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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-29782
WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 58-2398004
(State of Incorporation) (I.R.S. Employer Identification No.)
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945 EAST PACES FERRY ROAD
SUITE 2200
ATLANTA, GA 30326
(Address of Principal Executive (Zip Code)
Offices)
(404) 231-2025
(Registrant's Telephone Number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
As of April 8, 1999 there were 44,854,797 shares of Common Stock
outstanding. The aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant as of April 8, 1999, as based on the average
closing bid and ask prices, was approximately $332.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on June 15, 1999 are incorporated into Part III.
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WORLD ACCESS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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NUMBER
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 20
Item 3 Legal Proceedings........................................... 20
Item 4 Submission of Matters to a Vote of Security Holders......... 21
Item 4.5 Executive Officers of the Registrant........................ 22
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6 Selected Financial Data..................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A Quantitative and Qualitative Disclosures about Market
Risks....................................................... 49
Item 8 Financial Statements and Supplementary Information.......... 50
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 88
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 88
Item 11 Executive Compensation...................................... 88
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 88
Item 13 Certain Relationships and Related Transactions.............. 88
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 88
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FORWARD LOOKING STATEMENTS
This Form 10-K Report contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward looking statements may be
identified by use of such terms as "believes", "anticipates", "intends", or
"expects". These forward-looking statements relate to the plans, objectives and
expectations of World Access, Inc. (the "Company") for future operations. In
light of the risks and uncertainties inherent in all such projected operational
matters, the inclusion of forward-looking statements in this Report should not
be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved or that any of the Company's
operating expectations will be realized.
Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to, the
Company's dependence on (i) recently introduced products and products under
development; (ii) successful integration of new acquisitions; (iii) the impact
of technological change on the Company's products; (iv) changes in customer
rates per minute; (v) termination of certain service agreements or inability to
enter into additional service agreements; (vi) changes in or developments under
domestic or foreign laws, regulations, licensing requirements or
telecommunications standards; (vii) changes in the availability of transmission
facilities; (viii) loss of the services of key officers; (ix) loss of a customer
which provides significant revenues to the Company; (x) highly competitive
market conditions in the industry; and (xi) concentration of credit risk. The
foregoing review of the important factors should not be considered as
exhaustive. The Company undertakes no obligation to release publicly the results
of any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
The Company provides international long distance voice and data services
and proprietary network equipment to the global telecommunications markets. The
Company's Telecommunications Group provides wholesale international long
distance service through a combination of its own international network
facilities, various international termination relationships and resale
arrangements with other international long distance service providers. The
Company's Equipment Group develops, manufactures and markets digital switches,
billing and network telemanagement systems, cellular base stations, fixed
wireless local loop systems, intelligent multiplexers, digital microwave radio
systems and other telecommunications network products. To support and complement
its product sales, the Company also provides its customers with a broad range of
network design, engineering, testing, installation and other value-added
services.
REORGANIZATION
On October 28, 1998, World Access, Inc. reorganized its operations into a
holding company structure and changed its name to WA Telcom Products Co., Inc.
("WA Telcom"). As a result of the reorganization, WA Telcom became a
wholly-owned subsidiary of WAXS INC., which changed its name to World Access,
Inc. and is the Company filing this Report. Pursuant to the reorganization, the
Company exchanged each outstanding share of common stock of WA Telcom for one
share of common stock of the Company, converted each option and warrant to
purchase shares of common stock of WA Telcom into options and warrants to
purchase a like number of shares of common stock of the Company, and fully and
unconditionally guaranteed the payment of the $115.0 million aggregate principal
amount 4.5% convertible subordinated notes dated October 1, 1997 (due 2002)
previously issued by WA Telcom.
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TELECOMMUNICATIONS GROUP INDUSTRY BACKGROUND
The international long distance telecommunications services industry
consists of all transmissions of voice and data that originate in one country
and terminate in another. This industry is undergoing a period of fundamental
change which has resulted in substantial growth in international
telecommunications traffic. According to industry sources, worldwide gross
revenues for providers of international telephone service were in excess of
$65.0 billion in 1997. The volume of international traffic on the public
telephone network is expected to grow at a compound annual growth rate of
approximately 8.7% from 1998 through the year 2000.
The strong growth experienced in the international telecommunications
market is expected to continue into the foreseeable future, driven principally
by the following factors:
- Dramatic increases in the availability of telephones and the number
of access lines in service around the world, stimulated by economic growth
and technological advancements;
- Opening of overseas telecommunications markets due to deregulation
and the privatization of government-owned monopoly carriers, permitting the
emergence of new carriers;
- Rapid globalization of commerce, trade and travel, which is creating
increased communications needs;
- Reduction of international long distance rates, driven by
competition and technological advancements, which is making international
calling available to a much larger customer base and stimulating increasing
traffic volumes;
- Increased availability and quality of digital undersea fiber optic
cable, which have enabled long distance carriers to improve the quality of
their service while reducing customer access cost;
- Worldwide proliferation of new communications services such as
cellular telephones, facsimile machines, the Internet and other forms of
data communications services; and
- Rapidly increasing demand for bandwidth-intensive data transmission
services, including the Internet.
Bilateral operating agreements between international long distance carriers
in different countries are key components of the international long distance
telecommunications market. Under an operating agreement, each carrier agrees to
terminate traffic in its country and provide proportional return traffic to its
partner carrier. The implementation of a high quality international network,
including the acquisition and utilization of digital undersea fiber optic cable
and adherence to the technical recommendations of the International Telegraph
and Telephone Consultative Committee of the International Telephone Union for
signaling, protocol and transmission, is an important element in enabling a
carrier to compete effectively in the international long distance
telecommunications market.
In February 1997, over 60 countries signed a global agreement on
telecommunications under the auspices of the World Trade Organization (the
"WTO"), which became effective February 5, 1998. The agreement seeks to open
markets to competition in telecommunications services, improve foreign
investment opportunities in the telecommunications industry and to adopt
pro-competitive regulatory principles. The Federal Communications Commission
("FCC") has adopted various rules designed to implement the principles of the
WTO agreement.
EQUIPMENT GROUP INDUSTRY BACKGROUND
The global telecommunications industry has undergone significant
transformation and growth in recent years due to continued domestic
deregulation, technological innovation and growth in international markets. In
addition, business and residential demand for voice, data and video services has
increased the need for additional systems capacity and network bandwidth to
accommodate the provision of such services by telecommunications providers. The
Company believes that these market forces will intensify in the foreseeable
future and that an increased number of telecommunications service providers, the
availability of new services and strong international demand for the deployment
of basic telephone service will provide the Company with
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extensive opportunities to sell its wireline and wireless switching, transport
and access products in the United States and in international markets.
Domestic Deregulation. The number of telecommunications service providers
continues to increase as a result of the federal and state deregulation of the
United States telecommunications industry. Changes in federal and state
regulations have created the opportunity for a number of new network operators
to enter the market and have fostered competition between both new and
established network operators. The Telecommunications Act of 1996
("Telecommunication Act") permits local and long distance telecommunications
companies, cable television companies and electric utility companies, subject to
certain conditions designed to facilitate local exchange competition, to compete
with each other to provide local and long distance telephony, data and video
services. The Telecommunications Act has also contributed to an increasing
number of mergers and acquisitions among large telecommunications service
providers. As a result, certain providers have changed key network technology
already in place to optimize efficiency and network compatibility.
To accommodate the demand for enhanced wireless services, the FCC auctioned
additional spectrum licenses for wireless communications in recent years,
potentially increasing the number of operators competing in each metropolitan
statistical area from two to eight. In addition, the FCC has announced plans to
auction additional spectrum in the future. Changes in FCC and certain state
public utility commission regulations governing interconnections have created
opportunities for the Regional Bell Operating Companies ("RBOCS") and other
local exchange carriers to provide services in markets and geographic regions in
which they traditionally have been prohibited. In addition, such changes have
allowed local exchange carriers, inter-exchange carriers, competitive access
providers, cable television companies and other telecommunications service
providers to enter these same markets and regions. The Company believes that the
Telecommunications Act, together with FCC and other government initiatives, will
increase the demand for telecommunications systems and services as network
operators respond to the changing competitive environment by constructing new or
enhancing existing networks and increasing the available bandwidth to meet
customer demand for voice, data and video services.
Technological Innovation. In recent years, there have been a number of
significant developments relating to telecommunications technology, including
the continuing miniaturization of large scale integrated circuits, the
development of lower cost, higher capacity memory devices and microprocessors
and new network protocols such as spread spectrum Code Division Multiple Access
("CDMA"), which are now available to offer improved performance and increased
security. These developments have lowered the cost of delivering multifunctional
services combining voice, data and video. In addition, new low cost, modular,
software-driven products (so-called "intelligent" products) can be readily
upgraded to provide additional revenue generating features such as call waiting,
call forwarding and caller-ID without having to undertake costly hardware
replacement. Moreover, the increasing use of wireless systems and technology
permits the more rapid deployment of telecommunications systems at lower costs
than traditional wireline networks.
These technological advances make it possible for products to facilitate
the delivery of telecommunications services and create new network configuration
options. For example, Integrated Services Digital Network ("ISDN") service
allows for the dynamic allocation of bandwidth between, and simultaneous
transmission of, any combination of voice, data and video, and individual call
set-up permits users to easily designate and change the service configuration.
Other new advanced technologies include Asymmetrical Digital Subscriber Line
("ADSL"), a communications technology which permits the transmission of
information at rates up to 50 megabits per second over existing copper wires,
and High-Speed Digital Subscriber Line ("HDSL"), a communications technology
which permits the digital transmission of information over longer distances
without adding signal regenerator equipment. These new technologies create
additional demands for switching systems, intelligent multiplexers and digital
loop carriers. In addition, cable television companies are beginning to expand
beyond one-way broadcast to provide interactive services using high-speed cable
modems and have announced plans to provide telephony and high speed data
services.
Growth in International Markets. The Company believes that international
markets represent significant opportunities for growth, particularly in Latin
America and other developing areas. Advances in radio and antenna technology in
recent years have made it possible for carriers to provide basic communications
access
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with wireline quality without the construction cost and obstacles associated
with establishing a wireline grid, thereby further encouraging the deployment of
telecommunications networks in developing countries. The governments of a number
of developed and developing countries have privatized, or are in the process of
privatizing, their state-owned telecommunications service providers and have
granted, or are in the process of granting, licenses to new network operators to
compete with them. In many instances, as part of the privatization, these
governments have imposed service requirements on all network operators,
resulting in an acceleration of capital expenditures on new or expanded network
systems.
TELECOMMUNICATIONS GROUP SERVICES
The Company's Telecommunications Group was established in December 1998 in
connection with the acquisition of Cherry Communications Incorporated, d/b/a
Resurgens Communications Group ("RCG"), and Cherry Communications U.K. Limited
("Cherry U.K.", and together with RCG, "Resurgens"). RCG 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, Inc.
("WorldCom"), its largest creditor. John D. Phillips, who was appointed the
Company's President and Chief Executive Officer in December 1998, was appointed
President and Chief Executive Officer of Resurgens in October 1997 and oversaw a
restructuring program that consisted of the recruitment of an experienced
management team, a complete redesign of Resurgens' operating network, the
installation of a new and accurate billing system, the establishment of a
network management center and the negotiation of new direct connectivity
agreements. Resurgens' monthly revenues 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 is a facilities-based international long
distance carrier, offering wholesale switched voice and data services, primarily
to U.S.-based long distance carriers. International long distance service is
terminated in foreign countries through a combination of owned and leased
domestic and international network facilities (including international switching
facilities and digital undersea fiber optic cable), various foreign termination
relationships, and resale arrangements with other international long distance
providers.
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 multiple switch configuration
provides redundant capability to minimize the effect of network component
failure. The network switches are currently equipped at approximately 65% of
maximum port capacity.
The Telecommunications Group's Network Operations Center in San Francisco
is in place to ensure the integrity of the internal network and the quality of
the services provided. The Center operates 24 hours a day, seven days a week and
is staffed with experienced technicians and customer service personnel.
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. The owned trans-Atlantic capacity is three digital
signal level 3's ("DS3"). Capacity of one DS3 refers to a transmission rate of
44 million bits per second with 672 channels. 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 (a "PTT Direct") or with a licensed alternative
long-distance carrier (a "Carrier Direct", and together with a PTT Direct, a
"Direct"). Transit agreements are also in place
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with PTTs for termination services in which the PTT acts as an intermediary for
delivery to other destination countries (a "Direct Transit"). 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, Carrier Directs, Direct Transits and Resale
Agreements is used to take advantage of price opportunities available in the
market. These are generally provided by carriers who target specific geographic
regions to achieve low-cost termination facilities, carriers who presently have
under-utilized facilities and carriers who have made volume commitments to
achieve favorable pricing. As of March 30, 1999, the Telecommunications Group
had PTT Directs, Carrier Directs, Direct Transits and Resale Agreements to
terminate traffic in more than 200 countries.
For selected financial information for each of the Company's segments,
refer to "Part II -- Item 6. Selected Financial Data."
EQUIPMENT GROUP PRODUCTS AND SERVICES
The Company's 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 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 Company was Northern Telecom switching products and
reengineered cellular base stations and related mobile network equipment. As a
result of the Company's acquisitions of Advanced TechCom, Inc. ("ATI"), NACT
Telecommunications, Inc. ("NACT") and Telco Systems, Inc. ("Telco") during 1998,
and the strategic decision made in December 1998 to sell its wireline switch
resale business (see "-- Discontinued Operations"), the Equipment Group's
products are now predominantly proprietary in nature and include advanced
technology platforms and software applications.
Switching Products. 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,
NTS billing systems and the CDX switch. Current users of the Company'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.
NACT's STX Switching System ("STX") consists of a switching hardware
platform and an integrated suite of applications software. The Company sells an
optional companion Master Control Unit ("MCU") to integrate and service multiple
STXs and to add redundancy to the network. The Company believes that the STX
offers value added features and capacity at price points typically below those
offered by its competitors. The STX hardware platform can operate on a
standalone basis with a port capacity of 1,920. An optional MCU can link up to
three STXs, which can be served by a common database for a total system capacity
of 5,760 ports. The STX is also designed to work seamlessly with NACT's NTS
billing systems.
The suite of STX applications software consists of over one million lines
of code. This software supports major application features that are fully
integrated and interoperable. The major applications features include: equal
access calling (1+), automated operator (0+), live operator service provider
support (0--), real-time validation of credit card and billing numbers, prepaid
debit cards, prepaid cellular, international call back, phone centers, real-time
rating, fraud minimization, external computer application programming
interfaces, call reorigination, and integrated audio with 22 languages.
Interoperability enables several applications packages to be used in conjunction
with each other. Almost all features are implemented in software, allowing
unlimited capability for enhancement and customization.
The MCU allows interconnectivity between multiple STX platforms and permits
database information to become centralized by connecting co-located systems.
Interconnectivity permits expanded carrier call routing. With more ports
available due to the MCU, the likelihood of a caller receiving a "system busy"
signal is essentially eliminated. Downtime of a single switch has minimal caller
impact when proper carrier management is used.
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The STX applications platform has been developed to allow multiple
application packages to run simultaneously and in a seamless fashion. An example
would be a client wishing to use international call back/reorigination, with the
assistance of an operator to place the call, and the cost of the call being
debited from the client's prepaid calling account. Virtually all features are
implemented in the software allowing unlimited capability for enhancement and
customization.
The NTS 1000 Billing System ("NTS 1000") is a call rating, accounting,
switch management, invoicing and traffic engineering system designed to process
the day-to-day operations of a small-to-medium sized long distance company. The
NTS 1000 can collect calls from most major switching platforms, including the
STX, and can rate all types of call traffic and, using a sophisticated rating
engine, provide the owner with a highly flexible and completely customized
rating capability. The accounting system handles all of the required information
for managing a long distance customer base including configuration of
authorization codes, accounts receivable, and management of delinquent accounts.
A major feature of the NTS 1000 is its switch management capability. When
coupled with the STX, information that has been entered into the NTS 1000 can be
electronically transferred into the STX, thereby minimizing data entry needs.
The NTS 1000 also has comprehensive international call back/reorigination and
prepaid debit card management support, as well as a complete invoicing package
that supports multiple invoice styles and options for summary reports. It has a
sophisticated traffic engineering reporting package that provides the ability to
generate over 20 types of reports with a user specified beginning and ending
time range. The NTS 1000 is Year 2000 compliant with NTS version 7.5 software,
which is expected to be released in the second quarter of 1999.
The NTS 2000 Billing System ("NTS 2000") is NACT's next generation billing
system, incorporating leading edge technology, data processing techniques and
Year 2000 compliance. This new product integrates the popular features and
functionality of the NTS 1000 with the following major enhancements: real time
data processing, including call rating; user friendly graphical user interface
("GUI"); open system connectivity, which allows integration with other
information systems; and enhanced security. This new system utilizes Informix's
industry standard On-Line Dynamic Server RDBMS, which provides for expanded
growth and also takes advantage of multiprocessor configurations. The new GUI
screens provide an advanced user interface, which dramatically increases user
productivity by consolidating operational and management needs and providing an
environment that is user friendly and intuitive. The NTS 2000 has additional
functionality, including support of 20-digit authorization code numbers, full
support of international rating, real time credit limit checks, and real-time
customer support management. The NTS 2000 was released for general sale during
the first quarter of 1999.
NACT also offers facilities management services to its customers who do not
have or plan to hire technical operators. This service allows the customer to
concentrate on marketing its products while NACT operates and maintains its
switch for a fee. NACT offers facilities management services primarily to
facilitate sales of its switches.
Pursuant to a long-term technology license agreement, the Company
manufactures and markets the Compact Digital Exchange Switch ("CDX"), a
microprocessor-based, modular, digital central office switch. The CDX utilizes
extensive large scale integrated circuit technology to provide advanced
telephony services such as call waiting, call forwarding and conference calling,
and requires reduced power and floorspace compared with alternative products.
The current switch serves applications up to 5,000 subscriber lines and is
designed to be expandable through future software enhancements. The CDX is
targeted for use in the international marketplace due to its compatibility with
international standards, "plug and play" installation features and tolerance of
a wide range of environmental conditions.
The Company intends to expand its United States customer base for switching
products and to increase its marketing efforts to customers outside the United
States through the addition of international features to the STX. This
development effort is in process and is expected to be completed in 1999. In
addition, the Company recently began a long-term development program to
integrate the central office functionality of the CDX and the long-distance
functionally of the STX into a common, "next generation" technology platform.
This strategic decision, performance difficulties experienced by certain
customers' applications of the CDX switch in 1998, and dramatically reduced
internal estimates for CDX switch revenues in 1999 caused the
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Company to significantly write-down CDX related assets as of December 31, 1998
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restructuring and Other Charges.")
Transport and Access Products. The Equipment Group 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 ("Broadband") and network access
("Access") products engineered by Telco, ATI microwave and millimeterwave radio
systems and cellular base stations and related mobile network equipment sold by
the Company's Cellular Infrastructive Supply, Inc. ("CIS") subsidiary.
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, RBOCs, independent and competitive
local exchange providers ("CLEC"), 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 DS0 (64kbps) low speed data and voice traffic to
digital fiber optic transmission of high-speed, high-capacity services over
SONET OC-3 (155 Mbps) networks.
Primary customers of Telco's Broadband products are RBOCs and major
independent telephone companies as well as competitive and alternate access
providers. Products are sold as either complete systems or as stand-alone
equipment installed by Telco, third party installers, or by Telco's customers.
The most common application of Broadband transmission products is for
cost-effective delivery of high capacity T1 (1.544Mbps) and T3 (45Mbps) services
in the local loop applications between the telephone company central office or
hubbing sites and customers' business premises. These services are delivered
over both fiber optic technology and copper-based technology.
In early 1998, Telco introduced its EdgeLink 100 product. This DS3
multiplexer aggregates and consolidates traffic from various T1 lines over a
more cost-effective T3 line. It is marketed to major carriers as well as
competitive local exchange providers interested in reducing their cost of access
and delivery of services to customers.
Telco's Access products are designed for the digital multiplexing of voice
and data traffic of up to T1 and international E1 rates. The trend towards
increased use of public network services for voice, data and video applications
has created greater demand for customer premises access multiplexers. Telco's
access servers enable integration of multiple slower-speed lines and services
onto a single or multiple, high-speed, T1/E1 access facility, ultimately saving
access line charges for end users. They support interfaces for various types of
telephony and data services, such as Plain Old Telephone Service ("POTS"),
Centrex extensions, P-Phones, switched data, ISDN and frame relay. In addition,
Telco Systems provides a network management system which is designed to control
its intelligent multiplexer products.
Telco's Access45 and Access60 network access servers provide highly
reliable digital access to public, private and hybrid networks. They integrate
multiple business applications through cost-effective connections to dedicated,
switched and packet network services, and support multiple networking functions
such as T1/E1 add/drop multiplexing, grooming and digital cross-connection. They
also support advanced services such as ISDN and frame relay. The products
provide complete redundant architecture for fail-safe operation, which is a
critical feature for service providers. Access45 was introduced during 1997, and
is a smaller version of Access60 representing a lower price point. It is
designed to meet a key requirement for the CLEC marketplace, which is to provide
a high number of service ports in a very small form factor. It is completely
compatible with Access60, and uses the same interface cards to deliver the same
services.
In January 1998, Telco Systems acquired Jupiter Technology, Inc. This
acquisition brought frame relay and asynchronous transfer mode ("ATM")
technology to enhance the features and interfaces available in
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Telco's product portfolio. This product family includes the EdgeLink 500, a
low-cost, frame relay access device. By combining the benefits of traditional
routers with frame relay, the Edgelink 500 enables safe access to business
critical data over public and private frame relay networks. Products which will
utilize ATM technology are currently under development and are expected to reach
technological feasibility in late 1999.
In October 1998, Telco acquired Synaptyx Corporation, a developer of
integrated access solutions focusing on new service providers in the local loop
services market. The EdgeLink 300 product is a next generation integrated access
device for bundled Internet Protocol ("IP"), Frame Relay and TDMA services.
Future versions of the EdgeLink 300 will include E1 capability for use in Europe
and other international markets. This product will provide a platform for a
family of next generation products specifically targeted at the international
marketplace.
Primary customers of Telco's Access products are long distance service
providers, competitive and alternate local access providers, RBOCs, government
agencies, electric utilities and wireless service operators. In many cases, the
products are purchased by the service providers and are installed on customer
premises or are leased to private network users. These products comply with both
North American and international standards for specific applications, and are
sold worldwide.
Telco's products use digital technology, and over 40 different plug-in
printed circuit cards are available to support a large variety of analog and
digital voice, data and video applications. The products provide conversion of
analog signals into digital information, combine them with additional digital
data inputs and enable them to be processed and transmitted at high speed over
copper wires. Telco Systems provides a full range of products from cost
effective digital channel banks to high-functionality DSU/CSU.
Telco also offers a standards-based SNMP network management system, the
MVX. This system is designed to control all major products in the Telco Systems
portfolio. This system remotely manages voice and data mix, bandwidth
allocation, and selective access to special services offered by T1 carriers. In
addition, it can be used to modify the network as user requirements change.
ATI develops, manufacturers and markets a complete family of high
performance, technologically advanced digital radios for point-to-point
transmission of data and voice for short and long haul applications. The
majority of ATI's historical sales have been to customers operating outside the
United States. ATI's product lines are offered in a wide range of data rates and
frequency bands, including 1.5 GHz to 38 GHz and DS1/E1 to DS3/E3.
CIS offers its customers cellular base stations and related mobile network
equipment. Although substantially all of the equipment sold by CIS is
manufactured by other telecommunications equipment companies, CIS provides a
full range of highly technical, value-added services such as deinstallation,
system design, equipment tuning and installation.
In mid-1997, the Company introduced its Wireless Local Loop-2000
("WLL-2000"), a fixed wireless point-to-multipoint system offering toll quality
telephone service to subscribers in urban and suburban areas and remote
communities. To take advantage of existing market opportunities, the Company
reached an agreement in 1997 with another telecommunications equipment company
to private label its point-to-multipoint radio system and exclusively market it
within certain Latin American countries. The current WLL-2000 integrates the
Company's CDX and the radio products. The integrated switch provides customers
with the ability to switch local calls at the WLL-2000 base station, thus
providing superior service and reducing expensive back-haul costs to a central
office.
In 1997, the Company also executed a technology licensing agreement that
grants the Company the perpetual right to incorporate spread spectrum CDMA-based
wireless technology into the Company's products sold throughout the world. Under
the terms of the agreement, the Company also has the rights to use the
technology covered by seven patents, all of which address digital data signals
and wireless communication systems. The Company currently intends to use this
technology as the platform for several new products, including a proprietary
version of the WLL-2000.
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Engineering Services. In 1997, the Company acquired Galaxy Personal
Communications Services, Inc. ("Galaxy"), a provider of system design,
implementation, optimization and other value-added radio engineering and
consulting services to PCS, cellular and other wireless telecommunications
service companies. The background and experience of Galaxy's management and
staff of RF engineers is also utilized to support the Company's customers as
they build new, or upgrade existing, telecommunications networks throughout the
world. Galaxy's engineers also provide customers with a full range of support
services for wireless transmission equipment, including site surveys, path
calculations, installation and maintenance.
For selected financial information for each of the Company's segments,
refer to "Part II -- Item 6. Selected Financial Data."
DISCONTINUED OPERATIONS
In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the refurbishment and resale of
wireline switching equipment, third party repair of telecom equipment and pay
telephone refurbishment. An investment banking firm has been engaged to
facilitate the sale and management expects the sale to be completed in 1999.
Switching equipment offered for resale by the Company has line capacities
ranging from 100 to 120,000 subscribers and 30 to 60,000 inter-exchange trunks.
These products have been developed and manufactured by other telecommunications
equipment companies, primarily Northern Telecom. These products include complete
switching systems as well as add-on frames, line cards and modified circuit
boards for either newly constructed networks or upgrades to existing networks.
The Company also repairs a broad range of switching and transmission plug-in
circuit boards originally manufactured by other telecommunications equipment
companies.
The Company's Restor Telephone Products division includes the refurbishment
and upgrade of AT&T pay telephones to like-new condition and the sale of related
pay telephone products, such as stainless steel custom logo vault doors,
handsets and dial assemblies. To date, substantially all of these refurbishment
services and product sales have been provided to four RBOCs.
SALES AND MARKETING
Telecommunications Group. The Telecommunications Group sells its services
to international long distance companies. The Group's sales and marketing
efforts are directly managed by its Chief Operating Officer and its Vice
President of U.K. Operations. As of March 30, 1999, there were eight employees
dedicated to the sales and marketing activities of the Group.
Equipment Group. The Equipment Group has a decentralized approach to the
sales and marketing of its products and services. NACT, Telco, ATI, CIS and
Galaxy each employ sales and marketing personnel responsible for obtaining a
thorough technical knowledge of its respective products and services, soliciting
new customers and maintaining relationships with new customers. The Group's
Executive Vice President of Business Development and his staff provide support
to these personnel by coordinating significant project bids that incorporate
multiple product lines and facilitating certain trade show appearances by the
Company. As of March 30, 1999, there were 65 employees conducting the sales and
marketing activities of the Equipment Group, 43 of which were dedicated to NACT
and Telco products.
NACT sells its products primarily through a direct sales force located at
its headquarters in Provo, Utah and through remote sales offices in New York,
Florida and London. NACT's marketing strategy is to generate leads through
attendance at trade shows, advertising in industry periodicals and referrals
from existing customers. NACT sponsors annual two-day meetings for its customers
to discuss their experiences with NACT's products. These discussions provide
significant input into future NACT product development and enhancement programs.
During 1997, NACT sold its first STX switching and NTS billing systems
outside the United States. NACT has established a sales presence in the United
Kingdom and plans to establish a sales presence in other countries it believes
to be strategically advantageous. NACT believes that there is substantial
opportunity for
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future growth in the international market, particularly in the developing
countries and in countries in which the telecommunications industry is being
deregulated.
Telco markets its products through a combination of its own sales force,
value-added resellers and distributors. Installation is primarily performed by
third party providers. Telco has technical support and applications engineering
personnel and offers training of customer personnel. Telco's products are
generally sold to specialized common carriers and telephone operating companies
on an off-the-shelf basis. Typically, the products have been evaluated by such
customers and approved for purchase in advance. Both Broadband and Access
products are manufactured by Telco based on forecasted usage.
CUSTOMERS
Telecommunications Group. As of March 30, 1999, the Telecommunications
Group has approximately 38 customers. In June 1998, RCG entered into a Carrier
Service Agreement (the "Service Agreement") with a wholly-owned subsidiary of
WorldCom, pursuant to which WorldCom purchases international long distance
services on a wholesale basis. WorldCom is obligated to purchase from the
Telecommunications Group at least $25.0 million a month of such services,
provided the services are of acceptable quality and the rates quoted are at
least equal to the rates WorldCom is obtaining from other third party providers.
The Service Agreement has a rolling 12-month evergreen term, subject to a one
year prior notice of termination. WorldCom prepays the services it purchases
under the Service Agreement twice a month. The Telecommunications Group's
revenues attributable to the Service Agreement comprised approximately 65% of
its total revenues for the month of December 1998 and the year ended December
31, 1998. There can be no assurance, however, that WorldCom will purchase any
services under the Service Agreement. Termination of the Service Agreement, or
any reduction in services provided thereunder, could have a material adverse
affect on the Company's business, financial condition or results of operations.
Equipment Group. A small number of customers historically has accounted
for a significant percentage of the Equipment Group's total sales. For the years
ended December 31, 1998 and 1997, no customer individually accounted for more
than 10.0% of the Group's total sales from continuing operations and the top 10
customers accounted for 30.1% and 57.0%, respectively, of the Group's total
sales from continuing operations.
NACT's applications platforms and billing systems have been accepted in a
variety of segments of the telecommunications industry and serve a broad array
of domestic and international applications. To date, NACT estimates that it has
installed over 500 application switching and billing systems. NACT's customers
are diverse and represent many different aspects of the telecommunications
industry. These customers have implemented a wide variety of features on the STX
switching platform and NTS billing system, including prepaid debit card,
international call back, operator services, prepaid cellular and other
applications for specialty markets.
Telco is dependent for a significant amount of its sales upon Bell Atlantic
Corporation, Walker and Associates and Sprint Corporation, which in total
represented approximately 62.8% and 54.7% of Telco's sales for 1998 and 1997,
respectively. Telco and other Equipment Group customers typically are not
obligated contractually to purchase any quantity of products or services in any
particular period. The loss of, or a material reduction in orders by, one or
more of these key customers could have a material adverse effect on the
Company's business, financial condition or results of operations.
International Sales. The Company's international sales from continuing
operations represented approximately 14.8% and 16.6% of the Company's total
sales from continuing operations during the years ended December 31, 1998 and
1997, respectively. The Company intends to continue to focus significant product
development and sales efforts on emerging international markets.
MANUFACTURING, ASSEMBLY AND TESTING
NACT's manufacturing operations consist primarily of material requirements
planning, material procurement and final assembly, testing and quality control
of subassemblies and completed systems. NACT
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outsources its printed circuit board assembly, which provides flexibility in the
manufacturing process and achieves lower direct labor and overhead costs. NACT
currently conducts its manufacturing operations in approximately 10,000 square
feet of its facility in Provo, Utah.
NACT utilizes an annual planning forecast, which is modified monthly, to
determine its material and outsourcing requirements. NACT orders materials with
differing lead times, generally 30 to 180 days in advance. NACT uses
"just-in-time" ordering of materials that are readily available to minimize
inventory carrying costs. NACT's systems are manufactured to a standard
configuration that allows for better production planning, lower direct labor and
overhead costs and shorter order-to-shipment times.
Telco uses major contract manufacturers to supply final products, including
U.S. Assemblies, Inc. and SCI Technologies, Inc. Telco's contract manufacturing
process primarily involves the assembly of electronic components onto
custom-designed printed circuit boards, incorporating these boards into larger
system packages, and testing the finished products to assure their proper
functioning in accordance with product specifications. Most components used in
the process are standard electrical, electronic and mechanical parts available
from many suppliers. Telco presently maintains a favorable relationship with its
contract manufacturers and its other suppliers and does not presently anticipate
any difficulties that would prevent timely procurement of scheduled products.
Products manufactured by the Company typically require the procurement of
printed circuit boards, electronic components, cable assemblies, fabricated
metal, plastic parts and other materials, of which electronic components are the
most costly. The Company purchases electronic components from numerous sources,
including original manufacturers and parts distributors.
The Company purchases substantially all of its components and other parts
on a purchase order basis and does not maintain long-term supply arrangements.
Most of the components used in the Company's products and related services are
available from multiple sources. However, several components, primarily custom
hybrid integrated circuits, are currently obtained from a single source. To
date, the Company has been able to obtain adequate supplies of these components.
The Company's inability in the future to obtain sufficient quantities of
limited-source components, or to develop alternative sources therefor, could
result in delays in product delivery and increased component cost, either of
which could have a material adverse effect on the Company's business, financial
condition or results of operations.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company has a decentralized approach to engineering support and product
development activities, with NACT, Telco, ATI and Galaxy maintaining separate
groups to support their respective products and customers. The Company's
internal engineering resources permit it to continually reduce the production
costs and improve the feasability of its products. The Executive Vice President
of Product Development for the Equipment Group monitors these development
activities to ensure common technology platforms, software languages, testing
protocols, etc. are used to minimize costs and facilitate efficient interfaces
between the Company's products. The Company's engineers have significant
experience in switching systems configurations, transmission and access
applications and wireless technology such as spread spectrum CDMA, radio path
calculations, field performance measurement and frequency licensing. As of March
30, 1999, there were 241 professional engineers and supporting personnel
employed by the Company, including 102 at Telco, 67 RF engineers at Galaxy, 34
at NACT and 21 in a product development group maintained at the Equipment Group
level.
NACT's research and development efforts are focused on the development of
both new products and the addition of new features and capabilities to its
existing suite of products. The research and development department continually
works to improve the quality of NACT's products and to ensure that such products
meet industry standards and government regulations. In addition, NACT is working
toward the successful development of new products that will enable it to offer
additional intelligence to a customer's existing network (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Purchased In-Process Research and Development").
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Telco maintains three technology centers for research and development
located in Norwood, Massachusetts, Wilmington, Massachusetts and Germantown,
Maryland. In the broadband transmission product area, Telco is concentrating its
research and development efforts on new products for delivering more
cost-effective solutions for DS3 based systems in the local loop distribution
portion of the telephone network. In the network access product area,
development programs are in process for further enhancements and new features
for digital loop access and data services applications for Access45 and Access60
network access servers. In both areas, a significant portion of the R&D
investment is going towards development of lower-cost designs to improve gross
margins of existing products (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Purchased In-Process Research
and Development").
The Company established a corporate level development group in mid-1997
that is based in Pleasanton, California and Plano, Texas. This group is focused
on the development of the WLL-2000 product and the integration of the WLL-2000,
NACT, Telco and ATI technology into unique, cost effective, next generation
product solutions.
The market for the Company's products and services is generally
characterized by rapidly changing technology, evolving industry standards and
frequent new product and service introductions that can render existing products
and services obsolete or unmarketable. The future success of the Company will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion enhancements to its existing products and services and new
products and services that meet changing customer requirements and emerging
industry standards. The failure of the Company to introduce new products and
services and respond to industry changes on a timely and cost effective basis
could have a material adverse affect on the Company's business, financial
condition and results of operations.
The development of new, technologically advanced products and services is a
complex and uncertain process requiring high levels of innovation and capital,
as well as the accurate anticipation of technological and market trends.
Furthermore, the introduction and marketing of new or enhanced products and
services require the Company to manage the transition from existing products and
services in order to minimize disruption in customer purchasing patterns. There
can be no assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis, new products and services or
product enhancements, that its new products and services will adequately address
the changing needs of the marketplace, or that it will successfully manage the
transition to new or enhanced products and services. There also can be no
assurance that the Company will be able to identify, develop, manufacture or
support new products and services successfully, that such new products and
services will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products
and services. There can be no assurance that in the future the Company will be
able to introduce product enhancements or new products and services on a timely
and cost effective basis. The rapid development of new technologies also
increases the risk that current or new competitors could develop products and
services that would reduce the competitiveness of Company products and services.
There can be no assurance that products, services or technologies developed by
others will not render the Company's products, services or technologies
noncompetitive or obsolete.
Products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released, and
such errors have occurred in these products in the past. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments. The occurrence of such errors could result in the loss of
or delay in market acceptance of Company products, diversion of development
resources, damage to the Company's reputation or increased service or warranty
costs, any of which could have a material adverse effect upon the Company's
business, financial condition or results of operations.
Furthermore, from time to time, the Company may announce new products,
services, capabilities or technologies that have the potential to replace or
shorten the life cycle of their existing product and service offerings. There
can be no assurance that announcements of product enhancements or new product or
service offerings will not cause customers to defer purchasing existing Company
products and services or cause
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resellers to return products to the Company. Failure to introduce new products
and services or product or service enhancements effectively and on a timely
basis, customer delays in purchasing products and services in anticipation of
new product or service introductions and any inability of the Company to respond
effectively to technological changes, emerging industry standards or product and
service announcements by competitors could have a material adverse effect on the
Company's business, financial condition or results of operations.
COMPETITION
Telecommunications Group. The international telecommunications industry is
highly competitive and subject to the introduction of new services facilitated
by advances in technology. International telecommunications providers compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services. The U.S.-based international
telecommunications services market is dominated by AT&T, WorldCom and Sprint. As
the Telecommunications Group's network expands to serve a broader range of
customers, the Company expects to encounter increasing competition from these
and other major domestic and international communications companies, many of
which may have significantly greater resources and more extensive domestic and
international communications networks than the Company. Moreover, the Company is
likely to be subject to additional competition as a result of the formation of
global alliances and mergers among the largest telecommunications carriers and
an increasing amount of resold international telecommunications services due to
deregulation of telecommunications markets worldwide.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Those technologies being developed or already
introduced include satellite-based systems, such as the proposed Iridium and
GlobalStar systems, utilization of the Internet for international voice and data
communications, and digital wireless communication systems such as personal
communications services. The Company is unable to predict which of many possible
future products and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services.
Recent regulatory changes also are expected to increase competition in the
telecommunications industry. The Telecommunications Act promotes additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies. The Telecommunications Act
permits the RBOCs to compete in interstate and international service. Some RBOCs
have begun to resell international services. AT&T has obtained relaxed pricing
restrictions and relief from other regulatory constraints that should make it
easier for AT&T to compete with alternative carriers such as the Company. There
can be no assurance that the Company will be able to effectively compete in the
new regulatory environment or that these changes or other regulatory
developments will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Equipment Group. The segments of the telecommunications industry in which
the Equipment Group operates are intensely competitive. The ability to compete
will be dependent upon several factors, including price, quality, product
features and timeliness of delivery. Many of the Group's competitors have
significantly more extensive engineering, manufacturing, marketing, financial
and technical resources than the Company.
The market for switching equipment and network management and billing
systems is highly competitive, and NACT expects competition to increase in the
future. The market is subject to rapid technological change, regulatory
developments in the telecommunications industry and emerging industry standards.
NACT believes that the primary competitive factors in the market for switching
equipment and network telemanagement and billing systems are the development and
rapid introduction of new product features, price/performance, reliability and
quality of customer support. NACT believes that it competes across three
categories, PC Based Switch Platforms, Open Architecture (Programmable) Hardware
Platforms, and Application Switch Platforms.
A PC-based switch platform is a personal computer, usually with high
capacity, that contains generic telephone boards for interfacing with the public
network. A typical platform provides a single application such as debit card or
international call back/reorigination, which are software applications that can
be brought to
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market rapidly. Leading providers of these types of switches are Communications
Product Development, Inc., Integrated Telephoning Products, Inc. and PCS
Telecom, Inc. The users of this equipment generally tend to be start-up
operations that are concerned about initial equipment costs and that are
generally able to bring software solutions to the market rapidly. While these
users may feel that PC-based solutions are relatively low cost, as their
business grows, it becomes apparent that these systems are costly to expand on a
cost per port basis and offer few features that are standard with switch-based
platforms. Additionally, PC-based systems are not regarded as a viable solution
for larger users due to their reliability concerns.
A programmable hardware platform generally consists of proprietary switch
hardware, together with the necessary software to provide a programmable
application interface ("API") that allows other computers executing third-party
application software to control the calls within the switch hardware. Leading
providers of these types of switches are Summa Four, Inc., Excel, Inc. and
Redcom Laboratories, Inc. and the value-added software providers that support
this type of hardware, such as Megellan Network Systems, Inc., Boston
Technology, Inc. and Open Development Corporation. The users of this type of
equipment tend to be companies that have the ability and desire to write their
own applications code or are willing to purchase their applications code from a
specialized third party developer.
An application switching platform is an integrated hardware/software
switching system that contains software applications that perform basic 1+ and
operator assisted services over the public network. To provide intelligent
functionality, an adjunct switch must be connected to the application switch
platform. Leading providers of application switch platforms are Harris
Corporation and Siemens Stromberg Carlson. The major users are companies that
are established in their telephony business such as 1+ providers that now need
to expand their offerings to their customers to remain competitive in the
marketplace. Enhanced services are particularly attractive to these customers
and play a large part in their decision making process.
As NACT's business develops and it seeks to market its switches to a
broader customer base, NACTs competitors may include larger switch and
telecommunications equipment manufacturers such as Lucent Technologies Inc.,
Harris Corporation, Siemens AG, Alcatel Alsthom Compagnie, Generale
D'Electricite, Telefonaktiebolaget, L.M. Ericcson and Northern Telecom Ltd. Many
of NACT's current and potential competitors have substantially greater
technical, financial, manufacturing and marketing resources than NACT.
Telco's competitors in the broadband transmission market are predominantly
large, full-line, integrated manufacturers of telecommunications equipment, such
as Lucent Technologies, Fujitsu, Northern Telecom Limited, Alcatel, NEC and ADC
Telecommunications. Many of these competitors have introduced newer SONET
transmission products which the telephone operating companies are deploying in
public networks. The availability of such SONET products by competitors provides
a distinct product advantage for them in certain customer applications. However,
the higher cost of the SONET products, typically 20-50% more expensive than the
asynchronous transmission products, is providing a continued strong demand for
Telco's asynchronous transmission products in certain customer applications.
Telco's principal competitors with respect to the network access product market
include Premisys Communications, Verilink Corp., Newbridge Networks, Tellabs and
Carrier Access Corp. Telco believes that it has substantially strengthened its
competitive position in this market with the availability of new features for
the Access60 product, introduction of the new EdgeLink 100 and Access45 products
and new products from the Jupiter and Synaptyx acquisitions, as well as with a
stronger network of distributors. Telco Systems also believes that the
redundancy, high-density application and the fail-safe nature of the Access60
architecture makes the product more suitable for the service providers market.
The Equipment Group may face competition from the RBOCs, which have
historically been prohibited from manufacturing telecommunications equipment by
the terms of the Modification of Final Judgment entered into in connection with
the divestiture of the RBOCs by AT&T Corp. ("AT&T") in 1984. The
Telecommunications Act contains provisions that permit the RBOCs, subject to
satisfying certain conditions designed to facilitate local exchange competition,
to manufacture telecommunications equipment. In light of these provisions, it is
possible that one or more of the RBOCs, some of which are major customers of the
Company, may decide to manufacture telecommunications equipment or to form
alliances with other
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manufacturers. Any of these developments could result in increased competition
which may have a material adverse effect on the Company's business, financial
condition or results of operations.
GOVERNMENT REGULATION
The Telecommunications Group's businesses are heavily regulated. The FCC
exercises authority over all interstate and international facilities-based and
resale services offered by the Company. Services that originate and terminate
within the same state, also known as intrastate services, are regulated by state
regulatory commissions. The Company also may be subject to regulation in foreign
countries in connection with certain business activities. For example, the
Company's use of Direct, Direct Transit and Resale Agreements may be affected by
regulations in either the transited or terminating foreign jurisdiction. There
can be no assurance that foreign countries will not adopt laws or regulatory
requirements that could adversely effect the Company's business, financial
condition or results of operations. There can be no assurance that regulators or
other third parties will not raise issues or take enforcement actions with
regard to the Company's compliance with applicable regulations.
Federal Regulation. The Company must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications Act"),
as amended by the Telecommunications Act (together with the Communications Act,
the "Act"), including the offering of service on a non-discriminatory basis at
just and reasonable rates, and obtaining FCC approval prior to any assignments
of authorizations or any transfer of de jure or de facto control of the Company.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
both domestic and international service. Under the Act and the FCC's rules, all
international carriers, including the Company, are required to obtain authority
under Section 214 of the Act prior to initiating international common carrier
services, and must file and maintain tariffs containing the rates, terms and
conditions applicable to their services. The FCC has streamlined its regulation
of non-dominant international carriers to provide that these tariffs and any
revisions thereto are effective upon one day's notice in lieu of the previous
14-day notice period. The Company has filed international tariffs (for switched
and private line services) with the FCC. Nevertheless, an otherwise non-
dominant U.S.-based carrier may be subject to dominant carrier regulation on a
specific international route if it is affiliated with a foreign carrier with
market power operating at the foreign point. The Company is not subject to
dominant carrier treatment on any route.
In late 1996, the FCC implemented significant changes in its tariff
requirements. Exercising forbearance authority granted to it by the
Telecommunications Act, the FCC ruled that interexchange carriers must cancel
their tariffs for domestic interstate interexchange services. In August 1997,
the FCC affirmed its decision to end tariff filing requirements for domestic
interstate long distance services provided by non-dominant carriers. The FCC
also eliminated the requirement that non-dominant long distance carriers make
publicly available information on rates and terms of their products. The
detariffing order has been stayed by the U.S. Court of Appeals for the District
of Columbia and the order on reconsideration also is stayed until the Court
issues a decision. It is not known when the Court of Appeals will issue a
decision. On March 18, 1999, the FCC adopted an order that would permit the
alternative of posting rates on the carrier's website. This order will not
become effective until the Court affirms the FCC's mandatory detariffing scheme.
International Services. The Company must have Section 214 facilities-based
authority to offer international services via satellites and undersea fiber
optic cables. Section 214 resale authority is required to resell international
services. The Company has obtained global Section 214 facilities-based and
resale authority.
The Company must conduct its international business in compliance with the
FCC's international settlements policy ("ISP"). The ISP establishes the
permissible boundaries for U.S.-based carriers and their foreign correspondents
to exchange traffic and settle the cost of terminating each other's traffic over
their respective networks. The precise terms of settlement are established in a
correspondent agreement, also referred to as an operating agreement. Among other
terms, the operating agreement establishes the types of service covered by the
agreement, the division of revenues between the carrier that bills for the call
and the carrier that terminates the call at the other end, the frequency of
settlements (i.e. monthly or quarterly), the
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currency in which payments will be made, the formula for calculating traffic
flows between countries, technical standards, procedures for the settlement of
disputes, the effective date of the agreement and the term of the agreement. The
Company may provide services over international private lines without complying
with the ISP, but only between the United States and countries specifically
approved by the FCC for this activity.
To promote competition in the international telecommunications market, in
November 1996, the FCC issued a new international settlement order, which
provided international carriers more flexibility in negotiating operating
agreements. Under the FCC's new international settlement order, U.S.-based
carriers can apply for waivers of the ISP. Such waivers, if granted, would allow
carriers to negotiate more flexible operating agreements that, for example,
allow them to accept greater than a proportionate share of return traffic. When
it implemented the WTO Agreement (see below), the FCC adopted a rebuttable
presumption that flexibility is permitted for WTO member countries. Although the
Company is unable to predict exactly how it will affect its international
business, the new ISP may reduce international access costs and facilitate the
Company's international business.
International telecommunications service providers are required to file
copies of their contracts with other carriers, including operating agreements,
with the FCC within 30 days of execution and to obtain approval of certain of
these contracts. The FCC's rules also require the Company to file a variety of
reports regarding its international traffic flows and use of international
facilities. In addition, the FCC requires carriers to notify them 60 days prior
to becoming affiliated with a foreign carrier or 30 days after acquiring a 25%
or greater noncontrolling interest in a foreign carrier. The FCC can impose
dominant carrier treatment on affiliates of WTO carriers with market power or
restrict service of affiliates of non-WTO carriers.
In February 1997, the United States entered into the WTO Agreement, which
seeks to open markets to competition in telecommunications services, improve
foreign investment opportunities in the telecommunications industry and promote
pro-competitive regulatory principles. In June 1997, the FCC proposed to
implement new rules in order to comply with the WTO Agreement. These new rules
were adopted by the FCC in November 1997 and became effective in February 1998.
The new rules facilitate the entry of foreign carriers operating in
countries that signed the WTO Agreement ("WTO Carriers") into the United States
telecommunications market. The rules replace the effective competitive
opportunities test (the "ECO Test") for entry of WTO Carriers with streamlined
procedures that presume entry is pro-competitive. The rules similarly relax the
equivalency test for WTO Carriers that seek to provide switched services over
private lines between the United States and certain WTO member countries. In
addition, the rules revise competitive safeguards to eliminate or reduce various
operating conditions and replace them with more targeted safeguards that enhance
the FCC's ability to monitor and detect anti-competitive behavior in the United
States market. The FCC has retained the right to issue fines, require additional
conditions on a grant of authority and, if necessary, deny or rescind a grant of
authority.
The FCC also narrowed the "No Special Concessions" rule, which generally
provides that United States carriers cannot accept benefits from foreign
carriers to which other United States carriers are not entitled. This rule
continues to apply to non-WTO Carriers. The new rule applicable to WTO Carriers
simply prohibits United States carriers from entering into exclusive
arrangements with WTO Carriers that have sufficient market power to affect
competition adversely in the United States market. To provide more certainty in
the market, the FCC adopted a rebuttable presumption that WTO Carriers with less
than 50% market share in a foreign market lack such market power. As a result,
United States carriers may enter into exclusive dealings with such WTO Carriers
involving a variety of matters, including operating agreements and
interconnection arrangements.
In addition, in 1997 the FCC revised the safeguards that apply to United
States carriers classified as dominant due to an affiliation with a foreign
carrier that has market power on the foreign end of an international route. The
rules rely on reporting requirements, rather than restrictions on carriers'
provision of service, to prevent affiliated carriers from restricting
competition in the United States. In particular, the rules replace the 14-day
advance notice tariff filing requirement with one-day advance notice requirement
and accords these tariff filings a presumption of lawfulness. The rules also
remove the prior approval requirement for circuit additions or discontinuances
on the dominant route. The rules require quarterly reports on traffic
16
<PAGE> 19
and revenue, provisioning and maintenance, and circuit status for the dominant
carrier in order to monitor and detect anti-competitive behavior. The rules also
require a limited form of structural separation between United States carriers
and their foreign affiliates with market power. The FCC adopted a rebuttable
presumption that a foreign carrier with less than 50% market share in the
foreign market lacks market power and, therefore, its United States affiliate
should be presumptively treated as non-dominant.
In August 1997, the FCC adopted mandatory settlement rate benchmarks for
carriers receiving traffic from or sending traffic to the United States. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC prohibits
a United States carrier affiliated with a foreign carrier from providing
facilities-based service to the foreign carrier's home market until and unless
the foreign carrier has implemented a settlement rate within the benchmark. In
connection with these rules, the FCC also adopted rules that liberalize the
provision of switched services over private lines to WTO member countries by
allowing such services on routes where 50% or more of United States billed
traffic is being terminated in the foreign country at or below the applicable
settlement rate benchmark, or where the foreign country's rules concerning the
provision of international switched services over private lines are deemed
equivalent to United States rules.
The Company is unable to predict the full effect on the international
telecommunications market resulting from the WTO Agreement or the rules enacted
to implement its provisions or the establishment of mandatory settlement rate
benchmarks. These changes are expected to increase competition in the
telecommunications market (see "-- Competition"). These changes may result in
lower costs to the Company, however, the revenues that the Company receives from
inbound international traffic may decrease to a greater degree as a result of
increased competition. WTO Carriers with market power in their home markets may
be able to more easily offer United States and foreign customers services to the
disadvantage of United States carriers, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such services. In addition, many foreign
carriers are currently challenging the enforceability against such carriers of
the FCC's order adopting mandatory settlement rate benchmarks. A finding that
this order was unenforceable against such carriers could accelerate the entry of
foreign carriers into the United States market by making it easier for foreign
carriers to route international traffic to the United States at low, cost-based
termination rates, while United States carriers would continue to have to route
international traffic into most foreign countries at much higher settlement
rates. There can be no assurance that these events would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Foreign Ownership. Under the Act, no common carrier radio licensee may be
held by non-U.S. citizens, foreign governments or corporations organized under
the laws of a foreign country, or their representatives. For companies from WTO
countries, the FCC has established an open entry standard, meaning that the FCC
presumptively will approve greater than 25% indirect ownership by a WTO carrier
of a U.S. common carrier radio licensee subject to certain competitive
safeguards. The FCC has reserved the right in certain cases to attach additional
conditions to a grant of authority, and to deny the application in the
exceptional case in which an application poses a very high risk to competition.
For carriers from countries that are non-signatory to the WTO Agreement, the FCC
will continue to apply the ECO test in deciding whether to approve greater than
25% ownership of a radio licensee.
Federal Legislation and Implementation. The Telecommunications Act was
adopted in February 1996 and substantially changed the regulation of
telecommunications in the United States. The Telecommunications Act permits
RBOCs to provide domestic and international long distance services to customers
located outside of the RBOCs' home regions; permits a petitioning RBOC to
provide domestic and international long distance service to customers within its
operating area on a state by state basis upon finding by the FCC that a
petitioning RBOC has satisfied certain criteria for opening up its local
exchange network to competition and that provision of long distance services
would further the public interest; and removes existing barriers to entry into
local service markets. Additionally, there were significant changes in the
manner by which carrier-to-carrier arrangements are regulated at the federal and
state level; procedure to revise universal service standards; and penalties for
unauthorized switching of customers. The FCC has instituted and, in most
instances completed, proceedings addressing the implementation of this
legislation.
17
<PAGE> 20
In implementing the Telecommunications Act, the FCC established nationwide
rules designed to encourage new entrants to participate in the local services
markets through interconnection with the incumbent local exchange carriers
("ILECs"), resale of ILECs' retail services, and use of individual and
combinations of unbundled network elements. These rules set the groundwork for
the statutory criteria governing the RBOC entry into the long distance market.
Appeals of the FCC Order adopting those rules were consolidated before the
United States Court of Appeals for the Eighth Circuit (the "Eighth Circuit").
The Eighth Circuit upheld challenges to certain practices implementing cost
provisions of the Telecommunications Act that were ordered by certain state
public utility commissions to be premature, but vacated significant portions of
the FCC's nationwide pricing rules, and vacated an FCC rule requiring that
unbundled network elements be provided on a combined basis. The Solicitor
General, on behalf of the FCC, and certain other parties, sought certiorari in
the United States Supreme Court, which was granted. Certain RBOCs have also
raised constitutional challenges to provisions of the Telecommunications Act
restricting RBOC provision of long distance services, manufacturing of
telecommunications equipment, electronic publishing and alarm monitoring
services. On December 31, 1997, the United States District Court for the
Northern District of Texas ruled that these restrictions violate the Bill of
Attainder Clause of the U.S. Constitution. Currently, this decision only applies
to SBC Corporation ("SBC"), US West Communications Group ("US WEST") and Bell
Atlantic Corporation ("Bell Atlantic"). AT&T, WorldCom, the U.S. Department of
Justice and the FCC announced that they will appeal the decision and sought a
stay of the ruling. The Company cannot predict either the ultimate outcome of
these or future challenges of the Telecom Act, any related appeals of regulatory
or court decisions, or the eventual effect on its businesses or the industry in
general. On January 25, 1999, the U.S. Supreme Court reversed most aspects of
the Eighth Circuit's decision, and reinstated several of the vacated rules, but
vacated another FCC rule that delineated the network elements to be unbundled by
the ILECs. The Eighth Circuit and the FCC are expected to conduct further
proceedings in response to the Supreme Court's decision.
The FCC has denied applications filed by Ameritech Corporation
("Ameritech"), SBC and BellSouth Corporation ("BellSouth") seeking authority to
provide inter-local access transport area ("interLATA") long distance service to
Michigan, Oklahoma and South Carolina, respectively. SBC has appealed the FCC's
denial of its application to the Eighth Circuit. In its denial of an Ameritech
application and a BellSouth application, the FCC provided detailed guidance to
applicants regarding the obligations of the applicants, the format of future
applications, the content of future applications, and the review standards that
it will apply in evaluating any future applications. The National Association of
Regulatory Utility Commissioners and several state regulatory commissions have
appealed jurisdictional aspects of the Ameritech application denial to the
Eighth Circuit. The Company cannot predict either the outcome of these appeals,
of the RBOC's willingness to abide by these FCC guidelines, or the timing or
outcome of future applications submitted to the FCC. Other RBOCs have announced
their intention to file applications at the FCC for authority to provide inter
LATA services. The Company cannot predict the outcome of these proceedings. To
the extent that the RBOC's are permitted to enter the international
long-distance business, they could become major competitors of the Company. It
is also possible that they could become customers of the Company's wholesale
business although there is no assurance that this would happen.
On May 7, 1997, the FCC announced that it will issue a series or orders
that will reform Universal Service Subsidy allocations and adopted various
reforms to the existing rate structure for interstate access services provided
by the ILECs that are designed to reduce access charges, over time, to more
economically efficient levels and rate structures. It also affirmed that
information services providers (including, among others, internet service
providers) should not be subject to existing access charges ("ISP Exemption").
Petitions for reconsideration of, among other things, the access service and ISP
Exemption related actions were filed before the FCC, and appeals were taken to
various United States Courts of Appeals. On reconsideration, the FCC, in
significant part, affirmed the access charge and ISP Exemption actions, and the
court appeals have been consolidated before the Eighth Circuit. Also, several
state agencies have started proceedings to address the reallocation of implicit
subsidies contained in access rates and retail service rates to state universal
service funds. Access charges are a principal component of the Company's
telecommunications expense. The Company cannot predict either the outcome of
these appeals or whether or not the result(s) will have a material impact upon
the consolidated financial position or the Company's results of operations.
18
<PAGE> 21
Certain Foreign Termination Arrangements. The Company has entered into and
expects to continue to enter into certain termination or origination
arrangements with competitive carriers in certain foreign countries. These
arrangements involve the termination of U.S. originated traffic or the
origination of foreign-based traffic from foreign countries over private lines
and may be viewed by foreign regulatory agencies as "international simple
resale" arrangements. The Company believes that foreign telecommunications
regulations are being liberalized and that such arrangements are permitted in
some instances and may be expressly approved by foreign regulatory agencies in
other instances. Nevertheless, at this time the FCC or a foreign regulatory
agency in a particular country may take the view that such arrangements are not
in compliance with current regulatory policies. If the FCC finds that such
arrangements violate FCC rules, the FCC could impose a variety of sanctions on
the Company, including rescission of the Company's Section 214 License. In
addition, competitive carriers, which compete with the PTT, may not be permitted
by foreign regulatory agencies or the PTT may act unilaterally to cancel or
eliminate the private line service on which the alternative carrier depends. For
example, in 1997, regulatory authorities in Hong Kong and the PTT in Mexico have
acted against such arrangements. The competitive carriers with whom the Company
enters into such arrangements, and perhaps the Company itself, could be subject
to a variety of penalties in connection with such arrangements under foreign or
U.S. law, including without limitation orders to cease operations or to limit
future operations, loss of licenses or of license opportunities, fines, seizure
of equipment and, in certain foreign jurisdictions, criminal prosecution. The
revenue and/or profit generated under such arrangements may have become a
significant portion of the overall revenue and/or profit of the Company at the
time such arrangements are discovered and curtailed. Moreover, the discovery of
the existence of such arrangements by foreign PTTs could adversely affect the
Company. Any of the developments described above (i.e., the imposition of
penalties, the loss of revenue and/or profit generated by such arrangements
(whether as a result of regulatory problems or otherwise) or the discovery of
the existence of such arrangements by foreign PTTs) could have a material
adverse effect on the Company's business, financial condition or results of
operations.
PATENTS AND TRADEMARKS
The Company owns, licenses or has applied for various patents with respect
to its technology and products. While these patents are of value, the Company
does not believe that it is dependent to any material extent upon patent
protection. The Company further believes that timely implementation of
technological advances, responsiveness to market requirements, depth of
technical expertise and a high level of customer service and support are more
important to its success than patent rights.
The Company has various trademarks, trade names and service marks used in
connection with its business and for private label marketing of certain of its
products, including: Access45(TM), Access60(R), CDX(TM), Compact Digital
Exchange(TM), EdgeLink 100(TM), EdgeLink 300(TM), EdgeLink 500(TM) and
WLL-2000(TM). Although the Company considers these trademarks, trade names and
service marks to be readily identifiable with, and valuable to, its business,
the Company does not believe the loss of any of the foregoing rights for
intellectual property would have a material adverse effect on the Company's
business, financial condition or results of operations.
EMPLOYEES
As of March 30, 1999, the Company had 791 full-time employees, including
658 in continuing operations and 133 in discontinued operations. The continuing
operations employees consist of 579 dedicated to the Equipment Group, 57
dedicated to the Telecommunications Group and 22 working in the Company's
executive office. From time to time, the Company also uses part-time employees
and contractors in its operations, primarily to accommodate temporary changes in
production levels and facilitate certain research and development projects. None
of the Company's employees is represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
considers its employee relations to be good.
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<PAGE> 22
ITEM 2. PROPERTIES
The Company's executive offices are located in Atlanta, Georgia, where it
occupies approximately 12,000 square feet under a lease expiring in October
2003. The Company owns NACT's building in Provo, Utah and leases its other
facilities under operating leases which expire at various dates during the next
five years. The following provides a summary of the significant facilities
currently utilized by the Company to conduct its operations.
<TABLE>
<CAPTION>
SQUARE FOOTAGE LEASE EXPIRES
-------------- -------------
<S> <C> <C>
Norwood, Massachusetts...................................... 80,000 January 2004
Wilmington, Massachusetts................................... 53,300 November 2000
Provo, Utah................................................. 40,000 Owned
Savannah, Georgia........................................... 33,500 October 2001
U.S. Switching Centers...................................... 33,900 Various
Alpharetta, Georgia......................................... 12,200 March 2002
Other warehouses and offices................................ 35,000 Various
-------
Total Continuing Operations....................... 287,900
Orlando, Florida............................................ 72,000 April 2002
Dallas, Texas............................................... 54,000 February 2003
South Bend, Indiana......................................... 22,000 July 2002
-------
Total Discontinued Operations..................... 148,000
-------
Total Company..................................... 435,900
=======
</TABLE>
The Company's existing facilities are adequate for its current operations,
and the Company believes that convenient, additional facilities are readily
available should the business need arise.
Telco leases a 216,000 square foot manufacturing, research and
administration facility in Norwood, Massachusetts, that is owned by a limited
partnership in which Telco has a 50% partnership interest. Approximately 80,000
square feet of this facility is currently utilized by Telco. Excess costs
associated with the idle portion of the facility through January 2004, the lease
termination date, have been reserved for in Telco's balance sheet.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
relating to claims arising in the ordinary course of the Company's business.
Other than as discussed below, neither the Company nor any of its subsidiaries
is party to any legal proceeding, the outcome of which is expected to have a
material adverse effect on the Company's financial condition or results of
operations.
Following the Company's announcement on January 5, 1999 regarding earnings
expectations for the quarter and fiscal year ended December 31, 1998 and the
subsequent decline in the price of the Company's common stock, 22 putative class
action complaints were filed between January 7, 1999 and March 5, 1999 in the
United States District Court for the Northern District of Georgia. The Company
and certain of its then current officers and directors were named as defendants.
A second decline in the Company's stock price occurred shortly after actual
earnings were announced on February 11, 1999, and a few of these cases were
amended, and additional, similar complaints were filed. On March 8, 1999, a
group of plaintiffs filed a joint motion seeking to be appointed as lead
plaintiffs and to have certain law firms appointed as lead counsel in these
actions. The Company expects that the cases will be consolidated and that an
amended consolidated complaint will be filed after a ruling on the pending
motion regarding the appointment of lead plaintiffs and lead counsel.
Although the 22 complaints differ in some respects, the plaintiffs,
generally, have alleged violations of the federal securities laws arising from
misstatements of material information in and/or omissions of material
information from certain of the Company's securities filings and other public
disclosures, principally related to inventory and sales activities during the
fourth quarter of 1998. With the exception of a single complaint (not
20
<PAGE> 23
filed by one of the proposed lead plaintiffs) which seeks to include stock
purchases that occurred as early as April 10, 1998, the complaints are filed on
behalf of: (a) persons who purchased shares of the Company's common stock
between October 7, 1998 and February 11, 1999; (b) shareholders of Telco who
received shares of common stock of the Company as a result of the Company's
acquisition of Telco that closed on November 30, 1998; and, (c) shareholders of
NACT who received shares of common stock of the Company as a result of the
Company's acquisition of NACT that closed on October 28, 1998. Plaintiffs have
requested damages in an unspecified amount in their complaints. Although the
Company and the individuals named as defendants deny that they have violated any
of the requirements or obligations of the federal securities laws, there can be
no assurance the Company will not sustain material liability as a result of or
related to these shareholder suits.
RCG operated under Chapter 11 bankruptcy protection from October 1997 until
December 1998 (the "Bankruptcy Case"). On September 3, 1998, the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division (the
"Bankruptcy Court"), entered an Order confirming the Debtor's Second Amended
Plan of Reorganization, dated September 2, 1998 (the "Plan"), which was
effective December 14, 1998. In general, the Plan provides for, among other
things, the discharge by the creditors of RCG of all indebtedness of and claims
against RCG and the issuance by the Company of 9,375,000 shares of common stock
of the Company to a disbursing agent for ultimate distribution to the creditors
of RCG. The Company has already issued such shares, which are being distributed
to the RCG creditors under the terms of the Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders was held on November 30, 1998 (the
"November Special Meeting") at the Company's headquarters in Atlanta, Georgia.
There were 25,675,253 shares of common stock issued and entitled to vote at the
November Special Meeting, of which 14,519,172 were present in person or by
proxy. The November Special Meeting did not involve the election of directors.
At the November Special Meeting, the following matters were voted on:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Approval and adoption of the Agreement and Plan of Merger 14,466,993 26,002 26,177
and Reorganization, dated as of June 4, 1998, as amended
by the first amendment thereto dated as of October 27,
1998, among World Access, Inc. (formerly known as WAXS
INC.), WA Telcom Products Co., Inc. (formerly known as
World Access, Inc.), Telco Systems, Inc. and Tail
Acquisition Corporation, pursuant to which Telco Systems,
Inc. was merged with and into Tail Acquisition
Corporation.
Approval of amendment to World Access, Inc. Certificate 14,127,104 351,587 40,481
of Incorporation to increase the number of authorized
shares of World Access common stock to 150,000,000.
Adoption of the World Access, Inc. 1998 Incentive Equity 10,775,569 3,676,000 67,603
Plan.
Ratification and approval of the indemnification 13,431,243 1,013,168 74,761
agreements with directors and executive officers of World
Access, Inc.
</TABLE>
21
<PAGE> 24
(b) A special meeting of stockholders was also held on December 14, 1998
(the "December Special Meeting") at the Company's headquarters in Atlanta,
Georgia. There were 25,678,453 shares of Common Stock issued and entitled to
vote at the December Special Meeting, of which 21,234,874 were present in person
or by proxy. At the December Special Meeting, the following matters were voted
on:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Approval and Adoption of the Agreement and Plan of Merger 12,677,099 44,322 31,985
and Reorganization, dated as of May 12, 1998, as amended
by the first amendment thereto dated as of July 20, 1998
and the second amendment thereto dated as of September 2,
1998, among World Access, Inc., WA Telcom Products Co.,
Inc., WA Merger Corp. and Cherry Communications
Incorporated (d/b/a Resurgens Communications Group),
pursuant to which WA Merger Corp. was merged with and
into Resurgens Communications Group.
Approval and adoption of the Share Exchange Agreement and 12,633,726 86,670 33,010
Plan of Reorganization, dated as of May 12, 1998, among
World Access, Inc., WA Telcom Products Co., Inc., Cherry
Communications, U.K. Limited, and Renaissance Partners
II.
</TABLE>
<TABLE>
<CAPTION>
FOR VOTE WITHHELD
Election of the following director nominees --- -------------
<S> <C> <C> <C>
Stephen J. Clearman 21,069,496 165,378
(to serve for a two-year term)
Mark A. Gergel 21,051,932 182,942
(to serve for a three-year term)
John P. Imlay, Jr. 21,059,406 175,468
(to serve for a three-year term)
Carl E. Sanders 21,071,708 163,166
(to serve for a three-year term)
</TABLE>
The other directors of the Company whose terms of office continued after
the December Special Meeting are Max E. Bobbit, Steven A. Odom and John D.
Phillips.
ITEM 4.5 EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information, as of March 30, 1999, concerning
the Company's executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven A. Odom............... 45 Chairman of the Board
John D. Phillips............. 56 President, Chief Executive Officer and Director
Mark A. Gergel............... 41 Executive Vice President, Chief Financial Officer
and Director
A. Lindsay Wallace........... 49 President, World Access Equipment Group
Dennis E. Bay................ 55 Executive Vice President and Chief Operating Officer,
World Access Telecommunications Group
W. Tod Chmar................. 45 Executive Vice President and Secretary
</TABLE>
Steven A. Odom. Mr. Odom joined the Company's Board in October 1994. In
November 1994, he was appointed to the newly created position of Chairman of the
Board. In August 1995, he became Chairman and Chief Executive Officer of the
Company and served in that capacity until December 1998, when he relinquished
his Chief Executive Officer duties. From 1983 to 1987, he founded and served as
Chairman and
22
<PAGE> 25
Chief Executive Officer of Data Contract Company, Inc. ("DCC"), a designer and
manufacturer of intelligent data PBX systems, pay telephones and diagnostic
equipment. From 1987 to 1990, he was Vice President for the Public
Communications Division of Executone Information Systems, Inc., a public company
that acquired DCC in 1987. Mr. Odom formerly served as a director for Telematic
Products, Inc., a manufacturer of telephone central office equipment and
Resurgens Communications Group, Inc. ("Old Resurgens"), a provider of long
distance operator services that later merged with LDDS Communications, Inc., now
known as WorldCom.
