 28, 1998, FaciliCom issued $300 million aggregate
principal amount of the Notes. FaciliCom believes that the net proceeds from the
offering of the Notes, together with cash provided by operating activities and
vendor financing, will provide FaciliCom with sufficient capital to fund planned
capital expenditures and anticipated losses and to make interest payments on the
Notes through at least September 30, 1999.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-Term Debt. During 1997, FCI entered into an Equipment Loan and
Security Agreement with NTFC Capital Corporation ("NTFC") to finance up to
$5,000,000 for the purchase of transmission and communications equipment.
Interest was payable quarterly and was calculated based upon the London
Interbank Offering Rate ("LIBOR") plus 4%. Quarterly principal payments were to
commence on June 30, 1999. The loan was collateralized by the related equipment
purchased under such agreement. FaciliCom used a portion of the proceeds from
the offering of Notes to pay off the indebtedness under the Equipment Loan and
Security Agreement and the agreement was terminated.
During 1995, FCI entered into an equipment financing agreement with
Ericsson I.F.S. to purchase certain equipment. The original agreement was
amended and restated on December 30, 1996, to increase the borrowing limit to
$7,000,000 and certain terms were further revised on June 12, 1997 and November
21, 1997. Interest was calculated based upon LIBOR plus 4%. Quarterly principal
payments were to commence on June 30, 1998. The loan was collateralized by the
related equipment purchased under the financing agreement. FaciliCom used a
portion of the proceeds from the offering of Notes to pay off the indebtedness
under the equipment financing agreement and the agreement was terminated.
On January 28, 1998, FCI issued $300 million aggregate principal amount of
Notes bearing interest at 10 1/2% due 2008 pursuant to an Indenture (the
"Offering"). The Notes are unsecured obligations of FCI and interest on the
Notes is payable semiannually in arrears on January 15 and July 15 of each year,
commencing on July 15, 1998.
The Notes are redeemable at the option of FCI, in whole or in part at any
time on or after January 15, 2003, at specified redemption prices plus accrued
and unpaid interest. In addition, at any time prior to January 15, 2001, FCI,
may redeem from time to time up to 35% of the originally issued aggregate
principal amount of the Notes at the specified redemption prices with the net
cash proceeds (as defined in the Indenture) of one or more public equity
offerings. In the event of a change in control of ownership of FCI,
F-12
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inc., each holder of the Notes has the right to require FCI, to purchase all or
any of such holder's Notes at a purchase price in cash equal to 101% of the
aggregate principal amount.
FCI used approximately $86.5 million of the proceeds from the Offering to
purchase investments consisting of U.S. Government Obligations, which are
pledged as security and restricted for the first six scheduled interest payments
on the Notes (see Note 16).
The Notes require maintenance of certain financial and nonfinancial
covenants, including limitations on additional indebtedness, restricted payments
including dividends, transactions with affiliates, liens and asset sales.
Long-term debt at September 30, 1998 and 1997 consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
INTEREST RATE 1998 1997
------------- -------- -------
<S> <C> <C> <C>
Indenture notes, due 2008.......................... 10.5% $300,000 $ --
NTFC debt.......................................... LIBOR + 4% -- 7,116
Ericsson debt...................................... LIBOR + 4% -- 5,094
Cable capacity debt, due 2001...................... LIBOR + 4.5% 740 1,134
Other.............................................. Various -- 699
-------- -------
Sub-total.......................................... 300,740 14,043
Less: Current portion of long-term debt............ (394) (1,043)
-------- -------
$300,346 $13,000
======== =======
</TABLE>
The LIBOR rate was 5.3% and 5.8% on September 30, 1998 and 1997,
respectively.
Capital Leases. FaciliCom leases certain fiber optic cables under
agreements permitting the use of the cables over periods up to 25 years with
payment requirements over periods not exceeding five years. Payments are made
quarterly and interest is calculated at LIBOR plus 4% to 4.5%.
Future minimum payments on long-term debt and capital lease obligations at
September 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES
--------- -------
<S> <C> <C>
1999........................................................ $ 394 $4,195
2000........................................................ 346 4,065
2001........................................................ -- 650
2002........................................................ -- 221
2003........................................................ -- --
Thereafter.................................................. 300,000 --
-------- ------
Total future minimum payments............................... $300,740 9,131
========
Less: Amount representing interest (using September 30, 1998
LIBOR rate)............................................... (933)
------
$8,198
======
</TABLE>
5. INCOME TAXES
At September 30, 1998, FaciliCom has approximately $2.6 million of
cumulative net operating losses ("NOLs") to offset future U.S. federal taxable
income and approximately $25.3 million of NOLs to offset future foreign taxable
income for those subsidiaries taxed in foreign jurisdictions. The U.S. NOLs
expire in fifteen years, while the foreign NOLs do not expire. A valuation
allowance was established for the deferred assets related to the NOLs at
September 30, 1998.
F-13
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets of approximately $3,130,000 at September 30, 1997 were
related to the NOL carryforwards of foreign subsidiaries taxed in foreign
jurisdictions totaling approximately $11,100,000. A valuation allowance was
established for the amount of deferred tax assets at September 30, 1997.
On December 22, 1997, FaciliCom adopted a tax sharing agreement with AHI,
whereby FaciliCom is obligated to file a consolidated federal income tax return
with AHI and subsidiaries. Under the Agreement, FCI is obligated to pay, with
certain exceptions, its share of the consolidated tax liability to AHI and FCI
will not be paid by AHI for tax benefits realized in the consolidated tax
return. At December 31, 1997, FCI had approximately $1,018,000 of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes that amounted to
approximately $393,000 and was recorded as a deferred tax liability and deferred
income tax expense for the change in tax status for the year ended September 30,
1998.
From December 23, 1997 through September 30, 1998, the period after the
change in tax status, FCI recorded a tax benefit of $12.1 million based upon
FaciliCom's losses expected to be utilized by AHI. The net benefit recorded was
passed through to AHI.
The components of loss before income taxes for the periods ended September
30, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Domestic................................................... $43,432 $ 6,978 $3,009
Foreign.................................................... 14,514 7,053 6,653
------- ------- ------
Total............................................ $57,946 $14,031 $9,662
======= ======= ======
</TABLE>
The components of the income tax provision for the years ended September
30, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax-asset foreign NOLs............................. $ 2,010 $ 1,120
Valuation allowance......................................... (2,010) (1,120)
------- -------
$ -- $ --
======= =======
</TABLE>
A reconciliation of the total tax benefit with the amount computed by
applying the statutory federal income tax rate to the loss before taxes for the
year ended September 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Loss applying statutory rate................................ $19,700
Permanent differences....................................... (3,693)
Foreign country taxes....................................... (302)
Change in tax status........................................ (393)
State taxes................................................. 226
Valuation allowance......................................... (4,187)
-------
Income tax benefit.......................................... $11,351
=======
</TABLE>
There are no pro forma income tax amounts presented giving effect to the
change in tax status for the statements of operations presented as FaciliCom
would have been a stand alone taxpaying entity and a valuation allowance would
have been established for any net deferred tax benefit related to net operating
losses.
F-14
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities at September 30, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax asset -- foreign NOLs.......................... $ 7,718 $ --
Deferred tax asset -- domestic NOLs......................... 1,065 3,130
Property and equipment...................................... 600 --
Stock-based compensation.................................... 2,522 --
Valuation allowance......................................... (11,905) (3,130)
-------- -------
$ -- $ --
======== =======
</TABLE>
6. OPERATING LEASES
FaciliCom leases office facilities and certain fiber optic cables and
switching facilities under noncancelable operating leases. Rental expense for
the fiscal years ended September 30, 1998, 1997, and 1996 was $21.9 million,
$4.7 million and $1.4 million, respectively, of which $19.2 million, $3.8
million and $1.1 million relates to fiber optic cable leases, which are
generally for less than one year. Future minimum lease payments under
noncancelable operating leases as of September 30, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $ 3,864
2000........................................................ 3,733
2001........................................................ 3,599
2002........................................................ 3,247
2003........................................................ 2,955
Thereafter.................................................. 13,659
-------
Total....................................................... 31,057
Less: Subleases............................................. (1,087)
-------
$29,970
=======
</TABLE>
7. BORROWINGS FROM OWNERS
At September 30, 1996, FaciliCom had outstanding interest-bearing working
capital advances from Armstrong totaling $1,549,000. On November 1, 1996, FCI
entered into a Convertible Line of Credit Agreement with Armstrong. The
outstanding advances were converted into borrowings under the line of credit
agreement. Under such agreement, FCI had a $15,000,000 credit facility of which
$5,000,000 was available in cash and $10,000,000 was available for letter of
credit needs. Armstrong had the right, at any time on or before October 31,
1999, to convert the entire principal amount of the cash loan into a maximum of
3.1% of additional ownership and convert the letter of credit balance
outstanding into a maximum additional 4.44% ownership. In 1997, Armstrong
converted the outstanding balance of $5,396,000 under the cash portion of the
agreement into an ownership interest.
At September 30, 1997, FCI had $10,000,000 for letter of credit needs of
which it had outstanding letters of credit of $6,136,000 under the Convertible
Line of Credit Agreement.
In 1997, FCI entered into a Bridge Loan Agreement with Armstrong in which
FCI could borrow up to $10,000,000. Interest was calculated based upon prime
plus 1%. The prime rate was 8.5% at September 30, 1997. The loan was due on
October 1, 1998. The outstanding balance at September 30, 1997 was $6,250,000.
During the year ended September 30, 1998, Armstrong converted the outstanding
balance of $6,250,000 into an ownership interest (see Note 1).
Additionally, as of September 30, 1996, FCI-Sweden had outstanding
convertible debentures in the amount of $480,000 to a minority stockholder of
both FCI-Sweden and FGC (the "Minority Stockholder").
F-15
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such convertible debentures accrued interest at LIBOR plus 4%. Interest was
payable annually on September 30, with the full principal amount due on
September 30, 2003. In December 1996, these convertible debentures were assigned
to FCI (see Note 8).
FCI's total interest expense under the above borrowings was $195,000,
$462,000 and $26,000 for the years ended September 30, 1998, 1997 and 1996,
respectively.
8. OTHER RELATED PARTY TRANSACTIONS
As of September 30, 1996, FCI had an outstanding advance to the Minority
Stockholder of $499,000.
As of September 30, 1996, FCI and the Minority Stockholder held $1,120,000
and $480,000, respectively, of FCI-Sweden debentures totaling $1,600,000 which
earned interest at LIBOR plus 4%. The holder of the debentures had the right to
convert the outstanding principal balance into FCI-Sweden common stock at a
predetermined price ranging from $200 to $250 per share.
On December 23, 1996, the Minority Stockholder assigned its right, title
and interest in the FCI-Sweden convertible debentures to FCI to satisfy the
outstanding advance due to FCI from the Minority Stockholder. On March 14, 1997,
FCI converted all of its FCI-Sweden convertible debentures into 7,400 shares of
FCI-Sweden common stock. On May 15, 1997, FCI-Sweden issued 14,400 additional
shares of common stock to FCI for consideration of $3,600,000. Such transactions
increased FCI's ownership in FCI-Sweden to 89.6%.
In March 1996, Tele8 Kontakt, a subsidiary of FCI at that time, was awarded
a license agreement from the Swedish government for certain rights relating to
communications systems and technology. During October 1996, FCI distributed its
rights under such license agreement to its owners.
FCI has contracted with AHI, since its inception, for the performance of
certain services by AHI for FCI, including but not limited to financial
accounting, professional and billing services. In May 1998, an agreement was
entered into for such services. The agreement expires on September 30, 2002.
Expenses related to such contracted services of approximately $1.6 million,
$439,000 and $7,000 are included in the statements of operations for the years
ended September 30, 1998, 1997 and 1996, respectively.
The terms of the agreements include professional services billed at hourly
rates, check processing at an amount per check and data center services based on
usage and disk storage space. FaciliCom believes that the terms of the
agreements are competitive with similar services offered in the industry.
As of September 30, 1998 an affiliate of AHI had issued letters of credits
on behalf of FaciliCom totaling $9.4 million.
9. BENEFIT PLANS
Foreign Operations. Various foreign subsidiaries contribute to their
respective government pension funds, social insurance, medical insurance and
unemployment charters for their employees. The total contribution was $1.3
million, $781,000 and $563,000 for the years ended September 30, 1998, 1997 and
1996, respectively.
401(k). Employees of FCI may participate in a salary reduction (401(k)
plan administered by AHI. All contributions represent employee salary
reductions.
10. CONCENTRATION OF RISK
Financial instruments that potentially subject FaciliCom to concentration
of credit risk are accounts receivable. Four of FaciliCom's customers accounted
for approximately 13.0% and 31.0% of gross accounts receivable as of September
30, 1998 and 1997, respectively. FaciliCom performs on-going credit evaluations
of its customers and in certain circumstances requires collateral to support
customer receivables. However, many
F-16
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of FaciliCom's customers, including these four, are suppliers to whom FaciliCom
has accounts payable that mitigate this risk.
In addition, FaciliCom is dependent upon certain suppliers for the
provision of telecommunication services to its customers. FaciliCom has not
experienced, and does not expect, any disruption of such services.
Approximately 24% and 41% of FaciliCom's revenues for the years ended
September 30, 1997 and 1996, respectively, were derived from two customers each
with percentages in excess of 10%. No one customer represented 10% or more of
FaciliCom's revenues for the year ended September 30, 1998.
11. COMMITMENTS
Equipment. At September 30, 1998, FaciliCom had outstanding commitments to
purchase certain switching equipment for approximately $15 million.
In May 1998, FaciliCom entered into a Memorandum of Understanding ("MOU")
with Qwest. The MOU incorporates agreements to provide Qwest with international
direct dial termination service to various destinations and provides FaciliCom
an indefeasible right of use ("IRU") for domestic and international fiber optic
capacity. Deliveries of capacity under the IRU began in March 1999. The IRU is
for twenty-five years, for which FaciliCom has agreed to pay $24 million.
Delivery of two of the capacity segments occurred during the nine month period
ended June 30, 1999. The delivery of the remaining capacity is expected by
September 30, 1999. FaciliCom has recorded a liability related to the two
capacity segments that were delivered during the nine month period ended June
30, 1999. In addition, during a three-year period, Qwest has the right of first
refusal pursuant to additional capacity purchases made by FaciliCom.
FaciliCom has also entered into two agreements that provide FaciliCom with
IRU's for international fiber optic capacity for Europe and the Pacific Rim.
Deliveries of the capacity under the agreements are expected prior to November
1999. The IRU's are for ten to fifteen years, for which FaciliCom has agreed to
pay approximately $41.6 million through September 30, 2002, of which $2.5
million has already been paid as a deposit and an additional $24.1 million is
expected to be paid in the fiscal year ended September 30, 1999.
Subsequent to September 30, 1998, FaciliCom agreed to acquire additional
capacity in Europe and Scandinavia for $8.6 million. Deliveries and payment of
the capacity under these agreements are expected by September 30, 1999.
12. CONTINGENCIES AND LITIGATION
FaciliCom is involved in various claims and possible actions arising in the
normal course of its business. Although the ultimate outcome of these claims
cannot be ascertained at this time, it is the opinion of FaciliCom's management,
based on its knowledge of the facts and advice of counsel, that the resolution
of such claims and actions will not have a material adverse effect on
FaciliCom's financial condition or results of operations.
In August 1997, FaciliCom entered into a settlement agreement relating to
litigation arising from a certain 1996 FCI-Sweden international telephone
services agreement and related billing, collection and factoring agreements with
third parties. For the fiscal year ended September 30, 1996, selling, general
and administrative expenses includes approximately $708,000 of losses relating
to the settlement of which $500,000 represents a reserve on advances, paid at
the time of the settlement agreement, on behalf of the telephone service
company. Under the settlement agreement all of the above amounts were paid to
fully satisfy any amounts which may be owing from FaciliCom and the telephone
services company to a company under a factoring agreement. At the date of
settlement, the management of FaciliCom believed the amounts advanced to the
telephone services company were uncollectible. The settlement agreement also
provides for the factoring company to assign to FaciliCom any and all receivable
claims the factoring company may have against the billing and collection agent
("Agent"). FaciliCom filed a complaint against the Agent for breach of contract
and related claims pursuant to an agreement between FaciliCom and the Agent. The
Agent placed
F-17
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in escrow the sum of $1,431,324. On May 8, 1998, the balance of the escrow
account was distributed among various entities. FaciliCom received $791,000.
13. STOCK-BASED COMPENSATION
Through December 22, 1997, certain employees and directors were eligible to
participate in a Performance Unit Plan established by FaciliCom, under which a
maximum of 1,254,000 units could have been granted. A unit is a right to receive
a cash payment equal to the excess of the fair market value of a unit on its
maturity date over the initial value of a unit. Fair market value of a unit as
determined by the management committee of FaciliCom. At September 30, 1997 and
1996, 484,500 and 152,000 units had been granted, respectively. Participants
vested in their units over a period not to exceed two years and were entitled to
receive cash compensation equivalent to the value of the units at the time a
participant retires provided the participant had 10 years of continuous service
or, if earlier, upon the occurrence of certain events, including a change in
control of FaciliCom. FaciliCom accrued to expense over the participant's
service vesting period (10 years) amounts based on the value of the unit at year
end. Amounts charged to expense for this plan for the year ended September 30,
1997 was $288,000. No amounts were expensed in prior years.
On December 22, 1997, the Board of Directors adopted the 1997 Phantom Stock
Rights Plan (the "Phantom Stock Plan"). The Phantom Stock Plan provided for the
granting of phantom stock rights ("Phantom Shares") to certain directors,
officers and key employees of FaciliCom and its subsidiaries. The total number
of Phantom Shares eligible for grant pursuant to the Phantom Stock Plan was
6,175, subject to adjustments for stock splits and stock dividends.
All of the units granted under FaciliCom's Performance Unit Plan were
exchanged for equivalent phantom rights with equivalent terms under the new
phantom rights plan. Accordingly, 4,845 Phantom Shares had been granted of which
3,182 had vested. All of the provisions of the Phantom Stock Plan including
vesting, forfeiture and cash settlement mirror the provisions of FaciliCom's
Performance Unit Plan.
On March 31, 1998, the Board of Directors adopted the FaciliCom
International, Inc. 1998 Stock Option Plan (the "1998 Stock Option Plan"). By
resolution of the Board of Directors on March 31, 1998, FaciliCom's Certificate
of Incorporation was amended to create 25,000 shares of a non-voting class of
common stock. At September 30, 1998, FaciliCom has 300,000 authorized shares, of
which 275,000 are a voting class of common stock.
The 1998 Stock Option Plan provides for the grant of options to purchase
shares of FaciliCom's non-voting common stock to certain directors, officers,
key employees and advisors of FaciliCom. The aggregate number of options that
may be granted under the 1998 Stock Option Plan is 22,574 and no option may be
granted after March 31, 2008. No option is exercisable within the first six
months of grant and options expire after ten years.
Also on March 31, 1998, all of the Phantom Shares previously granted to
employees of FaciliCom under FaciliCom's Phantom Stock Plan were converted to
options under the 1998 Stock Option Plan, and FaciliCom granted additional
options to purchase 6,448 shares of non-voting common stock to employees,
directors and advisors under the 1998 Stock Option Plan. The exchange of
employees' Phantom Shares for options resulted in additional compensation cost
for the incremental value of the new option amortized over the vesting period of
the option that is shorter than the service period of the Phantom Shares. Total
unrecognized compensation cost approximated $1,672,375 at time of conversion.
F-18
<PAGE> 132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the stock option activity at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
OPTION SHARES OPTION SHARES OPTION SHARES OPTION SHARES
(EXERCISE (EXERCISE PRICE (EXERCISE PRICE (EXERCISE PRICE
PRICE $1) $263) $500) $1,000)
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Options granted March 31, 1998..... 9,918 670 705 --
Options granted June 1, 1998....... -- -- 30 --
Options granted July 1, 1998....... -- -- -- 200
----- --- --- ---
Options outstanding at September
30, 1998......................... 9,918 670 735 200
===== === === ===
Options exercisable at September
30, 1998......................... 9,490 380
===== ===
</TABLE>
All of the options outstanding at September 30, 1998 have a 10-year life
and an option price range from $1.00 to $1,000 per option share. The options
vest over a period up to 5 years and at September 30, 1998 there were 8,826
options granted that vested immediately. FaciliCom recognized compensation cost
of $5,706,000 as of September 30, 1998 relating to options granted and
recognized compensation cost of $311,592 for the year ended September 30, 1998
relating to FaciliCom's Phantom Stock plan. For the year ended September 30,
1998 compensation cost includes $2,112,640 for 3,401 options with an exercise
price of $1.00 granted to certain non-employee directors and advisors related to
certain directors of FaciliCom.
The fair value of options granted at September 30, 1998 was as follows:
<TABLE>
<CAPTION>
OPTION SHARES OPTION FAIR VALUE
EXERCISE PRICE AT DATE OF GRANT
- -------------- -----------------
<S> <C>
$ 1.................................................... $640
$ 263..................................................... $423
$ 500..................................................... $306
$1,000.................................................... $135
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes model are: dividend yield 0%, volatility 30%, risk free interest
rate of 6%, assumed forfeiture rate of 0% and an expected life of 3 to 5 years.
If FaciliCom would have recorded compensation cost for FaciliCom's stock
option plan consistent with the fair value-based method of accounting prescribed
under SFAS No. 123 it would have had an immaterial effect on the net loss of
FaciliCom for the fiscal year ended September 30, 1998.
On October 1, 1998, FaciliCom granted options to purchase 1,702 shares at
exercise prices ranging from $1 to $950. The options vest over 1 to 5 years and
are exercisable for 10 years. Approximately $589,000 of compensation expense
will be recorded for the options.
14. VALUATION AND QUALIFYING ACCOUNTS
Activity in FaciliCom's allowance accounts for the periods ended September
30, 1998, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DOUBTFUL ACCOUNTS
ADDITIONS
---------------------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT
PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1996......................... $ -- $ -- $ -- $ -- $ --
1997......................... $ -- $1,263 $ -- $(1,102) $ 161
1998......................... $161 $3,771 $745 $ (57) $4,620
</TABLE>
F-19
<PAGE> 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DEFERRED TAX ASSET VALUATION
--------------------------------
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
BEGINNING OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
------------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1996................................ $ -- $1,120 $ -- $ 1,120
1997................................ $1,120 $2,010 $ -- $ 3,130
1998................................ $3,130 $8,221 $ -- $11,351
</TABLE>
15. GEOGRAPHIC DATA
FaciliCom operates as a provider of international long-distance
telecommunications services. FaciliCom is a multinational company operating in
many countries including the United States, the United Kingdom, Sweden, Denmark,
France, Germany and The Netherlands. Sales between geographic areas represent
the providing of services through carrying and ultimately termination of
customer traffic originated in the other geographic area and are accounted for
based on established sales prices. In computing operating loss for foreign
operations, no allocations of certain general corporate expenses have been made.
Summary information with respect to FaciliCom's geographic operations is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
NET REVENUE
North America........................................ $ 142,126 $ 56,315 $ 8,363
Europe............................................... 112,392 24,187 7,347
Eliminations......................................... (70,272) (10,315) (3,819)
--------- -------- -------
Total........................................ $ 184,246 $ 70,187 $11,891
========= ======== =======
OPERATING LOSS
North America........................................ $ (29,553) $ (6,337) $(2,936)
Europe............................................... (14,333) (5,023) (6,640)
--------- -------- -------
Total........................................ $ (43,886) $(11,360) $(9,576)
========= ======== =======
ASSETS
North America........................................ $ 488,649 $ 25,035 $ 9,431
Europe............................................... 150,992 21,824 13,042
Eliminations......................................... (260,757) (2,842) (1,465)
--------- -------- -------
Total........................................ $ 378,884 $ 44,017 $21,008
========= ======== =======
</TABLE>
16. MARKETABLE SECURITIES
In accordance with SFAS 115, FaciliCom's debt securities are considered
either held-to-maturity or available-for-sale. Held-to-maturity securities
represent those securities that FaciliCom has both the positive intent and the
ability to hold to maturity, and are carried at amortized cost. This
classification includes those securities purchased and pledged for payment of
interest on the Notes. Available-for-sale securities represent those securities
that do not meet that classification of held-to-maturity, are not actively
traded and are carried at fair value. Unrealized gains and losses on these
securities are excluded from earnings and are reported as a separate component
of capital accounts until realized.
F-20
<PAGE> 134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of the marketable securities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-Maturity
U.S. Government Securities Maturing in 1
year or less............................. $ 31,394 $ 79 $ -- $ 31,473
Maturing between 1 and 3 years.............. 43,124 546 -- 43,670
-------- ------- ---- --------
Total held-to-maturity.............. 74,518 625 -- 75,143
-------- ------- ---- --------
Available-for-sale
Commercial paper............................ 6,887 -- -- 6,887
Government backed securities................ 31,787 24 -- 31,811
-------- ------- ---- --------
Total available-for-sale............ 38,674 24 -- 38,698
-------- ------- ---- --------
Total marketable securities......... $113,192 $ 649 $ -- $113,841
-------- ------- ---- --------
AS REPORTED SEPTEMBER 30, 1998 (IN THOUSANDS):
Current Assets:
Held-to-maturity (at amortized cost)................... $31,394
Available-for-sale (at fair value)..................... 38,698
-------
Total current assets........................... $70,092
=======
Noncurrent Assets:
Held-to-maturity (at amortized cost)................... $43,124
=======
Capital Accounts:
Holding gain on marketable securities.................. $ 24
=======
</TABLE>
At June 30, 1999, there were no available-for-sale securities.
17. OTHER EVENTS (UNAUDITED)
Revolving Credit Facility. On May 24, 1999, FaciliCom entered into a $35.0
million revolving credit facility (the "Credit Facility"), which is scheduled to
terminate on May 23, 2000. As of June 30, 1999, FaciliCom had $10.0 million
outstanding under the Credit Facility. The Credit Facility contains interest
rate options based upon LIBOR or Prime, plus applicable margin percentages. The
Credit Facility contains certain restrictive covenants.
Subsequent to June 30, 1999, FaciliCom replaced certain switching equipment
with newer equipment. As such, in the 4th quarter of fiscal year ending
September 30, 1999, FaciliCom will record approximately a $3.8 million
write-down for the remaining net book value of the replaced equipment.
Subsequent to June 30, 1999, FaciliCom canceled 539 shares of its
outstanding voting common stock and simultaneously issued 2,379 options under
the 1998 Stock Option Plan to certain advisors at an exercise price of $.01 per
share, which vested immediately. As such, FaciliCom will record a 4th quarter
charge of approximately $3.3 million for related compensation expense.