John D. Phillips. Mr. Phillips has served as a director of the Company
since December 1994 and was appointed its President and Chief Executive Officer
in December 1998. Mr. Phillips was Chairman of the Board and Chief Executive
Officer of RCG and Cherry U.K. from October 1997 until December 1998, when both
companies were acquired by the Company. He was President, Chief Executive
Officer and a director of Metromedia International Group, Inc. ("Metromedia"), a
global media, entertainment and communications company, from November 1995 until
December 1996. Metromedia was formed in November 1995 through the merger of The
Actava Group, Inc. ("Actava"), Orion Pictures Corporation, MCEG Sterling
Incorporated and Metromedia International Telecommunications, Inc. He served as
President, Chief Executive Officer and a director of Actava from April 1994
until November 1995. In May 1989, Mr. Phillips became Chief Executive Officer of
Old Resurgens and served in this capacity until September 1993 when Old
Resurgens merged with Metromedia Communications Corporation and WorldCom.
Mark A. Gergel. Mr. Gergel joined the Company in April 1992 as Vice
President and Chief Financial Officer. In December 1996, he was named an
Executive Vice President of the Company and in December 1998, he was elected a
director of the Company. From 1983 until March 1992, Mr. Gergel held five
positions of increasing responsibility with Federal-Mogul Corporation, a
publicly-held manufacturer and distributor of vehicle parts, including
International Accounting Manager, Assistant Corporate Controller, Manager of
Corporate Development and Director of Internal Audit. Prior to joining
Federal-Mogul, Mr. Gergel spent four years with the international accounting
firm of Ernst & Young. Mr. Gergel is a Certified Public Accountant.
A. Lindsay Wallace. Mr. Wallace joined the Company in February 1998 in
connection with the Company's acquisition of a majority interest in NACT. He
served as President of the Switching Division from February 1998 until December
1998, when he was appointed Executive Vice President and Chief Operating Officer
of the Company's Equipment Group. In January 1999, he was named President of the
Equipment Group. From January 1996 until October 1998, when NACT merged with and
into the Company, Mr. Wallace was President, Chief Executive Officer and a
director of NACT. From January 1994 until January 1996, he was NACT's Director
of Sales and Marketing. In October 1995 he was named an Executive Vice President
of NACT. Prior to joining NACT, Mr. Wallace worked for Sprint Corporation for
five years where he held several positions including National Account Manager.
Dennis E. Bay. Mr. Bay has served as Executive Vice President and Chief
Operating Officer of the Company's Telecommunications Group since December 1998.
He was Senior Vice President and General Manager of RCG and Cherry U.K. from
November 1997 until December 1998, when both companies were acquired by the
Company. From 1994 to November 1997, Mr. Bay provided consulting services to
international long distance carriers through DBCS, his own consulting firm. He
was Vice President of Operations for Old Resurgens from 1989 until December
1993.
W. Tod Chmar. Mr. Chmar has served as Executive Vice President and
Secretary of the Company since December 1998. He was an Executive Vice President
and director of RCG and Cherry U.K. from October 1997 to December 1998, when
both companies were acquired by the Company. Mr. Chmar served as Senior Vice
President of Metromedia from November 1995 until December 1996 and of Actava
from 1994 until November 1995. From January 1985 until September 1993, Mr. Chmar
was a partner in the law firm of Long Aldridge & Norman LLP, specializing in
mergers and acquisitions and corporate finance.
23
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market ("Nasdaq")
under the symbol "WAXS". The quarterly price ranges for the Company's common
stock as reported by Nasdaq are as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
---- --- -----
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $33 1/2 $21 5/8 $32 1/2
Second Quarter............................................ 40 25 3/8 30
Third Quarter............................................. 30 15/16 18 3/4 20 1/4
Fourth Quarter............................................ 24 3/4 12 21 3/8
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $ 9 1/4 $ 7 1/2 $ 8
Second Quarter............................................ 23 7 5/8 20 1/2
Third Quarter............................................. 34 1/8 20 32 1/2
Fourth Quarter............................................ 33 3/4 17 23 7/8
</TABLE>
As of March 30, 1999, there were 679 holders of record of the Company's
common stock. This number does not include beneficial owners of the Company's
common stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
SALE OF UNREGISTERED SECURITIES
On December 14, 1998, pursuant to the Plan approved by the Bankruptcy Court
in the Bankruptcy Case and the merger agreement between the Company and RCG, the
Company issued 9,375,000 shares of its common stock to a disbursing agent to be
distributed to creditors of RCG in exchange for the discharge by such creditors
of RCG of all indebtedness of and claims against RCG. The shares were issued
under Section 1145 of the United States Bankruptcy Code which generally provides
that the registration requirements of the Securities Act do not apply to the
offer or sale under a plan of reorganization of securities of a debtor in
exchange for a claim against, or interest in, the debtor. Section 1145 further
provides that an offer or sale of securities under the Section is deemed to be a
public offering.
On December 14, 1998, the Company issued 1,812,500 shares of common stock
to Renaissance Partners II, the sole stockholder of Cherry U.K., in connection
with the Company's acquisition of Cherry U.K. The shares were issued under
Section 4(2) of the Securities Act which provides for an exemption from the
registration requirements of the Securities Act for transactions by an issuer
not involving any public offering.
DIVIDEND POLICY
The Company has not paid or declared any cash dividends on its common stock
and currently intends to retain all future earnings to fund operations and the
continued development of its business. In addition, the Company's credit
facility contains restrictions limiting the ability of the Company to pay cash
dividends. Any future determination to declare and pay cash dividends will be at
the discretion of the Board of Directors and will be dependent on the Company's
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
24
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information for each of the five years in the period
ended December 31, 1998 set forth below has been derived from and should be read
in conjunction with the financial statements and other financial information
presented elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONTINUING OPERATIONS DATA(1):
Equipment sales................................ $138,990 $ 48,614 $17,131 $12,612 $ 6,014
Carrier service revenues....................... 13,143 -- -- -- --
-------- -------- ------- ------- -------
Total sales.......................... 152,133 48,614 17,131 12,612 6,014
Gross profit................................... 56,031 21,087 3,055 1,802 135
In-process research and development............ 100,300 -- -- -- --
Goodwill impairment............................ 6,200 -- -- -- --
Restructuring and other charges................ 17,240 -- -- -- --
Income (loss) from continuing operations(2).... (114,645) 8,350 (1,041) (389) (2,079)
Net income (loss) from continuing operations
per share(3)................................. $ (5.19) $ 0.45 $ (0.07) $ (0.04) $ (0.45)
Weighted average shares outstanding(3)......... 22,073 18,708 14,530 9,083 4,631
BALANCE SHEET DATA(4):
Cash and equivalents........................... $ 55,176 $118,065 $22,480 $ 1,887 $ 753
Working capital................................ 125,586 153,750 37,961 10,222 2,267
Total assets................................... 613,812 225,283 60,736 28,515 8,943
Long-term debt................................. 137,864 115,264 -- 3,750 4,328
Total liabilities.............................. 253,229 133,528 8,362 14,181 7,783
Stockholders' equity........................... 360,583 91,755 52,374 14,334 1,160
</TABLE>
- ---------------
(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: AIT -- May 1995; CIS -- January 1997;
Galaxy -- July 1997; ATI -- January 1998; NACT -- February 1998;
Telco -- November 1998; and Resurgens -- December 1998. On a pro forma
unaudited basis, as if the acquisitions of ATI, NACT, Telco and Resurgens
had occurred as of January 1, 1997, total sales, net loss from continuing
operations and net loss from continuing operations per diluted share for the
years ended December 31, 1998 and 1997 would have been approximately $378.0
million and $370.6 million; $100.8 million and $178.7 million; and $2.91 and
$5.48, respectively. The results of operations for Galaxy during 1996 and
the first six months of 1997 were not material and therefore are not
included in the pro forma disclosure.
(2) The Company recorded no income tax expense during 1994 and 1995 due to net
losses realized and the availability of federal income tax net operating
loss carryforwards.
(3) 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 common stock for 1998, 1997, 1996 and 1995,
respectively, that are held in escrow accounts. See Notes A and B to the
Consolidated Financial Statements.
(4) In October 1997, the Company sold $115.0 million of convertible subordinated
notes. See Note I to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company 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 its own international network
facilities, various international termination relationships and resale
arrangements with other international long
25
<PAGE> 28
distance service providers. The World Access Equipment Group develops,
manufactures and markets digital switches, billing and network telemanagement
systems, cellular base stations, fixed wireless local loop systems, intelligent
multiplexers, digital microwave radio systems and other telecommunications
network products. To support and complement its product sales, the Company also
provides its customers with a broad range of network design, engineering,
testing, installation and other value-added services.
The Company acquired five businesses during 1995 to 1997 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, a full service provider of Northern Telecom
switching systems, add-on frames and related circuit boards; effective October
1995, the Company acquired Westec Communications, Inc. ("Westec"), a provider of
wireless products and services primarily to the cable television industry;
effective January 1996, the Company acquired Sunrise Sierra, Inc. ("Sunrise"), a
developer and manufacturer of intelligent transport and access products;
effective January 1997, the Company acquired CIS, a provider of mobile network
equipment and related design, installation and technical support services to
cellular, PCS and other wireless service providers; and effective August 1997,
the Company acquired Galaxy, a RF engineering firm that provides system design,
implementation, optimization and other value-added radio engineering and
consulting services to the wireless service markets. The markets served by CIS
and Galaxy complement the Company's traditional telephone service provider and
private network operator markets.
During 1998, the Company continued to execute its Total Network Solutions
strategy of broadening its offering of proprietary equipment and services by
acquiring four businesses. In the first quarter of 1998, the Company acquired
ATI, a designer and manufacturer of digital microwave and millimeterwave radio
systems for voice, data and/or video applications and a majority stake in NACT,
a single-source provider of advanced telecommunications switching platforms with
integrated telephony software applications and network telemanagement
capabilities. In October 1998, the Company acquired the remaining minority
interest in NACT. In November 1998, the Company acquired Telco, a designer and
manufacturer of broadband transmission, network access and bandwidth
optimization products.
During 1998, Telco has been building a core product portfolio that
incorporates new technologies and strategically positions it for the impending
evolution of telecommunications markets. Telco Systems made two strategic
acquisitions in 1998 that expanded its product offerings from circuit switched
into packet switched, frame relay and ATM markets.
In December 1998, the Company acquired Resurgens, a provider of wholesale
international long distance services. Resurgens now conducts its business as the
World Access Telecommunications Group. As a result of the Resurgens acquisition,
WorldCom, a major customer and vendor of Resurgens, now owns approximately 14%
of the outstanding common stock of the Company.
Through the completion of the acquisitions in 1998, the Company believes it
is now positioned to offer its customers a complete telecommunications network
solutions, including access to international long distance, proprietary
equipment, and network planning and engineering services. The Company's
management believes that numerous synergies exist as a result of these
acquisitions, including cross-selling opportunities, technology development and
cost savings.
In December 1998, John D. ("Jack") Phillips was appointed the Company's new
President and Chief Executive Officer. Mr. Phillips was formerly the President
and Chief Executive Officer of Resurgens. Also in December 1998, two new outside
directors joined the Company's Board.
In connection with the recently completed acquisitions, the appointment of
a new Chief Executive Officer and the election of the new directors, the Company
approved and began implementing a major restructuring program to reorganize its
operating structure, consolidate several facilities, outsource its manufacturing
requirements, rationalize its product offerings and related development efforts,
and pursue other potential synergies expected to be realized as a result of the
integration of recently acquired businesses. The Company expects the plans
associated with the program to be substantially completed during the second
quarter of 1999.
26
<PAGE> 29
In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the resale of Nortel and other
original equipment manufacturers' wireline switching equipment, third party
repair of telecom equipment and pay telephone refurbishment. These businesses
have been accounted for as discontinued operations and, accordingly, the results
of operations have been excluded from continuing operations in the consolidated
Statements of Operations.
During the past few years, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity offering
and a recently executed $75.0 million credit facility. The Company has used this
capital for acquisitions and to support the working capital requirements
associated with the Company's growth.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of total sales from continuing operations except other data, which is
expressed as a percentage of the applicable revenue type:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Equipment sales........................................... 91.4% 100.0% 100.0%
Carrier service revenues.................................. 8.6 -- --
----- ----- -----
Total sales....................................... 100.0 100.0 100.0
Cost of equipment sold.................................... 48.9 56.6 82.2
Write-down of inventories................................. 6.1 -- --
Cost of carrier services.................................. 8.2 -- --
----- ----- -----
Total cost of sales............................... 63.2 56.6 82.2
----- ----- -----
Gross profit...................................... 36.8 43.4 17.8
Research and development.................................. 4.5 3.4 3.4
Selling, general and administrative....................... 13.1 13.6 21.4
Amortization of goodwill.................................. 2.8 2.3 1.1
In-process research and development....................... 65.9 -- --
Write-down of impaired goodwill........................... 4.1 -- --
Provision for doubtful accounts........................... 7.4 -- --
Restructuring and other charges........................... 11.3 -- --
----- ----- -----
Operating income (loss)........................... (72.3) 24.1 (8.1)
Interest and other income................................. 2.2 5.1 1.6
Interest expense.......................................... (4.5) (2.1) (0.2)
----- ----- -----
Income (loss) from continuing operations before
income taxes and minority interests............. (74.6) 27.1 (6.7)
Income taxes (benefits)................................... (0.9) 9.9 (0.6)
----- ----- -----
Income (loss) from continuing operations before minority
interests.............................................. (73.7) 17.2 (6.1)
Minority interests in earnings of subsidiary.............. 1.6 -- --
----- ----- -----
Income (loss) from continuing operations.......... (75.3)% 17.2% (6.1)%
===== ===== =====
</TABLE>
1998 CONTINUING OPERATIONS COMPARED TO 1997 CONTINUING OPERATIONS
Sales. Total sales increased $103.5 million, or 212.9%, to $152.1 million
in 1998 from $48.6 million in 1997. Equipment sales increased $90.4 million, or
185.9% to $139.0 million in 1998 from $48.6 million in 1997. Carrier service
revenues were $13.1 million which primarily represented the revenues from
Resurgens which was acquired on December 15, 1998 and facilities management
services from NACT. The increase in equipment sales related to digital radio
systems sold by ATI, which was acquired effective January 29, 1998, switching
products sold by NACT, which was acquired effective February 28, 1998,
transmission and access
27
<PAGE> 30
products sold by Telco, which was acquired effective November 30, 1998, and an
increase in sales of cellular equipment sold by CIS.
Gross Profit. Gross profit increased $34.9 million, or 165.7%, to $56.0
million in 1998 from $21.1 million in 1997. Gross profit margin decreased to
36.8% in 1998 as compared to 43.4% in 1997.
Gross profit before special charges increased $44.2 million, or 209.8%, to
$65.3 million in 1998 from $21.1 million in 1997. Equipment Group gross profit
margin before special charges increased to 46.6% in 1998 from 43.4% in 1997.
Carrier service gross profit margin was 4.7% in 1998. The improved margin
performance of the Equipment Group relates to the switching products sold by
NACT and transmission and access products sold by Telco. The increase was
partially offset by the digital radio systems sold by ATI, which included sales
of the new WavePLEX radio system which carries a lower profit margin in its
infancy until costs are reduced by increased production. The Company's margins
on sales of cellular equipment sold by CIS declined over 1997, resulting from
large contract price negotiations which enabled CIS to obtain significant sales
growth of 70.4% over 1997.
Research and Development. Research and development expenses increased $5.2
million, or 315.4%, to $6.8 million in 1998 from $1.6 million in 1997. The
increase in expenses was attributable to the acquisitions of Telco, NACT and ATI
and the further expansion of a corporate product development group during 1998.
Research and development expenses increased to 4.5% of total sales in 1998 from
3.4% of total sales in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.4 million, or 204.4%, to $20.0 million in
1998 from $6.6 million in 1997. The increase primarily related to expenses
associated with the operations of ATI and NACT, which were acquired in early
1998, expenses related to the operations of Telco and Resurgens, which were
acquired in the fourth quarter of 1998, the Company's continued expansion of a
dedicated international sales and marketing group and corporate business
development function. As a percentage of total sales, selling, general and
administrative expenses decreased to 13.1% in 1998 from 13.6% in 1997.
Amortization of Goodwill. Amortization of goodwill increased $3.1 million
to $4.3 million in 1998 from $1.1 million in 1997, primarily as a result of the
goodwill generated in connection with the ATI, NACT, Telco and Resurgens
acquisitions. In December 1998, the Company recorded impairment charges of $6.2
million related to the unamortized balance of goodwill recorded in connection
with the acquisitions of Westec in October 1995 and Sunrise in January 1996.
Both of these businesses, which have become less strategic to the Company due to
the ATI and Telco Mergers in 1998, are currently forecasted to generate nominal
revenues and cash flow in 1999.
Operating Income (Loss). Operating income (loss) decreased $121.8 million
to $(110.1) million in 1998 as compared to $11.7 million in 1997 due to the
significant special charges recorded during 1998, related to acquisitions and
restructuring programs. Operating margin was (72.3%) in 1998 as compared to
24.1% in 1997. Operating income before special charges increased $21.9 million,
or 186.7%, to $33.6 million in 1998 from $11.7 million in 1997. Operating income
margin decreased to 22.1% in 1998 from 24.1% in 1997. The reduction in operating
income margin is due to the margins of the newly formed Telecommunications Group
which are substantially less than those of the Equipment Group.
Interest and Other Income. Interest and other income increased $953,000,
or 38.6%, to $3.4 million in 1998 from $2.5 million in 1997 due to increased
invested cash balances of the Company, resulting primarily from proceeds
received from a $115.0 million private debenture offering completed in October
1997.
Interest Expense. Interest expense increased to $6.8 million in 1998 from
$1.0 million in 1997. The increase is primarily related to the $115.0 million
private debenture offering completed in October 1997.
1997 CONTINUING OPERATIONS COMPARED TO 1996 CONTINUING OPERATIONS
Sales. Total sales increased $31.5 million, or 183.8%, to $48.6 million in
1997 from $17.1 million in 1996. There were no carrier service revenues in 1997
and 1996.
28
<PAGE> 31
The increase related to sales of cellular equipment by CIS, which was
acquired effective January 1, 1997, sales of the Company's international
products, the CDX and WLL-2000 and engineering services performed by Galaxy,
which was acquired effective July 1, 1997. These increases were partially offset
by a decline in electronic manufacturing revenues resulting from a strategic
decision to begin utilizing the Company's manufacturing capacity for new Company
products rather than servicing external contract manufacturing customers.
Equipment sales for 1996 included approximately $4.8 million in one-time sales
of a distributed product.
Gross Profit. Gross profit increased $18.0 million, or 590.2%, to $21.1
million in 1997 from $3.1 million in 1996. Gross profit margin increased to
43.4% in 1997 from 17.8% in 1996. The improved performance resulted from
economies of scale associated with the 183.8% increase in total sales and the
change in sales mix to higher margin equipment including CIS cellular equipment
and the CDX and WLL-2000.
Research and Development. Research and development expenses increased $1.1
million, or 184.0%, to $1.6 million in 1997 from $580,000 in 1996. The increase
in expenses was attributable to the formation of a corporate product development
group during the third quarter of 1996 and the continued expansion of the
development group during 1997. Research and development expenses were 3.4% of
total sales in 1997 and 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.9 million, or 79.1%, to $6.6 million in
1997 from $3.7 million in 1996. The increase related primarily to expenses
associated with the operations of CIS and Galaxy, which were acquired effective
January 1, 1997 and July 1, 1997, respectively, and the Company's establishment
of a dedicated international sales and marketing group and corporate business
development function in March 1996. In addition, the Company recorded
approximately $960,000 of incentive compensation expense in 1997 as compared to
a provision of approximately $300,000 in 1996. As a percentage of total sales,
selling, general and administrative expenses decreased to 13.5% in 1997 from
21.4% in 1996.
Amortization of Goodwill. Amortization of goodwill increased $915,000 to
$1.1 million in 1997 from $195,000 in 1996, primarily as a result of goodwill
recorded in connection with the CIS and Galaxy acquisitions.
Operating Income. Operating income increased $13.1 million, or 945.9%, to
$11.7 million in 1997 from a loss of $(1.4) million in 1996. Operating income
margin increased to 24.1% in 1997 from (8.1)% in 1996.
Interest and Other Income. Interest and other income increased $2.2
million to $2.5 million in 1997 from $269,000 in 1996 due to a significant
increase in cash balances of the Company, resulting primarily from the sale of
$115.0 million convertible subordinated notes in October 1997 and proceeds
received from a $26.2 million secondary public equity offering completed in
October 1996.
Interest Expense. Interest expense increased to $1.0 million in 1997 from
$39,000 in 1996. The increase is primarily due to the sale of $115.0 million
convertible subordinated notes in October 1997 which bear interest at 4.5%.
Income Taxes. The Company's effective income tax rate increased to 36.5%
in 1997 from (9.9)% in 1996. The Company's 1996 effective rate was favorably
impacted by the recognition of a $4.1 million deferred tax asset during the year
to reflect the benefits of the Company's remaining net operating loss
carryforward.
DISCONTINUED OPERATIONS
Overview. During 1998, the Company broadened its offering of proprietary
equipment by acquiring three equipment businesses. The Company acquired ATI, a
designer and manufacturer of digital microwave and millimeterwave radio systems
for voice, data and/or video applications; NACT, a single-source provider of
advanced telecommunications switching platforms with integrated telephony
software applications and network telemanagement capabilities and Telco, a
designer and manufacturer of broadband transmission, network access and
bandwidth optimization products.
29
<PAGE> 32
In connection with the completion of the acquisitions above, certain of the
Company's non-proprietary businesses became non-strategic. In December 1998, the
Company formalized its plan to offer for sale all of its non-core businesses,
which consist of the resale of Nortel and other original equipment
manufacturers' wireline switching equipment, third party repair of telecom
equipment and pay telephone refurbishment. On January 5, 1999, the Company
formally announced its intention to sell these businesses. Management expects
that the sale will be completed in 1999. These businesses have been accounted
for as discontinued operations and, accordingly, the results of operations have
been excluded from continuing operations in the Consolidated Statements of
Operations for all periods presented.
1998 Compared to 1997. Sales increased $14.2 million, or 32.0%, to $58.6
million in 1998 from $44.4 million in 1997. This increase was primarily due to
an increase in the resale of Nortel and other original equipment manufacturers'
wireline switching equipment at the Company's AIT business. Gross profit before
special charges increased $2.1 million, or 18.9%, to $13.1 million in 1998.
Gross profit margin before special charges declined to 22.4% in 1998 from 25.0%
in 1997. The Company elected to sell approximately $10.0 million of Nortel
equipment at substantially reduced margins in the fourth quarter in anticipation
of additional pricing pressure and in an effort to reduce the inventory levels
of this business. The Company also experienced margin declines in the \pay
telephone refurbishment business in 1998 related to the introduction of a vandal
resistant pay telephone modification which carries lower margins than the
historical refurbishment revenues.
During 1998, the Company also recorded special charges of approximately
$12.4 million relating to the non-core businesses (see "-- Restructuring and
Other Charges").
1997 Compared to 1996. Sales increased $10.5 million, or 31.0% to $44.4
million in 1997 from $33.9 million in 1996. The increase was due to growth in
Nortel resale business of AIT and pay telephone refurbishment. Gross profit
decreased to $11.1 million in 1997 from $11.9 million in 1996. Gross profit
margin decreased to 25.0% in 1997 from 35.3% in 1996. The decline in gross
profit margin in 1997 related to margin pressure experienced by the Nortel
resale business.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Overview. In connection with the ATI, NACT and Telco Mergers in 1998, the
Company wrote off purchased in-process R&D totaling $5.4 million, $44.6 million
and $50.3 million, respectively. These amounts were expensed as non-recurring
charges on the respective acquisition dates. These write-offs were necessary
because the acquired technology had not yet reached technological feasibility
and had no future alternate use.
The value of the purchased in-process technology from ATI was determined by
estimating the projected net cash flows related to in-process research and
development projects, including costs to complete the development of the
technology. These cash flows were discounted back to their net present value.
The projected net cash flows from such projects were based on management's
estimates of revenues and operating profits related to such projects. These
estimates were based on several assumptions, including those summarized below.
The value of the purchased in-process technology from NACT and Telco was
determined by estimating the projected net cash flows related to in-process
research and development projects, excluding costs to complete the development
of the technology. These cash flows were discounted back to their net present
value. The projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects. These estimates were based on several assumptions, including those
summarized below for each respective acquisition. The resultant net present
value amount was then reduced by a stage of completion factor. This factor more
specifically captures the development risk of an in-process technology (i.e.,
market risk is still incorporated in the estimated rate of return).
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
30
<PAGE> 33
If these projects to develop commercially viable products based on the
purchased in-process technology are not successfully completed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may become impaired.
ATI Merger. ATI develops and manufactures a series of high-performance
digital microwave and millimeterwave radio equipment. Their products reach
across all frequency bands and data rates and offer numerous features. The
nature of the in-process research and development was such that technological
feasibility had not been attained. Failure to attain technological feasibility
would have rendered partially designed equipment useless for other applications.
ATI's products are designed for specific frequency bandwidths and, as such, are
highly customized to those bandwidths and the needs of customers wishing to
operate in them. Products only partially completed for certain bandwidths cannot
be used in other bandwidths.
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave and millimeterwave radio equipment. Each
project consists of multiple products. These projects were at multiple stages
along ATI's typical development timeline. Some projects were beginning testing
in ATI labs; others were at earlier stages of planning and designing. The
majority of the products were scheduled to be released during 1998, 1999 and
early 2000. Revenue projections for the in-process technologies reflected the
anticipated release dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from 30.9% to 60.9% as other products are released
in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $11.8 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base and movement into new markets.
Projected revenues from in-process technology were assumed to peak in 2001 and
decline from 2002 through 2004 as other new products are expected to enter the
market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit (loss) ranged from approximately a low of
$(900,000) to a high of $9.1 million within the term of the projections.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
Management estimated that the costs to develop the in-process technology
acquired in the ATI acquisition would be approximately $24.3 million in the
aggregate through the year 2002. The expected sources of funding were scheduled
R&D expenses from the operating budget of ATI.
NACT Merger. NACT provides advanced telecommunications switching platforms
with integrated applications software and network telemanagement capabilities.
NACT designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained. Failure to attain technological
feasibility, especially given the high degree of customization required for
complete integration into the NACT solution, would have rendered partially
designed hardware
31
<PAGE> 34
and software useless for other applications. Incomplete design of hardware and
software coding would create a non-connective, inoperable product that would
have no alternative use.
NACT's business plan called for a shift in market focus to large customers,
both domestic and international; therefore, NACT had numerous projects in
development at the time of the acquisition. Additionally, the pending completion
of a major release of NACT's billing system required significant development
efforts to ensure continued integration with NACT's product suite. The purchased
in-process technology acquired in the NACT acquisition was comprised of 13
projects related to switching and billing systems. These projects were scheduled
to be released between February 1998 and April 2000. These projects include
planned additions of new products, based on undeveloped technologies, to NACT's
suite of STX and NTS products. The projects also include the creation of
products for new product suites. The research and development projects were at
various stages of development. None of the in-process projects considered in the
write-off had attained technological feasibility. The in-process projects do not
build on existing core technology; such existing technologies were valued as a
separate asset.
A brief summary of the significant technologies NACT was developing for
their STX and NTS products at the time of the acquisition is as follows:
STX Application Switching Platform ("STX") -- STX was introduced in May
1996 as an integrated digital tandem switching system which allows scalability
from 24 ports to a capacity of 1,024 ports per switch. The STX can be combined
with three additional STXs to provide a total capacity of 4,096 ports per
system. The current STX is not sufficiently developed to address NACT's
objective of targeting larger, more diverse telecommunications companies. To
move into this expanded customer base, NACT has multiple development tasks
planned for the STX product. NACT plans to incorporate into the STX certain
features and enhancements such as SS7 and E1 (discussed below), R-2 signaling,
and Integrated Services Digital Network, which are critical to the Company's
strategy to broaden its customer base. The SS7 and E1 features are considered
new products within the STX family of products.
Master Control Unit ("MCU") -- MCU is a database hub which can link up to
four switches, creating a larger capacity tandem switch. NACT is developing an
updated MCU, called the "redundant MCU", which allows for intelligent peripheral
or recognition of pre-paid caller numbers. Redundant MCU is an important
extension to the MCU system because it will allow a telecommunications company
to create an entire switching network outside of the public network owned by
major telecommunications firms.
NTS Telemanagement and Billing System ("NTS") -- NTS performs call rating,
accounting, switch management, invoicing, and traffic engineering for multiple
NACT switches. NACT recently finished development of an improved billing system,
the NTS 2000, which is designed for real-time transaction processing with
graphical user interface and improved call reports. The NTS 2000 is compatible
with non-NACT switches. The NTS 2000 also allows for customization of invoices
and reports.
E1 to T1 Conversion -- The T1 is the switchboard hardware used in the STX.
The T1 product has been in existence for several years. The E1 is the standard
switchboard used in Europe. NACT is creating a technology which facilitates
compatibility between the T1 and the switchboard hardware currently used in
Europe. In addition, NACT is currently developing enhanced switchboard hardware
called the T3, which will allow for more calls to pass through the switchboard
at one time. Both development efforts, the T3 and compatibility between E1 and
T1, are necessary as NACT moves into international markets.
Transmission Control Protocol/Internet Protocol ("TCP/IP")
Connectivity -- TCP/IP is the most common method of connecting personal
computers, workstations and servers. Other historically dominant networking
protocols, such as the local area network ("LAN") protocol and international
packet exchange/sequence packet exchange, are losing ground to TCP/IP. The
addition of TCP/IP is vital relative to NACT's strategic objective of offering
voice-over-Internet.
68060 -- The Company is incorporating the Motorola 68060 board in the STX
application platform to enable the STX to support 2,048 ports per switch or
8,192 ports per integrated MCU system. With this enhancement, the STX is
expected to process significantly more call minutes per month.
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Signaling System 7 ("SS7") -- SS7 is software that allows a call, which
normally would have to go through a series of switchboards to reach its
destination, to instead skip from the first switchboard to the last. With the
addition of this enhancement, the STX switch can interface with carriers more
quickly and efficiently. In addition, NACT is developing the C7, which is the
European version of the SS7.
NACT had 13 projects in development at the time of acquisition. These
projects were at multiple stages along NACT's development timeline. Some
projects were beginning testing in NACT labs; others were at earlier stages of
planning and designing. These projects were scheduled for release between
December 1998 and December 2000. Revenue projections for the in-process
technologies reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the 12-year projection at annual rates ranging from
61.4% to 2.81%, decreasing over the remaining years at annual rates ranging from
16.0% to 48.5% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $8.0 million to a high of $101.1 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base and movement into new markets. Projected revenues from in-process
technology were assumed to peak in 2003 and decline from 2004 through 2009 as
other new products are expected to enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 67.2% to a low of 2.8% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $2.1 million to $29.3
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $5.0 million in the
aggregate through the year 1999. The expected sources of funding were scheduled
research and development expenses from the operating budget of NACT.
Telco Merger. Telco develops and manufactures products focused on
providing integrated access for network services. Telco's products can be
separated into three categories: (1) broadband transmission products, (2)
network access products, and (3) bandwidth optimization products. Telco's
products are deployed at the edge of the service provider's networks to provide
organizations with a flexible, cost-effective means of transmitting voice, data,
video and image traffic over public or private networks.
At the time of acquisition, Telco had several primary projects in
development relating to next-generation telecommunication and data network
hardware. These projects were at various stages in the development process. Some
were about to enter the testing phase of the initial hardware prototype, while
others were still in the early concept and design specification stages. These
projects were scheduled for commercial release at various points in time from
December 1998 through early 2000.
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<PAGE> 36
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
A brief description of the significant in-process projects is set forth
below:
Access 45/60 Release 1 -- Access 45/60 Release 1 product provides
essentially the same functional service as the existing Access 45/60 network
access servers by providing highly reliable digital access to public, private
and hybrid networks, integrating multiple business applications through
cost-effective connections to dedicated, switched and packet network services.
However, unlike the current versions, the technology underlying the Release 1
("R1") version is based on high-bit-rate digital subscriber line ("HDSL")
technology. This HDSL technology will enable high-density voice and data
applications to travel simultaneously over one to ten HDSL lines from a single
platform, which will launch the R1 product into a whole new loop market by
eliminating the need for service providers to have separate platforms for voice
and data at the customer's premises or at the provider's central office.
Although the Access 45/60 R1 product is designed to provide a service similar to
the current Access 45/60 product, the core functional technology of the new R1
is very different, and the target market of the R1 product is different.
If technological feasibility is achieved, Telco expects the product to be
introduced into the market at the end of 1999. However, before that can occur,
Telco must complete the first prototype builds of the product and perform
initial system testing which will not begin until the end of August 1999. In
September 1999, Telco will begin testing for system quality assurance and
expects to begin beta field testing in October or November 1999.
EdgeLink300 E1 -- The EdgeLink300 E1 version is an addition to the 300
family which will be marketed internationally. Conforming to all applicable ETSI
and ITU standards, this product will provide a cornerstone to the next
generation of international product offerings. This product is in the mid stage
of development. Software code generation is expected to be completed in April
1999. Prototype builds for initial units are expected to be completed in May
1999, and initial beta field tests are expected to begin in June 1999.
SONET Edge Device -- The SONET Edge Device is a next-generation edge device
expected to provide access to SONET networks. This access device will be
designed to take a T1 voice input from a PBX or an Access60 and convert to SONET
formatted tributaries and send it out via a traditional STS1 interface.
This project is in the early concept stage, and is not expected to reach
commercial viability until early 2000. Documentation of the hardware and
software design is expected to be completed in April 1999; software code
generation is expected to be completed in August 1999; prototype builds for
initial units are expected to be completed in October 1999; and initial beta
field tests are expected to begin in January 2000.
EdgeLink650 -- The EdgeLink650 ATM device will be designed to be a
multislot version of the Edgelink600 with DS3 and NxDS1 interface support. This
product will incorporate an ATM Inverse Multiplexer ("IMA"). This product is in
an early stage of development and is expected to reach commercial viability in
early 2000. Documentation of the hardware and software design is expected to be
completed in June 1999; prototype builds for initial units are expected to be
completed in May 1999; and initial beta field tests are expected to begin in
December 1999.
Voice-Over-Packet Engines -- Voice-over-packet refers to sending voice
transmissions over packet-based communication protocols, such as internet
protocols (IP telephony), Frame Relay, or ATM. Telco is currently in the early
stages of developing the software and hardware for a generic "engine" to be
integrated into the EdgeLink family of products to enable this functionality.
This is expected to be commercially viable in late 1999. Software code
generation is expected to be completed in June 1999; prototype builds for
initial units are expected to be completed in July 1999; and initial beta field
tests are expected to begin in September 1999.
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If these projects are not completed as planned, the in-process research and
development will have no alternative use. Failure of the in-process technologies
to achieve technological feasibility may adversely affect the future
profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 103.6% to a low of 3.8%, reflecting both the displacement
of Telco's old products by these new products as well as the expected growth in
the overall market in which Telco's products compete. Thereafter, revenues are
projected to decline over the remaining projection period at annual rates
ranging from 15.2% to 42.6%, as the acquired in process technologies become
obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $39.0
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
was projected to grow over the first five years of the projection period at
annual rates ranging from a high of 240.9% to a low of 22.2% with one
intermediate year of marginally declining operating income. Thereafter, the
contribution to operating income was projected to decline through the projection
period. The acquired in-process technology's contribution to operating income
ranged from a low of approximately $4.4 million to a high of approximately $70.5
million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology and
potential obsolescence of legacy products, and the risk associated with the
financial assumptions with respect to the projections used in the analysis.
The discount rates used to value the in-process technologies were 18.0% and
20.0%, depending on the stage of development. These discount rates were selected
due to several incremental inherent risks. First the actual useful economic life
of such technologies may differ from the estimates used in the analysis. Second,
risks associated with the financial projections on the specific products that
comprise the acquired in-process research and development. The third factor is
the incomplete and unproven nature of the technologies. Finally, future
technological advances that are currently unknown may negatively impact the
economic and functional viability of the in-process R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $11.6 million through 2001. Over the projection
period, management expects to spend an additional aggregate $48.2 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes and identified
upgrades.
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<PAGE> 38
RESTRUCTURING AND OTHER CHARGES
Summary. During 1998, the Company approved and began implementing two
restructuring programs designed to reduce operating costs, outsource
manufacturing requirements and focus Company resources on recently acquired
business units containing proprietary technology or services. Management
carefully reviewed the provisions of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity" in
determining which costs related to the various actions should be included in the
special charges. No costs were included in the charge that would derive future
economic benefit to the Company, e.g., relocation of existing employees,
recruiting and training of new employees and facility start-up costs. A summary
of restructuring and related charges recorded in connection with these programs
follows:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
---------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
First Quarter
Restructuring Charges
Severance and termination benefits..................... $ 175 $ 375 $ 550
Idle facility costs.................................... 125 1,215 1,340
Idle production equipment.............................. 290 1,060 1,350
------- ------- -------
590 2,650 3,240
Related Charges
Write-down of inventories.............................. 465 2,895 3,360
------- ------- -------
Total First Quarter............................... 1,055 5,545 6,600
------- ------- -------
Fourth Quarter
Restructuring Charges
Severance and termination benefits..................... 2,050 -- 2,050
Idle facility costs.................................... 1,200 -- 1,200
Asset write-downs...................................... 11,763 -- 11,763
Other exit costs....................................... 1,637 -- 1,637
------- ------- -------
16,650 -- 16,650
Related Charges
Write-down of inventories.............................. 8,827 4,923 13,750
Provision for doubtful accounts........................ 10,674 1,926 12,600
------- ------- -------
Total Fourth Quarter.............................. 36,151 6,849 43,000
------- ------- -------
Total Charges..................................... $37,206 $12,394 $49,600
======= ======= =======
</TABLE>
First Quarter 1998. In January 1998, the Company's senior management
decided that the following actions were necessary to streamline operations and
position the Company to service anticipated sales growth:
- Close down the existing Orlando, Florida manufacturing and repair
facility. Move the manufacturing of certain World Access products to the
company's Alpharetta, Georgia manufacturing facility.
- Exit the contract manufacturing business.
- Close down four Lakeland, Florida facilities and move AIT operations to a
new facility in Orlando, Florida. Repair operations would be integrated
with AIT in this new facility.
- Close down Westec's facility in Scottsdale, Arizona and integrate its
operations into ATI's facility in Wilmington, Massachusetts.
Shortly thereafter, senior management informed the operating management of
the applicable divisions. All Orlando and Lakeland employees were informed in
January and Westec employees were informed in February (subsequent to the
closing of the ATI acquisition).
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<PAGE> 39
Severance and termination benefits were clearly communicated up front to
the approximately 60 employees who lost their jobs as a direct result of the
consolidations. Affected employees were notified shortly after the January and
February employee meetings. Benefits were determined consistent with the
Company's severance policy of one week of pay for each full year of service
(minimum of two weeks) and continued benefits through the month severance pay is
exhausted. Approximately 10 of these employees were involuntarily terminated in
February and March, approximately 40 employees were involuntarily terminated in
April and approximately 10 employees were involuntarily terminated in June. The
Orlando and Lakeland facilities were closed in April and the Scottsdale facility
was closed in June. The actual severance and termination benefit costs incurred
by the Company were not materially different from the $550,000 recorded in the
special charge.
The idle facility and equipment portion of the special charge included the
write-off of "old Orlando", Lakeland and Scottsdale leasehold improvements,
provisions for the estimated costs to terminate idle facility and equipment
leases, the write-off of Orlando manufacturing equipment not relocated to the
Company's Alpharetta facility and certain phase-down expenses associated with
the six facilities closed down.
As previously noted, all activities that resulted in the first quarter
special charge were completed by the Company as of June 30, 1998. Of the
$3,240,000 special charge, approximately $1.4 million related to assets directly
written-off or amounts charged to the reserve in the first quarter. As of
December 31, 1998, the accrual for the first quarter special charges was
approximately $325,000, which consisted primarily of lease termination losses
expected to be incurred.
Fourth Quarter 1998. In December 1998, in connection with the (i) recently
completed NACT Merger, Telco Merger and Resurgens Merger; (ii) election of
several new outside directors to the Company's Board; and (iii) appointment of a
new Chief Executive Officer, the Company approved and began implementing a major
restructuring program which included the following activities:
- Reorganize the Company's Equipment Group operating structure.
- Consolidate the Company's ATI operations in Wilmington, Massachusetts
into Telco's facility in Norwood, Massachusetts.
- Outsource its electrical manufacturing requirements resulting in the sale
of the Company's Alpharetta, Georgia manufacturing facility to an
established contract manufacturer.
- Change in the Company's long-term focus for its switching products,
primarily its Compact Digital Exchange ("CDX") switch.
Costs associated with the reorganized operating structure consist primarily
of retirement benefits payable to the Company's former President, which will be
paid throughout 1999, and remaining lease obligations on the Company's Equipment
Group headquarters facility in Alpharetta, Georgia. Group personnel relocated to
the Company's headquarters in Atlanta and the facility was closed in February
1999.
Immediately following the completion of the Telco Merger, the Company
announced that Telco would be the cornerstone of the Company's Transport and
Access Systems Group. Leveraging on Telco's existing operating infrastructure
was anticipated in the Telco Merger to reduce overall operating costs.
Restructuring charges were recorded for costs related to the consolidation of
the Company's ATI operations in Wilmington, Massachusetts into Telco's facility
in Norwood, Massachusetts. Manufacturing of ATI's wireless radios is being
out-sourced to a contract manufacturer and all other aspects of ATI's operations
will be integrated into Telco's existing operating infrastructure. Approximately
60 ATI employees will be losing their jobs as the consolidation program is
executed during the first half of 1999. Severance and other termination benefits
were determined consistent with the Company's severance policy as noted
previously. A provision was recorded for the costs associated with the idle
portion of the Wilmington facility, which is leased through November 2000.
Production equipment was written-down to reflect its estimated net realizable
value upon disposal.
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<PAGE> 40
An integral part of the restructuring program was the Company's decision to
outsource all its electrical manufacturing requirements and sell its Alpharetta,
Georgia manufacturing facility to an established contract manufacturer.
Approximately 25 personnel who were not offered employment by the new buyer
received severance and other termination benefits consistent with the Company's
severance policy, the majority of which was paid in January and February 1999.
Restructuring charges also included the write-off of leasehold improvements
related to the manufacturing portion of the Alpharetta facility, and to
write-down production equipment and other manufacturing assets to their
estimated net realizable values. The Company completed the sale of its
manufacturing operations in March 1999. The actual loss incurred in connection
with the sale did not differ materially from the amounts recorded in the
restructuring charges.
The most significant component of the restructuring charges related to a
change in the Company's long-term focus for its switching products, primarily
its Compact Digital Exchange ("CDX") switch. In January 1999, the Company
elected to reallocate development resources targeted for the CDX switch as a
stand-alone product to the integration of the central office functionality of
the CDX switch and the long-distance functionality of NACT's switch into a
common, next generation technology platform. This strategic decision,
performance difficulties experienced by certain customers' applications of the
CDX switch in 1998, and dramatically reduced internal estimates for CDX switch
revenues in 1999 caused the Company to significantly write-down all CDX related
assets as of December 31, 1998.
Restructuring charges related to the CDX switch included $3.0 million
related to an international long-term contract, $3.5 million to reserve for
potential losses on an equity investment in and loan made to two companies
planning CDX-based network infrastructure build-outs in Latin America, and the
write-off of $1.7 million in other assets related to the development and
deployment of the CDX switch, including prepaid royalties and tooling costs.
Other charges to continuing operations recorded in the fourth quarter of
1998 were provisions for potential inventory obsolescence and doubtful accounts.
The inventory charge was recorded to write-down CDX inventories to estimated net
realizable value and to reflect estimated losses to be incurred in connection
with the sale of ATI and manufacturing inventories to contract manufacturers.
The provision for doubtful accounts was recorded primarily to reduce the
carrying value of accounts receivable resulting from previous CDX sales to
estimated minimum realizable values in light of the issues noted above.
Of the fourth quarter restructuring charges of $16.7 million, approximately
$11.8 million related to assets directly written-off in the fourth quarter. As
of December 31, 1998, the accrual for the fourth quarter restructuring and
special charges was approximately $4.6 million, which consisted of $1.9 million
of severance and other termination benefits, $1.2 million of idle facility
costs. As of the date of this Report, the Company does not expect the actual
costs for these items to be materially different from the amounts recorded in
the restructuring and special charges. The Company expects the plans associated
with the program to be substantially completed during the first half of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of December 31, 1998, the Company had
$55.2 million of cash and equivalents and $63.1 million in borrowings available
under its credit line to support its current working capital requirements and
strategic growth initiatives.
Operating Activities. Cash used by operating activities was $13.0 million
in 1998 and $1.6 million in 1997. The increased use of cash in 1998 resulted
from the Company's need to finance increased accounts receivable and inventories
to support its growth.
Accounts receivable increased $50.2 million, or 247.8%, to $70.5 million at
December 31, 1998 from $20.3 million at December 31, 1997. This was due to the
acquisitions of ATI, NACT, Telco and Resurgens
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<PAGE> 41
and increased sales activity at the Company (fourth quarter 1998 sales were
$73.4 million as compared to fourth quarter 1997 sales of $21.3 million).
Average days sales outstanding at December 31, 1998 were approximately 88 days
as compared to 81 days at December 31, 1997. The Company's sales to
international customers have increased during the last twelve months.
International sales generally have payment terms in excess of 90 days. The
Company also has recently begun to enter into long-term notes receivable with
selected customers. To maximize cash flow, the Company sells the notes where
possible on either a non-recourse or recourse basis to a third party financing
institution. As of December 31, 1998, the Company has a contingent liability of
approximately $19.8 million related to notes sold with recourse. The Company
believes it has recorded sufficient reserves to recognize the current risk
associated with these recourse sales.
Inventories increased $26.2 million, or 116.7%, to $48.6 million at
December 31, 1998 from $22.4 million at December 31, 1997. This increase was due
to the acquisition of ATI, NACT and Telco and the increase in CIS inventories as
a result of the timing of a large equipment purchase in the fourth quarter. The
increases above were offset by the $17.2 million provision for obsolete and
redundant inventories related to the restructuring activities during 1998 (see
"-- Restructuring and Other Charges").
Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, was $66.5 million and $18.2 million for 1998 and
1997, respectively.
Between May 1995 and July 1997, the Company completed the acquisitions of
AIT, Westec, Sunrise, CIS and Galaxy (the "Acquisitions"), which were designed
to bring new wireline and wireless switching, transport and access products and
technology into the Company. All of the Acquisitions were relatively similar in
structure in that the former owners received initial consideration consisting of
a combination of common stock and cash, as well as contingent consideration tied
to the future profitability of the ongoing business. The majority of the
contingent consideration may be paid, at the option of the Company in the form
of Company common stock valued at its then-current market price. At the time it
becomes highly probable that contingent consideration will be earned, the fair
market value is measured and recorded on the Company's balance sheet as
additional goodwill and stockholders' equity. See Note B to the Consolidated
Financial Statements.
In addition to the $3.5 million in cash paid and 440,874 shares of common
stock issued up front to the CIS stockholders, the stockholders of CIS were
issued 845,010 restricted shares of common stock. These shares were immediately
placed into escrow and, together with $6.5 million in additional purchase price,
will be released and paid to the stockholders of CIS contingent upon the
realization of certain predefined levels of pre-tax income from CIS's operations
during three one-year periods beginning January 1, 1997.
The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was January 1, 1997 to December 31, 1997.
In reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 317,427 escrowed shares
were accounted for as if released and $3.5 million in contingent cash payments
were accounted for as if paid as of April 30, 1997. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$6.5 million at April 30, 1997. These shares were released and payment was made
to the former stockholders of CIS on February 15, 1998.
The second measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1998 to December 31, 1998. In
reviewing CIS's pre-tax income performance as of August 31, 1998, the Company
determined that it was highly probable that the conditions for release and
payment for the first period would be met. Accordingly, 244,929 escrowed shares
were accounted for as if released and $2.0 million of CIS Additional
Consideration was accounted for as if paid as of August 31, 1998. The net effect
of this accounting was to increase goodwill and stockholders' equity by
approximately $5.1 million and $3.1 million, respectively, as of August 31,
1998. These escrowed shares were released and CIS Additional Consideration was
paid to the former stockholders of CIS on February 15, 1999. The $2.0 million of
CIS Additional Consideration earned is included in Other accrued liabilities on
the Company's December 31, 1998 balance sheet.
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<PAGE> 42
In addition to the $1.2 million in cash and 262,203 shares of common stock
issued up front, the former Galaxy stockholders were issued 131,101 restricted
shares of the Company's common stock. These shares were immediately placed into
escrow, and along with $3.5 million in additional consideration (the "Galaxy
Additional Consideration"), will be released and paid to the former stockholders
of Galaxy contingent upon the realization of redefined levels of pre-tax income
from Galaxy's operations during four measurement periods between July 1, 1997
and December 31, 2000.
As of February 15, 1999, the Company had released 53,215 shares from escrow
and paid $1.4 million of Galaxy Additional Consideration (in the form of 101,015
restricted shares of Company common stock) based on Galaxy's pretax income
through December 31, 1998. The net effect of the above has been to increase
goodwill, other accrued liabilities and stockholder's equity as of December 31,
1998 by $2.3 million, $1.0 million and $1.3 million, respectively.
In the fourth quarter of 1997, the Company began its three phase
acquisition of NACT. During November and December 1997, the Company purchased
355,000 shares of NACT common stock in the open market for approximately $5.0
million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 63% of the outstanding shares of NACT common stock (the "NACT
Acquisition"). On February 27, 1998 the NACT Acquisition was completed with GST
USA receiving $59.7 million in cash and 1,429,907 restricted shares of the
Company's common stock valued at approximately $26.9 million.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. On October 28, 1998, the
NACT Merger was completed whereby the Company issued 2,790,182 shares of the
Company's common stock valued at approximately $67.8 million for the remaining
minority interest of NACT.
On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and 424,932
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $6.3 million.
In addition to the 424,932 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be released to the stockholders of
ATI contingent upon the realization of predefined levels of pre-tax net income
from ATI's operations during calendar years 1998 and 1999. The pre-tax income of
ATI for 1998 fell below the level required to release escrowed shares in 1998.
In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.4 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.
On June 4, 1998, the Company entered into a definitive agreement to acquire
Telco, a Norwood, Massachusetts based design and manufacturer of broadband
transmission, network access and bandwidth optimization products. On October 13,
1998 the Company and Telco agreed to amend the agreement to provide Telco
stockholders a minimum per share value. On November 30, 1998, the transaction
was completed in its final form whereby Telco was merged with and into a
wholly-owned subsidiary of the Company (the "Telco Merger").
In connection with the Telco Merger, the stockholders of Telco received
7,041,773 shares of the Company's common stock valued at approximately $143.0
million. In addition, the Company issued 1,028,670 non-qualified options to
purchase Company common stock at an average exercise price of $15.78 per share
in
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exchange for substantially all the options held by Telco employees, which became
immediately vested in connection with the Telco Merger. These options had an
initial fair value of approximately $10.8 million.
On February 12, 1998, the Company executed a letter of intent to acquire
Resurgens, a provider of wholesale international long distance services. On May
12, 1998, the Company signed definitive agreements to acquire Resurgens. On
December 14, 1998, the transactions were completed in its final form whereby RCG
and Cherry U.K. became wholly-owned subsidiaries of the Company (the "Resurgens
Merger").
In connection with the Resurgens Merger, the creditors of RCG and the sole
stockholder of Cherry U.K. received 3,687,500 restricted shares of the Company's
common stock valued at approximately $92.9 million. The shares may not be sold
or otherwise transferred until December 15, 1999, i.e. a one-year lock up.
In addition to the shares noted above, the RCG creditors and Cherry U.K.
stockholders were issued 7.5 million restricted shares of Company common stock
("Contingent Payment Stock"). These shares were immediately placed into escrow
and will be released if the sum of the earnings before interest, taxes,
depreciation and amortization ("EBITDA") for Resurgens for the three performance
periods December 1, 1998 to and including May 31, 1999; January 1, 1999 to and
including December 31, 1999; and January 1, 2000 to and including December 31,
2000 equals or exceeds the Target EBITDA for such performance periods. See Note
B to the Consolidated Financial Statements.
In addition, if the EBITDA for Resurgens is less than the Target EBITDA
required for the release of Contingent Payment Stock in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding the table above, the Contingent
Payment Stock shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
Company's common stock as reported by the Nasdaq Stock Market ("Nasdaq") equals
or exceeds $65.00 for any five consecutive trading days during such calendar
quarter, then 25% of all of the shares of Contingent Payment Stock shall be
released on February 15, 2000, provided that if no shares of Contingent Payment
Stock are eligible for release during any such calendar quarter, then such
shares of Contingent Payment Stock shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Company's Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which shares of Contingent Payment Stock
were not eligible for release; (b) if the combined EBITDA for Resurgens for the
Second Performance Period equals or exceeds \$52,775,000, then the Contingent
Payment Stock related to the Third Performance Period shall be released on
February 15, 2000; and (c) all of the shares of Contingent Payment Stock shall
be released upon a Change of Control (as defined in the Merger Agreement).
During 1998 and 1997, the Company invested $12.2 million and $3.6 million,
respectively, in capital expenditures. The Company invested approximately $5.0
million during 1998 related to the establishment of the new manufacturing
facility in Alpharetta, Georgia. The remaining expenditures were primarily for
computer network and related communications equipment designed to upgrade the
Company's management information systems and facilitate the integration of the
Acquisitions, and facility improvements required in connection with the
Company's growth.
The Company began capitalizing software development costs in the fourth
quarter of 1997 in connection with its increased focus on developing proprietary
technology and products. Software development costs are capitalized upon the
establishment of technological feasibility of the product. During 1998, the
Company capitalized approximately $5.2 million of software development costs.
During 1998, the Company loaned a total of $7.9 million to three
independent companies in an effort to support its product and market development
programs. One of the companies is developing a product that the
41
<PAGE> 44
Company has gained certain distribution rights to and the other two companies
are building out telecommunications network infrastructure in certain
international markets that the Company expects to sell products and services
into in the future. Each of the loans is interest-bearing and is secured by
equipment, licenses and/or other assets of the borrower. In November 1998, a
$5.0 million loan was made to Telegroup, Inc. ("Telegroup"), a publicly held
provider of international long distance services. In early 1999, Telegroup filed
for Chapter 11 bankruptcy protection. Management believes that its loan to
Telegroup, which is included in Other current assets on the Company's December
31, 1998 balance sheet, is adequately secured and currently expects it to be
paid in full in 1999.
Financing Activities. Cash provided from financing activities was $16.7
million and $115.4 million for 1998 and 1997, respectively.
In December 1998, the Company entered into a $75.0 million revolving line
of credit facility (the "Facility"), with a banking syndicate group led by Bank
of America, Fleet National Bank and Bank Austria Creditanstalt. The new facility
consists of a 364-day revolving line of credit which may be extended under
certain conditions and provides the Company the option to convert existing
borrowings to a three year term loan. Borrowings under the line are secured by a
first lien on substantially all the assets of the Company. The Facility, which
expires in December 2001, contains standard lending covenants including
financial ratios, restrictions on dividends and limitations on additional debt
and the disposition of Company assets. Interest is paid at the rate of prime
plus 1 1/4% or LIBOR plus 2 1/4%, at the option of the Company. As of December
31, 1998, borrowings of $4.5 million were outstanding under the Facility.
The Facility restricts distributions from the Company's consolidated
subsidiaries. Accordingly, the assets and cash flows of such subsidiaries,
including WA Telcom, the primary obligor on the Notes, may not be used to pay
any dividends to World Access, Inc.
In September 1998, the Company entered into a loan agreement with the
Public Development Authority of Forsyth County, Georgia (the "Issuer"), in the
principal amount of $7,365,000. The Issuer issued its tax exempt industrial
revenue bonds (the "Bonds"), for the sole purpose of financing a portion of the
cost of the acquisition, construction and installation of the Company's
Alpharetta, Georgia telecommunications equipment and printed circuit boards
manufacturing plant. The Company delivered an irrevocable, direct pay letter of
credit of approximately $7.5 million as security for payment of the Bonds.
The Bonds have an original maturity date of August 1, 2008. In March 1999,
the Company sold the Alpharetta, Georgia based manufacturing operation. Pursuant
to terms and conditions of the Bonds, the Company is required to pay off the
Bonds upon the sale of these assets and accordingly, the Bonds will be repaid in
April 1999.
As of December 31, 1998, the Company had qualifying expenditures under the
Bonds of approximately $4.1 million. The remaining $3.3 million of the proceeds
from the Bonds is restricted for qualifying future expenditures. The Bonds are
presented net of the restricted proceeds on the Company's December 31, 1998
balance sheet.
In October 1997, WA Telecom, a wholly-owned subsidiary of the Company sold
$115.0 million in aggregate principal amount of convertible subordinated notes
(the "Notes") under Rule 144A of the Securities Act of 1933. The Notes bear
interest at the rate of 4.5% per annum, are convertible into Company common
stock at an initial price of $37.03 per share and mature on October 1, 2002.
Interest on the Notes is payable on April 1 and October 1 of each year. The
Notes are general unsecured obligations of the Company and are subordinate in
right of payment to all existing and senior indebtedness. The Company received
$111.5 million from the sale of the Notes, after the initial purchasers'
discount fees of $3.5 million.
In October 1996, the Company received net cash proceeds of approximately
$25.3 million from the sale of 3,487,500 shares of common stock in a public
offering at a price of $8.00 per share. In October 1996, the Company used
approximately $3.9 million of the net proceeds to repay all amounts borrowed
under its bank term loan.
42
<PAGE> 45
During 1998 and 1997, the Company received approximately $23.2 million and
$11.3 million in cash, respectively, including related federal income tax
benefits of approximately $12.8 million and $6.7 million, respectively, from the
exercises of incentive and non-qualified stock options and warrants by the
Company's directors and employees.
Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company realized
federal income tax benefits during 1998 and 1997 of approximately $12.8 million
and $6.7 million, respectively. Although these tax benefits do not have any
effect on the Company's provision for income tax expense in 1998 and 1997, they
represent a significant cash benefit to the Company. This tax benefit is
accounted for as a decrease in current income taxes payable and an increase in
capital in excess of par value. Due to the Company's net operating losses during
1998, approximately $10.5 million of these tax benefits have not yet been
utilized and are available to reduce future taxable income of the Company. These
benefits are included in Deferred income taxes on the Company's balance sheet at
December 31, 1998.
Summary. The completion of the sale of $115.0 million of Notes in October
1997 and the $75.0 million line of credit received in December 1998, have
significantly enhanced the financial strength of the Company and improved its
liquidity. As of the date of this Report, the Company has approximately $35.0
million of cash, and approximately $67.6 million available under the line of
credit. The Company believes that existing cash balances, available borrowings
under the Company's line of credit and cash projected to be generated from
operations will provide the Company with sufficient capital resources to support
its current working capital requirements and business plans for at least the
next 12 months.
43
<PAGE> 46
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's Telecommunications Group carrier service revenues, costs and
expenses have fluctuated significantly in the past and are likely to continue to
fluctuate significantly in the future as a result of numerous factors. The
Company's revenues in any given period can vary due to factors such as call
volume fluctuations, particularly in regions with relatively high per-minute
rates; the addition or loss of major customers, whether through competition,
merger, consolidation or otherwise; the loss of economically beneficial routing
options for the termination of the Company's traffic; financial difficulties of
major customers; pricing pressure resulting from increased competition; and
technical difficulties with or failures of portions of the Company's network
that impact the Company's ability to provide service to or bill its customers.
The Company's operating expenses in any given period can vary due to factors
such as fluctuations in rates charged by carriers to terminate traffic;
increases in bad debt expense and reserves; the timing of capital expenditures,
and other costs associated with acquiring or obtaining other rights to switching
and other transmission facilities; and costs associated with changes in staffing
levels of sales, marketing, technical support and administrative personnel. In
addition, the Company's operating results can vary due to factors such as
changes in routing due to variations in the quality of vendor transmission
capability; loss of favorable routing options; the amount of, and the accounting
policy for, return traffic under operating agreements; actions by domestic or
foreign regulatory entities; the level, timing and pace of the Company's
expansion in international and commercial markets; and general domestic and
international economic and political conditions. Further, a substantial portion
of transmission capacity used by the Company is obtained on a variable, per
minute and short-term basis, subjecting the Company to the possibility of
unanticipated price increases and service cancellations. Since the Company does
not generally have long-term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, the Company's operating results may vary significantly.
As the Company's Equipment Group increases its number of telecommunications
product offerings, its future operating results may vary significantly depending
on factors such as the timing and shipment of significant orders, new product
offerings by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the availability of new technologies, the mix of
distribution channels through which the Company's products are sold, the
inability to obtain sufficient supplies of sole or limited source components for
the Company's products, gains or losses of significant customers, the timing of
customers' upgrade and expansion programs, changes in the level of operating
expenses, the timing of acquisitions, seasonality and general economic
conditions.
The following table presents unaudited quarterly operating results for each
of the Company's last eight quarters. This information has been prepared on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments, consisting only of normal recurring accruals, that
the Company considers necessary for a fair presentation in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future operating results. This information should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto included elsewhere in this Report.
The following includes the results of operations for businesses acquired
from their respective dates of acquisition as follows: CIS -- January 1, 1997;
Galaxy -- July 1, 1997; ATI -- January 29, 1998; NACT -- February 27, 1998;
Telco -- November 30, 1998; and Resurgens -- December 15, 1998. Net income
(loss) per share is presented on a diluted basis.
44
<PAGE> 47
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equipment sales............... $7,628 $13,525 $14,426 $13,035 $ 22,860 $33,823 $35,619 $ 46,688
Carrier service revenues...... -- -- -- -- 545 719 629 11,250
------ ------- ------- ------- -------- ------- ------- ---------
Total sales............... 7,628 13,525 14,426 13,035 23,405 34,542 36,248 57,938
Cost of equipment sold........ 4,767 7,761 7,032 7,967 11,717 17,171 18,395 27,005
Write-down of inventories..... -- -- -- -- 465 -- -- 8,827
Cost of carrier services...... -- -- -- -- 492 625 628 10,777
------ ------- ------- ------- -------- ------- ------- ---------
Total cost of sales....... 4,767 7,761 7,032 7,967 12,674 17,796 19,023 46,609
------ ------- ------- ------- -------- ------- ------- ---------
Gross profit.............. 2,861 5,764 7,394 5,068 10,731 16,746 17,225 11,329
Research and development...... 260 378 553 456 732 1,746 1,778 2,586
Selling, general and
administrative.............. 1,218 1,776 1,890 1,681 2,776 3,779 4,938 8,491
Amortization of goodwill...... 123 219 384 384 643 833 927 1,852
In-process research and
development(1).............. -- -- -- -- 35,400 -- -- 64,900
Goodwill impairment........... -- -- -- -- -- -- -- 6,200
Provision for doubtful
accounts.................... 5 4 22 18 9 235 166 10,922
Restructuring and other
charges..................... -- -- -- -- 590 -- -- 16,650
------ ------- ------- ------- -------- ------- ------- ---------
Operating income (loss)... 1,255 3,387 4,545 2,529 (29,419) 10,153 9,416 (100,272)
Interest and other income..... 405 238 226 1,597 1,271 700 857 591
Interest expense.............. -- -- (7) (1,033) (1,443) (1,516) (1,641) (2,232)
------ ------- ------- ------- -------- ------- ------- ---------
Income loss from
continuing operations
before
income taxes and
minority interests...... 1,660 3,625 4,764 3,093 (29,591) 9,337 8,632 (101,913)
Income taxes (benefits)....... 546 1,352 1,774 1,120 2,185 3,720 3,473 (10,765)
------ ------- ------- ------- -------- ------- ------- ---------
Income (loss) from
continuing operations
before
minority interests...... 1,114 2,273 2,990 1,973 (31,776) 5,617 5,159 (91,148)
Minority interests in earnings
of subsidiary............... -- -- -- -- 684 849 1,090 (126)
------ ------- ------- ------- -------- ------- ------- ---------
Income (loss) from
continuing operations... 1,114 2,273 2,990 1,973 (32,460) 4,768 4,069 (91,022)
Net income (loss) from
discontinued operations..... 1,498 1,155 1,381 750 (1,742) 1,702 2,962 (4,979)
Write-down of discontinued
operations to net realizable
value....................... -- -- -- -- -- -- -- (3,500)
------ ------- ------- ------- -------- ------- ------- ---------
Net income (loss)......... $2,612 $ 3,428 $ 4,371 $ 2,723 $(34,202) $ 6,470 $ 7,031 $ (99,501)
====== ======= ======= ======= ======== ======= ======= =========
Net Income (Loss) Per Common
Share:
Continuing Operations..... $ 0.06 $ 0.12 $ 0.15 $ 0.10 $ (1.68) $ 0.22 $ 0.20 $ (4.12)
Discontinued Operations... 0.09 0.06 0.07 0.04 0.09 0.08 0.12 (0.38)
------ ------- ------- ------- -------- ------- ------- ---------
Net Income (Loss)......... $ 0.15 $ 0.18 $ 0.22 $ 0.14 $ (1.59) $ 0.30 $ 0.32 $ (4.50)
====== ======= ======= ======= ======== ======= ======= =========
</TABLE>
- ---------------------
(1) During the first quarter of 1998, $44.6 million of purchased in-process R&D
was expensed, which consisted of 67.3% of the value of NACT products in the
development stage that were not considered to have reached technological
feasibility as of the date of the NACT Acquisition. In connection with the
NACT Merger, the Company revalued purchased in-process R&D to reflect the
current status of in-process NACT technology and related business forecasts
and to ensure compliance with the additional guidance provided by the
Securities and Exchange Commission in its September 15, 1998 letter to the
American Institute of Certified Public Accountants. The revalued amount
approximated the $44.6 million expensed in connection with the NACT
Acquisition, therefore no additional charge was recorded for purchased
in-process R&D. However, the effect of the revaluation required the Company
to reduce the first quarter charge related to the purchased in-process R&D
by $14.6 million and record an additional charge of $14.6 million in the
fourth quarter as of the date of the NACT Merger.
45
<PAGE> 48
Consequently, net loss for the quarter ended March 31, 1998 of $48.8 million
as reported in the Company's Report on Form 10-Q is now reported as $34.2
million in the table above.
The following table sets forth the above unaudited quarterly financial
information as a percentage of total sales from continuing operations:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equipment sales....................... 100.0% 100.0% 100.0% 100.0% 97.7% 97.9% 98.3% 80.6%
Carrier service revenues.............. -- -- -- -- 2.3 2.1 1.7 19.4
----- ----- ----- ----- ------ ----- ----- ------
Total sales....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of equipment sold................ 62.5 57.4 48.7 61.1 50.1 49.7 50.8 46.6
Write-down of inventories............. -- -- -- -- 2.0 -- -- 15.2
Cost of carrier services.............. -- -- -- -- 2.0 1.8 1.7 18.6
----- ----- ----- ----- ------ ----- ----- ------
Total cost of sales............... 62.5 57.4 48.7 61.1 54.1 51.5 52.5 80.4
----- ----- ----- ----- ------ ----- ----- ------
Gross profit...................... 37.5 42.6 51.3 38.9 45.9 48.5 47.5 19.6
Research and development.............. 3.4 2.8 3.8 3.5 3.1 5.1 4.9 4.5
Selling, general and administrative... 16.0 13.2 13.1 12.9 11.9 10.9 13.6 14.7
Amortization of goodwill.............. 1.6 1.6 2.7 3.0 2.7 2.4 2.5 3.2
In-process research and development... -- -- -- -- 151.2 -- -- 112.0
Goodwill impairment................... -- -- -- -- -- -- -- 10.7
Provision for doubtful accounts....... -- -- 0.2 0.1 -- 0.7 0.5 18.9
Restructuring and other charges....... -- -- -- -- 2.5 -- -- 28.7
----- ----- ----- ----- ------ ----- ----- ------
Operating income (loss)........... 16.5 25.0 31.5 19.4 (125.5) 29.4 26.0 (173.1)
Interest and other income............. 5.3 1.8 1.6 12.2 5.3 2.0 2.3 1.0
Interest expense...................... -- -- (0.1) (7.9) (6.2) (4.4) (4.5) (3.8)
----- ----- ----- ----- ------ ----- ----- ------
Income loss from continuing
operations before
income taxes and minority
interests....................... 21.8 26.8 33.0 23.7 (126.4) 27.0 23.8 (175.9)
Income taxes (benefits)............... 7.1 10.0 12.3 8.6 9.4 10.8 9.6 (18.6)
----- ----- ----- ----- ------ ----- ----- ------
Income (loss) from continuing
operations before
minority interests.............. 14.7 16.8 20.7 15.1 (135.8) 16.2 14.2 (157.3)
Minority interests in earnings of
subsidiary.......................... -- -- -- -- 2.9 2.4 3.0 (0.2)
----- ----- ----- ----- ------ ----- ----- ------
Income (loss) from continuing
operations...................... 14.7 16.8 20.7 15.1 (138.7) 13.8 11.2 (157.1)
Net income (loss) from discontinued
operations.......................... 19.6 8.5 9.6 5.8 (7.4) 4.9 8.2 (8.6)
Write-down of discontinued operations
to net realizable value............. -- -- -- -- -- -- -- (6.0)
----- ----- ----- ----- ------ ----- ----- ------
Net income (loss)................. 34.3% 25.3% 30.3% 20.9% (146.1)% 18.7% 19.4% (171.7)%
===== ===== ===== ===== ====== ===== ===== ======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In March 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("ACSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This Statement is effective for fiscal years beginning after
December 15, 1998. In April 1998, the ACSEC issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." This statement is effective for fiscal years
beginning after December 15, 1998. The future adoption of SFAS 133, SOP 98-1 and
SOP 98-5 is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
46
<PAGE> 49
YEAR 2000 ISSUE
The turn of the century, Year 2000, poses a serious challenge for
Information Technology ("IT") used by virtually every corporation around the
world. The problem arises as a result of past standard industry practices to
store year date data in a 2-digit (YY) field, instead of a 4-digit (CCYY) format
where the first 2 digits (CC) represent the century and the last 2 digits (YY)
represent the year. Thus, in the two digit format, 1999 is stored as 99. This
causes programs that perform arithmetic operations, comparisons, or date sorts
to possibly generate erroneous results when the program is required to process
dates from both centuries. The absence of the century information adds an
ambiguity to the date information stored or processed by the program, and it may
also cause problems with data entry and display screens. The problem is further
complicated because many applications are not stand-alone, but interface with
one or more applications.