F-21
<PAGE> 135
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 17, 1999
AMONG
WORLD ACCESS, INC., A DELAWARE CORPORATION,
FACILICOM INTERNATIONAL, INC., A DELAWARE CORPORATION,
ARMSTRONG INTERNATIONAL TELECOMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
EPIC INTERESTS, INC., A PENNSYLVANIA CORPORATION,
AND
BFV ASSOCIATES, INC., A DELAWARE CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE> 136
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.1 The Merger.................................................. A-4
1.2 Closing..................................................... A-4
1.3 Effective Time.............................................. A-5
1.4 Effects of the Merger....................................... A-5
1.5 Certificate of Incorporation/Bylaws......................... A-5
1.6 Directors of the Surviving Corporation...................... A-5
1.7 Merger Consideration........................................ A-5
1.8 Effect on Capital Stock of FCI.............................. A-6
1.9 FCI Stock Options........................................... A-6
1.10 Exchange Procedures......................................... A-6
ARTICLE II
[RESERVED]
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of WAXS...................... A-7
3.2 Representations and Warranties of FCI....................... A-13
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of WAXS........................................... A-18
4.2 Covenants of FCI............................................ A-19
4.3 Operational Reports......................................... A-20
4.4 Control of Other Party's Business........................... A-20
ARTICLE V
ADDITIONAL AGREEMENTS
Preparation of Proxy Statement and Consent Solicitation
5.1 Statement; Stockholders Meetings............................ A-20
5.2 Access to Information....................................... A-21
5.3 Reasonable Efforts.......................................... A-22
5.4 Acquisition Proposals....................................... A-22
5.5 Fees and Expenses........................................... A-23
5.6 Public Announcements........................................ A-23
5.7 Termination of Tax Sharing Agreements....................... A-23
5.8 Directors' and Officers' Indemnification and Insurance...... A-23
5.9 Reservation of Shares....................................... A-24
5.10 Registration and Listing.................................... A-24
5.11 Board of Directors.......................................... A-24
ARTICLE VI
CONDITIONS PRECEDENT
Conditions to Each Party's Obligation to Effect the
6.1 Merger...................................................... A-25
6.2 Additional Conditions to Obligations of WAXS................ A-25
Additional Conditions to Obligations of FCI and the
6.3 Shareholders................................................ A-26
</TABLE>
A-2
<PAGE> 137
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination................................................. A-27
7.2 Effect of Termination....................................... A-28
7.3 Amendment................................................... A-28
7.4 Extension, Waiver........................................... A-28
ARTICLE VIII
GENERAL PROVISIONS
Non-Survival of Representations, Warranties and
8.1 Agreements.................................................. A-29
8.2 Notices..................................................... A-29
8.3 Interpretation.............................................. A-30
8.4 Counterparts................................................ A-30
8.5 Entire Agreement; No Third Party Beneficiaries.............. A-30
8.6 Governing Law............................................... A-30
8.7 Severability................................................ A-30
8.8 Assignment.................................................. A-30
8.9 Submission to Jurisdiction; Waivers......................... A-31
8.10 Enforcement................................................. A-31
8.11 Definitions................................................. A-31
</TABLE>
A-3
<PAGE> 138
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 17, 1999 (this
"Agreement"), among WORLD ACCESS, INC., a Delaware corporation ("WAXS"),
FACILICOM INTERNATIONAL, INC., a Delaware corporation ("FCI"), ARMSTRONG
INTERNATIONAL TELECOMMUNICATIONS, INC., a Delaware corporation ("AIT"), EPIC
INTERESTS, INC., a Pennsylvania corporation ("EPI"), and BFV ASSOCIATES, INC., a
Delaware corporation ("BFV" and together with AIT and EPI, the "Shareholders").
WITNESSETH:
WHEREAS, the Boards of Directors of FCI and WAXS deem it advisable and in
the best interests of each corporation and its respective stockholders that FCI
and WAXS engage in a business combination in order to advance the long-term
strategic business interests of FCI and WAXS;
WHEREAS, the combination of FCI and WAXS shall be effected by the terms of
this Agreement through a merger as outlined below (the "Merger");
WHEREAS, in furtherance thereof, the respective Boards of Directors of FCI
and WAXS have approved the Merger, upon the terms and subject to the conditions
set forth in this Agreement, pursuant to which each share of voting common
stock, par value $.01 per share, of FCI ("FCI Voting Common Stock") and each
share of non-voting common stock, par value $.01 per share of FCI ("FCI
Non-Voting Common Stock") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3) will be converted into the right to
receive (i) shares of common stock, par value $.01 per share, of WAXS ("WAXS
Common Stock") or cash and (ii) shares of Convertible Preferred Stock, Series C,
of WAXS ("WAXS Preferred Stock"), as set forth in Section 1.7; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder; and
WHEREAS, simultaneously with the execution and delivery of this Agreement,
FCI and the Shareholders and each of John D. Phillips, WorldCom Network
Services, Inc. and The 1818 Fund III, L.P. (the "Principal Stockholders") are
entering into an agreement (the "Voting Agreement") pursuant to which each
Principal Stockholder will agree to, among other things, vote in favor of the
Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law (the
"DGCL"), FCI shall be merged with and into WAXS at the Effective Time. Following
the Merger, the separate corporate existence of FCI shall cease and WAXS shall
continue as the surviving corporation (the "Surviving Corporation").
1.2 Closing. Subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger and the transactions contemplated
by this Agreement (the "Closing") will take place on the second business day
following the satisfaction or waiver of such conditions, unless another time or
date is agreed to in writing by the parties hereto (the actual time and date of
the Closing being referred to herein as the "Closing Date"). The Closing shall
be held at the offices of Long Aldridge & Norman, LLP, 303 Peachtree Street,
Suite 5300, Atlanta, Georgia 30303, unless another place is agreed to by the
parties hereto.
A-4
<PAGE> 139
1.3 Effective Time. On the date of the Closing the parties shall (i) file
a certificate of merger (the "Certificate of Merger") in such form as is
required by, and executed in accordance with, the relevant provisions of the
DGCL and (ii) make all other filings or recordings required under the DGCL in
connection with the Merger. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State or
at such subsequent time as WAXS and FCI shall agree and as shall be specified in
the Certificate of Merger (the date and time the Merger becomes effective being
the "Effective Time"). The filing of the Certificate of Merger shall be made on
the Closing Date.
1.4 Effects of the Merger. At and after the Effective Time, the Merger
will have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers, licenses, authorizations and franchises of FCI and
WAXS shall be vested in the Surviving Corporation, and all debts, liabilities
and duties of FCI and WAXS shall become the debts, liabilities and duties of the
Surviving Corporation.
1.5 Certificate of Incorporation/Bylaws. The certificate of incorporation
and bylaws of WAXS, as in effect immediately prior to the Effective Time, shall
be the certificate of incorporation and bylaws of the Surviving Corporation,
until thereafter changed or amended as provided therein or by applicable law.
1.6 Directors of the Surviving Corporation. The directors of the Surviving
Corporation as of the Effective Time shall be comprised of ten (10) members, six
(6) of which shall be designated by WAXS and four (4) of which shall be
designated by FCI. The initial directors of WAXS as of the Effective Time shall
be as set forth on Exhibit 1.6.
1.7 Merger Consideration.
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, all issued and outstanding
shares of FCI Voting Common Stock and FCI Non-Voting Common Stock shall be
converted into the right to receive, in the aggregate, (i) 380,000 shares
of WAXS Preferred Stock, less that number of shares of WAXS Preferred Stock
(on an as converted basis using the Conversion Price (as defined in the
Certificate of Designation)) as is equal to the number of shares of WAXS
Common Stock to be the subject of any stock options granted by WAXS in
consideration for the cancellation of FCI stock options pursuant to Section
1.9, and (ii), if WAXS has been able to issue and sell shares of WAXS
Common Stock on or prior to the Closing Date as provided below, an amount
in cash equal to the net proceeds from any such sales up to $56,000,000
less the amount of cash to be paid to FCI optionholders in consideration
for the cancellation of their options pursuant to Section 1.9. WAXS agrees
to use its reasonable best efforts to issue and sell, not later than such
time as all other conditions provided for in Article VI have been satisfied
or waived, such number of shares of WAXS Common Stock as will result in net
proceeds to WAXS of $56,000,000 with such proceeds to be used to satisfy
the cash payment obligations pursuant to Sections 1.7 and 1.9. If WAXS is
unable to obtain net proceeds of $56,000,000 (the "Cash Shortfall") on or
prior to the Closing, then each of the Shareholders and Anand Kumar shall
be entitled to receive (i) (A) at the Closing, that number of shares of
WAXS Common Stock as is equal to the amount of the Cash Shortfall that is
attributable to each of them as determined by FCI divided by the Market
Price (as defined in the Certificate of Designation) on the Trading Day
immediately preceding the Closing Date and (B) WAXS shall be obligated to
issue and each of the Shareholders and Anand Kumar shall be entitled to
receive, at such time or times as may be requested by the Shareholders and
Anand Kumar, provided that such persons shall have contracted to sell all
shares of WAXS Common Stock issued pursuant to clause (A) above, such
number of shares of WAXS Common Stock for resale by such persons as will
result, together with the net proceeds from the resale by such persons of
any WAXS Common Stock issued pursuant to clause (A) above or this clause
(B), in net cash proceeds to such persons equal to the Cash Shortfall
attributable to such persons and (ii) the FCI Optionholders entitled to
receive cash in consideration for the cancellation of their options
pursuant to Section 1.9 shall be entitled to receive, and WAXS shall be
obligated to issue, at such time or times as may be requested by such
optionholders, such number of shares of WAXS Common Stock for resale by
such optionholders as will result in net cash proceeds to each of such
persons in an amount equal to the Cash Shortfall that is attributable to
each such optionholder as determined by FCI. The parties agree that
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the Shareholders, Anand Kumar and such FCI optionholders shall be entitled
to, and shall use their respective reasonable best efforts to, resell any
such shares of WAXS Common Stock on such terms and conditions as they may
determine in their sole discretion on the Closing Date, provided that any
such resale shall be on an arm's-length basis. Any cash to be paid by WAXS
on the Closing Date shall be delivered by wire transfer to as many accounts
as the Shareholders may reasonably request. WAXS shall file a registration
statement on Form S-3 (the "Registration Statement") in connection with the
resale, pursuant to open market or privately negotiated transactions, of
the WAXS Common Stock to be received by the Shareholders pursuant to this
Section 1.7(a), which Registration Statement shall be in a form that can be
declared effective by the staff of the SEC. WAXS agrees to maintain the
effectiveness of the Registration Statement until its obligation to issue
shares of WAXS Common Stock pursuant to this Section 1.7(a) has been
satisfied. WAXS agrees to pay all Registration Expenses (as defined in the
Registration Rights Agreement) in connection with such registration. The
parties agree that the provisions of Sections 2.3, 2.4, 2.5 and 2.7 of the
Registration Rights Agreement shall apply, with any necessary
modifications, to the registration and sale of any shares of WAXS Common
Stock pursuant to the Registration Statement.
(b) The WAXS Preferred Stock shall have such powers, preferences,
rights, qualifications, limitations and restrictions as set forth in the
Certificate of Designation therefor attached hereto as Exhibit 1.7(b) (the
"Certificate of Designation").
1.8 Effect on Capital Stock of FCI.
(a) Subject to Section 1.8(b), as a result of the Merger and without
any action on the part of the holders thereof, at the Effective Time, all
shares of FCI Voting Common Stock and FCI Non-Voting Common Stock shall
cease to be outstanding and shall be canceled and retired and shall cease
to exist, and each holder of a certificate which immediately prior to the
Effective Time represented any such shares of FCI Voting Common Stock or
FCI Non-Voting Common Stock (a "Certificate") shall thereafter cease to
have any rights with respect to such shares, except as provided herein or
by law.
(b) Each share of FCI Voting Common Stock and FCI Non-Voting Common
Stock issued and directly or indirectly owned or held by FCI at the
Effective Time shall, by virtue of the Merger, cease to be outstanding and
shall be canceled and retired and no stock of WAXS or other consideration
shall be delivered in exchange therefor.
1.9 FCI Stock Options. On or prior to the Effective Time, FCI shall use
its reasonable best efforts to take all action necessary (including obtaining
consents from optionholders if necessary) such that each stock option granted by
FCI shall cease to represent a right to acquire shares of FCI Non-Voting Common
Stock. At the Closing, each holder of such FCI stock options shall be entitled
to receive such portion of the cash or WAXS Common Stock in lieu thereof to be
delivered or issued pursuant to Section 1.7 or such number of stock options
granted by WAXS for WAXS Common Stock, in each case as FCI may advise WAXS in
writing prior to the Closing. At the Closing, WAXS shall grant the stock options
required by this Section 1.9, on terms reasonably satisfactory to FCI and WAXS.
1.10 Exchange Procedures. At the Closing, each Shareholder shall surrender
its Certificates to the Surviving Corporation and shall receive therefor, and
Anand Kumar, if he shall surrender his Certificate(s) to the Surviving
Corporation, shall receive therefor, (i) if the Shareholders have not selected
the Cash Option, one or more certificates representing, in the aggregate, the
whole number of shares of WAXS Common Stock that such Person has a right to
receive pursuant to Section 1.7, and (ii) one or more certificates representing,
in the aggregate, the whole number of shares of WAXS Preferred Stock that such
Person is entitled to receive pursuant to Section 1.7.
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ARTICLE II
[RESERVED]
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of WAXS. Except as set forth in the
WAXS SEC Reports (as defined below) filed and publicly available prior to the
date hereof or the WAXS Disclosure Schedule delivered by WAXS to FCI prior to
the execution of this Agreement (the "WAXS Disclosure Schedule") (each section
of which qualifies the correspondingly numbered representation and warranty or
covenant to the extent specified therein) WAXS represents and warrants to FCI
and the Shareholders as follows:
(a) Organization; Standing and Power; Subsidiaries.
(1) Each of WAXS and each of its Subsidiaries (as defined in
Section 8.11) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, has the requisite power and authority to own, lease and
operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized, existing and in
good standing or to have such power and authority would not have a
Material Adverse Effect on WAXS, and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification necessary other than in such jurisdictions where the
failure to so qualify or to be in good standing would not have a
Material Adverse Effect on WAXS. The copies of the certificate of
incorporation and bylaws of WAXS which were previously furnished or made
available to FCI are true, complete and correct copies of such documents
as in effect on the date of this Agreement.
(2) Exhibit 21.1 to WAXS's Annual Report on Form 10-K for the year
ended December 31, 1998 includes all the Subsidiaries of WAXS which as
of the date of this Agreement are Significant Subsidiaries (as defined
in Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares
of capital stock of, or other equity interests in, each such Significant
Subsidiary have been validly issued and are fully paid and nonassessable
and are owned directly or indirectly by WAXS, free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of
any kind or nature whatsoever (collectively "Liens") and free of any
other restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other ownership
interests). Neither WAXS nor any of its Subsidiaries directly or
indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture or
other business association or entity (other than the Subsidiaries of
WAXS) that is or would reasonably be expected to be material to WAXS and
its Subsidiaries taken as a whole.
(b) Capital Structure.
(1) The authorized capital stock of WAXS consists of (A)
150,000,000 shares of WAXS Common Stock, par value $.01 per share, of
which 44,920,342 shares are outstanding and zero shares are held in the
treasury of WAXS and (B) 10,000,000 shares of Preferred Stock, par value
$.01 per share, of which 50,000 shares designated as 4.25% Cumulative
Senior Perpetual Convertible Preferred Stock, Series A, par value $.01
per share (the "Series A Preferred Stock"), and 23,174 shares designated
as 4.25% Cumulative Junior Convertible Preferred Stock, Series B, par
value $.01 per share (the "Series B Preferred Stock"), are outstanding.
WAXS has reserved or has available 4,347,827 shares of WAXS Common Stock
for issuance upon conversion of the Series A Preferred Stock and
1,448,375 shares of WAXS Common Stock for issuance upon conversion of
the Series B Preferred Stock. All issued and outstanding shares of the
capital stock of WAXS are duly authorized, validly issued, fully paid
and nonassessable, and no class of capital stock is entitled to
preemptive rights. There are outstanding no options, warrants or other
rights to acquire capital stock from WAXS other than options
representing in the aggregate the right to purchase 8,960,951 shares
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of WAXS Common Stock (collectively, the "WAXS Stock Options") under the
World Access, Inc. 1991 Stock Option Plan, World Access, Inc. Outside
Directors' Warrant Plan, World Access, Inc. Directors' Warrant Incentive
Plan, World Access, Inc. 1998 Incentive Equity Plan, Telco Systems, Inc.
1980 Stock Option Plan, Telco Systems, Inc. 1988 Non-Statutory Stock
Option Plan and Telco Systems, Inc. 1990 Stock Option Plan
(collectively, the "WAXS Stock Option Plans"). Section 3.1(b) of the
WAXS Disclosure Schedule sets forth a complete and correct list of the
number of shares of WAXS Common Stock subject to WAXS Stock Options or
other rights to purchase or receive WAXS Common Stock granted under the
WAXS Benefit Plans or otherwise and the exercise prices thereof.
(2) No bonds, debentures, notes or other indebtedness of WAXS
having the right to vote on any matters on which holders of capital
stock of WAXS may vote ("WAXS Voting Debt") are issued or outstanding.
(3) Except as otherwise set forth in this Section 3.1(b) and as
contemplated by Section 1.7 and Section 1.9, there are no securities,
options, warrants, calls, rights, commitments, agreements, arrangements
or undertakings of any kind to which WAXS or any of its Subsidiaries is
a party or by which any of them is bound obligating WAXS or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities
of WAXS or any of its Subsidiaries or obligating WAXS or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call right, commitment, agreement, arrangement or
undertaking. There are no outstanding obligations of WAXS or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of WAXS or any of its Subsidiaries.
(c) Authority; No Conflicts.
(1) WAXS has all requisite corporate power and authority to enter
into this Agreement and the Registration Rights Agreement and to
consummate the transactions contemplated hereby and thereby subject to
the approval by the stockholders of WAXS by the Required WAXS Vote as
defined in Section 3.1(g) of this Agreement and the transactions
contemplated hereby, including the issuance of the shares of WAXS Common
Stock and WAXS Preferred Stock to be issued in the Merger (the "Share
Issuance"). The execution and delivery of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of WAXS, subject to the approval
by the stockholders of WAXS of this Agreement and of the Share Issuance
by the Required WAXS Vote. This Agreement has been duly executed and
delivered by WAXS and constitutes, and the Registration Rights Agreement
will have been duly executed and delivered by WAXS and shall constitute,
at the Closing, a valid and binding agreement of WAXS, enforceable
against it in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to or affecting creditors generally or by general
equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(2) Subject to the approval by the stockholders of WAXS of this
Agreement and the Share Issuance by the Required WAXS Vote, the
execution and delivery of this Agreement and the Registration Rights
Agreement by WAXS does not or will not, as the case may be, and the
consummation by WAXS of the Merger and the other actions contemplated
hereby and thereby will not, conflict with, or result in any violation
of, or constitute a default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation or the loss of a material
benefit under, or the creation of a Lien on any assets (any such
conflict, violation, default, right of termination, amendment,
cancellation or acceleration, loss or creation, a "Violation") pursuant
to: (A) any provision of the certificate of incorporation or bylaws of
WAXS or any Subsidiary of WAXS, or (B) except as would not have a
Material Adverse Effect on WAXS and subject to obtaining or making the
consents, approvals,
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orders, authorizations, registrations, declarations and filings referred
to in paragraph (3) below, any loan or credit agreement, note, mortgage,
bond, indenture, lease, Benefit Plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to WAXS
or any Subsidiary of WAXS or their respective properties or assets.
(3) No consent, approval, order or authorization of, or
registration, declaration or filing with, any supranational, national,
state, municipal, local or foreign government, any instrumentality,
subdivision, court, administrative agency or commission or other
authority thereof, or any quasi-governmental or private body exercising
any regulatory, taxing, importing or other governmental or
quasi-governmental authority (a "Governmental Entity"), is required by
or with respect to WAXS or any Subsidiary of WAXS in connection with the
execution and delivery of this Agreement or the Registration Rights
Agreement by WAXS or the consummation of the Merger and the other
transactions contemplated hereby and thereby, except for those required
under or in relation to (A) the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) state securities or "blue
sky" laws (the "Blue Sky Laws"), (C) the Securities Act, (D) the
Exchange Act, (E) the DGCL with respect to the filing of the Certificate
of Merger, (F) rules and regulations of Nasdaq, (G) antitrust or other
competition laws of other jurisdictions, (H) such consents, approvals,
orders, authorizations, registrations, declarations and filings as are
required by applicable laws, regulations and rules governing the
telecommunications business, and (I) such consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to make or obtain would not have a Material Adverse Effect on
WAXS. 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 as
"Necessary Consents".
(d) Reports and Financial Statements.
(1) WAXS has filed all required registration statements,
prospectuses, reports, schedules, forms, statements and other documents
required to be filed by it under the federal securities laws with the
SEC since January 1, 1998 (collectively, including all exhibits thereto,
the "WAXS SEC Reports"). No Subsidiary of WAXS is required to file any
form, report, registration statement, prospectus or other document with
the SEC not otherwise filed with a WAXS SEC Report. None of the WAXS SEC
Reports, as of their respective dates (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing), contained or will contain any untrue statement of a material
fact or omitted or will 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. The WAXS
SEC Reports, taken as a whole, do not and as of the Effective Time will
not contain any untrue statement of a material fact or omit or will omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances existing as
of the Effective Time, not misleading. Each of the financial statements
(including the related notes) included in the WAXS SEC Reports (or, if
amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) presents fairly, in all material
respects, the consolidated financial position and consolidated results
of operations and cash flows of WAXS and its Subsidiaries as of the
respective dates or for the respective periods set forth therein all in
conformity with GAAP consistently applied during the periods involved
except as otherwise noted therein, and subject, in the case of the
unaudited interim financial statements, to normal and recurring year-end
adjustments that have not been and are not expected to be material in
amount. All of such WAXS SEC Reports, as of their respective dates (or
as of the date of any amendment to the respective WAXS SEC Report filed
prior to the date of this Agreement), complied or will comply as to form
in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder.
(2) Since December 31, 1998, WAXS and its Subsidiaries have not
incurred any liabilities that are of a nature that would be required to
be disclosed on a balance sheet of WAXS and its Subsidiaries or the
footnotes thereto prepared in conformity with GAAP, other than (A)
liabilities
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incurred in the ordinary course of business or (B) liabilities that
would not have a Material Adverse Effect on WAXS.
(e) Information Supplied. None of the information supplied or to be
supplied by WAXS for inclusion or incorporation by reference in the Proxy
Statement or the Consent Solicitation Statement (as defined herein) will,
on the date it is first mailed to WAXS's stockholders or the holders of the
FCI Notes (as defined herein), as applicable, or at the time of the WAXS
Stockholders Meeting or the taking of the FCI Notes Consent (as defined
herein), as applicable, 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 were made, not misleading. The Proxy Statement will, on
the date it is first mailed to WAXS's stockholders and at the time of the
WAXS Stockholders Meeting, comply as to form in all material respects with
the requirements of the Exchange Act and the rules and regulations
promulgated thereunder.
(f) Board Approval. The Board of Directors of WAXS, by resolutions
duly adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way (the "WAXS Board Approval"),
has duly (i) determined that this Agreement and the Merger are fair to and
in the best interests of WAXS and its stockholders, (ii) approved this
Agreement, the Merger and the Share Issuance and (iii) recommended that the
stockholders of WAXS approve and adopt this Agreement, the Merger and the
Share Issuance and directed that such matters be submitted for
consideration by WAXS's stockholders at the WAXS Stockholders Meeting.
(g) Vote Required. The affirmative vote of holders of shares of WAXS
Common Stock, Series A Preferred Stock and Series B Preferred Stock, voting
together as a single class, representing a majority of the total votes cast
at a meeting of the holders of outstanding shares of WAXS Common Stock,
Series A Preferred Stock and Series B Preferred Stock (the "Required WAXS
Vote"), is the only vote of the holders of any class or series of WAXS
capital stock necessary to approve the transactions contemplated by this
Agreement, the Registration Rights Agreement, the Merger and the Share
Issuance.
(h) Litigation: Compliance with Laws.
(1) There is no suit, investigation, action or proceeding pending
or, to the Knowledge of WAXS, threatened, against or affecting WAXS or
any Subsidiary of WAXS having, or which would have a Material Adverse
Effect on WAXS, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against WAXS
or any Subsidiary of WAXS having, or which would have a Material Adverse
Effect on WAXS.
(2) Except as would not have a Material Adverse Effect on WAXS,
WAXS and its Subsidiaries hold all permits, licenses, variances,
authorizations, exemptions, orders and approvals of all Governmental
Entities which are necessary for the operation of the businesses of WAXS
and its Subsidiaries, taken as a whole (the "WAXS Permits"). WAXS and
its Subsidiaries are in compliance with the terms of the WAXS Permits,
except where the failure so to comply would not have a Material Adverse
Effect on WAXS. The businesses of WAXS and its Subsidiaries are not
being conducted in violation of, and WAXS has not received any notices
of violations with respect to, any law, ordinance or regulation of any
Governmental Entity, except for possible violations which would not have
a Material Adverse Effect on WAXS.
(i) Absence of Certain Changes or Events. Except in connection with
this Agreement or the transactions contemplated hereby, and except as
permitted by Section 4.1, since December 31, 1998 through and including the
date hereof, (i) WAXS and its Subsidiaries have conducted, in all material
respects, their business only in the ordinary course and (ii) there has not
been any change, circumstance or event which has had, or would reasonably
be expected to have, a Material Adverse Effect on WAXS, other than any
change, circumstance or effect relating (A) to the economy or financial
markets in general, or (B) in general to the industries in which WAXS and
its Subsidiaries operate and not specifically relating to WAXS and its
Subsidiaries.
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(j) Environmental Matters. Except as would not have a Material
Adverse Effect on WAXS, (i) the operations of WAXS and its Subsidiaries
have been and are in compliance with all Environmental Laws and with all
licenses required by Environmental Laws (as defined below), (ii) there are
no pending or, to the Knowledge of WAXS, threatened, actions, suits,
claims, investigations or other proceedings (collectively, "Actions") under
or pursuant to Environmental Laws against WAXS or its Subsidiaries or
involving any real property currently or, to the Knowledge of WAXS,
formerly owned, operated or leased by WAXS or its Subsidiaries, (iii) WAXS
and its Subsidiaries are not subject to any Environmental Liabilities (as
defined below), and, to the Knowledge of WAXS, no facts, circumstances or
conditions relating to, arising from, associated with or attributable to
any real property currently or, to the Knowledge of WAXS, formerly owned,
operated or leased by WAXS or its Subsidiaries or operations thereon would
reasonably be expected to result in Environmental Liabilities, (iv) all
real property owned and, to the Knowledge of WAXS, all real property
operated or leased by WAXS or its Subsidiaries is free of contamination
from Hazardous Material (as defined below) that would have an adverse
effect on human health or the environment and (v) there is not now, nor, to
the Knowledge of WAXS, has there been in the past, on, in or under any real
property owned, leased or operated by WAXS or its Subsidiaries or any of
their respective predecessors (a) any underground storage tanks regulated
pursuant to 40 C.F.R. Part 280 or delegated state programs, dikes or
impoundments containing more than a reportable quantity of Hazardous
Materials, (b) any friable asbestos-containing materials or (c) any
polychlorinated biphenyls.
As used in this Agreement, "Environmental Laws" means any and all
federal, state, local or municipal laws, rules, orders, regulations,
statutes, ordinances, codes, decisions, injunctions, orders, decrees,
requirements of any Governmental Entity, any and all common law
requirements, rules and bases of liability regulating, relating to or
imposing liability or standards of conduct concerning pollution, Hazardous
Materials or protection of human health, safety or the environment, as
currently in effect and includes the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. sec. 9601 et seq., the Hazardous
Materials Transportation Act, 49 U.S.C. sec. 1801 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. sec. 6901 et seq.,the Clean Water
Act, 33 U.S.C. sec. 1251 et seq., the Clean Air Act, 33 U.S.C. sec. 2601 et
seq., the Toxic Substances Control Act, 15 U.S.C. sec. 2601 et seq., the
Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C., sec. 136 et
seq., Occupational Safety and Health Act 29 U.S.C. sec. 651 et seq. and the
Oil Pollution Act of 1990, 33 U.S.C. sec. 2701 et seq., as such laws have
been amended or supplemented, and the regulations promulgated pursuant
thereto, and all analogous state or local statutes. As used in this
Agreement, "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 such 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. As used in this Agreement "Hazardous Materials" means any
hazardous or toxic substances, materials or wastes, defined, listed,
classified or regulated as such in or under any Environmental Laws which
includes petroleum, petroleum products, friable asbestos, urea formaldehyde
and polychlorinated biphenyls.
(k) Intellectual Property. Except as would not have a Material
Adverse Effect on WAXS: (i) WAXS and each of its Subsidiaries owns, or is
licensed to use (in each case, free and clear of any Liens), all
Intellectual Property (as defined below) used in or necessary for the
conduct of its business as currently conducted, (ii) the use of any
Intellectual Property by WAXS and its Subsidiaries does not infringe on or
otherwise violate the rights of any Person and is in accordance with any
applicable license pursuant to which WAXS or any Subsidiary acquired the
right to use any Intellectual Property; (iii) to the Knowledge of WAXS, no
Person is challenging, infringing on or otherwise violating any right of
WAXS or any of its Subsidiaries with respect to any Intellectual Property
owned by and/or licensed to WAXS or its Subsidiaries; and (iv) neither WAXS
nor any of its Subsidiaries has received any written notice of any pending
claim with respect to any Intellectual Property used by WAXS and its
Subsidiaries and to its Knowledge no Intellectual Property owned and/or
licensed by WAXS or its Subsidiaries is being used or enforced in a manner
that would result in the abandonment, cancellation or unenforceabil-
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ity of such Intellectual Property. For purposes of this Agreement,
"Intellectual Property" shall mean trademarks, service marks, brand names,
certification marks, trade dress and other indications of origin, the
goodwill associated with the foregoing and registrations in any
jurisdiction of, and applications in any jurisdiction to register, the
foregoing, including any extension, modification or renewal of any such
registration or application; inventions, discoveries and ideas, whether
patentable or not, in any jurisdiction; patents, applications for patents
(including, without limitation, divisions, continuations, continuations in
part and renewal applications), and any renewals, extensions or reissues
thereof, in any jurisdiction; non-public information, trade secrets and
confidential information and rights in any jurisdiction to limit the use or
disclosure thereof by any person; writings and other works, whether
copyrightable or not, in any jurisdiction; registrations or applications
for registration of copyrights in any jurisdiction, and any renewals or
extensions thereof; any similar intellectual property or proprietary
rights; and any claims or causes of action arising out of or relating to
any infringement or misappropriation of any of the foregoing.
(l) Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in
connection with any of the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of WAXS, except Donaldson,
Lufkin & Jenrette, (the "WAXS Financial Advisor"), whose fees and expenses
will be paid by WAXS in accordance with WAXS's agreement with such firm, a
copy of which has been, or will be promptly when available, provided to
FCI.
(m) Opinion of WAXS Financial Advisor. WAXS has received the opinion
(the "Fairness Opinion") of the WAXS Financial Advisor, dated the date of
this Agreement, to the effect that as of such date, the Merger
Consideration is fair, from a financial point of view, to WAXS and its
stockholders, a copy of which has been, or will be promptly when available,
provided to FCI.
(n) Taxes.
(1) (i) All material Tax Returns of WAXS and its Subsidiaries have
been filed, or requests for extensions have been timely filed and have
not expired; (ii) all Tax Returns filed by WAXS and its Subsidiaries are
complete and accurate in all material respects; (iii) all Taxes shown to
be due on such Tax Returns or on subsequent assessments with respect
thereto have been paid or adequate reserves have been established for
the payment of such Taxes, and no other material Taxes are payable by
WAXS and its Subsidiaries with respect to items or periods covered by
such Tax Returns (whether or not shown on or reportable on such Tax
Returns) or with respect to any period prior to the date of this
Agreement; (iv) there are no material liens on any of the assets of WAXS
and its Subsidiaries with respect to Taxes, other than liens for Taxes
not yet due and payable or for Taxes that WAXS and its Subsidiaries is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established; and (v) there is no audit,
examination, deficiency or refund litigation or matter in controversy
with respect to any Taxes of WAXS and its Subsidiaries that might
reasonably be expected to result in a Tax determination which would have
a Material Adverse Effect on WAXS.
(2) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of WAXS and its Subsidiaries that,
individually or collectively, could give rise to the payment of any
amount (or portion thereof) that would not be deductible pursuant to
Sections 280G, 404, or 162 of the Code.
(3) Neither WAXS nor any of its Subsidiaries is a party to a Tax
Sharing Agreement.
(o) Certain Contracts. Neither WAXS nor any of its Subsidiaries is a
party to or bound by (i) any "material contract" (as such term is defined
in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition
agreement or any other agreement or arrangement that limits or otherwise
restricts WAXS or any of its Subsidiaries or any successor thereto, from
engaging or competing in any line of business or in any geographic area,
which agreement or arrangement would have a Material Adverse Effect on the
Surviving Corporation after giving effect to the Merger, or (iii) any
agreement or
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arrangement between WAXS or any of its Subsidiaries, on the one hand, and
any affiliates, directors or officers of WAXS or its Subsidiaries, on the
other hand, that is not on arm's-length terms. All contracts filed with the
WAXS SEC Reports and the contracts listed on Section 3.1(o) of the WAXS
Disclosure Schedule are valid, binding and are in full force and effect and
enforceable in accordance with their respective terms, other than such
contracts which by their terms are no longer in force or effect. Neither
WAXS nor its Subsidiaries are in violation or breach of or default under
any such contract, nor to WAXS's and its Subsidiaries' Knowledge, is any
other party to any such contract in violation or breach or other default
under any such contract, except for any such violation, breach or default
which would not have a Material Adverse Effect on WAXS.
(p) Certain Employee Matters. To the Knowledge of WAXS, no key
employee, or group of employees of WAXS has any plans to terminate
employment with WAXS other than employees with plans to retire. WAXS has
complied in all material respects with all laws relating to the employment
of labor, including provisions thereof relating to wages, hours and equal
opportunity, and, to the Knowledge of WAXS, it does not have any material
labor relations problems (including threatened or actual strikes or work
stoppages or material grievances). Neither WAXS nor any of its Subsidiaries
is a party to any collective bargaining agreement.
3.2 Representations and Warranties of FCI. Except as set forth in the FCI
SEC Reports (as defined below) filed and publicly available prior to the date
hereof or the FCI Disclosure Schedule delivered by FCI to WAXS prior to the
execution of this Agreement (the "FCI Disclosure Schedule") (each section of
which qualifies the correspondingly numbered representation and warranty or
covenant to the extent specified therein), FCI represents and warrants to WAXS
as follows:
(a) Organization; Standing and Power; Subsidiaries.
(1) Each of FCI and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the requisite power
and authority to own, lease and operate its properties and to carry on
its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power and
authority would not have a Material Adverse Effect on FCI and is duly
qualified and in good standing to do business in each jurisdiction in
which the nature of its business or the ownership or leasing of its
properties makes such qualification necessary other than in such
jurisdictions where the failure so to qualify or to be in good standing
would not have a Material Adverse Effect on FCI. The copies of the
certificate of incorporation and by-laws of FCI which were previously
furnished or made available to WAXS are true, complete and correct
copies of such documents as in effect on the date of this Agreement.
(2) Exhibit 21.1 to FCI's Annual Report on Form 10-K for the year
ended September 30, 1998 includes all the Subsidiaries of FCI which as
of the date of this Agreement are Significant Subsidiaries (as defined
in Rule 102 of Regulation S-X of the SEC). All the outstanding shares of
capital stock of, or other equity interests in, each such Significant
Subsidiary have been validly issued and are fully paid and nonassessable
and are owned directly or indirectly by FCI, free and clear of all Liens
and free of any other restriction (including any restriction on the
right to vote, sell or otherwise dispose of such capital stock or other
ownership interests). Neither FCI nor any of its Subsidiaries directly
or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture or
other business association or entity (other than the Subsidiaries of
FCI), that is or would reasonably be expected to be material to FCI and
its Subsidiaries taken as a whole.
(b) Capital Structure.
(1) The authorized capital stock of FCI consists of 275,000 shares
of FCI Voting Common Stock, of which 225,741 shares are outstanding and
zero shares are held in the treasury of FCI and 25,000 shares of FCI
Non-Voting Common Stock, of which 1,182 shares are outstanding and zero
shares are held in the treasury of FCI. Section 3.2(b) of the FCI
Disclosure Schedule sets forth a
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complete and accurate list of the number of shares of FCI Voting Common
Stock and FCI Non-Voting Common Stock owned beneficially and of record
by each holder thereof. All issued and outstanding shares of the capital
stock of FCI are duly authorized, validly issued, fully paid and
nonassessable, and no class of capital stock is entitled to preemptive
rights. There are outstanding no options, warrants or other rights to
acquire capital stock from FCI other than options representing in the
aggregate the right to purchase no more than 11,736 shares of FCI
Non-Voting Common Stock (collectively, the "FCI Stock Options") under
the FaciliCom International, Inc. 1998 Stock Option Plan as such plan
has been amended (the "FCI Stock Option Plan"). Section 3.2(b) of the
FCI Disclosure Schedule sets forth a complete and correct list of the
number of shares of FCI Voting Common Stock and FCI Non-Voting Common
Stock subject to FCI Stock Options or other rights to purchase or
receive FCI Voting Common Stock or FCI Non-Voting Common Stock granted
under the FCI Benefit Plans or otherwise and the exercise prices
thereof.
(2) No bonds, debentures, notes or other indebtedness of FCI having
the right to vote on any matters on which stockholders may vote ("FCI
Voting Debt") are issued or outstanding.
(3) Except as otherwise set forth in this Section 3.2(b), as of the
date of this Agreement, there are no securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of
any kind to which FCI or any of its Subsidiaries is a party or by which
any of them is bound obligating FCI or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of FCI or any of its
Subsidiaries or obligating FCI or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking. There are no
outstanding obligations of FCI or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of FCI or any of
its Subsidiaries.
(c) Authority; No Conflicts.
(1) FCI and the Shareholders have all requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the actions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
FCI and the Shareholders. This Agreement has been duly executed and
delivered by FCI and the Shareholders and constitutes a valid and
binding agreement of FCI and the Shareholders, enforceable against them
in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to or affecting creditors generally, or by general
equity principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(2) The execution and delivery of this Agreement by FCI and the
Shareholders does not or will not, as the case may be, and the
consummation by FCI and the Shareholders of the Merger and the other
actions contemplated hereby will not, conflict with, or result in a
Violation pursuant to: (A) any provision of the certificate of
incorporation or bylaws of FCI or a Shareholder or any Subsidiary of FCI
or (B) except as would not have a Material Adverse Effect on FCI or a
Shareholder, subject to obtaining or making the consents, approvals,
orders, authorizations, registrations, declarations and filings referred
to in paragraph (3) below, any loan or credit agreement, note, mortgage,
bond, indenture, lease, Benefit Plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to FCI or
a Shareholder, any Subsidiary of FCI or their respective properties or
assets.
(3) No consent, approval order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to FCI or a Shareholder or any Subsidiary of
FCI in connection with the execution and delivery of this Agreement or
the Registration Rights Agreement by FCI and the Shareholders, or the
consummation of the Merger and the other transactions contemplated
hereby and thereby, except the Necessary Consents and such consents,
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approvals, orders, authorizations, registrations, declarations and
filings the failure of which to make or obtain would not have a Material
Adverse Effect on FCI or the Shareholders.
(d) Reports and Financial Statements.
(1) FCI has filed all required registration statements,
prospectuses, reports, schedules, forms, statements and other documents
required to be filed by it under the federal securities laws with the
SEC since January 1, 1998 (collectively, including all exhibits thereto,
the "FCI SEC Reports"). No Subsidiary of FCI is required to file any
form, report, registration statement or prospectus or other document
with the SEC not otherwise filed with an FCI SEC Report. None of the FCI
SEC Reports, as of their respective dates (or, if amended or superseded
by a filing prior to the date of this Agreement, then on the date of
such filing), contained or will contain any untrue statement of a
material fact or omitted or will 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.
The FCI SEC Reports, taken as a whole, do not and as of the Effective
Time will not contain any untrue statement of a material fact or omit or
will omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
existing as of the Effective Time, not misleading. Each of the financial
statements (including the related notes) included in the FCI SEC Reports
(or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) presents fairly, in all
material respects, the consolidated financial position and consolidated
results of operations and cash flows of FCI and its Subsidiaries as of
the respective dates or for the respective periods set forth therein,
all in conformity with GAAP consistently applied during the periods
involved except as otherwise noted therein, and subject, in the case of
the unaudited interim financial statements, to normal and recurring
year-end adjustments that have not been and are not expected to be
material in amount. All of such FCI SEC Reports, as of their respective
dates (or as of the date of any amendment to the respective FCI SEC
Report filed prior to the date of this Agreement), complied or will
comply as to form in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and the rules
and regulations promulgated thereunder.
(2) Since September 30, 1998, FCI and its Subsidiaries have not
incurred any liabilities that are of a nature that would be required to
be disclosed on a balance sheet of FCI and its Subsidiaries or the
footnotes thereto prepared in conformity with GAAP, other than (A)
liabilities incurred in the ordinary course of business or (B)
liabilities that would not have a Material Adverse Effect on FCI.
(e) Information Supplied. None of the information supplied or to be
supplied by FCI for inclusion or incorporation by reference in the Proxy
Statement or the Consent Solicitation Statement (as defined herein) will,
on the date it is first mailed to WAXS's stockholders or the holders of the
FCI Notes (as defined herein), as applicable, or at the time of the WAXS
Stockholders Meeting, or the taking of the FCI Notes Consent (as defined
herein), as applicable, 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 were made, not misleading.
(f) Board/Shareholder Approval. The Board of Directors of FCI, by
resolutions duly adopted by unanimous written consent and not subsequently
rescinded or modified in any way (the "FCI Board Approval"), has duly (i)
determined that this Agreement and the Merger are fair to and in the best
interests of FCI and the Shareholders, (ii) approved this Agreement and the
Merger and (iii) recommended that the Shareholders of FCI adopt this
Agreement and approve the Merger and directed that this Agreement and the
transactions contemplated hereby be submitted for consideration by the
Shareholders. The Shareholders, by resolutions duly adopted by unanimous
written consent and not subsequently rescinded or modified in any way, have
adopted this Agreement and approved the Merger.
(g) Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of FCI Voting Common Stock to approve the Merger
(the "Required FCI Vote") was the only vote of the
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holders of any class or series of FCI capital stock necessary to adopt this
Agreement and approve the Merger and the other transactions contemplated
hereby.
(h) Litigation: Compliance with Laws.
(1) There is no suit, investigation, action or proceeding pending
or, to the Knowledge of FCI, threatened, against or affecting FCI or any
Subsidiary of FCI having, or which would have a Material Adverse Effect
on FCI, nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against FCI or any
Subsidiary of FCI having, or which would have a Material Adverse Effect
on FCI.
(2) Except as would not have a Material Adverse Effect on FCI, FCI
and its Subsidiaries hold all permits, licenses, variances,
authorizations, exemptions, orders and approvals of all Governmental
Entities necessary for the operation of the businesses of FCI and its
Subsidiaries, taken as a whole (the "FCI Permits"). FCI and its
Subsidiaries are in compliance with the terms of the FCI Permits, except
where the failure so to comply would not have a Material Adverse Effect
on FCI. The businesses of FCI and its Subsidiaries are not being
conducted in violation of, and FCI has not received any notices of
violations with respect to, any law, ordinance or regulation of any
Governmental Entity, except for possible violations which would not have
a Material Adverse Effect on FCI.
(i) Absence of Certain Changes or Events. Except for liabilities
incurred in connection with this Agreement or the transactions contemplated
hereby, except as disclosed in the FCI SEC Reports filed prior to the date
of this Agreement, and except as permitted by Section 4.2, since September
30, 1998 through and including the date hereof, (i) FCI and its
Subsidiaries have conducted, in all material respects, their business only
in the ordinary course and (ii) there has not been any change, circumstance
or event which has had, or would reasonably be expected to have, a Material
Adverse Effect on FCI, other than any change, circumstance or effect
relating (i) to the economy or financial markets in general, or (ii) in
general to the industries in which FCI and its Subsidiaries operate and not
specifically relating to FCI and its Subsidiaries.
(j) Environmental Matters. Except as would not have a Material
Adverse Effect on FCI, (i) the operations of FCI and its Subsidiaries have
been and are in compliance with all Environmental Laws and with all
licenses required by Environmental Laws (ii) there are no pending or, to
the Knowledge of FCI, threatened, actions under or pursuant to
Environmental Laws against FCI or its Subsidiaries or involving any real
property currently or, to the knowledge of FCI, formerly owned, operated or
leased by FCI or its Subsidiaries, (iii) FCI and its Subsidiaries are not
subject to any Environmental Liabilities and, to the Knowledge of FCI, no
facts, circumstances or conditions relating to, arising from, associated
with or attributable to any real property currently or, to the Knowledge of
FCI, formerly owned, operated or leased by FCI or its Subsidiaries or
operations thereon would reasonably be expected to result in Environmental
Liabilities, (iv) all real property owned and, to the Knowledge of FCI all
real property operated or leased by FCI or its Subsidiaries is free of
contamination from Hazardous Material that would have an adverse effect on
human health or the environment and (v) there is not now, nor, to the
Knowledge of FCI, has there been in the past, on, in or under any real
property owned, leased or operated by FCI or its Subsidiaries or any of
their respective predecessors (a) any underground storage tanks, regulated
pursuant to 40 C.F.R. Part 280 or delegated state programs, dikes or
impoundments containing more than a reportable quantity of Hazardous
Materials, (b) any friable asbestos containing materials or (c) any
polychlorinated biphenyls.
(k) Intellectual Property. Except as would not have a Material
Adverse Effect on FCI: (i) FCI and each of its Subsidiaries owns, or is
licensed to use (in each case, free and clear of any Liens), all
Intellectual Property used in or necessary for the conduct of its business
as currently conducted, (ii) the use of any Intellectual Property by FCI
and its Subsidiaries does not infringe on or otherwise violate the rights
of any Person and is in accordance with any applicable license pursuant to
which FCI or any Subsidiary acquired the right to use any Intellectual
Property; (iii) to the Knowledge of FCI, no Person is challenging,
infringing on or otherwise violating any right of FCI or any of its
Subsidiaries with respect to
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any Intellectual Property owned by and/or licensed to FCI or its
Subsidiaries; and (iv) neither FCI nor any of its Subsidiaries has received
any written notice of any pending claim with respect to any Intellectual
Property used by FCI and its Subsidiaries and to FCI's Knowledge, no
Intellectual Property owned and/or licensed by FCI or its Subsidiaries is
being used or enforced in a manner that would result in the abandonment,
cancellation or unenforceability of such Intellectual Property.
(l) Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in
connection with any of the transactions contemplated by this Agreement,
based upon arrangements made by or on behalf of FCI except Lehman Brothers,
Inc. (the "FCI Financial Advisor"), whose fees and expenses will be paid by
FCI in accordance with The Armstrong Group's agreement with such firm, a
copy of which has been, or will be promptly when available, provided to
WAXS.
(m) Taxes.
(1) (i) All material Tax Returns of FCI and its Subsidiaries have
been filed, or requests for extensions have been timely filed and have
not expired; (ii) all Tax Returns filed by FCI and its Subsidiaries are
complete and accurate in all material respects; (iii) all Taxes shown to
be due on such Tax Returns or on subsequent assessments with respect
thereto have been paid or adequate reserves have been established for
the payment of such Taxes, and no other material Taxes are payable by
FCI and its Subsidiaries with respect to items or periods covered by
such Tax Returns (whether or not shown on or reportable on such Tax
Returns) or with respect to any period prior to the date of this
Agreement; (iv) there are no material liens on any of the assets of FCI
or any of its Subsidiaries with respect to Taxes, other than liens for
Taxes not yet due and payable or for Taxes that FCI or any of its
Subsidiaries is contesting in good faith through appropriate proceedings
and for which appropriate reserves have been established; and (v) there
is no audit, examination, deficiency or refund litigation or matter in
controversy with respect to any Taxes of FCI and its Subsidiaries that
might reasonably be expected to result in a Tax determination which
would have a Material Adverse Effect on FCI or any of its Subsidiaries.
(2) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of FCI or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of any
amount (or portion thereof) that would not be deductible pursuant to
Sections 280G, 404, or 162 of the Code.
(3) Neither FCI nor any of its Subsidiaries is a party to a Tax
Sharing Agreement.
(n) Certain Contracts. Neither FCI nor any of its Subsidiaries is a
party to or bound by (i) any "material contract" (as such term is defined
in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition
agreement or any other agreement or arrangement that limits or otherwise
restricts FCI or any of its Subsidiaries or any successor thereto or that
would, after the Effective Time, limit or restrict the Surviving
Corporation or any of its affiliates (other than the Shareholders and their
respective affiliates) or any successor thereto, from engaging or competing
in any line of business or in any geographic area, which agreement or
arrangement would have a Material Adverse Effect on the Surviving
Corporation and its Subsidiaries, taken together, after giving effect to
the Merger, or (iii) any agreement or arrangement between FCI or any of its
Subsidiaries, on the one hand, and any affiliates, directors or officers of
FCI or its Subsidiaries, on the other hand, that is not on arm's-length
terms. All contracts filed with the FCI SEC Reports and the contracts
listed on Section 3.1(n) of the FCI Disclosure Schedule (unless otherwise
indicated thereon) are valid binding and are in full force and effect and
enforceable in accordance with their respective terms, other than such
contracts which by their terms are no longer in force or effect. Neither
FCI nor its Subsidiaries are in violation or breach of or default under any
such contract, nor to FCI's Knowledge, is any other party to any such
contract in violation or breach or other default under any such contract,
except for any such violation, breach or default which would not have a
Material Adverse Effect on FCI.
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(o) Certain Employee Matters. To the Knowledge of FCI, no key
employee, or group of employees of FCI has any plans to terminate
employment with FCI other than employees with plans to retire. FCI has
complied in all material respects with all laws relating to the employment
of labor, including provisions thereof relating to wages, hours and equal
opportunity, and, to the Knowledge of FCI, it does not have any material
labor relations problems (including threatened or actual strikes or work
stoppages or material grievances). Neither FCI nor any of its Subsidiaries
is a party to any collective bargaining agreement.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of WAXS. During the period from the date of this Agreement
and continuing until the Effective Time, WAXS agrees as to itself and its
Subsidiaries that (except as expressly required, contemplated or permitted by
this Agreement or the WAXS Disclosure Schedule or as required by a Governmental
Entity of competent jurisdiction or any law or regulation or to the extent that
FCI shall otherwise consent in writing, which consent shall not be unreasonably
withheld, delayed or conditioned):
(a) Ordinary Course. WAXS and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in all
material respects, in substantially the same manner as heretofore
conducted, and shall use all reasonable efforts to preserve intact their
present lines of business, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others having
significant business dealings with them.
(b) Dividends; Changes in Share Capital. Except as required under the
Certificates of Designation for the WAXS Series A Preferred Stock and the
WAXS Series B Preferred Stock or as set forth on Section 4.1(b) of the WAXS
Disclosure Schedule, WAXS shall not, and shall not permit any of its
Subsidiaries to, and shall not propose to, (i) declare or pay any dividends
on or make other distributions in respect of any of its capital stock, (ii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for, shares of its capital stock, except for any such
action by a wholly owned Subsidiary of WAXS which remains a wholly owned
Subsidiary after consummation of such transaction, or (iii) repurchase,
redeem or otherwise acquire any shares of capital stock of WAXS or any of
its Subsidiaries or any securities convertible into or exercisable for any
shares of such capital stock, except for the purchase from time to time by
WAXS of WAXS Common Stock in the ordinary course of business consistent
with past practice in connection with the WAXS Benefit Plans.
(c) Governing Documents. Except to the extent required by the rules
and regulations of the Nasdaq, neither WAXS nor any of its Subsidiaries
shall amend or propose to amend their respective certificates of
incorporation, by-laws or other governing documents.
(d) Acquisitions and Sales. Except for acquisitions, the fair market
value of the total consideration (including equity and assumed indebtedness
and preferred stock) for which does not exceed $20,000,000 or sales which
are not material to WAXS and its Subsidiaries, taken as a whole, WAXS shall
not, and shall not permit any of its Subsidiaries to, acquire or sell or
agree to acquire or sell by merging or consolidating with, or by purchasing
or selling a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or sell or agree to acquire or sell any assets (other
than the acquisition or sale of assets used in the operations of the
business of WAXS and its Subsidiaries in the ordinary course).
(e) Accounting Methods; Income Tax Elections. WAXS shall not change
its methods of accounting in effect at December 31, 1998, except as
required by changes in GAAP as concurred in by WAXS's independent public
accountants. WAXS shall not (i) change its fiscal year or (ii) make any
material tax election, (iii) adopt or change any Tax accounting method,
(iv) enter into any closing agreement, (v) surrender any right to claim a
refund of Taxes, or (vi) take any other action which would have the
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effect of materially increasing the Tax liability or materially decreasing
any Tax Asset of WAXS, other than in the ordinary course of business
consistent with past practice.
(f) Certain Agreements. WAXS shall not, and shall not permit any of
its Subsidiaries to, enter into any agreement or arrangement that limits or
otherwise restricts WAXS or any of its Subsidiaries or any of their
respective affiliates or any successor thereto, from engaging or competing
in any line of business or in any geographic area which agreement or
arrangement would reasonably be expected to have a Material Adverse Effect
on the Surviving Corporation after giving effect to the Merger.
(g) Other Actions. WAXS agrees not to take any action which could
reasonably be expected to cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
(h) Litigation. WAXS shall not and shall not permit any of its
Subsidiaries to settle or compromise any litigation, except where the
amount paid or payable, in each case, does not exceed $250,000.
4.2 Covenants of FCI. During the period from the date of this Agreement
and continuing until the Effective Time, FCI agrees as to itself and its
Subsidiaries that (except as expressly required, contemplated or permitted by
this Agreement or the FCI Disclosure Schedule or as required by a Governmental
Entity of competent jurisdiction or any law or regulation or to the extent that
WAXS shall otherwise consent in writing, which consent shall not be unreasonably
withheld, delayed or conditioned):
(a) Ordinary Course. FCI and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in all
material respects, in substantially the same manner as heretofore
conducted, and shall use all reasonable efforts to preserve intact their
present lines of business, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others having
significant business dealings with them.