State of Readiness. The Company is addressing the Year 2000 issue by
implementing its comprehensive Year 2000 Readiness Plan (the "Y2K Plan"). The
Y2K Plan involves the following phases: (1) developing an inventory of products,
systems and equipment that may be affected by the Year 2000 date change, (2)
assessment and (3) remediation. Efforts have been underway in certain
subsidiaries of the Company since 1997, and a formal Year 2000 Readiness Program
was developed in the first quarter of 1998. All of the Company's business units
are now engaged in identifying and remediating Year 2000 issues. In addition,
the Company has retained one of the nation's largest and most reputable
providers of Year 2000 remediation and compliance services to assist in the
execution of the Y2K Plan.
The Y2K Plan consists of several phases that overlap in areas and may be in
progress simultaneously. The first phase involves developing an inventory of all
products, IT and non-IT systems, software, and business infrastructure systems
and equipment that may be affected by the Year 2000 date change. External
parties, including customers, suppliers and service providers, with which the
Company interacts, and which may have Year 2000 readiness issues are also
identified. This phase has been completed in most areas of the Company and is
expected to be completed in mid-April 1999. Inventory listings include
computers, computer network equipment, routers, servers, computer software,
telephony systems, telecommunications equipment, facilities equipment, test
equipment, business tools, as well as all suppliers and all Company products.
The second phase involves risk and impact assessment, selection of
appropriate remediation methods, and resource/cost assessment for compliance.
Each inventory item identified in the first phase is assigned a compliance
status risk level of critical, moderate, low or no risk. Items associated with
critical or moderate risk are addressed with highest priority. Similarly, a risk
assessment is made for the customers, suppliers and service providers
identified. This phase includes contacting suppliers or manufacturers for
information regarding their Year 2000 readiness, technical review of products
and systems, and compliance testing. The necessary actions to bring each item
into compliance are determined, and remediation costs are estimated. To address
potential problems, contingency plans are developed as necessary. This phase has
been completed in most areas of the Company and is expected to be completed
before the end of April 1999. Information received from manufacturers and
suppliers is maintained in databases to monitor compliance status, and
compliance testing has been completed for most Company products.
The third phase involves the remediation for items found to be non-Year
2000 compliant. This involves replacement of equipment or upgrading of software
or hardware. This phase includes communications with the Company's customers and
suppliers to determine Year 2000 issues as appropriate. Verification testing is
done to ensure the effectiveness of the remediation efforts. Capital assets
found to be non-compliant have been, or will be replaced or remediated in this
phase. This phase is expected to be completed in the second quarter of 1999.
Most of the Company's internally controlled software has been remediated and
verified. Integrated testing (also known as "end-to-end" testing) is planned and
should expose unforeseen compliance problems associated with system interfaces
and dependencies.
Organizationally, the Company established a Program Management Office
("PMO") and support teams, including the Year 2000 Steering Committee, the Year
2000 Management Team and the Year 2000 Implementation Teams. A representative
from the Company's senior management has been appointed as the overall Year 2000
Program Director, who works closely with the support teams and manages the PMO.
47
<PAGE> 50
The Year 2000 Steering Committee consists of the Company's senior managers
for Information Technology and Quality, the Company's Chief Financial Officer,
and the Company's President and Chief Executive Officer. The committee provides
high-level direction for the Y2K Plan and approves requests for Year 2000
resources.
The Year 2000 Management Team consists of the business unit managers from
each internal department of the Company. Each such manager monitors progress of
the program in his or her respective department and allocates resources to
remediate Year 2000 issues.
The Year 2000 Implementation Teams are directly responsible for ensuring
Year 2000 compliance for the Company's products and information systems
infrastructure. This includes efforts to ensure suppliers and service providers
are able to provide uninterrupted product or services through the Year 2000. The
Year 2000 Implementation Teams consist of personnel from each of the Company's
internal departments, including: Information Technology, Quality, Operations,
Materials, Product Development, Human Resources, Finance and Contracts. Members
of the Year 2000 Implementation Teams are responsible for developing the
inventory listings and assessing the inventory for compliance, assuring that
each Company product is assessed for compliance, handling customer requests for
compliance information, auditing Year 2000 test plans and results, and reporting
status and progress of team activities to the Company's management on a
divisional level and the PMO.
The PMO provides planning and project management support to the teams, as
well as assisting in each phase of the Y2K Plan. The Company's Year 2000 outside
consultant furnishes expert Year 2000 professionals for the PMO, including a
Service Delivery Manager, a Project Manager, Senior Analysts, Analysts and a
Project Administrator. The PMO meets with the Company's management weekly to
review Y2K Plan status and costs, plan activities and schedule resources, and
report progress, status, risks, issues and costs.
To aid in communication with the Company's customers, suppliers and
business partners, the Company is making Year 2000 readiness and product
compliance information available on the internet. This information is updated
periodically to include the most current information on products and services.
All Transport and Access products have been determined to be Year 2000
compliant, or may be upgraded at no charge. Software required for upgrades is
presently available and may be downloaded from the internet. Switching products
have also been determined to be Year 2000 compliant, or may be upgraded at no
charge, with the exception of the obsolete LCX (superseded by the STX). LCX
customers have been contacted to advise them that this product may experience
minor data-logging failures associated with the Year 2000, and that the fully
compliant STX provides direct replacement. NTS-2000 Billing System software is
fully Year 2000 compliant, and compliant NTS-1000 Billing System software will
be available in April 1999.
The Telecommunications Group has assessed their switching and billing
systems and identified the required upgrades for Year 2000 compliance, as well
as estimated costs. These upgrades are expected to be implemented by the end of
the third quarter of 1999 and will enable ongoing, uninterrupted business
operations through the Year 2000. The Telecommunications Group continually
updates and maintains its switching and billing systems to the state of the art,
and to comply with FCC and international regulations, which include Year 2000
specific requirements.
Costs. The total cost associated with the Company's Year 2000 remediation
initiative is not expected to be material to the Company's financial condition
or results of operations. Approximately $500,000 has been spent by the Company
since 1997 in connection with Year 2000 issues. The Telecommunications Group
estimates $800,000 will be required in 1999 for upgrades to switching equipment
and billing systems. The Equipment Group estimates $1,000,000 will be required
in 1999 for upgrades and remediation efforts. The estimated total cost of the
Company's Year 2000 initiative is not expected to exceed $3.0 million and is
being funded through operating cash flows of the Company.
Risks. The Company believes, based on currently available information,
that it will be able to properly manage its total Year 2000 exposure. There can
be no assurance, however, that the Company will be successful in its efforts, or
that the computer systems of other companies on which the Company relies will be
48
<PAGE> 51
modified in a timely manner. Additionally, there can be no assurance that a
failure to modify such systems by another company, or modifications that are
incompatible with the Company's systems, would not have a material adverse
effect on the Company's business, financial condition or results of operations.
Contingency Plans. All of the Company's inventory items that are
identified as having a compliance status risk level of critical in the first
phase of the Y2K Plan are expected to be Year 2000 compliant within the
timeframe planned, and the Y2K Plan is currently on schedule. However, the
Company will develop business continuation or "contingency" plans for potential
areas of exposure as they are identified.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At December 31, 1998, the Company was not invested in any market risk
sensitive instruments held for either trading purposes or for purposes other
than trading. As a result, the Company is not subject to interest rate risk,
foreign currency exchange rate risk, commodity price risk, or other relevant
market risks, such as equity price risk.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either the prime rate
or two percent over the London Interbank Offered Rates. The Company had $4.5
million outstanding pursuant to its revolving line of credit agreement at
December 31, 1998. The Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's financial
position, results of operations and cash flows should not be material.
49
<PAGE> 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Auditors.............................. 50
Report of Independent Certified Public Accountants.......... 51
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 52
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 53
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... 54
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 55
Notes to Consolidated Financial Statements.................. 56
Supplementary Financial Information for WA Telcom Products
Co., Inc. ................................................ 88
</TABLE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of World Access, Inc.,
We have audited the accompanying consolidated balance sheet of World
Access, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of World Access,
Inc. and subsidiaries at December 31, 1998 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
March 26, 1999
50
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of World Access, Inc.,
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
World Access, Inc. and its subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 5, 1998, except for the discontinued operations reclassifications in the
Consolidated Statements of Operations and Note D, which are as of April 9, 1999
51
<PAGE> 54
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents...................................... $ 55,176 $118,065
Accounts receivable....................................... 70,485 20,264
Inventories............................................... 48,591 22,427
Deferred income taxes..................................... 37,185 1,089
Other current assets...................................... 21,381 9,835
-------- --------
Total Current Assets.............................. 232,818 171,680
Property and equipment...................................... 63,602 5,705
Goodwill and other intangibles.............................. 298,780 36,758
Other assets................................................ 18,612 11,140
-------- --------
Total Assets...................................... $613,812 $225,283
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 17,989 $ 82
Accounts payable.......................................... 36,418 9,340
Other accrued liabilities................................. 52,825 8,508
-------- --------
Total Current Liabilities......................... 107,232 17,930
Long-term debt.............................................. 137,864 115,264
Other liabilities........................................... 8,133 334
-------- --------
Total Liabilities................................. 253,229 133,528
-------- --------
Stockholders' Equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value, 150,000,000 shares
authorized; 44,136,349 and 19,306,235 issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 441 193
Capital in excess of par value............................ 472,945 84,163
Retained earnings (deficit)............................... (112,803) 7,399
-------- --------
Total Stockholders' Equity........................ 360,583 91,755
-------- --------
Total Liabilities and Stockholders' Equity........ $613,812 $225,283
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
52
<PAGE> 55
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Equipment sales............................................. $ 138,990 $48,614 $17,131
Carrier service revenues.................................... 13,143 -- --
--------- ------- -------
Total Sales....................................... 152,133 48,614 17,131
--------- ------- -------
Cost of equipment sold...................................... 74,288 27,527 14,076
Write-down of inventories................................... 9,292 -- --
Cost of carrier services.................................... 12,522 -- --
--------- ------- -------
Total Cost of Sales............................... 96,102 27,527 14,076
--------- ------- -------
Gross Profit...................................... 56,031 21,087 3,055
Research and development.................................... 6,842 1,647 580
Selling, general and administrative......................... 19,984 6,565 3,665
Amortization of goodwill.................................... 4,255 1,110 195
In-process research and development......................... 100,300 -- --
Goodwill impairment......................................... 6,200 -- --
Provision for doubtful accounts............................. 11,332 49 --
Restructuring and other charges............................. 17,240 -- --
--------- ------- -------
Operating Income (Loss)........................... (110,122) 11,716 (1,385)
Interest and other income................................... 3,419 2,466 269
Interest expense............................................ (6,832) (1,040) (39)
--------- ------- -------
Income (Loss) From Continuing Operations Before
Income Taxes and Minority Interests............. (113,535) 13,142 (1,155)
Income taxes (benefits)..................................... (1,387) 4,792 (114)
--------- ------- -------
Income (Loss) From Continuing Operations Before
Minority Interests.............................. (112,148) 8,350 (1,041)
Minority interests in earnings of subsidiary................ 2,497 -- --
--------- ------- -------
Income (Loss) From Continuing Operations.......... (114,645) 8,350 (1,041)
Net income (loss) from discontinued operations.............. (2,057) 4,784 7,820
Write-down of discontinued operations to net realizable
value..................................................... (3,500) -- --
--------- ------- -------
Net Income (Loss)................................. $(120,202) $13,134 $ 6,779
========= ======= =======
Income (Loss) Per Common Share:
Basic:
Continuing Operations.................................. $ (5.19) $ .48 $ (.08)
Discontinued Operations................................ (.26) .28 .60
--------- ------- -------
Net Income (Loss)...................................... $ (5.45) $ .76 $ .52
========= ======= =======
Diluted:
Continuing Operations.................................. $ (5.19) $ .45 $ (.07)
Discontinued Operations................................ (.26) .25 .53
--------- ------- -------
Net Income (Loss)...................................... $ (5.45) $ .70 $ .46
========= ======= =======
Weighted Average Shares Outstanding:
Basic..................................................... 22,073 17,242 13,044
========= ======= =======
Diluted................................................... 22,073 18,708 14,530
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
53
<PAGE> 56
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN NOTE RETAINED
COMMON EXCESS OF RECEIVABLE EARNINGS
STOCK PAR VALUE FROM AFFILIATE (DEFICIT) TOTAL
------ ---------- -------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996..................... $126 $ 27,642 $ (920) $ (12,514) $ 14,334
Net and comprehensive net income............... 6,779 6,779
Issuance of 3,488 shares in secondary public
offering..................................... 35 25,296 25,331
Issuance of 655 shares for Sunrise
acquisition.................................. 6 2,991 2,997
Release of 319 escrowed shares for AIT
acquisition.................................. 2,042 2,042
Repayment of loan by affiliate, net............ 348 348
Issuance of 50 shares for technology license... 1 137 138
Issuance of 247 shares for options and
warrants..................................... 2 378 380
Retirement of 672 escrowed shares from 1991
I.P.O........................................ (7) 7 --
Issuance of shares to 401K plan................ 25 25
---- -------- -------- --------- --------
Balance at December 31, 1996................... 163 58,518 (572) (5,735) 52,374
Net and comprehensive net income............... 13,134 13,134
Issuance of 1,286 shares for CIS acquisition... 13 5,601 5,614
Issuance of 408 shares for Galaxy
acquisition.................................. 4 4,769 4,773
Release of 209 escrowed shares for
acquisitions................................. 1,728 1,728
Issuance of 121 shares for AIT acquisition..... 1 2,169 2,170
Repayment of loan by affiliate................. 572 572
Issuance of 1,155 shares for options and
warrants..................................... 12 4,594 4,606
Tax benefit from option and warrant
exercises.................................... 6,675 6,675
Issuance of shares to 401K plan................ 109 109
---- -------- -------- --------- --------
Balance at December 31, 1997................... 193 84,163 -- 7,399 91,755
Net and comprehensive net loss................. (120,202) (120,202)
Issuance of 634 shares and options for ATI
acquisition.................................. 6 6,509 6,515
Issuance of 4,357 shares and options for NACT
acquisition.................................. 44 105,856 105,900
Issuance of 7,042 shares and options for Telco
acquisition.................................. 70 153,719 153,789
Issuance of 11,188 shares for Resurgens
acquisition.................................. 112 92,759 92,871
Release of 408 escrowed shares for
acquisitions................................. 6,592 6,592
Issuance of 1,599 shares for options and
warrants..................................... 16 10,394 10,410
Tax benefit from option and warrant
exercises.................................... 12,759 12,759
Issuance of shares to 401K plan................ 194 194
---- -------- -------- --------- --------
Balance at December 31, 1998................... $441 $472,945 $ -- $(112,803) $360,583
==== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
54
<PAGE> 57
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(120,202) $ 13,134 $ 6,779
Adjustments to reconcile net income (loss) to net cash from
(used by) operating activities:
Depreciation and amortization............................. 9,200 3,096 1,420
Deferred income tax provision (benefit)................... (7,566) 1,561 (453)
Income tax benefit from stock option and warrant
exercises.............................................. 12,759 6,675 --
Provision for inventory reserves.......................... 17,193 773 197
Provision for bad debts................................... 13,741 172 168
In-process research and development....................... 100,300 -- --
Restructuring and other charges........................... 18,063 -- --
Goodwill impairment....................................... 6,200 -- --
Write-down of discontinued operations to net realizable
value.................................................. 3,500 -- --
Minority interests in earnings of subsidiary.............. 2,497 -- --
Changes in operating assets and liabilities, net of
effects from businesses acquired:
Accounts receivable.................................... (31,883) (8,797) (258)
Inventories............................................ (24,761) (12,147) (5,988)
Accounts payable....................................... 6,743 4,313 (47)
Other assets and liabilities........................... (18,822) (10,382) 177
--------- -------- -------
Net Cash From (Used By) Operating Activities...... (13,038) (1,602) 1,995
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired............ (40,280) (14,840) (437)
Expenditures for property and equipment..................... (12,216) (3,591) (1,176)
Software development costs.................................. (5,226) (360) --
Loans to business partners.................................. (7,917) -- --
Other....................................................... (888) 551 (180)
--------- -------- -------
Net Cash Used By Investing Activities............. (66,527) (18,240) (1,793)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt.................................. 4,116 111,909 --
Net proceeds from secondary public offering................. -- -- 25,331
Proceeds from exercise of stock warrants and options........ 10,410 4,606 4,251
Short-term debt borrowings (repayments)..................... 4,268 (588) (5,510)
Long-term debt repayments................................... (1,261) -- (3,625)
Debt issuance costs......................................... (857) (500) (56)
--------- -------- -------
Net Cash From Financing Activities................ 16,676 115,427 20,391
--------- -------- -------
Increase (Decrease) in Cash and Equivalents....... (62,889) 95,585 20,593
Cash and Equivalents at Beginning of Period....... 118,065 22,480 1,887
--------- -------- -------
Cash and Equivalents at End of Period............. $ 55,176 $118,065 $22,480
========= ======== =======
Supplemental Schedule of Noncash Financing and Investing
Activities:
Issuance of common stock and stock options for businesses
acquired.................................................. $ 365,159 $ 14,285 $ 5,039
Reduction in note receivable from affiliate to recognize
contingent purchase price earned.......................... -- -- 583
Conversion of accounts receivable to investment in
technology license........................................ -- -- 242
Issuance of common stock for technology license............. 508 -- 138
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE> 58
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: GENERAL
NATURE OF BUSINESS
World Access, Inc. and its subsidiaries (the "Company") provide
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 its own 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 digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital microwave radio systems and other
telecommunications network products. To support and complement its product
sales, the Company also provides its customers with a broad range of network
design, engineering, testing, installation and other value-added services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of World Access,
Inc. and its majority owned subsidiaries from their effective dates of
acquisition (see "Note B"). All material intercompany accounts and transactions
are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of the respective
balance sheet dates. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein.
The fair values of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate the carrying values due to their short-term
nature. The fair values of long-term debt are estimated based on current market
rates and instruments with the same risk and maturities and approximate the
carrying value.
REVENUE RECOGNITION
In general, revenues are recognized when the Company's products are shipped
or services are rendered, provided that there are no significant uncertainties
regarding the customer's acceptance and collection of the related receivable is
probable. Revenue is deferred for estimated future returns for stock balancing
and excess quantities above levels the Company deems appropriate in its
distribution channels.
Revenues from sales of software products, which have not been material to
date, are recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collectibility is probable in
accordance with Statement of Position 97-2, "Software Revenue Recognition", as
amended.
56
<PAGE> 59
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the normal course of business, the Company enters into certain
sales-type lease arrangements with Equipment Group customers. These leases are
generally sold to third-party financing institutions. A portion of these
arrangements contains certain recourse provisions under which the Company
remains liable. The Company's maximum exposure under the recourse provisions,
net of related reserves, was approximately $19.8 million at December 31, 1998. A
portion of this contingent obligation is collateralized by security interests in
the related equipment. The fair value of the recourse obligation at December 31,
1998 was not determinable as no market exists for these obligations.
Occasionally, the Company enters into long-term contracts which require
percentage of completion accounting treatment. No revenues were recognized for
such contracts during 1998 and 1996. During 1997, the Company recognized
approximately $5.3 million of revenues under the percentage of completion
method. No costs and estimated earnings in excess of billings are included in
the Company's December 31, 1998 balance sheet.
SIGNIFICANT CUSTOMERS
During 1998 and 1997, no customer individually accounted for 10.0% of the
Company's total sales from continuing operations. During 1996, one customer
accounted for 10.9% of total sales from continuing operations.
RESEARCH AND DEVELOPMENT
Research, engineering and product development costs are expensed as
incurred. Development costs incurred in the research and development of new
software products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such costs are amortized over the lesser of four years or
the estimated economic life of the related product. Capitalized software costs,
net of accumulated amortization, are included in Goodwill and other intangibles
on the Company's balance sheet.
On a quarterly basis, the Company evaluates the recoverability of
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, any remaining capitalized amounts are written off.
No significant write-offs have been recorded by the Company to date.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising expenses for
1998, 1997 and 1996 were approximately $450,000, $125,000 and $100,000,
respectively.
CASH AND EQUIVALENTS
Cash equivalents consist of highly liquid time deposits, commercial paper,
and U.S. Treasury bills and notes with maturities of 90 days or less from the
date of purchase.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful accounts
of $9.8 million and $237,000 at December 31, 1998 and 1997, respectively.
57
<PAGE> 60
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ACCRUED LIABILITIES
At December 31, 1998, other accrued liabilities included accrued
restructuring costs, customer deposits and accrued payroll of $11.3 million,
$6.9 million and $5.8 million, respectively.
EARNINGS PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. There was no potential common stock
included in the calculation of diluted earnings per share for 1998.
Approximately 1.5 million shares of potential common stock were included in the
calculation of diluted earnings per share for 1997 and 1996. A total of
8,307,000, 995,000, and 401,000 shares of common stock, held in escrow primarily
from certain business acquisitions (see "Note B"), were excluded from the
earnings per share calculations for 1998, 1997 and 1996, respectively, because
the conditions for release of shares from escrow had not been satisfied.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In March 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("ACSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This Statement is effective for fiscal years beginning after
December 15, 1998. In April 1998, the ACSEC issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." This statement is effective for fiscal years
beginning after December 15, 1998. The future adoption of SFAS 133, SOP 98-1 and
SOP 98-5 is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
RECLASSIFICATIONS
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the current presentation.
NOTE B: ACQUISITIONS
ATI ACQUISITION
On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for voice,
data and/or video applications. On January 29, 1998, the transaction was
completed in its final form whereby ATI was merged with and into Cellular
Infrastructure Supply, Inc., a wholly-owned subsidiary of the Company (the "ATI
Merger").
In connection with the ATI Merger, the stockholders of ATI received
approximately $300,000 in cash and 424,932 restricted shares of the Company's
common stock valued at approximately $6.3 million. The Company's policy is to
value restricted stock issued in acquisitions at the average market price of its
common stock for the three trading days prior and the three trading days
subsequent to the date economic terms of the acquisition are announced (the
"Stock Valuation Date"), less a discount to reflect the lack of marketability
caused by trading restrictions, size of the share issuances and other relevant
factors. A discount factor of 30%
58
<PAGE> 61
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was used to value the 424,932 restricted shares, which was based on previous
sales of restricted Company common stock and independent studies regarding
discount attributable to lack of marketability. Management believes the discount
rate used to value these restricted shares was appropriate and reasonable.
In addition to the shares noted above, the stockholders of ATI were issued
209,050 restricted shares of the Company's common stock. These shares were
immediately placed into escrow and will be released to the stockholders of ATI
contingent upon the realization of predefined levels of pre-tax income from
ATI's operations during calendar years 1998 and 1999. Upon issuance, the 209,050
escrowed shares were valued by the Company at par value only, or $2,091. As it
becomes probable that the conditions for release from escrow will be met, the
fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity, respectively. To date, the pre-tax
income of ATI has been below the level required to release escrowed shares.
The acquisition of ATI has been accounted for using the purchase method of
accounting. Accordingly, the results of ATI's operations have been included in
the accompanying consolidated financial statements from January 29, 1998. The
purchase price was allocated to the net assets acquired, including $5.4 million
of purchased in-process research and development ("R&D"). The excess of purchase
price over the fair value of net assets acquired, currently estimated at
approximately $3.3 million, has been recorded as goodwill and is being amortized
over a 15 year period.
Purchased in-process R&D, which consisted of the value of ATI products in
the development stage that, were not considered to have reached technological
feasibility as of the date of the ATI Merger, was expensed in the first quarter
of 1998 in accordance with applicable accounting rules. (see "Note C").
NACT ACQUISITION
In the fourth quarter of 1997, the Company began a three-phase acquisition
of NACT Telecommunications, Inc., ("NACT") a Provo, Utah based single-source
provider of advanced telecommunications switching platforms with integrated
telephony software applications and network telemanagement capabilities. During
November and December 1997, the Company purchased 355,000 shares of NACT common
stock in the open market for approximately $5.0 million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 67.3% if the outstanding shares of NACT (the "NACT Acquisition").
On February 27, 1998, the NACT Acquisition was completed with GST USA receiving
$59.7 million in cash and 1,429,907 restricted shares of the Company's common
stock valued at approximately $26.9 million. These shares were valued at $18.80
per share, a 20% discount to the closing market price of Company common stock on
February 26, 1998. Management believes this valuation was appropriate and
reasonable based on the fact GST USA sold all 1,429,907 restricted shares at
$18.80 per share to an independent third party in a private transaction
completed on February 27, 1998.
In addition, the Company issued 740,543 non-qualified options to purchase
Company common stock at $11.15 per share and 106,586 non-qualified options to
purchase Company common stock at $16.25 per share in exchange for substantially
all the options held by NACT employees, which became immediately vested in
connection with the NACT Acquisition. These options had an initial fair value of
approximately $8.4 million.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST agreed to share evenly the costs of any judgement against NACT
as a result of a patent dispute claim filed by Aerotel, Ltd. and Aerotel U.S.A.,
Inc. (collectively "Aerotel") in 1996. Subsequent to the NACT Acquisition, the
Company actively engaged in settlement negotiations. On October 26, 1998, the
Company, GST and Aerotel settled the Aerotel litigation. The Company's portion
of the total settlement costs, including NACT legal fees, was approximately $3.4
million. The payment made to Aerotel was satisfied through the issuance of
137,334
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Company common stock. The settlement costs incurred by the Company as
a result of the Aerotel litigation have been accounted for as additional NACT
purchase price.
On February 24, 1998, the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA (the "NACT Merger"). On
October 28, 1998, the NACT Merger was completed whereby the Company issued
2,790,182 shares of the Company's common stock valued at approximately $67.8
million for the remaining minority interest of NACT.
The acquisition of NACT has been accounted for using the purchase method of
accounting. Accordingly, the results of NACT's operations have been included in
the accompanying consolidated financial statements from February 27, 1998, the
date the majority interest was acquired. The purchase price was allocated to the
net assets acquired, including $44.6 million of purchased in-process R&D. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $92.7 million, has been recorded as goodwill and is
being amortized over a 20 year period.
During the first quarter of 1998, $44.6 million of purchased in-process R&D
was expensed, which consisted of 67.3% of the value of NACT products in the
development stage that were not considered to have reached technological
feasibility as of the date of the NACT Acquisition. In connection with the NACT
Merger, the Company revalued purchased in-process R&D to reflect the current
status of in-process NACT technology and related business forecasts and to
ensure compliance with the additional guidance provided by the Securities and
Exchange Commission in its September 15, 1998 letter to the American Institute
of Certified Public Accountants. The revalued amount approximated the $44.6
million expensed in connection with the NACT Acquisition, therefore no
additional charge was recorded for purchased in-process R&D. However, the effect
of the revaluation required the Company to reduce the first quarter charge
related to the purchased in-process R&D by $14.6 million and record an
additional charge of $14.6 million in the fourth quarter as of the date of the
NACT Merger (see "Note C").
TELCO ACQUISITION
On June 4, 1998, the Company entered into a definitive agreement to acquire
Telco Systems, Inc. ("Telco") a Norwood, Massachusetts based design and
manufacturer of broadband transmission, network access and bandwidth
optimization products. On October 13, 1998 the Company and Telco agreed to amend
the agreement to provide Telco stockholders a minimum per share value. On
November 30, 1998, the transaction was completed in its final form whereby Telco
was merged with and into a wholly-owned subsidiary of the Company (the "Telco
Merger").
In connection with the Telco Merger, the stockholders of Telco received
7,041,773 shares of the Company's common stock valued at approximately $143.0
million. In addition, the Company issued 1,028,670 non-qualified options to
purchase Company common stock at an average exercise price of $15.78 per share
in exchange for substantially all the options held by Telco employees, which
became immediately vested in connection with the Telco Merger. These options had
an initial fair value of approximately $10.8 million.
The acquisition of Telco has been accounted for using the purchase method
of accounting. Accordingly, the results of Telco's operations have been included
in the accompanying consolidated financial statements from November 30, 1998.
The purchase price was allocated to net assets acquired, including $50.3 million
of purchased in-process R&D. The excess of purchase price over the fair value of
net assets acquired, currently estimated at approximately $39.4 million, has
been recorded as goodwill and is being amortized over a 20 year period.
Purchased in-process R&D, which consisted of the value of Telco products in
the development stage that were not considered to have reached technological
feasibility as of the date of the Telco Merger, was expensed in the fourth
quarter of 1998 in accordance with applicable accounting rules (see "Note C").
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESURGENS ACQUISITION
On February 12, 1998, the Company executed a letter of intent to acquire
Cherry Communications Incorporated, d/b/a Resurgens Communications Group
("RCG"), and Cherry Communications U.K. Limited ("Cherry U.K.", and together
with RCG, "Resurgens") providers of wholesale international long distance
services. On May 12, 1998, the Company signed definitive agreements to acquire
Resurgens. On December 14, 1998, the transactions were completed in its final
form whereby RCG and Cherry U.K. became wholly-owned subsidiaries of the Company
(the "Resurgens Merger").
In connection with the Resurgens Merger, the creditors of RCG and the sole
stockholder of Cherry U.K. received 3,687,500 restricted shares of the Company's
common stock valued at approximately $92.9 million. The shares may not be sold
or otherwise transferred until December 15, 1999. The shares were valued at
$25.17 per share, a 30% discount from the average trading price of Company
common stock on the Stock Valuation Date. This discount factor was based on
previous sales of restricted Company common stock, an independent review by an
investment banking firm, and independent studies regarding discount attributable
to lack of marketability. The market value of Company's common stock was $19.88
per share as of the date of the Resurgens Merger. Management believes the
discount rate used to value these restricted shares was appropriate and
reasonable.
In addition to the shares noted above, the RCG creditors and Cherry U.K.
stockholders were issued 7.5 million restricted shares of Company common stock
("Contingent Payment Stock"). These shares were immediately placed into escrow
and will be released in the amounts and on the dates specified below if the sum
of the earnings before interest, taxes, depreciation and amortization ("EBITDA")
for Resurgens for the performance periods set forth below equals or exceeds the
Target EBITDA for such performance period:
<TABLE>
<CAPTION>
PERCENTAGE OF
CONTINGENT PAYMENT
PERFORMANCE PERIOD RELEASE DATE STOCK TO BE RELEASED TARGET EBITDA
- ------------------ ----------------- -------------------- -------------
<S> <C> <C> <C>
December 1, 1998 to and including
May 31, 1999 (the "First
Performance Period").............. July 15, 1999 25.0% $14,100,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period").............. February 15, 2000 37.5 29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period").............. February 15, 2001 37.5 36,500,000
</TABLE>
In addition, if the EBITDA for Resurgens is less than the Target EBITDA
required for the release of Contingent Payment Stock in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding the table above, the Contingent
Payment Stock shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
Company's common stock as reported by The Nasdaq Stock Market ("Nasdaq") equals
or exceeds $65.00 for any five consecutive trading days during such calendar
quarter, then 25% of all of the shares of Contingent Payment Stock shall be
released on February 15, 2000, provided that if no shares of Contingent Payment
Stock are eligible for release during any such calendar quarter, then such
shares of Contingent Payment Stock shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Company's Common Stock as reported by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nasdaq equals or exceeds $65.00 for a total number of consecutive trading days
during such subsequent calendar quarter equal to or exceeding the total number
of trading days which such closing price was required to equal or exceed for (i)
such subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which shares of Contingent Payment Stock
were not eligible for release; (b) if the combined EBITDA for Resurgens for the
Second Performance Period equals or exceeds $52,775,000, then the Contingent
Payment Stock related to the Third Performance Period shall be released on
February 15, 2000; and (c) all of the shares of Contingent Payment Stock shall
be released upon a Change of Control (as defined in the Merger Agreement).
Upon issuance, the 7.5 million escrowed shares were valued by the Company
at par value only, or $75,000. As it becomes probable that the conditions for
release from escrow will be met, the fair market value of the shares as measured
at that time will be recorded as additional goodwill and stockholders' equity,
respectively.
The acquisition of Resurgens has been accounted for using the purchase
method of accounting. Accordingly, the results of Resurgen's operations have
been included in the accompanying consolidated financial statements from
December 14, 1998. The excess of purchase price over the fair value of net
assets acquired, currently estimated at approximately $78.6 million, has been
recorded as goodwill and is being amortized over a 20 year period.
CIS ACQUISITION
On March 11, 1997, the Company entered into an agreement to acquire
Cellular Infrastructure Supply, Inc. ("CIS"), a Burr Ridge, Illinois based
provider of new and/or upgraded equipment and related design, installation and
technical support services to cellular, PCS and other wireless service
providers. On March 27, 1997, the transaction was completed in its final form
whereby CIS was merged with and into CIS Acquisition Corp., a wholly-owned
subsidiary of the Company (the "CIS Merger"). CIS Acquisition Corp. subsequently
changed its name to Cellular Infrastructure Supply, Inc. In connection with the
CIS Merger, the three stockholders of CIS received $3.5 million in cash and
440,874 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $2.6 million.
In addition to the 440,874 shares noted above, the stockholders of CIS were
issued 845,010 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $6.5 million in additional
purchase price (the "CIS Additional Consideration"), will be released and paid
to the stockholders of CIS contingent upon the realization of predefined levels
of pre-tax income from CIS's operations during three one-year periods beginning
January 1, 1997.
Upon issuance, the 845,010 escrowed shares were valued by the Company at
par value only, or $8,450. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any CIS Additional Consideration earned, will be recorded as additional goodwill
and stockholders' equity, respectively.
The first measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1997 to December 31, 1997. In
reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for the first period would be met. Accordingly, 317,427 escrowed shares
were accounted for as if released and $3.5 million of CIS Additional
Consideration was accounted for as if paid as of April 30, 1997. The net effect
of this accounting was to increase goodwill and stockholders' equity by
approximately $6.5 million and $3.0 million, respectively, as of April 30, 1997.
These escrowed shares were released and CIS Additional Consideration was paid to
the former stockholders of CIS on February 15, 1998.
The second measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1998 to December 31, 1998. In
reviewing CIS's pre-tax income performance as
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of August 31, 1998, the Company determined that it was highly probable that the
conditions for release and payment for the first period would be met.
Accordingly, 244,929 escrowed shares were accounted for as if released and $2.0
million of CIS Additional Consideration was accounted for as if paid as of
August 31, 1998. The net effect of this accounting was to increase goodwill and
stockholders' equity by approximately $5.1 million and $3.1 million,
respectively, as of August 31, 1998. These escrowed shares were released and CIS
Additional Consideration was paid to the former stockholders of CIS on February
15, 1999. The $2.0 million of CIS Additional Consideration earned is included in
Other accrued liabilities on the Company's December 31, 1998 balance sheet.
The acquisition of CIS has been accounted for using the purchase method of
accounting. Accordingly, the results of CIS's operations have been included in
the accompanying consolidated financial statements from January 1, 1997, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $17.6 million, has been recorded as goodwill and is
being amortized over a 15 year period.
GALAXY ACQUISITION
On July 29, 1997, the Company entered into a letter of intent to acquire
Galaxy Personal Communications Services, Inc. ("Galaxy"), a Norcross, Georgia
based provider of system design, implementation, optimization and other
value-added radio engineering and consulting services to PCS, cellular and other
wireless telecommunications service providers. On August 26, 1997, the
transaction was completed in its final form whereby Galaxy was merged with and
into Galaxy Acquisition Corp., a wholly-owned subsidiary of the Company (the
"Galaxy Merger"). Galaxy Acquisition Corp. subsequently changed its name to
Galaxy Personal Communications Services, Inc. In connection with the Galaxy
Merger, the former stockholders of Galaxy received approximately $1.2 million in
cash and 262,203 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $4.2 million.
In addition to the 262,203 shares noted above, the former Galaxy
stockholders were issued 131,101 restricted shares of the Company's common
stock. These shares were immediately placed into escrow, and along with $3.5
million in additional consideration (the "Galaxy Additional Consideration"),
will be released and paid to the former stockholders of Galaxy contingent upon
the realization of predefined levels of pre-tax income from Galaxy's operations
during four measurement periods between July 1, 1997 and December 31, 2000. The
Galaxy Additional Consideration may be paid, at the option of the Company, in
the form of cash or restricted shares of the Company's common stock valued at
the then current market prices.
Upon issuance, the 131,101 escrowed shares were valued by the Company at
par value only, or $1,311. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any Galaxy Additional Consideration earned, will be recorded as additional
goodwill and stockholders' equity, respectively.
As of February 15, 1999, the Company had released 53,215 shares from escrow
and paid $1.4 million of Galaxy Additional Consideration (in the form of 101,015
restricted shares of Company common stock) based on Galaxy's pre-tax income
through December 31, 1998. The net effect of the above has been to increase
goodwill, other accrued liabilities and stockholder's equity as of December 31,
1998 by $2.3 million, $1.0 million and $1.3 million, respectively.
The acquisition of Galaxy has been accounted for using the purchase method
of accounting. Accordingly, the results of Galaxy's operations have been
included in the accompanying consolidated financial statements from July 1,
1997, the effective date of acquisition as defined in the definitive agreement
and plan of merger. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values as of the date of acquisition. The excess of purchase price over the fair
value of net assets acquired, currently estimated at approximately $6.9 million,
has been recorded as goodwill and is being amortized over a 15 year period.
PRO FORMA RESULTS OF OPERATIONS
On a pro forma, unaudited basis, as if the acquisitions of ATI, NACT, Telco
and Resurgens had occurred as of January 1, 1997, total sales, operating loss,
loss from continuing operations and net loss from continuing operations per
diluted common share for the years ended December 31, 1998 and 1997 would have
been approximately $378.0 million and $370.6 million; $88.4 million and $165.3
million; $100.8 million and $178.7 million; $2.91 and $5.48, respectively. The
results of operations for Galaxy during the first six months of 1997 were not
material and therefore are not included in the pro forma disclosure.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
dates indicated. Purchased in-process R & D expensed in connection with the ATI,
NACT and Telco Mergers has been excluded from the pro forma results due to its
nonrecurring nature.
NOTE C: PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
OVERVIEW
In connection with the ATI, NACT and Telco Mergers in 1998, the Company
wrote off purchased in-process R&D totaling $5.4 million, $44.6 million and
$50.3 million, respectively. These amounts were expensed as non-recurring
charges on the respective acquisition dates. These write-offs were necessary
because the acquired technology had not yet reached technological feasibility
and had no future alternate use.
The value of the purchased in-process technology from ATI was determined by
estimating the projected net cash flows related to in-process research and
development projects, including costs to complete the development of the
technology. These cash flows were discounted back to their net present value.
The projected net cash flows from such projects were based on management's
estimates of revenues and operating profits related to such projects. These
estimates were based on several assumptions, including those summarized below.
The value of the purchased in-process technology from NACT and Telco was
determined by estimating the projected net cash flows related to in-process
research and development projects, excluding costs to complete the development
of the technology. These cash flows were discounted back to their net present
value. The projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects. These estimates were based on several assumptions, including those
summarized below for each respective acquisition. The resultant net present
value amount was then reduced by a stage of completion factor. This factor more
specifically captures the development risk of an in-process technology (i.e.,
market risk is still incorporated in the estimated rate of return).
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
If these projects to develop commercially viable products based on the
purchased in-process technology are not successfully completed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may become impaired.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ATI MERGER
ATI develops and manufactures a series of high-performance digital
microwave and millimeterwave radio equipment. Their products reach across all
frequency bands and data rates and offer numerous features. The nature of the
in-process research and development was such that technological feasibility had
not been attained. Failure to attain technological feasibility would have
rendered partially designed equipment useless for other applications. ATI's
products are designed for specific frequency bandwidths and, as such, are highly
customized to those bandwidths and the needs of customers wishing to operate in
them. Products only partially completed for certain bandwidths cannot be used in
other bandwidths.
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave and millimeterwave radio equipment. Each
project consists of multiple products. These projects were at multiple stages
along ATI's typical development timeline. Some projects were beginning testing
in ATI labs; others were at earlier stages of planning and designing. The
majority of the products were scheduled to be released during 1998, 1999 and
early 2000. Revenue projections for the in-process technologies reflected the
anticipated release dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from 30.9% to 60.9% as other products are released
in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $11.8 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base and movement into new markets.
Projected revenues from in-process technology were assumed to peak in 2001 and
decline from 2002 through 2004 as other new products are expected to enter the
market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit (loss) ranged from approximately a low of
$(900,000) to a high of $9.1 million within the term of the projections.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
Management estimated that the costs to develop the in-process technology
acquired in the ATI acquisition would be approximately $24.3 million in the
aggregate through the year 2002. The expected sources of funding were scheduled
R&D expenses from the operating budget of ATI.
NACT MERGER
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Failure to attain technological feasibility, especially given the high degree of
customization required for complete integration into the NACT solution, would
have rendered partially designed hardware and software useless for other
applications. Incomplete design of hardware and software coding would create a
non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to large customers,
both domestic and international; therefore, NACT had numerous projects in
development at the time of the acquisition. Additionally, the pending completion
of a major release of NACT's billing system required significant development
efforts to ensure continued integration with NACT's product suite. The purchased
in-process technology acquired in the NACT acquisition was comprised of 13
projects related to switching and billing systems. These projects were scheduled
to be released between February 1998 and April 2000. These projects include
planned additions of new products, based on undeveloped technologies, to NACT's
suite of STX and NTS products. The projects also include the creation of
products for new product suites. The research and development projects were at
various stages of development. None of the in-process projects considered in the
write-off had attained technological feasibility. The in-process projects do not
build on existing core technology; such existing technologies were valued as a
separate asset.
A brief summary of the significant technologies NACT was developing for
their STX and NTS products at the time of the acquisition is as follows:
STX Application Switching Platform ("STX") -- STX was introduced in May
1996 as an integrated digital tandem switching system which allows scalability
from 24 ports to a capacity of 1,024 ports per switch. The STX can be combined
with three additional STXs to provide a total capacity of 4,096 ports per
system. The current STX is not sufficiently developed to address NACT's
objective of targeting larger, more diverse telecommunications companies. To
move into this expanded customer base, NACT has multiple development tasks
planned for the STX product. NACT plans to incorporate into the STX certain
features and enhancements such as SS7 and E1 (discussed below), R-2 signaling,
and Integrated Services Digital Network, which are critical to the Company's
strategy to broaden its customer base. The SS7 and E1 features are considered
new products within the STX family of products.
Master Control Unit ("MCU") -- MCU is a database hub which can link up to
four switches, creating a larger capacity tandem switch. NACT is developing an
updated MCU, called the "redundant MCU", which allows for intelligent peripheral
or recognition of pre-paid caller numbers. Redundant MCU is an important
extension to the MCU system because it will allow a telecommunications company
to create an entire switching network outside of the public network owned by
major telecommunications firms.
NTS Telemanagement and Billing System ("NTS") -- NTS performs call rating,
accounting, switch management, invoicing, and traffic engineering for multiple
NACT switches. NACT recently finished development of an improved billing system,
the NTS 2000, which is designed for real-time transaction processing with
graphical user interface and improved call reports. The NTS 2000 is compatible
with non-NACT switches. The NTS 2000 also allows for customization of invoices
and reports.
E1 to T1 Conversion -- The T1 is the switchboard hardware used in the STX.
The T1 product has been in existence for several years. The E1 is the standard
switchboard used in Europe. NACT is creating a technology which facilitates
compatibility between the T1 and the switchboard hardware currently used in
Europe. In addition, NACT is currently developing enhanced switchboard hardware
called the T3, which will allow for more calls to pass through the switchboard
at one time. Both development efforts, the T3 and compatibility between E1 and
T1, are necessary as NACT moves into international markets.
Transmission Control Protocol/Internet Protocol ("TCP/IP")
Connectivity -- TCP/IP is the most common method of connecting personal
computers, workstations and servers. Other historically dominant networking
protocols, such as the local area network ("LAN") protocol and international
packet ex-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
change/sequence packet exchange, are losing ground to TCP/IP. The addition of
TCP/IP is vital relative to NACT's strategic objective of offering
voice-over-Internet.
68060 -- The Company is incorporating the Motorola 68060 board in the STX
application platform to enable the STX to support 2,048 ports per switch or
8,192 ports per integrated MCU system. With this enhancement, the STX is
expected to process significantly more call minutes per month.
Signaling System 7 ("SS7") -- SS7 is software that allows a call, which
normally would have to go through a series of switchboards to reach its
destination, to instead skip from the first switchboard to the last. With the
addition of this enhancement, the STX switch can interface with carriers more
quickly and efficiently. In addition, NACT is developing the C7, which is the
European version of the SS7.
NACT had 13 projects in development at the time of acquisition. These
projects were at multiple stages along NACT's development timeline. Some
projects were beginning testing in NACT labs; others were at earlier stages of
planning and designing. These projects were scheduled for release between
December 1998 and December 2000. Revenue projections for the in-process
technologies reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the 12-year projection at annual rates ranging from
61.4% to 2.81%, decreasing over the remaining years at annual rates ranging from
16.0% to 48.5% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $8.0 million to a high of $101.1 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base and movement into new markets. Projected revenues from in-process
technology were assumed to peak in 2003 and decline from 2004 through 2009 as
other new products are expected to enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 67.2% to a low of 2.8% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $2.1 million to $29.3
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $5.0 million in the
aggregate through the year 1999. The expected sources of funding were scheduled
research and development expenses from the operating budget of NACT.
Telco Merger. Telco develops and manufactures products focused on
providing integrated access for network services. Telco's products can be
separated into three categories: (1) broadband transmission products, (2)
network access products, and (3) bandwidth optimization products. Telco's
products are
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deployed at the edge of the service provider's networks to provide organizations
with a flexible, cost-effective means of transmitting voice, data, video and
image traffic over public or private networks.
At the time of acquisition, Telco had several primary projects in
development relating to next-generation telecommunication and data network
hardware. These projects were at various stages in the development process. Some
were about to enter the testing phase of the initial hardware prototype, while
others were still in the early concept and design specification stages. These
projects were scheduled for commercial release at various points in time from
December 1998 through early 2000.
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
A brief description of the significant in-process projects is set forth
below:
Access 45/60 Release 1 -- Access 45/60 Release 1 product provides
essentially the same functional service as the existing Access 45/60 network
access servers by providing highly reliable digital access to public, private
and hybrid networks, integrating multiple business applications through
cost-effective connections to dedicated, switched and packet network services.
However, unlike the current versions, the technology underlying the Release 1
(R1) version is based on high-bit-rate digital subscriber line (HDSL)
technology. This HDSL technology will enable high-density voice and data
applications to travel simultaneously over one to ten HDSL lines from a single
platform, which will launch the R1 product into a whole new loop market by
eliminating the need for service providers to have separate platforms for voice
and data at the customer's premises or at the provider's central office.
Although the Access 45/60 R1 product is designed to provide a service similar to
the current Access 45/60 product, the core functional technology of the new R1
is very different, and the target market of the R1 product is different.
If technological feasibility is achieved, Telco expects the product to be
introduced into the market at the end of 1999. However, before that can occur,
Telco must complete the first prototype builds of the product and perform
initial system testing which will not begin until the end of August 1999. In
September 1999, Telco will begin testing for system quality assurance and
expects to begin beta field testing in October or November 1999.
EdgeLink300 E1 -- The EdgeLink300 E1 version is an addition to the 300
family which will be marketed internationally. Conforming to all applicable ETSI
and ITU standards, this product will provide a cornerstone to the next
generation of international product offerings. This product is in the mid stage
of development. Software code generation is expected to be completed in April
1999. Prototype builds for initial units are expected to be completed in May
1999, and initial beta field tests are expected to begin in June 1999.
SONET Edge Device -- The SONET Edge Device is a next-generation edge device
expected to provide access to SONET networks. This access device will be
designed to take a T1 voice input from a PBX or an Access60 and convert to SONET
formatted tributaries and send it out via a traditional STS1 interface.
This project is in the early concept stage, and is not expected to reach
commercial viability until early 2000. Documentation of the hardware and
software design is expected to be completed in April 1999; software code
generation is expected to be completed in August 1999; prototype builds for
initial units are expected to be completed in October 1999; and initial beta
field tests are expected to begin in January 2000.
EdgeLink650 -- The EdgeLink650 ATM device will be designed to be a
multislot version of the Edgelink600 with DS3 and NxDS1 interface support. This
product will incorporate an ATM Inverse Multiplexer (IMA). This product is in an
early stage of development and is expected to reach commercial viability in
early 2000. Documentation of the hardware and software design is expected to be
completed in
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 1999; prototype builds for initial units are expected to be completed in
May 1999; and initial beta field tests are expected to begin in December 1999.
Voice-Over-Packet Engines -- Voice-over-packet refers to sending voice
transmissions over packet-based communication protocols, such as internet
protocols (IP telephony), Frame Relay, or ATM. Telco is currently in the early
stages of developing the software and hardware for a generic "engine" to be
integrated into the EdgeLink family of products to enable this functionality.
This is expected to be commercially viable in late 1999. Software code
generation is expected to be completed in June 1999; prototype builds for
initial units are expected to be completed in July 1999; and initial beta field
tests are expected to begin in September 1999.
If these projects are not completed as planned, the in-process research and
development will have no alternative use. Failure of the in-process technologies
to achieve technological feasibility may adversely affect the future
profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 103.6% to a low of 3.8%, reflecting both the displacement
of Telco's old products by these new products as well as the expected growth in
the overall market in which Telco's products compete. Thereafter, revenues are
projected to decline over the remaining projection period at annual rates
ranging from 15.2% to 42.6%, as the acquired in process technologies become
obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $39.0
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
was projected to grow over the first five years of the projection period at
annual rates ranging from a high of 240.9% to a low of 22.2% with one
intermediate year of marginally declining operating income. Thereafter, the
contribution to operating income was projected to decline through the projection
period. The acquired in-process technology's contribution to operating income
ranged from a low of approximately $4.4 million to a high of approximately $70.5
million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology and
potential obsolescence of legacy products, and the risk associated with the
financial assumptions with respect to the projections used in the analysis.
The discount rates used to value the in-process technologies were 18.0% and
20.0%, depending on the stage of development. These discount rates were selected
due to several incremental inherent risks. First the actual useful economic life
of such technologies may differ from the estimates used in the analysis. Second,
risks associated with the financial projections on the specific products that
comprise the acquired in-process research and development. The third factor is
the incomplete and unproven nature of the technologies. Finally, future
technological advances that are currently unknown may negatively impact the
economic and functional viability of the in-process R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $11.6 million through 2001. Over the projection
period, management expects to spend an additional aggregate $48.2 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes and identified
upgrades.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D: DISCONTINUED OPERATIONS
In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the resale of Nortel and other
original equipment manufacturers' wireline switching equipment, third party
repair of telecom equipment and pay telephone refurbishment. In connection
therewith, goodwill recorded for these businesses was written-down by $3.5
million to reflect the estimated net realizable value. On January 5, 1999, the
Company formally announced its intention to sell these businesses. Management
expects that the sale will be completed in 1999.
These businesses have been accounted for as discontinued operations and,
accordingly, the results of operations have been excluded from continuing
operations in the Consolidated Statements of Operations for all periods
presented. Results of discontinued operations for 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Total sales.............................................. $ 58,557 $44,370 $33,869
Cost of equipment sold................................... 45,418 33,317 21,930
Write-down of inventories................................ 7,818 -- --
-------- ------- -------
Gross Profit................................... 5,321 11,053 11,939
Selling, general and administrative...................... 2,340 2,601 2,656
Amortization of goodwill................................. 813 646 339
Restructuring and other charges.......................... 2,650 -- --
Provision for doubtful accounts.......................... 2,408 123 201
-------- ------- -------
Operating Income (Loss)........................ (2,890) 7,683 8,743
Net interest income (expense)............................ 53 (154) (64)
-------- ------- -------
Income (Loss) Before Income Taxes.............. (2,837) 7,529 8,679
Income taxes (benefits).................................. (780) 2,745 859
-------- ------- -------
Net Income (Loss).............................. $ (2,057) $ 4,784 $ 7,820
======== ======= =======
</TABLE>
The assets and liabilities of the discontinued operations included in the
Consolidated Balance Sheet at December 31, 1998 consisted of the following (in
thousands):
<TABLE>
<S> <C>
Current Assets
Accounts receivable....................................... $11,453
Inventories............................................... 12,083
Other current assets...................................... 252
-------
$23,788
=======
Noncurrent Assets
Property and equipment.................................... $ 2,028
Goodwill and other intangibles............................ 5,335
Other assets.............................................. --
-------
$ 7,363
=======
Current Liabilities
Accounts payable.......................................... $ 4,083
Other accrued liabilities................................. 3,741
-------
$ 7,824
=======
</TABLE>
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E: RESTRUCTURING AND OTHER CHARGES
SUMMARY
During 1998, the Company approved and began implementing two restructuring
programs designed to reduce operating costs, outsource manufacturing
requirements and focus Company resources on recently acquired business units
containing proprietary technology or services. A summary of restructuring and
related charges recorded in connection with these programs follows:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
---------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
First Quarter
Restructuring Charges
Severance and termination benefits..................... $ 175 $ 375 $ 550
Idle facility costs.................................... 125 1,215 1,340
Idle production equipment.............................. 290 1,060 1,350
------- ------- -------
590 2,650 3,240
Related Charges
Write-down of inventories.............................. 465 2,895 3,360
------- ------- -------
Total First Quarter............................... 1,055 5,545 6,600
------- ------- -------
Fourth Quarter
Restructuring Charges
Severance and termination benefits..................... 2,050 -- 2,050
Idle facility costs.................................... 1,200 -- 1,200
Asset write-downs...................................... 11,763 -- 11,763
Other exit costs....................................... 1,637 -- 1,637
------- ------- -------
16,650 -- 16,650
Related Charges
Write-down of inventories.............................. 8,827 4,923 13,750
Provision for doubtful accounts........................ 10,674 1,926 12,600
------- ------- -------
Total Fourth Quarter.............................. 36,151 6,849 43,000
------- ------- -------
Total Charges..................................... $37,206 $12,394 $49,600
======= ======= =======
</TABLE>
FIRST QUARTER 1998
In January 1998, the Company approved and began implementing a
restructuring program to consolidate several operations and exit the contract
manufacturing business. The Company's wireline telecom equipment resale business
("AIT") in Lakeland, Florida and its circuit board repair operations were
consolidated into a new facility in Orlando, Florida; the Company's
manufacturing operations were moved from an old facility in Orlando to a new
facility in Alpharetta, Georgia; and the Company's Scottsdale, Arizona
operations were integrated into ATI's facility in Wilmington, Massachusetts.
71
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The special charges included approximately $3.4 million to cost of sales
for obsolete contract manufacturing inventories and other inventories deemed
obsolete or redundant as a result of the consolidation activities. Severance and
termination benefits of approximately $550,000 were paid to the approximately 60
employees who lost their jobs as a direct result of the restructuring program.
The idle facility and equipment portion of the charge, collectively representing
$2.7 million, included the write-off of Orlando, Lakeland and Scottsdale
leasehold improvements, provisions for the estimated costs to terminate idle
facility and equipment leases, the write-off of Orlando manufacturing equipment
not relocated to the Company's Alpharetta facility and certain phase-down
expenses associated with the six facilities closed down.
This consolidation program began in the first quarter of 1998 and was
completed as of June 30, 1998. No costs were included in the charges that are
expected to derive future economic benefit to the Company. As of December 31,
1998, approximately $325,000 of these charges, which consisted primarily of
costs associated with carrying vacated space and certain idle equipment until
lease expiration dates, are included in Other accrued liabilities on the
Company's balance sheet.
FOURTH QUARTER 1998
In December 1998, in connection with the (i) recently completed NACT
Merger, Telco Merger and Resurgens Merger; (ii) election of several new outside
directors to the Company's Board; and (iii) appointment of a new Chief Executive
Officer, the Company approved and began implementing a major restructuring
program to reorganize its operative structure, consolidate several facilities,
outsource its manufacturing requirements, rationalize its product offerings and
related development efforts, and pursue other potential synergies expected to be
realized as a result of the integration of recently acquired businesses. The
Company expects the plans associated with the program to be substantially
completed during the first half of 1999.
Details of the restructuring charges related to this program are as
follows:
<TABLE>
<CAPTION>
RESTRUCTURING RESERVE BALANCE
CHARGE ACTIVITY AT 12/31/98
------------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reorganize Operating Structure
Employee termination benefits............................ $ 449 $ -- $ 449
Idle facility costs...................................... 258 -- 258
Other.................................................... 437 133 304
------- ------- ------
1,144 133 1,011
Consolidation of ATI and Telco
Employee termination benefits............................ 1,175 -- 1,175
Idle facility costs...................................... 577 -- 577
Write-down production equipment.......................... 700 700 --
Other.................................................... 300 -- 300
------- ------- ------
2,752 700 2,052
Outsource Manufacturing
Employee termination benefits............................ 426 116 310
Idle facility costs...................................... 365 -- 365
Write-down production equipment.......................... 1,662 1,662 --
Write-down other assets.................................. 731 731 --
Other.................................................... 332 -- 332
------- ------- ------
3,516 2,509 1,007
</TABLE>
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RESTRUCTURING RESERVE BALANCE
CHARGE ACTIVITY AT 12/31/98
------------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Product Line Rationalization
Write-down of CDX assets................................. 4,707 4,707 --
Write-down of international investments.................. 3,542 3,542 --
Write-down of capitalized software....................... 421 421 --
Other.................................................... 568 -- 568
------- ------- ------
9,238 8,670 568
------- ------- ------
Total............................................ $16,650 $12,012 $4,638
======= ======= ======
</TABLE>
Costs associated with the reorganized operating structure consist primarily
of termination benefits payable to the Company's former President, which will be
paid throughout 1999, and remaining lease obligations on the Company's Equipment
Group headquarters facility in Alpharetta, Georgia. Group personnel relocated to
the Company's headquarters in Atlanta and the facility was closed in February
1999.
Restructuring charges also included costs associated with the planned
consolidation of the Company's ATI operations in Wilmington, Massachusetts into
Telco's facility in Norwood, Massachusetts. Manufacturing of ATI's wireless
radios is being out-sourced to a contact manufacturer and all other aspects of
ATI's operations will be integrated into Telco's existing operating
infrastructure. Severance and other termination benefits of approximately $1.2
million are to be paid to approximately 60 ATI employees as the consolidation
program is completed during the first half of 1999. A provision of $577,000 was
recorded for the costs associated with the idle portion of the Wilmington
facility, which is leased through November 2000. Production equipment was
written-down by $700,000 to reflect its estimated net realizable value upon
disposal.
An integral part of the restructuring program was the Company's decision to
outsource all its electrical manufacturing requirements and sell its Alpharetta,
Georgia manufacturing facility to an established contract manufacturer.
Severance and other termination benefits of $426,000 were provided for in
December 1998, the majority of which was paid in January 1999 to approximately
25 personnel. Restructuring charges also included the write-off of $365,000 in
leasehold improvements related to the manufacturing portion of the Alpharetta
facility, and $2.4 million to write-down production equipment and other
manufacturing assets to their estimated net realizable values. The Company
completed the sale of its manufacturing operations in March 1999. The actual
loss incurred in connection with the sale did not differ materially from the
amounts recorded in the restructuring charges. As part of this sale agreement,
the Company committed to purchase a minimum of $15.0 million of products and
services from the contract manufacturer in each of three consecutive 12 month
periods beginning April 1, 1999.
The most significant component of the restructuring charges related to a
change in the Company's long-term focus for its switching products, primarily
its Compact Digital Exchange ("CDX") switch. In January 1999, the Company
elected to reallocate development resources targeted for the CDX switch as a
stand-alone product to the integration of the central office functionally of the
CDX switch and the long-distance functionality of NACT's switch into a common,
next generation technology platform. This strategic decision, performance
difficulties experienced by certain customers' applications of the CDX switch in
1998, and dramatically reduced internal estimates for CDX switch revenues in
1999 caused the Company to significantly write-down all CDX related assets as of
December 31, 1998.
Restructuring charges related to the CDX switch included $3.0 million
related to an international long-term contract, $3.5 million to reserve for
potential losses on an equity investment in and loan made to two companies
planning CDX-based network infrastructure build-outs in Latin America, and $1.7
million for the
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
write-off of other assets related to the development and deployment of the CDX
switch, including prepaid royalties and tooling costs.
Other charges to continuing operations recorded in the fourth quarter of
1998 were provisions for potential inventory obsolescence and doubtful accounts
of $8.8 million and $10.7 million, respectively. The inventory charge consisted
primarily of $4.7 million to write-down CDX inventories to estimated net
realizable value and $3.8 million to reflect estimated losses to be incurred in
connection with the sale of ATI and manufacturing inventories to contract
manufacturers. The provision for doubtful accounts was recorded primarily to
reduce the carrying value of accounts receivable resulting from previous CDX
sales to estimated minimum realizable values in light of the issues noted above.
NOTE F: INVENTORIES
Inventories are stated at the lower of cost or market as determined
primarily on a first-in, first-out basis. To address potentially obsolete and
slow moving inventories and related market valuation adjustments, the Company
charged to operations for the years ended December 31, 1998, 1997 and 1996
approximately $17.2 million, $773,000 and $197,000, respectively (see "Note E").
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Transport and access products............................... $ 8,824 $ 1,088
Switching systems........................................... 6,218 --
Cellular equipment.......................................... 9,421 695
Work in progress............................................ 4,953 1,738
Raw materials............................................... 7,092 4,554
------- -------
Continuing operations............................. 36,508 8,075
Discontinued operations..................................... 12,083 14,352
------- -------
Total inventories................................. $48,591 $22,427
======= =======
</TABLE>
Inventories from continuing operations are presented net of reserves of
$18.9 million and $700,000 at December 31, 1998 and 1997, respectively. These
reserves, which consist of valuation adjustments for excess quantities,
potential obsolescence and market valuation, have been established in connection
with the purchase accounting for businesses acquired (see "Note B") and through
charges to operations.
NOTE G: PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation as
computed using the straight-line method. Leasehold improvements are depreciated
over their remaining estimated lease term. Estimated lives for other depreciable
assets range from three to eight years. Depreciation expense for the years ended
December 31, 1998, 1997 and 1996 was $2.6 million, $1.0 million and $830,000,
respectively.
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Buildings and leasehold improvements........................ $ 7,724 $ 915
Manufacturing assembly and test equipment................... 60,664 9,865
Office furniture and equipment.............................. 2,411 1,740
Vehicles.................................................... 501 130
------- -------
71,300 12,650
Accumulated depreciation.................................... (7,698) (6,945)
------- -------
$63,602 $ 5,705
======= =======
</TABLE>
The Company leases various facilities and equipment under operating leases.
As of December 31, 1998, future minimum payments under noncancelable operating
leases with initial or remaining terms of more than one year are approximately
$20.8 million, payable over the next five years as follows: 1999 -- $6.0
million; 2000 -- $4.8 million; 2001 -- $4.0 million; 2002 -- $3.3 million; and
2003 -- $2.7 million.
Total rental expense under operating leases for the years ended December
31, 1998, 1997 and 1996 was approximately $2.5 million, $1.7 million and $1.3
million, respectively, exclusive of property taxes, insurance and other
occupancy costs generally payable by the Company.
NOTE H: GOODWILL AND OTHER INTANGIBLES
SUMMARY
Intangible assets, which are amortized on a straight-line basis, consisted
of the following at December 31:
<TABLE>
<CAPTION>
AMORTIZATION
1998 1997 PERIODS
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.............................................. $245,738 $34,166 15-20 years
Existing technology acquired.......................... 38,400 -- 8 years
Patents............................................... 6,800 -- 8 years
Capitalized software development costs................ 7,224 360 3-4 years
Other intangibles..................................... 9,238 5,264 3-20 years
-------- -------
307,400 39,790
Accumulated amortization.............................. (8,620) (3,032)
-------- -------
$298,780 $36,758
======== =======
</TABLE>
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired, consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
NACT........................................................ $ 92,668 $ --
Resurgens................................................... 78,625 --
Telco....................................................... 39,418 --
CIS......................................................... 17,553 12,485
AIT......................................................... 7,307 11,558
Galaxy...................................................... 6,902 5,089
ATI......................................................... 3,265 --
Other....................................................... -- 5,034
-------- -------
245,738 34,166
Accumulated amortization.................................... (6,605) (2,506)
-------- -------
$239,133 $31,660
======== =======
</TABLE>
The Company reviews the net carrying value of goodwill on a regular basis,
and if deemed necessary, charges are recorded against current operations for any
impairment in the value of these assets. Such reviews include an analysis of
current results and take into consideration the discounted value of projected
operating cash flows. Goodwill is removed from the books when fully amortized.
In December 1998, the Company's Equipment Group recorded impairment charges
of $6.2 million related to the unamortized balance of goodwill recorded in
connection with the acquisitions of Westec Communications, Inc. in October 1995
and Sunrise Sierra, Inc. in January 1996. Both of these businesses, which have
become less strategic to the Company due to the ATI and Telco Mergers in 1998,
are currently forecasted to generate nominal revenues and cash flow in 1999.
EXISTING TECHNOLOGY
In connection with the Telco and NACT Mergers, the Company allocated $34.0
million and $4.4 million of the purchase price, respectively, to existing
technology acquired. Existing technology assets are comprised of technology that
is incorporated into products currently sold in the market place or at an
advanced stage of development where technological feasibility exists. The
valuation of the existing technology was performed by independent appraisers.
PATENTS
In connection with the Telco Merger, the Company allocated $6.8 million to
Telco's patents. The valuation of the patents was performed by independent
appraisers.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes certain initial software development costs and
enhancements thereto incurred after technological feasibility has been
demonstrated. To date, all products and enhancements thereto have utilized
proven technology. Such capitalized amounts are amortized commencing with
product introduction under the straight-line method over the remaining estimated
economic life, ranging from three to four years. The unamortized capitalized
costs by product are reduced to an amount not to exceed the future net
realizable value by product at each balance sheet date. Future net realizable
value is determined through sales forecasts. Although it is possible that
management's estimate for the future net realizable value could change in the
near
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future, management is not currently aware of any events that would result in a
change to its estimate which would be material to the Company's financial
position or its results of operations.
The amount of development costs capitalized in accordance with SFAS No. 86
for 1998 and 1997 was $5.2 million and $360,000, respectively. Amortization of
software development costs of $106,000 was charged to expense during 1998. There
was no amounts charged to expense during 1997 and 1996.
NOTE I: DEBT
SUMMARY
Debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Convertible subordinated notes.............................. $ 115,000 $115,000
Capital lease obligations................................... 30,162 310
Industrial revenue bond..................................... 4,072 --
Bank line of credit......................................... 4,500 --
Other debt.................................................. 2,119 36
--------- --------
Total debt........................................ 155,853 115,346
Amount due within one year.................................. (17,989) (82)
--------- --------
Long-term debt.................................... $ 137,864 $115,264
========= ========
</TABLE>
Interest paid during 1998, 1997 and 1996 was $5.9 million, $57,000 and
$352,000, respectively.
CONVERTIBLE SUBORDINATED NOTES
In October 1997, the Company sold $115.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year. The Notes are general unsecured obligations of the
Company and are subordinate in right of payment to all existing and senior
indebtedness. The Company received $111.5 million from the sale of the Notes,
after the application of the initial purchasers' discount fees of $3.5 million.
The discount fees and legal, accounting, printing and other expenses (the
"Debt issuance costs") related to the Notes amounted to approximately $4.0
million, and are being amortized to expense over the five year term of the
Notes. During 1998 and 1997, the Company recognized approximately $800,000 and
$200,000, respectively, of Debt issuance costs amortization related to the
Notes. Debt issuance costs of approximately $3.0 million are included in
Goodwill and other intangibles on the Company's December 31, 1998 balance sheet.
77
<PAGE> 80
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL LEASE OBLIGATIONS
As a result of the Resurgens Merger, the Company leases telecommunications
and other equipment through capitalized lease arrangements. Future minimum lease
payments on these capitalized lease obligations at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $10,133
2000........................................................ 10,045
2001........................................................ 9,732
2002........................................................ 5,046
-------
Net minimum lease payments................................ 34,956
Less amount representing interest........................... (4,794)
-------
Present value of minimum lease payments................... 30,162
Less current portion of capitalized lease obligations....... 7,890
-------
Long-term portion of capitalized lease obligations........ $22,272
=======
</TABLE>
The net carrying value of assets under capital leases was approximately
$26.6 million at December 31, 1998, and is included in Property and equipment on
the Company's December 31, 1998 balance sheet. Amortization of these assets is
included in depreciation expense.
INDUSTRIAL REVENUE BOND
In September 1998, the Company entered into a loan agreement with the
Public Development Authority of Forsyth County, Georgia (the "Issuer"), in the
principal amount of $7,365,000. The Issuer issued its tax exempt industrial
revenue bonds (the "Bonds") for the sole purpose of financing a portion of the
cost of the acquisition, construction and installation of the Company's
Alpharetta, Georgia telecommunications equipment and printed circuit boards
manufacturing plant. The Company delivered an irrevocable, direct pay letter of
credit of approximately $7.5 million as security for payment of the Bonds.
The Bonds, which bear interest at a variable rate of approximately 4.0% as
of December 31, 1998, have an original maturity date of August 1, 2008. In March
1999, the Company sold the Alpharetta, Georgia based manufacturing operation.
Pursuant to the terms and conditions of the Bonds, the Company is required to
pay off the Bonds upon the sale of these assets and accordingly, the Bonds will
be repaid in April 1999.
As of December 31, 1998, the Company had qualifying expenditures under the
Bonds of approximately $4.1 million. The remaining $3.3 million of the proceeds
from the Bonds is restricted for qualifying future expenditures. The Bonds are
presented net of the restricted proceeds on the Company's December 31, 1998
balance sheet.
BANK LINE OF CREDIT
In December 1998, the Company entered into a $75.0 million revolving line
of credit facility (the "Facility"), with a banking syndicate group led by Bank
of America, Fleet National Bank and Bank Austria Creditanstalt. The new facility
consists of a 364-day revolving line of credit which may be extended under
certain conditions and provides the Company the option to convert existing
borrowings to a three year term loan. Borrowings under the line are secured by a
first lien on substantially all the assets of the Company. The Facility, which
expires in December 2001, contains standard lending covenants including
financial ratios, restrictions on dividends and limitations on additional debt
and the disposition of Company assets. Interest is paid at the rate of prime
plus 1 1/4% or LIBOR plus 2 1/4%, at the option of the Company. As of December
31, 1998, borrowings of $4.5 million were outstanding under the Facility.