(b) Dividends; Changes in Share Capital. FCI shall not, and shall not
permit any of its Subsidiaries to, and shall not propose to, (i) declare or
pay any dividends on or make other distributions in respect of any of its
capital stock, except for dividends by wholly owned Subsidiaries of FCI,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for, shares of its capital stock, except for any
such action by a wholly owned Subsidiary of FCI which remains a wholly
owned Subsidiary after consummation of such transaction, or (iii)
repurchase, redeem or otherwise acquire any shares of capital stock of FCI
or any of its Subsidiaries or any securities convertible into or
exercisable for any shares of such capital stock except for the purchase
from time to time by FCI of FCI Voting Common Stock and FCI Non-Voting
Common Stock in the ordinary course of business consistent with past
practice in connection with the FCI Benefit Plans.
(c) Issuance of Securities. FCI shall not, and shall not permit any
of its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any FCI Voting Debt or any securities convertible into or
exercisable for, or any rights, warrants or options to acquire, any such
shares or FCI Voting Debt, or enter into any agreement with respect to any
of the foregoing, other than (i) the issuance of FCI Common Stock upon the
exercise of FCI Stock Options or in connection with other stock-based
Benefits Plans outstanding on the date hereof, in each case in accordance
with their present terms, (ii) issuances by a wholly-owned Subsidiary of
FCI of capital stock to such Subsidiary's parent or another wholly-owned
subsidiary of FCI, or (iii) the granting of FCI Stock Options in the
ordinary course of business consistent with past practice.
(d) Governing Documents. Except to the extent required by the rules
and regulations of the Nasdaq, neither FCI nor any of its Subsidiaries
shall amend or propose to amend their respective certificates of
incorporation, by-laws or other governing documents.
(e) Acquisitions and Sales. Except for acquisitions, the fair market
value of the total consideration (including equity and assumed indebtedness
and preferred stock) for which does not exceed
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$20,000,000 or sales which are not material to WAXS and its Subsidiaries,
FCI shall not, and shall not permit any of its Subsidiaries to, acquire or
sell or agree to acquire or sell by merging or consolidating with, or by
purchasing or selling a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof or otherwise acquire or sell or agree to acquire or sell
any assets (other than the acquisition or sale of assets used in the
operations of the business of FCI and its Subsidiaries in the ordinary
course).
(f) Accounting Methods; Income Tax Matters. FCI shall not change its
methods of accounting in effect on September 30, 1998, except as required
by changes in GAAP as concurred in by FCI's independent auditors. FCI shall
not (i) change its fiscal year, (ii) make any material tax election, (iii)
adopt or change any Tax accounting method, (iv) enter into any closing
agreement, (v) surrender any right to claim a refund of Taxes, or (vi) take
any other action which would have the effect of materially increasing the
Tax liability or materially decreasing any Tax Asset of FCI or any of its
Subsidiaries, other than in the ordinary course of business consistent with
past practice.
(g) Certain Agreements. FCI shall not, and shall not permit any of
its Subsidiaries to, enter into any agreement or arrangement that limits or
otherwise restricts FCI or any of its Subsidiaries or any of their
respective affiliates or any successor thereto, or that could, after the
Effective Time, limit or restrict the Surviving Corporation or any of its
affiliates or any successor thereto, from engaging or competing in any line
of business or, in any geographic area which agreement or arrangement would
reasonably be expected to have a Material Adverse Effect on the Surviving
Corporation after giving effect to the Merger.
(h) Other Actions. FCI agrees not to take any action which could
reasonably be expected to cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
(i) Litigation. FCI shall not and shall not permit any of its
Subsidiaries to settle or, compromise any litigation, except where the
amount paid or payable, in each case, does not exceed $250,000.
4.3 Operational Reports. Each of WAXS and FCI shall, on a regular and
frequent basis, report to each other (to the extent permitted by law or
regulation or any applicable confidentiality agreement) on material operational
matters of WAXS, FCI, or their respective Subsidiaries, as applicable.
4.4 Control of Other Party's Business. Nothing contained in this Agreement
shall give FCI, directly or indirectly, the right to control or direct WAXS's
operations prior to the Effective Time. Nothing contained in this Agreement
shall give WAXS, directly or indirectly, the right to control or direct FCI's
operations prior to the Effective Time. Prior to the Effective Time, each of FCI
and WAXS shall exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision over its respective operations.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Proxy Statement and Consent Solicitation Statement;
Stockholders Meetings.
(a) As promptly as reasonably practicable following the date hereof,
WAXS shall prepare and file with the SEC in accordance with the Exchange
Act and the rules and regulations promulgated thereunder, and provide to
FCI a copy of, proxy materials which shall constitute the proxy statement
in connection with the WAXS Stockholders Meeting (such proxy statement, and
any amendments or supplements thereto, the "Proxy Statement"). WAXS will
use reasonable best efforts to cause the Proxy Statement to be mailed to
WAXS's stockholders as promptly as practicable under the Exchange Act. WAXS
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified or to file a general
consent to service of process) required to be taken under any applicable
state securities laws in connection with the Share Issuance and FCI shall
furnish all information concerning FCI and the holders of FCI Common Stock
as may be reasonably requested in
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connection with any such action. As promptly as reasonably practicable
following the date hereof, WAXS and FCI shall cooperate and prepare in form
and substance reasonably satisfactory to each of WAXS and FCI a Consent
Solicitation Statement (the "Consent Solicitation Statement") of WAXS for
use in connection with the solicitation (the "Consent Solicitation") by
WAXS of waivers from the holders of the $300 million aggregate principal
amount of 10 1/2 % Series B Senior Notes due 2008 (the "FCI Notes") issued
under the indenture between FCI, as issuer, and State Street Bank Trust
Company, as trustee, dated as of January 28, 1998, as amended (the
"Indenture"), of their right pursuant to the Indenture to require FCI to
repurchase their FCI Notes at 101% of the principal amount of such FCI
Notes in connection with the change of control of FCI resulting from the
consummation of the Merger and any other waivers or amendments of the
Indenture required to consummate the Merger or as may be agreed to by WAXS
and FCI (the "FCI Notes Consent"). Each of WAXS and FCI agrees to cooperate
and use its reasonable best efforts to obtain the FCI Notes Consent as soon
as reasonably practicable following the date hereof, to comply in all
material respects with all laws and regulations applicable to the Consent
Solicitation and to prepare and, if necessary, execute all other documents
in form and substance reasonably satisfactory to WAXS and/or FCI, as the
case may be, as may be necessary to consummate the Consent Solicitation. If
at any time prior to the Effective Time any information relating to WAXS or
FCI, or any of their respective affiliates, officers or directors, should
be discovered by WAXS or FCI which should be set forth in an amendment or
supplement to the Proxy Statement or the Consent Solicitation Statement so
that such document would not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
the party which discovers such information shall promptly notify the other
party hereto and, to the extent required by law, rules or regulations, an
appropriate amendment or supplement describing such information shall
promptly be prepared and, in the case of the Proxy Statement, filed by WAXS
with the SEC and disseminated to the stockholders of WAXS and, in the case
of the Consent Solicitation Statement, dissemination to the holders of the
FCI Notes. WAXS shall as soon as reasonably practicable notify FCI and the
Shareholders of (i) the approval of the Proxy Statement by the SEC, (ii)
the receipt of any comments from the SEC with respect to the Proxy
Statement and (iii) any request by the SEC for any amendment to the Proxy
Statement or for additional information.
(b) WAXS shall, as promptly as reasonably practicable following the
execution of this Agreement, duly take all lawful action to call, give
notice of, convene and hold a meeting of its stockholders (the "WAXS
Stockholders Meeting") for the purpose of obtaining the Required WAXS Vote
with respect to this Agreement, the Merger and the Share Issuance, and
shall take all reasonable and lawful action to solicit the approval of such
matters by the Required WAXS Vote, including the inclusion in the Proxy
Statement of the recommendation of the Board of Directors of the adoption
of this Agreement by WAXS's Stockholders and the Fairness Opinion. The
Board of Directors of WAXS shall recommend approval of such matters by the
stockholders of WAXS to the effect as set forth in Section 3.1(f), and
shall not withdraw, modify or materially qualify in any manner adverse to
FCI or the Shareholders such recommendation or take any action or make any
statement in connection with the WAXS Stockholders Meeting materially
inconsistent with such recommendation (collectively, an "Adverse Change in
the WAXS Recommendation"); provided, however, that nothing herein shall
prohibit accurate disclosure in the Proxy Statement (and such disclosure
shall not be deemed to be an Adverse Change in the WAXS Recommendation) of
factual information regarding the business, financial condition or
operations of FCI, or information regarding the satisfaction of the
conditions to WAXS's obligation to consummate the transactions contemplated
hereby.
5.2 Access to Information. Upon reasonable notice, each of FCI and WAXS
shall (and shall cause its Subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
parties hereto reasonable access during normal business hours, during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers and employees and, during such period, each of
FCI and WAXS shall (and shall cause its Subsidiaries to) furnish promptly to the
other parties hereto (a) a copy of each report, schedule, registration statement
and other document filed, published, announced or received by it during such
period pursuant to the requirements of Federal or state
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securities laws, as applicable (other than documents which such party is not
permitted to disclose under applicable law), and (b) consistent with its legal
obligations, all other information concerning it and its business, properties
and personnel as such other party may reasonably request; provided, however,
that either FCI or WAXS may restrict the foregoing access to the extent that any
law, treaty, rule or regulation of any Governmental Entity applicable to such
party requires such party or its Subsidiaries to restrict access to any
properties or information. The parties will hold any such information which is
non-public in confidence to the extent required by, and in accordance with, the
provisions of the Confidentiality Agreement, dated July 27, 1999, between FCI
and WAXS (the "Confidentiality Agreement"). Any investigation by WAXS or FCI or
the Shareholders shall not affect the representations and warranties made herein
of FCI or WAXS, as the case may be.
5.3 Reasonable Efforts.
(a) Subject to the terms and conditions of this Agreement, each party
will use 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 the Merger and the other
transactions contemplated by this Agreement as soon as practicable after
the date hereof, including (i) preparing and filing as promptly as
practicable all documentation to effect all necessary applications,
notices, petitions, filings, and other documents and to obtain as promptly
as practicable all consents, waivers, licenses, orders, registrations,
approvals, permits and authorizations necessary or advisable to be obtained
from any third party and/or any Governmental Entity in order to consummate
the Merger or any of the other transactions contemplated by this Agreement
and (ii) taking all reasonable steps as may be necessary to obtain all such
material consents, waivers, licenses, registrations, permits,
authorizations, tax rulings, orders and approvals. The parties each shall
keep the other apprised of the status of matters relating to completion of
the transactions contemplated hereby, including promptly furnishing the
other with copies of notices or other communications received by it or any
of its Subsidiaries or affiliates from any Governmental Entity or third
party with respect to the Merger or any of the other transactions
contemplated by this Agreement, in each case, to the extent permitted by
law or regulation or any applicable confidentiality agreements existing on
the date hereof.
(b) The parties shall promptly prepare and file any required
notifications with the United States Department of Justice (the "DOJ") and
the Federal Trade Commission (the "FTC") as required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). The parties shall cooperate with each other in connection with the
preparation of such notifications and related matters, including sharing
information concerning sales and ownership and such other information as
may be needed to complete such notification, and providing a copy of such
notifications to the other prior to filing; provided, that WAXS and FCI
shall have the right to redact any dollar revenue information from the
copies of such notifications provided to the other parties. The parties
shall keep all information about the other obtained in connection with the
preparation of such notification confidential pursuant to the terms of the
Confidentiality Agreement. Each party shall pay the filing fee required
under the regulations promulgated pursuant to the HSR Act with respect for
the notification for which such party is the "Acquiring Person" (as defined
in the regulations promulgated to the HSR Act).
5.4 Acquisition Proposals. Without the prior written consent of WAXS (in
the case of FCI and the Shareholders) or FCI (in the case of WAXS), pending the
Closing, each of FCI, the Shareholders and WAXS agrees that neither it nor any
of its Subsidiaries shall, and that it shall use its reasonable best efforts to
cause its employees, officers, directors, affiliates, agents and representatives
(including any investment banker, financial advisor, attorney or accountant
retained by any of them) not to, directly or indirectly, initiate, solicit,
encourage or knowingly facilitate (including by way of furnishing information or
engaging in discussions or negotiations) any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar action involving FCI or WAXS, or any purchase or sale of a material
portion of assets (including stock of Subsidiaries) of such party, taken as a
whole, or any purchase or sale of, or tender or exchange offer for, a material
portion of the equity securities of such party (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal"). Each of FCI, the
Shareholders and WAXS further agrees that neither it nor
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any of its Subsidiaries shall, and that it shall use its reasonable best efforts
to cause it and its Subsidiaries' officers, directors, affiliates, employees,
agents and representatives (including any investment banker, financial advisor,
attorney or accountant retained by it or any of its Subsidiaries) not to,
directly or indirectly, have any discussion with or provide any confidential
information or data to any Person relating to an Acquisition Proposal, or engage
in any negotiations concerning an Acquisition Proposal, or knowingly facilitate
any effort or attempt to make or implement an Acquisition Proposal or accept an
Acquisition Proposal. Each of FCI, the Shareholders and WAXS agrees that it and
its Subsidiaries will, and will cause its officers, directors, affiliates,
employees, agents and representatives to, immediately cease and cause to be
terminated any activities, discussions or negotiations existing as of the date
of this Agreement with any parties conducted heretofore with respect to any
Acquisition Proposal. Each of FCI , the Shareholders and WAXS agrees that it
will use its reasonable best efforts to promptly inform its directors, officers,
affiliates, key employees, agents and representatives of the obligations
undertaken in this Section 5.4.
5.5 Fees and Expenses. All Expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such Expenses, except if the Merger is consummated, the Surviving
Corporation shall pay, or cause to be paid, any and (i) all Expenses incurred by
FCI (but not the Shareholders, except with respect to such Expenses incurred for
the general benefit of both FCI and the Shareholders) and (ii) all Expenses
incurred by any of the parties in connection with the Consent Solicitation and
obtaining the FCI Notes Consent shall be paid by WAXS. As used in this
Agreement, "Expenses" includes all out-of-pocket expenses (including all fees
and expenses of counsel, accountants, investment bankers, experts and
consultants to a parry hereto and its affiliates) incurred by a party or on its
behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement and the transactions
contemplated hereby.
5.6 Public Announcements. None of WAXS, FCI or the Shareholders shall
issue a press release or any other public statement with respect to this
Agreement or the transactions contemplated hereby except pursuant to a joint
communications plan, in the case of WAXS, with FCI's prior consent, and in the
case of FCI, with WAXS's prior consent, unless otherwise required by applicable
law or by obligations pursuant to any listing agreement with or rules of any
securities exchange, in which case the parties shall use reasonable best efforts
to consult with each other before issuing any press release or otherwise making
any public statement with respect to this Agreement or the transactions
contemplated hereby.
5.7 Termination of Tax Sharing Agreements. As of the Effective Time, FCI
shall cause all Tax Sharing Agreements to which FCI or any of its Subsidiaries
is a party to be terminated and of no further force and effect after the
Effective Time, thereby extinguishing any rights or obligations of any party
thereunder. AIT shall indemnify the Surviving Corporation and hold the Surviving
Corporation harmless from any liability for the Taxes of any Person (other than
FCI and its Subsidiaries) which are imposed on the Surviving Corporation either
as a transferee, or pursuant to United States Treasury Regulation Section
1.1502-6(a) or pursuant to any other provision of federal, territorial, state,
local, or foreign law or regulations, together with any costs and expenses
incurred by the Surviving Corporation in connection therewith.
5.8 Directors' and Officers' Indemnification and Insurance.
(a) From the Effective Time through the sixth (6th) anniversary of the
date on which the Effective Time occurs, the Surviving Corporation shall
indemnify and hold harmless each present (as of the Effective Time) or
former officer or director of FCI and its Subsidiaries (the "Indemnified
Parties"), against all claims, losses, liabilities, damages, judgments,
fines and reasonable fees, costs and expenses, including attorneys' fees
and disbursements (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 (i) the
fact that the Indemnified Party is or was an officer or director of FCI or
any of its Subsidiaries or (ii) matters existing or occurring at or prior
to the Effective Time (including this Agreement and the transactions and
actions contemplated hereby), whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent permitted under applicable
law; provided that no Indemnified Party may settle any such claim without
the prior approval of the Surviving Corporation (which approval shall not
be unreasonably withheld or delayed). Each Indemnified Party will be
entitled
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to advancement of expenses incurred in the defense of any claim, action,
suit, proceeding or investigation from the Surviving Corporation within ten
(10) business days of receipt by the Surviving Corporation from the
Indemnified Party of a request therefor; provided that any person to whom
expenses are advanced provides an undertaking, to the extent required by
the DGCL, to repay such advances if it is ultimately determined that such
person is not entitled to indemnification.
(b) The Surviving Corporation shall maintain, at no expense to the
beneficiaries, in effect for six years from the Effective Time the current
policies of the directors' and officers' liability insurance maintained by
FCI with respect to matters existing or occurring at or prior to the
Effective Time (including the transactions contemplated by this Agreement);
provided that the Surviving Corporation may substitute therefor policies of
at least the same coverage containing terms and conditions which are not
materially less advantageous to any beneficiary thereof; and provided,
further, that in no event shall the Surviving Corporation be required to
pay annual premiums for such insurance in excess of 125% of the annual
premiums currently paid by FCI for such insurance.
(c) Notwithstanding anything herein to the contrary, if any claim,
action, suit, proceeding or investigation (whether arising before, at or
after the Effective Time) is made against any Indemnified Party, on or
prior to the sixth (6th) anniversary of the Effective Time, the provisions
of this Section 5.8 shall continue in effect until the final disposition of
such claim, action, suit, proceeding or investigation.
(d) The covenants contained in this Section 5.8 are intended to be for
the benefit of, and shall be enforceable by, each of the Indemnified
Parties and their respective heirs and legal representatives and shall not
be deemed exclusive of any other rights to which an Indemnified Party is
entitled, whether pursuant to law, contract or otherwise.
(e) In the event that the Surviving Corporation or any of its
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 or conveys all or substantially
all of its properties and assets to any Person, then, and in each such
case, proper provision shall be made so that the successors or assigns of
the Surviving Corporation or the purchaser of such properties and assets
shall succeed to the obligations set forth in this Section 5.8.
5.9 Reservation of Shares. WAXS shall at all times reserve and keep
available out of its authorized WAXS Common Stock, solely for the purpose of
issue or delivery upon conversion or exchange of the WAXS Preferred Stock as
provided in the Certificate of Designation, such number of shares of WAXS Common
Stock as shall then be issuable or deliverable upon the conversion or exchange
of all outstanding shares of WAXS Preferred Stock. Such shares of WAXS Common
Stock shall, when issued or delivered in accordance with the Certificate of
Designation, be duly and validly issued and fully paid and non-assessable. WAXS
shall issue the WAXS Common Stock into which the Preferred Stock is convertible
or exchangeable upon the proper surrender of the Preferred Stock in accordance
with the provisions of the Certificate of Designation and shall otherwise comply
with the terms thereof.
5.10 Registration and Listing. If any shares of WAXS Common Stock required
to be reserved for purposes of conversion or exchange of the WAXS Preferred
Stock as provided in the Certificate of Designation require registration with or
approval of any Governmental Entity under any federal or state or other
applicable law before such WAXS Common Stock may be issued or delivered upon
conversion or exchange, WAXS will endeavor in good faith and as expeditiously as
possible to cause such WAXS Common Stock to be duly registered or approved, as
the case may be. So long as the WAXS Common Stock is quoted on the Nasdaq or
listed on any national securities exchange, WAXS, if permitted by the rules of
such system or exchange, will quote or list and keep quoted or listed on such
system or exchange, upon official notice of issuance, all WAXS Common Stock
issuable or deliverable upon conversion or exchange of the WAXS Preferred Stock
and all WAXS Common Stock, if any, issuable pursuant to Article I hereof.
5.11 Board of Directors. If the WAXS Preferred Stock has been converted
into WAXS Common Stock pursuant to the provisions of the Certificate of
Designation, the Shareholders (and any of their affiliates and the initial
transferees holding the shares of WAXS Common Stock issued upon any such
conversion)
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shall be entitled to designate four (4) persons to be nominated and recommended
by the WAXS Board for election to the WAXS Board at any meeting of WAXS
stockholders; provided that, on the record date for determining the stockholders
of WAXS entitled to vote on such matters, there are shares of WAXS Common Stock
held by such persons constituting at least fifteen percent (15%) of the shares
of WAXS Common Stock issued upon conversion of the Preferred Stock (the "Minimum
Condition"). Notwithstanding the foregoing, if the shares of WAXS Common Stock
held by such persons represent less than twenty percent (20%) of the total of
all issued and outstanding shares of capital stock entitled to vote for the
election of directors, then, so long as the Minimum Condition is satisfied, such
persons shall be entitled to designate that number of persons to be nominated
and recommended by the WAXS Board for election to the WAXS Board at any meeting
of WAXS stockholders so that such persons would have, assuming the election of
such nominees, at all times such number of persons nominated by them as members
of the WAXS Board which, as a percentage of the total number of the members of
the WAXS Board, is at least equal to the percentage of all issued and
outstanding shares of capital stock entitled to vote for the election of
directors held by such persons on the record date for determining the
stockholders of WAXS entitled to vote on such matters. WAXS shall cause any such
designees to be included in the slate of nominees recommended by the WAXS Board
to the WAXS Stockholders for election as directors and WAXS shall use its
reasonable best efforts to cause the election of such designees, including
voting all shares for which WAXS proxies (unless otherwise directed by the
stockholders submitting the proxy) or is otherwise entitled to vote in favor of
the election of such designees. In the event any such designee shall cease to
serve as a director for any reason, WAXS shall use its reasonable best efforts
to cause the vacancy resulting thereby to be filled by a designee of such
persons.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of FCI, the Shareholders and WAXS to effect the Merger
are subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) No Injunctions or Restraints, Illegality. No Laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Entity of competent jurisdiction shall be in effect, (i) having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger or (ii) which otherwise would reasonably be expected to have a
Material Adverse Effect on the Surviving Corporation after giving effect to
the Merger; provided, however, that the provisions of this Section 6.1(a)
shall not be available to any party whose failure to fulfill its
obligations pursuant to Section 5.3 shall have been the cause of, or shall
have resulted in, any such order or injunction.
(b) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(c) Stockholder Approval. WAXS shall have obtained the Required WAXS
Vote in connection with the approval of this Agreement, the Merger and the
Share Issuance by the stockholders of WAXS.
(d) FCI Notes Consent. The FCI Notes Consent shall have been
obtained.
6.2 Additional Conditions to Obligations of WAXS. The obligations of WAXS
to effect the Merger are subject to the satisfaction of, or waiver by WAXS, on
or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of FCI set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any
such representations and warranties shall be true and correct as of such
date), except where any failures to be true and correct would not have a
Material Adverse Effect on the Surviving Corporation or its Subsidiaries,
and WAXS shall have received a certificate of the chief executive officer
and the chief financial officer of FCI to such effect.
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(b) Performance of Obligations of FCI and the Shareholders. FCI and
the Shareholders shall have performed or complied in all material respects
with all material agreements and covenants required to be performed by them
under this Agreement at or prior to the Closing Date, and WAXS shall have
received a certificate of the chief executive officer and the chief
financial officer of FCI to such effect.
(c) Consents and Approvals. Other than (i) the filing provided for
under Section 1.3, (ii) filings pursuant to the HSR Act (which are
addressed in Section 5.3(b)), and (iii) any consent, approval or waiver
required under the Bank Credit Facility between Key Corporate Capital, Inc.
and FaciliCom International LLC and Armstrong Holdings, Inc. dated May 21,
1999 (the "FCI Agreement") all consents, approvals and actions of, filings
with and notices to any Governmental Entity required to consummate the
Merger, the Share Issuance and the other transactions contemplated hereby,
or of any other third party required of FCI or any of its Subsidiaries to
consummate the Merger and the other transactions contemplated hereby, the
failure of which to be obtained or taken would have a Material Adverse
Effect on the Surviving Corporation after giving effect to the Merger,
shall have been obtained; provided, however, that the provisions of this
Section 6.2(c) shall not be available to WAXS, if WAXS's failure to fulfill
its obligations pursuant to Section 5.3 shall have been the cause of, or
shall have resulted in, the failure to obtain such consent or approval.
(d) No Material Change. FCI and its Subsidiaries, taken as a whole,
shall not have suffered, since the date hereof, a Material Adverse Effect,
other than any change, circumstance or effect relating (i) to the economy
or financial markets in general, or (ii) in general to the industries in
which FCI operates and not specifically relating to FCI.
(e) Opinion of Counsel to FCI. WAXS shall have received from Simpson
Thacher & Bartlett an opinion, dated the Closing Date, in a form reasonably
satisfactory to WAXS.
6.3 Additional Conditions to Obligations of FCI and the Shareholders. The
obligations of FCI and the Shareholders to effect the Merger are subject to the
satisfaction of, or waiver by FCI, on or prior to the Closing Date of the
following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of WAXS set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any
such representations and warranties shall be true and correct as of such
date), except where any failures to be true and correct would not have a
Material Adverse Effect on the Surviving Corporation or its Subsidiaries,
and FCI shall have received a certificate of the chief executive officer
and the chief financial officer of WAXS to such effect.
(b) Performance of Obligations of WAXS. WAXS shall have performed or
complied in all material respects with all material agreements and
covenants required to be performed by it under this Agreement at or prior
to the Closing Date, and FCI shall have received a certificate of the chief
executive officer and the chief financial officer of WAXS to such effect.
(c) Consents and Approvals. Other than the filing provided for under
Section 1.3, and filings pursuant to the HSR Act (which are addressed in
Section 5.3(b)), all consents, approvals and actions of, filings with and
notices to any Governmental Entity required to consummate the Merger, the
Share Issuance and the other transactions contemplated hereby, or of any
other third party required of WAXS or any of its Subsidiaries to consummate
the Merger and the transactions contemplated hereby, the failure of which
to be obtained or taken would have a Material Adverse Effect on the
Surviving Corporation after giving effect to the Merger, shall have been
obtained; provided, however, that the provisions of this Section 6.3(c)
shall not be available to FCI and the Shareholders if their failure to
fulfill any of their obligations pursuant to Section 6.3 shall have been
the cause of, or shall have resulted in, the failure to obtain such consent
or approval.
(d) No Material Change. WAXS and its Subsidiaries, taken as a whole,
shall not have suffered, since the date hereof, a Material Adverse Effect,
other than any change, circumstance or effect relating
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(i) to the economy or financial markets in general, (ii) in general to the
industries in which WAXS operates and not specifically relating to WAXS or
(iii) the trading price of WAXS as reported by Nasdaq.