78
<PAGE> 81
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Facility restricts distributions from the Company's consolidated
subsidiaries. Accordingly, the assets and cash flows of such subsidiaries,
including WA Telcom Products Co., Inc., the primary obligor on the Notes, may
not be used to pay any dividends to World Access, Inc. As a result, restricted
net assets of consolidated subsidiaries of the Company amounted to approximately
$462.7 million at December 31, 1998.
NOTE J: STOCKHOLDERS' EQUITY
During September and October 1996, 3,487,500 shares of Company common stock
were sold in a secondary public offering at a price of $8.00 per share. The
Company received $26,156,250 from this offering, net of underwriting discounts.
The Company incurred additional expenses of approximately $825,000 in connection
with this offering.
In connection with the Company's initial public offering in August 1991,
all of the existing holders of the Company's common stock placed in escrow an
aggregate of 672,419 shares of the Company's common stock. As of August 12,
1996, the termination date of the escrow agreement, the conditions for release
of the shares had not been met. Accordingly, the 672,419 escrowed shares of
Company common stock were returned to the Company and became authorized but
unissued shares.
NOTE K: STOCK WARRANTS AND OPTIONS
DIRECTOR WARRANT PLANS
In December 1994, in an effort to attract and retain experienced executives
to serve as outside directors for the Company, the Company's Board of Directors
adopted an Outside Directors' Warrant Plan (the "Plan"). The Plan, as amended,
provides for the granting of up to 2.4 million warrants. Warrants granted are
priced at market value on the date of grant, are typically vested within a one
year period and must be exercised prior to the fifth anniversary from the date
of grant. As of December 31, 1998, there were 1,174,000 warrants available for
future grant under the Plan.
In December 1994, the Board also adopted the Directors Warrant Incentive
Plan (the "Incentive Plan"), pursuant to which the Board, beginning in 1997, may
grant to each director on an annual basis warrants to purchase up to 50,000
shares of Company common stock at an exercise price per share equal to no less
than 110% of the fair market value of the common stock at the date of grant.
Warrants may only be issued under this plan if the Company's common stock has
appreciated by a compounded average annual growth rate equal to or in excess of
35% for the four years preceding the year of grant. The Incentive Plan provides
for the granting of up to 600,000 warrants. As of December 31, 1998, there were
300,000 warrants available for future grant under the Incentive Plan.
The following table summarizes the activity relating to the Plan and the
Incentive Plan:
79
<PAGE> 82
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF WARRANTS PRICE
----------- -------
<S> <C> <C>
Balance at January 1, 1996.................................. 1,026,000 $ 2.61
Warrants granted............................................ --
Warrants exercised.......................................... --
Warrants lapsed or canceled................................. --
-----------
Balance at December 31, 1996................................ 1,026,000 2.61
Warrants granted............................................ 200,000 9.21
Warrants exercised.......................................... (358,660) 2.02
Warrants lapsed or canceled................................. --
-----------
Balance at December 1, 1997................................. 867,340 4.37
Warrants granted............................................ 400,000 22.87
Warrants exercised.......................................... (700,000) 3.76
Warrants lapsed or canceled................................. (100,000) 25.85
-----------
Balance at December 31, 1998................................ 467,340 $16.52
===========
Exercisable at December 31, 1998............................ 467,340 $16.52
===========
</TABLE>
The vesting of all warrants awarded pursuant to the plans above typically
will be subject to the Board's discretion, provided that the director to whom
such warrants have been granted has attended at least 75% of the meetings of the
Board of Directors for the year in which such warrants are scheduled to vest.
Notwithstanding this limitation, the warrants to be awarded pursuant to the
plans will become immediately exercisable (i) if the Company is to be
consolidated with or acquired by another entity in a merger, (ii) upon the sale
of substantially all of the Company's assets or the sale of at least 90% of the
outstanding common stock of the Company to a third party, (iii) upon the merger
or consolidation of the Company with or into any other corporation or the merger
or consolidation of any corporation with or into the Company (in which
consolidation or merger the shareholders of the Company receive distributions of
cash or securities as a result thereof), or (iv) upon the liquidation or
dissolution of the Company.
STOCK OPTION PLANS
In 1991, the Company's stockholders adopted the 1991 Stock Option Plan (the
"1991 Plan"). The 1991 Plan, as amended, provided for the granting of up to 3.5
million options. As of December 31, 1998, no options were available for future
grant under the 1991 Plan.
In December 1997, the Company's Board of Directors authorized the adoption
of the 1998 Incentive Equity Plan (the "1998 Plan"). The 1998 Plan, which was
ratified by the Company's shareholders on November 30, 1998, provides for the
granting of up to 5.0 million options. As of December 31, 1998, there were
2,386,500 options available for future grant under the 1998 Plan.
These plans allow the Board of Directors to grant non-qualified and
incentive stock options to purchase the Company's common stock at an exercise
price not less than fair market value as of the grant date. Options issued under
these plans typically vest over a four year period. Options awarded under the
1991 Plan and the 1998 Plan are subject to the same vesting acceleration
provisions described above under the director warrant plans.
80
<PAGE> 83
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity relating to the 1991 Plan and
the 1998 Plan:
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF OPTIONS PRICE
---------- -------
<S> <C> <C>
Balance at January 1, 1996.................................. 1,681,829 $ 4.57
Options granted............................................. 883,269 8.03
Options exercised........................................... (170,030) 1.47
Options lapsed or canceled.................................. (67,940) 5.38
----------
Balance at December 31, 1996................................ 2,327,128 6.08
Options granted............................................. 1,955,500 16.95
Options exercised........................................... (647,700) 5.77
Options lapsed or canceled.................................. (80,440) 7.23
----------
Balance at December 31, 1997................................ 3,554,488 12.14
Options granted............................................. 3,589,299 17.66
Options exercised........................................... (1,110,140) 7.74
Options lapsed or canceled.................................. (145,011) 15.27
----------
Balance at December 31, 1998................................ 5,888,636 $16.43
==========
Exercisable at December 31, 1998............................ 2,621,786 $14.00
==========
</TABLE>
The options outstanding at December 31, 1998 have been segregated into six
price ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE PRICES
- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ .01 - 3.97.............................. 415,853 4.8 $ 2.23
5.44 - 9.75.............................. 1,051,303 3.2 7.79
11.09 - 14.71.............................. 462,051 3.1 11.35
15.89 - 19.88.............................. 788,185 6.8 17.91
20.04 - 24.74.............................. 2,946,189 4.8 21.11
25.25 - 32.41.............................. 225,055 5.1 26.44
</TABLE>
In February 1998, the Company issued 740,543 non-qualified options to
purchase Company common stock at $11.15 per share and 106,586 non-qualified
options to purchase Company common stock at $16.25 per share in exchange for
substantially all the options held by NACT employees, which became immediately
vested in connection with the NACT Merger. As of December 31, 1998, there were
533,125 of these options outstanding at an average exercise price of $14.40 per
share.
In November 1998, the Company issued 1,028,670 non-qualified options to
purchase Company common stock at prices ranging from $.01 to $32.41 per share in
exchange for substantially all the options held by Telco employees, which became
immediately vested in connection with the Telco Merger. As of December 31, 1998,
there were 1,025,659 of these options outstanding at an average exercise price
of $15.77 per share.
81
<PAGE> 84
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its employee
stock options. Therefore, no compensation cost has been recognized related to
stock options. If the company had elected to account for its stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Income
As reported........................................... $ (120,202) $13,134 $6,779
Pro forma............................................. (124,249) 11,380 6,100
Basic Earnings Per Share
As reported........................................... (5.19) 0.76 0.52
Pro forma............................................. (5.63) 0.66 0.47
Diluted Earnings Per Share
As reported........................................... (5.19) 0.70 0.46
Pro forma............................................. (5.63) 0.61 0.42
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Since the Company's employee stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
The fair value of each option has been estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield.............................................. n/a n/a n/a
Expected volatility......................................... 72 44 50
Risk-free interest rate..................................... 5.0 5.5 5.1
Expected life of stock options (in years)................... 5.0 4.5 3.0
</TABLE>
NOTE L: RETIREMENT SAVINGS PLAN
The Company has a retirement savings 401(k) plan that covers substantially all
employees. The plan provides for the employees to voluntarily contribute a
portion of their compensation on a tax deferred basis and allows for the Company
to make discretionary matching contributions as determined by the Board of
Directors. For 1998, 1997 and 1996, the Company contributed approximately
$194,000, $109,000, and $25,000, respectively, in the form of Company common
stock to the Plan. In 1998 and 1997, Company contributions were based on a 50%
match to employee contributions, up to the first six percent contributed.
NOTE M: INCOME TAXES
The Company uses the asset and liability approach for financial accounting
and reporting for income taxes. Certain expenses are reported for financial
accounting purposes in different periods than for income tax
82
<PAGE> 85
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes. These temporary differences arise primarily from depreciation,
provisions for doubtful accounts, inventory valuation reserves and various other
accrued expenses.
The components of the provision (benefit) for income taxes attributable to
income (loss) from continuing operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal Income Taxes
Current................................................... $ 5,764 $3,412 $ --
Deferred.................................................. (7,566) 853 (91)
------- ------ -----
(1,802) 4,265 (91)
------- ------ -----
State Income Taxes
Current................................................... 415 389 --
Deferred.................................................. -- 138 (23)
------- ------ -----
415 527 (23)
------- ------ -----
Total Income Taxes................................ $(1,387) $4,792 $(114)
======= ====== =====
</TABLE>
As a result of the exercises of non-qualified stock options and warrants by
the Company's directors and employees, the Company realized federal income tax
benefits during 1998 and 1997 of approximately $12.8 million and $6.7 million,
respectively. These tax benefits are accounted for as a decrease in current
income taxes payable and an increase in capital in excess of par value. Due to
the Company's net operating losses during 1998, approximately $10.5 million of
these tax benefits have not yet been utilized and are available to reduce future
taxable income of the Company. These benefits are included in Deferred income
taxes on the Company's balance sheet at December 31, 1998.
The provision (benefit) for income taxes attributable to continuing
operations differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate......................... $(40,125) $4,600 $(404)
Effect of:
Nondeductible purchase adjustments.................... 35,000 (40) 3
Loss producing no current tax benefit................. -- -- 234
Reduction in valuation allowance, utilization of net
operating loss carryforwards and reduction of
reserves............................................ -- (499) --
Amortization of goodwill.............................. 3,570 388 68
State tax, net of federal benefit..................... 269 343 (15)
Other................................................. (101) -- --
-------- ------ -----
Income tax expense.................................... $ (1,387) $4,792 $(114)
======== ====== =====
</TABLE>
83
<PAGE> 86
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities consisted of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Inventory and other reserves.............................. $ 7,305 $ 809
Restructuring/acquisition costs........................... 25,270 --
Net operating loss carryforwards.......................... 97,783 --
Federal tax credits carryforward.......................... 4,102 --
Capital loss carryforwards................................ -- 493
Other..................................................... 1,461 455
-------- ------
135,921 1,757
Valuation reserve......................................... (66,381) (493)
-------- ------
Total deferred tax assets......................... $ 69,540 $1,264
Deferred tax liabilities
Depreciation/amortization................................. (2,579) (306)
Intangible assets......................................... (18,020) --
Capitalized software...................................... (2,596) --
Other..................................................... -- (182)
-------- ------
Total deferred tax liabilities.................... (23,195) (488)
-------- ------
Net deferred tax assets........................... $ 46,345 $ 776
======== ======
</TABLE>
SFAS No. 109 "Accounting for Income Taxes" requires that a valuation
reserve be established if it is "more likely than not" that realization of the
tax benefits will not occur. The valuation reserve increased by approximately
$65.9 million in 1998, primarily due to the valuation allowance established for
the net operating loss ("NOL") carryforward acquired in connection with the
Resurgens Merger. This NOL carryforward is subject to limitations under the
consolidation return regulations and limits for certain ownership changes.
At December 31, 1998, the Company had NOL carryforwards acquired through
acquisitions to reduce future taxable income of these acquisitions by
approximately $213.0 million. To the extent not utilized, the U.S. Federal NOL
carryforwards will expire in 2011 through 2013. The Company also acquired
through business acquisitions unused research and development and investment tax
credit carryforwards of approximately $4.1 million at December 31, 1998, which
will expire in 1999 through 2013.
NOTE N: REPORTABLE SEGMENT DATA
The Company has two reportable segments: telecommunications equipment
("World Access Equipment Group") and telecommunications carrier services ("World
Access Telecommunications Group"). The World Access Equipment Group develops,
manufactures and markets digital switches, billing and network telemanagement
systems, cellular base stations, fixed wireless local loop systems, intelligent
multiplexers, digital microwave radio systems and other telecommunications
network products. The World Access Telecommunications Group provides wholesale
international long distance service through a combination of its own
international network facilities, various international termination
relationships and resale arrangements with other international long distance
service providers.
The World Access Telecommunications Group consists of the Resurgens
business which was acquired in December 1998 and a portion of the NACT business
which was acquired in February and October 1998. Prior to 1998, the Company
operated in one reportable business segment, therefore no reportable segment
disclosures are presented for those periods.
The Company evaluates performance and allocates resources based on
operating income or loss before interest and other income, interest expense and
income taxes. The accounting policies of the reportable
84
<PAGE> 87
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segments are the same as those described in the summary of significant
accounting policies. Intersegment sales and transfers are recorded at cost plus
a markup that equals current market prices. There were no intersegment sales
during 1998, 1997 and 1996.
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately due
to the unique nature of each segment (i.e., selling telecommunications equipment
versus providing international long distance services). The following tables
present revenues and other financial information by business segment and
geographic region:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
EQUIPMENT TELECOM CONTINUING DISCONTINUED
GROUP GROUP OTHER OPERATIONS OPERATIONS TOTAL
--------- -------- -------- ---------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.................... $140,172 $ 11,961 $ -- $ 152,133 $ 58,557 $ 210,690
Depreciation and amortization
expense...................... 6,088 315 205 6,608 2,592 9,200
In-process research and
development.................. 100,300 -- -- 100,300 -- 100,300
Restructuring and other
charges...................... 17,240 -- -- 17,240 2,650 19,890
Segment income or loss......... (104,400) (321) (9,924) (114,645) (5,557) (120,202)
Segment assets................. 380,721 161,137 40,823 582,681 31,131 613,812
Expenditures for long-lived
assets....................... 8,838 -- 2,194 11,032 1,184 12,216
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
REVENUES(A) LONG-LIVED ASSETS REVENUES(A) LONG-LIVED ASSETS REVENUES(A) LONG-LIVED ASSETS
----------- ------------------ ----------- ------------------ ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
United States............. $129,660 $54,297 $40,563 $5,705 $16,887 $2,658
United Kingdom............ -- 9,305 -- -- -- --
Other foreign countries... 22,473 -- 8,051 -- 244 --
Consolidated total........ 152,133 63,602 48,614 5,705 17,131 2,658
</TABLE>
- ---------------
(a) Revenues are attributed to countries based on the location of customers.
NOTE O: LITIGATION
Following the Company's announcement in January 1999 regarding earnings
expectations for the quarter and year ended December 31, 1998 and the subsequent
decline in the price of the Company's common stock, 22 putative class action
complaints were filed against the Company. The Company and certain of its then
current officers and directors were named as defendants. A second decline in the
Company's stock price occurred shortly after actual earnings were announced in
February 1999, and a few of these cases were amended, and additional similar
complaints were filed. The Company expects that the cases will be consolidated
and that an amended consolidated complaint will be filed after a ruling on a
pending motion regarding the appointment of lead plaintiffs and lead counsel.
Although the 22 complaints differ in some respects, the plaintiffs,
generally, have alleged violations of the federal securities laws arising from
misstatements of material information in and/or omissions of material
information from certain of the Company's securities filings and other public
disclosures, principally related to inventory and sales activities during the
fourth quarter of 1998. In general, the complaints are filed on behalf of: (a)
persons who purchased shares of the Company's common stock between October 7,
1998 and February 11, 1999; (b) shareholders of Telco who received shares of
common stock of the Company as a
85
<PAGE> 88
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result of the Company's acquisition of Telco that closed on November 30, 1998;
and (c) shareholders of NACT who received shares of common stock of the Company
as a result of the Company's acquisition of NACT that closed on October 28,
1998. Plaintiffs have requested damages in an unspecified amount in their
complaints. Although the Company and the individuals named as defendants deny
that they have violated any of the requirements or obligations of the federal
securities laws, there can be no assurance the Company will not sustain material
liability as a result of or related to these shareholder suits.
NOTE P: RELATED PARTY TRANSACTIONS
In October 1997, John D. ("Jack") Phillips, a director of the Company,
entered into a series of agreements whereby, among other things, he became the
new Chairman and Chief Executive Officer of Resurgens. In connection with the
Resurgens Merger in December 1998, he was appointed President and Chief
Executive Officer of the Company. He is a general partner of the sole
stockholder of Cherry U.K. and beneficially owns 625,000 shares of Company
common stock and 1,250,000 shares of Contingent Payment Stock issued at the time
of the Resurgens Merger.
MCI WorldCom, Inc. ("WorldCom"), which owned approximately 14% of the
Company's outstanding common stock at December 31, 1998, purchases international
long distance services from the Company's Telecommunications Group under a
Carrier Service Agreement (the "Service Agreement") entered into in June 1998.
WorldCom is obligated to purchase from the Telecommunications Group 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 WorldCom is
obtaining from other third party providers. The Service Agreement has a rolling
12-month evergreen term, subject to a one year prior notice of termination.
WorldCom prepays the services it purchases under the Service Agreement twice a
month. Although the revenues attributable to this Service Agreement were not
material to the Company's 1998 consolidated financial statements, these revenues
comprised approximately 65% of Resurgens' total revenues for the year ended
December 31, 1998.
86
<PAGE> 89
WORLD ACCESS, INC.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION
OF
WA TELCOM PRODUCTS CO., INC.
On October 28, 1998, World Access, Inc. reorganized its operations into a
holding company structure and changed its name to WA Telcom Products Co., Inc.
("WA Telcom"). As a result of the reorganization, WA Telcom became a
wholly-owned subsidiary of WAXS INC., which changed its name to World Access,
Inc. and is the Company filing this Report. Pursuant to the reorganization, the
Company exchanged each outstanding share of common stock of WA Telcom for one
share of common stock of the Company, converted each option and warrant to
purchase shares of common stock of WA Telcom into options and warrants to
purchase a like number of shares of common stock of the Company, and fully and
unconditionally guaranteed the payment of the $115.0 million aggregate principal
amount 4.5% convertible subordinated notes dated October 1, 1997 (due 2002)
previously issued by WA Telcom.
Set forth below is summarized financial information of WA Telcom presented
for the information of its debtholders. The summarized financial information
presented below includes the results of operations for the following businesses
from their respective dates of acquisitions: Cellular Infrastructure Supply,
Inc. -- January 1997; Galaxy Personal Communications Services, Inc. -- July
1997; Advanced TechCom, Inc. -- January 1998; NACT Telecommunications,
Inc. -- February 1998; and Cherry Communications Incorporated and Cherry
Communications U.K. Limited -- December 1998.
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $162,554 $152,852
Non-current assets.......................................... 300,139 37,445
Total assets................................................ 462,693 190,297
Current liabilities......................................... 70,976 9,045
Non-current liabilities..................................... 145,839 115,598
Stockholders equity......................................... 245,878 65,654
Total liabilities and stockholders equity................... 462,693 190,297
</TABLE>
OPERATING STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Total sales................................................. $ 139,246 $48,614 $17,131
Gross profit................................................ 49,794 21,087 3,055
Income (loss) from continuing operations(1)................. (111,282) 8,350 (1,041)
Income (loss) from discontinued operations(2)............... (2,057) 4,784 7,820
Net income (loss)........................................... (116,839) 13,134 6,779
</TABLE>
- ---------------
(1) Income (loss) from continuing operations includes special charges relating
to: $100.3 million of in-process research and development; $6.2 million of
goodwill impairment; and $17.2 million of restructuring and other charges.
(2) Reflects the Company's plan to sell all of its non-core businesses, which
consist of the resale of Nortel and other original equipment manufacturers'
wireline switching equipment, third party repair of telcom equipment and pay
telephone refurbishment. The discontinued operations had total assets of
$31.1 million and $35.0 million as of December 31, 1998 and 1997,
respectively, and total liabilities of $7.8 million and $8.9 million as of
December 31, 1998 and 1997, respectively.
87
<PAGE> 90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 22, 1998, the Company engaged Ernst & Young LLP as the
certifying accountants and dismissed PricewaterhouseCoopers LLP. The Company's
Board of Directors approved this change in accountants. The Company had no
disagreements with its accountants during the period covered by this Report and
such accountants' report on the financial statements for each of the past two
years did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information with respect to the Company's directors outlined in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on June 15, 1999 (the "Proxy Statement"), is incorporated herein by
reference.
EXECUTIVE OFFICERS
The information with respect to the Company's executive officers is set
forth in Item 4.5 of Part I of this Report.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership set forth under the caption "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The index to the financial statements included in this Report within Item 8
(page 50) is incorporated herein by reference.
88
<PAGE> 91
(2) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
-------- --------
<S> <C>
II 94
</TABLE>
(3) Exhibits -- See Item 14 (c) below
(b) Reports on Form 8-K
On October 28, 1998, World Access, Inc. (the "Registrant") filed a Report
on Form 8-K announcing the consummation of the transactions contemplated by the
Agreement and Plan of Merger and Reorganization, dated as of February 24, 1998,
as amended, by and between the Registrant, WA Telcom Products Co., Inc. ("Old
World Access"), NACT Telecommunications, Inc. ("NACT"), WAXS Acquisition Corp.
and NACT Acquisition Corp. on October 28, 1998.
On November 12, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the transactions contemplated by the Agreement and Plan of
Merger and Reorganization, dated as of February 24, 1998, as amended, by and
between the Registrant, WA Telcom Products Co., Inc. ("Old World Access"), NACT
Telecommunications, Inc. ("NACT"), WAXS Acquisition Corp. and NACT Acquisition
Corp. on October 28, 1998.
On December 1, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the business combination with Telco Systems, Inc. ("Telco").
On December 16, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the acquisition of Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) on December 15, 1998.
On December 28, 1998, the Registrant filed a Report on Form 8-K announcing
the change in its certifying accountant as of December 22, 1998.
On October 14, 1998, Old World Access filed a Report on Form 8-K announcing
the agreement in principle with Telco to extend the deadline for completing the
Telco merger.
(c) The exhibits filed herewith and incorporated by reference herein are
set forth on the Exhibit Index on page 92 hereof. Included in those exhibits are
the following executive compensation plans and arrangements:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1 -- 1991 Stock Option Plan
10.2 -- Amendment to 1991 Stock Option Plan
10.3 -- Second Amendment to 1991 Stock Option Plan
10.4 -- Third Amendment to 1991 Stock Option Plan
10.5 -- Outside Directors' Warrant Plan
10.6 -- Directors' Warrant Incentive Plan
10.7 -- Fourth Amendment to 1991 Stock Option Plan
10.8 -- Fifth Amendment to 1991 Stock Option Plan
10.9 -- Amendment One to Outside Directors' Warrant Plan
10.10 -- Amendment One to Directors' Warrant Incentive Plan
10.11 -- Amendment Two to Outside Directors' Warrant Plan
10.12 -- Amendment Two to Directors' Warrant Incentive Plan
10.13 -- Sixth Amendment to 1991 Stock Option Plan
10.14 -- Severance Protection Agreement -- Steven A. Odom
</TABLE>
89
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.15 -- Severance Protection Agreement -- Hensley E. West
10.16 -- Severance Protection Agreement -- Mark A. Gergel
10.21 -- Amendment Three to Outside Directors' Warrant Plan
10.22 -- Executive Employment Agreement between World Access, Inc.
and Steven A. Odom
10.23 -- Executive Employment Agreement between World Access, Inc.
and Mark A. Gergel
10.24 -- Letter Agreement with Hensley E. West
10.25 -- 1998 Incentive Equity Plan, as amended
</TABLE>
90
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
3.1 -- Certificate of Incorporation of the Registrant and
Amendments to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Registrant's Form S-4 filed
October 6, 1998, Registration No. 333-65389, Amendment to
Certificate of Incorporation incorporated by reference to
Exhibit 3.2 of Old World Access' Form 8-K filed October 28,
1998).
3.2 -- Amendment to the Certificate of Incorporation.
3.3 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to Registrant's Form S-4 filed October 6, 1998,
No. 333-65389).
4.1 -- Indenture dated as of October 1, 1997 by and between World
Access, Inc. and First Union Bank, as trustee (incorporated
by reference to Exhibit 4.1 to Old World Access' Form 8-K,
filed October 8, 1997).
4.2 -- First Supplemental Indenture dated October 28, 1998 between
World Access, Inc., WA Telcom Products Co., Inc. and First
Union Bank, as Trustee (incorporated by reference to Exhibit
4.1 to the Registrant's Form 8-K filed October 28, 1998).
10.1 -- World Access, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to Old World
Access' Registration Statement on Form S-18, filed on July
25, 1991, No. 33-41255-A).
10.2 -- Amendment to World Access, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Old World
Access' Form 10-K for the year ended December 31, 1993,
filed March 31, 1994).
10.3 -- Second Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Old World Access' Form 10-K for
the year ended December 31, 1993, filed March 31, 1994).
10.4 -- Third Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.26 to Old World Access' Form S-2,
Amendment No. 2, filed on February 14, 1995, No. 33-87026).
10.5 -- World Access, Inc. Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.40 to Old World
Access' Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.6 -- Directors' Warrant Incentive Plan (incorporated by reference
to Exhibit 10.41 to Old World Access' Form 10-K for the year
ended December 31, 1995, filed April 10, 1996).
10.7 -- Fourth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.32 to Old World Access' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.8 -- Fifth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.9 -- Amendment One to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.33 to Old World
Access' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.10 -- Amendment One to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.31 to Old World
Access' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.11 -- Amendment Two to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.21 to Old World
Access' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.12 -- Amendment Two to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.22 to Old World
Access' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.13 -- Sixth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.22 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
</TABLE>
91
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.14 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Steven A. Odom (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.15 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Hensley E. West (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.16 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Mark A. Gergel (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.17 -- License Agreement dated July 1, 1996, by and between
International Communication Technologies, Inc., World Access
and Eagle Telephonics, Inc. (incorporated by reference to
Exhibit 10.36 to Old World Access' Form 10-K for the year
ended December 31, 1996, filed April 11, 1997).
10.18 -- Agreement and Plan of Merger between and among World Access,
Inc. and CIS Acquisition Corp. and Thomas R. Canham; Brian
A. Schuchman; and Cellular Infrastructure Supply, Inc. (with
exhibits thereto) (incorporated by reference to Exhibit Z to
Old World Access' Form 8-K, filed April 10, 1997).
10.19 -- Registration Rights Agreement dated October 1, 1997 by and
between World Access, Inc., BT Alex Brown Incorporated and
Prudential Securities Incorporated (incorporated by
reference to Exhibit 10.2 to Old World Access' Form 8-K,
filed October 8, 1997).
10.20 -- Agreement and Plan of Merger by and among World Access,
Inc., Cellular Infrastructure Supply, Inc., Advanced
TechCom, Inc. and Ernest H. Lin dated as of December 24,
1997 (incorporated by reference to Exhibit 2.1 to Old World
Access' Form 8-K, filed February 13, 1998).
10.21 -- Amendment Three to Outside Directors' Warrant Plan.
10.22 -- Executive Employment Agreement between World Access, Inc.
and Steven A. Odom dated as of December 14, 1998.
10.23 -- Executive Employment Agreement between World Access, Inc.
and Mark A. Gergel dated as of December 14, 1998.
10.24 -- Letter Agreement with Hensley E. West, dated as of December
14, 1998.
10.25 -- World Access, Inc. 1998 Incentive Equity Plan, as amended.
10.26 -- Assignment and Assumption Agreement dated October 29, 1998
between World Access, Inc. and WA Telcom Products Co., Inc.
(incorporated by Exhibit 10.1 to the Registrant's Form 8-K
filed October 28, 1998).
10.27 -- Form of Indemnification Agreement with directors and
officers (incorporated by reference to Appendix H to the
Registrant's Joint Proxy Statement/Prospectus dated November
10, 1998 relating to the Special Meeting of Stockholders
held on November 30, 1998).
10.28 -- Schedule of all officers and directors who have signed an
Indemnification Agreement referred to in Exhibit 10.27.
10.29 -- Credit Agreement dated as of December 30, 1998 between Telco
Systems, Inc., World Access Holdings, Inc. and NationsBank,
N.A. as Administrative Agent and Fleet National Bank as
Syndication Agent and Bank Creditanstalt Corporate Finance,
Inc.
10.30 -- Guaranty dated as of December 30, 1998 between the
Registrant, Telco, World Access Holdings, Inc., NationsBank,
N.A. as Administrative Agent and the lenders party to the
Credit Agreement (referred to in Exhibit 10.29).
</TABLE>
92
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.31 -- Pledge Agreement dated as of December 31, 1998 by the
Registrant. in favor of NationsBank, N.A. as Administrative
Agent and the lenders party to the Credit Agreement
(referred to in Exhibit 10.29).
10.32 -- Security Agreement dated as of December 31, 1998 by the
Registrant in favor of NationsBank, N.A. as Administrative
Agent and the lenders party to the Credit Agreement
(referred to in Exhibit 10.29).
10.33 -- Disbursement Agreement dated as of December 14, 1998, by and
the Registrant, Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) and William H. Cauthen, Esq.
10.34 -- Agreement and Plan of Merger and Reorganization by and among
World Access, Inc., WAXS INC., WA Merger Corp. and Cherry
Communications Incorporated (d/b/a Resurgens Communications
Group) dated as of May 12, 1998, as amended (incorporated by
reference to Appendix A to the Registrant's Proxy Statement
dated November 12, 1998 relating to the Special Meeting of
Stockholders held on December 14, 1998).
10.35 -- Share Exchange Agreement by and among World Access, Inc.,
WAXS INC., Cherry Communications U.K. Limited and
Renaissance Partners II, dated as of May 12, 1998
(incorporated by reference to Appendix B to the Registrant's
Proxy Statement dated November 12, 1998 relating to the
Special Meeting of Stockholders held on December 14, 1998).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
27.1 -- Financial Data Schedule for 1998. (For SEC use only).
27.2 -- Financial Data Schedule for 1997 and 1996 as restated for
discontinued operations.
</TABLE>
93
<PAGE> 96
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Deducted from asset account
Allowance for doubtful
accounts.................... $ 237 $ 7,732 $ 4,133(B) $ (2,310)(A) $ 9,792
Reserves for inventories...... 1,797 17,193 23,145(B) (19,009)(C) 23,126
Year Ended December 31, 1997:
Deducted from asset account
Allowance for doubtful
accounts.................... 265 172 35(B) (235)(A) 237
Reserves for inventories...... 1,509 773 295(B) (780)(C) 1,797
Year Ended December 31, 1996:
Deducted from asset account
Allowance for doubtful
accounts.................... 207 168 30(B) (140)(A) 265
Reserves for inventories...... 1,335 197 55(B) (78)(C) 1,509
</TABLE>
- ---------------
(A) Write-off of uncollectible amounts.
(B) Reserves from businesses acquired.
(C) Disposal of inventories.
94
<PAGE> 97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed, on
its behalf by the undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ JOHN D. PHILLIPS
------------------------------------
John D. Phillips
President and Chief Executive
Officer
Dated as of April 8, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN A. ODOM Chairman of the Board April 8, 1999
- -----------------------------------------------------
Steven A. Odom
/s/ JOHN D. PHILLIPS Director, President and Chief April 8, 1999
- ----------------------------------------------------- Executive Officer (Principal
John D. Phillips Executive Officer)
/s/ MARK A. GERGEL Director, Executive Vice April 8, 1999
- ----------------------------------------------------- President and Chief Financial
Mark A. Gergel Officer (Principal Financial
Officer)
/s/ MARTIN D. KIDDER Vice President and Controller April 8, 1999
- ----------------------------------------------------- (Principal Accounting
Martin D. Kidder Officer)
/s/ STEPHEN J. CLEARMAN Director April 8, 1999
- -----------------------------------------------------
Stephen J. Clearman
/s/ JOHN P. IMLAY, JR. Director April 8, 1999
- -----------------------------------------------------
John P. Imlay, Jr.
/s/ CARL E. SANDERS Director April 8, 1999
- -----------------------------------------------------
Carl E. Sanders
</TABLE>
95
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
WORLD ACCESS, INC.
World Access, Inc. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify:
FIRST: That, the Board of Directors of the Corporation
unanimously adopted a resolution setting forth proposed amendment to the
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable, and directing that said amendment be presented to the stockholders of
the Corporation for consideration at a special meeting of the stockholders or by
written consent of the stockholders. The resolutions setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended to change the number of shares of stock that the
Corporation has authority to issue and that such amendment be effected
by deleting the first paragraph of ARTICLE IV and substituting the
following paragraph in lieu thereof:
CAPITAL STOCK
"The total number of shares of stock that the corporation
shall have authority to issue is One Hundred Sixty Million
(160,000,000), consisting of One Hundred Fifty Million (150,000,000)
shares of common stock, $.01 par value per share ("Common Stock"), and
Ten Million (10,000,000) shares of preferred stock, $.01 par value per
share ("Preferred Stock")."
The designation, relative rights, preferences and limitations of the shares
remain as stated in the original Certificate of Incorporation.
SECOND: That, pursuant to resolution of the Board of Directors
of the Corporation, a special meeting of the stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be signed as of this 30th day of November, 1998.
WORLD ACCESS, INC.
By:
-------------------------------------
Steven A. Odom, Chairman of the Board
<PAGE> 1
EXHIBIT 10.21
AMENDMENT TO OUTSIDE DIRECTORS' WARRANT PLAN AND GRANT OF WARRANTS
WHEREAS the Company's Outside Director's Warrant Plan (the "Warrant
Plan") authorizes the Company to issue to the Company's non-employee directors
warrants to purchase up to 1,200,000 shares of the Company's common stock;
WHEREAS, the Company has already issued under the Warrant Plan warrants
to purchase an aggregate of 1,026,000 shares of its common stock;
WHEREAS, the Board has determined that it is in the best interests of
the Company to amend the Warrant Plan to provide for issuance thereunder of
warrants to purchase an aggregate of 2,400,000 shares of the Company's common
stock (the "Plan Amendment");
WHEREAS, the Board desires to recommend the Plan Amendment to the
Company's stockholders for their approval; and
WHEREAS, the Board has determined that it is in the best interests of
the Company to grant to each of John P. Imlay, Jr. and Carl E. Sanders a warrant
under the Plan to purchase 100,000 shares of the Company's common stock;
NOW, THEREFORE, IT IS HEREBY RESOLVED, that, subject to the approval of
the Company's stockholders, the Board does hereby amend Section 3 of the Warrant
Plan by increasing the number of shares of common stock for issuance thereunder
from 1,200,000 to 2,400,000;
FURTHER RESOLVED, that, subject to the approval of the Company's
stockholders, the Plan Amendment shall be effective immediately upon such
stockholder approval;
FURTHER RESOLVED, that, subject to the approval of the Company's
stockholders, all of the other terms and provisions of the Warrant Plan shall
remain in full force and effect, except as specifically amended hereby;
FURTHER RESOLVED, that pursuant to the Warrant Plan, the Board hereby
grants, as of the date hereof, to each of Messrs. Imlay and Sanders, a warrant
to purchase an aggregate of 100,000 shares of the Company's common stock, which
may be exercised from time to time, or at any time until 11:59 p.m. on December
14, 2003, at an exercise price of $19.88 per share, the closing price of the
Company's common stock on The Nasdaq National Market on December 14, 1998, which
warrants shall be immediately vested and may be exercised without regard to the
proviso contained in Section 4(D) of the Plan, provided that each such warrant
shall be subject to the approval of the Plan Amendment by the Company's
stockholders to extent of the last 13,000 shares of the Company's common stock
issuable upon exercise of each such warrant;
FURTHER RESOLVED, that the Board hereby authorizes, empowers, and
directs the Chairman, the Chief Executive Officer and the President and any
Executive Vice President of the
<PAGE> 2
Company, and each of them and any such other officers as any of them may
authorize, empower, and direct, to take any and all such actions and to pay over
to, execute and deliver and file and record, as the case may be, any and all
such documents, agreements, instruments, certificates and instructions (however
characterized or described), as such officer, may deem necessary or advisable,
including, without limitation, a warrant certificate or agreement, in order to
carry into effect the purposes and intent of the Plan Amendment and grant of the
warrants, or the transactions contemplated therein or thereby, as shall be
evidenced conclusively by the taking of such actions or the execution and
delivery and the filing and recording, as the case may be, of such documents,
agreements, instruments, certificates or instructions by such officers; and
FURTHER RESOLVED, that any and all such actions heretofore taken and
any and all documents, agreements, instruments, certificates or instructions
(however characterized or described) heretofore executed and delivered or filed
and recorded, as the case may be, on behalf of the Company by any duly elected
officer of the Company in order to carry into effect the purposes and intent of
the foregoing resolutions or the transactions contemplated therein or thereby
are hereby ratified, confirmed and adopted and approved, in all respects.
<PAGE> 1
EXHIBIT 10.22
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of December 14, 1998, between WORLD ACCESS, INC., a Delaware
corporation f/k/a WAXS INC. (the "Company"), and STEVEN A. ODOM (the
"Employee"), an individual resident of the State of Georgia.
1. Term. The term (the "Term") of this Agreement shall begin on
the date hereof (the "Effective Date") and shall continue in effect for a period
of three (3) years from the Effective Date (the "Initial Term"); provided,
however, the Term shall be extended automatically for an additional year (each
an "Additional Term") on each anniversary of the Effective Date unless either
party hereto gives written notice to the other party not to so extend at least
ninety (90) days prior thereto, in which case no further extension shall occur;
provided further, however, that notwithstanding any such notice by the Company
not to extend, the Term shall not expire prior to the expiration of twenty-four
(24) months after the occurrence of a Change in Control (as hereinafter
defined).
2. Employment and Duties. The Employee shall serve as the
Chairman of the Company's board of directors, reporting only to the board, and
shall have such powers and duties as may from time to time be prescribed by the
board, provided that such duties are consistent with the Employee's position as
a senior executive of the Company. The Company shall provide the Employee with a
private office, secretarial and administrative assistance, office equipment,
supplies and other facilities and services suitable to the Employee's position.
3. Salary. For all services to be rendered by the Employee
pursuant to this Agreement, the Company hereby agrees to pay the Employee a base
salary at an annual rate of $625,000.00 per year (the "Base Salary"), payable in
accordance with the Company's payroll practices in effect from time to time. Any
increase in Base Salary or other compensation granted by the compensation
committee of the Company's board of directors shall in no way limit or reduce
any other obligation of the Company hereunder. Once established at an increased
specified rate, the Base Salary hereunder shall not thereafter be reduced, and
the term Base Salary used in this Agreement shall refer to the Base Salary as so
increased.
4. Bonus. In addition to his Base Salary, in the discretion of
the Company's board of directors, the Employee may be awarded for each calendar
year during the Term an annual bonus (an "Annual Bonus") either pursuant to a
bonus or incentive plan of the Company or otherwise on terms no less favorable
than those awarded to other executive officers of the Company.
5. Benefits. The Employee shall be entitled to all benefits and
conditions of employment provided by the Company to its executive officers,
including, without limitation, insurance, participation in the Company's
vacation policy, and participation in any stock option or incentive compensation
plans, pension, profit sharing or other retirement plans, subject (in each case)
to the terms of such plans and any provisions, rules, regulations and laws
applicable to such plans.
<PAGE> 2
6. Most Favorable Terms. Notwithstanding anything herein to the
contrary, each of the Base Salary, Annual Bonus and benefits, including, without
limitation, the grant of any stock options, warrants or stock appreciation
rights and any amounts payable upon termination of employment or other rights or
benefits accruing in connection therewith, to which the Employee is entitled
pursuant to the terms of this Agreement shall be at least as favorable to the
Employee as the highest of each of the salary, bonus and benefits payable by the
Company to the Company's Chief Executive Officer or to John D. Phillips in
whatever capacity (whether pursuant to an employment agreement or otherwise).
7. Reimbursement for Business Expenses. The Employee shall be
reimbursed for all reasonable out-of-pocket business expenses incurred by him in
the direct performance of his duties during his employment with the Company
pursuant to the terms of this Agreement and in accordance with the Company's
policies in effect from time to time. All requests for reimbursement shall be
substantiated by invoices and other pertinent data reasonably satisfactory to
the Company.
8. Performance. The Employee shall devote all of his working time
and efforts to the business and affairs of the Company and to the diligent,
faithful and competent performance of the duties and responsibilities assigned
to him pursuant to this Agreement, except for vacations, weekends and holidays.
Notwithstanding the foregoing, the Employee may render charitable, civic and
outside board services so long as such services do not materially interfere with
the Employee's ability to discharge his duties, including, without limitation,
such outside services as the Employee is currently performing.
9. Non-Disclosure of Proprietary Information; Non-Competition;
Non-Solicitation.
9.1. Confidential Information; Trade Secrets. As used in
this Agreement, the term "Confidential Information" shall mean
valuable, non-public, competitively sensitive data and information
relating to the Company's business or the business of any entity
affiliated with the Company, other than Trade Secrets (as defined
below). "Confidential Information" shall include, among other things,
information specifically designated as a Trade Secret that is,
notwithstanding the designation, determined by a court of competent
jurisdiction not to be a "trade secret" under applicable law. As used
in this Agreement, the term "Trade Secrets" shall mean information or
data of or about the Company or any entity affiliated with the Company,
including, without limitation, technical or non-technical data,
formulas, patterns, compilations, programs, devices, methods,
techniques, drawings, processes, financial data, financial plans,
product plans, or lists of actual or potential customers or suppliers,
that (i) derive economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from their disclosure
or use; and (ii) are subject of efforts that are reasonable under the
circumstances to maintain their secrecy. To the extent that the
foregoing definition is
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inconsistent with a definition of "trade secret" under applicable law,
the foregoing definition shall be deemed amended to the extent
necessary to render it consistent with applicable law.
9.2. Non-Disclosure. The Employee will be exposed to Trade
Secrets and Confidential Information as a result of his employment by
the Company as provided in this Agreement. The Employee acknowledges
and agrees that any unauthorized disclosure or use of any of the Trade
Secrets or Confidential Information of the Company would be wrongful
and would likely result in immediate and irreparable injury to the
Company. In consideration of the Employee's right to employment (or
continued employment) under the terms of this Agreement, except as
appropriate in connection with the performance of his obligations under
this Agreement, the Employee shall not, without the express prior
written consent of an officer of the Company other than the Employee,
redistribute, market, publish, disclose or divulge to any other person
or entity, or use or modify for use, directly or indirectly, in any way
for any person or entity (i) any Confidential Information during the
Term of this Agreement and for a period of two (2) years after the
final date of the Term of this Agreement; and (ii) any Trade Secrets at
any time (during or after the Term of this Agreement) during which such
information or data shall continue to constitute a "trade secret" under
applicable law. The Employee agrees to cooperate with any reasonable
confidentiality requirements of the Company. The Employee shall
immediately notify the Company of any unauthorized disclosure or use of
any Trade Secrets or Confidential Information of which the Employee
becomes aware.
9.3. Non-Competition. The Employee shall not, either
directly or indirectly, alone or in partnership, be connected or
concerned with or participate in any other competing business or
pursuit during any employment by the Company, except that the Employee
may own up to three percent of the outstanding securities of a
competing business the securities of which are registered with the
Securities and Exchange Commission if such company is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934,
as amended (the "1934 Act").
9.4. Non-Solicitation. For a period of one (1) year
immediately following any termination of the Employee's employment, the
Employee will not solicit, or participate in any solicitation of, the
customers, suppliers, employees or representatives of the Company (or
any of its subsidiaries or affiliated companies) to breach any contract
with the Company, terminate any relationship with the Company or leave
the Company. For purposes of this Agreement, customers shall be limited
to actual customers or actively-sought prospective customers of the
Company or any subsidiary or affiliate of the Company with whom the
Employee has had substantial contact during the Term of this Agreement.
10. Certain Definitions.
10.1. Accrued Compensation. For purposes of this Agreement,
"Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the "Termination Date" (as
hereinafter defined) but not paid as of the Termination Date,
including, without limitation, (i) Base Salary, (ii) reimbursement for
reasonable and necessary expenses
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incurred by the Employee on behalf of the Company during the period
ending on the Termination Date, (iii) vacation pay, (iv) bonuses,
including, without limitation, any Annual Bonus, and incentive
compensation, and (v) all other amounts to which the Employee is
entitled under any compensation plan of the Company at the times such
payments are due.
10.2. Base Amount. For purposes of this Agreement, "Base
Amount" shall mean the Employee's annual Base Salary at the highest
rate in effect on, or at any time during the ninety (90) day period
prior to, the Termination Date and shall include all amounts of the
Employee's Base Salary that are deferred under any qualified and
non-qualified employee benefit plans of the Company or any other
agreement or arrangement.
10.3. Cause. For purposes of this Agreement, a termination
of employment is for "Cause" if the Employee has been convicted of a
felony or a felony prosecution has been brought against the Employee or
if the termination is evidenced by a resolution adopted in good faith
by two-thirds (2/3) of the Company's board of directors that the
Employee (i) intentionally and continually failed substantially to
perform his reasonably assigned duties with the Company (other than a
failure resulting from the Employee's incapacity due to physical or
mental illness or from the Employee's assignment of duties that would
constitute "Good Reason" (as hereinafter defined)) which failure
continued for a period of at least thirty (30) days after a written
notice of demand for substantial performance has been delivered to the
Employee specifying the manner in which the Employee has failed
substantially to perform, or (ii) intentionally engaged in illegal
conduct or gross misconduct which results in material economic harm to
the Company; provided, however, that (A) where the Employee has been
terminated for Cause because a felony prosecution has been brought
against him and no conviction or plea of guilty or plea of nolo
contendere or its equivalent results therefrom, then said termination
shall no longer be deemed to have been for Cause and the Employee shall
be entitled to all the benefits provided by Section 11.1(i) hereof from
and after the date on which the prosecution of the Employee has been
dismissed or a judgement of acquittal has been entered, whichever shall
first occur; and (B) no termination of the Employee's employment shall
be for Cause as set forth in clause (ii) above until (x) there shall
have been delivered to the Employee a copy of a written notice setting
forth that the Employee was guilty of the conduct set forth in clause
(ii) and specifying the particulars thereof in detail, and (y) the
Employee shall have been provided an opportunity to be heard in person
by the Company's board of directors (with the assistance of the
Employee's counsel if the Employee so desires). No act, or failure to
act, on the Employee's part shall be considered "intentional" unless
the Employee has acted or failed to act with a lack of good faith and
with a lack of reasonable belief that the Employee's action or failure
to act was in the best interests of the Company. Any act, or failure to
act, based upon authority given pursuant to a resolution duly adopted
by the Company's board of directors or upon the instructions of any
senior officer of the Company or based upon the advice of counsel for
the Company shall be conclusively presumed to be done, or omitted to be
done, by the Employee in good faith and in the best interests of the
Company. Any termination of the Employee's employment by the Company
hereunder shall be deemed to be a termination other than for Cause
unless it meets all requirements of this Section 10.3.
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10.4. Change in Control. For purposes of this Agreement, a
"Change in Control" shall have occurred if:
(i) a majority of the directors of the Company
shall be persons other than persons: (A) for whose election
proxies shall have been solicited by the Company's board of
directors, or (B) who are then serving as directors appointed
by the Company's board of directors to fill vacancies on the
board of directors caused by death or resignation (but not by
removal) or to fill newly-created directorships;
(ii) a majority of the outstanding voting power
of the Company shall have been acquired or beneficially owned
(as defined in Rule 13d-3 under the 1934 Act or any successor
rule thereto) by any person (other than the Company, a
subsidiary of the Company or the Employee) or Group (as
defined below), which Group does not include the Employee; or
(iii) there shall have occurred:
(A) a merger or consolidation of the Company
with or into another corporation (other than (1) a
merger or consolidation with a subsidiary of the
Company or (2) a merger or consolidation in which (a)
the holders of voting stock of the Company
immediately prior to the merger as a class continue
to hold immediately after the merger at least a
majority of all outstanding voting power of the
surviving or resulting corporation or its parent and
(b) all holders of each outstanding class or series
of voting stock of the Company immediately prior to
the merger or consolidation have the right to receive
substantially the same cash, securities or other
property in exchange for their voting stock of the
Company as all other holders of such class or
series);
(B) a statutory exchange of shares of one or
more classes or series of outstanding voting stock of
the Company for cash, securities or other property;
(C) the sale or other disposition of all or
substantially all of the assets of the Company (in
one transaction or a series of transactions); or
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<PAGE> 6
(D) the liquidation or dissolution of the
Company;
unless more than twenty-five percent (25%) of the voting stock
(or the voting equity interest) of the surviving corporation
or the corporation or other entity acquiring all or
substantially all of the assets of the Company (in the case of
a merger, consolidation or disposition of assets) or of the
Company or its resulting parent corporation (in the case of a
statutory share exchange) is beneficially owned by the
Employee or a Group that includes the Employee.
10.5. Group. For purposes of this Agreement, "Group" shall
mean any two or more persons acting as a partnership, limited
partnership, syndicate, or other group acting in concert for the
purpose of acquiring, holding or disposing of voting stock of the
Company.
10.6. Disability. For purposes of this Agreement,
"Disability" shall mean a physical or mental infirmity which impairs
the Employee's ability to substantially perform his duties with the
Company for a period of one hundred eighty (180) consecutive days and
the Employee has not returned to his full time employment prior to the
Termination Date as stated in the "Notice of Termination" (as
hereinafter defined).
10.7. Good Reason.
10.7.1. For purposes of this Agreement, "Good
Reason" shall mean a good faith determination by the Employee,
in the Employee's sole and absolute judgment, that any one or
more of the following events has occurred, without the
Employee's express written consent:
(i) the assignment to the Employee of
any duties inconsistent with the Employee's position
(including, without limitation, status, titles and
reporting requirements), authority, duties or
responsibilities as in effect immediately prior to
the date hereof, or any other action by the Company
that results in a material diminution in such
position, authority, duties or responsibilities,
excluding for this purpose isolated and inadvertent
action not taken in bad faith and remedied by the
Company promptly after receipt of notice thereof
given by the Employee;
(ii) a reduction by the Company in the
Employee's Base Salary, as the same may be increased
from time to time, or a change in the eligibility
requirements or performance criteria under any bonus,
incentive or compensation plan, program or
arrangement under which the Employee is covered
immediately prior to the Termination Date which
adversely affects the Employee;
(iii) any failure to pay the Employee any
compensation or benefits to which he is entitled
within five (5) days of the date due;
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(iv) the Company's requiring the
Employee to be based anywhere other than within fifty
(50) miles of the Employee's job location as of the
date hereof, except for reasonably required travel on
the Company's business which is not greater than such
travel requirements prior to the date hereof;
(v) the taking of any action by the
Company that would materially adversely affect the
physical conditions existing in or under which the
Employee performs his employment duties;
(vi) the insolvency or the filing (by
any party, including the Company) of a petition for
bankruptcy by the Company;
(vii) any purported termination of the
Employee's employment for Cause by the Company which
does not comply with the terms of Section 10.3
hereof; or
(viii) any breach by the Company of any
provision of this Agreement.
10.7.2. The Employee's right to terminate his
employment pursuant to this Section 10 shall not be affected
by his incapacity due to physical or mental illness.
10.8. Notice of Termination. For purposes of this
Agreement, "Notice of Termination" shall mean a written notice of
termination from the Company of the Employee's employment which
indicates the specific termination provision in this Agreement relied
upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Employee's employment under the provision so indicated.
10.9. Termination Date. For purposes of this Agreement,
"Termination Date" shall mean, in the case of the Employee's death, his
date of death, in the case of the Employee's voluntary termination, the
last day of employment, and in all other cases (other than in the case
of a successor or an assignee, which is provided for in Section 15.1
hereof), the date specified in the Notice of Termination; provided,
however, that if the Employee's employment is terminated by the Company
for Cause or due to Disability, the date specified in the Notice of
Termination shall be at least thirty (30) days from the date the Notice
of Termination is given to the Employee; and provided further that in
the case of Disability the Employee shall not have returned to the
full-time performance of his duties during such period of at least
thirty (30) days.
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11. Benefits and Payments Upon Termination of Employment.
11.1. Compensation and Benefits. If, during the term of
this Agreement, the Employee's employment with the Company shall be
terminated, the Employee shall be entitled to the following
compensation and benefits in the following circumstances:
(i) If the Employee's employment with the
Company shall be terminated (A) by the Company for Cause or
Disability or (B) by reason of the Employee's death, then the
Company shall pay to the Employee all Accrued Compensation.
(ii) If the Employee's employment with the
Company shall be terminated by the Company pursuant to Section
14.2 hereof, then the Employee shall be entitled to the
following:
(A) the Company shall pay the Employee all
Accrued Compensation;
(B) the Company shall pay the Employee as
severance pay and in lieu of any further compensation
for periods subsequent to the Termination Date an
amount in cash equal to two (2) times the Base
Amount;
(C) for twenty-four (24) months or such
longer period as may be provided by the terms of the
appropriate program, practice or policy, the Company
shall, at its expense, continue on behalf of the
Employee and his dependents and beneficiaries the
life insurance, disability, medical, dental and
hospitalization benefits generally made available to
the Company's executive officers at any time during
the 90-day period prior to the Termination Date or at
any time thereafter, provided that (1) the Company's
obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the
Employee obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case
the Company may reduce the coverage of any benefits
it is required to provide the Employee hereunder as
long as the aggregate coverages and benefits of the
combined benefit plans are no less favorable to the
Employee than the coverages and benefits required to
be provided hereunder, and (2) this clause (C) shall
not be interpreted so as to limit any benefits to
which the Employee or his dependents or beneficiaries
may be entitled under any of the Company's employee
benefit plans, programs or practices following the
Employee's termination of employment, including,
without limitation, retiree medical and life
insurance benefits;
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(D) the restrictions on any outstanding
incentive awards (including, without limitation,
restricted stock and granted performance shares or
units) under any incentive plan or arrangement shall
lapse and such incentive award shall become 100%
vested, all stock options, warrants and stock
appreciation rights granted to the Employee on or
prior to the date of this Agreement shall become
immediately exercisable and 100% vested and,
notwithstanding anything to the contrary contained in
the plan, agreement or other instrument relating to
such stock option, warrant or stock appreciation
rights with regard to the period of time within which
such stock option, warrant or stock appreciation
rights must be exercised following the Employee's
termination of employment or provision of services to
the Company, all such stock options, warrants and
stock appreciation rights may be exercised at any
time and from time to time until the one (1) year
anniversary of the Termination Date, and all
performance units granted to the Employee shall
become 100% vested; and
(E) the Company shall, at its sole expense
as incurred, provide for a twenty-four (24) month
period following the Termination Date the Employee
with reasonable office space and secretarial
assistance.
(iii) If the Employee's employment with the
Company shall be terminated by the Employee pursuant to
Section 14.3 hereof, then (A) the restrictions on any
outstanding incentive awards (including, without limitation,
restricted stock and granted performance shares or units)
under any incentive plan or arrangement shall lapse and such
incentive award shall become 100% vested, all stock options,
warrants and stock appreciation rights granted to the Employee
on or prior to the date of this Agreement shall become
immediately exercisable and 100% vested and, notwithstanding
anything to the contrary contained in the plan, agreement or
other instrument relating to such stock option, warrant or
stock appreciation rights with regard to the period of time
within which such stock option, warrant or stock appreciation
rights must be exercised following the Employee's termination
of employment or provision of services to the Company, all
such stock options, warrants and stock appreciation rights may
be exercised at any time and from time to time until the one
(1) year anniversary of the Termination Date, and all
performance units granted to the Employee shall become 100%
vested, and (B) the Company shall, at its sole expense as
incurred, provide for a twenty-four (24) month period
following the Termination Date the Employee with reasonable
office space and secretarial assistance.
(iv) The amounts provided for in subsections
11.1(i) and 11.1(ii)(A) and (B) shall be payable to the
Employee in substantially equal bi-weekly installments for a
twenty-four (24) month period commending on the Termination
Date and otherwise in accordance with the Company's payroll
practices in effect from time to time.
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(v) The Employee shall not be required to
mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, and no
such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any
subsequent employment, except as provided in subsection
11.1(ii)(C).
11.2. No Severance. The severance pay and benefits provided
for in this Section 11 shall be in lieu of any other severance or termination
pay to which the Employee may be entitled under any Company severance or
termination plan, program, practice or arrangement; provided, however, if the
Employee would be entitled to the severance pay and benefits under that certain
Severance Protection Agreement dated as of November 1, 1997 by and between World
Access, Inc. and the Employee (the "Severance Protection Agreement"), then the
severance pay and benefits provided for in the Severance Protection Agreement
shall be in lieu of the severance pay and benefits provided for in this Section
11.
11.3. Other Compensation and Benefits. The Employee's
entitlement to any other compensation or benefits shall be determined in
accordance with the Company's employee benefit plans and other applicable
programs, policies and practices then in effect.
12. Excise Tax Payments.
12.1. Excise Tax. Notwithstanding anything contained herein
to the contrary, if any portion of the payments and benefits provided hereunder
and benefits provided to, or for the benefit of, the Employee under any other
plan or agreement of the Company (such payments or benefits are collectively
referred to as the "Payments") would be subject to the excise tax (the "Excise
Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), or would be nondeductible by the Company pursuant to
Section 280G of the Code, the Payments shall be reduced (but not below zero) if
and to the extent necessary so that no portion of any Payment to be made or
benefit to be provided to the Employee shall be subject to the Excise Tax or
shall be nondeductible by the Company pursuant to Section 280G of the Code (such
reduced amount is hereinafter referred to as the "Limited Payment Amount").
Unless the Employee shall have given prior written notice specifying a different
order to the Company to effectuate the Limited Payment Amount, the Company shall
reduce or eliminate the Payments by first reducing or eliminating those payments
or benefits, if any, which are not payable in cash and then by reducing or
eliminating cash payments, in each case in reverse order beginning with payments
or benefits which are to be paid the farthest in time from the Determination (as
hereinafter defined). Any notice given by the Employee pursuant to the
immediately preceding sentence shall take precedence over the provisions of any
other plan, arrangement or agreement governing the Employee's rights and
entitlements to any benefits or compensation.
12.2. Initial Determination. An initial determination as to
whether the Payments shall be reduced to the Limited Payment Amount and the
amount of such Limited Payment Amount shall be made by a nationally-recognized
accounting firm selected by the Company and
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reasonably acceptable to the Employee (the "Accounting Firm"). The Accounting
Firm shall provide its determination (the "Determination"), together with
detailed supporting calculations and documentation, to the Company and the
Employee within thirty (30) days of the Termination Date and if the Accounting
Firm determines that no Excise Tax is payable by the Employee with respect to a
Payment or Payments, it shall furnish the Employee with an opinion reasonably
acceptable to the Employee that no Excise Tax will be imposed with respect to
any such Payment or Payments. Within ten (10) days of the delivery of the
Determination to the Employee, the Employee shall have the right to dispute the
Determination (the "Dispute"). If there is no Dispute, the Determination shall
be binding, final and conclusive upon the Company and the Employee subject to
the application of Section 12.3 below.
12.3. Final Determination. As a result of the uncertainty
in the application of Sections 4999 and 280G of the Code, it is possible that
the Payments to be made to, or provided for the benefit of, the Employee either
have been made or will be made by the Company which, in either case, will be
inconsistent with the limitations provided in Section 12.1 (hereinafter referred
to as an "Excess Payment" or "Underpayment", respectively). If it is established
pursuant to a final determination of a court of competent jurisdiction or an
Internal Revenue Service (the "IRS") proceeding which has been finally and
conclusively resolved that an Excess Payment has been made, such Excess Payment
shall be deemed for all purposes to be a loan to the Employee made on the date
the Employee received the Excess Payment, and the Employee shall repay the
Excess Payment to the Company on demand (but not less than ten (10) days after
written notice is received by the Employee), together with interest on the
Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d)
of the Code) from the date of the Employee's receipt of such Excess Payment
until the date of such repayment. In the event that it is determined by (i) the
Accounting Firm, the Company (which shall include the position taken by the
Company, or together with its consolidated group, on its federal income tax
return) or the IRS, (ii) pursuant to a determination by a court of competent
jurisdiction, or (iii) upon the resolution, to the Employee's satisfaction, of
the Dispute, that an Underpayment has occurred, the Company shall pay an amount
equal to the Underpayment to the Employee within ten (10) days of such
determination or resolution, together with interest on such amount at the
Applicable Federal Rate from the date such amount would have been paid to the
Employee until the date of payment.
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13. One Million Dollar Deduction Limit.
13.1. Section 162(m). Notwithstanding anything contained
herein to the contrary, if any portion of the Payments would be nondeductible by
the Company pursuant to Section 162(m) of the Code, the Payments to be made to
the Employee in any taxable year of the Company shall be reduced (but not below
zero) if and to the extent necessary so that no portion of any Payment to be
made or benefit to be provided to the Employee in such taxable year of the
Company shall be nondeductible by the Company pursuant to Section 162(m) of the
Code. The amount by which any Payment is reduced pursuant to the immediately
preceding sentence, together with interest thereon at the Applicable Federal
Rate, shall be paid by the Company to the Employee on or before the fifth
business day of the immediately succeeding taxable year of the Company, subject
to the application of the limitations of the immediately preceding sentence and
this Section 13. Unless the Employee shall have given prior written notice
specifying a different order to the Company to effectuate this Section 13, the
Company shall reduce or eliminate the Payments in any one taxable year of the
Company by first reducing or eliminating those payments or benefits which are
not payable in cash and then by reducing or eliminating cash payments, in each
case in reverse order beginning with payments or benefits which are to be paid
the farthest in time from the Section 162(m) Determination (as hereinafter
defined). Any notice given by the Employee pursuant to the immediately preceding
sentence shall take precedence over the provisions of any other plan,
arrangement or agreement governing the Employee's rights and entitlements to any
benefits or compensation.
13.2. Section 162(m) Determination. The determination as to
whether the Payments shall be reduced pursuant to Section 13.1 hereof and the
amount of the Payments to be made in each taxable year after the application of
Section 13.1 hereof shall be made by the Accounting Firm at the Company's
expense. The Accounting Firm shall provide its determination (the "Section
162(m) Determination"), together with detailed supporting calculations and
documentation, to the Company and the Employee within thirty (30) days of the
Termination Date. The Section 162(m) Determination shall be binding, final and
conclusive upon the Company and the Employee.
14. Termination. The Employee's employment hereunder may
be terminated without any breach of this Agreement only in accordance with this
Section 14.
14.1. Termination by the Company for Cause. The
Company may terminate the Employee's employment at any time
for Cause by providing to the Employee a Notice of
Termination, whereupon the Employee shall be entitled to all
of the benefits and payments provided for under Section 11
hereof.
14.2. Termination by the Company without Cause.
The Company may terminate the Employee's employment at any
time without Cause by providing to the Employee a Notice of
Termination, whereupon the Employee shall be entitled to all
of the benefits and payments provided for under Section 11
hereof.
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14.3. Termination by the Employee. The Employee's
employment may be terminated by the Employee at any time by providing
the Company with notice of such termination and specifying in the
notice the effective date of such termination, which shall not be less
than one hundred twenty (120) days after giving such notice, whereupon
the Employee's employment shall terminate on the date specified in such
notice and the Employee shall be entitled to all of the benefits and
payments provided for under Section 11 hereof; provided, however, that
following receipt of such notice, the Company may specify, in its
discretion, the date on which the Employee's employment shall terminate
so long as the date so specified is not more than one hundred twenty
(120) days after the date on which the Employee shall have given
notice, in which case the Employee's employment shall terminate on the
date so specified by the Company.
14.4. Termination Upon Disability. The Company may
terminate the Employee's employment upon the Disability of the Employee
by providing to the Employee a Notice of Termination, whereupon the
Employee shall be entitled to all of the benefits and payments provided
for under Section 11 hereof.
14.5. Death. In the event of the Employee's death during
his employment hereunder, the Employee's employment shall be
automatically terminated.
15. Successors and Assigns.
15.1. Assumption and Agreement. This Agreement shall be
binding upon and shall inure to the benefit of the Company, its successors and
assigns, and the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) or assign, by agreement in form
and substance satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to compensation from the
Company in the same amount and on the same terms as he would be entitled to
hereunder if his employment had been terminated pursuant to Section 14.2 hereof,
except that for purposes of implementing the foregoing, the date on which any
such succession or assignment becomes effective shall be deemed the Termination
Date hereunder. As used in the Agreement, Company shall mean the Company as
hereinbefore defined and any successor or assign that executes and delivers the
agreement provided for in this Section 15.1 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
15.2. Rights of Employee. This Agreement and all rights of
the Employee hereunder shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devises and legatees. If the Employee should
die while any amounts would still be payable to him hereunder if he had
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continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devise,
legatee or other designee or, if there be no such designee, to the Employee's
estate.
16. Injunctive Relief. The Company and the Employee agree that
damages are an inadequate remedy for, and that the Company or any successor to
the business of the Company would be irreparably harmed by, any breach of
Section 9 of this Agreement, and that the Company, any successor to the business
of the Company or any permitted assignee of the Company shall be entitled to
equitable relief in the form of a preliminary or permanent injunction upon any
breach of Section 9 hereof.
17. Notices. For the purpose of this Agreement, notices and all
other communications to either party hereunder provided for in the Agreement
shall be in writing and shall be deemed to have been duly given when delivered
in person or mailed by first-class mail or airmail, postage prepaid, addressed:
If to the Employee:
Mr. Steven A. Odom
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326
If to the Company:
World Access, Inc.
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326
or to such other address(es) as either party may have furnished to the other
party in writing in accordance with this Section.
18. Miscellaneous. No provision of this Agreement may be amended,
modified or waived unless such amendment, modification or waiver (i) is agreed
to in writing and is signed by the Employee and a representative of the Company,
its successor or permitted assignee and (ii) has been approved by the board of
directors of the Company, its successor or any permitted assignee of the
Company. No waiver by either party to this Agreement at any time of breach by
the other party of, or compliance by the other party with, any condition or
provision of this Agreement to be performed by the other party shall be deemed
to be a waiver of similar or dissimilar provisions or conditions at the same or
any prior or subsequent time. No agreements or representations, oral or
otherwise, expressed or implied, with respect to the subject matter of this
Agreement have been made by either party that are not expressly set forth in
this Agreement.
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19. Validity. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of the other provisions of this Agreement, which other provisions shall remain
in full force and effect, nor shall the invalidity or unenforceability of a
portion of any provision of this Agreement affect the validity or enforceability
of the balance of such provision.
20. Counterparts. This document may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute a single agreement.
21. Headings. The headings of the paragraphs contained in this
document are for reference purposes only and shall not, in any way, affect the
meaning or interpretation of any provision of this Agreement.
22. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal substantive laws, and not the choice
of law rules, of the State of Georgia.
23. Arbitration. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof, other than the provisions of
Section 9 hereof, shall, on the written request of one party served upon the
other, be settled by binding arbitration in Fulton County, Georgia in accordance
with the commercial arbitration rules then recognized by the American
Arbitration Association, and judgment upon the award rendered may be entered and
enforced in any court having jurisdiction thereof.
24. Fees and Expenses. The Company shall pay all legal fees and
related expenses incurred by the Employee as they become due as a result of or
in connection with (i) the Employee's termination of employment (including,
without limitation, all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment), (ii) the Employee seeking to
obtain or enforce any right or benefit provided by this Agreement (including,
without limitation, any such fees and expenses incurred in connection therewith)
or by any other plan or arrangement maintained by the Company under which the
Employee is or may be entitled to receive benefits, (iii) the Employee's hearing
before the Company's board of directors as contemplated in Section 10.3 of this
Agreement, and (iv) any tax audit or proceeding to the extent attributable to
the application of any Excise Tax with respect to any Payment or Payments
hereunder, plus in each case interest on any delayed payment at the "Applicable
Federal Rate," as defined in Section 1274(d) of the Code, as then in effect.
25. Entire Agreement. Other than the Severance Protection
Agreement, which shall continue in full force and effect until the Termination
Date, this Agreement constitutes the entire agreement between the parties hereto
and supersedes all prior agreements (if any), understandings and arrangements
(oral or written) between the parties hereto.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and delivered by its duly authorized officer, and the Employee has
executed and delivered this Agreement, all as of the date first written above.
WORLD ACCESS, INC.
By:
------------------------------------
Mark A. Gergel
Executive Vice President and
Chief Financial Officer
-------------------------------
STEVEN A. ODOM
<PAGE> 1
EXHIBIT 10.23
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of December 14, 1998, between WORLD ACCESS, INC., a Delaware
corporation f/k/a WAXS INC. (the "Company"), and MARK A. GERGEL (the
"Employee"), an individual resident of the State of Georgia.
1. TERM. The term (the "Term") of this Agreement shall begin on the
date hereof (the "Effective Date") and shall continue in effect for a period of
three (3) years from the Effective Date (the "Initial Term"); provided, however,
the Term shall be extended automatically for an additional year (each an
"Additional Term") on each anniversary of the Effective Date unless either party
hereto gives written notice to the other party not to so extend at least ninety
(90) days prior thereto, in which case no further extension shall occur;
provided further, however, that notwithstanding any such notice by the Company
not to extend, the Term shall not expire prior to the expiration of twenty-four
(24) months after the occurrence of a Change in Control (as hereinafter
defined).
2. EMPLOYMENT AND DUTIES. The Employee shall serve as the Executive
Vice President and Chief Financial Officer of the Company, reporting only to the
Company's Chief Executive Officer, and shall have supervision and control over,
and responsibility for, the general financial management and operation of the
Company, and shall have such other powers and duties as may from time to time be
prescribed by the Company's Chief Executive Officer or board of directors,
provided that such duties are consistent with his present duties and with the
Employee's position as a senior executive officer in charge of the general
financial management of the Company. The Company shall provide the Employee with
a private office, secretarial and administrative assistance, office equipment,
supplies and other facilities and services suitable to the Employee's position.
3. SALARY. For all services to be rendered by the Employee pursuant to
this Agreement, the Company hereby agrees to pay the Employee a base salary at
an annual rate of $300,000.00 per year (the "Base Salary"), payable in
accordance with the Company's payroll practices in effect from time to time. Any
increase in Base Salary or other compensation granted by the compensation
committee of the Company's board of directors shall in no way limit or reduce
any other obligation of the Company hereunder. Once established at an increased
specified rate, the Base Salary hereunder shall not thereafter be reduced, and
the term Base Salary used in this Agreement shall refer to the Base Salary as so
increased.