(e) Opinion of Counsel to WAXS. FCI shall have received from Long
Aldridge & Norman LLP an opinion, dated the Closing Date, in a form
reasonably satisfactory to FCI and the Shareholders.
(f) Registration Rights Agreement. WAXS shall have executed and
delivered to the Shareholders a Registration Rights Agreement substantially
in the form attached hereto as Exhibit 6.3 (the "Registration Rights
Agreement").
(g) WAXS Registration Statement. Unless the Shareholders, Anand Kumar
and the FCI option holders entitled to receive cash shall have received in
the aggregate $56,000,000 in cash at the Closing, WAXS shall have filed the
Registration Statement in connection with the resale, pursuant to open
market or privately negotiated transactions, of the WAXS Common Stock to be
received by the Shareholders hereunder, which Registration Statement shall
be in a form that can be declared effective by the staff of the SEC.
(h) Certificate of Designation. The Certificate of Designation shall
have been duly filed by WAXS with the Secretary of State of the State of
Delaware in accordance with the DGCL.
(i) Approval of WAXS Series A Preferred Stock. Any required approval
of this Agreement and the transactions contemplated hereby by the holders
of the WAXS Series A Preferred Stock shall have been obtained and shall
continue to be valid and in effect.
(j) Armstrong Guarantee. The guarantee of Armstrong Holdings, Inc.
pursuant to the FCI Credit Agreement shall have been terminated without any
liability on the part of Armstrong Holdings, Inc. and on terms and
conditions reasonably satisfactory to FCI.
(k) Armstrong Letters of Credit. The letters of credit issued by
Armstrong Utilities, Inc. on behalf of FCI shall have been terminated
without any liability on the part of Armstrong Utilities, Inc. and on terms
and conditions reasonably satisfactory to FCI.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the Board of Directors of the
terminating party or parties:
(a) By mutual written consent of WAXS, FCI and the Shareholders;
(b) By either WAXS or FCI and the Shareholders, if FCI and the
Shareholders (in the case of WAXS) or WAXS (in the case of FCI and the
Shareholders) shall have failed to comply in any material respect with any
of its or their material covenants or agreements contained in this
Agreement, which failure to so comply has not been cured within ten (10)
business days following receipt by such other party of written notice of
such failure to comply; provided, however, that if any such breach is
curable by the breaching party through the exercise of the breaching
party's reasonable efforts and for so long as the breaching party shall be
so using its best efforts to cure such breach, the non-breaching party may
not terminate this Agreement pursuant to this paragraph; and provided,
further, that no party shall have the right to terminate this Agreement
pursuant to this Section 7.1(b) if such party is then failing to comply in
any material respect with any of its covenants or agreements contained in
this Agreement;
(c) By either WAXS or FCI and the Shareholders, if there has been a
breach by FCI and the Shareholders (in the case of WAXS) or WAXS (in the
case of FCI and the Shareholders) of any representations or warranties,
which breach has not been cured within ten (10) business days following
receipt by such other party of written notice of such failure to comply;
provided, however, that if any such breach is curable by the breaching
party through the exercise of the breaching party's reasonable efforts and
for so long as the breaching party shall be so using its reasonable efforts
to cure such breach, the non-breaching party may not terminate this
Agreement pursuant to this paragraph; and provided further, that
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this provision shall not apply to such breaches which would not have a
Material Adverse Effect on the Surviving Corporation and its Subsidiaries
after giving effect to the Merger;
(d) By either FCI and the Shareholders or WAXS, if the Effective Time
shall not have occurred on or before February 28, 2000 (the "Termination
Date"); provided, however, that the right to terminate this Agreement under
this Section 7.1(d) shall not be available to any party whose action or
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before
the Termination Date and any such action or failure constitutes a breach of
this Agreement;
(e) By either FCI and the Shareholders or WAXS if any Governmental
Entity (i) shall have issued an order, decree or ruling or taken any other
action (which the parties shall have used their reasonable best efforts to
resist, resolve or lift, as applicable, in accordance with Section 5.3)
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 or (ii)
shall have failed to issue an order, decree or ruling or to take any other
action (which order, decree, ruling or other action the parties shall have
used their reasonable best efforts to obtain, in accordance with Section
5.3), in the case of each of (i) and (ii) which is necessary to fulfill the
conditions set forth in subsection 6.1(b) or with respect to WAXS only,
6.2(b) or, with respect to FCI and the Shareholders only, subsection
6.3(b), as applicable, and such denial of a request to issue such order,
decree, ruling or take such other action shall have become final and
nonappealable; provided, however, that the right to terminate this
Agreement under this Section 7.1(e) shall not be available to any party
whose action or failure to fulfill any obligation under this Agreement has
been the cause of such action or inaction and any such action or failure
constitutes a breach of this Agreement; or
(f) By WAXS or FCI and the Shareholders if the adoption of this
Agreement by the stockholders of WAXS shall not have been obtained by
reason of the failure to obtain the Required WAXS Vote, in each case upon
the taking of such vote at a duly held meeting of stockholders of WAXS, or
at any adjournment thereof.
7.2 Effect of Termination. In the event of any termination of this
Agreement by either FCI and the Shareholders, or WAXS, as provided in Section
7.1, this Agreement shall forthwith become void and there shall be no liability
or obligation on the part of WAXS or FCI and the Shareholders or their
respective officers or directors except with respect to Section 3.1(l), Section
3.2(l), the second sentence of Section 5.2, Section 5.5, Section 5.6, this
Section 7.2, and Article VIII, which provisions shall survive such termination
and except that, notwithstanding anything to the contrary contained in this
Agreement, neither WAXS nor FCI nor the Shareholders shall be relieved or
released from any liabilities or damages arising out of its breach of this
Agreement.
7.3 Amendment. This Agreement may be amended by FCI and WAXS, by action
taken or authorized by their respective Boards of Directors or representatives
or authorized officers, at any time before or after approval of the matters
presented in connection with the Merger by the stockholders of FCI and WAXS,
but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of any relevant stock exchange or automatic quotations
system requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of FCI, the Shareholders and WAXS.
7.4 Extension, Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, representatives or authorized officers, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and other agreements in this
Agreement or in any instrument delivered pursuant to this Agreement including
any rights arising out of any breach of such representations, warranties,
covenants and other agreements, shall survive the Effective Time, except for
those covenants and agreements contained herein and therein that by their terms
apply or are to be performed in whole or in part after the Effective Time and
this Article VIII.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, or by telecopy or facsimile, upon confirmation of receipt, (b) on
the first business day following the date of dispatch if delivered by a
recognized next day courier service, or (c) on the tenth business day following
the date of mailing if delivered by registered or certified mail return receipt
requested, postage prepaid All notices hereunder shall be delivered as set forth
below, or pursuant to such other instructions as may be designated in writing by
the party to receive such notice:
(a) If to WAXS or Merger Sub, to:
World Access, Inc.
Resurgens Plaza, Suite 2210
945 East Paces Ferry Road
Atlanta, Georgia 30326
Facsimile No.: (404) 233-2280
Attention: John D. Phillips
with a copy to
Long Aldridge & Norman LLP
303 Peachtree Street, Suite 5300
Atlanta, Georgia 30308
Facsimile No.: (404) 527-4198
Attention: H. Franklin Layson
(b) If to FCI to:
FaciliCom International, Inc.
1401 New York Avenue, N.W., 9th Floor
Washington, D.C. 20005
Facsimile No.: (202) 496-1109
Attention: Walter J. Burmeister
with a copy to
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Facsimile No.: (212) 455-2502
Attention: Alan M. Klein
(c) If to the Shareholders, to:
Armstrong Holdings, Inc.
One Armstrong Place
Butler, PA 16001
Facsimile No.: (724) 283-9655
Attention: Kirby J. Campbell
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and
Epic Interests, Inc.
Two Gateway Center, 16th Floor
Pittsburgh, PA 15222
Facsimile No.: (412) 341-8296
Attention: Robert Reid
with a copy to
Robert Reid
808 Silver Spring Road
Pittsburgh, PA 15243
and
BFV Associates, Inc.
6845 Wilson Lane
Bethesda, MD 20817
Facsimile No.: (202) 661-4408
Attention: Walter J. Burmeister
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule 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 Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation".
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries.
(a) This Agreement, the Registration Rights Agreement, and the
Confidentiality Agreement constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
(b) 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 other Person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement, except as provided for in Section 5.8.
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware (without giving effect to
choice of law principles thereof).
8.7 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the actions
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 in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
8.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto, in whole
or in part (whether by operation of law or otherwise),
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without the prior written consent of the other parties, and any attempt to make
any such assignment without such consent shall be null and void. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
8.9 Submission to Jurisdiction; Waivers. Each of WAXS and FCI irrevocably
agrees that any legal action or proceeding with respect to this Agreement or for
recognition and enforcement of any judgment in respect hereof brought by the
other party hereto or its successors or assigns may be brought and determined in
the Chancery or other Courts of the State of Delaware, and each of WAXS and FCI
hereby irrevocably submits with regard to any such action or proceeding for
itself and in respect to its property, generally and unconditionally, to the
nonexclusive jurisdiction of the aforesaid courts. Each of WAXS and FCI hereby
irrevocably waives, and agrees not to assert, by way of motion, as a defense,
counterclaim or otherwise, in any action or proceeding with respect to this
Agreement, (i) any claim that it is not personally subject to the jurisdiction
of the above named courts for any reason other than the failure to lawfully
serve process (ii) that it or its property is exempt or immune from jurisdiction
of any such court or from any legal process commenced in such courts (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise), and (iii) to the
fullest extent permitted by applicable law, that (a) the suit, action or
proceeding in any such court is brought in an inconvenient forum, (b) the venue
of such suit, action or proceeding is improper and (c) this Agreement, or the
subject matter hereof, may not be enforced in or by such courts.
8.10 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.11 Definitions. As used in this Agreement:
(a) "beneficial ownership" or "beneficially own" shall have the
meaning under Section 13(d) of the Exchange Act and the rules and
regulations thereunder.
(b) "Benefit Plans" means, with respect to any Person, each employee
benefit plan, program, arrangement and contract (including, without
limitations any "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
any bonus, deferred compensation, stock bonus, stock purchase, restricted
stock, stock option, employment, termination, stay agreement or bonus,
change in control and severance plan, program, arrangement and contract) in
effect on the date of this Agreement to which such Person or its Subsidiary
is a party, which is maintained or contributed to by such Person, or with
respect to which such Person could incur material liability under Section
4069, 4201 or 4212(c) of ERISA.
(c) "Board of Directors" means the Board of Directors of any specified
Person and any committees thereof.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(e) "GAAP" means United States generally accepted accounting
principles.
(f) "Known" or "Knowledge" means, with respect to any party, the
knowledge of such party's executive officers after reasonable inquiry.
(g) "Material Adverse Effect" means, with respect to any entity, any
change, circumstance or effect or any breach of the provisions of this
Agreement that, individually or in the aggregate with all other changes,
circumstances and effects or breaches, is or would reasonably be expected
to be materially adverse to (i) other than with respect to the
Shareholders, the business, financial condition or results of operations of
such entity and its Subsidiaries taken as a whole, or (ii) the ability of
such party to consummate the transactions contemplated by this Agreement.
(h) "Nasdaq" means the National Market System of the NASDAQ Stock
Market.
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(i) "Person" means an individual, corporation, limited liability
company, partnership, association, trust, unincorporated organization,
other entity or group (as defined in the Exchange Act).
(j) "SEC" means the Securities and Exchange Commission.
(k) "Securities Act" means the Securities Act of 1933, as amended.
(l) "Subsidiary", when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated,
(i) of which such party or any other Subsidiary of such party is a general
partner (excluding partnerships, the general partnership interests of which
held by such party or any Subsidiary of such party do not have a majority
of the voting interests in such partnership) or (ii) at least a majority of
the securities or other interests of which having by their terms ordinary
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or
by any one or more of its Subsidiaries, or by such party and one or more of
its Subsidiaries.
(m) "Tax" (and, with correlative meaning, "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, however denominated,
including any interest, penalties or other additions to tax that may become
payable in respect thereof, imposed by any federal, territorial, state,
local or foreign government or any agency or political subdivision of any
such government, which taxes shall include, without limiting the generality
of the foregoing, all income or profits taxes (including, but not limited
to, federal income taxes and state income taxes), payroll and employee
withholding taxes, unemployment insurance, social security taxes, sales and
use taxes, ad valorem taxes, excise taxes, employer tax, estimated,
severance, telecommunications, occupation, goods and services, capital,
profits, value added taxes, franchise taxes, gross receipts taxes, business
license taxes, occupation taxes, real and personal property taxes, stamp
taxes, environmental taxes, transfer taxes, workers' compensation, Pension
Benefit Guaranty Corporation premiums and other governmental charges, and
other obligations of the same or of a similar nature to any of the
foregoing, which the Person is required to pay, withhold or collect.
(n) "Tax Asset" means any net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any
other credit or tax attribute which could reduce Taxes (including, without
limitation, credits related to alternative minimum Taxes).
(o) "Tax Return" shall mean all reports, estimates, declarations of
estimated tax, information statements and returns (including any attached
schedules) or similar statement relating to, or required to be filed in
connection with, any Taxes, including information returns or reports with
respect to backup withholding and other payments to third parties.
(p) "Tax Sharing Agreement" shall mean any and all existing Tax
sharing agreements, or arrangements written or unwritten, express or
implied, binding two or more Persons with respect to the payment of Taxes,
including any agreements or arrangements which afford any other Person the
right to receive any payment from one or more other Persons in respect to
any Taxes or the benefit of any Tax Asset of one or more other Persons or
require or permit the transfer or assignment of any income, revenue,
receipts or gains.
IN WITNESS WHEREOF, WAXS, FCI and the Shareholders have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first above written.
WAXS:
WORLD ACCESS, INC.
By: /s/ JOHN D. PHILLIPS
------------------------------------
Name: John D. Phillips
Title: Chairman, President and
Chief Executive Officer
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FCI:
FACILICOM INTERNATIONAL, INC.
By: /s/ WALTER J. BURMEISTER
------------------------------------
Name: Walter J. Burmeister
Title: President and Chief Executive
Officer
SHAREHOLDERS:
ARMSTRONG INTERNATIONAL
TELECOMMUNICATIONS, INC.
By: /s/ KIRBY J. CAMPBELL
------------------------------------
Name: Kirby J. Campbell
Title: Chief Executive
Officer/Executive Vice
President and Treasurer
EPIC INTERESTS, INC.
By: /s/ ROBERT L. REED
------------------------------------
Name: Robert L. Reed
Title: President
BFV ASSOCIATES, INC.
By: /s/ WALTER J. BURMEISTER
------------------------------------
Name: Walter J. Burmeister
Title: President
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EXHIBIT 1.7(B)
WORLD ACCESS, INC.
CERTIFICATE OF DESIGNATION OF
CONVERTIBLE PREFERRED STOCK, SERIES C,
SETTING FORTH THE POWERS, PREFERENCES,
RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS OF SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the Delaware General Corporation Law, World
Access, Inc., a Delaware corporation (the "Corporation"), DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation (the
"Charter"), the Board of Directors of the Corporation on August 16, 1999 duly
adopted the following resolution creating a series of Preferred Stock designated
as Convertible Preferred Stock, Series C, and such resolution has not been
modified and is in full force and effect on the date hereof:
RESOLVED that, pursuant to the authority vested in the Board of Directors
of the Corporation in accordance with the provisions of the Charter, a series of
the class of authorized Preferred Stock, par value $0.01 per share, of the
Corporation is hereby created and that the designation and number of shares
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations and restrictions thereof are as follows:
Section 1. Designation and Number.
(a) The shares of such series shall be designated as Convertible Preferred
Stock, Series C (the "Preferred Stock"). The number of shares initially
constituting the Preferred Stock shall be , which number may be
decreased (but not increased) by the Board of Directors without a vote of
stockholders; provided, however, that such number may not be decreased below the
number of then outstanding shares of Preferred Stock.
(b) The Preferred Stock shall, with respect to dividend rights, rank (i)
pari passu with the Common Stock (as defined in Section 10) and (ii) junior to
the 4.25% Cumulative Junior Convertible Preferred Stock, Series B (the "Series B
Preferred Stock"), and all other classes and series of Senior Stock (as defined
in Section 10) now or hereafter authorized.
(c) The Preferred Stock shall, with respect to rights on liquidation,
dissolution or winding up, rank (i) prior to the Common Stock, (ii) pari passu
with the Series B Preferred Stock, and (iii) junior to all classes and series of
Senior Stock (other than the Series B Preferred Stock) now or hereafter
authorized.
(d) Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in Section 10 below.
Section 2. Dividends and Distributions.
(a) In the event that the Corporation shall declare a dividend or make any
other distribution (including, without limitation, in cash, in capital stock
(which shall include, without limitation, any options, warrants or other rights
to acquire capital stock) of the Corporation, whether or not pursuant to a
shareholder rights plan, "poison pill" or similar arrangement, or other property
or assets) to holders of Common Stock, then the Board of Directors shall
declare, and the holder of each share of Preferred Stock shall be entitled to
receive, a dividend or distribution in an amount equal to the amount of such
dividend or distribution received by a holder of the number of shares of Common
Stock for which such share of Preferred Stock is convertible on the record date
for such dividend or distribution. Any such amount shall be paid to the holders
of shares of Preferred Stock at the same time such dividend or distribution is
made to holders of Common Stock.
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(b) The holders of shares of Preferred Stock shall not be entitled to
receive any dividends or other distributions except as provided herein.
Section 3. Voting Rights.
(a) Except as provided in Sections 3(b) and (c), in addition to any voting
rights provided by law, so long as the Preferred Stock is outstanding, each
share of Preferred Stock shall entitle the holder thereof to vote, in person or
by proxy, at a special or annual meeting of stockholders, on all matters voted
on by holders of Common Stock voting together as a single class with other
shares entitled to vote thereon. With respect to any such vote, each share of
Preferred Stock shall entitle the holder thereof to cast that number of votes
per share as is equal to the number of votes that such holder would be entitled
to cast had such holder converted his shares of Preferred Stock into Common
Stock on the record date for determining the stockholders of the Corporation
eligible to vote on any such matters.
(b) The issued and outstanding shares of Preferred Stock shall entitle the
holders thereof, voting separately as a single series, in person or by proxy, at
a special or annual meeting of stockholders called for the purpose of electing
directors, to nominate and elect four (4) directors to the Corporation's Board
of Directors, provided that, on the record date for determining the stockholders
of the Corporation entitled to vote on such matters, there are shares of
Preferred Stock issued and outstanding constituting at least fifteen percent
(15%) of the shares of Preferred Stock issued and outstanding on the Issue Date
pursuant to the Merger Agreement (the "Minimum Percentage"). Notwithstanding the
foregoing, if the shares of Common Stock issuable upon conversion of the
Preferred Stock represent (without giving effect to the last sentence of this
Section 3(b)) less than twenty percent (20%) of all issued and outstanding
shares of capital stock of WAXS entitled to vote for the election of directors,
then, so long as the issued and outstanding shares of Preferred Stock constitute
at least the Minimum Percentage, the holders thereof shall have the right to
nominate and elect, voting separately as a single series, such number of
directors which, as a percentage of the total number of members of the Board of
Directors, is at least equal to the percentage of all issued and outstanding
shares of capital stock entitled to vote for the election of directors held by
such holders on an as converted basis (without giving effect to the last
sentence of this Section 3(b)) on the record date for determining the
stockholders of the Corporation entitled to vote on such matters. So long as the
holders of Preferred Stock are entitled to nominate and elect directors pursuant
to this Section 3(b), such holders shall not have the right, by virtue of their
ownership of Preferred Stock, to vote on, or otherwise participate in, the
nomination and election of any other directors of the Corporation.
(c) Unless the consent or approval of a greater number of shares shall then
be required by law, the affirmative vote of the holders of at least 66 2/3% of
the outstanding shares of Preferred Stock, voting separately as a single series,
in person or by proxy, at a special or annual meeting of stockholders called for
the purpose, shall be necessary to:
(i) authorize, increase the authorized number of shares of or issue
(including on conversion or exchange of any convertible or exchangeable
securities or by reclassification), any shares of any class or classes of
Senior Stock (as defined in Section 10);
(ii) authorize, adopt or approve an amendment to the Charter that
would increase or decrease the par value of the shares of Preferred Stock,
or alter or change the powers, preferences or special rights of the shares
of Preferred Stock, or would alter or change the powers, preferences or
special rights of other Senior Stock;
(iii) amend or alter the Charter so as to affect the shares of
Preferred Stock adversely and materially, including, without limitation, by
granting any voting right to any holder of notes, bonds, debentures or
other debt obligations of the Corporation or by reclassifying any capital
stock into Senior Stock;
(iv) authorize or issue any security convertible into, exchangeable
for or evidencing the right to purchase or otherwise receive any shares of
any class or classes of Senior Stock; and
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(v) effect the voluntary liquidation, dissolution, winding up,
recapitalization or reorganization of the Corporation, or the consolidation
or merger of the Corporation with or into any other Person (except a
wholly-owned subsidiary of the Corporation), or the sale or other
distribution to another Person of all or substantially all of the assets of
the Corporation; provided, however, that no separate vote of the holders of
the Preferred Stock as a series shall be required in the case of a
recapitalization, reorganization, consolidation or merger of the
Corporation if either:
(A) (i) the resulting or surviving corporation will have after such
recapitalization, reorganization, consolidation or merger no Senior
Stock or Parity Stock either authorized or outstanding (except such
Senior Stock or Parity Stock of the Corporation as may have been
authorized or outstanding immediately preceding such consolidation or
merger, or such stock of the resulting or surviving corporation (having
the same powers, preferences and special rights of any such Senior Stock
or Parity Stock) as may be issued in exchange therefor); and (ii) each
holder of shares of Preferred Stock immediately preceding such
recapitalization, reorganization, consolidation or merger will receive
in exchange therefor the same number of shares of stock, with the same
preferences, rights and powers, of the resulting or surviving
corporation;
or
(B) each holder of shares of Preferred Stock, immediately preceding
such recapitalization, reorganization, consolidation or merger will
receive the same consideration to be received by holders of WAXS Common
Stock in connection with such recapitalization, reorganization,
consolidation or merger, where such consideration is valued so that each
such holder of Preferred Stock shall receive aggregate consideration
with a Fair Market Value at least equal to the Liquidation Preference
multiplied by the number of shares of Preferred Stock held by such
holder.
(d) (i) The foregoing right of holders of shares of Preferred Stock to take
any action as provided in Sections 3(b) and 3(c) may be exercised at any annual
meeting of stockholders or at a special meeting of holders of shares of
Preferred Stock held for such purpose as hereinafter provided or at any
adjournment thereof, or by the written consent, delivered to the Secretary of
the Corporation, of the holders of the minimum number of shares required to take
such action.
So long as such right to vote continues (and unless such right has been
exercised by written consent of the minimum number of shares required to take
such action), the President of the Corporation may call, and upon the written
request of holders of record of at least 5% of the outstanding shares of
Preferred Stock, addressed to the Secretary of the Corporation at the principal
office of the Corporation, shall call, a special meeting of the holders of
shares entitled to vote as provided herein. Such meeting shall be held within 30
days after delivery of such request to the Secretary, at the place and on the
notice provided by law and in the by-laws of the Corporation for the holding of
meetings of stockholders.
(ii) At each meeting of stockholders at which the holders of shares of
Preferred Stock shall have the right, voting separately as a single series,
to elect directors of the Corporation as provided in Section 3(b) or to
take any other action, the presence in person or by proxy of the holders of
record of one-third of the total number of shares of Preferred Stock then
outstanding and entitled to vote on the matter shall be necessary and
sufficient to constitute a quorum of such holders. At any such meeting or
at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Preferred
Stock shall not prevent the election of directors other than those to be
elected by the holders of shares of Preferred Stock (voting separately
as a single series), and the absence of a quorum of the holders of
shares of any other class or series of capital stock shall not prevent
the election of directors to be elected by the holders of shares of
Preferred Stock, or the taking of any action as provided in this Section
3; and
(B) in the absence of a quorum of the holders of shares of
Preferred Stock, a majority of the holders of such shares present in
person or by proxy shall have the power to adjourn the meeting as to the
actions to be taken by the holders of shares of Preferred Stock from
time to time and place to place without notice other than announcement
at the meeting until a quorum shall be present.
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For taking of any action as provided in Section 3(b) or Section
3(c) by the holders of the shares of Preferred Stock, each such holder
shall have one vote for each share of such stock standing in his name on
the transfer books of the Corporation as of any record date fixed for
such purpose or, if no such date be fixed, at the close of business on
the Business Day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the Business Day next
preceding the day on which the meeting is held; provided, however, that
shares of Preferred Stock held by the Corporation or any Affiliate of
the Corporation shall not be deemed to be outstanding for purposes of
taking any action as provided in this Section 3.
Each director elected by the holders of shares of Preferred Stock
as provided in Section 3(b) shall, unless his term shall expire earlier
in accordance with the provisions thereof, hold office until the annual
meeting of stockholders next succeeding his election or until his
successor, if any, is elected and qualified.
If any director so elected by the holders of Preferred Stock shall
cease to serve as a director before his term shall expire (except by
reason of the termination of the voting rights accorded to the holders
of Preferred Stock in accordance with Section 3(b)), the holders of the
Preferred Stock then outstanding and entitled to vote for such director
may, by written consent as provided herein, or at a special meeting of
such holders called as provided herein, elect a successor to hold office
for the unexpired term of the director whose place shall be vacant.
Any director elected by the holders of shares of Preferred Stock
voting separately as a single series may be removed from office with or
without cause by the vote or written consent of the holders of at least
a majority of the outstanding shares of Preferred Stock, at the time of
removal. A special meeting of the holders of shares of Preferred Stock
may be called in accordance with the procedures set forth in Section
3(d).
Section 4. Reacquired Shares.
Any shares of Preferred Stock converted, exchanged, redeemed, purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares of
Preferred Stock shall upon their cancellation become authorized but unissued
shares of preferred stock, par value $.01 per share, of the Corporation and,
upon the filing of an appropriate Certificate of Designation with the Secretary
of State of the State of Delaware, may be reissued as part of another series of
preferred stock, par value $.01 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth therein, but in any event may
not be reissued as shares of Preferred Stock or other Parity Stock unless all
shares of the Preferred Stock issued on the Issue Date shall have already been
redeemed, converted or exchanged.
Section 5. Liquidation, Dissolution or Winding Up.
(a) If the Corporation shall commence a voluntary case under the United
States bankruptcy laws or any applicable bankruptcy, insolvency or similar law
of any other country, or consent to the entry of an order for relief in an
involuntary case under any such law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or make
an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
juris diction in the premises in an involuntary case under the United States
bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any
other country, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and on account of any such event the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up, no distribution shall be made:
(i) to the holders of shares of Junior Stock unless, prior thereto,
the holders of shares of Preferred Stock, subject to Section 6, shall have
received the Liquidation Preference with respect to each share; or
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(ii) to the holders of shares of Parity Stock, except distributions
made ratably on the Preferred Stock and all other Parity Stock in
proportion to the total amounts to which the holders of all shares of the
Preferred Stock and other Parity Stock are entitled upon such liquidation,
dissolution or winding up.
(b) Neither the consolidation or merger of the Corporation with or into any
other Person nor the sale or other distribution to another Person of all or
substantially all the assets, property or business of the Corporation shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 5.
Section 6. Voluntary Conversion.
(a) Any holder of Preferred Stock shall have the right, at its option, at
any time and from time to time, to convert, subject to the terms and provisions
of this Section 6, any or all of such holder's shares of Preferred Stock into
such number of fully paid and non-assessable shares of Common Stock as is equal,
subject to Section 6(f), to the product of the number of shares of Preferred
Stock being so converted multiplied by the quotient of (i) the Liquidation
Preference divided by (ii) the Conversion Price then in effect. The conversion
right under this Section 6 shall be exercised by the surrender of the shares to
be converted to the Corporation at any time during usual business hours at its
principal place of business to be maintained by it, accompanied by written
notice that the holder elects to convert such shares and (if so required by the
Corporation) by a written instrument or instruments of transfer in form
reasonably satisfactory to the Corporation duly executed by the holder or its
duly authorized legal representative and transfer tax stamps or funds therefor,
if required pursuant to Section 6(j). All shares of Preferred Stock surrendered
for conversion shall be delivered to the Corporation for cancellation and
canceled by it and no shares of Preferred Stock shall be issued in lieu thereof.
(b) As promptly as practicable after the surrender, as herein provided, of
any shares of Preferred Stock for conversion pursuant to Section 6(a), the
Corporation shall deliver to or upon the written order of the holder of such
shares so surrendered a certificate or certificates representing the number of
fully paid and non-assessable shares of Common Stock into which such shares of
Preferred Stock have been converted in accordance with the provisions of this
Section 6. Subject to the following provisions of this paragraph and of Section
6(c), such conversion shall be deemed to have been made immediately prior to the
close of business on the date that such shares of Preferred Stock shall have
been surrendered in satisfactory form for conversion, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion of such shares of
Preferred Stock shall be treated for all purposes as having become the record
holder or holders of such Common Stock at such time, and such conversion shall
be at the Conversion Price in effect at such time; provided, however, that no
surrender shall be effective to constitute the Person or Persons entitled to
receive the Common Stock issuable upon conversion of such shares of Preferred
Stock as the record holder of such Common Stock while the share transfer books
of the Corporation shall be closed (but not for any period in excess of five (5)
days), but such surrender shall be effective to constitute the Person or Persons
entitled to receive the Common Stock upon issuable conversion of such shares of
Preferred Stock as the record holder or holders thereof for all purposes
immediately prior to the close of business on the next succeeding day on which
such share transfer books are open, and such conversion shall be deemed to have
been made at, and shall be made at the Conversion Price in effect at, such time
on such next succeeding day.
(c) The Conversion Price for purposes of this Section 6 and Section 7 shall
be subject to adjustment as follows:
(i) In case the Corporation shall at any time or from time to time (A)
pay a dividend or make a distribution on the outstanding shares of Common
Stock in capital stock (which, for purposes of this Section 6(c) shall
include, without limitation, any options, warrants or other rights to
acquire capital stock) of the Corporation, (B) subdivide the outstanding
shares of Common Stock into a larger number of shares, (C) combine the
outstanding shares of Common Stock into a smaller number of shares, (D)
issue any shares of its capital stock in a reclassification of the Common
Stock or (E) pay a dividend or make a distribution on the outstanding
shares of Common Stock in securities of the Corporation pursuant to a
shareholder rights plan, "poison pill" or similar arrangement, then, and in
each such case, the Conversion Price in effect immediately prior to such
event shall be adjusted (and any other
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appropriate actions shall be taken by the Corporation) so that the holder
of any share of Preferred Stock thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock or other
securities of the Corporation that such holder would have owned or would
have been entitled to receive upon or by reason of any of the events
described above, had such share of Preferred Stock been converted
immediately prior to the occurrence of such event. An adjustment made
pursuant to this Section 6(c)(i) shall become effective retroactively (A)
in the case of any such dividend or distribution, to a date immediately
following the close of business on the record date for the determination of
holders of Common Stock entitled to receive such dividend or distribution
or (B) in the case of any such subdivision, combination or
reclassification, to the close of business on the day upon which such
corporate action becomes effective.
(ii) In case the Corporation shall at any time or from time to time
issue shares of Common Stock (or securities convertible into or
exchangeable for Common Stock, or any options, warrants or other rights to
acquire shares of Common Stock) for a consideration per share less than the
lower of the (A) Current Market Price per share of Common Stock or (B)
Market Price per share of Common Stock then in effect at the record date or
"issuance date"(referred to in the following sentence), as the case may be
(the "Date") (treating the price per share of any security convertible or
exchangeable or exercisable into Common Stock as equal to (A) the sum of
the price for such security convertible, exchangeable or exercisable into
Common Stock plus any additional consideration payable (without regard to
any anti-dilution adjustments) upon the conversion, exchange or exercise of
such security into Common Stock divided by (B) the number of shares of
Common Stock initially underlying such convertible, exchangeable or
exercisable security), then, and in each such case, the Conversion Price
then in effect shall be adjusted by dividing the Conversion Price in effect
on the day immediately prior to the Date by a fraction (x) the numerator of
which shall be the sum of the number of shares of Common Stock outstanding
on the Date plus the number of additional shares of Common Stock issued or
to be issued (or the maximum number into which such convertible or
exchangeable securities initially may convert or exchange or for which such
options, warrants or other rights initially may be exercised) and (y) the
denominator of which shall be the sum of the number of shares of Common
Stock outstanding on the Date plus the number of shares of Common Stock
which the aggregate consideration for the total number of such additional
shares of Common Stock so issued or to be issued upon the conversion,
exchange or exercise of such convertible or exchangeable securities or
options, warrants or other rights (plus the aggregate amount of any
additional consideration initially payable upon such conversion, exchange
or exercise of such security) would purchase at the Current Market Price or
the Market Price, as applicable.
Such adjustment shall be made whenever such shares, securities, options,
warrants or other rights are issued, and shall become effective
retroactively to a date immediately following the close of business (1) in
the case of issuance to stockholders of the Corporation, as such, on the
record date for the determination of stockholders entitled to receive such
shares, securities, options, warrants or other rights and (2) in all other
cases, on the date ("issuance date") of such issuance; provided that:
(A) the determination as to whether an adjustment is required to be
made pursuant to this Section 6(c)(ii) shall be made upon the issuance
of such shares or such convertible or exchangeable securities, options,
warrants or other rights;
(B) if any convertible or exchangeable securities, options,
warrants or other rights (or any portions thereof) which shall have
given rise to an adjustment pursuant to this Section 6(c)(ii) shall have
expired or terminated without the exercise thereof and/or if by reason
of the terms of such convertible or exchangeable securities, options,
warrants or other rights there shall have been an increase or increases
or decrease or decreases, with the passage of time or otherwise, in the
price payable upon the exercise or conversion thereof, then the
Conversion Price hereunder shall be readjusted (but to no greater extent
than originally adjusted) on the basis of (x) eliminating from the
computation any additional shares of Common Stock corresponding to such
convertible or exchangeable securities, options, warrants or other
rights as shall have expired or terminated, (y) treating the additional
shares of Common Stock, if any, actually issued or issuable pursuant to
the previous exercise of such convertible or exchangeable securities,
options, warrants or other rights
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as having been issued for the consideration actually received and
receivable therefor and (z) treating any of such convertible or
exchangeable securities, options, warrants or other rights which remain
outstanding as being subject to exercise or conversion on the basis of
such exercise or conversion price as shall be in effect at this time;
and
(C) no adjustment in the Conversion Price shall be made pursuant to
this Section 6(c)(ii) as a result of any issuance of securities by the
Corporation in respect of which an adjustment to the Conversion Price is
made pursuant to Section 6(c)(i).
(iii) In case the Corporation shall at any time or from time to time
distribute to all holders of shares of its Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Corporation is the resulting or surviving corporation and the Common Stock
is not changed or exchanged) cash, evidences of indebtedness of the
Corporation or another issuer, securities of the Corporation or another
issuer or other assets (excluding dividends payable in shares of Common
Stock for which adjustment is made under Section 6(c)(i)) or rights or
warrants to subscribe for or purchase securities of the Corporation
(excluding those referred to in Section 6(c)(ii) or those in respect of
which an adjustment in the Conversion Price is made pursuant to Section
6(c)(i) or (ii)), then, and in each such case, the Conversion Price then in
effect shall be adjusted by dividing the Conversion Price in effect
immediately prior to the date of such distribution by a fraction (x) the
numerator of which shall be the Market Price of the Common Stock on the
record date referred to below and (y) the denominator of which shall be
such Market Price of the Common Stock less the then Fair Market Value (as
determined by the Board of Directors of the Corporation) of the portion of
the cash, evidences of indebtedness, securities or other assets so
distributed or of such subscription rights or warrants applicable to one
share of Common Stock (but such denominator not to be less than one). Such
adjustment shall be made whenever any such distribution is made and shall
become effective retroactively to a date immediately following the close of
business on the record date for the determination of stockholders entitled
to receive such distribution.
(iv) In case the Corporation, at any time or from time to time, shall
take any action affecting its Common Stock similar to or having an effect
similar to any of the actions described in any of Section 6(c)(i) through
Section 6(c)(iii), inclusive, or Section 6(g) (but not including any action
described in any such Section) and the Board of Directors of the
Corporation in good faith determines that it would be equitable in the
circumstances to decrease the Conversion Price as a result of such action,
then, and in each such case, the Conversion Price shall be decreased in
such manner and at such time as the Board of Directors of the Corporation
in good faith determines would be equitable in the circumstances (such
determination to be evidenced in a resolution, a certified copy of which
shall be mailed to the holders of the Preferred Stock).
(v) Notwithstanding anything herein to the contrary, no adjustment
under this Section 6(c) need be made to the Conversion Price unless such
adjustment would require an increase or decrease of at least $0.05 in the
Conversion Price then in effect. Any lesser adjustment shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment, which, together with any adjustment or adjustments
so carried forward, shall amount to an increase or decrease of at least
$0.05 in such Conversion Price. Any adjustment to the Conversion Price
carried forward and not theretofore made shall be made immediately prior to
the conversion of any shares of Preferred Stock pursuant hereto.
(vi) Notwithstanding anything herein to the contrary, no adjustment
under this Section 6(c) shall be made upon (A) the grant of options to
acquire up to 2,000,000 shares of Common Stock to employees or directors of
the Corporation pursuant to benefit plans approved by the Board of
Directors of the Corporation or upon the issuance of shares of Common Stock
upon exercise of such options, (B) the issuance of any Common Stock (or
securities convertible into or exchangeable for capital stock or options,
warrants or other rights to acquire capital stock) in exchange for
professional or other services rendered to the Corporation up to a maximum
of 500,000 shares of Common Stock per annum, but no more than 1,000,000
shares of Common Stock in the aggregate, (C) the issuance of any Common
Stock pursuant to this Certificate of Designation or the Certificates of
Designation related to the Series A
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Preferred Stock and the Series B Preferred Stock or (D) the sale of Common
Stock by the Corporation in an underwritten public offering.
(d) If the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, and shall thereafter and before the distribution to stockholders
thereof legally abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the Conversion Price then in
effect shall be required by reason of the taking of such record.
(e) Upon any increase or decrease in the Conversion Price, then, and in
each such case, the Corporation promptly shall deliver to each registered holder
of Preferred Stock at least (five) 5 Business Days prior to effecting any of the
foregoing transactions a certificate, signed 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, setting forth in reasonable detail
the event requiring the adjustment and the method by which such adjustment was
calculated and specifying to the extent feasible the increased or decreased
Conversion Price then in effect following such adjustment.
(f) No fractional shares or scrip representing fractional shares shall be
issued upon the conversion of any shares of Preferred Stock. If more than one
share of Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Preferred Stock so surrendered. If the conversion of any share or shares of
Preferred Stock results in a fraction, an amount equal to such fraction
multiplied by the Market Price of the Common Stock on the Business Day preceding
the day of conversion shall be paid to such holder in cash by the Corporation.
(g) In case of any capital reorganization or reclassification or other
change of outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value), or in
case of any consolidation or merger of the Corporation with or into another
Person (other than a consolidation or merger in which the Corporation is the
resulting or surviving Person and which does not result in any reclassification
or change of outstanding Common Stock) (any of the foregoing, a "Transaction"),
the Corporation, or such successor or purchasing Person, as the case may be,
shall execute and deliver to each holder of Preferred Stock at least ten (10)
Business Days prior to effecting any of the foregoing Transactions a certificate
that the holder of each share of Preferred Stock then outstanding shall have the
right thereafter to convert such share of Preferred Stock into the kind and
amount of shares of stock or other securities (of the Corporation or another
issuer) or property or cash receivable upon such Transaction by a holder of the
number of shares of Common Stock into which such share of Preferred Stock could
have been converted immediately prior to such Transaction. Such certificate
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. If, in the case
of any such Transaction, the stock, other securities, cash or property
receivable thereupon by a holder of Common Stock includes shares of stock or
other securities of a Person other than the successor or purchasing Person and
other than the Corporation, which controls or is controlled by the successor or
purchasing Person or which, in connection with such Transaction, issues stock,
securities, other property or cash to holders of Common Stock, then such
certificate also shall be executed by such Person, and such Person shall, in
such certificate, specifically acknowledge the obligations of such successor or
purchasing Person and acknowledge its obligations to issue such stock,
securities, other property or cash to the holders of Preferred Stock upon
conversion of the shares of Preferred Stock as provided above. The provisions of
this Section 6(g) and any equivalent thereof in any such certificate similarly
shall apply to successive Transactions.
(h) In case at any time or from time to time:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants;
(iii) there shall be any reclassification of the Common Stock, or any
consolidation or merger to which the Corporation is a party and for which
approval of any shareholders of the Corporation is required, or any sale or
other disposition of all or substantially all of the assets of the
Corporation; or
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(iv) there shall be any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall mail to each holder of shares of Preferred Stock at
such holder's address as it appears on the transfer books of the Corporation, as
promptly as possible but in any event at least ten (10) days prior to the
applicable date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights
or warrants or, if a record is not to be taken, the date as of which the holders
of Common Stock of record to be entitled to such dividend, distribution or
rights are to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, conveyance, dissolution, liquidation or winding up
is expected to become effective. Such notice also shall specify the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their Common Stock for shares of stock or other securities or property
or cash deliverable upon such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up.
(i) The Corporation shall at all times reserve and keep available for
issuance upon the conversion or exchange of the Preferred Stock pursuant to
Section 6(a) or 7, such number of its authorized but unissued shares of Common
Stock as will from time to time be sufficient to permit the conversion of all
outstanding shares of Preferred Stock, and shall take all action required to
increase the authorized number of shares of Common Stock if at any time there
shall be insufficient authorized but unissued shares of Common Stock to permit
such reservation or to permit the conversion of all outstanding shares of
Preferred Stock.
(j) The issuance or delivery of certificates for Common Stock upon the
conversion or exchange of shares of Preferred Stock pursuant to Section 6(a) or
7 shall be made without charge to the converting holder of shares of Preferred
Stock for such certificates or for any tax in respect of the issuance or
delivery of such certificates or the securities represented thereby, and such
certificates shall be issued or delivered in the respective names of, or
(subject to compliance with the applicable provisions of federal and state
securities laws) in such names as may be directed by, the holders of the shares
of Preferred Stock converted; provided, however, that the Corporation shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the holder of the shares of Preferred Stock converted, and the
Corporation shall not be required to issue or deliver such certificate unless or
until the Person or Persons requesting the issuance or delivery thereof shall
have established to the reasonable satisfaction of the Corporation that such tax
has been paid.
Section 7. Mandatory Conversion.
(a) If for sixty (60) consecutive Trading Days the Market Price of the
Common Stock at the end of each such Trading Day during such period exceeds the
Conversion Price in effect on each such Trading Day, then on the Business Day
next succeeding such sixty (60) day period (the "Sixty Day Conversion Date"),
the outstanding shares of Preferred Stock shall automatically be converted into
such number of fully paid and non-assessable shares of Common Stock as is equal,
subject to Section 6(f), to the number of shares of Preferred Stock being so
converted multiplied by the quotient of (i) the Liquidation Preference divided
by (ii) the Conversion Price in effect on the Sixty Day Conversion Date.
(b) Any shares of Preferred Stock that have not been converted into shares
of Common Stock pursuant to the terms of this Certificate of Designation on that
date which is three (3) years following the Issue Date (the "Three Year
Conversion Date") shall automatically be converted into such number of fully
paid and non-assessable shares of Common Stock as is equal, subject to Section
6(f), to the number of shares of Preferred Stock being so converted multiplied
by the quotient of (i) the Liquidation Preference divided by (ii) the Current
Market Price in effect on the Three Year Conversion Date (the "Three Year
Conversion Price"). Notwithstanding the foregoing, (x) the Three Year Conversion
Price shall in no event be less than $11.50, subject to adjustment on the same
basis as the Conversion Price pursuant to Section 6(c), and (y) in the event
that (A) the Three Year Conversion Price is less than the Market Price on the
Issue Date, subject to adjustment on the same basis as the Conversion Price
pursuant to Section 6(c), and (B) the Nasdaq Composite Index ("IXIC") as of the
close of business on the Three Year Conversion Date is eighty-five percent (85%)
or less than the IXIC as of the close of business on the Issue Date (the
difference between one
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hundred percent (100%) and such percentage is hereinafter referred to as the
"Market Correction Percentage"), then the Three Year Conversion Price shall be
increased by a percentage equal to that portion of the Market Correction
Percentage in excess of fifteen percent (15%). Notwithstanding the foregoing, in
no event, shall the Three Year Conversion Price be greater than the Conversion
Price, subject to adjustment pursuant to Section 6(c), on the Three Year
Conversion Date.
(c) Within ten (10) Business Days after the Sixty Day Conversion Date or
the Three Year Conversion Date, as applicable, the Corporation shall deliver to
each holder of Preferred Stock being converted (i) an officer's certificate
attesting to the satisfaction of the condition precedent to mandatory conversion
and (ii) a certificate or certificates representing the number of fully paid and
non-assessable shares of Common Stock into which such shares of Preferred Stock
have been converted in accordance with this Section 7. Such conversion shall be
deemed to have been made immediately prior to the close of business on the Sixty
Day Conversion Date or the Three Year Conversion Date, as applicable, and the
Person or Persons entitled to receive the Common Stock deliverable upon
conversion of such shares of Preferred Stock shall be treated for all purposes
as having become the record holder or holders of such Common Stock at such time.
(d) Notwithstanding that any certificates for such shares shall not have
been surrendered for cancellation, from and after the Sixty Day Conversion Date
or the Three Year Conversion Date, as applicable, (i) the shares represented
thereby shall no longer be deemed outstanding, and (ii) all rights of the
holders of shares of Preferred Stock to be converted shall cease and terminate,
excepting only the right to receive the shares of Common Stock to which such
holder is entitled under this Section 7 and any dividends or other distributions
thereon; provided, however, that if the Corporation shall default in the
execution and delivery of the shares of Common Stock, the shares of Preferred
Stock that were to be converted shall thereafter be deemed to be outstanding and
the holders thereof shall have all of the rights of a holder of Preferred Stock
until such time as such default shall no longer be continuing or shall have been
waived by holders of at least 66-2/3% of the then outstanding shares of
Preferred Stock.
(e) Notice of a conversion of shares of Preferred Stock pursuant to Section
7(a) shall be given by publication in a newspaper of general circulation in the
Borough of Manhattan, The City of New York (if such publication shall be
required by applicable law, regulation or securities exchange requirement).
Section 8. Certain Restrictions.
Whenever the Corporation shall not have converted or exchanged shares of
Preferred Stock at a time required by Section 6 or 7, at such time and
thereafter until all conversion and exchange obligations provided in Section 6
or 7 that have come due shall have been satisfied, the Corporation shall not:
(A) declare or pay dividends, or make any other distributions, on any shares of
its capital stock or (B) redeem, convert, purchase or otherwise acquire for
consideration any shares of its capital stock.
Section 9. Certain Remedies.
Any registered holder of Preferred Stock shall be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Certificate of
Designation and to enforce specifically the terms and provisions of this
Certificate of Designation in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to which
such holder may be entitled at law or in equity.
Section 10. Definitions.
For the purposes of this Certificate of Designation of Preferred Stock, the
following terms shall have the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act; provided that
for purposes of this Certificate of Designation the initial holders of the
Preferred Stock and their respective Affiliates shall not be considered
Affiliates of the Corporation.
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"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks in The City of New York, New York or
The City of Atlanta, Georgia are authorized or required by law or executive
order to close.
"Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Corporation and each other class of capital stock of the Corporation
into which such stock is reclassified or reconstituted.
"Conversion Price" shall mean $20.38, subject to adjustments as set
forth in Section 6(c).
"Current Market Price" per share shall mean, on any date specified
herein for the determination thereof, (a) the average daily Market Price of
the Common Stock for those days during the period of twenty (20) days,
ending on such date, which are Trading Days, and (b) if the Common Stock is
not then listed or admitted to trading on any national securities exchange
or quoted in the over-the-counter market, the Market Price on such date.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Securities and Exchange
Commission thereunder.
"Fair Market Value" shall mean the amount which a willing buyer, under
no compulsion to buy, would pay a willing seller, under no compulsion to
sell, in an arm's-length transaction (assuming that the Common Stock is
valued "as if fully distributed" so that, among other things, there is no
consideration given for minority investment discounts or discounts related
to illiquidity or restrictions on transferability).
"Issue Date" shall mean the original date of issuance of shares of
Preferred Stock to the holders pursuant to the Merger Agreement.
"Junior Stock" shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding
up) to the Preferred Stock including, without limitation, the Common Stock.
"Liquidation Preference" with respect to a share of Preferred Stock
shall mean $1,000.00.
"Market Price" shall mean, per share of Common Stock on any date
specified herein: (a) the closing price per share of the Common Stock on
such date published in The Wall Street Journal or, if no such closing price
on such date is published in The Wall Street Journal, the average of the
closing bid and asked prices on such date, as officially reported on the
principal national securities exchange on which the Common Stock is then
listed or admitted to trading; (b) if the Common Stock is not then listed
or admitted to trading on any national securities exchange but is
designated as a national market system security, the last trading price of
the Common Stock on such date; or (c) if there shall have been no trading
on such date or if the Common Stock is not so designated, the average of
the reported closing bid and asked prices of the Common Stock on such date
as shown by Nasdaq and reported by any member firm of the NYSE, selected by
the Corporation. If neither (a), (b) or (c) is applicable, Market Price
shall mean the Fair Market Value per share determined in good faith by the
Board of Directors of the Corporation unless holders of at least fifteen
percent (15%) of the outstanding shares of Preferred Stock request that the
Corporation obtain an opinion of a nationally recognized investment banking
firm chosen by such holders and the Corporation (at the Corporation's
expense), in which event Fair Market Value shall be determined by such
investment banking firm.
"Merger Agreement" shall mean the Agreement and Plan of Merger, dated
August 17, 1999, between World Access, Inc., FaciliCom International, Inc.,
Armstrong International Telecommunications, Inc., Epic Interests, Inc., and
BFV Associates, Inc.
"Nasdaq " shall mean the National Market System of the NASDAQ Stock
Market.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Parity Stock" shall mean any capital stock of the Corporation,
including the Preferred Stock, ranking on a par upon liquidation,
dissolution or winding up with the Preferred Stock.
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"Person" shall mean any individual, firm, corporation, partnership,
limited liability company, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency
or political subdivision thereof) or other entity of any kind, and shall
include any successor (by merger) of such entity.
"Preferred Stock" shall have the meaning set forth in Section 1(a)
hereof.
"Senior Stock" shall mean any capital stock of the Corporation ranking
senior to the Preferred Stock (either as to dividends or upon liquidation,
dissolution or winding up), including, without limitation, the Series A
Preferred Stock and the Series B Preferred Stock.
"Series A Preferred Stock" shall mean the 4.25% Cumulative Senior
Perpetual Convertible Preferred Stock, Series A.
"Subsidiary" shall mean, with respect to any Person, a corporation or
other entity of which 50% or more of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such
Person.
"Trading Days" shall mean a day on which the national securities
exchanges are open for trading.
Section 11. Modification or Amendment.
Except as specifically set forth herein, modifications or amendments to
this Certificate of Designation may be made by the Corporation only with the
consent of the holders of more than 50% of the outstanding shares of Preferred
Stock.
IN WITNESS WHEREOF, World Access, Inc. has caused this Certificate to be
duly executed in its corporate name on this day of , 1999.
WORLD ACCESS, INC.
By:
------------------------------------
Name:
Title:
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EXHIBIT 6.3
REGISTRATION RIGHTS AGREEMENT, dated as of , 1999, between WORLD
ACCESS, INC., a Delaware corporation (the "Company"), and ARMSTRONG
INTERNATIONAL TELECOMMUNICATIONS, INC., a Delaware corporation, BFV ASSOCIATES,
INC., a Delaware corporation, EPIC INTERESTS, INC., a Pennsylvania corporation,
and ANAND KUMAR (collectively, the "Stockholders").
1. Background. Pursuant to an Agreement and Plan of Merger, dated August
, 1999, by and among the Company, the Stockholders (other than Anand
Kumar) and FaciliCom International, Inc. ("FaciliCom") (the "Merger Agreement"),
the Stockholders are to receive, among other things, up to 380,000 shares of the
Company's Convertible Preferred Stock, Series C, $.01 par value per share (the
amount of such stock issued at Closing, the "Preferred Stock"). The Preferred
Stock is convertible into shares of common stock, par value $.01 per share, of
WAXS (the "Common Stock") under certain terms and conditions. Capitalized terms
used and not otherwise defined herein shall have the meanings ascribed to them
in the Merger Agreement.
2. Registration Under Securities Act, etc.
2.1 Registration on Request.
(a) Request. At any time, or from time to time following the date
of this Agreement, one or more holders (the "Initiating Holders") of an
aggregate of 25% or more of the total number of shares of Common Stock
issued or issuable upon conversion or issued upon exchange of the
Preferred Stock may, upon written request, require the Company to effect
the registration under the Securities Act of any Registrable Securities
held by such Initiating Holders. The Company promptly will given written
notice of such requested registration to all other holders of
Registrable Securities who may join in such registration. The Company
will use its reasonable best efforts to effect, at the earliest possible
date, the registration under the Securities Act, including by means of a
shelf registration on Form S-3 (or any successor form) pursuant to Rule
415 under the Securities Act if so requested in such request (but only
if the Company is then eligible to use such a shelf registration and if
Form S-3 (or such successor form) is then available to the Company), of
(i) the Registrable Securities that the Company has been so
requested to register by such Initiating Holders, and
(ii) all other Registrable Securities that the Company has been
requested to register by the Holders thereof (such Holders together
with the Initiating Holders hereinafter are referred to as the
"Selling Holders") by written request given to the Company within 30
days after the giving of such written notice by the Company of such
registration, all to the extent requisite to permit the disposition
of the Registrable Securities so to be registered.