4. BONUS. In addition to his Base Salary, in the discretion of the
Company's board of directors, the Employee may be awarded for each calendar year
during the Term an annual bonus (an "Annual Bonus") either pursuant to a bonus
or incentive plan of the Company or otherwise on terms no less favorable than
those awarded to other executive officers of the Company.
<PAGE> 2
5. BENEFITS. The Employee shall be entitled to all benefits and
conditions of employment provided by the Company to its executive officers,
including, without limitation, insurance, participation in the Company's
vacation policy, and participation in any stock option or incentive compensation
plans, pension, profit sharing or other retirement plans, subject (in each case)
to the terms of such plans and any provisions, rules, regulations and laws
applicable to such plans.
6. REIMBURSEMENT FOR BUSINESS EXPENSES. The Employee shall be
reimbursed for all reasonable out-of-pocket business expenses incurred by him in
the direct performance of his duties during his employment with the Company
pursuant to the terms of this Agreement and in accordance with the Company's
policies in effect from time to time. All requests for reimbursement shall be
substantiated by invoices and other pertinent data reasonably satisfactory to
the Company.
7. PERFORMANCE. The Employee shall devote all of his working time and
efforts to the business and affairs of the Company and to the diligent, faithful
and competent performance of the duties and responsibilities assigned to him
pursuant to this Agreement, except for vacations, weekends and holidays.
Notwithstanding the foregoing, the Employee may render charitable, civic and
outside board services so long as such services do not materially interfere with
the Employee's ability to discharge his duties, including, without limitation,
such outside services as the Employee is currently performing.
8. NON-DISCLOSURE OF PROPRIETARY INFORMATION; NON-COMPETITION;
NON-SOLICITATION.
8.1. CONFIDENTIAL INFORMATION; TRADE SECRETS. As used in this
Agreement, the term "Confidential Information" shall mean valuable, non-public,
competitively sensitive data and information relating to the Company's business
or the business of any entity affiliated with the Company, other than Trade
Secrets (as defined below). "Confidential Information" shall include, among
other things, information specifically designated as a Trade Secret that is,
notwithstanding the designation, determined by a court of competent jurisdiction
not to be a "trade secret" under applicable law. As used in this Agreement, the
term "Trade Secrets" shall mean information or data of or about the Company or
any entity affiliated with the Company, including, without limitation, technical
or non-technical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data, financial plans,
product plans, or lists of actual or potential customers or suppliers, that (i)
derive economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons who can
obtain economic value from their disclosure or use; and (ii) are subject of
efforts that are reasonable under the circumstances to maintain their secrecy.
To the extent that the foregoing definition is inconsistent with a definition of
"trade secret" under applicable law, the foregoing definition shall be deemed
amended to the extent necessary to render it consistent with applicable law.
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<PAGE> 3
8.2. NON-DISCLOSURE. The Employee will be exposed to Trade
Secrets and Confidential Information as a result of his employment by the
Company as provided in this Agreement. The Employee acknowledges and agrees that
any unauthorized disclosure or use of any of the Trade Secrets or Confidential
Information of the Company would be wrongful and would likely result in
immediate and irreparable injury to the Company. In consideration of the
Employee's right to employment (or continued employment) under the terms of this
Agreement, except as appropriate in connection with the performance of his
obligations under this Agreement, the Employee shall not, without the express
prior written consent of an officer of the Company other than the Employee,
redistribute, market, publish, disclose or divulge to any other person or
entity, or use or modify for use, directly or indirectly, in any way for any
person or entity (i) any Confidential Information during the Term of this
Agreement and for a period of two (2) years after the final date of the Term of
this Agreement; and (ii) any Trade Secrets at any time (during or after the Term
of this Agreement) during which such information or data shall continue to
constitute a "trade secret" under applicable law. The Employee agrees to
cooperate with any reasonable confidentiality requirements of the Company. The
Employee shall immediately notify the Company of any unauthorized disclosure or
use of any Trade Secrets or Confidential Information of which the Employee
becomes aware (the "1934 Act").
8.3. NON-COMPETITION. The Employee shall not, either directly
or indirectly, alone or in partnership, be connected or concerned with or
participate in any other competing business or pursuit during any employment by
the Company, except that the Employee may own up to three percent of the
outstanding securities of a competing business the securities of which are
registered with the Securities and Exchange Commission if such company is
subject to the periodic reporting requirements of the Securities Exchange Act of
1934, as amended.
8.4. NON-SOLICITATION. For a period of one (1) year
immediately following any termination of the Employee's employment, the Employee
will not solicit, or participate in any solicitation of, the customers,
suppliers, employees or representatives of the Company (or any of its
subsidiaries or affiliated companies) to breach any contract with the Company,
terminate any relationship with the Company or leave the Company. For purposes
of this Agreement, customers shall be limited to actual customers or
actively-sought prospective customers of the Company or any subsidiary or
affiliate of the Company with whom the Employee has had substantial contact
during the Term of this Agreement.
9. CERTAIN DEFINITIONS.
9.1. ACCRUED COMPENSATION. For purposes of this Agreement,
"Accrued Compensation" shall mean an amount which shall include all amounts
earned or accrued through the "Termination Date" (as hereinafter defined) but
not paid as of the Termination Date, including, without limitation, (i) Base
Salary, (ii) reimbursement for reasonable and necessary expenses incurred by the
Employee on behalf of the Company during the period ending on the Termination
Date, (iii) vacation pay, (iv) bonuses, including, without limitation, any
Annual Bonus, and incentive compensation, and (v) all other amounts to which the
Employee is entitled under any compensation plan of the Company at the times
such payments are due.
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<PAGE> 4
9.2. BASE AMOUNT. For purposes of this Agreement, "Base
Amount" shall mean the Employee's annual Base Salary at the highest rate in
effect on, or at any time during the ninety (90) day period prior to, the
Termination Date and shall include all amounts of the Employee's Base Salary
that are deferred under any qualified and non-qualified employee benefit plans
of the Company or any other agreement or arrangement.
9.3. CAUSE. For purposes of this Agreement, a termination of
employment is for "Cause" if the Employee has been convicted of a felony or a
felony prosecution has been brought against the Employee or if the termination
is evidenced by a resolution adopted in good faith by two-thirds (2/3) of the
Company's board of directors that the Employee (i) intentionally and continually
failed substantially to perform his reasonably assigned duties with the Company
(other than a failure resulting from the Employee's incapacity due to physical
or mental illness or from the Employee's assignment of duties that would
constitute "Good Reason" (as hereinafter defined)) which failure continued for a
period of at least thirty (30) days after a written notice of demand for
substantial performance has been delivered to the Employee specifying the manner
in which the Employee has failed substantially to perform, or (ii) intentionally
engaged in illegal conduct or gross misconduct which results in material
economic harm to the Company; provided, however, that (A) where the Employee has
been terminated for Cause because a felony prosecution has been brought against
him and no conviction or plea of guilty or plea of nolo contendere or its
equivalent results therefrom, then said termination shall no longer be deemed to
have been for Cause and the Employee shall be entitled to all the benefits
provided by Section 10.1(i) hereof from and after the date on which the
prosecution of the Employee has been dismissed or a judgement of acquittal has
been entered, whichever shall first occur; and (B) no termination of the
Employee's employment shall be for Cause as set forth in clause (ii) above until
(x) there shall have been delivered to the Employee a copy of a written notice
setting forth that the Employee was guilty of the conduct set forth in clause
(ii) and specifying the particulars thereof in detail, and (y) the Employee
shall have been provided an opportunity to be heard in person by the Company's
board of directors (with the assistance of the Employee's counsel if the
Employee so desires). No act, or failure to act, on the Employee's part shall be
considered "intentional" unless the Employee has acted or failed to act with a
lack of good faith and with a lack of reasonable belief that the Employee's
action or failure to act was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Company's board of directors or upon the instructions of any senior
officer of the Company or based upon the advice of counsel for the Company shall
be conclusively presumed to be done, or omitted to be done, by the Employee in
good faith and in the best interests of the Company. Any termination of the
Employee's employment by the Company hereunder shall be deemed to be a
termination other than for Cause unless it meets all requirements of this
Section 9.3.
9.4. CHANGE IN CONTROL. For purposes of this Agreement, a
"Change in Control" shall have occurred if:
(i) a majority of the directors of the Company shall
be persons other than
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<PAGE> 5
persons: (A) for whose election proxies shall have been
solicited by the Company's board of directors, or (B) who are
then serving as directors appointed by the Company's board of
directors to fill vacancies on the board of directors caused
by death or resignation (but not by removal) or to fill
newly-created directorships;
(ii) a majority of the outstanding voting power of
the Company shall have been acquired or beneficially owned (as
defined in Rule 13d-3 under the 1934 Act or any successor rule
thereto) by any person (other than the Company, a subsidiary
of the Company or the Employee) or Group (as defined below),
which Group does not include the Employee; or
(iii) there shall have occurred:
(A) a merger or consolidation of the Company
with or into another corporation (other than (1) a
merger or consolidation with a subsidiary of the
Company or (2) a merger or consolidation in which (a)
the holders of voting stock of the Company
immediately prior to the merger as a class continue
to hold immediately after the merger at least a
majority of all outstanding voting power of the
surviving or resulting corporation or its parent and
(b) all holders of each outstanding class or series
of voting stock of the Company immediately prior to
the merger or consolidation have the right to receive
substantially the same cash, securities or other
property in exchange for their voting stock of the
Company as all other holders of such class or
series);
(B) a statutory exchange of shares of one or
more classes or series of outstanding voting stock of
the Company for cash, securities or other property;
(C) the sale or other disposition of all or
substantially all of the assets of the Company (in
one transaction or a series of transactions); or
(D) the liquidation or dissolution of the
Company;
unless more than twenty-five percent (25%) of the voting stock
(or the voting equity interest) of the surviving corporation
or the corporation or other entity acquiring all or
substantially all of the assets of the Company (in the case of
a merger, consolidation or disposition of assets) or of the
Company or its resulting parent corporation (in the case of a
statutory share exchange) is beneficially owned by the
Employee or a Group that includes the Employee.
9.5. GROUP. For purposes of this Agreement, "Group" shall mean
any two or more persons acting as a partnership, limited partnership, syndicate,
or other group acting in
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concert for the purpose of acquiring, holding or disposing of voting stock of
the Company.
9.6. DISABILITY. For purposes of this Agreement, "Disability"
shall mean a physical or mental infirmity which impairs the Employee's ability
to substantially perform his duties with the Company for a period of one hundred
eighty (180) consecutive days and the Employee has not returned to his full time
employment prior to the Termination Date as stated in the "Notice of
Termination" (as hereinafter defined).
9.7. GOOD REASON.
9.7.1. For purposes of this Agreement, "Good Reason"
shall mean a good faith determination by the Employee, in the
Employee's sole and absolute judgment, that any one or more of
the following events has occurred, without the Employee's
express written consent:
(i) the assignment to the Employee of any
duties inconsistent with the Employee's position
(including, without limitation, status, titles and
reporting requirements), authority, duties or
responsibilities as in effect immediately prior to
the date hereof, or any other action by the Company
that results in a material diminution in such
position, authority, duties or responsibilities,
excluding for this purpose isolated and inadvertent
action not taken in bad faith and remedied by the
Company promptly after receipt of notice thereof
given by the Employee;
(ii) a reduction by the Company in the
Employee's Base Salary, as the same may be increased
from time to time, or a change in the eligibility
requirements or performance criteria under any bonus,
incentive or compensation plan, program or
arrangement under which the Employee is covered
immediately prior to the Termination Date which
adversely affects the Employee;
(iii) any failure to pay the Employee any
compensation or benefits to which he is entitled
within five (5) days of the date due;
(iv) the Company's requiring the Employee to
be based anywhere other than within fifty (50) miles
of the Employee's job location as of the date hereof,
except for reasonably required travel on the
Company's business which is not greater than such
travel requirements prior to the date hereof;
(v) the taking of any action by the Company
that would materially adversely affect the physical
conditions existing in or under which the Employee
performs his employment duties;
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<PAGE> 7
(vi) the insolvency or the filing (by any
party, including the Company) of a petition for
bankruptcy by the Company;
(vii) any purported termination of the
Employee's employment for Cause by the Company which
does not comply with the terms of Section 9.3 hereof;
or
(viii) any breach by the Company of any
provision of this Agreement.
9.7.2. The Employee's right to terminate his
employment pursuant to this Section 9 shall not be affected by
his incapacity due to physical or mental illness.
9.8. NOTICE OF TERMINATION. For purposes of this Agreement,
"Notice of Termination" shall mean a written notice of termination from the
Company of the Employee's employment which indicates the specific termination
provision in this Agreement relied upon and which sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Employee's employment under the provision so indicated.
9.9. TERMINATION DATE. For purposes of this Agreement,
"Termination Date" shall mean, in the case of the Employee's death, his date of
death, in the case of the Employee's voluntary termination, the last day of
employment, and in all other cases (other than in the case of a successor or an
assignee, which is provided for in Section 14.1 hereof), the date specified in
the Notice of Termination; provided, however, that if the Employee's employment
is terminated by the Company for Cause or due to Disability, the date specified
in the Notice of Termination shall be at least thirty (30) days from the date
the Notice of Termination is given to the Employee; and provided further that in
the case of Disability the Employee shall not have returned to the full-time
performance of his duties during such period of at least thirty (30) days.
10. BENEFITS AND PAYMENTS UPON TERMINATION OF EMPLOYMENT.
10.1. COMPENSATION AND BENEFITS. If, during the term of this
Agreement, the Employee's employment with the Company shall be terminated, the
Employee shall be entitled to the following compensation and benefits in the
following circumstances:
(i) If the Employee's employment with the Company
shall be terminated (A) by the Company for Cause or
Disability, or (B) by reason of the Employee's death, then the
Company shall pay to the Employee all Accrued Compensation.
(ii) If the Employee's employment with the Company
shall be terminated by the Company pursuant to Section 13.2
hereof, the Employee shall be entitled to the following:
(A) the Company shall pay the Employee all
Accrued Compensation;
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<PAGE> 8
(B) the Company shall pay the Employee as
severance pay and in lieu of any further compensation
for periods subsequent to the Termination Date an
amount in cash equal to one (1) times the Base
Amount;
(C) for twelve (12) months or such longer
period as may be provided by the terms of the
appropriate program, practice or policy, the Company
shall, at its expense, continue on behalf of the
Employee and his dependents and beneficiaries the
life insurance, disability, medical, dental and
hospitalization benefits generally made available to
the Company's executive officers at any time during
the 90-day period prior to the Termination Date or at
any time thereafter, provided that (1) the Company's
obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the
Employee obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case
the Company may reduce the coverage of any benefits
it is required to provide the Employee hereunder as
long as the aggregate coverages and benefits of the
combined benefit plans are no less favorable to the
Employee than the coverages and benefits required to
be provided hereunder, and (2) this clause (C) shall
not be interpreted so as to limit any benefits to
which the Employee or his dependents or beneficiaries
may be entitled under any of the Company's employee
benefit plans, programs or practices following the
Employee's termination of employment, including,
without limitation, retiree medical and life
insurance benefits; and
(D) the restrictions on any outstanding
incentive awards (including, without limitation,
restricted stock and granted performance shares or
units) under any incentive plan or arrangement shall
lapse and such incentive award shall become 100%
vested, all stock options, warrants and stock
appreciation rights granted to the Employee on or
prior to the date of this Agreement shall become
immediately exercisable and 100% vested and,
notwithstanding anything to the contrary contained in
the plan, agreement or other instrument relating to
such stock option, warrant or stock appreciation
rights with regard to the period of time within which
such stock option, warrant or stock appreciation
rights must be exercised following the Employee's
termination of employment or provision of services to
the Company, all such stock options, warrants and
stock appreciation rights may be exercised at any
time and from time to time until the one (1) year
anniversary of the Termination Date, and all
performance units granted to the Employee shall
become 100% vested.
(iii) If the Employee's employment with the Company
shall be terminated
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<PAGE> 9
by the Employee pursuant to Section 13.3 hereof, then the
Employee shall be entitled to the following:
(A) the Company shall pay the Employee all
Accrued Compensation;
(B) the Company shall pay the Employee as
severance pay and in lieu of any further compensation
for periods subsequent to the Termination Date an
amount in cash equal to one-half (1/2) times the Base
Amount;
(C) for six (6) months or such longer period
as may be provided by the terms of the appropriate
program, practice or policy, the Company shall, at
its expense, continue on behalf of the Employee and
his dependents and beneficiaries the life insurance,
disability, medical, dental and hospitalization
benefits generally made available to the Company's
executive officers at any time during the 90-day
period prior to the Termination Date or at any time
thereafter, provided that (1) the Company's
obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the
Employee obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case
the Company may reduce the coverage of any benefits
it is required to provide the Employee hereunder as
long as the aggregate coverages and benefits of the
combined benefit plans are no less favorable to the
Employee than the coverages and benefits required to
be provided hereunder, and (2) this clause (C) shall
not be interpreted so as to limit any benefits to
which the Employee or his dependents or beneficiaries
may be entitled under any of the Company's employee
benefit plans, programs or practices following the
Employee's termination of employment, including,
without limitation, retiree medical and life
insurance benefits; and
(D) the restrictions on any outstanding
incentive awards (including, without limitation,
restricted stock and granted performance shares or
units) under any incentive plan or arrangement shall
lapse and such incentive award shall become 100%
vested, all stock options, warrants and stock
appreciation rights granted to the Employee on or
prior to the date of this Agreement shall become
immediately exercisable and 100% vested and,
notwithstanding anything to the contrary contained in
the plan, agreement or other instrument relating to
such stock option, warrant or stock appreciation
rights with regard to the period of time within which
such stock option, warrant or stock appreciation
rights must be exercised following the Employee's
termination of employment or provision of services to
the Company, all such stock options, warrants and
stock appreciation rights may be exercised at any
time and from time to
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<PAGE> 10
time until the one (1) year anniversary of the
Termination Date, and all performance units granted
to the Employee shall become 100% vested.
(iv) The amounts provided for in subsections 10.1(i),
10.1(ii)(A) and (B) and 10(iii)(A) and (B) shall be paid (A)
in a lump sum in cash within five (5) days of the Employee's
Termination Date, or (B) at the Employee's option made
pursuant to a written election delivered to the Company before
the Termination Date, in three (3) substantially equal annual
payments commencing no later than five (5) days after the
Employee's Termination Date. Should the Employee elect to
receive such payments in installments, the amount of the
Company's outstanding obligation to the Employee shall be
credited with interest on a monthly basis at a rate equal to
the "Applicable Federal Rate," as defined in Section 1274(d)
of the Internal Revenue Code of 1986, as amended (the "Code"),
then in effect.
(v) The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, and no such payment
shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent
employment, except as provided in subsection 10.1(ii)(C) and
10.1(iii)(C).
10.2. NO SEVERANCE. The severance pay and benefits provided
for in this Section 10 shall be in lieu of any other severance or termination
pay to which the Employee may be entitled under any Company severance or
termination plan, program, practice or arrangement; provided, however, if the
Employee would be entitled to the severance pay and benefits under that certain
Severance Protection Agreement dated as of November 1, 1997 by and between World
Access, Inc. and the Employee (the "Severance Protection Agreement"), then the
severance pay and benefits provided for in the Severance Protection Agreement
shall be in lieu of the severance pay and benefits provided for in this Section
10.
10.3. OTHER COMPENSATION AND BENEFITS. The Employee's
entitlement to any other compensation or benefits shall be determined in
accordance with the Company's employee benefit plans and other applicable
programs, policies and practices then in effect.
11. EXCISE TAX PAYMENTS.
11.1. EXCISE TAX. Notwithstanding anything contained herein to
the contrary, if any portion of the payments and benefits provided hereunder and
benefits provided to, or for the benefit of, the Employee under any other plan
or agreement of the Company (such payments or benefits are collectively referred
to as the "Payments") would be subject to the excise tax (the "Excise Tax")
imposed under Section 4999 of the Code or would be nondeductible by the Company
pursuant to Section 280G of the Code, the Payments shall be reduced (but not
below zero) if and to the extent necessary so that no portion of any Payment to
be made or benefit to be provided to the Employee shall be subject to the Excise
Tax or shall be nondeductible by the
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Company pursuant to Section 280G of the Code (such reduced amount is hereinafter
referred to as the "Limited Payment Amount"). Unless the Employee shall have
given prior written notice specifying a different order to the Company to
effectuate the Limited Payment Amount, the Company shall reduce or eliminate the
Payments by first reducing or eliminating those payments or benefits, if any,
which are not payable in cash and then by reducing or eliminating cash payments,
in each case in reverse order beginning with payments or benefits which are to
be paid the farthest in time from the Determination (as hereinafter defined).
Any notice given by the Employee pursuant to the immediately preceding sentence
shall take precedence over the provisions of any other plan, arrangement or
agreement governing the Employee's rights and entitlements to any benefits or
compensation.
11.2. INITIAL DETERMINATION. An initial determination as to
whether the Payments shall be reduced to the Limited Payment Amount and the
amount of such Limited Payment Amount shall be made by a nationally-recognized
accounting firm selected by the Company and reasonably acceptable to the
Employee (the "Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed supporting
calculations and documentation, to the Company and the Employee within thirty
(30) days of the Termination Date and if the Accounting Firm determines that no
Excise Tax is payable by the Employee with respect to a Payment or Payments, it
shall furnish the Employee with an opinion reasonably acceptable to the Employee
that no Excise Tax will be imposed with respect to any such Payment or Payments.
Within ten (10) days of the delivery of the Determination to the Employee, the
Employee shall have the right to dispute the Determination (the "Dispute"). If
there is no Dispute, the Determination shall be binding, final and conclusive
upon the Company and the Employee subject to the application of Section 11.3
below.
11.3. FINAL DETERMINATION. As a result of the uncertainty in
the application of Sections 4999 and 280G of the Code, it is possible that the
Payments to be made to, or provided for the benefit of, the Employee either have
been made or will be made by the Company which, in either case, will be
inconsistent with the limitations provided in Section 11.1 (hereinafter referred
to as an "Excess Payment" or "Underpayment", respectively). If it is established
pursuant to a final determination of a court of competent jurisdiction or an
Internal Revenue Service (the "IRS") proceeding which has been finally and
conclusively resolved that an Excess Payment has been made, such Excess Payment
shall be deemed for all purposes to be a loan to the Employee made on the date
the Employee received the Excess Payment, and the Employee shall repay the
Excess Payment to the Company on demand (but not less than ten (10) days after
written notice is received by the Employee), together with interest on the
Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d)
of the Code) from the date of the Employee's receipt of such Excess Payment
until the date of such repayment. In the event that it is determined by (i) the
Accounting Firm, the Company (which shall include the position taken by the
Company, or together with its consolidated group, on its federal income tax
return) or the IRS, (ii) pursuant to a determination by a court of competent
jurisdiction, or (iii) upon the resolution, to the Employee's satisfaction, of
the Dispute, that an Underpayment has occurred, the Company shall pay an amount
equal to the Underpayment to the Employee within ten (10) days of such
determination or resolution, together with interest on such amount at the
Applicable
11
<PAGE> 12
Federal Rate from the date such amount would have been paid to the Employee
until the date of payment.
12. ONE MILLION DOLLAR DEDUCTION LIMIT.
12.1. SECTION 162(M). Notwithstanding anything contained
herein to the contrary, if any portion of the Payments would be nondeductible by
the Company pursuant to Section 162(m) of the Code, the Payments to be made to
the Employee in any taxable year of the Company shall be reduced (but not below
zero) if and to the extent necessary so that no portion of any Payment to be
made or benefit to be provided to the Employee in such taxable year of the
Company shall be nondeductible by the Company pursuant to Section 162(m) of the
Code. The amount by which any Payment is reduced pursuant to the immediately
preceding sentence, together with interest thereon at the Applicable Federal
Rate, shall be paid by the Company to the Employee on or before the fifth
business day of the immediately succeeding taxable year of the Company, subject
to the application of the limitations of the immediately preceding sentence and
this Section 12. Unless the Employee shall have given prior written notice
specifying a different order to the Company to effectuate this Section 12, the
Company shall reduce or eliminate the Payments in any one taxable year of the
Company by first reducing or eliminating those payments or benefits which are
not payable in cash and then by reducing or eliminating cash payments, in each
case in reverse order beginning with payments or benefits which are to be paid
the farthest in time from the Section 162(m) Determination (as hereinafter
defined). Any notice given by the Employee pursuant to the immediately preceding
sentence shall take precedence over the provisions of any other plan,
arrangement or agreement governing the Employee's rights and entitlements to any
benefits or compensation.
12.2. SECTION 162(M) DETERMINATION. The determination as to
whether the Payments shall be reduced pursuant to Section 12.1 hereof and the
amount of the Payments to be made in each taxable year after the application of
Section 12.1 hereof shall be made by the Accounting Firm at the Company's
expense. The Accounting Firm shall provide its determination (the "Section
162(m) Determination"), together with detailed supporting calculations and
documentation, to the Company and the Employee within thirty (30) days of the
Termination Date. The Section 162(m) Determination shall be binding, final and
conclusive upon the Company and the Employee.
13. TERMINATION. The Employee's employment hereunder may be terminated
without any breach of this Agreement only in accordance with this Section 13.
13.1. TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate the Employee's employment at any time for Cause by providing
to the Employee a Notice of Termination, whereupon the Employee shall
be entitled to all of the benefits and payments provided for under
Section 10 hereof.
13.2. TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company
may terminate the Employee's employment at any time without Cause by
providing to the
12
<PAGE> 13
Employee a Notice of Termination, whereupon the Employee shall be
entitled to all of the benefits and payments provided for under Section
10 hereof.
13.3. TERMINATION BY THE EMPLOYEE. The Employee's employment
may be terminated by the Employee at any time by providing the Company
with notice of such termination and specifying in the notice the
effective date of such termination, which shall not be less than one
hundred twenty (120) days after giving such notice, whereupon the
Employee's employment shall terminate on the date specified in such
notice and the Employee shall be entitled to all of the benefits and
payments provided for under Section 10 hereof; provided, however, that
following receipt of such notice, the Company may specify, in its
discretion, the date on which the Employee's employment shall terminate
so long as the date so specified is not more than one hundred twenty
(120) days after the date on which the Employee shall have given
notice, in which case the Employee's employment shall terminate on the
date so specified by the Company.
13.4. TERMINATION UPON DISABILITY. The Company may terminate
the Employee's employment upon the Disability of the Employee by
providing to the Employee a Notice of Termination, whereupon the
Employee shall be entitled to all of the benefits and payments provided
for under Section 10 hereof.
13.5. DEATH. In the event of the Employee's death during his
employment hereunder, the Employee's employment shall be automatically
terminated.
14. SUCCESSORS AND ASSIGNS.
14.1. ASSUMPTION AND AGREEMENT. This Agreement shall be
binding upon and shall inure to the benefit of the Company, its successors and
assigns, and the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) or assign, by agreement in form
and substance satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to compensation from the
Company in the same amount and on the same terms as he would be entitled to
hereunder if his employment had been terminated pursuant to Section 13.2 hereof,
except that for purposes of implementing the foregoing, the date on which any
such succession or assignment becomes effective shall be deemed the Termination
Date hereunder. As used in the Agreement, Company shall mean the Company as
hereinbefore defined and any successor or assign that executes and delivers the
agreement provided for in this Section 14.1 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
14.2. RIGHTS OF EMPLOYEE. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of and be enforceable by the
Employee's personal or legal
13
<PAGE> 14
representatives, executors, administrators, successors, heirs, distributees,
devises and legatees. If the Employee should die while any amounts would still
be payable to him hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Employee's devise, legatee or other designee or, if there
be no such designee, to the Employee's estate.
15. INJUNCTIVE RELIEF. The Company and the Employee agree that damages
are an inadequate remedy for, and that the Company or any successor to the
business of the Company would be irreparably harmed by, any breach of Section 8
of this Agreement, and that the Company, any successor to the business of the
Company or any permitted assignee of the Company shall be entitled to equitable
relief in the form of a preliminary or permanent injunction upon any breach of
Section 8 hereof.
16. NOTICES. For the purpose of this Agreement, notices and all other
communications to either party hereunder provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when delivered in person
or mailed by first-class mail or airmail, postage prepaid, addressed:
If to the Employee:
Mr. Mark A. Gergel
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326
If to the Company:
World Access, Inc.
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326
or to such other address(es) as either party may have furnished to the other
party in writing in accordance with this Section.
17. MISCELLANEOUS. No provision of this Agreement may be amended,
modified or waived unless such amendment, modification or waiver (i) is agreed
to in writing and is signed by the Employee and a representative of the Company,
its successor or permitted assignee and (ii) has been approved by the board of
directors of the Company, its successor or any permitted assignee of the
Company. No waiver by either party to this Agreement at any time of breach by
the other party of, or compliance by the other party with, any condition or
provision of this Agreement to be performed by the other party shall be deemed
to be a waiver of similar or dissimilar provisions or conditions at the same or
any prior or subsequent time. No agreements or representations, oral or
otherwise, expressed or implied, with respect to the subject matter of this
Agreement have been made by either party that are not expressly set forth in
this Agreement.
14
<PAGE> 15
18. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
the other provisions of this Agreement, which other provisions shall remain in
full force and effect, nor shall the invalidity or unenforceability of a portion
of any provision of this Agreement affect the validity or enforceability of the
balance of such provision.
19. COUNTERPARTS. This document may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute a single agreement.
20. HEADINGS. The headings of the paragraphs contained in this document
are for reference purposes only and shall not, in any way, affect the meaning or
interpretation of any provision of this Agreement.
21. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the internal substantive laws, and not the choice of law
rules, of the State of Georgia.
22. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, other than the provisions of Section 8
hereof, shall, on the written request of one party served upon the other, be
settled by binding arbitration in Fulton County, Georgia in accordance with the
commercial arbitration rules then recognized by the American Arbitration
Association, and judgment upon the award rendered may be entered and enforced in
any court having jurisdiction thereof.
23. FEES AND EXPENSES. The Company shall pay all legal fees and related
expenses incurred by the Employee as they become due as a result of or in
connection with (i) the Employee's termination of employment (including, without
limitation, all such fees and expenses, if any, incurred in contesting or
disputing any such termination of employment), (ii) the Employee seeking to
obtain or enforce any right or benefit provided by this Agreement (including,
without limitation, any such fees and expenses incurred in connection therewith)
or by any other plan or arrangement maintained by the Company under which the
Employee is or may be entitled to receive benefits, (iii) the Employee's hearing
before the Company's board of directors as contemplated in Section 9.3 of this
Agreement, and (iv) any tax audit or proceeding to the extent attributable to
the application of any Excise Tax with respect to any Payment or Payments
hereunder, plus in each case interest on any delayed payment at the "Applicable
Federal Rate," as defined in Section 1274(d) of the Code, as then in effect.
24. ENTIRE AGREEMENT. Other than the Severance Protection Agreement,
which shall continue in full force and effect until the Termination Date, this
Agreement constitutes the entire agreement between the parties hereto and
supersedes all prior agreements (if any), understandings and arrangements (oral
or written) between the parties hereto.
15
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and delivered by its duly authorized officer, and the Employee has
executed and delivered this Agreement, all as of the date first written above.
WORLD ACCESS, INC.
By:
-----------------------------------------
Steven A. Odom
Chairman of the Board
--------------------------------------------
MARK A. GERGEL
<PAGE> 1
EXHIBIT 10.24
WORLD ACCESS, INC.
2200 RESURGENS PLAZA
945 E. PACES FERRY ROAD
ATLANTA, GEORGIA 30326
December 14, 1998
Mr. Hensley E. West
c/o World Access, Inc.
2200 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Dear Mr. West:
This letter will confirm our agreement regarding the compensation and
benefits to which you will entitled in the event of your resignation from the
Board of Directors (the "Board") of World Access, Inc. (the "Company") and from
your position as an officer of WA Telcom Products Co., Inc. ("WA Telcom").
Upon the written request of the Company, you agree to resign from the
Board and from serving as an officer of WA Telcom, such resignation to be
effective on the date specified in the Company's written request (the
"Resignation Date"). Upon your resignation, you will be entitled to the
following:
1. From the Resignation Date through January 15, 2000 (the
"Continuation Period"), you will continue to serve as an employee of
the Company and will perform such duties as may be reasonably requested
by the Company's Chairman of the Board, to whom you will report. For
the services rendered by you during such time, the Company will pay you
a base salary equal to your base salary in effect on the date hereof.
2. Unless your employment is earlier terminated, for the
Continuation Period (or such longer period as may be provided by the
terms of the appropriate program, practice or policy), the Company
will, at its expense, continue on behalf of you and your dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization benefits generally made available to the Company's
executive officers at any time during the 90-day period prior to the
Resignation Date or at any time during the Continuation Period,
provided that (A) the Company's obligation hereunder with respect to
the foregoing benefits will be limited to the extent that you obtain
any such benefits pursuant to a subsequent employer's benefit plans, in
which case the Company may reduce the coverage of any benefits it is
required to provide you hereunder as long as the aggregate coverages
and benefits of the combined benefit plans are no less favorable to you
than the coverages and benefits required to be provided hereunder, and
(B) this paragraph 2 will not be interpreted so as to limit any
<PAGE> 2
benefits to which you or your dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following your termination of employment, including, without
limitation, retiree medical and life insurance benefits;
3. The outstanding stock options granted to you on or prior to
the date hereof under the Company's 1998 Incentive Equity Plan (the
"1998 Plan Options") will become immediately exercisable and 100%
vested and, notwithstanding anything to the contrary contained in the
plan, agreement or other instrument relating to such 1998 Plan Options
with regard to the period of time within which such stock options must
be exercised following your termination of employment or provision of
services to the Company, all 1998 Stock Plan Options may be exercised
at any time and from time to time until the one (1) year anniversary of
the Resignation Date.
4. Notwithstanding anything to the contrary contained in the
plan, agreement or other instrument relating to the outstanding stock
options granted to you on or prior to the date hereof under the
Company's 1991 Stock Option Plan, as amended (the "1991 Plan Options"),
with regard to the period of time within which such stock options must
be exercised following your termination of employment or provision of
services to the Company, all 1991 Plan Options may be exercised at any
time and from time to time until December 31, 2000.
If you elect to resign from the Board and from serving as an officer of
WA Telcom, then you will be entitled to the same benefits as set forth in
paragraphs 1 through 4 above, provided that you give the Company written notice
of your resignation at least sixty (60) days prior to the proposed effective
date thereof, which date will be the Resignation Date for purposes hereof.
From and after the Resignation Date, your employment hereunder may only
be terminated by the Company for "cause" or in the event of your death or
"disability."
For purposes of this letter agreement:
A. "Cause" shall exist:
(i) if you are convicted of (from which no
appeal may be taken), or plead guilty to, any act of
fraud, misappropriation or embezzlement, or any
felony;
(ii) if, in the sole determination of the
Board, and as set forth in a written statement
executed by the Board, you have engaged in conduct or
activities materially damaging to the business of the
Company (it being understood, however, that neither
conduct nor activities pursuant to your exercise of
your good faith business judgment nor unintentional
physical damage to any property of the Company by you
will be grounds for such a determination by the
<PAGE> 3
Mr. Hensley E. West
December 14, 1998
Page 3
Board); or
(iii) if you have failed without reasonable
cause to perform the duties assigned to you and,
after written notice from the Company of such
failure, you at any time thereafter again so fail,
provided that the Company gives you notice of such
failure prior to or together with any such notice of
termination.
B. "Disability" means your failure to perform your normal
required duties hereunder at your office for a period of three (3)
consecutive months, by reason of your mental or physical disability as
so determined by a licensed physician selected by the Company
satisfactory to you.
Other than that certain Severance Protection Agreement dated as of
November 1, 1997 by and between World Access, Inc. and you, which shall continue
in full force and effect until the Resignation Date, this letter agreement
constitutes the entire agreement between the parties hereto and supersedes all
prior agreements (if any), understandings and arrangements (oral or written)
between the parties hereto with respect to the subject matter hereof.
If the foregoing correctly reflects our agreement, I would appreciate
your executing and returning to me a copy of this letter agreement.
Sincerely,
WORLD ACCESS, INC.
By:
-----------------------------------------
Steven A. Odom, Chairman of the Board
AGREED AND ACCEPTED:
- ----------------------------
Hensley E. West
<PAGE> 1
EXHIBIT 10.25
WORLD ACCESS, INC.
1998 INCENTIVE EQUITY PLAN
ARTICLE I
NAME AND PURPOSE
1.1 Name. The name of this Plan is the "World Access, Inc. 1998 Incentive
Equity Plan."
1.2 Purpose. The purpose of the Plan is to attract, motivate and retain the
best available personnel for service as officers, key employees, directors,
consultants, independent contractors and other agents of the Company, to provide
additional equity ownership opportunities to such individuals and align the
long-term interests of these individuals with those of the Company's
stockholders.
ARTICLE II
DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
2.1 General Definitions. The following words and phrases, when used in the
Plan, unless otherwise specifically defined or unless the context clearly
otherwise requires, shall have the following respective meanings:
(a) Affiliate. A Parent or Subsidiary or any other entity designated by
the Committee in which the Company owns at least a 50% interest (including,
but not limited to, partnerships and joint ventures).
(b) Agreement. The document which evidences the grant of any Benefit under
the Plan and which sets forth the Benefit and the terms, conditions and
provisions of, and restrictions relating to, such Benefit.
(c) Benefit. Any benefit granted to a Participant under the Plan.
(d) Board. The Board of Directors of the Company.
(e) Change of Control. (i) The acquisition at any time by a Person or
Group (excluding, for this purpose, the Company or any Subsidiary or any
employee benefit plan of the Company or any Subsidiary) or beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) directly or
indirectly, of securities representing 50% or more of the combined voting
power in the election of directors of the then-outstanding securities of the
Company or any successor of the Company; (ii) the termination of services as
directors, for any reason other than death, disability or retirement from
the Board, during any period of two consecutive years or less, of
individuals who at the beginning of such period constituted a majority of
the Board of Directors, unless the election of or nomination for election of
each new director during such period was approved by a vote of at least
two-thirds of the directors still in office who were directors at the
beginning of the period; (iii) approval by the stockholders of the Company
of any merger or consolidation or statutory share exchange as a result of
which the Common Stock shall be changed, converted or exchanged (other than
a merger or share exchange with a wholly- owned Subsidiary of the Company)
or liquidation of the Company or any sale or disposition of 50% or more of
the assets or earning power of the Company; or (iv) approval by the
stockholders of the Company of any merger or consolidation or statutory
share exchange to which the Company is a party as a result of which the
Persons who were stockholders of the Company immediately prior to the
effective date of the merger or consolidation or statutory share exchange
shall have beneficial ownership of less than 50% of the combined voting
power in the election of directors of the surviving corporation following
the effective date of such merger or consolidation or statutory share
exchange; provided, however, no Change in Control shall be deemed to have
occurred if, prior to such time as a Change in Control would otherwise be
deemed to have occurred, the Company's Board of Directors deems otherwise. A
"Change in Control" shall not include any reduction in ownership of an
Affiliate so long as the entity continues to meet the definitions of those
terms as contained in this Section.
(f) Code. The Internal Revenue Code of 1986, as amended. Any reference to
the Code includes the regulations promulgated thereunder.
(g) Company. World Access, Inc.
<PAGE> 2
(h) Committee. The Board's Compensation Committee or its successor.
(i) Common Stock. The Company's $0.01 par value common stock.
(j) Consultant. A Person engaged by the Company or any Affiliate to
provide consulting services to the Company or any Affiliate.
(k) Directors. A duly-elected member of the Board.
(l) Effective Date. The date that the Plan is approved by the stockholders
of the Company, which must occur within 12 months after adoption by the
Board. Any grants of Benefits prior to the approval by the stockholders of
the Company shall be void if such approval is not obtained.
(m) Employee. Any Person employed by the Company and all Affiliates.
(n) Exchange Act. The Securities Exchange Act of 1934, as amended.
(o) Fair Market Value. The closing price of a Share on The Nasdaq National
Market on a given date, or, in the absence of sales on a given date, the
closing price on The Nasdaq National Market on the last day on which a sale
occurred prior to such date.
(p) Fiscal Year. The taxable year of the Company which is the calendar
year.
(q) Group. Any two or more Persons acting as a partnership, limited
partnership, syndicate, or other group acting in concert for the purpose of
acquiring, holding or disposing of voting stock of the Company.
(r) Independent Contractor. A Person engaged to provide services to the
Company or any Affiliate on an independent basis and not as an Employee.
(s) ISO. An Incentive Stock Option as defined in Section 422 of the Code.
(t) NQSO. A Non-Qualified Stock Option, which is an Option that does not
meet the statutory requirements of an ISO.
(u) Option. An option to purchase Shares granted under the Plan.
(v) Other Stock Based Award. An award under ARTICLE XVI that is valued in
whole or in part by reference to, or is otherwise based on, Common Stock.
(w) Parent. Any corporation (other than the Company) in an unbroken chain
of corporations ending with the Company, if, at the time of the grant of an
Option or other Benefit, each of the corporations (other than the Company or
a Subsidiary) owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
(x) Participant. An Employee, Director, Consultant, Independent Contractor
or other agent who is granted a Benefit under the Plan.
(y) Performance Share. A Share awarded to a Participant under ARTICLE XV
of the Plan.
(z) Person. An individual, corporation, partnership, limited liability
company, joint venture, association, syndicate, trust, unincorporated
organization or other entity.
(aa) Plan. The World Access, Inc. 1998 Incentive Equity Plan and all
amendments and supplements to it.
(ab) Restricted Stock. Shares issued under ARTICLE XIV of the Plan.
2
<PAGE> 3
(ac) Rule 16b-3. Rule 16b-3 promulgated by the SEC, as amended, or any
successor rule in effect from time to time.
(ad) SEC. The Securities and Exchange Commission.
(ae) Share. A share of Common Stock.
(af) Subsidiary. Any Person (other than an individual), other than the
Company, in an unbroken chain of Persons (other than individuals) beginning
with the Company, if, at the time of grant of an Option or other Benefit,
each of such Persons, other than the last such Person in the unbroken chain,
owns stock possessing 50% or more of the total combined voting power of all
classes of stock or other equity interests in one of the other such Persons
in such chain.
2.2 Other Definitions. In addition to the above definitions, certain words
and phrases used in the Plan and any Agreement may be defined in other portions
of the Plan or in such Agreement.
2.3 Conflicts in Plan. In the case of any conflict in the terms of the Plan,
or between the Plan and an Agreement, relating to a Benefit, the provisions in
the ARTICLE of the Plan which specifically grants such Benefit shall control
those in a different ARTICLE or in such Agreement.
ARTICLE III
COMMON STOCK
3.1 Numbers of Shares. The number of Shares which may be issued or sold or
for which Options, Restricted Stock or Performance Shares may be granted under
the Plan shall be 5,000,000; provided, however, that not more than (i) 1,000,000
of such Shares may be issued as Restricted Stock and (ii) 1,000,000 of such
Shares may be issued as Performance Shares. Such Shares may be authorized but
unissued Shares, reacquired Shares, Shares acquired on the open market
specifically for distribution under this Plan, or any combination thereof.
3.2 Reusage. If an Option expires or is terminated, surrendered or canceled
without having been fully exercised, if Restricted Stock or Performance Shares
are forfeited, or if any other grant results in any Shares not being issued, the
unused Shares covered by any such Benefit shall again be available for grant
under the Plan to any Participant.
3.3 Adjustments. If there is any change in the Common Stock of the Company
by reason of any stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares, or any other similar transactions, the number of shares available for
grant under the Plan or subject to or granted pursuant to a Benefit and the
price thereof, as applicable, shall be appropriately adjusted by the Committee.
ARTICLE IV
ELIGIBILITY
4.1 Determined By Committee. The Participants and the Benefits they receive
under the Plan shall be determined by the Committee in its sole discretion. In
making its determinations, the Committee shall consider past, present and
expected future contributions of Participants and potential Participants to the
Company and any Affiliate. Members of the Committee and any other Persons whose
participation in the Plan would cause disqualification of this or any other
benefit plan intended to be qualified under Rule 16b-3 are ineligible to
participate in the Plan.
ARTICLE V
ADMINISTRATION
5.1 Committee. The Plan shall be administered by the Company's Compensation
Committee or its successors. The Committee shall consist of two or more members
of the Board who are "non-employee directors" as defined in Rule 16b-3 and are
"outside directors" as defined in Code Section 162(m) and the regulations
thereunder.
3
<PAGE> 4
5.2 Authority. Subject to the terms of the Plan, the Committee shall have
sole discretionary authority to:
(a) determine the individuals to whom Benefits are granted, the type
and amounts of Benefits to be granted and the date of issuance and duration of
all such grants;
(b) determine the terms (including any pricing terms), conditions and
provisions of, and restrictions relating to, each Benefit granted and any
modification or amendment thereof;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to the
Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Benefits under the Plan;
(g) maintain accounts, records and ledgers relating to Benefits;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other Persons for such
purposes as the Committee considers necessary or desirable; and
(j) do and perform all acts which it may deem necessary or appropriate
for the administration of the Plan and to carry out the purposes of the Plan
5.3 Delegation. Except as required by Rule 16b-3 with respect to grants of
Options, Restricted Stock, Performance Shares, Other Stock Based Awards, or
other Benefits to individuals who are subject to Section 16 of the Exchange Act
or as otherwise required for compliance with Rule 16b-3 or other applicable law,
the Committee may delegate all or any part of its authority under the Plan to
any Employee, Employees or committee of Employees.
5.4 Decisions of Committee and its Delegates. All decisions made by the
Committee, or (unless the Committee has specified an appeal process to the
contrary) any other Person or Persons to whom the Committee has delegated
authority, pursuant to the provisions hereof shall be final and binding on all
Persons.
ARTICLE VI
AMENDMENT OF PLAN
6.1 Power of Committee. The Committee shall have the sole right and power to
amend the Plan at any time and from time to time, provided, however, that the
Committee may not amend the Plan, without approval of the stockholders of the
Company, in a manner which would:
(a) cause outstanding Options which are intended to qualify as ISOs to
fail to so qualify;
(b) cause the Plan to fail to meet the requirements of Rule 16b-3; or
(c) violate applicable law or rules to which the Company or any
Affiliate is subject.
<PAGE> 5
4
<PAGE> 6
ARTICLE VII
TERM AND TERMINATION OF PLAN
7.1 Term. The Plan shall be effective as of the Effective Date. No Benefit
shall be granted pursuant to the Plan on or after the tenth anniversary date of
the adoption of the Plan by the Board, but Benefits granted prior to such tenth
anniversary may extend beyond that date to the date(s) specified in the
Agreement(s) covering such Benefits.
7.2 Termination. Subject to ARTICLE VIII, the Plan may be terminated at any
time by the Committee.
ARTICLE VIII
MODIFICATION OF TERMINATION OF BENEFITS
8.1 General. Subject to the provisions of Section 8.2, the amendment or
termination of the Plan shall not adversely affect a Participant's rights to or
under any Benefit granted prior to such amendment or termination.
8.2 Committee's Right. Except as may be provided in an Agreement, any
Benefit granted may be converted, modified, forfeited or canceled, prospectively
or retroactively in whole or in part, by the Committee in its sole discretion,
but, subject to Section 8.3, no such action may impair the rights of any
Participant without his or her consent. Except as may be provided in an
Agreement, the Committee may, in its sole discretion, in whole or in part, waive
any restrictions or conditions applicable to, or may accelerate the vesting of,
any Benefit.
8.3 Termination of Benefits under Certain Conditions. The Committee in its
sole discretion may cancel any unexpired, unpaid, or deferred Benefits at any
time if the Participant is not in compliance with all applicable provisions of
this Plan or with any Agreement or if the Participant, whether or not he or she
is then an Employee, Director, Consultant, Independent Contractor or other
agent, acts in a manner contrary to the best interests of the Company or any
Affiliate.
8.4 Awards to Foreign Nationals and Employees Outside the United States. To
the extent the Committee deems it necessary, appropriate or desirable to comply
with foreign law or practice and to further the purpose of this Plan, the
Committee may, without amending this Plan, (i) establish special rules
applicable to Benefits granted to Participants who are foreign nationals, are
employed or provide services to the Company outside the United States, or both,
including rules that differ from those set forth in this Plan, and (ii) grant
Benefits to such Participants in accordance with those rules.
ARTICLE IV
CHANGE OF CONTROL
9.1 Right of Committee. The occurrence of a Change of Control shall not
limit the Committee's authority to take any action, in its sole discretion,
permitted by Section 8.2. The Committee, in its sole discretion, may specify in
any Agreement the effect (if any) a Change of Control will have on such
Agreement and the Benefits granted thereunder.
ARTICLE X
AGREEMENTS AND CERTAIN BENEFITS
10.1 Grant Evidenced by Agreement. The grant of any Benefit under the Plan
may be evidenced by an Agreement which shall describe the specific Benefit
granted and the terms and conditions thereof. The granting of any benefit shall
be subject to, and conditioned upon, the recipient's execution of any Agreement,
all capitalized terms used in the Agreement shall have the same meaning as in
the Plan, and the Agreement shall be subject to all of the terms of the Plan.
10.2 Provisions of Agreement. Each Agreement shall contain such provisions
as the Committee shall determine in its sole discretion to be necessary,
desirable and appropriate for the Benefit granted which may include, but not
necessarily be limited to, the following: description of the type of Benefit;
the Benefit's duration; its transferability; if an Option, the exercise price,
the exercise period and the Person or Persons who may exercise the Option; the
effect upon such Benefit of the Participant's death, disability, change of
duties or termination of employment; the Benefit's conditions; when, if, and how
any Benefit may be forfeited, converted into another Benefit, modified,
exchanged for another Benefit, or replaced; and the restrictions on any Shares
purchased or granted under the Plan.
5
<PAGE> 7
10.3 Certain Benefits. Except as provided in Section 17.4 hereof, any
Benefit granted to an individual who is subject to Section 16 of the Exchange
Act (as well as any ISO granted to any Participant) shall not be transferable
other than by will or the laws of descent and distribution, and shall be
exercisable during the Participant's lifetime only by the Participant, his or
her guardian or legal representative. The designation of a beneficiary by such
individual shall not constitute a transfer.
ARTICLE XI
TANDEM AWARDS AND REISSUANCE OF OPTIONS
11.1 Tandem Awards. Benefits may be granted by the Committee in its sole
discretion individually or in tandem.
11.2 Cancellation and Reissuance. Notwithstanding anything herein to the
contrary, the Committee shall not permit the purchase price of any Option
granted or awarded to be reduced by any method, including by cancellation and
reissuance, without the approval of the Company's stockholders.
ARTICLE XII
PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING
12.1 Payment. Upon the exercise of an Option or in the case of any other
Benefit that requires a payment by a Participant to the Company, the amount due
the Company is to be paid:
(a) in cash;
(b) by the surrender of all or part of a Benefit (including the Benefit
being exercised);
(c) by the tender to the Company of Shares owned by the Participant and
registered in his or her name having a Fair Market Value equal to the amount due
to the Company;
(d) in other property, rights and credits, deemed acceptable by the
Committee, including the Participant's promissory note; or
(e) by any combination of the payment methods specified in (a) through
(d) above.
Notwithstanding the foregoing, any method of payment other than in cash may
be used only with the consent of the Committee or if and to the extent so
provided in an Agreement. The proceeds of the sale of Shares purchased pursuant
to an Option and any payment to the Company for other Benefits shall be added to
the general funds of the Company or to the reacquired Shares held by the
Company, as the case may be, and used for general corporate purposes of the
Company as the Board shall determine.
12.2 Dividend Equivalents. In the sole discretion of the Committee, grants
of Benefits in Shares or Share equivalents may include dividend or dividend
equivalent payments or dividend credit rights.
12.3 Optional Deferral. The right to receive any Benefit under the Plan may,
at the request of the Participant, be deferred for such period and upon such
terms as the Committee shall determine, which may include crediting of dividends
on deferrals denominated in shares.
12.4 Code Section 162(m). The Committee, in its sole discretion, may require
that one or more Agreements contain provisions which provide that, in the event
Section 162(m) of the Code, or any successor provision relating to excessive
Employee remuneration, would operate to disallow a deduction by the Company for
all or part of any Benefit under the Plan, a Participant's receipt of the
portion of such Benefit that would not be deductible by the Company shall be
deferred until the next succeeding year or years in which the Participant's
remuneration does not exceed the limit set forth in such provision of the Code.
12.5 Withholding. The Company may, at the time any distribution is made
under the Plan, or at the time any Option is exercised,
6
<PAGE> 8
withhold from such distribution of Shares issuable upon the exercise of an
Option, any amount necessary to satisfy federal, state and local withholding
requirements with respect to such distribution or exercise of such Option. Such
withholding may be satisfied, at the Company's option, either by cash or the
Company's withholding of Shares. Agreements may contain withholding provisions
applicable only to Participants who are subject to Section 16 of the Exchange
Act.
ARTICLE XIII
OPTIONS
13.1 Types of Options. It is intended that both ISOs and NQSOs may be
granted by the Committee under the Plan.
13.2 Option Price. The purchase price for Shares under any ISO shall be no
less than the Fair Market Value of the Shares at the time the Option is granted
(or, in the case of a greater- than-10% stockholder under Section 422(b)(6) of
the Code, 110% of Fair Market Value).
13.3 Other Requirements for ISOs. The terms of each Option which is intended
to qualify as an ISO shall meet all requirements of Section 422 of the Code or
any successor statute in effect from time to time, including (without
limitation) the requirement that the grantee be an Employee of the Company, a
Parent and/or a Subsidiary.
13.4 NQSOs. The terms of each NQSO shall provide that such Option will not
be treated as an ISO. The purchase price for Shares under any NQSO shall be no
less than the Fair Market Value of the Shares at the time the Option is granted,
except that the purchase price for no more than an aggregate of 500,000 Shares
under NQSOs may be as low as 50% of the Fair Market Value of the Shares at the
time such Options are granted. The term of any NQSO shall not extend beyond the
tenth anniversary of the date of grant of such NQSO.
13.5 Determination by Committee. Except as otherwise provided in Sections
13.2 through Section 13.4, the terms of all Options shall be determined by the
Committee.
ARTICLE XIV
RESTRICTED STOCK
14.1 Description. The Committee may grant Benefits in Shares as Restricted
Stock with such terms and conditions as may be determined in the sole discretion
of the Committee. Shares of Restricted Stock shall be issued and delivered at
the time of the grant or as otherwise determined by the Committee, but shall be
subject to forfeiture until provided otherwise in the applicable Agreement or
the Plan. Each certificate representing Shares of Restricted Stock shall bear a
legend referring to the Plan and any risk of forfeiture of the Shares and
stating that such Shares are nontransferable until all restrictions have been
satisfied and the legend has been removed. At the discretion of the Committee,
the grantee may or may not be entitled to full voting and dividend rights with
respect to all shares of Restricted Stock from the date of grant. The Committee
may (but is not obligated to) require that any dividends on such shares shall be
automatically deferred and reinvested in additional Restricted Stock subject to
the same restrictions as the underlying Benefit.
14.2 Cost of Restricted Stock. Grants of Shares of Restricted Stock shall be
made at such cost as the Committee shall determine and may be issued for no
monetary consideration, subject to applicable state law.
14.3 Nontransferability. Shares of Restricted Stock shall not be
transferable until after the removal of the legend with respect to such Shares.
14.4 Termination of Restrictions. Notwithstanding anything herein to the
contrary, the restrictions on the Restricted Stock granted hereunder shall
elapse (i) no sooner than one (1) year from the date of grant where such
restrictions are based upon the satisfaction of performance criteria established
by the Committee; or (ii) no sooner than on a pro rata basis over a three (3)
year period from the date of grant where such restrictions are based upon the
passage of time.
7
<PAGE> 9
ARTICLE XV
PERFORMANCE SHARES
15.1 Description. Performance Shares represent the right of a Participant to
receive Shares or cash equal to the Fair Market Value of such shares at a future
date in accordance with the terms and conditions of a grant. The terms and
conditions shall be determined by the Committee, in its sole discretion, but
generally are expected to be based substantially upon the attainment of targeted
financial and/or operational performance objectives.
15.2 Grant. The Committee may grant an award of Performance Shares at such
times, in such amounts and under such terms and conditions as it deems
appropriate.
ARTICLE XVI
OTHER STOCK BASED AWARDS AND OTHER BENEFITS
16.1 Other Stock Based Awards. The Committee shall have the right to grant
Other Stock Based Awards which shall include, without limitation, the grant of
Shares based on certain conditions, the payment of cash based on the market
performance of the Common Stock, and the grant of securities convertible into
Shares.
16.2 Other Benefits. The Committee shall have the right to provide other
types of Benefits under the Plan in addition to those specifically listed, if
the Committee believes that such Benefits would further the purposes for which
the Plan has been established.
ARTICLE XVII
MISCELLANEOUS PROVISIONS
17.1 Termination of Service. If the employment of a Participant with or the
provision of services by a Participant to the Company terminates for any reason,
all unexercised, deferred, and unpaid Benefits may be exercisable or paid only
in accordance with rules established by the Committee. These rules may provide,
as the Committee in its sole discretion may deem appropriate, for the
expiration, forfeiture, continuation, or acceleration of the vesting, except as
may be provided in an Agreement, of all or part of the Benefits.
17.2 Unfunded Status of the Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments or deliveries of Shares not yet made to a Participant by the Company,
nothing contained herein shall give any rights that are greater than those of a
general creditor of the Company. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Shares or payments hereunder consistent with the foregoing.
17.3 Designation of Beneficiary. A Participant may file with the Committee a
written designation of a beneficiary or beneficiaries (subject to such
limitations as to the classes and number of beneficiaries and contingent
beneficiaries as the Committee may from time to time prescribe) to exercise, in
the event of the death of the Participant, an Option, or to receive, in such
event, any Benefits. The Committee reserves the right to review and approve
beneficiary designations. A Participant may from time to time revoke or change
any such designation of beneficiary and any designation of beneficiary under the
Plan shall be controlling over any other disposition, testamentary or otherwise;
provided, however, that if the Committee shall be in doubt as to the right of
any such beneficiary to exercise any Option or to receive any Benefit, the
Committee may determine to recognize only an exercise by the legal
representative of the recipient, in which case the Company, the Committee and
the members thereof shall not be under any further liability to anyone.
17.4 Nontransferability. Unless otherwise determined by the Committee or
specified in an Agreement (and subject to Section 10.3 hereof), (i) no Benefit
granted under this Plan may be transferred or assigned by the Participant to
whom it is granted other than by beneficiary designation, will, pursuant to the
laws of descent and distribution, or pursuant to a qualified domestic relations
order, and (ii) a Benefit granted under this Plan may be exercised, during the
Participant's lifetime, only by the Participant or by the Participant's guardian
or legal representative; except that, no ISO may be transferred or assigned
pursuant to a qualified domestic relations order or exercised, during the
Participant's lifetime, by the Participant's guardian or legal representative.
17.5 Rule 16b-3. With respect to Participants subject to Section 16 of the
Exchange Act, transactions under this Plan are intended
8
<PAGE> 10
to comply with all applicable provisions of Rule 16b-3 or its successors under
the Exchange Act. To the extent any provision of the Plan or action by the Plan
administrators fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
17.6 Section Headings. The section headings contained in the Plan and in any
Agreement are included only for convenience, and they shall not be construed as
a part of the Plan or Agreement or in any respect affecting or modifying its
provisions.
17.7 Number and Gender. The masculine, feminine and neuter, wherever used in
the Plan or in any Agreement, shall refer to either the masculine, feminine or
neuter; and, unless the context otherwise requires the singular shall include
the plural and the plural the singular.
17.8 Governing Law. The place of administration of the Plan and each
Agreement shall be in the State of Georgia. The corporate law of the Company's
state of incorporation shall govern issues related to the validity and issuance
of Shares. Otherwise, this Plan and each Agreement shall be construed and
administered in accordance with the laws of the State of Georgia, without giving
effect to principles relating to conflict of laws.
17.9 Purchase for Investment. The Committee may require each Person
purchasing or receiving shares pursuant to a Benefit to represent to and agree
with the Company in writing that such Person is acquiring the Shares for
investment and without a view to distribution or resale. The certificates for
such Shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer. All certificates for Shares delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under all applicable laws,
rules and regulations, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate references to such restrictions.
17.10 No Employment Contract. Neither the adoption of the Plan nor any
Benefit granted hereunder shall confer upon any Employee, Director, Consultant,
Independent Contractor or other agent any right to continued employment with or
services to the Company or any Affiliate, nor shall the Plan or any Benefit
interfere in any way with the right of the Company or any Affiliate to terminate
the employment or provision of services of any of its Employees, Directors,
Consultants, Independent Contractors or other agents at any time.
17.11 No Effect on Other Benefits. The receipt of Benefits under the Plan
shall have no effect on any benefits to which a Participant may be entitled from
the Company or any Affiliate under another plan or otherwise, or preclude a
Participant from receiving any such benefits.
9
<PAGE> 1
EXHIBIT 10.28
SCHEDULE I
LIST OF OFFICERS AND DIRECTORS WHO HAVE
ENTERED INTO INDEMNIFICATION AGREEMENTS
W. Tod Chmar
Stephen J. Clearman
John P. Imlay, Jr.
Martin D. Kidder
Michael F. Mies
Scott N. Madigan
Steven A. Odom
John D. Phillips
Stephen E. Raville
Carl E. Sanders
Hensley E. West
88
<PAGE> 1
EXHIBIT 10.29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
CREDIT AGREEMENT
DATED AS OF DECEMBER 30, 1998
BETWEEN
TELCO SYSTEMS, INC.
WORLD ACCESS HOLDINGS, INC.
AND
NATIONSBANK, N.A.
AS ADMINISTRATIVE AGENT
AND
FLEET NATIONAL BANK
AS SYNDICATION AGENT
AND
BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC.
AS DOCUMENTATION AGENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I. DEFINITIONS
<S> <C> <C>
1.01. Definitions.............................................................1
1.02. Accounting and Other Terms.............................................23
ARTICLE II. AMOUNTS AND TERMS OF ADVANCES
2.01. The Facility...........................................................23
2.02. Making Advances........................................................23
2.03. Evidence of Indebtedness...............................................25
2.04. Reduction of Available Commitments.....................................25
2.05. Prepayments............................................................27
2.06. Mandatory Repayment....................................................28
2.07. Interest...............................................................28
2.08. Default Interest.......................................................29
2.09. Continuation and Conversion Elections..................................29
2.10. Fees...................................................................30
2.11. Funding Losses.........................................................31
2.12. Computations and Manner of Payments....................................31
2.13. Yield Protection.......................................................32
2.14. Use of Proceeds........................................................34
2.15. Collateral and Collateral Call.........................................34
2.16. Option to Extend the Conversion Date; Option to Convert to Term........35
2.17. Conditions Precedent to the Increase of the Available Commitment.......36
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit..........................................38
3.02. Letters of Credit Fee..................................................39
3.03. Reimbursement Obligations..............................................39
3.04. Lenders' Obligations...................................................41
3.05. Administrative Agent's Obligations.....................................41
3.06 Reinstatement..........................................................42
3.07 Survivability of Provisions............................................42
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to the Initial Advance............................42
4.02. Conditions Precedent to All Advances...................................44
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE V. REPRESENTATIONS AND WARRANTIES
<S> <C> <C>
5.01. Organization and Qualification.........................................45
5.02. Due Authorization; Validity............................................45
5.03. Conflicting Agreements and Other Matters...............................46
5.04. Financial Statements...................................................46
5.05. Litigation.............................................................46
5.06. Compliance With Laws Regulating the Incurrence of Debt.................46
5.07. Licenses, Title to Properties, and Related Matters.....................47
5.08. Outstanding Debt and Liens.............................................48
5.09. ERISA..................................................................48
5.10. Environmental Laws.....................................................48
5.11. Disclosure.............................................................49
5.12. Investments; Restricted Subsidiaries...................................49
5.13. Certain Fees...........................................................49
5.14. Intellectual Property..................................................50
5.16. Survival of Representations and Warranties, etc........................50
ARTICLE VI. AFFIRMATIVE COVENANTS
6.01. Compliance with Laws and Payment of Debt...............................51
6.02. Insurance..............................................................51
6.03. Inspection Rights......................................................52
6.04. Records and Books of Account; Changes in GAAP..........................52
6.05. Reporting Requirements.................................................52
6.06. Use of Proceeds........................................................54
6.07. Maintenance of Existence and Assets....................................55
6.08. Payment of Taxes.......................................................55
6.09. Indemnity..............................................................55
6.10. Management Fees Paid and Earned........................................56
6.11. Authorizations and Material Agreements.................................56
6.12. Further Assurances.....................................................56
6.13. Year 2000 Compliance...................................................57
6.14. Subsidiaries and Other Obligors........................................57
ARTICLE VII. NEGATIVE COVENANTS
7.01. Financial Covenants....................................................57
7.02. Debt...................................................................57
7.03. Contingent Liabilities.................................................58
7.04. Liens..................................................................58
7.05. Dispositions of Assets.................................................58
7.06. Distributions and Restricted Payments..................................58
7.07. Merger; Consolidation..................................................58
7.08. Business...............................................................58
7.09. Transactions with Affiliates...........................................59
</TABLE>
ii
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<TABLE>
<CAPTION>
<S> <C> <C>
7.10. Loans and Investments..................................................59
7.11. Fiscal Year and Accounting Method......................................59
7.12. Issuance of Partnership Interest and Capital Stock; Amendment of
Articles and By-Laws...................................................59
7.13. Change of Ownership....................................................59
7.14. Sale and Leaseback.....................................................59
7.15. Compliance with ERISA..................................................60
7.16. Rate Swap Exposure.....................................................60
7.17. Restricted Subsidiaries and Other Obligors.............................60
7.18. Limitation on Restrictive Agreements...................................60
ARTICLE VIII. EVENTS OF DEFAULT
8.01. Events of Default......................................................61
8.02. Remedies Upon Default..................................................64
8.03. Cumulative Rights......................................................65
8.04. Waivers................................................................65
8.05. Performance by Administrative Agent or any Lender......................65
8.06. Expenditures...........................................................66
8.07. Control................................................................66
ARTICLE IX. THE ADMINISTRATIVE AGENT
9.01. Authorization and Action...............................................66
9.02. Administrative Agent's Reliance, Etc...................................66
9.03. NationsBank, N. A. and Affiliates......................................67
9.04. Lender Credit Decision.................................................67
9.05. Indemnification by Lenders.............................................67
9.06. Successor Administrative Agent.........................................68
ARTICLE X. MISCELLANEOUS
10.01. Amendments and Waivers.................................................68
10.02. Notices................................................................69
10.03. Parties in Interest....................................................71
10.04. Assignments and Participations.........................................71
10.05. Sharing of Payments....................................................72
10.06. Right of Set-off.......................................................72
10.07. Costs, Expenses, and Taxes.............................................72
10.08. Indemnification by the Borrower........................................73
10.09. Rate Provision.........................................................74
10.10. Severability...........................................................74
10.11. Exceptions to Covenants................................................74
</TABLE>
iii
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<TABLE>
<CAPTION>
<S> <C> <C>
10.12. Counterparts...........................................................75
10.13. GOVERNING LAW; WAIVER OF JURY TRIAL....................................75
10.14. ENTIRE AGREEMENT.......................................................75
10.15. Joint and Several Obligations..........................................75
</TABLE>
iv
<PAGE> 6
TABLE OF SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 1.01 Restricted Subsidiaries
Schedule 5.01 Organization and Qualification
Schedule 5.01(d) Stock Options & Warrants Outstanding
Schedule 5.03 Consents under Material Agreements
Schedule 5.05 Litigation
Schedule 5.07 Authorizations
Schedule 5.08 Debt, Contingent Liabilities and Liens on the Closing Date
Schedule 5.11 Environmental Liabilities on the Closing Date
Schedule 5.12 Investments
Schedule 7.03 Subordination Terms
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Assignment and Acceptance
Exhibit C - Form of Pledge and Security Agreement
Exhibit D - Form of Compliance Certificate
Exhibit E - Form of Conversion/Continuation Notice
Exhibit F - Form of Borrowing Notice
</TABLE>
v
<PAGE> 7
TELCO SYSTEMS, INC.
WORLD ACCESS HOLDINGS, INC.
$100,000,000
CREDIT AGREEMENT
.
THIS CREDIT AGREEMENT is dated as of December 30, 1998 and is between
TELCO SYSTEMS, INC. and WORLD ACCESS HOLDINGS, INC. (collectively, the
"Borrower"), the Lenders from time to time party hereto (the "Lenders") or to
an Assignment and Acceptance, and NATIONSBANK, N.A., a national banking
association ("NationsBank"), as a Lender and Administrative Agent (the
"Administrative Agent"), Fleet National Bank, as Syndication Agent, and Bank
Austria Creditanstalt Corporate Finance, Inc., as Documentation Agent.
BACKGROUND
WHEREAS, the Borrower, the Administrative Agent and the Lenders hereby
enter into a Credit Agreement which provides for a 364-day revolving credit
facility in the amount of $75,000,000 ((which such loan facility may increase
to $100,000,000 as provided herein) and shall also include a letter of credit
availability of not more than $25,000,000), the proceeds of which shall be used
for Permitted Acquisitions, Capital Expenditures, working capital, and general
corporate purposes.
AGREEMENT
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I. DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms have
the respective meanings indicated below (such meanings to be applicable equally
to both the singular and plural forms of such terms):
"Administrative Agent" means NationsBank, N. A., in its capacity as
Administrative Agent hereunder, or any successor Administrative Agent appointed
pursuant to Section 9.06 hereof.
"Advance" means an advance made by a Lender to the Borrower pursuant
to Section 2.01 hereof, and may include Advances under the Term Loan.
"Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, Controls or is Controlled By or is Under Common Control
with another Person, and with respect to the Borrower, "Affiliate" means a
Person that directly or indirectly through one or more
<PAGE> 8
intermediaries, Controls or is Controlled By or is Under Common Control with
the Borrower or any Subsidiary of the Borrower.
"Agreement" means this Credit Agreement, as hereafter amended,
modified, or supplemented in accordance with its terms.