(b) Registration of Other Securities.
(i) Holders other than the Initiating Holders and holders of
other registrable securities with the right to participate in a
Company registration statement shall have the right to include their
shares of Registrable Securities or other registrable securities, as
the case may be, in any registration pursuant to this Section 2.1. In
connection with those registrations in which multiple Initiating
Holders or holders of other registrable securities with the right to
participate in such registration ("piggy-back rights holders")
participate, in the event the facilitating broker/dealer or, in an
underwritten offering, the lead managing underwriter advises that
marketing factors require a limitation on the number of shares to be
sold, the number of shares to be included in the sale or underwriting
and registration shall be allocated pro rata among the Initiating
Holders and the holders seeking registration pursuant to piggy-back
registration rights otherwise granted by the Company on the basis of
the estimated proceeds from the sale of the securities covered by
such registration.
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(ii) The Company shall have the right to cause the registration
of additional securities for sale for the account of the Company in
any registration of Registrable Securities requested by an Initiating
Holder pursuant to this Section 2.1 which involves an underwritten
offering; provided, however, that the Company shall not have the
right to cause the registration of such additional securities if such
Initiating Holders are advised in writing (with a copy to the
Company) by the lead managing underwriter designated pursuant to
Section 2.1(e) that, in such firm's good faith opinion, registration
of such securities in addition to those securities otherwise included
pursuant to Sections 2(a) and (b) would materially adversely affect
the offering and sale of the Registrable Securities then contemplated
by such Initiating Holders.
(c) Registration Statement Form. Registrations under this Section
2.1 shall be on such appropriate registration form of the Commission as
shall be reasonably selected by the Company.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected:
(i) unless a registration statement with respect thereto has
become effective and remained effective in compliance with the
provisions of the Securities Act with respect to the disposition of
all Registrable Securities covered by such registration statement
until the earlier of (x) such time as all of such Registrable
Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement and (y) 180 days after the effective date
of such registration statement with respect to any registration
statement filed pursuant to Rule 415 under the Securities Act,
(ii) if, after it has become effective, such registration is
interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court
for any reason not attributable to any of the Selling Holders and has
not thereafter become effective,
(iii) if the conditions to closing specified in the underwriting
agreement, if any, entered into in connection with such registration
are not satisfied or waived, other than by reason of a failure on the
part of any of the Selling Holders, or
(iv) if, when effective, it includes fewer than seventy-five
(75%) percent of the number of shares of Registrable Securities of
the Initiating Holders which were the subject matter of the request.
(e) Selection of Underwriters. The underwriter or underwriters of
each underwritten offering of Registrable Securities so to be registered
pursuant to this Section 2.1 shall be selected by the holders of more
than 50% of the Registrable Securities to be included in such
registration and shall be reasonably acceptable to the Company.
(f) Request to Withdraw Registration Statement. Notwithstanding
anything in Section 2.1(d) to the contrary, if the total number of
Registrable Securities requested by the Initiating Holders to be
included in such registration cannot be included as provided in Section
2.1(b), then the Initiating Holders owning 66 2/3 of the shares of
Common Stock originally proposed to be registered shall have the right
to withdraw their request for registration by giving written notice to
the Company within ten days after receipt of notice from the Company of
a pro rata cutback in the number of shares of Registrable Securities to
be offered and, in the event of such withdrawal, such request shall not
be counted for purposes of the requests for registration to which
holders of Registrable Securities are entitled pursuant to Section 2.1
hereof.
(g) Limitations on Registration on Request. Notwithstanding
anything in this Section 2.1 to the contrary, in no event will the
Company be required to (i) effect, in the aggregate, more than four
registrations pursuant to this Section 2.1 or (ii) effect more than one
registration pursuant to this Section 2.1 within any 12-month period
occurring immediately subsequent to the effectiveness (within the
meaning of Section 2.1(d)) of a registration statement filed pursuant to
this Section 2.1.
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(h) Listing. The Company shall list the Registrable Securities
subject to Section 2.1(a) on the Nasdaq Stock Market or any national
securities exchange where the Company's Common Stock is then listed.
(i) Expenses. The Company will pay all Registration Expenses
(except for any underwriting commissions or discounts) in connection
with the first and second registrations requested pursuant to this
Section 2.1. Each Holder of Registrable Securities whose Registrable
Securities are included in the third and fourth registrations requested
pursuant to this Section 2.1 shall pay its proportionate share of the
Registration Expenses (including any underwriting commissions or
discounts) on the basis of such Holder's share of the gross proceeds
from the sale of its Registrable Securities under such registrations.
2.2 Piggyback Registration.
(a) Right to Include Registrable Securities. If the Company at any
time proposes to register any shares of Common Stock or any securities
convertible into Common Stock under the Securities Act by registration on
any form other than Forms S-4 or S-8 (or successor forms), whether or not
for sale for its own account, it will each such time give prompt written
notice to all Holders of Registrable Securities of its intention to do so
and of such Holders' rights under this Section 2.2. Upon the written
request of any such Holder (a "Requesting Holder") made as promptly as
practicable and in any event within 30 days after the receipt of any such
notice, the Company will use its reasonable best efforts to effect the
registration under the Securities Act of all Registrable Securities that
the Company has been so requested to register by the Requesting Holders
thereof; provided, however, that prior to the effective date of an
underwritten registration statement filed in connection with such
registration, immediately upon notification to the Company from the
managing underwriter of the price at which such securities are to be sold,
if such price is below the price that any Requesting Holder shall have
indicated to be acceptable to such Requesting Holder, the Company shall so
advise such Requesting Holder of such price, and such Requesting Holder
shall then have the right to withdraw its request to have its Registrable
Securities included in such registration statement; provided further,
however, that if, at any time after giving written notice of its intention
to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election, give
written notice of such determination to each Requesting Holder of
Registrable Securities and (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from any
obligation of the Company to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any Holder or
Holders of Registrable Securities entitled to do so to cause such
registration to be effected as a registration under Section 2.1, and (ii)
in the case of a determination to delay registering, shall be permitted to
delay registering any Registrable Securities, for the same period as the
delay in registering such other securities. No registration effected under
this Section 2.2 shall relieve the Company of its obligation to effect any
registration upon request under Section 2.1.
(b) Priority in Piggyback Registrations. If the managing
underwriter of any underwritten offering shall inform the Company by
letter of its opinion that the number of Registrable Securities
requested to be included in such registration would materially adversely
affect such offering, and the Company has so advised the Requesting
Holders in writing, then the Company will include in such registration,
to the extent of the number and type that the Company is so advised can
be sold in (or during the time of) such offering, and subject to the
rights described in Section 2.1(f) of that certain Registration Rights
Agreement, dated as of April 21, 1999, between the Company and The 1818
Fund III, L.P., first, all securities proposed by the Company to be sold
for its own account, second such Registrable Securities requested to be
included in such registration pursuant to this Agreement and securities
of other Persons who have the right pursuant to agreements with the
Company to require that their securities be included in such
registration, pro rata on the basis of the estimated proceeds from the
sale thereof, and third, all other securities proposed to be registered.
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(c) Expenses. The Company will pay all Registration Expenses in
connection with any registration effected pursuant to this Section 2.2.
2.3 Registration Procedures. If and whenever the Company is required
to effect the registration of any Registrable Securities under the
Securities Act as provided in Sections 2.1 and 2.2, the Company will, as
expeditiously as possible:
(i) prepare and (within 90 days after the end of the period
within which requests for registration may be given to the Company or
in any event as soon thereafter as practicable) file with the
commission the requisite registration statement to effect such
registration and thereafter use its reasonable best efforts to cause
such registration statement to become effective; provided, however,
that the Company may discontinue any registration of its securities
that are not Registrable Securities (and, under the circumstances
specified in Section 2.2(a), its securities that are Registrable
Securities) and any time prior to the effective date of the
registration statement relating thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable
Securities covered by such registration statement until the earlier
of (a) such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof set forth in such registration
statement and (b) 180 days after the effective date of such
registration statement with respect to any registration statement
filed pursuant to Rule 415 under the Securities Act if the Company is
eligible to file a registration statement on Form S-3, in which case
the Company shall use its best efforts to keep the registration
statement effective and updated during such period;
(iii) provide to each seller of Registrable Securities covered
by such registration statement, such number of conformed copies of
such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including
each preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such
other documents, as such seller may reasonably request;
(iv) use its reasonable best efforts (x) to register or qualify
all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws
of such States of the United States of America where an exemption is
not available and as the sellers of Registrable Securities covered by
such registration statement shall reasonably request, (y) to keep
such registration or qualification in effect for so long as such
registration statement remains in effect and (z) to take any other
action that may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of the
securities to be sold by such sellers, except that the Company shall
not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this subdivision (iv) be
obligated to be so qualified or to consent to general service of
process in any such jurisdiction;
(v) use its reasonable best efforts to cause all Registrable
Securities covered by such registration statement to be registered
with or approved by such other federal or state governmental agencies
or authorities as may be necessary in the opinion of counsel to the
Company and counsel to the seller or sellers of Registrable
Securities to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
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(vi) in the case of an underwritten or "best efforts" offering,
furnish at the effective date of such registration statement to each
seller of Registrable Securities, and each such seller's
underwriters, if any, a signed counterpart of:
(A) an opinion of counsel for the Company, dated the
effective date of such registration statement and, if applicable,
the date of the closing under the underwriting agreement; and
(B) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements
included or incorporated by reference in such registration
statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of the accountants' comfort letter, with respect to events
subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the
accountants' comfort letter, such other financial matters, and, in
the case of the legal opinion, such other legal matters, as the
underwriters may reasonably request;
(vii) cause representatives of the Company to participate in any
"road show" or "road shows" reasonably requested by any underwriter
of an underwritten or "best efforts" offering of any Registrable
Securities;
(viii) notify each seller 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, upon
discovery that, or upon the happening of any event (including those
events referred to in Section 2.6) 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 any material fact required to be stated therein or necessary to
make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any
such seller, subject to the provisions of Section 2.6, promptly
prepare and furnish to it a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary
to that, as thereafter delivered to the purchasers of such
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 no
misleading in the light of the circumstances under which they were
made;
(ix) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and, if
required, make available to its Holders, as soon as reasonably
practicable, an earnings statement covering the period of at least 12
months, but not more than 18 months, beginning with the first full
calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 promulgated
thereunder, and promptly furnish to each such seller of Registrable
Securities a copy of any amendment or supplement to such registration
statement or prospectus;
(x) provide and cause to be maintained a transfer agent and
registrar (which, in each case, may be the Company) for all
Registrable Securities covered by such registration statement from
and after a date not later than the effective date of such
registration; and
(xi) use its reasonable best efforts to list all Registrable
Securities covered by such registration statement on the Nasdaq Stock
Market, Inc. or any national securities exchange on which Registrable
Securities of the same class covered by such registration statement
are then listed and, if no such Registrable Securities are so listed,
on the Nasdaq Stock Market, Inc. or any national securities exchange
on which the Common Stock is then listed.
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The Company may require each seller of Registrable Securities as to
which any registration is being effected to promptly furnish the Company
such information regarding such seller and the distribution of such
securities as the Company may from time to time reasonably request in
writing; provided, that any such information or questionnaires shall be
given or made by a seller of Registrable Securities without representation
or warranty of any kind whatsoever except representations with respect to
the identify of such seller, such seller's Registrable Securities and such
seller's intended method of distribution or any other representations
required by applicable law.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of
the happening of any event of the kind described in subdivision (viii) of
this Section 2.3, such holder will forthwith discontinue such holder's
disposition of Registrable Securities pursuant to the registration
statement relating to such Registrable Securities until such holder's
receipt of the copies of the supplemented or amended prospectus
contemplated by subdivision (viii) of this Section 2.3 and Section 2.6 and,
if so directed by the Company, will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in
such holder's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice.
2.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offering by Holders of Registrable
Securities pursuant to a registration requested under Section 2.1, the
Company will use its reasonable best efforts to enter into an underwriting
agreement with such underwriters for such offering, such agreement to be
reasonably satisfactory in substance and form to each such holder and the
underwriters and to contain such representations and warranties by the
Company and such other terms as are generally prevailing in agreements of
that type, including, without limitations, indemnities to the effect and to
the extent provided in Section 2.7. The Holders of the Registrable
Securities proposed to be sold by such underwriters will reasonably
cooperate with the Company in the negotiation of the underwriting
agreement. Such Holders of Registrable Securities to be sold by such
underwriters shall be parties to such underwriting agreement and may, at
their option, require that any or all of the representations and warranties
by, and the other agreements on the part of, the Company to and for the
benefit of such underwriters shall also be made to and for the benefit of
such Holders of Registrable Securities and that any or all of the
conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
Holders of Registrable Securities. No holder of Registrable Securities
shall be required to make any representations or warranties to, or
agreements with, the Company other than representations, warranties or
agreements regarding the identity of such holder, such holder's Registrable
Securities and such holder's intended method of distribution or any other
representations required by applicable law.
(b) Piggyback Underwritten Offerings. If the Company proposes to
register any of its securities under the Securities Act as contemplated by
Section 2.2 and such securities are to be distributed by or through one or
more underwriters, the Company will, if requested by any Requesting Holder
of Registrable Securities, use its reasonable best efforts to arrange for
such underwriters to include all the Registrable Securities to be offered
and sold by such Requesting Holder among the securities of the Company to
be distributed by such underwriters, subject to the provisions of Section
2.2(b). The Holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the
Company and such underwriters and may, at their option, require that any or
all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such Holders of Registrable
Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of such Holders of Registrable
Securities. No holder of Registrable Securities shall be required to make
any representations or warranties to, or agreements with, the Company or
the underwriters other than representations, warranties or agreements
regarding the identity of such holder, such holder's Registrable Securities
and such holder's intended method of distribution or any other
representations required by applicable law.
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(c) Underwriting Discounts and Commission. The Holders of Registrable
Securities sold in any offering pursuant to Section 2.4(a) or Section
2.4(b) shall pay all underwriting discounts and commissions of the
underwriter or underwriters with respect to the Registrable Securities sold
thereby.
2.5 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel the opportunity to participate in the
preparation of such registration statement, each prospectus included therein or
filed with the Commission, and each amendment thereof or supplement thereto, and
will give each of them such reasonable access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
2.6 Limitations, Conditions and Qualifications to Obligations under
Registration Covenants. Anything in this Agreement to the contrary
notwithstanding, it is understood and agreed that the Company shall not be
required to file a Registration Statement, amendment or post-effective amendment
thereto or prospectus supplement or to supplement or amend any Registration
Statement if the Company is then involved in discussions concerning, or
otherwise engaged in, an acquisition, disposition, financing or other material
transaction if the Company determines in good faith that the making of such a
filing, supplement or amendment at such time would materially adversely effect
or interfere with such transaction so long as the Company shall, as soon as
practicable thereafter (but in no event more than 90 days thereafter) make such
filing, supplement or amendment. The Company shall promptly give the Holders of
Registrable Securities written notice of such postponement, containing a general
statement of the reasons for such postponement and an approximation of the
anticipated delay. Upon receipt by a Holder of notice of an event of the kind
described in this Section 2.6, such Holder shall forthwith discontinue such
Holder's disposition of Registrable Securities until such Holder's receipt of
notice from the Company that such disposition may continue and of any
supplemented or amended prospectus indicated in such notice. If the Company
postpones the filing of a registration statement, Holders of Registrable
Securities requesting registration thereof pursuant to Section 2.1, representing
not less then 331/3% of the Registrable Securities with respect to which
registration has been requested and constituting not less than 662/3% of the
Initiating Holders, shall have the right to withdraw the request for
registration by giving written notice to the Company within 30 days after
receipt of notice of postponement and, in the event of such withdrawal, such
request shall not be counted for purposes of the requests for registration to
which Holders of Registrable Securities are entitled pursuant to Section 2.1.
2.7 Indemnification.
(a) Indemnification by the Company. The Company will, and hereby
does, indemnify and hold harmless, in the case of any registration
statement filed pursuant to Section 2.1 or 2.2, each seller of any
Registrable Securities covered by such registration statement and each
other Person who participates as an underwriter in the offering or sale of
such securities and each other Person, if any, who controls such seller or
any such underwriter within the meaning of the Securities Act, and their
respective directors, officers, partners, members, agents and affiliates
against any losses, claims, damages or liabilities, joint or several, to
which such seller or underwriter or any such director, officer, partner,
member, agent, affiliate or controlling person may become subject under the
Securities Act or otherwise, including, without limitation, the reasonable
fees and expenses of legal counsel (including those incurred in connection
with any claim for indemnity hereunder), insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under
the Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein in light
of the circumstances in which they were made not misleading, and the
Company will reimburse such seller or underwriter and each such director,
officer, partner, member, agent, affiliate and controlling Person for any
legal or any other expenses reasonably incurred by them in
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connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such seller or underwriter, as
the case may be, specifically stating that it is for use in the preparation
thereof; and provided further that the Company shall not be liable to any
Person who participates as an underwriter in the offering or sale of
Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to
the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such Person's
failure to send or give a copy of the final prospectus, as the same may
have been supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to
such Person if such statement or omission were corrected in such final
prospectus. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of such seller or any such
director, officer, partner, member, agent or controlling person and shall
survive the transfer of such securities by such seller.
(b) Indemnification by the Sellers. As a condition to including any
Registrable Securities in any registration statement, the Company shall
have received an undertaking satisfactory to it from the prospective seller
of such Registrable Securities, to indemnify and hold harmless (in the same
manner and to the same extent as set forth in Section 2.7(a)) the Company
and its respective directors, officers, partners, members, agents and
affiliates and each other Person, if any, who participates as an
underwriter in the offering or sale of such securities and each other
Person who controls the Company or any such underwriter within the meaning
of the Securities Act with respect to any statement or alleged statement in
or omission or alleged omission from such registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or
alleged statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company by such
seller specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided, however, that the liability
of such indemnifying party under this Section 2.7(b) shall be limited to
the amount of the net proceeds received by such indemnifying party in the
offering giving rise to such liability. Such indemnity shall remain in full
force and effect, regardless of any investigation made by or on behalf of
the Company or any such director, officer or controlling person and shall
survive the transfer of such securities by such seller.
(c) Notices of Claims, etc. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in Section 2.7(a) or (b), such indemnified party will, if
a claim in respect thereof is to be made against an indemnifying party,
give written notice to the latter of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 2.7, except to
the extent that the indemnifying party is actually prejudiced by such
failure to give notice. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that any indemnified party may, at its own
expense, retain separate counsel to participate in such defense.
Notwithstanding the foregoing, in any action or proceeding in which both
the Company and an indemnified party is, or is reasonably likely to become,
a party, such indemnified party shall have the right to employ separate
counsel at the Company's expense and to control its own defense of such
action or proceeding if, in the reasonable opinion of counsel to such
indemnified party, (i) there are or may be legal defenses available to such
indemnified party or to other indemnified parties that are different from
or additional to those available to the Company or (ii) any conflict or
potential conflict exists between the
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Company and such indemnified party that would make such separate
representation advisable; provided, however, that in no event shall the
Company be required to pay the reasonable fees and actual expenses under
this Section 2.7 for more than one firm of attorneys in any jurisdiction in
any one legal action or group of related legal actions. No indemnifying
party shall be liable for any settlement of any action or proceeding
effected without its written consent, which consent shall not be
unreasonably withheld. No indemnifying party shall, without the consent of
the 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 to such indemnified party of a release
from all liability in respect to such claim or litigation or which requires
action other than the payment of money by the indemnifying party.
(d) Contribution. If the indemnification provided for in this Section
2.7 shall for any reason be held by a court to be unavailable to an
indemnified party under Section 2.7(a) or (b) hereof in respect of any
loss, claim, damage or liability, or any action in respect thereof, then,
in lieu of the amount paid or payable under Section 2.7(a) or (b), the
indemnified party and the indemnifying party under Section 2.7(a) or (b)
shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating the same, including those incurred in connection with any
claim for indemnity hereunder), (i) in such proportion as is appropriate to
reflect the relative fault of the Company and the prospective sellers of
Registrable Securities covered by the registration statement which resulted
in such loss, claim, damage or liability, or action or proceeding in
respect thereof, with respect to the statements or omission which resulted
in such loss, claim, damage or liability, or action or proceeding in
respect thereof, as well as any other relevant equitable considerations, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as shall be appropriate to reflect the
relative benefits received by the Company and such prospective sellers from
the offering of the securities covered by such registration statement;
provided, however, that for purposes of this clause (ii), the relative
benefits received by the prospective sellers shall be deemed not to exceed
the amount of proceeds received by such prospective sellers. 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. Such prospective
sellers' obligations to contribute as provided in this Section 2.7(d) are
several in proportion to the relative value of their respective Registrable
Securities covered by such registration statement and not joint. In
addition, no Person shall be obligated to contribute hereunder any amounts
in payment for any settlement of any action or claim effected without such
Person's consent, which consent shall not be unreasonably withheld.
(e) Other Indemnification. Indemnification and contribution similar
to that specified in the preceding subdivisions of this Section 2.7 (with
appropriate modifications) shall be given by the Company and each seller of
Registrable Securities with respect to any required registration or other
qualification of securities under any federal or state law or regulation of
any governmental authority other than the Securities Act.
(f) Indemnification Payments. The indemnification and contribution
required by this Section 2.7 shall be made by periodic payments of the
amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
3. Definitions. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the common stock, par value $.01 per share, and
each other class of capital stock of the Company into which such stock is
reclassified or reconstituted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any other similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the
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time. Reference to a particular section of the Securities Exchange Act of 1934,
as amended, shall include a reference to the comparable section, if any, of any
such similar Federal statute.
"Holder" means the initial holder of Registrable Securities and any
subsequent direct or indirect holder of Registrable Securities.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by merger
or otherwise) of any such entity.
"Registrable Securities" means (i) any shares of Common Stock issued or
issuable upon conversion or exchange of the Preferred Stock, (ii) any Related
Registrable Securities, and (iii) any shares of Common Stock owned by the
Stockholders. As to any particular Registrable Securities, once issued, such
securities shall cease to be Registrable Securities when (a) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, (b) they shall have been sold
as permitted by Rule 144 (or any successor provision) under the Securities Act
and the purchaser thereof does not receive "restricted securities" as defined in
Rule 144, (c) they shall have been otherwise transferred, new certificates for
them not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent public distribution of them shall not, in the
opinion of counsel for the Holders, require registration of them under the
Securities Act or (d) they shall have ceased to be outstanding. All references
to percentages of Registrable Securities shall be calculated pursuant to Section
9.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with Section 2, including, without limitation, all
registration and filing fees, all fees of the NYSE, the Nasdaq Stock Market,
Inc., other national securities exchanges or the National Association of
Securities Dealers, Inc., all fees and expenses of complying with U.S.
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including the
expenses of "cold comfort" letters required by or incident to such performance
and compliance, any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities (excluding any underwriting discounts or
commissions with respect to the Registrable Securities) and the reasonable fees
and expenses of one counsel to the Selling Holders (selected by Selling Holders
representing at least 50% of the Registrable Securities covered by such
registration) up to a maximum amount of $50,000. Notwithstanding the foregoing,
in the event the Company shall determine, in accordance with Section 2.2(a) or
Section 2.6, not to register any securities with respect to which it had given
written notice of its intention to so register to Holders of Registrable
Securities, all of the costs of the type (and subject to any limitation to the
extent) set forth in this definition and incurred by Requesting Holders in
connection with such registration on or prior to the date the Company notifies
the Requesting Holders of such determination shall be deemed Registration
Expenses.
"Related Registrable Securities" means, with respect to shares of Common
Stock issuable upon conversion or exchange of the Preferred Stock, any
securities of the Company issued or issuable with respect to such shares of
Common Stock by way of a dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act of 1933, as amended, shall include a
reference to the comparable section, if any, of any such similar Federal
statute.
4. Rule 144 and Rule 144A. The Company shall take all actions reasonably
necessary to enable Holders of Registrable Securities to sell such securities
without registration under the Securities Act within the limitation of the
provisions of (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, (b) Rule 144A under the Securities Act, as such Rule may be
amended from time to time, or (c) any similar rules or regulations hereafter
adopted by the Commission. Upon the request of any holder of
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Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
5. Amendments and Waivers. This Agreement may be amended with the written
consent of the Company and the Company may take any action herein prohibited, or
omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the Holders of at least 50% of the Registrable Securities
affected by such amendment, action or omission to act. Each Holder of any
Registrable Securities at the time or thereafter outstanding shall be bound by
any consent authorized by this Section 5, whether or not such Registrable
Securities shall have been marked to indicate such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to the
Company, be treated as the holder of such Registrable Securities for purposes of
any request or other action by any holder or Holders of Registrable Securities
pursuant to this Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any holder or Holders of Registrable
Securities contemplated by this Agreement. If the beneficial owner of any
Registrable Securities so elects, the Company may require assurances reasonably
satisfactory to it of such owner's beneficial ownership of such Registrable
Securities.
7. Notices. All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, courier
service or personal delivery:
(i) if to the Stockholders, addressed to each of them in the manner
set forth in the Merger Agreement, or at such other address as each
shall have furnished to the Company in writing in the manner set forth
herein;
(ii) if to any other holder of Registrable Securities, at the
address that such holder shall have furnished to the Company in writing
in the manner set forth herein, or, until any such other holder so
furnishes to the Company an address, then to and at the address of the
last holder of such Registrable Securities who has furnished an address
to the Company; or
(iii) if to the Company, addressed to it in the manner set forth in
the Merger Agreement, or at such other address as the Company shall have
furnished to each holder of Registrable Securities at the time
outstanding in the manner set forth herein.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered to a
courier, if delivered by overnight courier service; five Business Days after
being deposited in the mail, postage prepaid, if mailed; and when receipt is
acknowledged, if telecopied.
8. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and, with respect to the
Company, its respective successors and permitted assigns and, with respect to
the Stockholders, any Holder of any Registrable Securities, subject to the
provisions respecting the minimum numbers of percentages of shares of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein. Except by operation of law, this
Agreement may not be assigned by the Company without the prior written consent
of the Holders of a majority in interest of the Registrable Securities
outstanding at the time such consent is requested.
9. Calculation of Percentage Interests in Registrable Securities. For
purposes of this Agreement, all references to a percentage of the Registrable
Securities shall be calculated based upon the number of shares of Registrable
Securities consisting of Common Stock outstanding at the time such calculation
is made and, if the closing price per share of Common Stock as quoted by the
Nasdaq Stock Market, Inc. or any national securities exchange is equal to or
greater than the price at which each share of Preferred Stock may be exchanged
for or convertible into Common Stock, then the number of shares of Common Stock
that may be so received upon such exchange after the exchange or conversion.
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10. No Inconsistent Agreements. The Company will not hereafter enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders of Registrable Securities in this Agreement.
Without limiting the generality of the foregoing, the Company will not hereafter
enter into any agreement with respect to its securities that grants, or modify
any existing agreement with respect to its securities to grant, to the holder of
its securities in connection with an incidental registration of such securities
higher priority to the rights granted to the Stockholders under Section 2.2(b).