"Annualized Operating Cash Flow" means, as of any date of
determination, (i) for the Borrower and each of its Restricted Subsidiaries
other than World Access Telecommunications Group, Inc. the product of two times
Operating Cash Flow for the two most recently ended fiscal quarters and (ii)for
World Access Telecommunications Group, Inc., the product of four times the
Operations Cash Flow for the most recently ended fiscal quarter
"Applicable Law" means (a) in respect of any Person, all provisions of
Laws of Tribunals applicable to such Person, and all orders and decrees of all
courts and arbitrators in proceedings or actions to which the Person in
question is a party and (b) in respect of contracts made or performed in the
State of Texas, "Applicable Law" also means the laws of the United States of
America, including, without limiting the foregoing, 12 U.S.C. Sections 85 and
86, as amended to the date hereof and as the same may be amended at any time
and from time to time hereafter, and any other statute of the United States of
America now or at any time hereafter prescribing the maximum rates of interest
on loans and extensions of credit, and the laws of the State of Texas,
including, without limitation, Article 5069-1H, Title 79, Revised Civil
Statutes of Texas, 1925, ("Art. 1H"), as amended, if applicable, and if Art. 1H
is not applicable, Article 5069-1D, Title 79, Revised Civil Statutes of Texas,
1925, ("Art. 1D"), as amended, and any other statute of the State of Texas now
or at any time hereafter prescribing maximum rates of interest on loans and
extensions of credit; provided however, that the Borrower agrees that the
provisions of Chapter 346 of the Texas Finance Code, as amended, shall not
apply to Advances hereunder.
"Applicable Margin" means (i) with respect to the Base Rate Advances
under the Facility, 1.250% per annum and (ii) with respect to LIBOR Advances
under the Facility, 2.250% per annum. Notwithstanding the foregoing, effective
three Business Days after receipt by the Administrative Agent from the Borrower
of a Compliance Certificate delivered to the Lenders for any reason and
demonstrating a change in the Total Leverage Ratio to an amount so that another
Applicable Margin should be applied pursuant to the table set forth below, the
Applicable Margin for each type of Advance shall mean the respective amount set
forth below opposite such relevant Total Leverage Ratio in Columns A and B
below, in each case until the first succeeding Quarterly Date which is at least
three Business Days after receipt by the Administrative Agent from the Borrower
of a Compliance Certificate, demonstrating a change in the Total Leverage Ratio
to an amount so that another Applicable Margin shall be applied; provided that,
if there exists a Default or if the Total Leverage Ratio shall at any time be
greater than or equal to 2.50 to 1.00, the Applicable Margin shall again be the
respective amounts first set forth in this definition; provided further, that
the Applicable Margin in effect on the Closing Date shall be determined
pursuant to a Compliance Certificate delivered on the Closing Date, provided,
further, that if the Borrower fails to deliver any financial statements to the
Administrative Agent within the required time periods set forth in Sections
6.05(a) and Section 6.05(b) hereof, the Applicable
2
<PAGE> 9
Margin shall again be the
respective amounts first set forth in this definition until the date which is
three Business Days after the Administrative Agent receives financial
statements from the Borrower which demonstrate that another Applicable Margin
should be applied pursuant to the table set forth below; and provided further,
that the Applicable Margin shall never be a negative number.
<TABLE>
<CAPTION>
COLUMN A COLUMN B
Total Leverage Ratio Base Rate LIBOR
- -------------------- --------- -----
<S> <C> <C>
Greater than or equal to
2.50 to 1.00 1.250% 2.250%
Greater than or equal to
2.00 to 1.00 but less than
2.50 to 1.00 1.000% 2.000%
Greater than or equal to
1.50 to 1.00 but less than
2.00 to 1.00 0.750% 1.750%
Greater than or equal to
1.00 to 1.00 but less than
1.50 to 1.00 0.500% 1.500%
Less than 0.250% 1.250%
1.00 to 1.00
</TABLE>
"Art. 1H" has the meaning specified in the definition herein of
"Applicable Law".
"Art. 1D" has the meaning specified in the definition herein of
"Applicable Law".
"Asset Sale" means any sale, disposition, liquidation, conveyance or
transfer by the Borrower or any Restricted Subsidiary of any Property (or
portion thereof) or an interest other than Permitted Dispositions.
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Lender and an Eligible Assignee, and accepted by Administrative
Agent, in the form of Exhibit B hereto, as each such agreement may be amended,
modified, extended, restated, renewed, substituted or replaced from time to
time.
"Assignor" has the meaning ascribed thereto in Section 10.04(a)
hereof.
"Auditor" means Ernst & Young LLP, or other independent certified
public accountants selected by the Borrower and acceptable to Administrative
Agent.
3
<PAGE> 10
"Authorizations" means all filings, recordings and registrations with,
and all validations or exemptions, approvals, orders, authorizations, consents,
Licenses, certificates and permits from, the FCC, applicable public utilities
and other federal, state and local regulatory or governmental bodies and
authorities or any subdivision thereof, including, without limitation, FCC
Licenses.
"Authorized Officer" means any of the President, Executive Vice
President-Chief Financial Officer, Vice President-Chief Accounting Officer,
Vice President-Finance, Secretary, Treasurer, or any other officer authorized
by the Borrower from time to time of which the Administrative Agent has been
notified in writing.
"Available Commitment" means $75,000,000, as such amount may be
increased prior to June 30, 1999 in accordance with the terms of Section 2.17
hereof, and as such amount may be reduced from time to time or terminated
pursuant to Sections 2.04, 2.06 or 8.02 hereof.
"Bank Affiliate" means the holding company of any Lender, or any
wholly owned direct or indirect subsidiary of such holding company or of such
Lender.
"Base Rate Advance" means an Advance bearing interest at the Base
Rate.
"Base Rate" means a fluctuating rate per annum as shall be in effect
from time to time equal to the lesser of (a) the Highest Lawful Rate and (b)
the sum of the Applicable Margin plus the greater of (i) the sum of Federal
Funds Rate in effect from time to time plus .50% and (ii) the rate of interest
as then in effect announced publicly by NationsBank, N.A. in Dallas, Texas from
time to time as its U.S. dollar prime commercial lending rate (such rate may or
may not be the lowest rate of interest charged by NationsBank from time to
time). The Base Rate shall be adjusted automatically as of the opening of
business on the effective date of each change in the prime rate to account for
such change.
"Bond Letter of Credit" means the $7,470,934.90 Irrevocable Letter of
Credit issued by Bank Austria AG backing payment of the $7,365,000 Forsyth
County Development Authority Industrial Development Revenue Bonds (World
Access, Inc. Project), Series 1998.
"Borrower" means, collectively, Telco Systems, Inc. and World Access
Holdings, Inc.
"Borrowing" means a borrowing under the Facility of the same Type made
on the same day.
"Borrowing Notice" has the meaning set forth in Section 2.02(a)
hereof.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Dallas, Texas and, if the applicable day relates to
any notice, payment or calculation related to a LIBOR Advance, in London,
England.
4
<PAGE> 11
"Capital Expenditures" means the aggregate amount of all purchases or
acquisitions of items considered to be capital items under GAAP, and in any
event shall include the aggregate amount of items leased or acquired under
Capital Leases at the cost of the item, and the acquisition of realty, tools,
equipment and fixed assets, and any deferred costs associated with any of the
foregoing.
"Capital Leases" means capital leases and subleases, as defined in
accordance with GAAP.
"Capital Stock" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital
stock of any Person that is a corporation and each class of partnership
interests (including, without limitation, general, limited and preference
units) in any Person that is a partnership and membership interests in limited
liability companies.
"Cash Equivalents" means investments (directly or through a money
market fund) in (a) certificates of deposit and other interest bearing deposits
or accounts with United States commercial banks having a combined capital and
surplus of at least $250,000,000, which certificates, deposits and accounts
mature within one year from the date of investment, (b) obligations issued or
unconditionally guaranteed by the United States government, or issued by an
agency thereof and backed by the full faith and credit of the United States
government, which obligations mature within one year from the date of
investment, (c) direct obligations issued by any state or political subdivision
of the United States, which mature within one year from the date of investment
and have the highest rating obtainable from Standard & Poor's Ratings Group or
Moody's Investors Services, Inc. on the date of investment, and (d) commercial
paper which has one of the three highest ratings obtainable from Standard &
Poor's Ratings Group or Moody's Investors Services, Inc.
"Change of Control" means the occurrence of any one or more of the
following events: (i) any event which results in the following: (i) any
"person" or "group" (as such terms are used in Section 13(d) and 14(d) of the
Exchange Act) shall become, or obtain rights (whether by means or warrants,
options or otherwise) to become, the "beneficial owner" (as defined in Rules
13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more
than 25% of the outstanding common stock of World Access, Inc., (ii) the board
of directors of the Parent shall cease to consist of a majority of Continuing
Directors, (iii) any event which results in World Access, Inc.'s failure to own
or control 100% of the Capital Stock of WA Telecom Products Co., Inc., WA
Telecom Products Co., Inc.'s failure to own or control 100% of the Capital
Stock of World Access Holdings, Inc. and Telco Systems, Inc. or World Access
Holdings, Inc.'s failure to own and control 100% of the Capital Stock of the
Restricted Subsidiaries, or (iv) as that term is defined in the Indenture.
"Closing Date" means December 30, 1998.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations issued thereunder, as from time to time in effect.
5
<PAGE> 12
"Collateral" means all "collateral" referred to in any Loan Paper and
all other property which is or may be subject to a Lien in favor or for the
benefit of Administrative Agent on behalf of Lenders or any Lender to secure
the Obligations, including, without limitation, "Collateral" as defined in
Section 2.15(a) hereof.
"Commitment Fees" means each of the fees described in Sections 2.10(a)
and 2.10(b) hereof.
"Compliance Certificate" means a certificate of an Authorized Officer
of the Borrower acceptable to Administrative Agent, in the form of Exhibit D
hereto, (a) certifying that such individual has no knowledge that a Default or
Event of Default has occurred and is continuing, or if a Default or Event of
Default has occurred and is continuing, a statement as to the nature thereof
and the action being taken or proposed to be taken with respect thereto, and
(b) setting forth detailed calculations with respect to each of the covenants
described in Section 7.01 hereof.
"Consequential Loss," with respect to (a) the Borrower's payment of
all or any portion of the then-outstanding principal amount of a LIBOR Advance
on a day other than the last day of the related Interest Period, including,
without limitation, payments made as a result of the acceleration of the
maturity of a Note, (b) (subject to Administrative Agents' prior consent), a
LIBOR Advance made on a date other than the date on which the Advance is to be
made according to Section 2.02(a) or Section 2.09 hereof, or (c) any of the
circumstances specified in Section 2.04, Section 2.05 and Section 2.06 hereof
on which a Consequential Loss may be incurred, means any loss, cost or expense
incurred by any Lender as a result of the timing of the payment or Advance or
in liquidating, redepositing, redeploying or reinvesting the principal amount
so paid or affected by the timing of the Advance or the circumstances described
in Section 2.04, Section 2.05, and Section 2.06 hereof, which amount shall be
the sum of (i) the interest that, but for the payment or timing of Advance,
such Lender would have earned in respect of that principal amount, reduced, if
such Lender is able to redeposit, redeploy, or reinvest the principal amount,
by the interest earned by such Lender as a result of redepositing, redeploying
or reinvesting the principal amount plus (ii) any expense or penalty incurred
by such Lender by reason of liquidating, redepositing, redeploying or
reinvesting the principal amount. Each determination by each Lender of any
Consequential Loss is, in the absence of manifest error, conclusive and
binding.
"Contingent Liability" means, as to any Person, any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Debt or obligation of any other Person in any
manner, whether directly or indirectly, including, without limitation, any
obligation of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Debt, (b) to purchase Property or services for the purpose
of assuring the owner of such Debt of its payment, or (c) to maintain the
solvency, working capital, equity, cash flow, fixed charge or other coverage
ratio, or any other financial condition of the primary obligor so as to enable
the primary obligor to pay any Debt or to comply with any agreement relating to
any Debt or obligation, and shall, in any event,
6
<PAGE> 13
include any contingent obligation under any letter of credit, application for
any letter of credit or other related documentation.
"Continue," "Continuation" and "Continued" each refer to the
continuation pursuant to Section 2.09 hereof of a LIBOR Advance from one
Interest Period to the next Interest Period.
"Continuing Directors" means the directors of World Access, Inc. on
the Closing Date, and each other director, if, in each case, such other
director's nomination for election to the board of directors of World Access,
Inc. is recommended by at least 66 2/3% of the then Continuing Directors.
"Control" or "Controlled By" or "Under Common Control" mean
possession, direct or indirect, of power to direct or cause the direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise); provided that, in any event (a) it shall include any
director (or Person holding the equivalent position) or executive officer (or
Person holding the equivalent position) of such Person or of any Affiliate of
such Person, (b) any Person which beneficially owns 5% or more (in number of
votes) of the securities having ordinary voting power for the election of
directors of a corporation shall be conclusively presumed to control such
corporation, (c) any general partner of any partnership shall be conclusively
presumed to control such partnership, (d) any other Person who is a member of
the immediate family (including parents, spouse, siblings and children) of any
general partner of a partnership, and any trust whose principal beneficiary is
such individual or one or more members of such immediate family and any Person
who is controlled by any such member or trust, or is the executor,
administrator or other personal representative of such Person, shall be
conclusively presumed to control such Person, and (e) no Person shall be deemed
to be an Affiliate of a corporation solely by reason of his being an officer or
director of such corporation.
"Controlled Group" means, as to any Person, all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) which are under common control with such Person and which,
together with such Person, are treated as a single employer under Section
414(b), (c), (m) or (o) of the Code.
"Conversion Date" means the date that is 364 days after the Closing
Date, as extended pursuant to Section 2.16(a) hereof.
"Conversion or Continuance Notice" has the meaning set forth in
Section 2.09(b) hereof.
"Debt" means all obligations, contingent or otherwise, which in
accordance with GAAP are required to be classified on the balance sheet as
liabilities, and, in any event, includes accrued Earn-Out Liabilities(in
accordance with GAAP), Capital Leases, Contingent Liabilities that are required
to be disclosed and quantified in notes to consolidated financial statements in
accordance with GAAP, and liabilities secured by any Lien on any Property,
regardless of whether such secured liability is with or without recourse.
7
<PAGE> 14
"Debt for Borrowed Money" means, as to any Person, at any date,
without duplication, (a) all obligations of such Person for borrowed money, (b)
all obligations of such Person evidenced by bonds, debentures, notes, letters
of credit (or applications for letters of credit) or other similar instruments,
(c) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business and (d) all obligations of such Person secured by a Lien on
any assets or property of any Person.
"Debtor Relief Laws" means applicable bankruptcy, reorganization,
moratorium or similar Laws, or principles of equity, affecting the enforcement
of creditors' rights generally.
"Default" means any event specified in Section 8.01 hereof, whether or
not any requirement in connection with such event for the giving of notice,
lapse of time or happening of any further condition has been satisfied.
"Distribution" means, as to any Person, (a) any declaration or payment
of any distribution or dividend (other than a stock dividend) on, or the making
of any pro rata distribution, loan, advance or investment to or in any holder
(in its capacity as a partner, shareholder or other equity holder) of, any
partnership interest or shares of capital stock or other equity interest of
such Person, or (b) any purchase, redemption or other acquisition or retirement
for value of any shares of partnership interest or capital stock or other
equity interest of such Person.
"Earn-Out Liability" means, with respect to the Borrower and its
Restricted Subsidiaries, any unsecured contingent liability of the Borrower or
any Restricted Subsidiary of the Borrower incurred in connection with any
Permitted Acquisition, which such contingent liability (a) constitutes a
portion of the purchase price for the property acquired but is not an amount
certain, (b) is only payable based on the performance of the acquired property
and in an amount based only on the performance of the acquired property or (c)
is not subject to any acceleration right (other than those rights in existence
as of the date hereof). "Earn-Out Liability" does not include shares of the
common stock of the Parent already issued and paid into escrow in connection
with any Permitted Acquisition.
"Eligible Assignee" means (a) any Bank Affiliate, (b) a commercial
bank organized under the laws of the United States or any state thereof, having
total assets in excess of $500,000,000; (c) a commercial bank organized under
the laws of any other country which is a member of the Organization for
Economic Cooperation and Development, or a political subdivision of any such
country, and having total assets in excess of $500,000,000, provided that such
bank is acting through a branch or agency located in the country in which it is
organized or another country which is described in this clause; and (d) the
central bank of any country which is a member of the Organization for Economic
Cooperation and Development.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. ss.9601 et seq.) ("CERCLA"), the
Hazardous Material Transportation Act (49 U.S.C. ss.1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C ss.6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. ss.1251 et seq.), the Clean Air Act
8
<PAGE> 15
(42 U.S.C. ss.7401 et seq.), the Toxic Substances Control Act (15 U.S.C.
ss.2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C. ss.651
et seq.) ("OSHA"), as such laws have been or hereafter may be amended or
supplemented, and any and all analogous future federal, or present or future
state or local, Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rulings and regulations issued thereunder, as from time to
time in effect.
"ERISA Affiliate" means any Person that for purposes of Title IV of
ERISA is a member of the controlled group of the Borrower or any Subsidiary of
the Borrower, or is under common control with the Borrower or any Subsidiary of
the Borrower, within the meaning of Section 414(c) of the Code.
"ERISA Event" means (a) a reportable event, within the meaning of
Section 4043 of ERISA, unless the 30-day notice requirement with respect
thereto has been waived by the PBGC, (b) the issuance by the administrator of
any Plan of a notice of intent to terminate such Plan in a distress situation,
pursuant to Section 4041(a)(2) and 4041(c) of ERISA (including any such notice
with respect to a plan amendment referred to in Section 4041(e) of ERISA), (c)
the cessation of operations at a facility in the circumstances described in
Section 4062(e) of ERISA, (d) the withdrawal by the Borrower, any Subsidiary of
the Borrower, or an ERISA Affiliate from a Multiple Employer Plan during a Plan
year for which it was a substantial employer, as defined in Section 4001(a)(2)
of ERISA, (e) the failure by the Borrower, any Subsidiary of the Borrower or
either Parent, or any ERISA Affiliate to make a payment to a Plan required
under Section 302 of ERISA, (f) the adoption of an amendment to a Plan
requiring the provision of security to such Plan, pursuant to Section 307 of
ERISA, or (g) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or condition
that constitutes grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, a Plan.
"Exchange Act" means the Securities and Exchange Act of 1934, as
amended, and the rulings and regulations issued thereunder, as from time to
time in effect.
"Event of Default" means any of the events specified in Section 8.01
hereof, provided there has been satisfied any requirement in connection
therewith for the giving of notice, lapse of time, or happening of any further
condition.
"Facility" means the revolving credit facility made hereunder, which
may convert to a Term Loan.
"FCC" means the Federal Communications Commission and any successor
thereto.
"FCC License" means any community antenna relay service, broadcast
auxiliary license, earth station registration, business radio, microwave or
special safety radio service license issued by the FCC pursuant to the
Communications Act of 1934, as amended, and any other FCC license
9
<PAGE> 16
from time to time necessary or advisable for the operation of the Parent's, the
Borrower's or any of their Subsidiaries' business.
"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of Dallas, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for such date on
such transactions received by Administrative Agent from three federal funds
brokers of recognized standing selected by it.
"Fee Letters" means that certain letter agreement addressed to the
Borrower and acknowledged by the Borrower, and describing certain fees payable
to the Administrative Agent in connection with this Agreement and the Facility,
and such other fee letter agreements as may be executed from time to time among
the parties hereto, as each may be amended, modified, substituted or replaced
by the parties thereto.
"Fixed Charges" means, for the Parent, the Borrower, and the
Restricted Subsidiaries, for the most recently completed four fiscal quarters,
the sum of (a) cash Total Interest Expense paid or accrued, plus (b) scheduled
repayments of principal of Total Debt (whether by installment or as a result of
a scheduled reduction in a revolving commitment, or otherwise), and accrued
Earn-Out Liabilities(in accordance with GAAP) plus (c) cash taxes paid or
accrued, plus (d) Distributions, plus (e) Capital Expenditures.
"Fixed Charges Coverage Ratio" means the ratio of Operating Cash Flow
for the most recently completed four fiscal quarters, to Fixed Charges.
"Funded Debt" means, without duplication, with respect to any Person,
all Debt of such Person, determined on a consolidated basis and measured in
accordance with GAAP that is either (a) Debt for Borrowed Money, (b) Debt
having a final maturity (or extendable at the option of the obligor for a
period ending) more than one year after the date of creation thereof,
notwithstanding the fact that payments are required to be made less than one
year after such date, (c) Capital Lease obligations (without duplication), (d)
reimbursement obligations relating to letters of credit, without duplication,
(e) Contingent Liabilities relating to any of the foregoing (without
duplication), (f) Withdrawal Liability, (g) Debt, if any, associated with
Interest Hedge Agreements, (h) payments due under Non-Compete Agreements, plus
(i) payments due for the deferred purchase price of property and services (but
excluding trade payables that are less than 90 days old or by that agreement
among the parties are under twelve months old and any thereof that are being
contested in good faith).
"GAAP" means generally accepted accounting principles applied on a
consistent basis. Application on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period, except for new
developments or statements promulgated by the Financial Accounting Standards
Board.
10
<PAGE> 17
"Guarantors" means the Parent and each Restricted Subsidiary and each
other Person from time to time guaranteeing payment of the Obligations to the
Administrative Agent and Lenders.
"Guaranty" of a Person means any agreement by which such Person
assumes, guarantees, endorses, contingently agrees to purchase or provide funds
for the payment of, or otherwise becomes liable upon, the obligation of any
other Person, or agrees to maintain the net worth or working capital or other
financial condition of any other Person, or otherwise assures any creditor or
such other Person against loss, including, without limitation, any agreement
which assures any creditor or such other Person payment or performance of any
obligation, or any take-or-pay contract and shall include, without limitation,
the contingent liability of such Person in connection with any application for
a letter of credit (without duplication of any amount already included in its
Debt).
"Hazardous Materials" means all materials subject to any Environmental
Law, including, without limitation materials, listed in 49 C.F.R. ss. 172.101,
Hazardous Substances, explosive or radioactive materials, hazardous or toxic
wastes or substances, petroleum or petroleum distillates, asbestos or material
containing asbestos.
"Hazardous Substances" means hazardous waste as defined in the Clean
Water Act, 33 U.S.C. ss. 1251 et seq., the Comprehensive Environmental Response
Compensation and Liability Act as amended by the Superfund Amendments and
Reauthorization Act, 42 U.S.C. ss. 9601 et seq., the Resource Conservation
Recovery Act, 42 U.S.C. ss. 6901 et seq., and the Toxic Substances Control Act,
15 U.S.C. ss. 2601 et seq.
"Highest Lawful Rate" means at the particular time in question the
maximum rate of interest which, under Applicable Law, Administrative Agent is
then permitted to charge on the Obligations. If the maximum rate of interest
which, under Applicable Law, such Lender is permitted to charge on the
Obligations shall change after the date hereof, the Highest Lawful Rate shall
be automatically increased or decreased, as the case may be, from time to time
as of the effective time of each change in the Highest Lawful Rate without
notice to the Borrower. For purposes of determining the Highest Lawful Rate
under Applicable Law, the applicable rate ceiling shall be (a) the indicated
rate ceiling described in and computed in accordance with the provisions of
Art. lH; or (b) either the annualized ceiling or quarterly ceiling computed
pursuant to .008 of Art. 1D; provided, however, that at any time the indicated
rate ceiling, the annualized ceiling or the quarterly ceiling, as applicable,
shall be less than 18% per annum or more than 24% per annum, the provisions of
Sections .009(a) and .009(b) of said Art. lD shall control for purposes of such
determination, as applicable.
"Indemnitees" has the meaning ascribed thereto in Section 6.09 hereof.
11
<PAGE> 18
"Indenture" means the Indenture dated as of October 1, 1997 between
World Access, Inc. and First Union National Bank, as Trustee, providing for the
Subordinated Notes, as amended, restated, supplemented or otherwise modified
from time to time.
"Initial Advance" means the initial Advance made in accordance with
the terms hereof, which shall only be after the Borrower has satisfied each of
the conditions set forth in Section 4.01 and Section 4.02 hereof (or any such
condition shall have been waived by each Lender).
"Insufficiency" means, with respect to any Plan, the amount, if any,
of its unfunded benefit liabilities within the meaning of Section 4001(a)(18)
of ERISA.
"Interest Coverage Ratio" means as of any date of determination, the
ratio of (a) Operating Cash Flow for the most recently completed four fiscal
quarters, to (b) Total Interest Expense for the most recently completed four
fiscal quarters.
"Interest Hedge Agreements" means any interest rate swap agreements,
interest cap agreements, interest rate collar agreements, or any similar
agreements or arrangements designed to hedge the risk of variable interest rate
volatility, or foreign currency hedge, exchange or similar agreements, on terms
and conditions reasonably acceptable to Administrative Agent (evidenced by
Administrative Agent's consent in writing), as such agreements or arrangements
may be modified, supplemented and in effect from time to time, and
notwithstanding the above, fixed rate Debt for Borrowed Money shall be deemed
an Interest Hedge Agreement.
"Interest Period" means, with respect to any LIBOR Advance, the period
beginning on the date an Advance is made or continued as or converted into a
LIBOR Advance and ending one, two, three or six months thereafter (as the
Borrower shall select) provided, however, that:
(a) the Borrower may not select any Interest Period that ends
after any principal repayment date unless, after giving effect to such
selection, the aggregate principal amount of LIBOR Advances having
Interest Periods that end on or prior to such principal repayment date
shall be at least equal to the principal amount of Advances due and
payable on and prior to such date;
(b) whenever the last day of any Interest Period would
otherwise occur on a day other than a Business Day, the last day of
such Interest Period shall be extended to occur on the next succeeding
Business Day, provided, however, that if such extension would cause
the last day of such Interest Period to occur in the next following
calendar month, the last day of such Interest Period shall occur on
the next preceding Business Day; and
(c) whenever the first day of any Interest Period occurs on a
day of an initial calendar month for which there is no numerically
corresponding day in the calendar month that succeeds such initial
calendar month by the number of months equal to the
12
<PAGE> 19
number of months in such Interest Period, such Interest Period shall
end on the last Business Day of such succeeding calendar month.
"Investment" means any acquisition of all or substantially all assets
of any Person, or any direct or indirect purchase or other acquisition of, or a
beneficial interest in, capital stock or other securities of any other Person,
or any direct or indirect loan, advance (other than advances to employees for
moving and travel expenses, entertainment expenses, drawing accounts and
similar expenditures in the ordinary course of business), or capital
contribution to or investment in any other Person, including without limitation
the incurrence or sufferance of Debt or accounts receivable of any other Person
that are not current assets or do not arise from sales to that other Person in
the ordinary course of business.
"Issuing Bank" means Bank Austria AG.
"Law" means any constitution, statute, law, ordinance, regulation,
rule, order, writ, injunction or decree of any Tribunal.
"Lenders" means the lenders listed on the signature pages of this
Agreement, and each Eligible Assignee which hereafter becomes a party to this
Agreement pursuant to Section 10.04 hereof, for so long as any such Person is
owed any portion of the Obligations or obligated to make any Advances.
"Lending Office" means, with respect to each Lender, its branch or
affiliate, (a) initially, the office of such Lender, branch or affiliate
identified as such on the signature pages hereof, and (b) subsequently, such
other office of such Lender, branch or affiliate as such Lender may designate
to the Borrower and Administrative Agent as the office from which the Advances
of such Lender will be made and maintained and for the account of which all
payments of principal and interest on the Advances and the Commitment Fees will
thereafter be made. Lenders may have more than one Lending Office for the
purpose of making Base Rate Advances and LIBOR Advances.
"Letter of Credit" means collectively those direct pay or standby
commercial letters of credit issued pursuant to Article III hereof , the Bond
Letter of Credit, and any other letters of credit issued by Bank Austria AG for
the account of the Parent, the Borrowers, or the Restricted Subsidiaries.
"Letter of Credit Commitment" means, on any date of determination, an
amount equal to the lesser of (a) $25,000,000 and (b) the Available Commitment
minus all outstanding Advances and Letters of Credit.
"LIBOR Advance" means an Advance bearing interest at the LIBOR Rate.
"LIBOR Rate" means a simple per annum interest rate equal to the
lesser of (a) the Highest Lawful Rate, and (b) the sum of the LIBOR Rate Basis
plus the Applicable Margin. The
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LIBOR Rate shall, with respect to LIBOR Advances subject to reserve or deposit
requirements, be subject to premiums assessed therefor by each Lender, which
are payable directly to each Lender. Once determined, the LIBOR Rate shall
remain unchanged during the applicable Interest Period.
"LIBOR Rate Basis" means, for any LIBOR Advance for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as
the London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period. If for any
reason such rate is not available, the term "LIBOR Rate Basis" shall mean, for
any LIBOR Advance for any Interest Period therefor, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen
LIBO Page as the London interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
Page, the applicable rate shall be the arithmetic mean of all such rates.
"License" means, as to any Person, any license, permit, certificate of
need, authorization, certification, accreditation, franchise, approval, or
grant of rights by any Tribunal or third person necessary or appropriate for
such Person to own, maintain, or operate its business or Property, including
FCC Licenses.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien, or charge of any kind, including without limitation any agreement to give
or not to give any of the foregoing, any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of or
agreement to give any financing statement or other similar form of public
notice under the Laws of any jurisdiction (except for the filing of a financing
statement or notice in connection with an operating lease).
"Litigation" means any proceeding, claim, lawsuit, arbitration, and/or
investigation conducted or threatened by or before any Tribunal, including
without limitation proceedings, claims, lawsuits, and/or investigations under
or pursuant to any environmental, occupational, safety and health, antitrust,
unfair competition, securities, Tax, or other Law, or under or pursuant to any
contract, agreement, or other instrument.
"Loan Papers" means this Agreement; the Notes; Interest Hedge
Agreements executed among any Obligor and any Lender or Bank Affiliate; all
Pledge Agreements; all Letters of Credit; all Guaranties executed by any Person
guaranteeing payment of any portion of the Obligations; all Fee Letters; each
Assignment and Acceptance; all promissory notes evidencing any portion of the
Obligations; assignments, security agreements and pledge agreements granting
any interest in any of the Collateral; stock certificates and partnership
agreements constituting part of the Collateral; mortgages, deeds of trust,
financing statements, collateral assignments, and other documents and
instruments granting an interest in any portion of the Collateral, or related
to the
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<PAGE> 21
perfection and/or the transfer thereof, all collateral assignments or other
agreements granting a Lien on any intercompany note, including without
limitation, all other documents, instruments, agreements or certificates
executed or delivered by the Borrower or any other Obligor, as security for the
Borrower's obligations hereunder, in connection with the loans to the Borrower
or otherwise; as each such document shall, with the consent of the Lenders
pursuant to the terms hereof, be amended, revised, renewed, extended,
substituted or replaced from time to time.
"Majority Lenders" means any combination of Lenders having at least
66.67% of the aggregate amount of Advances under the Facility; provided,
however, that if no Advances are outstanding under this Agreement, such term
means any combination of Lenders having a Specified Percentage equal to at
least 66.67% of the Facility.
"Management Fees" means all fees from time to time directly or
indirectly (including any payments made pursuant to guarantees of such fees)
paid or payable by the Borrower, the Parent, or any of the Restricted
Subsidiaries to any Person for management services for managing any portion of
the Borrower's, the Parent's or the Restricted Subsidiaries' business.
"Material Adverse Change" means any circumstance or event that (a) can
reasonably be expected to cause a Default or an Event of Default, (b) otherwise
can reasonably be expected to (i) be material and adverse to the continued
operation of the Parent, the Borrower and the Restricted Subsidiaries taken as
a whole, or (ii) be material and adverse to the financial condition, business
operations, prospects or Properties of the Parent, the Borrower and the
Restricted Subsidiaries taken as a whole, or (c) in any manner whatsoever does
or can reasonably be expected to materially and adversely affect the validity
or enforceability of any of the Loan Papers.
"Maturity Date" means December 30, 2001, or such earlier date all of
the Obligations become due and payable (whether by acceleration, prepayment in
full, scheduled reduction or otherwise).
"Maximum Amount" means the maximum amount of interest which, under
Applicable Law, Administrative Agent or any Lender is permitted to charge on
the Obligations.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Borrower, any Subsidiary of the Borrower or
any ERISA Affiliate is making or accruing an obligation to make contributions,
or has within any of the preceding five plan years made or accrued an
obligation to make contributions, such plan being maintained pursuant to one or
more collective bargaining agreements.
"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the
Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate and at least
one Person other than the Borrower, any Subsidiary of the Borrower or any ERISA
Affiliate, or (b) was so maintained and in respect of which the
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<PAGE> 22
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate could have
liability under Section 4064 or 4069 of ERISA in the event such plan has been
or were to be terminated.
"Net Proceeds" means the gross proceeds received by the Borrower, the
Parent or any Restricted Subsidiary in connection with or as a result of any
Asset Sale, minus (so long as each of the following are estimated in good faith
by the Vice President - Chief Financial Officer of the Borrower, the Parent or
such Restricted Subsidiary and certified to the Lenders in reasonable detail by
an Authorized Officer) (a) amounts paid or reserved in good faith, if any, for
taxes payable with respect to such Asset Sale in an amount equal to the tax
liability of the Borrower, the Parent, or any Restricted Subsidiary in respect
of such sale (taking into account all other tax benefits of each of the
parties) and (b) reasonable and customary transaction costs payable by the
Borrower, the Parent or any Restricted Subsidiary related to such sale.
"Non-Compete Agreement" means any agreement or related set of
agreements under which the Borrower or any Restricted Subsidiary agrees to pay
money in one or more installments to one or more Persons in exchange for
agreements from such Persons to refrain from competing with the Borrower or
such Restricted Subsidiary in a certain line of business in a specific
geographical area for a certain time period, or pursuant to which any Person
agrees to limit or restrict its right to engage, directly or indirectly, in the
same or similar industry for any period of time for any geographic location.
"Notes" means the promissory notes of the Borrower evidencing the
Advances and obligations owing hereunder to each Lender, in substantially the
form of Exhibit A hereto, each payable to the order of each Lender, as each
such note may be amended, extended, restated, renewed, substituted or replaced
from time to time.
"Obligations" means all present and future obligations, indebtedness
and liabilities, and all renewals and extensions of all or any part thereof, of
the Borrower and each other Obligor to Lenders, the Issuing Bank, and
Administrative Agent arising from, by virtue of, or pursuant to this Agreement,
any of the other Loan Papers and any and all renewals and extensions thereof or
any part thereof, or future amendments thereto, all interest accruing on all or
any part thereof and reasonable attorneys' fees incurred by Lenders, the
Issuing Bank, and Administrative Agent for the administration, execution of
waivers, amendments and consents, and in connection with any restructuring,
workouts or in the enforcement or the collection of all or any part thereof,
whether such obligations, indebtedness and liabilities are direct, indirect,
fixed, contingent, joint, several or joint and several. Without limiting the
generality of the foregoing, "Obligations" includes all amounts which would be
owed by the Borrower, each other Obligor and any other Person (other than
Administrative Agent or Lenders) to Administrative Agent or Lenders under any
Loan Paper, but for the fact that they are unenforceable or not allowable due
to the existence of a bankruptcy, reorganization or similar proceeding
involving the Borrower, any other Obligor or any other Person (including all
such amounts which would become due or would be secured but for the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding of the Borrower, any other Obligor or any
other Person under any Debtor Relief Law).
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"Obligor" means the Borrower, the Parent, the Restricted Subsidiaries
and any other Person liable to the Lenders under the Loan Papers.
"Operating Cash Flow" means, for the Parent, Borrower and the
Restricted Subsidiaries, for any period, determined in accordance with GAAP,
the consolidated net income (loss) (including, without limitation, 100% of the
net income (loss) of NACT Telecommunications, Inc.) for such period taken as a
single accounting period, excluding extraordinary gains and losses, plus the
sum of the following amounts for such period to the extent included in the
determination of such consolidated net income: (a) depreciation expense, (b)
amortization expense and other non-cash charges reducing income, (c) Total
Interest Expense, (d) total cash income tax expense plus (e) extraordinary
losses minus (f) extraordinary gains and (g) non cash income; provided, the
calculation is made after giving effect to acquisitions and dispositions of
assets of the Borrower or any Restricted Subsidiary during such period as if
such transactions had occurred on the first day of such period.
"Operating Leases" means operating leases, as defined in accordance
with GAAP.
"Parent" means collectively, World Access, Inc. and WA Telecom
Products Co., Inc.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor agency or entity performing substantially the same functions.
"Permitted Acquisitions" means cash acquisitions made by the Borrower
or any Restricted Subsidiary of Capital Stock or assets of Persons engaged in
telecommunications equipment manufacturing, long distance and long-haul carrier
and related businesses not in excess of $75,000,000 in the aggregate (excluding
the acquisition of Telco Systems, Inc.), so long as in each case (a) there
exists no Default or Event of Default both before and after giving effect to
any such acquisition, (b) such acquired entity becomes a Restricted Subsidiary
and executes a Guaranty of the Obligations, or such acquired assets are
acquired by a Restricted Subsidiary, (c)(i) in the case of an acquisition of
Capital Stock, 100% of the Capital Stock, and (ii) in all cases, all of the
assets of the Person being acquired, are pledged to the Lenders on a first Lien
basis, (d) no more than $50,000,000 of the Unused Commitment is used to make
such acquisition, and (e) the Borrower provides the Administrative Agent and
each Lender with information demonstrating pro forma compliance with the terms
of this Agreement through the Maturity Date, after giving effect to such
Permitted Acquisition, including, without limitation, each provision of Section
7.01 hereof.
"Permitted Dispositions" means provided that no Default or Event of
Default exists or would result therefrom (i) the sales of receivables by the
Borrower for the purpose of factoring not to exceed at any one time
$16,000,000, (ii) sales of the $6,430,250 receivable payable by Grupo Iusacell,
S.A. de C.B., due January 1, 1999, (iii) the sale by the Borrower of certain
real property located in Provo, Utah, (iv) the sale by the Borrower of the RTP
operations in Dallas, Texas, (v) the sale or issuance of the Capital Stock of
any Subsidiary of the Borrower to the
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<PAGE> 24
Borrower or to any other Subsidiary of the Borrower, and (vi) sales in the
ordinary course of business, including, without limitation, dispositions of
obsolete or useless assets.
"Permitted Liens" means
(a) those imposed by the Loan Papers;
(b) Liens in connection with workers' compensation,
unemployment insurance or other social security obligations (which phrase shall
not be construed to refer to ERISA);
(c) deposits, pledges or liens to secure the performance of
bids, tenders, contracts (other than contracts for the payment of borrowed
money), leases, statutory obligations, surety, customs, appeal, performance and
payment bonds and other obligations of like nature arising in the ordinary
course of business;
(d) mechanics', workers', carriers, warehousemen's,
materialmen's, landlords' or other like Liens arising in the ordinary course of
business with respect to obligations which are not due or which are being
contested in good faith and by appropriate proceedings diligently conducted;
(e) Liens for taxes, assessments, fees or governmental
charges or levies not delinquent or which are being contested in good faith and
by appropriate proceedings diligently conducted, and in respect of which
adequate reserves shall have been established in accordance with GAAP on the
books of the Borrower or any Restricted Subsidiary;
(f) Liens or attachments, judgments or awards against the
Borrower with respect to which an appeal or proceeding for review shall be
pending or a stay of execution shall have been obtained, and which are
otherwise being contested in good faith and by appropriate proceedings
diligently conducted, and in respect of which adequate reserves shall have been
established in accordance with GAAP on the books of the Borrower or any
Restricted Subsidiary; and
(g) Liens in existence on the Closing Date and described on
Schedule 5.08 hereto; and
(h) easements, rights of way, restrictions, leases of
Property to others, easements for installations of public utilities, title
imperfections and restrictions, zoning ordinances and other similar
encumbrances affecting Property which in the aggregate do not materially
adversely affect the value of such Property or materially impair its use for
the operation of the business of the Borrower; and
(i) Lien on Provo Utah property securing Debt For Borrowed
Money in an aggregate principal amount not exceeding $5,000,000.
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<PAGE> 25
"Person" means an individual, partnership, joint venture, corporation,
trust, Tribunal, unincorporated organization and government, or any department,
agency or political subdivision thereof.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Pledge Agreement" means each Security Agreement and each Pledge and
Security Agreement, whereby the Pledged Interests are pledged to Administrative
Agent and a security interest is granted in the assets of the Borrower and
Restricted Subsidiaries to secure the Obligations, each substantially in the
form of Exhibit C hereto, as each such agreement may be amended, modified,
extended, renewed, restated, substituted or replaced from time to time.
"Pledged Interests" means (a) a first perfected security interest in
100% of the Capital Stock of the Borrower and WA Telecom Products Co., Inc.;
(b) a first perfected security interest in 100% of the Capital Stock of each
Restricted Subsidiary, if any, now existing or hereafter formed or acquired;
and (c) a first perfected security interest in 65% of the Capital Stock of each
Unrestricted Subsidiary, if any, now existing or hereafter formed or acquired.
"Prohibited Transaction" has the meaning specified therefor in Section
4975 of the Code or Section 406 of ERISA.
"Property" means all types of real, personal, tangible, intangible or
mixed property, whether owned in fee simple or leased.
"Quarterly Date" means the last Business Day of each March, June,
September and December during the term of this Agreement, commencing on
December 31, 1998.
"Ratable" means, as to any Lender, in accordance with its Specified
Percentage.
"Refinancing Advance" means an Advance that is used to pay the
principal amount of an existing Advance (or any performance thereof) at the end
of its Interest Period and which, after giving effect to such application, does
not result in an increase in the aggregate amount of outstanding Advances.
"Regulatory Change" means any change after the date hereof in federal,
state or foreign Laws (including, the introduction of any new Law) or the
adoption or making after such date of any interpretations, directives or
requests of or under any federal, state or foreign Laws (whether or not having
the force of Law) by any Tribunal charged with the interpretation or
administration thereof, applying to a class of financial institutions that
includes any Lender, excluding, however, any such change which results in an
adjustment of the LIBOR Reserve Percentage and the effect of which is reflected
in a change in the LIBOR Rate as provided in the definition of such term.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events
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as to which the PBGC by regulation waived the requirement under Section 4043(a)
of ERISA that it be notified within 30 days of the occurrence of such event,
provided that a failure to meet the minimum funding standard under Section 412
of the Code and under Section 302 of ERISA shall be a Reportable Event
regardless of the issuance of any such waivers in accordance with either
Section 4043(a) of ERISA or Section 412(d) of the Code.
"Restricted Payments" means (a) any direct or indirect distribution,
Distribution or other payment on account of any general or limited partnership
interest in (or the setting aside of funds for, or the establishment of a
sinking fund or analogous fund with respect to), or shares of Capital Stock or
other securities of, the Borrower, the Parent or any Restricted Subsidiary; (b)
any payments of principal of, or interest on, or fees related to, or any other
payments and prepayments with respect to, or the establishment of, or any
payment to, any sinking fund or analogous fund for the purpose of making any
such payments on, Funded Debt of the Borrower, the Parent or any Restricted
Subsidiary (excluding the Obligations); (c) any Management Fee or any interest
thereon, payable by the Borrower, the Parent, or any Restricted Subsidiary to
any Affiliate of the Borrower or Parent or to any other Person; (d) any
administration fee or any administration, consulting or other similar fees, or
any interest thereon, payable by the Borrower, the Parent or any Restricted
Subsidiary to any Affiliate of Parent or the Borrower or to any other Person,
but not including fees for investment banking or accounting services or other
similar kinds of consulting fees in the ordinary course of business; (e) any
payments of any amounts owing under any Non-Compete Agreements; and (f) fees,
loans or other payments or advances by the Borrower, the Parent or any
Restricted Subsidiary to any Unrestricted Subsidiary or any other Affiliate of
the Parent or the Borrower.
"Restricted Subsidiaries" means all of the direct or indirect
Subsidiaries of the Parent and the Borrower and of their Restricted
Subsidiaries, including without limitation, those described on Schedule 1.01
attached hereto; and "Restricted Subsidiary" means any one of them, as
applicable in the context.
"Rights" means rights, remedies, powers, and privileges.
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, other than a Multiple Employer Plan, that is
maintained for employees of the Borrower or any ERISA Affiliate.
"Solvent" means, with respect to any Person, that on such date (a) the
fair value of the Property of such Person is greater than the total amount of
liabilities, including, without limitation, Contingent Liabilities of such
Person, (b) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature, and (d) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
Property would constitute an unreasonably small capital.
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"Special Counsel" means the law firm of Donohoe, Jameson & Carroll,
P.C., Dallas, Texas, special counsel to Administrative Agent, or such other
counsel selected by Administrative Agent from time to time.
"Specified Percentage" means, as to any Lender, the percentage
indicated beside its name on the signature pages hereof, or as adjusted or
specified in any Assignment and Acceptance, or amendment to this Agreement.
"Subordinated Debt" means subordinated indebtedness of the Borrower
incurred in accordance with the terms of Section 7.02(f)(ii) hereof.
"Subordinated Notes" means the $115,000,000 4.5% Convertible
Subordinated Notes due 2002.
"Subsidiary" of any Person means any corporation, partnership, limited
liability company, joint venture, trust or estate of which (or in which) more
than 50% of:
(a) the outstanding Capital Stock having voting power to
elect a majority of the Board of Directors of such corporation (or
other Persons performing similar functions of such entity, and
irrespective of whether at the time Capital Stock of any other class
or classes of such corporation shall or might have voting power upon
the occurrence of any contingency),
(b) the interest in the capital or profits of such
partnership or joint venture, or
(c) the beneficial interest of such trust or estate,
is at the time directly or indirectly owned by (i) such Person, (ii)
such Person and one or more of its Subsidiaries or (iii) one or more
of such Person's Subsidiaries.
"Taxes" means all taxes, assessments, imposts, fees or other charges
at any time imposed by any Laws or Tribunal.
"Term Loan" means that certain Term Loan made to the Borrower on the
Conversion Date in accordance with Sections 2.01 and 2.16(b) hereof.
"Total Debt" means, without duplication, with respect to the Parent,
the Borrower and the Restricted Subsidiaries, Funded Debt (including, without
limitation, recourse factoring and third- party financing arrangements and any
overdue interest on such indebtedness, but excluding any accrued but not
overdue interest on any indebtedness), calculated on a consolidated basis in
accordance with GAAP.
"Total Interest Expense" means as of any date of determination for any
period of calculation, the Parent's, Borrower's and the Restricted
Subsidiaries' consolidated interest
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<PAGE> 28
expense included in a consolidated income statement (after deduction of
interest income) on Total Debt for such period calculated on a consolidated
basis in accordance with GAAP, including, without limitation or duplication
(or, to the extent not so included, with the addition of), for the Parent, the
Borrower and the Restricted Subsidiaries: (a) the amortization of Debt
discounts; (b) any commitment fees or agency fees related to any Funded Debt,
but specifically excluding any one-time facility and/or arrangement fees
associated with the Facility; (c) any fees or expenses with respect to letters
of credit, bankers' acceptances or similar facilities; (d) fees and expenses
with respect to interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements, other than fees or charges related to
the acquisition or termination thereof which are not allocable to interest
expense in accordance with GAAP; (e) preferred stock Distributions for the
Borrower and the Restricted Subsidiaries declared and payable in cash; and (f)
interest capitalized in accordance with GAAP.
"Total Leverage Ratio" means as of any date of determination, the
ratio of (a) Total Debt of the Parent, the Borrower and the Restricted
Subsidiaries on such date of determination to (b) Annualized Operating Cash
Flow, all calculated on a consolidated basis in accordance with GAAP
consistently applied.
"Tribunal" means any state, commonwealth, federal, foreign,
territorial or other court or government body, subdivision, agency, department,
commission, board, bureau or instrumentality of a governmental body.
"Type" refers to the distinction between Advances bearing interest at
the Base Rate and LIBOR Rate.
"UCC" means the Uniform Commercial Code as adopted in the State of
Texas.
"Unavailable Commitment" means (a) prior to June 30, 1999, $25,000,000
(as such amount may be reduced from time to time as a result of the
reallocation of any portion of the Unavailable Commitment to the Available
Commitment in accordance with the terms of Section 2.17 hereof), and (b) on and
after June 30, 1999, $0.00.
"Unrestricted Subsidiary" means World Access, Ltd, World Access de
Mexico, S.A., WAXS Limitada, Telco Systems Asia/Pacific Ltd., Telco Indemnity
Corp., Telco Systems, Ltd., TSI Exports Ltd., Cherry Communications U.K.
Limited, and World Access U.K., Ltd., and, with the prior written consent of
the Majority Lenders, any other Subsidiary of the Parent designated as an
"Unrestricted Subsidiary" by the Borrower from time to time.
"Unused Commitment" means, on any date of determination, the Available
Commitment as in effect on such date, minus all outstanding Advances on such
date.
"Withdrawal Liability" has the meaning given such term under Part I of
Subtitle E of Title IV of ERISA.
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"Year 2000 Compliant" means, with respect to a Person, that all
computer hardware and software that are material to the business and operations
of such Person will on a timely basis be able to perform properly
date-sensitive functions for all dates before and after January 1, 2000,
including functions with respect to any leap year.
1.02. Accounting and Other Terms. All accounting terms used in this
Agreement which are not otherwise defined herein shall be construed in
accordance with GAAP consistently applied on a consolidated basis for Borrower
and the Restricted Subsidiaries, unless otherwise expressly stated herein.
References herein to one gender shall be deemed to include all other genders.
Except where the context otherwise requires, all references to time are deemed
to be Central Standard time.
ARTICLE II. AMOUNTS AND TERMS OF ADVANCES
2.01.The Facility. Each Lender severally agrees, on the terms and
subject to the conditions hereinafter set forth, from the Closing Date until
the Conversion Date, to make Advances under the Available Commitment to the
Borrower on any Business Day during the period from the Closing Date of this
Agreement until the Conversion Date, in an aggregate principal amount not to
exceed at any time outstanding such Lender's Specified Percentage of the
Available Commitment. Subject to the terms and conditions of this Agreement,
until the Conversion Date, the Borrower may borrow, repay and reborrow the
Advances under the Available Commitment. The Borrower shall repay all
outstanding Advances on the Conversion Date, unless on the Conversion Date, the
Borrower elects to convert to a Term Loan provided that the conditions set
forth in Section 2.16(b) are complied with, at which point the Borrower may not
borrow, repay and reborrow the Advances under the Available Commitment, all
Advances under the Available Commitment being Refinancing Advances on and after
the Conversion Date. The aggregate amount of all outstanding Advances under the
Term Loan shall be due and payable on the Maturity Date.
2.02. Making Advances.
(a) Each Borrowing of Advances shall be made upon the written
notice of the Borrower, received by Administrative Agent not later than (i)
12:00 noon three Business Days prior to the proposed date of the Borrowing, in
the case of LIBOR Advances, and (ii) not later than 10:00 a.m. on the date of
such Borrowing, in the case of Base Rate Advances. Each such notice of a
Borrowing (a "Borrowing Notice") shall be by telecopy, promptly confirmed by
letter, in substantially the form of Exhibit F hereto specifying therein:
(i) the date of such proposed Borrowing, which shall
be a Business Day;
(ii) the amount of such proposed Borrowing which, (A)
prior to the Conversion Date, shall not when aggregated together with
all other outstanding Advances exceed the Available Commitment, and
(B) shall, in the case of a Borrowing of LIBOR Advances, be in an
amount of not less than $1,000,000 or an integral multiple of $500,000
in excess
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thereof and, in the case of a Borrowing of Base Rate Advances, be in
an amount of not less than $500,000 or an integral multiple of
$100,000 in excess thereof;
(iii) the Type of Advances of which the Borrowing is to be
comprised; and
(iv) if the Borrowing is to be comprised of LIBOR
Advances, the duration of the initial Interest Period applicable to
such Advances.
If the Borrowing Notice fails to specify the duration of the initial
Interest Period for any Borrowing comprised of LIBOR Advances, such Interest
Period shall be one month. Each Lender shall, before 1:00 p.m. on the date of
each Advance prior to the Conversion Date (other than a Refinancing Advance),
make available to
Administrative Agent
NationsBank Plaza
901 Main Street
14th Floor
Dallas, Texas 75202
such Lender's Specified Percentage of the aggregate Advances, to be made on
that day in immediately available funds.
(b) Unless any applicable condition specified in Article IV hereof has
not been satisfied, Administrative Agent will make the funds on Advances under
the Facility promptly available to the Borrower (other than with respect to a
Refinancing Advance) at such account as shall have been specified by the
Borrower.
(c) After giving effect to any Borrowing, (i) there shall not be more
than ten different Interest Periods in the aggregate in effect under the
Facility and (ii) if prior to the Conversion Date, the aggregate principal of
outstanding Advances shall not exceed the Available Commitment.
(d) No Interest Period for a Borrowing under the Facility shall extend
beyond the Conversion Date or the Maturity Date.
(e) Unless a Lender shall have notified Administrative Agent prior to
the date of any Advance that it will not make available its Specified
Percentage of any Advance, Administrative Agent may assume that such Lender has
made the appropriate amount available in accordance with Section 2.02(a), and
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower a corresponding amount. If and to the extent any Lender shall not
have made such amount available to Administrative Agent, such Lender and the
Borrower severally agree to repay to Administrative Agent immediately on demand
such corresponding amount together with interest thereon, from the date such
amount is made available to the Borrower until
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<PAGE> 31
the date such amount is repaid to Administrative Agent, at (i) in the case of
the Borrower, the Base Rate, and (ii) in the case of such Lender, the Federal
Funds Rate.
(f) The failure by any Lender to make available its Specified
Percentage of any Advance hereunder shall not relieve any other Lender of its
obligation, if any, to make available its Specified Percentage of any Advance.
In no event, however, shall any Lender be responsible for the failure of any
other Lender to make available any portion of any Advance.
(g) The Borrower shall indemnify each Lender against any Consequential
Loss incurred by each Lender as a result of (i) any failure by the Borrower to
fulfill, on or before the date specified for the Advance, the conditions to the
Advance set forth herein or (ii) the Borrower's requesting that an Advance not
be made on the date specified in the Borrowing Notice.
2.03. Evidence of Indebtedness .
(a) The obligations of the Borrower with respect to all Advances made
by each Lender shall be evidenced by a Note and in the amount of such Lender's
Specified Percentage of the Available Commitment (as the same may be modified
pursuant to Section 10.04 hereof).
(b) Absent manifest error, Administrative Agent's and each Lender's
records shall be conclusive as to amounts owed Administrative Agent and such
Lender under the Notes and this Agreement.
2.04. Reduction of Available Commitments .
(a) Voluntary Commitment Reduction. The Borrower shall have the right
from time to time upon notice by the Borrower to the Administrative Agent not
later than 1:00 p.m., three Business Days in advance, to reduce prior to the
Conversion Date, the Available Commitment, in whole or in part; provided,
however, that the Borrower shall pay the accrued commitment fee on the amount
of each such reduction, if any, and any partial reduction shall be in an
aggregate amount which is not less than $1,000,000 and an integral multiple of
$500,000. Such notice shall specify the amount of reduction and the proposed
date of such reduction.
(b) Mandatory Commitment Reductions.
(i) Scheduled Reductions in the Commitment. Unless the
Borrower elects to convert to a Term Loan in accordance with Section
2.16(b) hereof, the Available Commitment shall be reduced to zero on
the Conversion Date.
(ii) Asset Sales. On the date of any Asset Sale by any of
the Borrowers (other than Asset Sales, the proceeds of which are
reinvested within 180 days after any such Asset Sale by the Borrower
in like or similar assets to those which were disposed of)(this
provision not permitting such Asset Sales), the Available Commitment
shall be
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<PAGE> 32
automatically and permanently reduced by an amount equal to 100% of
the Net Proceeds from such Asset Sales. On such date, the Borrower
shall deliver to Administrative Agent a certificate of an Authorized
Officer certifying as to the amount of (including the calculation of)
the reduction of the Available Commitment, and, with respect to the
Asset Sale giving rise thereto, the gross proceeds thereof and the
costs and expenses payable as a result thereof which were deducted in
determining the amount of Net Proceeds.
(iii) Debt Issuance. On the date of any issuance of
public or private Funded Debt by the Borrower (this provision not
permitting such Debt issuance) other than Debt For Borrowed Money
permitted by Section 7.02 hereof, the Available Commitment shall be
automatically and permanently reduced by an amount equal to 100% of
the net proceeds from the issuance of such Debt. On such date, the
Borrower shall deliver to the Administrative Agent a certificate of an
Authorized Officer certifying as to the amount of (including the
calculation of) such reduction in the Available Commitment, and, with
respect to the Debt issuance giving rise thereto, the gross proceeds
thereof and the costs and expenses payable as a result thereof which
were deducted in determining the amount of net proceeds of such Debt
issuance.
(iv) Change of Control. If a Change of Control occurs,
the Available Commitment shall be automatically and permanently
reduced to zero.
(v) Equity Issuances. On the date of any issuance of
equity by any of the Borrowers or the Parent (other than (i) the
issuance of common stock or options or rights to purchase common stock
of any of the Borrowers to employees and directors pursuant to stock
purchase plans or grant plans, or otherwise; and provided that no
Default or Event of Default exists or would result from the following
issuances of Capital Stock: (ii) issuances of Capital Stock pursuant
to Earn-Out Liabilities contained in agreements to which the Borrower,
the Parent or any Restricted Subsidiaries is currently a party; (iii)
issuances of common stock in the Parent; and (iv) issuances of
convertible preferred stock of the Parent on terms and provisions
acceptable to the Lenders), the Available Commitment shall be
automatically and permanently reduced by an amount equal to 100% of
the net proceeds from the issuance of such equity. On such date, the
Borrower shall deliver to Administrative Agent a certificate of an
Authorized Officer certifying as to the amount of (including the
calculation of) the reduction of the Available Commitment, and, with
respect to the equity issuance giving rise thereto, the gross proceeds
thereof and the costs and expenses payable as a result thereof which
were deducted in determining the amount of net proceeds of such equity
issuance.
(c) Commitment Reductions, Generally. To the extent the sum of the
aggregate outstanding Advances exceed the Available Commitment after any
reduction thereof, prior to or on the Conversion Date, the Borrower shall
immediately repay on the date of such reduction, any such excess amount and all
accrued interest thereon, together with any amounts constituting any
Consequential Loss. Once reduced or terminated pursuant to this Section 2.04,
the Available Commitment may not be increased or reinstated.
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<PAGE> 33
2.05 Prepayments.
(a) Optional Prepayments. The Borrower may, upon at least three Business
Days prior written notice to Administrative Agent stating the proposed date and
aggregate principal amount of the prepayment, prepay the outstanding principal
amount of any Advances in whole or in part, together with accrued interest to
the date of such prepayment on the principal amount prepaid without premium or
penalty other than any Consequential Loss; provided, however, that in the case
of a prepayment of a Base Rate Advance, the notice of prepayment may be given
by telephone by 11:00 a.m. on the date of prepayment. Each partial prepayment
shall, in the case of Base Rate Advances, be in an aggregate principal amount
of not less than $500,000 or a larger integral multiple of $100,000 in excess
thereof and, in the case of LIBOR Advances, be in an aggregate principal amount
of not less than $1,000,000 or a larger integral multiple of $500,000 in excess
thereof. If any notice of prepayment is given, the principal amount stated
therein, together with accrued interest on the amount prepaid and the amount,
if any, due under Section 2.11 and 2.13 hereof, shall be due and payable on
the date specified in such notice.
(b) Mandatory Prepayments.
(i) Asset Sales. (A) Prior to the Conversion Date, on the date of
any Asset Sale (other than Asset Sales, the proceeds of which are
reinvested within 180 days after the Asset Sale by the Borrower in like
or similar assets to those which were disposed of), the Borrower shall
repay the Obligations by an amount equal to 100% of the Net Proceeds
applied to Advances. Any amounts repaying the Term Loan after the
Conversion Date will be applied in the inverse order of maturity and may
not be reborrowed. On such date, the Borrower shall deliver to
Administrative Agent a certificate of an Authorized Officer certifying as
to the amount of (including the calculation of) such repayment and, with
respect to the Asset Sale giving rise thereto, the gross proceeds thereof
and the costs and expenses payable as a result thereof which were deducted
in determining the amount of Net Proceeds.
(ii) Debt Issuances. On the date of any issuance of public or
private Funded Debt by the Borrower (this provision not permitting such
Debt issuance) other than Debt For Borrowed Money permitted by Section
7.02 hereof, the Borrower shall repay the Obligations by an amount equal
to 100% of the net proceeds from such issuance, applied to outstanding
Advances. Any amounts repaying the Term Loan after the Conversion Date
will be applied in the inverse order of maturity and may not be
reborrowed. On such date, the Borrower shall deliver to Administrative
Agent a certificate of an Authorized Officer certifying as to the amount
of (including the calculation of) such repayment and, with respect to the
Debt issuance giving rise thereto, the gross proceeds thereof and the
costs and expenses payable as a result thereof which were deducted in
determining the amount of net proceeds of such Debt issuance.
(iii) Equity Issuances. (A) Prior to the Conversion Date, on the
date of any issuance of equity by Parent or the Borrower (other than (i)
the issuance of common
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<PAGE> 34
stock or options or rights to purchase common stock of the Parent to
employees and directors pursuant to stock purchase plans or grant
plans, or otherwise; and provided that no Default or Event of Default
exists or would result from the following issuances of Capital Stock:
(ii) issuances of Capital Stock pursuant to Earn-Out Liabilities
contained in agreements to which the Borrower, the Parent or any
Restricted Subsidiaries is currently a party; (iii) issuances of
shares of common stock of the Parent; and (iv) issuances of
convertible preferred stock of the Parent on terms and provisions
acceptable to the Lenders), the Borrower shall repay the Obligations
applied to outstanding Advances. Any amounts repaying the Term Loan
after the Conversion Date will be applied in the inverse order of
maturity and may not be reborrowed. On such date, the Borrower shall
deliver to Administrative Agent a certificate of an Authorized Officer
certifying as to the amount of (including the calculation of) such
repayment and, with respect to the equity issuance giving rise
thereto, the gross proceeds thereof and the costs and expenses payable
a s a result thereof which were deducted in determining the amount of
net proceeds of such equity issuance.
(v) Change of Control. If a Change of Control occurs, the
Borrower shall repay the Obligations in full.
(c) Prepayments, Generally. Any prepayment of Advances pursuant to
this Section 2.05 shall be applied first to Base Rate Advances, if any, then
outstanding under the Facility, second to LIBOR Advances for which the date of
prepayment is the last day of the applicable Interest Period, if any,
outstanding under the Facility and third to LIBOR Advances with the shortest
remaining Interest Periods outstanding under the Facility.
2.06. Mandatory Repayment. The Borrower agrees that all Advances
outstanding on the Conversion Date shall be paid in full on the Conversion
Date, unless the Borrower elects to convert on the Conversion Date to a Term
Loan in accordance with the provisions of Section 2.16(b), in which case, all
Obligations are due and payable in full on the Maturity Date.
2.07. Interest. Subject to Section 2.08 below, the Borrower shall pay
interest on the unpaid principal amount of each Advance from the date of such
Advance until such principal shall be paid in full, at the following rates, as
selected by the Borrower in accordance with the provisions of Section 2.02
hereof:
(a) Base Rate Advances. Base Rate Advances shall bear
interest at a rate per annum equal to the lesser of (i) the Base Rate
as in effect from time to time and (ii) the Highest Lawful Rate. If
the amount of interest payable in respect of any interest computation
period is reduced to the Highest Lawful Rate pursuant to the
immediately preceding sentence and the amount of interest payable in
respect of any subsequent interest computation period would be less
than the Maximum Amount, then the amount of interest payable in
respect of such subsequent interest computation period shall be
automatically increased to the Maximum Amount; provided that at no
time shall the aggregate amount by which interest paid has been
increased pursuant to this sentence
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exceed the aggregate amount by which interest has been reduced
pursuant to the immediately preceding sentence.
(b) LIBOR Advances. LIBOR Advances shall bear interest at the
rate per annum equal to the LIBOR Rate applicable to such Advance,
which at no time shall exceed the Highest Lawful Rate.
(c) Payment Dates. Accrued and unpaid interest on Base Rate
Advances shall be paid quarterly in arrears on each Quarterly Date and
on the appropriate maturity, repayment or prepayment date. Accrued and
unpaid interest on LIBOR Advances shall be paid on the last day of the
appropriate Interest Period and on the date of any prepayment or
repayment of such Advance; provided, however, that if any Interest
Period for a LIBOR Advance exceeds three months, interest shall also
be paid on each date occurring during the Interest Period which is the
three month anniversary date of the first day of the Interest Period.
2.08. Default Interest. During the continuation of any Event of
Default, the Borrower shall pay, on demand, interest (after as well as before
judgment to the extent permitted by Law) on the principal amount of all
Advances outstanding and on all other Obligations due and unpaid hereunder
equal to the lesser of the (a) the Highest Lawful Rate and (b) the Base Rate
(whether or not in effect) plus 2.00% per annum.
2.09. Continuation and Conversion Elections .
(a) The Borrower may upon irrevocable written notice to Administrative
Agent and subject to the terms of this Agreement:
(i) elect to convert, on any Business Day, all or any
portion of outstanding Base Rate Advances (in an aggregate amount not
less than $1,000,000 or a larger integral multiple of $500,000 in
excess thereof) into LIBOR Advances.
(ii) elect to convert at the end of any Interest Period
therefor, all or any portion of outstanding LIBOR Advances comprised
in the same Borrowing (in an aggregate amount not less than $500,000
or a larger integral multiple of $100,000 in excess thereof) into Base
Rate Advances; or
(iii) elect to continue, at the end of any Interest Period
therefor, any LIBOR Advances;
provided, however, that if the aggregate amount of outstanding LIBOR Advances
comprised in the same Borrowing shall have been reduced as a result of any
payment, prepayment or conversion of part thereof to an amount less than
$1,000,000, the LIBOR Advances comprised in such Borrowing shall automatically
convert into Base Rate Advances at the end of each respective Interest Period.
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<PAGE> 36
(b) The Borrower shall deliver a notice of conversion or continuation
(a "Notice of Conversion/Continuation"), in substantially the form of Exhibit E
hereto, to Administrative Agent not later than (i) 12:00 noon three Business
Days prior to the proposed date of conversion or continuation, if the Advances
or any portion thereof are to be converted into or continued as LIBOR Advances;
and (ii) not later than 10:00 a.m. on the proposed date of conversion or
continuation, if the Advances or any portion thereof are to be converted into
Base Rate Advances.
Each such Notice of Conversion/Continuation shall be by telecopy or
telephone, promptly confirmed in writing, specifying therein:
(i) the proposed date of conversion or continuation;
(ii) the aggregate amount of Advances to be converted or
continued;
(iii) the nature of the proposed conversion or
continuation; and
(iv) the duration of the applicable Interest Period.
(c) If, upon the expiration of any Interest Period applicable to LIBOR
Advances, the Borrower shall have failed to select a new Interest Period to be
applicable to such LIBOR Advances or if an Event of Default shall then have
occurred and be continuing, the Borrower shall be deemed to have elected to
convert such LIBOR Advances into Base Rate Advances effective as of the
expiration date of such current Interest Period.
(d) Upon receipt of a Notice of Conversion/Continuation,
Administrative Agent shall promptly notify each Lender thereof. All conversions
and continuations shall be made pro rata among Lenders based on their Specified
Percentage of the respective outstanding principal amounts of the Advances with
respect to which such notice was given held by each Lender.
(e) Notwithstanding any other provision contained in this Agreement,
after giving effect to any conversion or continuation of any Advances, there
shall not be outstanding Advances with more than ten different Interest Periods
in the aggregate under the Facility.
2.10. Fees.
(a) Subject to Section 10.09 hereof, the Borrower agrees to pay to
Administrative Agent, for the account of the Lenders in accordance with their
Specified Percentages, a commitment fee on the average daily amount of the
Unused Commitment, from the Closing Date through the Conversion Date, at the
rate of .50% per annum, payable quarterly in arrears on each Quarterly Date
occurring after the Closing Date, with the last such payment due and owing on
the Conversion Date.
(b) Subject to Section 10.09 hereof, the Borrower agrees to pay to
Administrative Agent for its own account as administrative lender and
underwriter, and to NationsBanc
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<PAGE> 37
Montgomery Securities, Inc., as arranger hereunder, such fees as agreed to in
writing among the Borrower and the Administrative Agent and NationsBanc
Montgomery Securities LLC, payable as set forth in that certain Fee Letter
executed among the Borrower, Administrative Agent and NationsBanc Montgomery
Securities LLC in accordance with the terms of the Fee Letter.
2.11. Funding Losses. If the Borrower makes any payment or prepayment
of principal with respect to any LIBOR Advance (including payments made after
any acceleration thereof) or converts any Advance from a LIBOR Advance on any
day other than the last day of an Interest Period applicable thereto, or if the
Borrower fails to prepay, borrow, convert or continue any LIBOR Advance after a
notice of prepayment, borrowing, conversion or continuation has been given (or
is deemed to have been given) to Administrative Agent, the Borrower shall pay
to each Lender on demand (subject to Section 10.09 hereof) any Consequential
Loss. The Borrower agrees that each Lender is not obligated to actually
reinvest the amount prepaid in any specific obligation as a condition to
receiving any Consequential Loss, or otherwise.
2.12. Computations and Manner of Payments.
(a) The Borrower shall make each payment hereunder and under the other
Loan Papers not later than 1:00 p.m. on the day when due in same day funds to
Administrative Agent, for the Ratable account of Lenders unless otherwise
specifically provided herein, at
Administrative Agent
NationsBank Plaza
901 Main Street
14th Floor
Dallas, Texas 75202
for further credit to the account of the Borrower. No later than the end of
each day when each payment hereunder is made, the Borrower shall notify
Administrative Agent, telephone (800) 880-5537, facsimile (214) 508-2515, or
such other Person as Administrative Agent may from time to time specify.
(b) Unless Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due hereunder that the
Borrower will not make payment in full, Administrative Agent may assume that
such payment is so made on such date and may, in reliance upon such assumption,
make distributions to Lenders. If and to the extent the Borrower shall not have
made such payment in full, each Lender shall repay to Administrative Agent
forthwith on demand the applicable amount distributed, together with interest
thereon at the Federal Funds Rate, from the date of distribution until the date
of repayment. The Borrower hereby authorizes each Lender, if and to the extent
payment is not made when due hereunder, to charge the amount so due against any
account of the Borrower with such Lender.
(c) Subject to Section 10.09 hereof, interest on LIBOR Advances shall
be calculated on the basis of actual days elapsed but computed as if each year
consisted of 360 days. Subject
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to Section 10.09 hereof, interest on Base Rate Advances, the Commitment Fees
and other amounts due under the Loan Papers shall be calculated on the basis of
actual days elapsed but computed as if each year consisted of 365 or 366 days,
as the case may be. Such computations shall be made including the first day but
excluding the last day occurring in the period for which such interest, payment
or Commitment Fees is payable. Each determination by Administrative Agent or a
Lender of an interest rate, fee or commission hereunder shall be conclusive and
binding for all purposes, absent manifest error. All payments under the Loan
Papers shall be made in United States dollars and without setoff, counterclaim
or other defense.
(d) Notwithstanding anything herein or in any Loan Paper to the
contrary, any payment made by the Borrower in excess of the Available
Commitment or outstanding Advances, shall be applied to outstanding amounts (or
to reduce the commitment) of any other outstanding Obligations.
(e) Reference to any particular index or reference rate for
determining any applicable interest rate under this Agreement is for purposes
of calculating the interest due and is not intended as and shall not be
construed as requiring any Lender to actually fund any Advance at any
particular index or reference rate.
2.13. Yield Protection.
(a) If any Lender determines that either (i) the adoption, after the
date hereof, of any Applicable Law, rule, regulation or guideline regarding
capital adequacy applicable to commercial banks or financial institutions
generally or any change therein, or any change, after the date hereof, in the
interpretation or administration thereof by any Tribunal, central bank or
comparable agency charged with the interpretation or administration thereof, or
(ii) compliance by any Lender (or Lending Office of any Lender) with any
request or directive made after the date hereof applicable to commercial banks
or financial institutions generally regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency has the effect of reducing the rate of return on such Lender's capital
as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking
into consideration such Lender's policies with respect to capital adequacy (but
excluding consequences of such Lender's negligence or intentional disregard of
law or regulation)) by an amount reasonably deemed by such Lender to be
material, then from time to time, within fifteen days after demand by such
Lender, the Borrower shall pay to such Lender such additional amount or amounts
as will adequately compensate such Lender for such reduction. Each Lender will
notify the Borrower of any event occurring after the date of this Agreement
which will entitle such Lender to compensation pursuant to this Section 2.13(a)
as promptly as practicable after such Lender obtains actual knowledge of such
event; provided that no Lender shall be liable for its failure or the failure
of any other Lender to provide such notification. A certificate of such Lender
claiming compensation under this Section 2.13(a), setting forth in reasonable
detail the calculation of the additional amount or amounts to be paid to it
hereunder and certifying that such claim is consistent with such Lender's
treatment of similar customers having similar provisions generally
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<PAGE> 39
in their agreements with such Lender shall be conclusive in the absence of
manifest error. Each Lender shall use reasonable efforts to mitigate the effect
upon the Borrower of any such increased costs payable to such Lender under this
Section 2.13(a).
(b) If, after the date hereof, any Tribunal, central bank or other
comparable authority, at any time imposes, modifies or deems applicable any
reserve (including, without limitation, any imposed by the Board of Governors
of the Federal Reserve System), special deposit or similar requirement against
assets of, deposits with or for the amount of, or credit extended by, any
Lender, or imposes on any Lender any other condition affecting a LIBOR Advance,
the Notes or its obligation to make a LIBOR Advance; and the result of any of
the foregoing is to increase the cost to such Lender of making or maintaining
LIBOR Advances, or to reduce the amount of any sum received or receivable by
such Lender under this Agreement or under the Notes or reimbursement
obligations by an amount reasonably deemed by such Lender to be material, then,
within five days after demand by such Lender, the Borrower shall pay to such
Lender such additional amount or amounts as will compensate such Lender for
such increased cost or reduction. Each Lender will (i) notify the Borrower and
Administrative Agent of any event occurring after the date of this Agreement
that entitles such Lender to compensation pursuant to this Section 2.13(b), as
promptly as practicable after such Lender obtains actual knowledge of the
event; provided that no Lender shall be liable for its failure or the failure
of any other Lender to provide such notification and (ii) use good faith and
reasonable efforts to designate a different Lending Office for LIBOR Advances
of such Lender if the designation will avoid the need for, or reduce the amount
of, the compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender. A certificate of such Lender claiming
compensation under this Section 2.13(b) setting forth in reasonable detail the
computation of the additional amount or amounts to be paid to it hereunder and
certifying that such claim is consistent with such Lender's treatment of
similar customers having similar provisions generally in their agreements with
such Lender shall be conclusive in the absence of manifest error. If such
Lender demands compensation under this Section 2.13(b), the Borrower may at any
time, on at least five Business Days' prior notice to such Lender, (i) repay in
full the then outstanding principal amount of LIBOR Advances of such Lender,
together with accrued interest thereon, or (ii) convert the LIBOR Advances to
Base Rate Advances in accordance with the provisions of this Agreement;
provided, however, that the Borrower shall be liable for the Consequential Loss
arising pursuant to those actions.
(c) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation or administration of
any Law shall make it unlawful, or any central bank or other Tribunal shall
assert that it is unlawful, for a Lender to perform its obligations hereunder
to make LIBOR Advances or to continue to fund or maintain LIBOR Advances
hereunder, then, on notice thereof and demand therefor by such Lender to the
Borrower, (i) each LIBOR Advance will automatically, upon such demand, convert
into a Base Rate Advance, and (ii) the obligation of such Lender to make or to
convert Advances into LIBOR Advances shall be suspended until such Lender
notifies Administrative Agent and the Borrower that such Lender has determined
that the circumstances causing such suspension no longer exist.
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(d) Upon the occurrence and during the continuance of any Default or
Event of Default, (i) each LIBOR Advance will automatically, on the last day of
the then existing Interest Period therefor, convert into a Base Rate Advance
and (ii) the obligation of each Lender to make or to convert Advances into
LIBOR Advances shall be suspended.
(e) Failure on the part of any Lender to demand compensation for any
increased costs, increased capital or reduction in amounts received or
receivable or reduction in return on capital pursuant to this Section 2.13 with
respect to any period shall not constitute a waiver of any Lender's right to
demand compensation with respect to such period or any other period, subject,
however, to the limitations set forth in this Section 2.13.
(f) The term "Lender" for purposes of this Section shall include the
Administrative Agent and the Issuing Bank. The obligations of the Borrower
under this Section 2.13 shall survive any termination of this Agreement.
(g) Determinations by Lenders for purposes of this Section 2.13 shall
be conclusive, absent manifest error. Any certificate delivered to the Borrower
by a Lender pursuant to this Section 2.13 shall include in reasonable detail
the basis for such Lender's demand for additional compensation and a
certification that the claim for compensation is consistent with such Lender's
treatment of similar customers having similar provisions generally in their
agreements with such Lender.
(h) If any Lender notifies Administrative Agent that the LIBOR Rate
for any Interest Period for any LIBOR Advances will not adequately reflect the
cost to such Lender of making, funding or maintaining LIBOR Advances for such
Interest Period, Administrative Agent shall promptly so notify the Borrower,
whereupon (i) each such LIBOR Advance will automatically, on the last day of
the then existing Interest Period therefor, convert into a Base Rate Advance
and (ii) the obligation of such Lender to make or to convert Advances into
LIBOR Advances shall be suspended until such Lender notifies Administrative
Agent that such Lender has determined that the circumstances causing such
suspension no longer exist and Administrative Agent notifies the Borrower of
such fact.
2.14. Use of Proceeds. The proceeds of the Advances shall be available
(and the Borrower shall use such proceeds) to (a) refinance existing Funded
Debt of the Borrower and its Restricted Subsidiaries, (b) fund Capital
Expenditures of the Borrower and the Restricted Subsidiaries permitted by the
terms of this Agreement, and (c) fund Permitted Acquisitions, and (d) use for
general working capital purposes.
2.15. Collateral and Collateral Call.
(a) Collateral. Payment of the Obligations is secured by (i) a first
perfected security interest in 100% of the Capital Stock of the Borrower and
the Restricted Subsidiaries, 100% of the Capital Stock of WA Telecom Products,
Inc., and 65% of the Capital Stock of Unrestricted Subsidiaries, (ii) subject
to Permitted Liens, a first perfected security interest in all of the
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accounts, equipment, inventory, chattel paper, general intangibles, and other
assets of the Borrower, the Restricted Subsidiaries and the Guarantors (other
than real property located in Provo, Utah, the real and personal property used
in the operation of the RTP operations in Dallas, Texas, and the leasehold
interests described in Section 2.15(b) hereof), subject to no other Lien, and
(iii) a Guaranty of the Obligations executed by each Guarantor (collectively,
together with all other Properties or assets of the Borrower, the Restricted
Subsidiaries and other Persons securing the Obligations from time to time, the
"Collateral"). The Borrower agrees that it will, and will cause the Restricted
Subsidiaries, the Parent and Affiliates (except the Unrestricted Subsidiaries)
to, execute and deliver, or cause to be executed and delivered, such documents
as Administrative Agent may from time to time reasonably request to create and
perfect a first Lien, and subject to Permitted Liens, for the benefit of
Administrative Agent and the Lenders in the Collateral.
(b) Collateral Call. The Borrower agrees that it will, and will cause
any other Person owning any interest in the Borrower or any Restricted
Subsidiary or the Parent from time to time to immediately pledge such interest
to secure the Obligations, pursuant to a pledge agreement substantially in the
form of the Pledge Agreements. The Borrower agrees to, and agrees to cause the
Parent and Restricted Subsidiaries to, promptly grant Administrative Agent and
the Lenders from time to time at the request of the Lenders a Lien on any of
the Property of the Borrower, the Parent, and the Restricted Subsidiaries not
already constituting Collateral to the extent permitted by the Indenture,
including, without limitation (on a best efforts basis), Liens on leasehold
estates by no later than 120 days following the Closing Date. In that regard,
the Borrower shall use best efforts to assist Administrative Agent and the
Lenders in creating and perfecting a first Lien for the benefit of
Administrative Agent and the Lenders securing the Obligations in any such
Property of the Borrower, the Parent and the Restricted Subsidiaries, subject
to Permitted Liens, including, without limitation, providing Administrative
Agent with title commitments, appraisals, surveys (with flood plain
certification), mortgagee title insurance, evidence of insurance, including
flood hazard insurance, environmental audits, UCC-11 searches, Tax and Lien
searches, recorded real estate documents, intellectual property documentation
and registration and other similar types of documents, consents,
Authorizations, instruments and agreements relating to all Property of the
Borrower, the Parent and the Restricted Subsidiaries as reasonably requested by
Administrative Agent from time to time.
2.16. Option to Extend the Conversion Date; Option to Convert to Term.
(a) The Borrower shall have the option to extend the Conversion Date
for the entire Available Commitment, for one additional 364-day period, on the
following conditions:
(i) no Default or Event of Default shall exist or shall result from
such extension;
(ii) the Borrower shall have made the request for such extension in
writing to Administrative Agent not later than 30 days prior
to the Conversion Date, setting forth the proposed Conversion
Date as extended; and
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(iii) the Majority Lenders shall have approved such extension not
later than 15 Business Days prior to the Conversion Date,
provided that, notwithstanding such approval by the Majority
Lenders, no Lender shall, without its approval, be required
to extend the Conversion Date with respect to Advances made
by it.
(b) The Borrower shall have the option to convert to the Term Loan on
the Conversion Date on the following conditions:
(i) no Default or Event of Default shall exist or shall result
from such extension;
(ii) the Borrower shall have made the request for such conversion
in writing to Administrative Agent no sooner than 90 days and
not later than 10 days prior to the Conversion Date, electing
to convert to a Term Loan; and
(iii) the Borrower shall execute such Loan Papers in form and
substance satisfactory to Administrative Agent evidencing
such Term Loan as Administrative Agent shall require.
2.17. Conditions Precedent to the Increase of the Available Commitment.
Prior to June 30, 1999, upon written request by the Borrower to
Administrative Agent and the other existing Lenders of its election ten
Business Days prior to the proposed effective date of the proposed increase,
the Available Commitment shall, subject to the further terms and conditions set
forth below, increase to a maximum of $100,000,000 in the manner set forth
below:
(a) On any date of proposed increase, the representations and
warranties contained in Article V hereof are true and correct on such
date, as though made on and as of such date, except to the extent
expressly made only as of a prior date; and
(b) On any date of proposed increase, no Default or Event of
Default shall exist on any such date, and no Default or Event of
Default would result from such increase in the Available Commitment
and the subsequent Advance to the Borrower up to the amount of the
Available Commitment; and
(c) On any date of proposed increase, there shall have
occurred no Material Adverse Change since September 30, 1998; and
(d) On any date of proposed increase, the sum of (i) all
Advances outstanding (after giving effect to any proposed Advance to
be made on such date), plus (ii) the aggregate face amount of all
outstanding Letters of Credit (after giving effect to any proposed
Letter of Credit to be made on such date), plus (iii) (without
duplication) the sum of all reimbursement obligations with respect to
all outstanding Letters of Credit, shall not exceed the Available
Commitment; and
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(e) The proposed increase shall occur prior to June 30, 1999
and the Available Commitment as increased shall not be in excess of
the sum of the Available Commitment prior to such increase plus the
Unavailable Commitment prior to such increase; and
(f) Upon satisfaction of each of the conditions precedent in
this Section 2.17, the Borrower shall be entitled to increase the
Available Commitment not more than one time, in an aggregate amount
for both such increases not to exceed the Unavailable Commitment. Each
Lender specified by the Borrower shall have received not less than ten
days' prior written notice from the Borrower requesting such Available
Commitment increase. Each such Lender electing to participate in such
Available Commitment increase shall commit to an amount not less than
$5,000,000, but shall accept any allocation amount designated by the
Borrower and the Administrative Agent that is equal to or less than
its proposed portion of the Available Commitment increase; and
(g) Notwithstanding anything herein or in any other Loan
Paper to the contrary, (i) the Borrower is not obligated to notify
each Lender of, or to allocate to any existing Lender any portion of,
the proposed increase, and the Borrower and the Administrative Agent
may agree to add other creditors in connection with any such proposed
increase. Each existing Lender agrees and acknowledges that new
creditors may be allocated all or any portion of the proposed increase
upon the determination of the Borrower and the Administrative Agent;
and
(h) Each of the one proposed increase shall be in an
aggregate minimum amount of $10,000,000 and $5,000,000 multiples
thereof; and
(i) The Administrative Agent shall have received a
certificate from the Borrower to the effect that (i) such increase has
received all required regulatory approvals, if necessary, and is in
compliance with all applicable Laws, and (ii) no other approvals or
consents from any Person are required by any such Person except to the
extent they have been received; and
(j) Each new Lender (including any new Lenders party hereto)
shall have received a promissory Note, and the Borrower and each new
Lender agrees to execute any and all such documents deemed necessary
by the Administrative Agent in order to effectuate this Section 2.17
(whether UCC-1s, new documentation relating to any Collateral,
Guaranty or otherwise); and
(k) On the date of increase, the Administrative Agent shall
deliver to each Lender evidence of new Specified Percentages adjusted
to give effect to the increase in the Available Commitment; and
(l) On or prior to the date of increase, each new lender
being added to the credit facility shall deliver to the Borrower and
the Administrative Agent documentation acceptable to the
Administrative Agent evidencing such new Lender's acceptance of this
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Agreement and all the other Loan Papers in form and substance
reasonably acceptable to the Administrative Agent (and making such
lender a party to this Agreement and the other Loan Papers); and
(m) The Administrative Agent shall have received financial
projections in form and substance acceptable to the Lenders and
demonstrating compliance with the financial covenants set forth in
Section 7.01 hereof throughout the term of this Agreement; and
(n) The Available Commitment shall (i) never exceed the sum
of the Available Commitment plus the Unavailable Commitment, as each
is reduced in accordance with Section 2.04 hereof, this Section 2.17
and the other terms of this Agreement, and (ii) never increase except
to the extent, and not to exceed such amount, that the Unavailable
Commitment is in excess of zero; and
(o) The Unavailable Commitment shall be reduced in accordance
with this Section 2.17 dollar for dollar for each increase in the
Available Commitment; and
(p) The Administrative Agent on behalf of each Lender shall
have received all amendments to security agreements, deeds of trust
and mortgages as the Administrative Agent shall deem necessary to
maintain its valid and perfected Lien.
No Lender shall be obligated to increase the dollar amount of its
share of the Available Commitment without its written consent in its sole
discretion. In connection with any increase to the Available Commitment in
accordance with the terms of this Section 2.17, each existing Lender
(regardless of whether such Lender is participating in such increase) agrees to
execute any and all agreements requested by the Administrative Agent to
effectuate the intent of this Section 2.17. Notwithstanding anything contained
herein to the contrary, the limitations placed upon assignments set forth in
Section 10.04 hereof shall not apply to proposed increases pursuant to this
Section.
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit. The Borrower shall give the
Administrative Agent not less than five Business Days prior written notice of a
request for the issuance of a Letter of Credit, and the Administrative Agent
shall promptly notify each Lender of such request. Upon receipt of the
Borrower's properly completed and duly executed Applications, and subject to
the terms of such Applications and to the terms of this Agreement, the
Administrative Agent agrees to issue Letters of Credit on behalf of the
Borrower in an aggregate face amount not in excess of the lesser of (a) Letter
of Credit Commitment and (b) the remainder of the Available Commitment minus
the sum of all outstanding Advances plus the aggregate face amount of all
outstanding Letters of Credit, including without limitation, the Bond Letter of
Credit. No Letter of Credit shall have a maturity extending beyond the earliest
of (i) the Conversion Date (or after the Conversion Date, the Maturity Date),
or (ii) one year from the date of its issuance, or (iii) such earlier date as
may be required to enable the Borrower to satisfy its repayment obligations
under Section 2.06 hereof. Subject to such
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maturity limitations and so long as no Default or Event of Default has occurred
and is continuing or would result from the renewal of a Letter of Credit, the
Letters of Credit may be renewed by the Administrative Agent in its discretion.
The Lenders shall participate ratably in any liability under the Letters of
Credit and in any unpaid reimbursement obligations of the Borrower with respect
to any Letter of Credit in their Specified Percentages. The amount of the
Letters of Credit (including, without limitation, the Bond Letter of Credit)
issued and outstanding and the unpaid reimbursement obligations of the Borrower
for such Letters of Credit shall reduce the amount of the Available Commitment
available, so that at no time shall the sum of (i) all outstanding Advances in
the aggregate, plus (ii) the aggregate face amount of all outstanding Letters
of Credit (including, without limitation, the Bond Letter of Credit), plus
(iii) (without duplication) all outstanding reimbursement obligations related
to Letters of Credit, exceed the Available Commitment, and at no time shall the
sum of all Advances by any Lender made plus its ratable share of amounts
available to be drawn under the Letters of Credit (including, without
limitation, the Bond Letter of Credit) and the unpaid reimbursement obligations
of the Borrower in respect of such Letters of Credit exceed its Specified
Percentage of the Available Commitment.
3.02. Letters of Credit Fee. In consideration for the issuance of each
Letter of Credit (including the Bond Letter of Credit), the Borrower shall pay
to (a) the Administrative Agent for its account and for the account of the
Issuing Bank, application and processing fees in the amount of the higher of
(i) $350.00 and (ii) the product of .125% multiplied by the face amount of such
Letter of Credit on each Letter of Credit, due and payable on the date of
issuance of each Letter of Credit (other than the issuance of the Bond Letter
of Credit by Bank Austria AG which has already been issued), and (b) the
Administrative Agent for the account of the Lenders in accordance with their
Specified Percentages or the Issuing Bank, as case may be, a per annum fee for
each Letter of Credit equal to the higher of (i) $350.00 and (ii) the product
of the Applicable Margin for a LIBOR Advance in effect on the date of
calculation multiplied by the face amount of each such Letter of Credit. Each
fee for each Letter of Credit under subsection (b) above shall be due and
payable to the Administrative Agent or the Issuing Bank, as the case may be,
quarterly as it accrues, on each Quarterly Date during the term of the Letter
of Credit and on the expiration or renewal of each such Letter of Credit,
beginning with the first such Quarterly Date after the issuance of each Letter
of Credit and ending on the expiration date of each such Letter of Credit.
3.03. Reimbursement Obligations.
(a) The Borrower hereby agrees to reimburse Administrative Agent and
the Issuing Bank immediately upon demand by Administrative Agent, and in
immediately available funds, for any payment or disbursement made by
Administrative Agent or the Issuing Bank under any Letter of Credit. Payment
shall be made by the Borrower with interest on the amount so paid or disbursed
by Administrative Agent or the Issuing Bank from and including the date payment
is made under any Letter of Credit to and including the date of payment, at the
lesser of (i) the Highest Lawful Rate, and (ii) the sum of the Base Rate in
effect from time to time plus 2% per annum; provided, however, that if the
Borrower would be permitted under the terms of Section 2.01, Section 2.02 and
Section 4.02 to borrow Advances in amounts at least equal to their
reimbursement obligation for a drawing under any Letter of Credit, a Base
Advance by each Lender in an amount equal to such
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Lender's Specified Percentage shall automatically be deemed made on the date of
any such payment or disbursement made by Administrative Agent or the Issuing
Bank in the amount of such obligation and subject to the terms of this
Agreement.
(b) The Borrower hereby also agrees to pay to Administrative Agent
immediately upon demand by Administrative Agent or the Issuing Bank and in
immediately available funds, as security for its reimbursement obligations in
respect of the Letters of Credit under Section 3.03(a) hereof and any other
amounts payable hereunder and under the Notes, an amount equal to the aggregate
amount available to be drawn under Letters of Credit then outstanding,
irrespective of whether the Letters of Credit have been drawn upon, upon an
Event of Default. Any such payments shall be deposited in a separate account
designated "World Access Special Account" or such other designation as
Administrative Agent shall elect. All such amounts deposited with
Administrative Agent shall be and shall remain funds of the Borrower on deposit
with Administrative Agent and may be invested by Administrative Agent as
Administrative Agent shall determine. Such amounts may not be used by
Administrative Agent or the Issuing Bank to pay the drawings under the Letters
of Credit; however, such amounts may be used by Administrative Agent and the
Issuing Bank as reimbursement for Letter of Credit drawings which
Administrative Agent or the Issuing Bank has paid. During the existence of an
Event of Default but after the expiration of any Letter of Credit that was not
drawn upon, the Borrower may direct Administrative Agent or the Issuing Bank to
use any cash collateral for any such expired Letter of Credit, if any, to
reduce the amount of the Obligations. Any amounts remaining in the World Access
Special Account after the date of the expiration of all Letters of Credit and
after all Obligations have been paid in full, shall be repaid to the Borrower
promptly after such expiration and such payment in full.
(c) The obligations of the Borrower under this Section 3.03 will
continue until all Letters of Credit have expired and all reimbursement
obligations with respect thereto have been paid in full by the Borrower and
until all other Obligations shall have been paid in full.
(d) The Borrower shall be obligated to reimburse Administrative Agent
and the Issuing Bank upon demand for all amounts paid under the Letters of
Credit as set forth in Section 3.03(a) hereof; provided, however, if the
Borrower for any reason fails to reimburse Administrative Agent or the Issuing
Bank in full upon demand, whether by failing to or not being permitted to
borrow Advances to pay such reimbursement obligations or otherwise, the Lenders
shall reimburse Administrative Agent and the Issuing Bank in accordance with
each Lender's Specified Percentage for amounts due and unpaid from the Borrower
as set forth in Section 3.04 hereof; provided, however, that no such
reimbursement made by the Lenders shall discharge the Borrower's obligations to
reimburse Administrative Agent or the Issuing Bank.
(e) The Borrower and the Parent shall indemnify and hold
Administrative Agent, the Issuing Bank, or any Lender, its officers, directors,
representatives and employees harmless from loss for any claim, demand or
liability which may be asserted against Administrative Agent, the Issuing Bank,
or such indemnified party in connection with actions taken under the Letters of
Credit or in connection therewith (INCLUDING LOSSES RESULTING FROM THE
NEGLIGENCE OF ADMINISTRATIVE AGENT OR SUCH INDEMNIFIED PARTY), and shall pay
Administrative Agent and the Issuing Bank for
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reasonable fees of attorneys (who may be employees of Administrative Agent and
the Issuing Bank) and legal costs paid or incurred by Administrative Agent and
the Issuing Bank in connection with any matter related to the Letters of
Credit, except for losses and liabilities incurred as a direct result of the
gross negligence or wilful misconduct of Administrative Agent, the Issuing
Bank, or such indemnified party. If the Borrower for any reason fails to
indemnify or pay Administrative Agent, the Issuing Bank or such indemnified
party of Administrative Agent as set forth herein in full, the Lenders shall
indemnify and pay Administrative Agent upon demand, in accordance with each
Lender's Specified Percentage of such amounts due and unpaid from the Borrower.
The provisions of this Section 3.03(e) shall survive the termination of this
Agreement.
3.04. Lenders' Obligations. Each Lender agrees, unconditionally and
irrevocably, to reimburse Administrative Agent or the Issuing Bank on demand
for such Lender's Specified Percentage of each draw paid by Administrative
Agent or the Issuing Bank under any Letter of Credit. All amounts payable by
any Lender under this subsection shall include interest thereon at the Federal
Funds Rate, from the date of the applicable draw to the date of reimbursement
by such Lender. No Lender shall be liable for the performance or nonperformance
of the obligations of any other Lender under this Section. The obligations of
the Lenders under this Section shall continue after the Maturity Date and shall
survive termination of any Loan Papers.
3.05. Administrative Agent's Obligations.
(a) Administrative Agent and the Issuing Bank each makes no
representation or warranty, and assumes no responsibility with respect to the
validity, legality, sufficiency or enforceability of any Application or any
document relative thereto or to the collectibility thereunder. Administrative
Agent and the Issuing Bank each assumes no responsibility for the financial
condition of the Borrower and its Subsidiaries or for the performance of any
obligation of the Borrower. Administrative Agent and the Issuing Bank each may
use its discretion with respect to exercising or refraining from exercising any
rights, or taking or refraining from taking any action which may be vested in
it or which it may be entitled to take or assert with respect to any Letter of
Credit or any Application.
(b) Administrative Agent and Issuing Bank each shall be under no
liability to any Lender with respect to anything Administrative Agent or
Issuing Bank may do or refrain from doing in the exercise of its judgment, the
sole liability and responsibility of Administrative Agent or Issuing Bank being
to handle each Lender's share on as favorable a basis as Administrative Agent
or Issuing Bank handles its own share and to promptly remit to each Lender its
share of any sums received by Administrative Agent under Article III or any
Application. Administrative Agent and Issuing Bank shall have no duties or
responsibilities except those expressly set forth herein, and those duties and
liabilities shall be subject to the limitations and qualifications set forth
herein.
(c) Neither Administrative Agent, Issuing Bank, nor any of its
directors, officers, or employees shall be liable for any action taken or
omitted (whether or not such action taken or omitted is expressly set forth
herein) under or in connection herewith or any other instrument or document in
connection herewith, except for gross negligence or willful misconduct, and no
Lender
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waives its right to institute legal action against Administrative Agent or
Issuing Bank for wrongful payment of any Letter of Credit due to Administrative
Agent's or Issuing Bank's gross negligence or willful misconduct.
Administrative Agent and Issuing Bank shall incur no liability to any Lender,
the Borrower or any Affiliate of the Borrower or Lender in acting upon any
notice, document, order, consent, certificate, warrant or other instrument
reasonably believed by Administrative Agent and Issuing Bank to be genuine or
authentic and to be signed by the proper party.
3.06 Reinstatement. The provisions of this Article III shall continue
to be effective, or be reinstated, as the case may be, if at any time payment,
or any part thereof, of any of the reimbursement obligations in respect of
Letters of Credit is rescinded or must otherwise be restored or returned by the
Administrative Agent or the Issuing Bank upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or any other
Obligor, or upon or as a result of the appointment of a receiver, intervenor or
conservator of, or custodian, trustee or similar officer for, the Borrower or
any other Obligor or any part of its property, or otherwise, all as though such
payments had not been made.
3.07 Survivability of Provisions. The Borrower agrees to replace the
Bond Letter of Credit with a Letter of Credit issued by the Administrative
Agent by no later than September 30, 1999. The Borrower agrees to replace all
other Letters of Credit issued by the Issuing Bank with a Letter of Credit
issued by the Administrative Agent by no later than January 15, 1999.
Notwithstanding the replacement of, or change in the identity of, the Issuing
Bank hereunder, the provisions of this Agreement relating to the Issuing Bank
shall continue to inure to the benefit of any prior Issuing Bank as to any
actions taken or omitted to be taken by such prior Issuing Bank while it was
Issuing Bank hereunder.
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to the Initial Advance. The obligations of
each Lender under this Agreement and the obligation of each Lender to make the
Initial Advance shall be subject to the following conditions precedent. On the
Closing Date:
(a) All terms, conditions and documentation in connection with this
Agreement shall be acceptable to the Lenders.
(b) The making of the Available Commitment shall not contravene any
Law applicable to Administrative Agent or any Lender.
(c) Each Lender shall have received a Certificate from an Authorized
Officer stating that no Material Adverse Change, as determined by the Lenders,
shall have occurred and be continuing in the business, assets, prospects or
financial condition of the businesses of the Borrower, the Parent and the
Restricted Subsidiaries since September 30, 1998.
(d) All proceedings of the Borrower, the Parent and the Restricted
Subsidiaries taken in connection with the transactions contemplated hereby, and
all documents incidental thereto,
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shall be reasonably satisfactory in form and substance to the Lenders. Each
Lender shall have received copies of all documents or other evidence that it
may reasonably request in connection with such transactions.
(e) Each Lender shall have received an executed copy of this
Agreement, and all documents required to be delivered pursuant thereto, as well
as its respective Notes, duly completed and correct. The Lenders shall have
received copies of the Fee Letters signed by the Borrower, as applicable. Each
of the following shall have been delivered to Administrative Agent on behalf of
Lenders, in form and substance satisfactory to Administrative Agent, Special
Counsel and each Lender to the extent required by Administrative Agent: Each
other Loan Paper requested by Administrative Agent, including, without
limitation, all guarantees, pledge agreements, security agreements, mortgages,
deeds of trust, collateral assignments and other agreements granting any
interest in any Collateral.
(f) The Borrower shall have delivered to each Lender a Certificate,
dated as of the Closing Date, executed by an Authorized Officer on behalf of
the Parent, the Borrower and its Restricted Subsidiaries, certifying that (i)
no Default or Event of Default has occurred and is continuing, (ii) the
representations and warranties set forth in Article V hereof are true and
correct, (iii) each of the Parent, the Borrower and its Restricted Subsidiaries
has complied with all agreements and conditions to be complied with by it under
the Loan Papers by such date, (iv) that the attached resolutions for each of
the Parent, the Borrower and its Restricted Subsidiaries are the true, accurate
and complete resolutions authorizing the corporate restructuring, the
incurrence and performance of the Facility and the Loan Papers, (v) that the
attached copies of certified articles of incorporation, or other articles of
organization, certificates of good standing, certificates of existence and
incumbency certificates for each of the Parent, the Borrower and its Restricted
Subsidiaries are (A) not more than 30 days old and certified by the appropriate
secretary of state or other governmental organization and (B) represent the
true and accurate certificate for each such entity, and (vi) the attached
copies of by-laws or other organizational documents represent the true and
accurate by-laws or other organizational documents for each of the Parent, the
Borrower and its Restricted Subsidiaries in effect on the Closing Date.
(g) Each Lender shall have received opinions of Rogers & Hardin LLP,
corporate counsel to the Parent, the Borrower and the Restricted Subsidiaries,
dated as of the Closing Date, acceptable to the Lenders and otherwise in form
and substance satisfactory to the Lenders and Special Counsel. Each Lender
shall have received opinions with respect to the grant of Liens on 65% of the
Capital Stock in Unrestricted Subsidiaries by no later than January 31, 1999.
(h) Each Lender shall have evidence satisfactory that the Borrower,
the Parent and each of their Subsidiaries has reasonably anticipated that all
computer applications that are material to their respective businesses and
operations will on a timely basis be able to perform properly date- sensitive
functions and will make an inquiry of each of their key suppliers, vendors and
customers as to whether such Persons will on a timely basis be Year 2000
Compliant in all material respects and, on the basis of that inquiry, believe
that all such Persons will be so compliant;
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(i) Each Lender shall have received an opinion of FCC counsel to the
Borrower, dated as of the Closing Date, acceptable to the Lenders and otherwise
in form and substance satisfactory to the Lenders and Special Counsel, with
respect to certain FCC matters, and final approval, if necessary, shall have
been received from the FCC regarding any transfer of any FCC license.
(j) All proceedings of the Parent, the Borrower and the Subsidiaries
of the Parent and the Borrower taken in connection with the transactions
contemplated hereby, and all documents incidental thereto, shall be
satisfactory in form and substance to each Lender. The Administrative Agent and
each Lender shall have received copies of all documents or other evidence that
it may reasonably request in connection with such transactions. No Material
Adverse Change, as determined by the Lenders, shall have occurred and be
continuing in the financial markets. The Borrower shall have paid all fees,
costs and expenses incurred by the Lenders in connection with the closing of
the Facility.
4.02. Conditions Precedent to All Advances. The obligation of each
Lender to make each Advance, except for Refinancing Advances, which constitutes
an increase, shall be subject to the further conditions precedent that (a) on
the date of such Advance, the following statements shall be true:
(i) The representations and warranties contained in Article V
hereof are true and correct on such date, as though made on and as of
such date (and the delivery of each Borrowing Notice under Section
2.02(a), and each Conversion or Continuation Notice under Section
2.09(b), or the failure to deliver a Conversion or Continuation Notice
under Section 2.09(b), shall constitute a representation that on the
disbursement date such representations are true (except as to
representations and warranties which (i) refer to a specific date,
(ii) have been modified by transactions permitted pursuant to this
Agreement or any other Loan Paper or (iii) have been specifically
waived in writing by Administrative Agent));
(ii) No event has occurred and is continuing, or would result
from such Advance (including the intended application of the proceeds
of such Advance), that does or could constitute a Default or Event of
Default;
(iii) There shall have occurred no Material Adverse Change,
and the making of such Advance shall not cause or result in a Material
Adverse Change; and
(iv) After giving effect to each such Advance, prior to the
Conversion Date, the aggregate amount of all outstanding Advances does
not exceed the Available Commitment;
and (b) Administrative Agent shall have received, in form and substance
acceptable to it, such other approvals, documents, certificates, opinions and
information as it may deem necessary or appropriate.
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ARTICLE V. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that the following are true and
correct:
5.01. Organization and Qualification. Each of the Borrower, the Parent
and their Restricted Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the Laws of the
jurisdiction of its incorporation or formation, as applicable. Each such Person
is qualified to do business in all jurisdictions where the nature of its
business or Properties require such qualification, except to the extent that
any failure to be so qualified could not, in the aggregate, reasonably be
expected to cause a Material Adverse Change. Set forth on Schedule 5.01
attached hereto is a complete and accurate listing with respect to the Borrower
and each of the Parent and their Restricted Subsidiaries, showing (a) the
jurisdiction of its organization and its mailing address, which is the
principal place of business and executive offices of each unless otherwise
indicated, (b) the classes of Capital Stock and shares of Capital Stock issued
and outstanding in each of the Parent, the Borrower and the Restricted
Subsidiaries and the numbers or amounts of each of the Parent's, the Borrower's
and the Restricted Subsidiaries' Capital Stock authorized and outstanding, (c)
other than with respect to the Parent, the Borrower and the Restricted
Subsidiaries, each record and beneficial owner of outstanding Capital Stock on
the date hereof, indicating the ownership percentage, and (d) all outstanding
options, rights, rights of conversion or purchase, repurchase, rights of first
refusal and similar rights relating to the Capital Stock of each of the Parent,
the Borrower and the Restricted Subsidiaries. Except as set forth on Schedule
5.01 hereto, neither the Borrower, the Parent nor any Restricted Subsidiary has
agreed to grant or issue any options, warrants or similar rights to any Person
to acquire any Capital Stock of the Borrower or any Restricted Subsidiary. All
Capital Stock is validly issued and fully paid. The Borrower has no knowledge
of any share of Capital Stock of it, the Parent or any Restricted Subsidiaries
being subject to any Lien, including any restrictions on hypothecation or
transfer, except Liens described on Schedule 5.08 hereto.
5.02. Due Authorization; Validity. The board of directors of the
Borrower, the Parent and each of their Restricted Subsidiaries, or of their
partners, as applicable, have duly authorized the execution, delivery, and
performance of the Loan Papers to be executed by the Borrower and each of the
Parent or their Restricted Subsidiaries, as appropriate. Each of the Borrower,
the Parent and their Restricted Subsidiaries has full legal right, power and
authority to execute, deliver and perform under the Loan Papers to be executed
and delivered by it. The Loan Papers constitute the legal, valid and binding
obligations of the Borrower, the Parent and their Restricted Subsidiaries, as
appropriate, enforceable in accordance with their terms (subject as to
enforcement of remedies to any applicable Debtor Relief Laws).
5.03. Conflicting Agreements and Other Matters. The execution or
delivery of any Loan Papers, and performance thereunder, does not conflict
with, result in a breach of the terms, conditions or provisions of, or
constitute a default under, result in any violation of or result in the
creation of any Lien (other than in favor of Administrative Agent) upon any
Properties of the Borrower, the Parent or their Restricted Subsidiaries under,
or require any consent, approval or other action by, notice to or filing with,
any Tribunal or Person pursuant to any organizational
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document, by-laws award of any arbitrator, or any agreement, instrument or Law
to which the Borrower, the Parent or any of their Restricted Subsidiaries or
any of their Properties is subject except as set forth on Schedule 5.03 hereto.
5.04. Financial Statements. The audited financial statements of the
Parent, the Borrower and the Restricted Subsidiaries dated December 31, 1997
and previously delivered to Administrative Agent, fairly present its financial
position and the results of operations as of the dates and for the periods
shown, all in accordance with GAAP. Such financial statements reflect all
material liabilities, direct and contingent, of the Parent, the Borrower and
their Restricted Subsidiaries that are required to be disclosed in accordance
with GAAP. As of the date of such financial statements, there were no
Contingent Liabilities, liabilities for Taxes, forward or long-term
commitments, or unrealized or anticipated losses from any unfavorable
commitments that are material in amount and that are not reflected on such
financial statements or otherwise disclosed in writing to Administrative Agent.
Since September 30, 1998, there has been no Material Adverse Change. The
Borrower, the Parent and each of the Restricted Subsidiaries is Solvent. The
projections of the Borrower, the Parent, and the Restricted Subsidiaries dated
October 16, 1998, previously delivered to Administrative Agent, were prepared
in good faith, and management believes them to be based on reasonable
assumptions (each of which is stated in such statement) and to provide
reasonable estimations of future performance as of the dates and for the
periods shown for the Parent, the Borrower and their Restricted Subsidiaries,
subject to the uncertainty and approximation inherent in any projections. The
Borrower's fiscal year ends on December 31.
5.05. Litigation. Shown on Schedule 5.05 is all Litigation that is
pending and, to the Borrower's best knowledge, threatened against the Borrower,
the Parent and their Restricted Subsidiaries, and any of their Properties or
assets on the date hereof. There is no pending or, to the Borrower's best
knowledge, threatened Litigation against the Borrower, the Parent or their
Restricted Subsidiaries, any of their Properties that could reasonably be
expected to cause a Material Adverse Change.
5.06. Compliance With Laws Regulating the Incurrence of Debt. No
proceeds of any Advance will be used directly or indirectly to acquire any
security in any transaction which is subject to Sections 13 and 14 of the
Exchange Act. The Borrower is not, nor is any of the Parent or their Restricted
Subsidiaries, engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U issued
by the Board of Governors of the Federal Reserve System), and no proceeds of
any Advance will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock.
Following the Borrower's intended use of the proceeds of each Advance, not more
than 25% of the
value of the assets of the Borrower will be "margin stock", within the meaning
of Regulation U. The Borrower is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Investment
Company Act of 1940, the Interstate Commerce Act (as any of the preceding acts
have been amended), or any other Law that the incurring of Debt by the Borrower
would violate in any material respect, including, without limitation, Laws
relating to common or contract carriers or the sale of
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electricity, gas, steam, water, or other public utility services. None of the
Borrower and its Restricted Subsidiaries, nor any agent acting on their behalf,
has taken or will knowingly take any action which might cause this Agreement or
any Loan Papers to violate any regulation of the Board of Governors of the
Federal Reserve System or to violate the Exchange Act, in each case as in
effect now or as the same may hereafter be in effect.
5.07. Licenses, Title to Properties, and Related Matters. Except as
listed on Schedule 5.07 hereto, the Borrower and each of the Parent and their
Restricted Subsidiaries possess all material Authorizations necessary and
appropriate to own, operate and conduct their business or otherwise for the
operation of their businesses and are not in violation thereof in any material
respect. All Authorizations are in full force and effect, and no event has
occurred that permits, or after notice or lapse of time could permit, the
revocation, termination or material and adverse modification of any such
Authorization, except those which in the aggregate could not reasonably be
expected to cause a Material Adverse Change. Schedule 5.07 shows the expiration
date and/or termination date for each Authorization (including, without
limitation, FCC Licenses) in effect on the Closing Date. The Borrower is not,
nor is any Subsidiary of the Borrower or the Parent, in violation of any
material duty or obligation required by the Communications Act of 1934, as
amended, or any FCC rule or regulation applicable to the operation of any
portion of any of its business. There is not pending or, to the best knowledge
of the Borrower, threatened, any action by the FCC to revoke, cancel, suspend
or refuse to renew any FCC License relating to any of the Borrower's, the
Parent's, or the Restricted Subsidiaries' business. There is not pending or, or
to the best knowledge of the Borrower, threatened, any action by the FCC to
modify adversely, revoke, cancel, suspend or refuse to renew any other
Authorization relating to such business. There is not issued or outstanding or,
to the best knowledge of the Borrower, threatened, any notice of any hearing,
violation or material complaint against the Borrower, the Parent or any of the
Restricted Subsidiaries with respect to the operation of any portion of such
businesses, and the Borrower has no knowledge that any Person intends to
contest renewal of any Authorization relating to such business. Each of the
Borrower, the Parent and their Restricted Subsidiaries has requisite corporate
or partnership power (as applicable) and legal right to own and operate its
Property and to conduct its business. Each has good and indefeasible title (fee
or leasehold, as applicable) to its Property, subject to no Lien of any kind,
except Permitted Liens. All of the assets of the Borrower, the Parent and each
of their Restricted Subsidiaries are located within the municipalities and
borough locations described on Schedule 5.07. Neither the Borrower, nor the
Parent nor their Restricted Subsidiaries is in violation of its respective
articles of organization or incorporation (as applicable) or bylaws. Neither
the Borrower, nor the Parent nor their Restricted Subsidiaries is in violation
of any Law, or material agreement or instrument binding on or affecting it or
any of its Properties, the effect of which could reasonably be expected to
cause a Material Adverse Change. No business or Properties of the Parent, the
Borrower or any Restricted Subsidiary is affected by any strike, lock-out or
other labor dispute. No business or Properties of the Parent, the Borrower or
any Restricted Subsidiary is affected by any drought, storm, earthquake,
embargo, act of God or public enemy or other casualty, the effect of which
could reasonably be expected to cause a Material Adverse Change.
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5.08. Outstanding Debt and Liens. The Borrower, the Parent and their
Restricted Subsidiaries have no outstanding Debt, Contingent Liabilities or
Liens, except Permitted Liens, except as shown on Schedule 5.08 hereto. No
breach, default or event of default exists under any document, instrument or
agreement evidencing or otherwise relating to any Funded Debt of any of the
Borrower, the Parent or their Restricted Subsidiaries.
5.09. ERISA. Each Plan of the Parent, the Borrower and each Restricted
Subsidiary of the Parent and the Borrower has satisfied the minimum funding
standards under all Laws applicable thereto, and no Plan has an accumulated
funding deficiency thereunder. The Borrower has not, and neither has the Parent
nor any Restricted Subsidiary of the Borrower or the Parent, incurred any
material liability to the PBGC with respect to any Plan. No ERISA Event has
occurred with respect to any Plan for which an Insufficiency in excess of
$100,000 exists on the date of such occurrence. None of the Parent, the
Borrower, nor any Restricted Subsidiary of the Parent or the Borrower has
participated in any non-exempt Prohibited Transaction with respect to any Plan
or trust created thereunder. None of the Borrower, the Parent or any Restricted
Subsidiary of the Parent or the Borrower, nor any ERISA Affiliate has incurred
any Withdrawal Liability to any Multiemployer Plan that has not been satisfied.
None of the Borrower, the Parent or any Restricted Subsidiary of the Parent or
the Borrower, nor any ERISA Affiliate has been notified by the sponsor of a
Multiemployer Plan that such Multiemployer Plan is in reorganization or has
been terminated, within the meaning of Title IV of ERISA.
5.10. Environmental Laws. The Borrower, the Parent and each of their
Restricted Subsidiaries have obtained all material environmental, health and
safety permits, licenses and other material authorizations required under all
Applicable Environmental Laws to carry on their respective businesses as being
conducted. On the Closing Date, there are no environmental liabilities of the
Borrower, the Parent or any other of their Restricted Subsidiaries (with
respect to any fee owned or leased Properties), except as disclosed and
described in detail on Schedule 5.11 hereto. Each of such permits, licenses and
authorizations is in full force and effect, and the Borrower and each
Restricted Subsidiary is in compliance with the terms and conditions thereof
and is also in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in any applicable Environmental Law or in any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply with
any thereof could not reasonably be expected to cause a Material Adverse
Change. In addition, no written notice, notification, demand, request for
information, citation, summons or order has been issued, no written complaint
has been filed, no penalty has been assessed and no investigation or review is
pending or, to the best knowledge of the Borrower or any Restricted Subsidiary,
threatened, by any Tribunal or other entity with respect to any alleged failure
by the Borrower or any Restricted Subsidiary to have any environmental, health
or safety permit, license or other authorization required under any Applicable
Environmental Law in connection with the conduct of the business of the
Borrower or any Restricted Subsidiary or with respect to any generation,
treatment, storage, recycling, transportation, discharge, disposal or release
of any Hazardous Materials by the Borrower or any Restricted Subsidiary. To the
best knowledge of the Borrower and each Restricted Subsidiary, there are no
material environmental liabilities of the Borrower or any Restricted
Subsidiary, except as previously disclosed in writing to the Lenders. To the
best knowledge of the Borrower and each Restricted Subsidiary, there are no
environmental
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liabilities of the Borrower or any Restricted Subsidiary which could reasonably
be expected to cause a Material Adverse Change. The Borrower has delivered to
Administrative Agent copies of all environmental studies and reports conducted
or received by the Borrower or any Restricted Subsidiary in connection with
real Property. Such studies cover all real Property, if any, owned in fee by
the Borrower and each Restricted Subsidiary. No Hazardous Materials are
generated or produced at or in connection with the Properties and operations of
the Borrower or any Restricted Subsidiary, nor have any Hazardous Materials
been disposed of or otherwise released on or to any Property on which any
operations of the Borrower or any Restricted Subsidiaries are conducted, except
in compliance with Applicable Environmental Laws.
5.11. Disclosure. Neither the Borrower, nor the Parent, nor any
Restricted Subsidiary has made a material misstatement of fact or failed to
disclose any material fact necessary to make the facts disclosed not misleading
in light of the circumstances under which they were made, to Administrative
Agent or any Lender during the course of application for and negotiation of any
Loan Papers or otherwise in connection with any Advances. There is no fact
known to the Borrower, the Parent or any other Restricted Subsidiary that
materially adversely affects any of the Borrower's, the Parent's or any
Restricted Subsidiary's Properties or business, or that could constitute a
Material Adverse Change, and that has not been set forth in the Loan Papers or
in other documents furnished to Administrative Agent or to any Lender.
5.12. Investments; Restricted Subsidiaries. The Parent, the Borrower
and the Restricted Subsidiaries have no Investments except as described on
Schedule 5.12 hereto and as permitted by Section 7.10 hereof. Schedule 5.12 is
a complete and accurate listing with respect to each of the Parent, the
Borrower and the Restricted Subsidiaries showing (a) its complete name, (b) its
jurisdiction of organization, (c) its capital structure, (d) its street and
mailing address, which is its principal place of business and executive office,
and (e) all interests in the Parent, the Borrower and the Restricted
Subsidiaries.
5.13. Certain Fees. No broker's, finder's, management fee or other fee
or commission will be payable by the Borrower with respect to the making of the
Available Commitment or Advances hereunder other than fees payable hereunder.
The Borrower, the Parent and each Restricted Subsidiary hereby agree to
indemnify and hold harmless Administrative Agent and each Lender from and
against any claims, demand, liability, proceedings, costs or expenses asserted
with respect to or arising in connection with any such fees or commissions.
5.14. Intellectual Property. The Borrower, the Parent and each
Restricted Subsidiary have obtained all patents, trademarks, service-marks,
trade names, copyrights, licenses and other rights, free from material
restrictions, which are necessary for the operation of their respective
businesses as presently conducted and as proposed to be conducted. Nothing has
come to the attention of the Borrower, the Parent or any Restricted Subsidiary
to the effect that (a) any process, method, part or other material presently
contemplated to be employed by the Borrower, the Parent or any other Restricted
Subsidiary may or could reasonably be alleged to infringe any
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patent, trademark, service- mark, trade name, license or other right (except
copyright) owned by any other Person, or (b) except as shown on Schedule 5.05
attached hereto, there is not pending or threatened any claim or litigation
against or affecting the Borrower, the Parent or any other Restricted
Subsidiary contesting its right to sell or use any such process, method, part
or other material. Nothing has come to the attention of the Borrower, the
Parent or any Restricted Subsidiary to the effect that any material presently
contemplated to be employed by the Borrower, the Parent or any Restricted
Subsidiary may or could reasonably be alleged to infringe any copyright owned
by any other Person, except to the extent that any such infringement, when
aggregated with all other copyright infringements, could not reasonably be
expected to cause a Material Adverse Change.
5.15. Year 2000 Compliance.
(a) Any reprogramming required to permit the proper functioning, in
and following the year 2000, of (i) the computer systems used by the Borrower,
the Parent and their Subsidiaries and (ii) equipment containing embedded
microchips (including systems and equipment supplied by others or with which
any of such systems interface) and the testing of all such material systems and
equipment, as so reprogrammed, will be completed by September 30, 1999. The
cost to the Borrower, the Parent and the Restricted Subsidiaries of such
reprogramming and testing and of the reasonably foreseeable consequences of
year 2000 to the Borrower, the Parent and the Restricted Subsidiaries
(including, without limitation, reprogramming errors and the failure of others'
systems or equipment) will not result in a Default or Event of Default or cause
a Material Adverse Change. Except for such of the reprogramming referred to in
the immediately preceding sentence as may be necessary, the computer and
management information systems of the Borrower, the Parent and their
Subsidiaries are and, with ordinary course upgrading and maintenance, will
continue for the term of this Agreement to be, sufficient to permit the
Borrower, the Parent and their respective Subsidiaries to conduct their
respective businesses without causing a Material Adverse Change.
(b) Each of the Borrower, the Parent and their Subsidiaries is in the
process of making inquiry of each of its key suppliers, vendors and customers
as to whether such Person will on a timely basis be Year 2000 Compliant in all
material respects. "Key suppliers, vendors and customers" refers to those
suppliers, vendors and customers of the Borrower, the Parent and their
Subsidiaries, the business failure of which could result in a Material Adverse
Change.
5.16. Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the Closing Date and at and as of the date of each Advance,
except for Refinancing Advances, and each shall be true and correct when made,
except to the extent (a) previously fulfilled in accordance with the terms
hereof, (b) subsequently inapplicable, or (c) previously waived in writing by
Administrative Agent and Lenders with respect to any particular factual
circumstance. The representations and warranties made under this Agreement
shall be deemed applicable to each Restricted Subsidiary as of the formation or
acquisition of such Restricted Subsidiary and at and as of each date the
representations and warranties are remade pursuant to this provision. All
representations and warranties made under this Agreement shall survive, and not
be waived by, the execution hereof
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by Administrative Agent and Lenders, any investigation or inquiry by
Administrative Agent or any Lender, or by the making of any Advance under this
Agreement.
ARTICLE VI. AFFIRMATIVE COVENANTS
So long as the Available Commitment, any Advance or any portion of the
Obligations is outstanding, or the Borrower, the Parent or any other Restricted
Subsidiary owes any other amount hereunder or under any other Loan Paper:
6.01. Compliance with Laws and Payment of Debt. The Borrower shall,
and shall cause the Parent and all Restricted Subsidiaries to, comply in all
material respects with all Applicable Laws, including, without limitation,
compliance with ERISA and all applicable federal and state securities Laws. The
Borrower shall, and shall cause the Parent and all Restricted Subsidiaries to,
pay its (a) Funded Debt as and when due (or within any applicable grace
period), unless payment thereof is being contested in good faith by appropriate
proceedings and adequate reserves have been established therefor, and (b) trade
debt in accordance with its past practices, and in any event before any trade
creditor takes any action or terminates any relationship, except those disputes
diligently contested in good faith by the Borrower, the Parent and their
Restricted Subsidiaries for which appropriate reserves have been established in
accordance with GAAP.
6.02. Insurance. The Borrower shall, and shall cause the Parent and
each Restricted Subsidiaries to, (a) keep its offices and other insurable
Properties adequately insured at all times by reputable insurers to such extent
and against such risks, including fire and other risks insured against by
extended coverage, as is customary with companies similarly situated and in the
same or similar businesses, (b) maintain in full force and effect public
liability (including liability insurance for all vehicles and other insurable
Property) and workers' compensation insurance, in amounts customary for such
similar companies to cover normal risks, by insurers satisfactory to
Administrative Agent, (c) maintain business interruption insurance for such
business in amounts satisfactory to the Lenders, and (d) maintain other
insurance as may be required by Law or reasonably requested by Administrative
Agent, provided that such insurance policies will show Administrative Agent, on
behalf of the Lenders, as additional insured or loss payee, as appropriate. The
Borrower shall deliver evidence of renewal of each insurance policy on or
before the date of its expiration, and from time to time shall deliver to
Administrative Agent, upon demand, evidence of the maintenance of such
insurance.
6.03. Inspection Rights. The Borrower shall, and shall cause the
Parent and each Restricted Subsidiary to, permit Administrative Agent or any
Lender, upon one day's notice or such lesser notice as is reasonable under the
circumstances, to examine and make copies of and abstracts from their records
and books of account, to visit and inspect their Properties and to discuss
their affairs, finances, and accounts with any of their directors, officers,
employees, accountants, attorneys and other representatives, all as
Administrative Agent or any Lender may reasonably request.
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6.04. Records and Books of Account; Changes in GAAP. The Borrower
shall, and shall cause the Parent and each Subsidiary of the Parent and the
Borrower to, keep adequate records and books of account in conformity with
GAAP. The Borrower shall not, nor shall the Borrower permit the Parent or any
Restricted Subsidiary of the Borrower or the Parent to change its fiscal year
or its method of financial accounting except in accordance with GAAP. In
connection with any such change after the date hereof, the Borrower and Lenders
shall negotiate in good faith to make appropriate alterations to the covenants
set forth in Section 7.01 hereof, reflecting such change.
6.05. Reporting Requirements. The Borrower shall furnish to the
Administrative Agent:
(a) As soon as available and in any event within 75 days after the end
of the Borrower's fiscal quarters, (i) consolidated balance sheets of Parent,
the Borrower, and the Restricted Subsidiaries and consolidating balance sheets
of the Borrower and its Subsidiaries, as of the end of such quarter, and
consolidated statements of income and statements of cash flows of the Parent,
the Borrower, and each of the Restricted Subsidiaries and consolidating
statements of income and statements of cash flows of the Parent, the Borrower
and the Restricted Subsidiaries, for the portion of the fiscal year ending with
such quarter, setting forth, in comparative form, figures for the corresponding
periods in the previous fiscal year, all in reasonable detail, and certified by
an Authorized Officer as prepared in accordance with GAAP, and fairly
presenting the financial position and results of operations of the Parent, the
Borrower and the Restricted Subsidiaries, subject to normal year-end
adjustments, (ii) for the Parent, the Borrower and the Restricted Subsidiaries,
comparisons and reconciliations of actual results to the budget delivered
pursuant to Section 6.05(e) below for the fiscal quarter most recently ended,
in reasonable detail and satisfactory to the Administrative Agent, and (iii)
for the Parent, the Borrower and the Restricted Subsidiaries, all information
set forth in (i) and (ii) above in a separate presentation;
(b) As soon as available, and in any event within 120 days after the
end of each fiscal year, (i) consolidated balance sheets of the Parent, the
Borrower and the Restricted Subsidiaries, and consolidating balance sheets of
the Parent, the Borrower and the Restricted Subsidiaries, as of the end of such
fiscal year, and consolidated statements of income and cash flows of the
Parent, the Borrower and the Restricted Subsidiaries, and consolidating
statements of income and cash flows of the Parent, the Borrower and the
Restricted Subsidiaries, for such fiscal year, all in reasonable detail,
prepared in accordance with GAAP, and accompanied by an unqualified opinion of
the Auditor, which opinion shall state that such financial statements were
prepared in accordance with GAAP, that the examination by the Auditor in
connection with such financial statements was made in accordance with generally
accepted auditing standards, and that such financial statements present fairly
the financial position and results of operations of the Parent, the Borrower
and the Restricted Subsidiaries, and (ii) for the Parent, the Borrower and the
Restricted Subsidiaries, all information set forth in (i) above in a separate
presentation;
(c) Promptly upon receipt thereof, (i) copies of all material reports
or letters submitted to the Borrower, the Parent or any Subsidiary of the
Borrower or the Parent by the Auditor or
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any other accountants in connection with any annual, interim, or special audit,
including without limitation, the comment letter submitted to management in
connection with any such audit, (ii) each financial statement, report, notice
or proxy statement sent by the Parent, the Borrower or any Restricted
Subsidiary in writing to stockholders generally, (iii) each regular or periodic
report and any registration statement or prospectus (or material written
communication in respect of any thereof) filed by the Parent, the Borrower or
any Restricted Subsidiary with any securities exchange, with the Securities and
Exchange Commission or any successor agency, and (iv) all press releases
concerning material financial aspects of the Parent, the Borrower or any
Restricted Subsidiary;
(d) Together with each set of financial statements delivered pursuant
to subsections (a) and (b) above, a Compliance Certificate executed by an
Authorized Officer, (i) certifying that there has occurred no Default or Event
of Event of Default, (ii) computing the Applicable Margin, and (iii) setting
forth the detailed calculations with respect to the financial covenants
required by Section 7.01 hereof;
(e) As soon as available, and in any event not later than 45 days
after the beginning of each fiscal year of the Borrower, the annual operating
and Capital Expenditure budgets of the Borrower and the Restricted Subsidiaries
for such fiscal year;
(f) Promptly upon knowledge by the Borrower, the Parent or any
Restricted Subsidiary of the occurrence of any Default or Event of Default, a
notice from an Authorized Officer, setting forth the details of such Default or
Event of Default and the action being taken or proposed to be taken with
respect thereto;
(g) As soon as possible, and in any event within five Business Days
after knowledge thereof by the Borrower, the Parent or any Restricted
Subsidiary, notice of any Litigation pending or threatened against the
Borrower, the Parent or any Restricted Subsidiary which, if determined
adversely, could reasonably be expected to result in a judgment, penalties or
damages in excess of $5,000,000, together with a statement of an Authorized
Officer describing the allegations of such Litigation and the action being
taken or proposed to be taken with respect thereto;
(h) Promptly following notice or knowledge thereof by the Borrower,
the Parent or any other Restricted Subsidiaries, notice of any actual or
threatened loss or termination of any material Authorization of the Borrower,
the Parent or any Restricted Subsidiary, together with a statement of an
Authorized Officer describing the circumstances surrounding the same and the
action being taken or proposed to be taken with respect thereto;
(i) Promptly after filing or receipt thereof, copies of all reports
and notices that the Parent, the Borrower or any Restricted Subsidiary (i)
files or receives in respect of any Plan with or from the Internal Revenue
Service, the PBGC or the United States Department of Labor, or (ii) furnishes
to or receives from any holders of any Debt or Contingent Liability, if in
either case, any information or dispute referred to therein either causes a
Default or Event of Default or could reasonably be expected to cause or result
in a Default or an Event of Default;
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(j) Within 30 days after renewal or issuance of any hazard, public
liability, business interruption or other insurance policy maintained by the
Borrower, the Parent or any Restricted Subsidiary, a copy of the binder or
insurance certificate (showing Administrative Agent, on behalf of the Borrower,
the Parent or any Restricted Subsidiary, as loss payee or additional insured,
as appropriate);
(k) As soon as possible and in any event within 10 days after the
Borrower, the Parent or any Restricted Subsidiary knows that any Reportable
Event has occurred with respect to any Plan, a statement, signed by an
Authorized Officer, describing said Reportable Event and the action which the
such Person proposes to take with respect thereto;
(l) As soon as possible, and in any event within 10 days after receipt
by the Borrower, the Parent or any Restricted Subsidiary thereof, a copy of (a)
any notice or claim to the effect that the Borrower, the Parent or any
Restricted Subsidiary is or may be liable to any Person as a result of the
release by the Borrower, the Parent, any Restricted Subsidiary or any other
Person of any toxic or hazardous waste or substance into the environment, and
(b) any notice alleging any violation of any federal, state or local
environmental, health or safety law or regulation by the Borrower, the Parent
or any Restricted Subsidiary, which, in either case, could reasonably be
expected to cause a Material Adverse Change;
(m) Promptly upon the filing thereof, copies of all material
registration statements and all annual, quarterly, monthly or other regular
reports which the Parent, the Borrower or any Restricted Subsidiary files with
the FCC or the Securities and Exchange Commission; and
(n) Promptly upon request, such other information concerning the
condition or operations of the Borrower, the Parent and any of the Restricted
Subsidiaries and any of their Affiliates, financial or otherwise, as
Administrative Agent or any Lender may from time to time reasonably request.
6.06. Use of Proceeds. The proceeds of the Advances shall be available
(and the Borrower shall use such proceeds) for (a) refinance existing Funded
Debt of the Borrower and its Restricted Subsidiaries, (b) Permitted
Acquisitions, (c) Capital Expenditures of the Borrower and the Restricted
Subsidiaries permitted by the terms of this Agreement, and (d) use for general
working capital purposes.
6.07. Maintenance of Existence and Assets. The Borrower shall
maintain, and shall cause the Parent and each Restricted Subsidiary to
maintain, its corporate existence, authority to do business in the
jurisdictions in which it is necessary for the Borrower, the Parent or each
Restricted Subsidiary to do so, and all Authorizations necessary for the
operation of any of their businesses. The Borrower shall maintain, and shall
cause the Parent and each other Restricted Subsidiary to maintain, the assets
necessary for use in their respective businesses in good repair, working order
and condition (normal wear and tear excepted), and make all such repairs,
renewals and replacements thereof as may be reasonably required.
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6.08. Payment of Taxes. The Borrower will, and will cause the Parent
and all Subsidiaries of the Parent and the Borrower to, promptly pay and
discharge all lawful Taxes imposed upon it or upon its income or profit or upon
any Property belonging to it, unless such Tax shall not at the time be due and
payable, or if the validity thereof shall currently be contested on a timely
basis in good faith by appropriate proceedings (provided that the enforcement
of any Liens arising out of any such nonpayment shall be stayed or bonded
during the proceedings) and adequate reserves with respect to such Tax shall
have been established in accordance with GAAP.
6.09. INDEMNITY.
(A) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD
HARMLESS ADMINISTRATIVE AGENT AND EACH LENDER, EACH OF THEIR RESPECTIVE
AFFILIATES, AND EACH OF THEIR RESPECTIVE (INCLUDING SUCH AFFILIATES') OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, SHAREHOLDERS AND CONSULTANTS
(INCLUDING, WITHOUT LIMITATION, THOSE RETAINED IN CONNECTION WITH THE
SATISFACTION OR ATTEMPTED SATISFACTION OF ANY OF THE CONDITIONS SET FORTH
HEREIN) OF EACH OF THE FOREGOING (COLLECTIVELY, "INDEMNITEES") FROM AND AGAINST
ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, CLAIMS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY
INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH
INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO OR SUCH PROCEEDING SHALL HAVE
ACTUALLY BEEN INSTITUTED), IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST SUCH
INDEMNITEES (WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL AND WHETHER BASED ON ANY
FEDERAL, STATE, OR LOCAL LAWS AND REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE
CAUSE, OR ON CONTRACT, TORT OR OTHERWISE), ARISING FROM OR CONNECTED WITH THE
PAST, PRESENT OR FUTURE OPERATIONS OF THE PARENT, THE BORROWER, ANY RESTRICTED
SUBSIDIARY OF THE BORROWER OR THE PARENT, ANY OTHER RESTRICTED SUBSIDIARY, ANY
AFFILIATE OR ANY PREDECESSORS IN INTEREST, OR THE PAST, PRESENT OR FUTURE
ENVIRONMENTAL CONDITION OF PROPERTY OF THE PARENT, THE BORROWER, ANY RESTRICTED
SUBSIDIARY OF THE BORROWER OR PARENT, ANY OTHER RESTRICTED SUBSIDIARY, ANY
AFFILIATE OR ANY PREDECESSORS IN INTEREST, IN EACH CASE RELATING TO OR ARISING
OUT OF THIS AGREEMENT, THE LOAN PAPERS OR ANY ACT, EVENT OR TRANSACTION OR
ALLEGED ACT, EVENT OR TRANSACTION RELATING OR ATTENDANT THERETO AND THE
MANAGEMENT OF THE ADVANCES BY THE ADMINISTRATIVE AGENT, INCLUDING IN CONNECTION
WITH, OR AS A RESULT, IN WHOLE OR IN PART, OF ANY NEGLIGENCE OF ADMINISTRATIVE
AGENT OR ANY LENDER (OTHER THAN THOSE MATTERS INVOLVING A CLAIM BY A
PARTICIPANT PURCHASER AGAINST ANY LENDER AND NOT THE BORROWER), OR THE USE OR
INTENDED USE OF THE PROCEEDS OF THE ADVANCES HEREUNDER, OR IN CONNECTION WITH
ANY INVESTIGATION OF ANY POTENTIAL MATTER COVERED HEREBY, BUT EXCLUDING ANY
CLAIM OR LIABILITY THAT ARISES AS THE RESULT OF THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF ANY INDEMNITEE, AS FINALLY JUDICIALLY DETERMINED BY A COURT OF
COMPETENT JURISDICTION (COLLECTIVELY, "INDEMNIFIED MATTERS").
(B) IN ADDITION, THE BORROWER SHALL PERIODICALLY, UPON REQUEST,
REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE LEGAL AND OTHER ACTUAL REASONABLE
EXPENSES (INCLUDING THE COST OF ANY INVESTIGATION AND PREPARATION) INCURRED IN
CONNECTION WITH ANY INDEMNIFIED MATTER. IF FOR ANY REASON THE FOREGOING
INDEMNIFICATION IS UNAVAILABLE TO ANY INDEMNITEE OR
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INSUFFICIENT TO HOLD ANY INDEMNITEE HARMLESS WITH RESPECT TO INDEMNIFIED
MATTERS, THEN THE BORROWER SHALL CONTRIBUTE TO THE AMOUNT PAID OR PAYABLE BY
SUCH INDEMNITEE AS A RESULT OF SUCH LOSS, CLAIM, DAMAGE OR LIABILITY IN SUCH
PROPORTION AS IS APPROPRIATE TO REFLECT NOT ONLY THE RELATIVE BENEFITS RECEIVED
BY THE BORROWER AND THE HOLDERS OF THE CAPITAL STOCK OF THE BORROWER ON THE ONE
HAND, AND SUCH INDEMNITEE ON THE OTHER HAND, BUT ALSO THE RELATIVE FAULT OF THE
BORROWER AND SUCH INDEMNITEE, AS WELL AS ANY OTHER RELEVANT EQUITABLE
CONSIDERATIONS. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION OBLIGATIONS UNDER
THIS SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE BORROWER MAY
OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO EACH
INDEMNITEE AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY
SUCCESSORS, ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES, AS THE CASE MAY BE, OF
THE BORROWER, THE ADMINISTRATIVE AGENT, THE LENDERS AND ALL OTHER INDEMNITEES.
THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 6.09 SHALL SURVIVE (I) THE
EXECUTION OF THIS AGREEMENT AND (II) ANY TERMINATION OF THIS AGREEMENT AND
PAYMENT OF THE OBLIGATIONS.
6.10. Management Fees Paid and Earned. The Borrower agrees that no
Management Fees will be paid by the Borrower or any Restricted Subsidiary to
any Person at any time.
6.11. Authorizations and Material Agreements. The Borrower shall, and
shall cause the Parent and the Restricted Subsidiaries to, obtain and comply in
all material respects with all FCC Licenses relating to the Borrower's, the
Parent's or the Subsidiaries' businesses. The Borrower shall, and shall cause
the Parent and the Restricted Subsidiaries to, obtain and comply in all
material respects with all Authorizations relating to such businesses, except
to the extent that a failure to do so could not reasonably be expected to cause
or result in a Material Adverse Change. The Borrower shall, and shall cause the
Parent and all other Restricted Subsidiaries to, maintain and comply in all
material respects with all agreements necessary or appropriate for any of them
to own, maintain or operate any of their businesses or Properties.
6.12. Further Assurances. The Borrower shall, and shall cause the
Parent and each other Restricted Subsidiary to, make, execute or endorse and
acknowledge and deliver or file or cause the same to be done, all such
vouchers, invoices, notices, certifications and additional agreements,
undertakings, conveyances, deeds of trust, mortgages, security agreements,
transfers, assignments, financing statements and other assurances, and take any
and all such other action, as Administrative Agent may, from time to time, deem
reasonably necessary or proper in connection with the Parent or any Restricted
Subsidiary's obligations under any of the Loan Papers and the obligations of
the Borrower thereunder, or for better assuring and confirming unto
Administrative Agent all or any part of the security for any of the
Obligations.
6.13. Year 2000 Compliance. The Borrower will promptly notify
Administrative Agent if the Borrower discovers or determines that any computer
application (including those of its suppliers and vendors) that is material to
its or any of the Parent's or any of the Borrower's and/or the Parent's
Subsidiaries' businesses and operations will not be Year 2000 Compliant on a
timely basis, except to the extent that such failure could not be reasonably
expected to cause a Material Adverse Change.
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6.14. Subsidiaries and Other Obligors. The Borrower shall cause each
of the Restricted Subsidiaries and the Parent to comply with each provision of
this Article VI.