11. Remedies. Each holder of Registrable Securities, 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 of a breach by it of the provisions of this Agreement
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
12. Certain Distributions. The Company shall not at any time make a
distribution on or with respect to the Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the resulting or surviving corporation and such Registrable
Securities are not changed or exchanged) of securities of another issuer if
Holders of Registrable Securities are entitled to receive such securities in
such distribution as Holders of Registrable Securities and any of the securities
so distributed are registered under the Securities Act, unless the securities to
be distributed to the Holders of Registrable Securities are also registered
under the Securities Act.
13. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the
Stockholders shall be enforceable to the fullest extent permitted by law.
14. Entire Agreement. This Agreement, together with the Merger Agreement
(including the exhibits and schedules thereto) and the Certificate of
Designation, is intended by the parties as a final expression of their agreement
and 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 and therein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the Merger Agreement (including the exhibits and schedules thereto)
and the Certificate of Designation supersede all prior agreements and
understandings between the parties with respect to such subject matter.
15. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
17. Counterparts. This Agreement may be executed in multiple counterparts,
each of which when so executed shall be deemed an original and all of which
taken together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective representatives hereunto duly
authorized as of the date first above written.
WORLD ACCESS, INC.
By:
------------------------------------
Name:
Title:
ARMSTRONG INTERNATIONAL
TELECOMMUNICATIONS, INC.
By:
------------------------------------
Name:
Title:
EPIC INTERESTS, INC.
By:
------------------------------------
Name:
Title:
BFV ASSOCIATES, INC.
By:
------------------------------------
Name:
Title:
ANAND KUMAR
By:
------------------------------------
Anand Kumar
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APPENDIX B
OPINION OF
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
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August 17, 1999
Board of Directors
World Access, Inc.
945 East Paces Ferry Road
Suite 2200
Atlanta, GA 30326
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to World Access, Inc. (the "Company") of the consideration to be paid by
the Company pursuant to the terms of the Agreement and Plan of Merger, dated as
of August 17, 1999 (the "Agreement"), by and among the Company, FaciliCom
International, Inc. ("FaciliCom") and Armstrong International
Telecommunications, Inc., Epic Interests, Inc. and BFV Associates, Inc. (the
"Shareholders"), pursuant to which FaciliCom will be merged (the "Merger") with
and into the Company.
Pursuant to the Agreement, all issued and outstanding shares of FaciliCom
voting and non-voting common stock will be converted into the right to receive
in the aggregate (i) 380,000 shares of the Company's Convertible Preferred
Stock, Series C ("Company Preferred Stock") less that number of shares of
Company Preferred Stock (on an as converted basis using the Conversion Price (as
defined)) as is equal to the number of shares of Company Common Stock to be the
subject of any stock options granted by the Company in consideration for the
cancellation of FaciliCom stock options and (ii) if the Company has been able to
issue and sell shares of the Company's common stock, par value $0.01 per share
("Company Common Stock"), as provided below, on or prior to the Closing Date, an
amount in cash equal to the net proceeds from any such sales up to $56 million
less the amount of cash to be paid to FaciliCom optionholders in consideration
for the cancellation of their options. The Company agrees to use its reasonable
best efforts to issue and sell such number of shares of Company Common Stock
that will result in net proceeds to the Company of $56 million with such
proceeds to be used to satisfy the above cash payment obligations. If the
Company is unable to obtain net proceeds of $56 million (the "Cash Shortfall")
on or prior to the Closing, then each of the Shareholders and Anand Kumar shall
be entitled to receive (i)(A) at the Closing, that number of shares of Company
Common Stock as is equal to the amount of the Cash Shortfall that is
attributable to each of them as determined by FaciliCom divided by the Market
Price (as defined) on the trading day immediately preceding the Closing Date and
(B) the Company shall be obligated to issue to each of the Shareholders and
Anand Kumar, provided that such persons shall have contracted to sell all shares
of Company Common Stock issued pursuant to clause (A) above, such number of
shares of Company Common Stock for resale by such persons as will result,
together with the net proceeds from the resale by such persons of any Company
Common Stock issued pursuant to clause (A) above or this clause (B), in net cash
proceeds to such persons equal to the Cash Shortfall attributable to such
persons and (ii) the Company shall be obligated to issue to the FaciliCom
optionholders entitled to receive cash in consideration for the cancellation of
their options, such number of shares of Company Common Stock for resale by such
optionholders as will result in net cash proceeds to each of such persons in an
amount equal to the Cash Shortfall that is attributable to each such
optionholder as determined by FaciliCom.
The Company Preferred Stock shall have a liquidation preference of $1,000
per share (up to $380 million in aggregate) and no fixed dividend rate. Each
share of the Company Preferred Stock shall be convertible at the option of the
holder at a conversion price of $20.38 (subject to antidilution adjustments)
(the "Conversion Price"). In addition, if for sixty (60) consecutive trading
days, the Market Price (as defined) of Company Common Stock for each day of such
period exceeds the Conversion Price, then each share of the Company Preferred
Stock shall automatically be converted into Company Common Stock at the
Conversion Price. Three years from the issue date (the "Three Year Conversion
Date"), any outstanding shares of Company Preferred Stock shall automatically be
converted into Company Common Stock at the Current Market Price (as defined) in
effect on the Three Year Conversion Date (the "Three Year Conversion Price"),
provided that (i) the Three Year Conversion Price shall in no event be less than
$11.50 (subject to antidilution
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adjustments) and (ii) in the event that (A) the Three Year Conversion Price is
less than the Market Price (subject to antidilution adjustments) on the issue
date of the Company Preferred Stock and (B) the Nasdaq Composite Index ("IXIC")
as of the close of business on the Three Year Conversion Date is eighty-five
percent (85%) or less than the IXIC as of the close of the business on the issue
date of the Company Preferred Stock (the difference between one hundred percent
(100%) and such percentage is referred to as the "Market Correction
Percentage"), then the Three Year Conversion Price shall be increased by a
percentage equal to that portion of the Market Correction Percentage in excess
of fifteen percent (15%). Not withstanding the foregoing, in no event shall the
Three Year Conversion Price be greater than the Conversion Price on the Three
Year Conversion Date. "Market Price" on any date shall mean the closing price of
the Company Common Stock on such date or if there is no such price, shall have
the meaning as otherwise set forth in the Certificate of Designation of the
Company Preferred Stock. "Current Market Price" on any date shall mean the
average daily Market Price of the Company Common Stock for those days during the
period of twenty (20) trading days ending on such date or shall have the meaning
as otherwise set forth in the Certificate of Designation of the Company
Preferred Stock. The Company Preferred Stock shall be entitled, voting as a
separate series, to elect 4 directors (and shall not be entitled to vote with
respect to any other directors) so long as at least 15% of the originally issued
Company Preferred Stock is issued and outstanding, subject to certain
exceptions.
In addition, the Company has advised us that under the terms of the Share
Exchange Agreement and Plan of Merger and Reorganization, dated May 12, 1998, by
and among the Company, WA Telecom Products Co., Inc. f/k/a/ World Access, Inc.
("Old World Access"), Cherry Communications U.K. Limited ("Cherry U.K.") and the
shareholder of Cherry U.K. (the "Cherry Shareholder"), pursuant to which the
Company acquired Cherry U.K., and under the terms of the Agreement and Plan of
Merger and Reorganization, dated May 12, 1998, by and among the Company, Old
World Access, WA Merger Corp. and Cherry Communications Incorporated d/b/a
Resurgens Communications Group ("Resurgens") pursuant to which the Company
acquired Resurgens, the Company will as a result of the Merger be required to
release to the shareholders of Resurgens an additional 7.5 million shares of
Company Common Stock.
In arriving at our opinion, we have reviewed the draft dated August 17,
1999 of the Agreement and the draft dated August 17, 1999 of the Certificate of
Designation of Convertible Preferred Stock, Series C. We also have reviewed
financial and other information that was publicly available or furnished to us
by the Company and FaciliCom including information provided during discussions
with their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of FaciliCom for the period beginning January 1, 1999 and ending December 31,
2003 prepared by the management of FaciliCom and certain financial projections
of the Company for the period beginning January 1, 1999 and ending December 31,
2003 prepared by the management of the Company. In addition, we have compared
certain financial and securities data of the Company and FaciliCom with various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of the common stock of the Company,
reviewed prices and premiums paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and FaciliCom or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Merger and upon our
discussion of such synergies with the management of FaciliCom. With respect to
the financial projections supplied to us, we have relied on representations that
they have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company and FaciliCom
as to the future operating and financial performance of the Company and
FaciliCom, respectively. We have not assumed any responsibility for making any
independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by us.
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Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the Company's securities will actually trade at any time. Our
opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the consideration to be paid by the Company pursuant to the
Agreement is fair to the Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ MICHAEL CONNOLLY
------------------------------------
Michael Connolly
Vice President
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APPENDIX C
VOTING AGREEMENT
This AGREEMENT dated as of August 17, 1999, among FaciliCom International,
Inc., a Delaware corporation ("FCI"), and Armstrong International
Telecommunications, Inc., a Delaware corporation ("AIT"), BFV Associates, Inc.,
a Delaware corporation ("BFV"), and Epic Interests, Inc., a Pennsylvania
corporation ("Epic") (each, an "FCI Shareholder" and, collectively, the "FCI
Shareholders"), and the parties listed on Schedule A hereto (each, a "WAXS
Shareholder" and, collectively, the "WAXS Shareholders").
WHEREAS, World Access, Inc., a Delaware corporation ("WAXS"), FCI and the
FCI Shareholders propose to enter into an Agreement and Plan of Merger dated as
of the date hereof (as the same may be amended or supplemented, the "Merger
Agreement"; capitalized terms used but not defined herein shall have the
meanings set forth in the Merger Agreement) providing for a merger (the
"Merger") of FCI with and into WAXS, upon the terms and subject to the
conditions set forth in the Merger Agreement;
WHEREAS, each WAXS Shareholder owns, of record or beneficially, at least
the number of shares of WAXS Common Stock or Series A Preferred Stock (the "WAXS
Capital Stock") set forth opposite such WAXS Shareholder's name on Schedule A
hereto (such shares of WAXS Capital Stock, together with any other shares of
WAXS Capital Stock or Series B Preferred Stock of which such WAXS Shareholder
acquires beneficial ownership after the date hereof and during the term of this
Agreement whether upon the exercise of options, warrants or rights, the
conversion or exchange of convertible or exchangeable securities, or by means of
purchase, dividend, distribution or otherwise, being collectively referred to
herein as the "Subject Shares"); and
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, FCI and the FCI Shareholders have requested that the WAXS
Shareholders enter into this Agreement.
NOW, THEREFORE, to induce FCI and the FCI Shareholders to enter into, and
in consideration of entering into, the Merger Agreement, and in consideration of
the premises and the representations, warranties and agreements contained
herein, the parties agree as follows:
1. Representations and Warranties of the WAXS Shareholders.
(a) Representations and Warranties of the WAXS Shareholders. Each
WAXS Shareholder hereby represents and warrants to FCI and the FCI
Shareholders as to itself as follows:
(i) Authority; No Conflicts. Such WAXS Shareholder has the
legal capacity (in the case of John D. Phillips) and all requisite
corporate power and authority to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized,
executed and delivered by such WAXS Shareholder and constitutes a
valid and binding obligation of such WAXS Shareholder enforceable in
accordance with its terms except to the extent that enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws affecting the enforcement of creditors'
rights generally and by general principals of equity, including,
without limitation, concepts of materiality, reasonableness, good
faith and fair dealing and the possible unavailability of specific
performance, injunctive relief or other equitable remedies,
regardless of whether enforceability is considered in a proceeding in
equity or at law. No filing with, and no permit, authorization,
consent or approval of, any Governmental Entity or any other Person
is necessary for the execution of this Agreement by such WAXS
Shareholder and the consummation by such WAXS Shareholder of the
transactions contemplated hereby except, in each case, where the
failure to make such filings or obtain such permits, authorizations,
consents or approvals would not prevent or delay the performance by
such WAXS Shareholder of its obligations under this Agreement. None
of the execution and delivery of this Agreement by such WAXS
Shareholder, the consummation of the transactions contemplated hereby
nor
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compliance with the terms hereof by such WAXS Shareholder will
conflict with, or result in any violation of, or default (with or
without notice or lapse of time or both) under any provision of, the
certificate of incorporation, by-laws or analogous documents of such
WAXS Shareholder (other than John D. Phillips) or any other agreement
to which such WAXS Shareholder is a party, including any voting
agreement, stockholders agreement, voting trust, trust agreement,
pledge agreement, loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license or violate any judgment, order, notice, decree,
statute, law, ordinance, rule or regulation applicable to such WAXS
Shareholder or to its property or assets except, in each case, for
any such conflicts, violations, defaults or other occurrences that
would not prevent or delay the performance by such WAXS Shareholder
of its obligations under this Agreement.
(ii) The Subject Shares. Such WAXS Shareholder is the record
and beneficial owner of (or, in the case of John D. Phillips, has
sole direct or indirect voting and dispositive power over), at least
the number of Subject Shares set forth opposite such WAXS
Shareholder's name on Schedule A hereto, free and clear of any
encumbrances, agreements, adverse claims, liens or other
arrangements, in each case, with respect to the right to vote or
dispose of the Subject Shares, except as set forth on Schedule A.
Except as set forth on Schedule A and subject to applicable
securities laws, such WAXS Shareholder has the sole right and power
to vote and dispose of the Subject Shares. None of such Subject
Shares is subject to any voting trust or other agreement, arrangement
or restriction (excluding applicable securities laws) with respect to
the voting or transfer of any of the Subject Shares, except as
contemplated by this Agreement or as set forth on Schedule A.
2. Representations and Warranties of FCI and the FCI
Shareholders. Each of FCI and the FCI Shareholders hereby represents and
warrants to the WAXS Shareholders that it has all requisite power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by FCI and the FCI Shareholders and constitutes a valid and
binding obligation of FCI and the FCI Shareholders enforceable in
accordance with its terms. Except as otherwise provided for or disclosed in
the Merger Agreement, (i) no filing with, and no permit, authorization,
consent or approval of, any Governmental Entity or any other person is
necessary for the execution of this Agreement by FCI and the FCI
Shareholders and the consummation by them of the transactions contemplated
hereby and (ii) none of the execution and delivery of this Agreement by FCI
or the FCI Shareholders, the consummation of the transactions contemplated
hereby nor the compliance with the terms hereof by FCI or the FCI
Shareholders will conflict with, or result in any violation of, or default
(with or without notice or lapse of time or both) under any provision of,
the certificate of incorporation, by-laws, certificate of formation or
analogous documents of FCI or any FCI Shareholder or any other agreement to
which they are a party, including any voting agreement, stockholders
agreement, voting trust, trust agreement, pledge agreement, loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license, or violate any
judgment, order, notice, decree, statute, law, ordinance, rule or
regulation applicable to FCI or any FCI Shareholder or to FCI's or any FCI
Shareholders' property or assets.
3. Covenants of the WAXS Shareholders. Until the termination of this
Agreement in accordance with Section 5 hereof, each WAXS Shareholder agrees
as follows:
(a) Voting of Subject Shares. At any meeting of stockholders of
WAXS or at any adjournment thereof or in any other circumstances upon
which any WAXS Shareholder's vote, consent or other approval (including
by written consent) is sought (including, if required, any action taken
by the holders of the Series A Preferred Stock acting as a separate
class), each such WAXS Shareholder shall vote all of the Subject Shares
then beneficially owned by such WAXS Shareholder (i) in favor of the
Merger and the adoption and the approval of the Merger Agreement and
each of the other transactions contemplated by the Merger Agreement,
(ii) against any action or agreement that would result in a breach in
any material respect of any covenant, representation or warranty or any
other obligation or agreement of WAXS under the Merger Agreement and
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(iii) against any action or agreement that would materially impede,
interfere with, delay or postpone or that would reasonably be expected
to discourage the Merger, including, but not limited to: (A) any
extraordinary corporate transactions (other than the Merger), such as a
merger, consolidation or other business combination involving WAXS or
its Subsidiaries, a sale or transfer of a material amount of assets of
WAXS or its Subsidiaries or a reorganization, recapitalization or
liquidation of WAXS or its Subsidiaries or; (B) any amendment of WAXS'
certificate of incorporation or by-laws or other proposal or transaction
involving WAXS or any of its Subsidiaries, which amendment or other
proposal or transaction would in any manner materially impede, prevent
or nullify the Merger, the Merger Agreement or any of the other
transactions contemplated by the Merger Agreement or change in any
manner the voting rights of any class of WAXS Capital Stock; provided,
however, that the restrictions in clause (iii) of this Section 3(a)
shall not prevent such WAXS Shareholder from supporting any action, or
motion with respect thereto, that is permitted by the Merger Agreement.
Each WAXS Shareholder shall not hereafter, unless and until this
Agreement terminates pursuant to Section 5 hereof, purport to grant
(other than through the irrevocable proxy granted in Section 3(b)(1) any
proxy or power of attorney with respect to any of the Subject Shares,
deposit any of the Subject Shares into a voting trust or enter into any
agreement (other than this Agreement), arrangement or understanding with
any person, directly or indirectly, to vote, grant any proxy or give
instructions with respect to the voting of any of the Subject Shares, in
each case only to the extent it relates to the matters referred to in
the preceding sentence.
(b) Proxies. Each WAXS Shareholder hereby grants to FCI and any
individual designated in writing by it, as such WAXS Shareholder's proxy
and attorney-in fact (with full power of substitution), for and in the
name, place and stead of such WAXS Shareholder, a proxy to vote, or to
grant a consent or approval in respect of, all of the Subject Shares
then beneficially owned by such WAXS Shareholder in favor of the Merger
and the adoption and approval of the Merger Agreement as indicated in
Section 3(a) above. Each WAXS Shareholder agrees that this proxy shall
be irrevocable and coupled with an interest and may under no
circumstances be revoked, agrees to take such further action or execute
such other instruments as may be necessary to effectuate the intent of
this proxy and hereby revokes any proxy previously granted by such WAXS
Shareholder with respect to any of the Subject Shares. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the DGCL.(1)
(c) Transfer Restrictions. Each WAXS Shareholder agrees from the
date hereof until termination of this Agreement not to (i) sell,
transfer, pledge, encumber, assign or otherwise dispose of (including by
gift) (collectively, "Transfer"), or enter into any contract, option or
other arrangement or understanding (including any profit sharing
arrangement) with respect to the Transfer of, any of the Subject Shares
to any person, (ii) enter into any voting arrangement or understanding,
whether by proxy, voting agreement or otherwise, with respect to any of
the Subject Shares only to the extent it relates to the matters referred
to in Section 3(a) above or (iii) take any action that would make any of
its representations or warranties contained herein untrue or incorrect
in any material respect or have the effect of preventing or materially
impeding such WAXS Shareholder from performing any of its obligations
under this Agreement (other than any exercised options or conversion of
Series A Preferred Stock into WAXS Common Stock).
4. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by any of the parties
hereto without the prior written consent of the other parties hereto.
Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
5. Termination. This Agreement shall terminate, and no party hereto
shall have any rights or obligations hereunder, upon the first to occur of
(a) the Effective Time of the Merger, (b) the termination of the Merger
Agreement in accordance with its terms, and (c) February 28, 2000.
- ---------------
1 The 1818 Fund III, L.P. did not agree to this provision.
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6. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) 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 by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by
like notice):
if to FCI or the FCI Shareholders:
FaciliCom International, Inc.
1401 New York Avenue, N.W., 9th Floor
Washington, D.C. 20005
Attention: Walter J. Burmeister
Facsimile: (202) 496-1109
and
Armstrong International Telecommunications, Inc.
One Armstrong Place
Butler, PA 16001
Attention: Kirby J. Campbell
Facsimile: (724) 283-2602
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Alan M. Klein, Esq.
Facsimile: (212) 455-2502
if to the WAXS Shareholders, to:
John D. Phillips
World Access, Inc.
Resurgens Plaza, Suite 2210
945 East Paces Ferry Road
Atlanta, Georgia 30326
Attention: W. Tod Chmar
Facsimile: (404) 233-2280
with a copy to
Long Aldridge & Norman LLP
303 Peachtree Street, Suite 5300
Atlanta, Georgia 30308
Attention: H. Franklin Layson
Facsimile: (404) 527-4198
and
MCI WORLDCOM, INC.
500 Clinton Center Dr.
Clinton, MS 39056
Attention: David Myers
Facsimile: (601) 460-8190
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<PAGE> 201
and
The 1818 Fund III, L.P.
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, New York 10005
Attention: Lawrence C. Tucker
Facsimile: (212) 493-8429
with a copy to
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Marilyn Sobel, Esq.
Facsimile: (212) 757-3990
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. 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. Wherever the words "include",
"includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
(d) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more of the
counterparts have been signed by each of the parties and delivered to
the other party, it being understood that each party need not sign the
same counterpart.
(e) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable
principles of conflicts of law.
(f) Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or 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 any
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 an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent
possible.
7. Enforcement. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that, in addition to any other remedy to
which it may be entitled, at law or in equity, the parties shall be
entitled to the remedy of specific performance of the covenants and
agreements contained herein and injunctive and other equitable relief.
8. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto. Except as provided in the
preceding sentence, nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies or any nature whatsoever under or by reason of this Agreement.
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IN WITNESS WHEREOF, each of the WAXS Shareholders, FCI, and the FCI
Shareholders have caused this Agreement to be signed by its signatory thereunto
duly authorized, as of the date first written above.
WORLDCOM NETWORK SERVICES, INC.
By: /s/ DAVID E. MYERS
------------------------------------
Name: David E. Myers
Title: Vice President and Controller
THE 1818 FUND III, L.P.
By: Brown Brothers Harriman & Co.,
its General Partner
By: /s/ LAWRENCE C. TUCKER
------------------------------------
Name: Lawrence C. Tucker
Title: Partner
JOHN D. PHILLIPS
By: /s/ JOHN D. PHILLIPS
------------------------------------
Name: John D. Phillips
FACILICOM INTERNATIONAL, INC.
By: /s/ WALTER J. BURMEISTER
------------------------------------
Name: Walter J. Burmeister
Title: President
ARMSTRONG INTERNATIONAL
TELECOMMUNICATIONS, INC.
By: /s/ KIRBY J. CAMPBELL
------------------------------------
Name: Kirby J. Campbell
Title: Chief Executive Officer
BFV ASSOCIATES, INC.
By: /s/ WALTER J. BURMEISTER
------------------------------------
Name: Walter J. Burmeister
Title: President
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EPIC INTERESTS, INC.
By: /s/ ROBERT L. REED
----------------------------------
Name: Robert L. Reed
Title: President
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<PAGE> 204
SCHEDULE A
<TABLE>
<S> <C>
WAXS SHAREHOLDER
WorldCom Network Services, Inc............... 1,310,430
Shares of WAXS Common Stock
The 1818 Fund III, L.P....................... 50,000
Shares of Series A Preferred Stock
which are convertible into 4,347,826
Shares of WAXS Common Stock(3)(4)
John D. Phillips............................. 1,875,000
Shares of WAXS Common Stock(1)(2)
</TABLE>
- ---------------
(1) Of the shares indicated, 937,500 shares are owned of record by Renaissance
Partners II, a Georgia general partnership, and 937,500 shares are owned of
record by Resurgens Partners, LLC, a Georgia limited liability company.
Renaissance Partners II is the manager of Resurgens Partners, LLC and, as
such, has sole voting and, except as noted below, dispositive power over the
shares of WAXS Common Stock owned of record by Resurgens Partners, LLC. John
D. Phillips beneficially owns a majority of the general partnership
interests of Renaissance Partners II and, as such, has sole voting and,
except as noted below, dispositive power over the shares of WAXS Common
Stock owned of record by Resurgens Partners, LLC. Of the aggregate 1,875,000
shares of WAXS Common Stock owned of record by Renaissance Partners II and
Resurgens Partners, LLC, an aggregate of 1,250,000 shares (625,000 owned of
record by each of Renaissance Partners II and Resurgens Partners, LLC) are
held in escrow pursuant to the Share Exchange Agreement and Plan of
Reorganization, dated May 12, 1998, between WAXS, WAXS Inc., Cherry
Communications, U.K. Limited and Renaissance Partners II (the "Share
Exchange Agreement") and the Agreement and Plan of Reorganization, dated May
12, 1998, between WAXS, WAXS Inc., WA Merger Corp. and Cherry Communications
Incorporated (the "Agreement"). The shares held in escrow pursuant to the
Share Exchange Agreement and the Agreement are subject to transfer
restrictions.
(2) John D. Phillips has options to acquire 167,340 shares of WAXS Common Stock.
(3) The 1818 Fund III, L.P. reports shared voting and dispositive power over
such securities with Brown Brothers Harriman & Co., Lawrence C. Tucker and
T. Michael Long.
(4) The 1818 Fund III, L.P. also holds an option to purchase up to an additional
20,000 shares of Series A Preferred Stock which are convertible into
1,739,130 shares of WAXS Common Stock.
<PAGE> 205
WORLD ACCESS, INC.
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 7, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF WORLD ACCESS, INC.
The Board of Directors of World Access, Inc. recommends that you vote FOR
the Merger Proposal
[x] Please mark votes as in this example.
The Merger Proposal: Approval of the adoption of the Agreement and Plan of
Merger, dated as of August 17, 1999, among World Access, Inc., FaciliCom
International, Inc., Armstrong International Telecommunications, Inc., Epic
Interests, Inc. and BFV Associates, Inc., pursuant to which FaciliCom
International, Inc. will be merged with and into World Access, Inc., and the
transactions contemplated thereby.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
The undersigned appoints W. Tod Chmar and Mark A. Gergel, and each of them,
with full power of substitution, the proxies and attorneys of the undersigned,
to vote as specified hereon at the Special Meeting of Stockholders (the
"Meeting") of World Access, Inc. to be held on December 7, 1999 at 11:00 a.m.
local time, and at any adjournments or postponements thereof, with all powers
(other than the power to revoke the proxy or vote the proxy in a manner not
authorized by the executed form of proxy) that the undersigned would have if
personally present at the Meeting, to act in their discretion upon any other
matter or matters that may properly be brought before the Meeting and to appear
and vote all the shares of Common Stock, 4.25% Cumulative Senior Perpetual
Convertible Preferred Stock, Series A, or 4.25% Cumulative Junior Convertible
Preferred Stock, Series B, of World Access, Inc. that the undersigned may be
entitled to vote. The undersigned hereby acknowledges receipt of the
accompanying Proxy Statement and hereby revokes any proxy or proxies heretofore
given by the undersigned relating to the Meeting.
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED AS IF MARKED "FOR" THE
FOREGOING PROPOSAL.
------------------------------
Signature
------------------------------
Signature (if jointly held)
Dated:
------------------------------
PLEASE DATE AND SIGN AS NAME
APPEARS HEREON. WHEN SIGNING
AS EXECUTOR, ADMINISTRATOR,
TRUSTEE, GUARDIAN OR ATTORNEY,
PLEASE GIVE FULL TITLE AS
SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED
CORPORATE OFFICER. IF A
PARTNER-SHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED
PERSON. JOINT OWNERS SHOULD
EACH SIGN.