ARTICLE VII. NEGATIVE COVENANTS
So long as the Available Commitment, any Advance, or any portion of
the Obligations is outstanding, or the Borrower, the Parent or any Restricted
Subsidiary owes any other amount hereunder or under any other Loan Paper:
7.01. Financial Covenants. The Borrower and the Restricted
Subsidiaries shall comply with the following covenants:
(a) Total Leverage Ratio. At all times during the term hereof, the
Total Leverage Ratio shall not be greater than 3.00 to 1.00, and in the event
the Conversion Date is extended for an additional 364-day period pursuant to
Section 2.16(a) hereof or the Borrower converts to a Term Loan pursuant to
Section 2.16(b) hereof, 2.50 to 1.00.
(b) Interest Coverage Ratio. At all times during the term hereof, the
Interest Coverage Ratio shall not be less than 2.50 to 1.00.
(c) Fixed Charges Coverage Ratio. At all times during the term hereof,
the Fixed Charges Coverage Ratio shall not be less than 1.25 to 1.00.
7.02. Debt. The Borrower shall not, and shall not permit the Parent or
any of the other Restricted Subsidiaries to, create, incur, assume, become or
be liable in any manner in respect of or suffer to exist, any Debt, except (a)
Debt under the Loan Papers, (b) Debt under the Subordinated Notes and other
Debt in existence on the date hereof as shown on Schedule 5.08 hereto, and
renewals, extensions (but not increases) and refinancings thereof on terms
substantially similar thereto and on terms no more restrictive, (c) trade
payables incurred and paid in the ordinary course of business, (d) Debt between
the Borrower and its Restricted Subsidiaries, and (e) so long as there exists
no Default or Event of Default in existence at the time incurred and none is
caused thereby, (i) $40,000,000 in Debt constituting Capital Leases outstanding
in the aggregate at any one time, (ii) unsecured subordinated Debt of the
Borrower on terms and conditions acceptable to the Administrative Agent and
each Lender, subordinated to the Facility pursuant to the subordination
language set forth on Schedule 7.02 hereto, (iii)with respect to the Borrower
Debt of the Borrower under Interest Hedge Agreements, (iv) Debt For Borrowed
Money not in excess of $5,000,000 secured by a Lien on the Provo, Utah
property, (v) no more than $25,000,000 in recourse third- party financing and
factoring arrangements outstanding at any one time, and (vi) accrued but unpaid
Earn- Out Liabilities.
7.03. Contingent Liabilities. The Borrower shall not, and shall not
permit the Parent, or any of the Restricted Subsidiaries to, create, incur,
assume, become or be liable in any manner in respect of, or suffer to exist,
any Contingent Liabilities, except Contingent Liabilities under
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or relating to the Loan Papers, Contingent Liabilities incurred in the ordinary
course of business, and Contingent Liabilities described on Schedule 7.03
hereof.
7.04. Liens. The Borrower shall not, and shall not permit the Parent,
or any of the Restricted Subsidiaries to, create or suffer to exist any Lien
upon any of its Properties, except Permitted Liens and Liens securing Debt
permitted under Section 7.02(e)(i) hereof. It is specifically acknowledged and
agreed that the Borrower shall not, and shall not permit the Parent or any of
the Restricted Subsidiaries to, hereafter agree with any Person (other than
Administrative Agent) not to grant a Lien on any of its assets.
7.05. Dispositions of Assets. Except for Permitted Dispositions, the
Borrower shall not, and shall not permit the Parent or any of the Restricted
Subsidiaries to, sell, lease, assign, or otherwise dispose of any assets of the
Borrower or any Restricted Subsidiary, or otherwise consummate any Asset Sale.
7.06. Distributions and Restricted Payments. The Borrower shall not,
and shall not permit the Parent or any Restricted Subsidiary to, make any
Restricted Payments, other than any Restricted Payment in the form of a
Distribution made by any Restricted Subsidiary to any other Restricted
Subsidiary or to the Borrower, and other than so long as there exists no
Default or Event of Default both before and after giving effect to any such
Restricted Payment, scheduled cash interest payments required to be paid by WA
Telecom Products Co., Inc. under the Subordinated Notes and issuances of common
stock by the Parent in connection with its Earn-Out Liabilities.
7.07. Merger; Consolidation. The Borrower shall not, and shall not
permit the Parent or any of the Restricted Subsidiaries to, merge into or
consolidate with any Person; provided that any Restricted Subsidiary may be
merged or consolidated with or into any other Restricted Subsidiary or with or
into the Borrower (so long as the Borrower shall be continuing or surviving
corporation).
7.08. Business. The Borrower shall not, and shall not permit the
Parent or any of the other Restricted Subsidiaries to, change the nature of its
business as now conducted. The Borrower shall not conduct any business except
the ownership and operation of telecommunications equipment manufacturing, long
distance, and long-haul carrier businesses. WA Telecom Products Co, Inc. shall
not conduct any business except the ownership of Capital Stock of World Access
Holdings, Inc. World Access, Inc. shall not conduct any business except the
ownership of Capital Stock of WA Telecom Products Co., Inc. and Telco Systems,
Inc.
7.09. Transactions with Affiliates. The Borrower shall not, and shall
not permit the Parent or any of the Restricted Subsidiaries to, enter into or
be party to a transaction with any Affiliate, except on terms no less favorable
than could be obtained on an arms'-length basis with a Person that is not an
Affiliate.
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7.10. Loans and Investments. The Borrower shall not, and shall not
permit the Parent or any of the Restricted Subsidiaries to, make any loan,
advance, extension of credit or capital contribution to, or make or have any
Investment in, any Person, or make any commitment to make any such extension of
credit or Investment, or make any acquisition, except (a) Investments in Cash
Equivalents, (b) Permitted Acquisitions, (c) provided no Default or Event of
Default exists or would result therefrom, Investments in Restricted
Subsidiaries that have executed or will execute Loan Papers required by the
Administrative Agent, and (d) provided no Default or Event of Default exists or
would result therefrom, Investments in Unrestricted Subsidiaries, and
Investments of not more than $5,000,000 individually or $25,000,000 in the
aggregate in companies in similar lines of business to those of the Borrower,
the Parent or the Restricted Subsidiaries.
7.11. Fiscal Year and Accounting Method. The Borrower shall not, and
shall not permit the Parent or any of the Restricted Subsidiaries to, change
its fiscal year or method of accounting, except as may be required by GAAP.
7.12. Issuance of Partnership Interest and Capital Stock; Amendment of
Articles and ByLaws. Except in connection with the transactions consummated on
or prior to the Closing Date, the Borrower shall not, and shall not permit WA
Telecom Products, Inc. or any of the Restricted Subsidiaries to, issue, sell or
otherwise dispose of any Capital Stock in such Person, or any options or rights
to acquire such partnership interest or capital stock not issued and
outstanding on the Closing Date. The Borrower shall not amend its articles of
organization or bylaws and the Borrower shall not permit the Parent or any of
the other Restricted Subsidiaries to amend its articles of organization or
bylaws or partnership agreement, as applicable, except, so long as there exists
no Default or Event of Default both prior to and after giving effect to such
amendment, and after written notice to the Administrative Agent, the Borrower,
the Parent, or any of the other Restricted Subsidiaries may make (i) changes to
comply with applicable Law and (ii) changes which would not result in a
Material Adverse Change.
7.13. Change of Ownership. The Borrower shall not, and shall not
permit the Borrower or any Restricted Subsidiary to, permit any change in the
ownership of the Borrower and each Guarantor (other than World Access, Inc.)
from the ownership thereof as of the date hereof as disclosed on Schedule 5.01
hereto.
7.14. Sale and Leaseback. Other than a transaction with respect to the
Borrower's real property located at Provo, Utah, the Borrower shall not, and
shall not permit any of the Parent, or the Restricted Subsidiaries to, enter
into any arrangement whereby it sells or transfers any of its assets, and
thereafter rents or leases such assets.
7.15. Compliance with ERISA. The Borrower shall not, and shall not
permit the Parent or any Subsidiary of the Borrower or the Parent to, directly
or indirectly, or permit any member of such Person's Controlled Group to
directly or indirectly, (a) terminate any Plan so as to result in any material
(in the opinion of Administrative Agent) liability to any of the Borrower, the
Parent or any Subsidiary of the Borrower or the Parent, or any member of their
Controlled
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Group, (b) permit to exist any ERISA Event, or any other event or condition,
which presents the risk of any material (in the opinion of Administrative
Agent) liability of any of the Parent, the Borrower or any Subsidiary of the
Parent or the Borrower, or any member of their Controlled Group, (c) make a
complete or partial withdrawal (within the meaning of Section 4201 of ERISA)
from any Multiemployer Plan so as to result in any material (in the opinion of
Administrative Agent) liability to any of the Borrower, the Parent or any
Subsidiary of the Parent or the Borrower, or any member of their Controlled
Group, (d) enter into any new Plan or modify any existing Plan so as to
increase its obligations thereunder (except in the ordinary course of business
consistent with past practice) which could result in any material (in the
opinion of Administrative Agent) liability to any of the Parent, the Borrower
or any Subsidiary of the Parent or the Borrower, or any member of their
Controlled Group, or (e) permit the present value of all benefit liabilities,
as defined in Title IV of ERISA, under each Plan of each of the Parent, the
Borrower or any Subsidiary of the Parent or the Borrower, or any member of
their Controlled Group (using the actuarial assumptions utilized by the PBGC
upon termination of a Plan) to materially (in the opinion of Administrative
Agent) exceed the fair market value of Plan assets allocable to such benefits
all determined as of the most recent valuation date for each such Plan.
7.16. Rate Swap Exposure. The Borrower shall not enter into or become
liable in respect of any Interest Hedge Agreement pursuant to which the
aggregate amount subject to such Interest Hedge Agreements exceeds the
aggregate principal amount of all Advances.
7.17. Restricted Subsidiaries and Other Obligors. The Borrower shall
not permit the Parent or any of its Restricted Subsidiaries to violate any
provision of this Article VII.
7.18. Limitation on Restrictive Agreements. The Borrower shall not,
and shall not permit the Parent or any Restricted Subsidiary to, other than in
connection with the Subordinated Notes, enter into any indenture, agreement,
instrument, financing document or other arrangement which, directly or
indirectly, prohibits or restrains, or has the effect of prohibiting or
restraining, or imposes materially adverse conditions upon: (a) the incurrence
of Debt, (b) the granting of Liens, (c) the making or granting of Guarantees,
(d) the payment of dividends or Distributions, (e) the purchase, redemption or
retirement of any Capital Stock, (f) the making of loans or advances, (g)
transfers or sales of property or assets (including Capital Stock) by the
Parent, the Borrower or any of the Restricted Subsidiaries, or (h) the making
of Investments or acquisitions.
ARTICLE VIII. EVENTS OF DEFAULT
8.01. Events of Default. Any one or more of the following shall be an
"Event of Default" hereunder, if the same shall occur for any reason
whatsoever, whether voluntary or involuntary, by operation of Law or otherwise:
(a) The Borrower shall fail to pay (i) any principal on any Note when
due; or (ii) any interest on any Note within three days after the same becomes
due; or (iii) any Commitment Fees, other fees, or other amounts payable under
any Loan Paper within five days after the same becomes due;
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(b) Any representation or warranty made or deemed made by the
Borrower, the Parent or any Restricted Subsidiary (or any of its officers or
representatives) under or in connection with any Loan Papers shall prove to
have been incorrect or misleading in any material respect when made or deemed
made;
(c) The Borrower, the Parent or any Restricted Subsidiary shall fail
to perform or observe any term or condition contained in Article VI hereof
(except Section 6.05(f) hereof) which is not remedied within thirty days after
the earlier of (i) actual knowledge of such breach by the Parent, the Borrower
or any of the Restricted Subsidiaries of such breach and (ii) written notice
from the Administrative Agent or any Lender of such breach;
(d) The Borrower, the Parent or any Restricted Subsidiary shall fail
to perform or observe any term or covenant contained in Article VII hereof or
in Section 6.05(f) hereof;
(e) The Borrower, the Parent or any Restricted Subsidiary shall fail
to perform or observe any other term or covenant contained in any Loan Paper,
other than those described in Sections 8.01(a), (b), (c) and (d) hereof which
is not remedied within thirty days after the earlier of (i) actual knowledge of
such breach by the Borrower, the Parent or any of the Restricted Subsidiaries
of such breach and (ii) written notice from Administrative Agent or any Lender
of such breach;
(f) (i) Any Loan Paper or material provision thereof shall, for any
reason, not be valid and binding on the Borrower, the Parent or any Restricted
Subsidiary signatory thereto, or not be in full force and effect, or shall be
declared to be null and void; (ii) the validity or enforceability of any Loan
Paper shall be contested by the Borrower, the Parent, or any Restricted
Subsidiary; (iii) the Borrower, the Parent or any Restricted Subsidiary shall
deny that it has any or further liability or obligation under its respective
Loan Papers; or(iv) any default or breach under any provision of any Loan
Papers shall continue after the applicable grace period, if any, specified in
such Loan Paper;
(g) Any of the following shall occur: (i) any of the Parent, the
Borrower or any Subsidiary of the Parent or the Borrower shall make an
assignment for the benefit of creditors or be unable to pay its debts generally
as they become due; (ii) any of the Parent, the Borrower or any Subsidiary of
the Parent or the Borrower shall petition or apply to any Tribunal for the
appointment of a trustee, receiver or liquidator of it or of any substantial
part of its assets, or shall commence any proceedings relating to any of the
Parent, the Borrower or any Subsidiary of the Parent or the Borrower under any
Debtor Relief Law, whether now or hereafter in effect; (iii) any such petition
or application shall be filed, or any such proceedings shall be commenced,
against any of the Parent, the Borrower or any Subsidiary of the Parent or the
Borrower, or an order, judgment or decree shall be entered appointing any such
trustee, receiver or liquidator, or approving the petition in any such
proceedings and such petition, application or proceedings shall continue
undismissed for 30 days or such order, judgment or decree shall continue
unstayed and in effect for 30 days; (iv) any final order, judgment or decree
shall be entered in any proceedings against any of the Parent, the Borrower or
any Subsidiary of the Parent or the Borrower decreeing
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its dissolution; (v) any final order, judgment or decree shall be entered in
any proceedings against any of the Parent, the Borrower or any Subsidiary of
the Parent or the Borrower decreeing its split-up which requires the
divestiture of a substantial part of its assets; or (vi) any of the Parent, the
Borrower or any Subsidiary of the Parent or the Borrower shall petition or
apply to any Tribunal for the appointment of a trustee, receiver or liquidator
of it or of any substantial part of its assets, or shall commence any
proceedings relating to any of the Parent, the Borrower or any Subsidiary of
the Parent or the Borrower under any Debtor Relief Law, whether now or
hereafter in effect;
(h) (i) Any of the Borrower, the Parent or any Restricted Subsidiary
shall fail to pay any Debt or Contingent Liability of $5,000,000 or more when
due (whether by scheduled maturity, required prepayment, acceleration, demand
or otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such Debt
or Contingent Liability; (ii) any of the Borrower, the Parent or any Restricted
Subsidiary shall fail to perform or observe any term or covenant contained in
any agreement or instrument relating to any such Debt or Contingent Liability,
when required to be performed or observed, and such failure shall continue
after the applicable grace period, if any, specified in such agreement or
instrument, and can result in acceleration of the maturity of such Debt or
Contingent Liability; or (iii) any such Debt or Contingent Liability shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated maturity thereof;
(i) Any of the Borrower, the Parent or Restricted Subsidiary shall
have any judgment(s) outstanding against it for the payment of $5,000,000 or
more, and such judgment(s) shall remain unstayed, in effect, uncontested and
unpaid for a period of 30 days;
(j) (i) Any Authorization necessary for the ownership or essential for
the operation of any of the interstate or intrastate telecommunications systems
or networks operated by the Parent, the Borrower or any Restricted Subsidiary
shall expire, and on or prior to such expiration, the same shall not have been
renewed or replaced by another Authorization authorizing substantially the same
operations; (ii) any Authorization necessary for the ownership or essential for
the operation of any of the Parent's, the Borrower's or the Restricted
Subsidiaries' businesses shall be canceled, revoked, terminated, rescinded,
annulled, suspended or modified in a materially adverse respect, or shall no
longer be in full force and effect, or the grant or the effectiveness thereof
shall have been stayed, vacated, reversed or set aside, and such action shall
be no longer subject to further administrative or judicial review; (iii) the
FCC shall have issued, on its own initiative and not upon the complaint of or
at the request of a third party, any hearing designation order in any
non-comparative license renewal proceeding or any license revocation proceeding
involving any License or Authorization necessary for the ownership or essential
for the operation of the Borrower's, the Parent's or the Restricted
Subsidiaries' businesses, or (iv) in any non-comparative license renewal
proceeding or license revocation proceeding initiated by the FCC upon the
complaint of or at the request of a third party or any comparative (i.e.,
multiple applicant) license renewal proceeding, in each case involving any
License or Authorization necessary for the ownership or essential for the
operation of such business; or (v) any
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administrative law judge of the FCC (or successor to the functions of an
administrative law judge of the FCC) shall have issued an initial decision to
the effect that the Parent, the Borrower or any Restricted Subsidiary lacks the
basic qualifications to own or operate its business or is not deserving of a
renewal expectancy, and such initial decision shall not have been timely
appealed or shall otherwise have become an order that is final and no longer
subject to further administrative or judicial review;
(k) Any of the Parent, the Borrower or any Subsidiary of the Parent or
the Borrower or any ERISA Affiliate shall have committed a failure described in
Section 302(f)(l) of ERISA, and the amount determined under Section 302(f)(3)
of ERISA is equal to or greater than $5,000,000;
(l) The Parent, the Borrower, any Subsidiary of the Parent or the
Borrower, or any ERISA Affiliate, shall have been notified by the sponsor of a
Multiemployer Plan that such Plan is in reorganization or is being terminated,
within the meaning of Title IV of ERISA, if as a result thereof, the aggregate
annual contributions to all Multiemployer Plans in reorganization or being
terminated is increased over the amounts contributed to such Plans for the
preceding Plan year by an amount exceeding $5,000,000;
(m) The Borrower, the Parent or any Restricted Subsidiary shall be
required under any Environmental Law (i) to implement any remedial,
neutralization or stabilization process or program, the cost of which could
constitute a Material Adverse Change, or (ii) to pay any penalty, fine or
damages in an aggregate amount of $5,000,000 or more;
(n) (i) Any Property (whether leased or owned) of any of the Borrower,
the Parent or any Restricted Subsidiary, or the operations conducted thereon by
any of them or any current or prior owner or operator thereof (in the case of
real Property), shall violate or have violated any applicable Environmental
Law, if such violation could constitute a Material Adverse Change; or (ii) any
of the Borrower, the Parent, or any Restricted Subsidiary shall not obtain or
maintain any License required to be obtained or filed under any Environmental
Law in connection with the use of such Property and assets, including, without
limitation, past or present treatment, storage, disposal or release of
Hazardous Materials into the environment, if the failure to obtain or maintain
the same could constitute a Material Adverse Change;
(o) Any Collateral Document shall for any reason (other than pursuant
to the terms thereof) cease to create a valid and perfected first priority Lien
in the Collateral (subject to Permitted Liens) purported to be covered thereby,
and the value of such Collateral, singly or in the aggregate, equals or exceeds
$5,000,000;
(p) The occurrence of any Change of Control;
(q) (i) A petition or complaint is filed before or by the Federal
Trade Commission, the United States Justice Department, or any other Tribunal,
seeking to cause the Borrower, the Parent or any Restricted Subsidiary to
divest a significant portion of its assets or the Capital
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Stock of any of the Parent, the Borrower or any Restricted Subsidiary pursuant
to any antitrust, restraint of trade, unfair competition or similar Laws, and
such petition or complaint is not dismissed or discharged within 60 days of the
filing thereof, which such divestiture could reasonably be expected to cause a
Material Adverse Change, or (ii) a warrant of attachment or execution or
similar process shall be issued or levied against Property of the Parent, the
Borrower or any Restricted Subsidiary which, together with all other such
Property of the Borrower, the Parent and the Restricted Subsidiaries subject to
other such process, exceeds in the aggregate $5,000,000 in value, and if such
judgment or award is not insured or, within 60 days after the entry, issue or
levy thereof, such judgment, warrant or process shall not have been paid or
discharged, bonded or stayed pending appeal, or if, after the expiration of any
such stay, such judgment, warrant or process shall not have been paid or
discharged;
(r) (i) Any civil action, suit or proceeding shall be commenced
against any of the Borrower, the Parent or any Restricted Subsidiary under any
federal or state racketeering statute (including, without limitation, the
Racketeer Influenced and Corrupt Organization Act of 1970)("RICO"), and such
suit shall be adversely determined by a court of applicable jurisdiction
resulting in a judgment against the Borrower, the Parent or any Restricted
Subsidiary in excess of $5,000,000; or (ii) any criminal action or proceeding
shall be commenced against any of the Borrower, the Parent or any Restricted
Subsidiary under any federal or state racketeering statute (including, without
limitation, RICO);
(s) There shall exist any Event of Default relating to the
Subordinated Notes or under the Indenture; or
(t) Any of the Parent, the Borrower or any of their Subsidiaries shall
fail to be Year 2000 Compliant.
8.02. Remedies Upon Default. If an Event of Default described in
Section 8.01(g) hereof shall occur with respect to the Parent, the Borrower or
any Subsidiary of the Parent or the Borrower, the Available Commitment shall be
immediately terminated and the aggregate unpaid principal balance of and
accrued interest on all Advances shall, to the extent permitted by applicable
Law, thereupon become due and payable concurrently therewith, without any
action by Administrative Agent or any Lender, and without diligence,
presentment, demand, protest, notice of protest or intent to accelerate, or
notice of any other kind, all of which are hereby expressly waived. Subject to
the immediately foregoing sentence, if any Event of Default shall occur and be
continuing, then no LIBOR Advances shall be available to the Borrower, and
Administrative Agent may at its election, and shall at the direction of
Majority Lenders, do any one or more of the following:
(a) Declare the entire unpaid balance of all Advances immediately due
and payable, whereupon it shall be due and payable without diligence,
presentment, demand, protest, notice of protest or intent to accelerate or
notice of any other kind (except notices specifically provided for under
Section 8.01), all of which are hereby expressly waived (except to the extent
waiver of the foregoing is not permitted by applicable Law);
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(b) Terminate the Available Commitment;
(c) Reduce any claim of Administrative Agent and Lenders to judgment;
or
(d) Exercise any Rights afforded under any Loan Papers or by Law,
including, without limitation to the UCC, in equity or otherwise.
8.03. Cumulative Rights. All Rights available to Administrative Agent
and Lenders under the Loan Papers shall be cumulative of and in addition to all
other Rights granted thereto at Law or in equity, whether or not amounts owing
thereunder shall be due and payable and whether or not Administrative Agent or
any Lender shall have instituted any suit for collection or other action in
connection with the Loan Papers.
8.04. Waivers. The acceptance by Administrative Agent or any Lender at
any time and from time to time of partial payment of any amount owing under any
Loan Papers shall not be deemed to be a waiver of any Default or Event of
Default then existing. No waiver by Administrative Agent or any Lender of any
Default or Event of Default shall be deemed to be a waiver of any Default or
Event of Default other than such Default or Event of Default. No delay or
omission by Administrative Agent or any Lender in exercising any Right under
the Loan Papers shall impair such Right or be construed as a waiver thereof or
an acquiescence therein, nor shall any single or partial exercise of any such
Right preclude other or further exercise thereof or the exercise of any other
Right under the Loan Papers or otherwise.
8.05. Performance by Administrative Agent or any Lender. Should any
covenant of any of the Borrower, the Parent or the Restricted Subsidiaries fail
to be performed in accordance with the terms of the Loan Papers, Administrative
Agent may, at its option, perform or attempt to perform such covenant on behalf
of such Person. Notwithstanding the foregoing, it is expressly understood that
neither Administrative Agent nor any Lender assumes, and neither shall ever
have, except by express written consent of Administrative Agent or such Lender,
any liability or responsibility for the performance of any duties or covenants
of any of the Borrower, the Parent or the Restricted Subsidiaries.
8.06. Expenditures. The Borrower shall reimburse Administrative Agent
and each Lender for any sums spent by it in connection with the exercise of any
Right provided herein. Such sums shall bear interest at the lesser of (a) the
Base Rate in effect from time to time, plus 2.0%, and (b) the Highest Lawful
Rate, from the date spent until the date of repayment by the Borrower.
8.07. Control. None of the covenants or other provisions contained in
this Agreement shall, or shall be deemed to, give Administrative Agent or any
Lender any Rights to exercise control over the affairs and/or management of any
of the Borrower, the Parent or the Restricted Subsidiaries, the power of
Administrative Agent and each Lender being limited to the Rights to exercise
the remedies provided in this Article; provided, however, that if
Administrative Agent or any Lender becomes the owner of any partnership, stock
or other equity interest in any Person,
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whether through foreclosure or otherwise, it shall be entitled to exercise such
legal Rights as it may have by being an owner of such stock or other equity
interest in such Person.
ARTICLE IX. THE ADMINISTRATIVE AGENT
9.01. Authorization and Action. Each Lender hereby appoints and
authorizes Administrative Agent to take such action as Administrative Agent
deems appropriate on its behalf and to exercise such powers under this
Agreement and the other Loan Papers as are delegated to the Administrative
Agent by the terms of the Loan Papers, together with such powers as are
reasonably incidental thereto. As to any matters not expressly provided for by
this Agreement and the other Loan Papers (including, without limitation,
enforcement or collection of the Notes), Administrative Agent shall not be
required to exercise any discretion or take any action, but shall be required
to act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of Majority Lenders (or all
Lenders, if required under Section 10.01), and such instructions shall be
binding upon all Lenders; provided, however, that Administrative Agent shall
not be required to take any action which exposes Administrative Agent to
personal liability or which is contrary to any Loan Papers or applicable Law.
Administrative Agent agrees to give to each Lender notice of each notice given
to it by the Borrower pursuant to the terms of this Agreement and to distribute
to each applicable Lender in like funds all amounts delivered to Administrative
Agent by the Borrower for the Ratable or individual account of any Lender.
9.02. Administrative Agent's Reliance, Etc. Neither Administrative
Agent, nor any of its directors, officers, agents, employees, or
representatives shall be liable for any action taken or omitted to be taken by
it or them under or in connection with this Agreement or any other Loan Paper,
except for its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, Administrative Agent (a) may
treat the payee of any Note as the holder thereof until Administrative Agent
receives written notice of the assignment or transfer thereof signed by such
payee and in form satisfactory to Administrative Agent; (b) may consult with
legal counsel (including counsel for the Borrower or any of the Restricted
Subsidiaries), independent public accountants and other experts selected by it,
and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants or
experts; (c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties or representations
made in or in connection with this Agreement or any other Loan Papers; (d)
shall not have any duty to ascertain or to inquire as to the performance or
observance of any of the terms, covenants or conditions of this Agreement or
any other Loan Papers on the part of the Borrower, the Parent or the Restricted
Subsidiaries or to inspect the Property (including the books and records) of
the Borrower, the Parent or the Restricted Subsidiaries; (e) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any other
Loan Papers, or any other instrument or document furnished pursuant hereto; and
(f) shall incur no liability under or in respect of this Agreement or any other
Loan Papers by acting upon any notice, consent, certificate or other
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instrument or writing believed by it to be genuine and signed or sent by the
proper party or parties.
9.03. NationsBank, N. A. and Affiliates. With respect to its Available
Commitment, its Advances, its Specified Percentage and any Loan Papers,
NationsBank, N. A. has the same Rights under this Agreement as any other Lender
and may exercise the same as though it were not Administrative Agent.
NationsBank, N. A. and its Affiliates may accept deposits from, lend money to
and generally engage in any kind of business with, any of the Borrower, the
Parent or the Restricted Subsidiary, any Affiliate thereof, and any Person who
may do business therewith, all as if NationsBank, N. A. were not Administrative
Agent and without any duty to account therefor to any Lender.
9.04. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Administrative Agent or any other
Lender, and based on the financial statements referred to in Section 5.04
hereof and such other documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Agreement. Each
Lender also acknowledges that it will, independently and without reliance upon
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement and the
other Loan Papers.
9.05. Indemnification by Lenders. Lenders shall indemnify
Administrative Agent, Ratable, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against Administrative Agent in any way
relating to or arising out of any Loan Papers or any action taken or omitted by
Administrative Agent thereunder, including any negligence of Administrative
Agent; provided, however, that no Lender shall be liable for any portion of
such liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses, or disbursements resulting from Administrative Agent's
gross negligence or willful misconduct. Without limitation of the foregoing,
Lenders shall reimburse Administrative Agent, Ratable, promptly upon demand for
any out-of-pocket expenses (including reasonable attorneys' fees) incurred by
Administrative Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiation, legal proceedings or otherwise) of, or legal and other advice in
respect of rights or responsibilities under, the Loan Papers. The indemnity
provided in this Section 9.05 shall survive the termination of this Agreement.
9.06. Successor Administrative Agent. Administrative Agent may resign
at any time by giving written notice thereof to Lenders and the Borrower, and
may be removed at any time with or without cause by the action of all Lenders
(other than Administrative Agent, if it is a Lender). Upon any such
resignation, Majority Lenders shall have the right to appoint a successor
Administrative Agent. If no successor Administrative Agent shall have been so
appointed and shall have accepted such appointment within thirty days after the
retiring Administrative Agent's giving of notice of resignation, then the
retiring Administrative Agent may, on behalf of Lenders,
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appoint a successor Administrative Agent, which shall be a commercial bank
organized under the Laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $50,000,000. Upon
the acceptance of any appointment as Administrative Agent hereunder by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the Rights and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations under the Loan Papers, provided that
if the retiring or removed Administrative Agent is unable to appoint a
successor Administrative Agent, Administrative Agent shall, after the
expiration of a sixty day period from the date of notice, be relieved of all
obligations as Administrative Agent hereunder. Notwithstanding any
Administrative Agent's resignation or removal hereunder, the provisions of this
Article IX shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was Administrative Agent under this
Agreement.
ARTICLE X. MISCELLANEOUS
10.01. Amendments and Waivers. No amendment or waiver of any provision
of this Agreement, or any other Loan Papers, nor consent to any departure by
the Borrower, the Parent or the Restricted Subsidiaries therefrom, shall be
effective unless the same shall be in writing and signed by Administrative
Agent with the consent of Majority Lenders, and then any such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, waiver or consent shall
(and the result of action or failure to take action shall not), unless in
writing and signed by all of Lenders and Administrative Agent, (a) increase the
Available Commitment, the Unavailable Commitment, or the Letter of Credit
Commitment, (b) reduce any principal, interest, fees or other amounts payable
hereunder, or waive or result in the waiver of any Event of Default under
Section 8.01(a) hereof, or change the pro rata sharing of payments, (c)
postpone any date fixed for any payment of principal, interest, fees or other
amounts payable hereunder, (d) release any Collateral or Guaranties securing
any Person's obligations hereunder, other than releases specifically
contemplated hereby and by the Loan Papers, including, without limitation,
releases of assets that have been sold or transferred as specifically permitted
hereby or by the Loan Papers, or (e) change the meaning of Specified Percentage
or the number of Lenders required to take any action hereunder. No amendment,
waiver or consent shall affect the Rights or duties of Administrative Agent
under any Loan Papers, unless it is in writing and signed by Administrative
Agent in addition to the requisite number of Lenders.
10.02. Notices.
(a) Manner of Delivery. All notices communications and other materials
to be given or delivered under the Loan Papers shall, except in those cases
where giving notice by telephone is expressly permitted, be given or delivered
in writing. All written notices, communications and materials shall be sent by
registered or certified mail, postage prepaid, return receipt requested, by
telecopier or delivered by hand. In the event of a discrepancy between any
telephonic notice and any written confirmation thereof, such written
confirmation shall be deemed the effective
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notice except to the extent Administrative Agent, any Lender or the Borrower
has acted in reliance on such telephonic notice.
(b) Addresses. All notices, communications and materials to be given
or delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
If to the Borrower:
c/o World Access, Inc.
2240 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Attention: Treasurer
Telephone No.: (404)231-2025
Facsimile No.: (404)365-9847
With a Copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Steven E. Fox
Telephone No.: (404)522-4700
Facsimile No.: (404)525-2224
If to Administrative Agent:
NationsBank, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202
Attention: David Williams
Telephone No.: (214) 508-9588
Facsimile No.: (214) 508-9390
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With a Copy to:
Donohoe, Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Attention: Michael Cuda
Telephone No.: (214) 698-3867
Facsimile No.: (214) 744-0231
If to any Lender, to its address set forth below opposite its signature or on
any Assignment and Acceptance or amendment to this Agreement or at such other
address or, telecopier or telephone number or to the attention of such other
individual or department as the party to which such information pertains may
hereafter specify for the purpose in a notice to the other specifically
captioned "Notice of Change of Address".
(d) Effectiveness. Each notice, communication and any material to be
given or delivered to any party pursuant to this Agreement shall be effective
or deemed delivered or furnished (i) if sent by mail, on the fifth Business Day
after such notice, communication or material is deposited in the mail,
addressed as above provided, (ii) if sent by telecopier, when such notice,
communication or material is transmitted to the appropriate number determined
as above provided in this Section 10.02 and the appropriate receipt is received
or otherwise acknowledged, (iii) if sent by hand delivery or overnight courier,
when left at the address of the addressee addressed as above provided, and (iv)
if given by telephone, when communicated to the individual or any member of the
department specified as the individual or department to whose attention
notices, communications and materials are to be given or delivered except that
notices of a change of address, telecopier or telephone number or individual or
department to whose attention notices, communications and materials are to be
given or delivered shall not be effective until received; provided, however,
that notices to Administrative Agent pursuant to Article II shall be effective
when received. The Borrower agrees that Administrative Agent shall have no duty
or obligation to verify or otherwise confirm telephonic notices given pursuant
to Article II and agrees to indemnify and hold harmless Administrative Agent
and Lenders for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs and expenses resulting,
directly or indirectly, from acting upon any such notice.
10.03. Parties in Interest. All covenants and agreements contained in
this Agreement and all other Loan Papers shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto. Each Lender may
from time to time assign or transfer its interests hereunder pursuant to
Section 10.04 hereof. Neither the Borrower, the Parent or any Restricted
Subsidiary may assign or transfer its Rights or obligations under any Loan
Paper without the prior written consent of Administrative Agent.
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10.04. Assignments and Participations.
(a) Subject to the following sentence, each Lender (an "Assignor") may
assign its Rights and obligations as a Lender under the Loan Papers to one or
more Eligible Assignees pursuant to an Assignment and Acceptance, so long as
(i) each assignment shall be of a constant, and not a varying, percentage of
all Rights and obligations thereunder, (ii) each Assignor shall obtain in each
case the prior written consent of Administrative Agent (and, so long as the
Bond Letter of Credit is outstanding and issued by Bank Austria AG, the prior
written consent of Bank Austria Creditanstalt Corporate Finance, Inc.), which
consent shall not be unreasonably withheld, (iii) each Assignor shall in each
case pay a $3,500 processing fee to Administrative Agent, and (iv) no such
assignment is for an amount less than the lesser of the total amount of the
Available Commitment or $5,000,000.
Within five Business Days after Administrative Agent receives notice of any
such assignment, the Borrower shall execute and deliver to Administrative
Agent, in exchange for the Notes issued to Assignor, new Notes to the order of
such Assignor and its assignee in amounts equal to their respective Specified
Percentages of the Available Commitment. Such new Notes shall be dated the
effective date of the assignment. It is specifically acknowledged and agreed
that on and after the effective date of each assignment, the assignee shall be
a party hereto and shall have the Rights and obligations of a Lender under the
Loan Papers.
(b) Each Lender may sell participations to one or more Persons in all
or any of its Rights and obligations under the Loan Papers; provided, however,
that (i) such Lender's obligations under the Loan Papers shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) such Lender shall
remain the holder of its Notes for all purposes of the Loan Papers, (iv) the
participant shall be granted the Right to vote on or consent to only those
matters described in Sections 10.01(a), (b), (c) and (d), (v) each of the
Borrower, the Parent, Restricted Subsidiaries, Administrative Agent and the
other Lenders shall continue to deal solely and directly with such Lender in
connection with its Rights and obligations under the Loan Papers, and (vi) no
such participation is for an amount less than the lesser of the total amount of
the Available Commitment or $5,000,000.
(c) Any Lender may, in connection with any assignment or
participation, or proposed assignment or participation, disclose to the
assignee or participant, or proposed assignee or participant, any information
relating to the Borrower, the Parent or any Restricted Subsidiary furnished to
such Lender by or on behalf of any of the Borrower, the Parent or any
Restricted Subsidiary.
(d) Notwithstanding any other provision set forth in this Agreement,
each Lender may at any time create a security interest in all or any portion of
its Rights under this Agreement (including, without limitation, the Advances
owing to it and the Note or Notes held by it) in favor of any Federal Reserve
Bank in accordance with Regulation A of the Board of Governors of the Federal
Reserve System.
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10.05. Sharing of Payments. If any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any Right of set-off,
or otherwise) on account of its Advances in excess of its Ratable share of
payments made by the Borrower, such Lender shall forthwith purchase
participations in Advances made by the other Lenders as shall be necessary to
share the excess payment Ratable with each of them; provided, however, that if
any of such excess payment is thereafter recovered from the purchasing Lender,
its purchase from each Lender shall be rescinded and each Lender shall repay
the purchase price to the extent of such recovery together with a Ratable share
of any interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. The Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this Section
10.05 may, to the fullest extent permitted by Law, exercise all its Rights of
payment (including the Right of set-off) with respect to such participation as
fully as if such Lender were the direct creditor of the Borrower in the amount
of such participation.
10.06. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, each Lender is hereby authorized at any
time and from time to time, to the fullest extent permitted by Law, to set-off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Lender to or for the credit or the account of the Borrower against any and all
of the obligations of the Borrower now or hereafter existing under this
Agreement and the other Loan Papers, whether or not Administrative Agent or any
Lender shall have made any demand under this Agreement or the other Loan
Papers, and even if such obligations are unmatured. Each Lender shall promptly
notify the Borrower after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The Rights of each Lender under this Section 10.06 are in addition
to other Rights (including, without limitation, other Rights of set-off) which
such Lender may have.
10.07. Costs, Expenses, and Taxes.
(a) The Borrower agrees to pay on demand (i) all costs and expenses of
Administrative Agent and the Issuing Bank (with respect solely to the Letters
of Credit issued by it) in connection with the preparation and negotiation of
all Loan Papers, including, without limitation, the reasonable fees and
out-of-pocket expenses of Special Counsel and (ii) all costs and expenses
(including reasonable attorneys' fees and expenses) of Administrative Agent and
each Lender in connection with administration, interpretation, modification,
amendment, waiver, or release of any Loan Papers and any restructuring,
work-out or collection of any portion of the Obligations or the enforcement of
any Loan Papers.
(b) In addition, the Borrower shall pay any and all stamp, debt and
other Taxes payable or determined to be payable in connection with any payment
hereunder (other than Taxes on the overall net income of Administrative Agent
or any Lender or franchise Taxes or Taxes on capital or capital receipts of
Administrative Agent or any Lender), or the execution, delivery or recordation
of any Loan Papers, and agrees to save Administrative Agent and each Lender
harmless from and against any and all liabilities with respect to, or resulting
from, any delay in
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paying or omission to pay any Taxes in accordance with this Section 10.07,
including any penalty, interest and expenses relating thereto. All payments by
the Borrower or any Restricted Subsidiary under any Loan Papers shall be made
free and clear of and without deduction for any present or future Taxes (other
than Taxes on the overall net income of Administrative Agent or any Lender of
any nature now or hereafter existing, levied or withheld, or franchise Taxes or
Taxes on capital or capital receipts of Administrative Agent or any Lender),
including all interest, penalties or similar liabilities relating thereto. If
the Borrower shall be required by Law to deduct or to withhold any Taxes from
or in respect of any amount payable hereunder, (i) the amount so payable shall
be increased to the extent necessary so that, after making all required
deductions and withholdings (including Taxes on amounts payable to
Administrative Agent or any Lender pursuant to this sentence), Administrative
Agent or any Lender receives an amount equal to the sum it would have received
had no such deductions or withholdings been made, (ii) the Borrower shall make
such deductions or withholdings, and (iii) the Borrower shall pay the full
amount deducted or withheld to the relevant taxing authority in accordance with
applicable Law. Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 10.07 shall survive the execution of this Agreement, termination
of the Available Commitment, repayment of the Obligations, satisfaction of each
agreement securing or assuring the Obligations and termination of this
Agreement and each other Loan Paper.
10.08. Indemnification by the Borrower. The Borrower shall indemnify,
defend and hold harmless Administrative Agent, each Lender and their respective
Affiliates, directors, officers, agents, employees and representatives, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against any of them in any way relating to or arising out of any Loan Papers
(including in connection with or as a result, in whole or in part, of the
negligence of any of them), any transaction related hereto or thereto, or any
act, omission or transaction of the Borrower, the Parent or any Restricted
Subsidiary and their respective Affiliates, or any of their directors,
partners, officers, agents, employees or representatives; provided, however,
that neither Administrative Agent nor any Lender shall be indemnified, defended
and held harmless pursuant to this Section 10.08 to the extent of any losses
or damages which the Borrower proves were caused by the indemnified party's
willful misconduct or gross negligence.
10.09. Rate Provision. It is not the intention of any party to any
Loan Papers to make an agreement violative of the Laws of any applicable
jurisdiction relating to usury. In no event shall the Borrower or any other
Person be obligated to pay any amount in excess of the Maximum Amount. If
Administrative Agent or any Lender ever receives, collects or applies, as
interest, any such excess, such amount which would be excessive interest shall
be deemed a partial repayment of principal and treated hereunder as such, and
if principal is paid in full, any remaining excess shall be paid to the
Borrower or the other Person entitled thereto. In determining whether or not
the interest paid or payable, under any specific contingency, exceeds the
Maximum Amount, each of the Borrower, the Parent or any Restricted Subsidiary,
Administrative Agent and each Lender shall, to the maximum extent permitted
under Applicable
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Law, (a) characterize any nonprincipal payment as an expense, fee or premium
rather than as interest, (b) exclude voluntary prepayments and the effect
thereof, and (c) amortize, prorate, allocate and spread in equal parts, the
total amount of inter est throughout the entire contemplated term of the
Obligations so that the interest rate is uniform throughout the entire term of
the Obligations; provided that if the Obligations are paid and performed in
full prior to the end of the full contemplated term thereof, and if the
interest received for the actual period of existence thereof exceeds the
Maximum Amount, Administrative Agent or Lenders, as appropriate, shall refund
to the Borrower the amount of such excess or credit the amount of such excess
against the total principal amount owing, and, in such event, neither
Administrative Agent nor any Lender shall be subject to any penalties provided
by any Laws for contracting for, charging or receiving interest in excess of
the Maximum Amount. This Section 10.09 shall control every other provision of
all agreements among the parties to the Loan Papers pertaining to the
transactions contemplated by or contained in the Loan Papers.
10.10. Severability. If any provision of any Loan Papers is held to be
illegal, invalid or unenforceable under present or future Laws during the term
thereof, such provision shall be fully severable, the appropriate Loan Paper
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part thereof, and the remaining provisions
thereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance therefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as a part of such Loan Paper a legal, valid and
enforceable provision as similar in terms to the illegal, invalid or
unenforceable provision as may be possible.
10.11. Exceptions to Covenants. Neither the Borrower, nor the Parent,
nor any Restricted Subsidiary shall be deemed to be permitted to take any
action or to fail to take any action that is permitted as an exception to any
covenant in any Loan Papers, or that is within the permissible limits of any
covenant, if such action or omission would result in a violation of any other
covenant in any Loan Papers.
10.12. Counterparts. This Agreement and the other Loan Papers may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
10.13. GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO BE
CONTRACTS MADE IN DALLAS, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO
CONFLICT OF LAWS) AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY OTHER
JURISDICTION AND NOT AS A LIMITATION OF SECTION 10.14 HEREOF, THE BORROWER
AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS
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<PAGE> 81
LOCATED IN DALLAS, TEXAS, WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION
HEREWITH. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE BORROWER HEREBY WAIVES
ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM
IN TORT, CONTRACT, EQUITY OR OTHERWISE) ARISING UNDER OR RELATING TO THIS
AGREEMENT, THE OTHER LOAN PAPERS OR ANY RELATED MATTERS AND AGREES THAT ANY
SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
(b) THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS
UPON IT. THE BORROWER AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY
REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE BORROWER AT ITS
ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT, AND SERVICE SO MADE SHALL
BE DEEMED TO BE COMPLETED FIVE BUSINESS DAYS AFTER DEPOSIT IN THE UNITED STATES
MAIL. NOTHING IN THIS SECTION 10.13 SHALL AFFECT THE RIGHT OF ADMINISTRATIVE
AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW.
10.14. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
10.15. Joint and Several Obligations. The Borrower and the Lenders
agree that the obligations and duties of the Borrower hereunder and under the
Loan Papers shall be joint and several in all instances.
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<PAGE> 82
IN WITNESS WHEREOF, this Credit Agreement is executed as of the date
first set forth above.
THE BORROWER:
WORLD ACCESS HOLDINGS, INC.
By:
------------------------------------------
Its:
------------------------------------------
TELCO SYSTEMS, INC.
By:
------------------------------------------
Its:
------------------------------------------
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<PAGE> 83
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A., as Administrative Agent
----------------------------------------------
By:
------------------------------------------
Its:
------------------------------------------
SYNDICATION AGENT:
FLEET NATIONAL BANK, as Syndication Agent
----------------------------------------------
By:
------------------------------------------
Its:
------------------------------------------
DOCUMENTATION AGENT:
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC., as Documentation
Agent
----------------------------------------------
By:
------------------------------------------
Its:
------------------------------------------
----------------------------------------------
By:
------------------------------------------
Its:
------------------------------------------
77
<PAGE> 84
LENDERS:
NATIONSBANK, N.A., individually as Lender
Specified Percentage: 46.6666666666%
By:
-----------------------------------
Its:
-----------------------------------
78
<PAGE> 85
FLEET NATIONAL BANK, individually as Lender
Specified Percentage: 33.3333333333%
By:
--------------------------------------
Its:
--------------------------------------
79
<PAGE> 86
HAMILTON BANK, N.A., individually as Lender
Specified Percentage: 13.3333333333%
By:
-------------------------------------
Its:
-------------------------------------
80
<PAGE> 87
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC., individually as
Lender
Specified Percentage: 20.0000000000%
By:
------------------------------------
Its:
------------------------------------
81
<PAGE> 1
EXHIBIT 10.30
GUARANTY
THIS GUARANTY, dated as of December 30, 1998 (as amended, restated and
otherwise modified from time to time this "Guaranty"), made by the undersigned
(the "Guarantor"), of the obligations of Telco Systems, Inc. and World Access
Holdings, Inc., (collectively "Company"), under the Credit Agreement (defined
below) among the Company, NationsBank, N.A., as administrative agent
("Administrative Agent"), and the lenders party to the Credit Agreement (singly,
a "Lender" and collectively, the "Lenders").
BACKGROUND
1. The Company, the Administrative Agent, and the Lenders have entered
into an Credit Agreement dated as of December 30, 1998 (as it may be amended,
restated or otherwise modified from time to time, being the "Credit Agreement").
The capitalized terms not otherwise defined herein have the meanings specified
in the Credit Agreement.
2. Pursuant to the Credit Agreement, the Company may, subject to the
terms of the Credit Agreement and the other Loan Papers, request that the
Lenders make Advances.
3. It is a condition precedent to the obligation of the Lenders to make
such Advances upon the terms and conditions set forth herein that the Guarantor
execute and deliver this Guaranty.
4. The Guarantor has determined that the execution, delivery, and
performance of this Guaranty is necessary and convenient to the conduct,
promotion, and attainment of Guarantor's business.
5. Guarantor desires to induce the Lenders to make such Advances which
may reasonably be expected to benefit, directly or indirectly, Guarantor.
NOW, THEREFORE, in consideration of the premises and in order to induce
the Lenders to make Advances, Guarantor hereby agrees as follows:
1. Guaranty.
(a) Guarantor hereby unconditionally guarantees the punctual payment
of, and promises to pay, when due, whether at stated maturity, by mandatory
prepayment, by acceleration or otherwise, all Obligations, indebtedness and
liabilities, and all rearrangements, renewals and extensions of all or any part
thereof, of Company, any Subsidiary or any other Obligor now or hereafter
arising from, by virtue of or pursuant to the Credit Agreement, the Notes, any
other Loan Paper, and any and all renewals and extensions thereof, or any part
thereof, or future amendments thereto, whether for principal, interest
(including, without limitation, interest, fees and other charges that would
accrue or become owing both prior to and subsequent to and but for the
commencement of any proceeding against or with respect to the Company under any
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<PAGE> 2
chapter of the Bankruptcy Code of 1978, 11 U.S.C. ss.101 et seq. whether or not
a claim is allowed for the same in any such proceeding), premium, fees,
commissions, expenses or otherwise (such obligations being the "Obligation"),
and agrees to pay any and all reasonable expenses (including reasonable counsel
fees and expenses) incurred in enforcement or collection of all or any part
thereof, whether such obligations, indebtedness and liabilities are direct,
indirect, fixed, contingent, joint, several or joint and several, and of any
rights under this Guaranty.
(b) Anything contained in this Guaranty to the contrary
notwithstanding, the obligations of Guarantor hereunder shall be limited to a
maximum aggregate amount equal to the largest amount that would not render its
obligations hereunder subject to avoidance as a fraudulent transfer or
conveyance under Section 548 of Title 11 of the United States Code or any
applicable provisions of comparable state law (collectively, the "Fraudulent
Transfer Laws"), in each case after giving effect to all other liabilities of
Guarantor, contingent or otherwise, that are relevant under the Fraudulent
Transfer Laws (specifically excluding, however, any liabilities of Guarantor in
respect of intercompany indebtedness to the Company or other Affiliates of the
Company to the extent that such indebtedness would be discharged in an amount
equal to the amount paid by Guarantor hereunder) and after giving effect as
assets, subject to Paragraph 4(a) hereof, to the value (as determined under the
applicable provisions of the Fraudulent Transfer Laws) of any rights to
subrogation or contribution of Guarantor pursuant to (i) Applicable Law or (ii)
any agreement providing for an equitable allocation among Guarantor and other
Affiliates of the Company of obligations arising under guaranties by such
parties.
2. Guaranty Absolute. Guarantor guarantees that the Obligation will be
paid strictly in accordance with the terms of the Credit Agreement, the Notes,
and the other Loan Papers, regardless of any Applicable Law, regulation or order
now or hereafter in effect in any jurisdiction affecting any of such terms or
the rights of the Lender with respect thereto; provided, however, nothing
contained in this Guaranty shall require Guarantor to make any payment under
this Guaranty in violation of any Applicable Law, regulation or order now or
hereafter in effect. The obligations and liabilities of Guarantor hereunder are
independent of the obligations of the Company under the Credit Agreement and any
Applicable Law, to the extent such payments are not in violation of any
Applicable Law. The liability of Guarantor under this Guaranty shall be absolute
and unconditional irrespective of:
(a) the taking or accepting of any other security or guaranty
for any or all of the Obligations;
(b) any increase, reduction or payment in full at any time or
from time to time of any part of the Obligation, including any
reduction or termination of the Commitment;
(c) any lack of validity or enforceability of the Credit
Agreement, the Notes, or any other Loan Paper or other agreement or
instrument relating thereto, including but not limited to the
unenforceability of all or any part of the Obligation by reason of the
fact that (i) the Obligation, and/or the interest paid or payable with
respect thereto,
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<PAGE> 3
exceeds the amount permitted by Applicable Law, (ii) the act of
creating the Obligation, or any part thereof, is ultra vires, (iii) the
officers creating same acted in excess of their authority, or (iv) for
any other reason;
(d) any lack of corporate power of the Company or any other
Person at any time liable for the payment of any or all of the
Obligation;
(e) any Debtor Relief Laws affecting the rights of creditors
generally involving the Company, Guarantor or any other Person
obligated on any of the Obligation;
(f) any renewal, compromise, extension, acceleration or other
change in the time, manner or place of payment of, or in any other term
of, all or any of the Obligation; any adjustment, indulgence,
forbearance, or compromise that may be granted or given by any Lender
or the Administrative Agent to the Company, Guarantor, or any Person at
any time liable for the payment of any or all of the Obligation; or any
other modification, amendment, or waiver of or any consent to departure
from the Credit Agreement, the Notes, or any other Loan Paper and other
agreement or instrument relating thereto without notification of
Guarantor (the right to such notification being herein specifically
waived by Guarantor);
(g) any exchange, release, sale, subordination, or
non-perfection of any collateral or Lien thereon or any lack of
validity or enforceability or change in priority, destruction,
reduction, or loss or impairment of value of any collateral or Lien
thereon;
(h) any release or amendment or waiver of or consent to
departure from any other guaranty for all or any of the Obligation;
(i) the failure by any Lender or the Administrative Agent to
make any demand upon or to bring any legal, equitable, or other action
against the Company or any other Person (including, without limitation,
Guarantor), or the failure or delay by any Lender or the Administrative
Agent to, or the manner in which any Lender or the Administrative Agent
shall, proceed to exhaust rights against any direct or indirect
security for the Obligation;
(j) the existence of any claim, defense, set-off, or other
rights which the Company or Guarantor may have at any time against the
Company, the Lenders, or Guarantor, or any other Person, whether in
connection with this Guaranty, the Loan Papers, the transactions
contemplated thereby, or any other transaction;
(k) any failure of any Lender or the Administrative Agent to
notify Guarantor of any renewal, extension, or assignment of the
Obligation or any part thereof, or the release of any security, or of
any other action taken or refrained from being taken by any Lender or
the Administrative Agent, it being understood that the Lenders and the
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<PAGE> 4
Administrative Agent shall not be required to give Guarantor any notice
of any kind under any circumstances whatsoever with respect to or in
connection with the Obligation;
(l) any payment by the Company to the Lenders or the
Administrative Agent is held to constitute a preference under any
Debtor Relief Law or if for any other reason the Lenders or the
Administrative Agent is required to refund such payment or pay the
amount thereof to another Person; or
(m) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, the Company, Guarantor, any
other guarantor or other Person liable on the Obligation, including,
without limitation, any defense by reason of any disability or other
defense of the Company, or the cessation from any cause whatsoever of
the liability of the Company, or any claim that Guarantor's obligations
hereunder exceed or are more burdensome than those of the Company.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Obligation is rescinded or must
otherwise be returned by any Lender or any other Person upon the insolvency,
bankruptcy or reorganization of the Company, Guarantor or otherwise, all as
though such payment had not been made.
3. Waiver. To the extent not prohibited by Applicable Law, Guarantor
hereby waives: (a) promptness, protests, diligence, presentments, acceptance,
performance, demands for performance, notices of nonperformance, notices of
protests, notices of dishonor, notices of acceptance of this Guaranty and of the
existence, creation or incurrence of new or additional indebtedness, and any of
the events described in Section 2 herein and of any other occurrence or matter
with respect to any of the Obligation, this Guaranty or any of the other Loan
Papers; (b) any requirement that the Administrative Agent or any Lender protect,
secure, perfect, or insure any Lien or security interest or any property subject
thereto or exhaust any right or take any action against the Company or any other
Person or any collateral or pursue any other remedy in the Administrative
Agent's or any Lender's power whatsoever; (c) any right to assert against the
Administrative Agent or any Lender as a counterclaim, set-off or cross-claim,
any counterclaim, set-off or claim which it may now or hereafter have against
the Company or other Person liable on the Obligation; (d) any right to seek or
enforce any remedy or right that the Administrative Agent or any Lender now has
or may hereafter have against the Company (to the extent permitted by Applicable
Law); (e) except as otherwise provided in Section 4 hereof, any right to
participate in any collateral or any right benefitting the Administrative Agent
or the Lenders in respect of the Obligation; and (f) any right by which it might
be entitled to require suit on an accrued right of action in respect of any of
the Obligation or require suit against the Company or any other Person, whether
arising pursuant to Section 34.02 of the Texas Business and Commerce Code, as
amended, Section 17.001 of the Texas Civil Practice and Remedies Code, as
amended, Rule 31 of the Texas Rules of Civil Procedure, as amended, or
otherwise.
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<PAGE> 5
4. Subrogation and Subordination.
(a) Notwithstanding any reference to subrogation contained herein to
the contrary, Guarantor hereby irrevocably waives any claim or other rights
which it may have or hereafter acquire against the Company that arise from the
existence, payment, performance or enforcement of Guarantor's obligations under
this Guaranty, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution, indemnification, any right to
participate in any claim or remedy of any Lender against the Company or any
collateral which any Lender now has or hereafter acquires, whether or not such
claim, remedy or right arises in equity, or under contract, statutes or common
law, including, without limitation, the right to take or receive from the
Company, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim or other rights
until the Obligation shall have been paid indefeasibly in full in cash and no
commitments of any Lender remain outstanding; and thereafter Guarantor will be
subrogated to the position of the Lenders to the extent of the payments made by
Guarantor. If any amount shall be paid to Guarantor in violation of the
immediately preceding sentence and the Obligation shall not have been paid
indefeasibly in full in cash or any commitment of any Lender shall remain
outstanding, such amount shall be deemed to have been paid to Guarantor for the
benefit of, and held in trust for the benefit of, the Lenders, and shall
forthwith be paid to the Administrative Agent to be credited and applied upon
the Obligation, whether matured or unmatured, in accordance with the terms of
the Credit Agreement. Guarantor acknowledges that it will receive direct and
indirect benefits from the financing arrangements contemplated by the Credit
Agreement and that the waiver set forth in this Paragraph 4(a) is knowingly made
in contemplation of such benefits.
(b) If Guarantor becomes the holder of any indebtedness payable by the
Company, Guarantor hereby subordinates all indebtedness owing to it from the
Company to all indebtedness of the Company to the Lenders, and agrees that upon
the occurrence and continuance of a Default or an Event of Default, it shall not
accept any payment on the same until payment indefeasibly in full in cash of the
Obligations of the Company under the Credit Agreement, the Notes and all other
Loan Papers, and shall in no circumstance whatsoever attempt to set-off or
reduce any obligations hereunder because of such indebtedness. If any amount
shall nevertheless be paid to Guarantor by the Company on behalf of the Company
prior to payment in full of the Obligation, such amount shall be held in trust
for the benefit of the Lenders and shall forthwith be paid to the Administrative
Agent to be credited and applied to the Obligation, whether matured or
unmatured.
5. Representations and Warranties. Guarantor hereby represents and
warrants that all representations and warranties as they apply to Guarantor only
set forth in Article V of the Credit Agreement (each of which is hereby
incorporated by reference) are true and correct.
6. Covenants. Guarantor hereby expressly assumes, confirms, and agrees
to perform, observe, and be bound by all conditions and covenants set forth in
the Credit Agreement, to the extent applicable to it, as if it were a signatory
thereto. Guarantor further covenants and agrees (a) punctually and properly to
perform all of Guarantor's covenants and duties under any other
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<PAGE> 6
Loan Papers; (b) from time to time promptly to furnish the Administrative Agent
with any information or writings which the Administrative Agent may request
concerning this Guaranty; and (c) promptly to notify the Administrative Agent of
any claim, action, or proceeding affecting this Guaranty. Guarantor hereby
designates the Obligation as Senior Indebtedness and Designated Senior
Indebtedness as defined in the Subordinated Notes and the Junior Exchangeable
Documentation.
7. Amendments, Etc. No amendment or waiver of any provision of this
Guaranty nor consent to any departure by Guarantor therefrom shall in any event
be effective unless the same shall be in writing and signed by Guarantor, the
Lenders or the Administrative Agent as provided in the Credit Agreement, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
8. Addresses for Notices. Unless otherwise provided herein, all
notices, requests, consents, demands, and other communications shall be in
writing and shall be personally delivered, sent by telecopy, sent by Federal
Express or other overnight delivery service or mailed, by certified mail,
postage prepaid, to the following addresses:
(a) If to the Guarantor:
c\oWorld Access, Inc.
945 East Paces Ferry Road
Suite 2240
Atlanta, GA 30326
Telephone No.: (404) 231-2025
Telecopier No.: (404) 365-9847
Attention: Chief Executive Officer
With a copy (which shall not constitute notice) to:
Rogers & Hardin, LLP
2700 International Tower
229 Peachtree Street NE
Atlanta, GA 30303
Telephone No.: (404) 522-4700
Facsimile No.: (404) 525-2224
Attention: Steven E. Fox, Esq.
(b) If to the Administrative Agent:
NationsBank, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202
Telephone No.: (214)508-9588
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<PAGE> 7
Facsimile: (214)508-9390
Attention: Mr. David Williams
Vice President
with a copy to:
Donohoe, Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Attention: Michael Cuda
(c) If to any Lender, to its address shown on the signature pages
hereto or to such other address as any party may designate in
written notice to the other parties. All notices, requests,
consents, demands, and other communications hereunder will be
effective when so personally delivered or sent by telecopy, or
one day after being sent by Federal Express or other overnight
delivery service or five days after being so mailed, except as
otherwise provided in the Credit Agreement.
9. No Waiver; Remedies. No failure on the part of the Administrative
Agent or any Lender to exercise, and no delay in exercising, any right hereunder
or under any of the Loan Papers shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder or under any of the Loan
Papers preclude any other or further exercise thereof or the exercise of any
other right. Neither the Administrative Agent nor any Lender shall be required
to (a) prosecute collection or seek to enforce or resort to any remedies against
the Company or any other Person liable on any of the Obligation, (b) join the
Company or any other Person liable on any of the Obligation in any action in
which Lender prosecutes collection or seeks to enforce or resort to any remedies
against the Company or other Person liable on any of the Obligation, or (c) seek
to enforce or resort to any remedies with respect to any Liens granted to (or
benefitting, directly or indirectly) the Administrative Agent or any Lender by
the Company or any other Person liable on any of the Obligation. Neither the
Administrative Agent nor any Lender shall have any obligation to protect, secure
or insure any of the Liens or the properties or interests in properties subject
thereto. The remedies herein provided are cumulative and not exclusive of any
remedies provided by Applicable Law.
10. Right of Set-off. Upon the occurrence and during the continuance of
any Event of Default, each Lender is hereby authorized at any time and from time
to time, to the fullest extent permitted by Law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by such Lender to or for the
credit or the account of Guarantor against any and all of the obligations of
Guarantor now or hereafter existing under this Guaranty, irrespective of whether
or not such Lender shall have made any demand under this Guaranty. Each Lender
agrees promptly to notify Guarantor after any such set-off and application,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of each Lender under this
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<PAGE> 8
Section 10 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which such Lender may have.
11. Liens. To the extent not prohibited by Applicable Law, Guarantor
agrees that the Administrative Agent or Lender, in its discretion, without
notice or demand to or upon Guarantor and without affecting either the liability
of Guarantor, the Company or any other Person liable on any of the Obligation
under, or the Liens and security interests created by, this Guaranty, or any
security interest or other Lien, may foreclose any deed of trust or mortgage or
similar Lien covering interests in real or personal property, and the interests
in real or personal property secured thereby, by nonjudicial sale; and Guarantor
hereby waives, to the extent not prohibited by Applicable Law, any defense to
the recovery by the Administrative Agent or any Lender hereunder against the
Company, Guarantor or any collateral of any deficiency after a nonjudicial sale
and Guarantor expressly waives any defense or benefits that may be derived from
Chapter 34 of the Texas Business and Commerce Code, Section 51.003 of the Texas
Property Code, or any similar statute in effect in any other jurisdiction.
Without limiting the foregoing, Guarantor waives, to the extent not prohibited
by Applicable Law, any defense arising out of any such nonjudicial sale even
though such sale operates to impair or extinguish any right of reimbursement or
subrogation or any other right or remedy of Guarantor against the Company or any
other Person or any Collateral or any other collateral. Guarantor hereby agrees
that Guarantor shall be liable, subject to the limitations of Section 1 hereof,
for any part of the Obligation remaining unpaid after any foreclosure.
12. Continuing Guaranty; Transfer of Notes. This Guaranty is an
irrevocable continuing guaranty of payment and shall (a) remain in full force
and effect until final payment indefeasibly in full in cash of the Obligations,
termination of the Commitment, and all other amounts payable under this
Guaranty, (b) be binding upon Guarantor, its successors and assigns, and (c)
inure to the benefit of and be enforceable by each Lender and its successors,
transferees and assigns. Without limiting the generality of the foregoing clause
(c), to the extent permitted by the Credit Agreement, each Lender may assign or
otherwise transfer its rights under the Credit Agreement, the Notes or any of
the Loan Papers or any interest therein to any other Person, and such other
Person shall thereupon become vested with all the rights or any interest
therein, as appropriate, in respect thereof granted to the Lender herein or
otherwise.
13. Information. Guarantor acknowledges and agrees that it shall have
the sole responsibility for obtaining from the Company such information
concerning the Company's financial condition or business operations as Guarantor
may require, and that neither the Administrative Agent nor any Lender has any
duty at any time to disclose to Guarantor any information relating to the
business operations or financial conditions of the Company.
14. GOVERNING LAW. (A) THIS AGREEMENT AND ALL LOAN PAPERS SHALL BE
DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE
EXTENT FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
-8-
<PAGE> 9
INTERPRETATION OF ALL OR ANY PART OF THIS AGREEMENT AND ALL LOAN PAPERS. WITHOUT
EXCLUDING ANY OTHER JURISDICTION, THE GUARANTOR AGREES THAT THE COURTS OF TEXAS
WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH.
(B) THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS
UPON IT. IN ADDITION, THE GUARANTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE
UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE GUARANTOR
AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY SUCH GUARANTOR. NOTHING IN THIS
SECTION 14 SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
15. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE
GUARANTOR AND THE LENDERS HEREBY WAIVE ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY
JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE)
ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER LOAN PAPERS, OR ANY
RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE
SITTING WITHOUT A JURY.
16. Ratable Benefit. This Guaranty is for the ratable benefit of the
Lenders, each of which shall share any proceeds of this Guaranty pursuant to the
terms of the Credit Agreement.
17. Guarantor Insolvency. Should Guarantor become insolvent, fail to
pay its debts generally as they become due, voluntarily seek, consent to, or
acquiesce in the benefits of any Debtor Relief Laws or become a party to or be
made the subject of any proceeding provided for by any Debtor Relief Laws (other
than as a creditor or claimant) that could suspend or otherwise adversely affect
the rights of any Lender granted hereunder, then, the obligations of Guarantor
under this Guaranty shall be, as between Guarantor and such Lender, a
fully-matured, due, and payable obligation of Guarantor to such Lender (without
regard to whether the Company is then in default under the Credit Agreement or
whether any part of the Obligation is then due and owing by the Company to such
Lender), payable in full by Guarantor to such Lender upon demand, which shall be
the estimated amount owing in respect of the contingent claim created hereunder.
18. ENTIRE AGREEMENT. THIS GUARANTY, TOGETHER WITH THE OTHER LOAN
PAPERS, REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR,
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<PAGE> 10
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed and delivered by its respective officers thereunto duly authorized as
of the date first above written.
WORLD ACCESS, INC.
By:
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Its:
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EXHIBIT 10.31
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of December 31, 1998 (this "Agreement"), by
World Access, Inc., a Delaware corporation ("Pledgor"), in favor of NationsBank,
N.A., a national banking association, in its capacity as Administrative Agent
pursuant to the Credit Agreement described below ("Administrative Agent") and
each lender a party to the Credit Agreement from time to time (singly, a
"Secured Party" and collectively "Secured Parties").
BACKGROUND.
(1) Secured Parties, Administrative Agent, Telco Systems, Inc. and
World Access Holdings, Inc. (the "Company") have entered into the Credit
Agreement dated as of December 31, 1998 (as the same may be supplemented,
amended and modified from time to time, being the "Credit Agreement").
(2) It is the intention of the parties hereto that this Agreement and
the steps contemplated hereby will create a first priority security interest
securing the payment of the obligations set forth in Section 1.02 hereof.
(3) It is a condition precedent to the extension of credit under the
Credit Agreement that Pledgor shall have executed and delivered this Agreement.
AGREEMENT.
NOW, THEREFORE, in consideration of the premises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, and in order to induce Secured Parties to make the
Advances under the Credit Agreement, Pledgor hereby agrees with Administrative
Agent, for its benefit and the ratable benefit of Secured Parties, as follows:
ARTICLE I. PLEDGE
1.01. Pledge. Pledgor hereby grants, pledges, assigns, hypothecates,
and transfers to Administrative Agent, for its benefit and the ratable benefit
of Secured Parties, a first and prior pledge and security interest in all
Capital Stock owned by Pledgor in all Persons and each other Person which is a
successor to such Persons (singly, an "Issuer" and collectively, "Issuers"), now
or hereafter owned beneficially or of record by Pledgor and any certificate or
instrument evidencing such interest, including, without limitation, the
interests listed on Schedule 1 hereto; and without affecting the obligation of
Pledgor or Issuer under any agreement prohibiting such action, in the event of
any consolidation or merger in which each Issuer is not the surviving entity, or
in the event of any sale, lease, transfer or other disposition of all or
substantially all of the assets of such Issuer, all Capital Stock, equity,
partnership, limited liability company ("LLC") or other interest of the
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successor entity formed by or resulting from such consolidation or merger, or of
the Person to which such sale, lease, transfer or other disposition shall have
been made, owned by Pledgor, and all proceeds and products of the foregoing
(collectively, "Collateral"), to secure the payment and performance of the
Obligations (as defined below).
1.02. Description of Obligations. The security interest granted by
Pledgor shall secure the payment and performance of any and all obligations now
or hereafter existing of the Company, Pledgor or any Subsidiary of the Pledgor,
and any other Obligor (other than Administrative Agent or Secured Parties) under
the Credit Agreement and the Loan Papers, including any extensions,
modifications, substitutions, amendments and renewals thereof, whether for
principal, interest, fees, premium, expenses, indemnification or otherwise (all
such obligations of the Company, Pledgor, each of its Subsidiaries, and each
other Obligor together with the "Obligations" as defined in the Credit Agreement
being the "Obligations"). Without limiting the generality of the foregoing, this
Agreement secures the payment of all amounts which constitute part of the
Obligations and would be owed by the Company, Pledgor, each of its Subsidiaries
or any other Obligor to Administrative Agent or any Secured Party under any Loan
Paper, but for the fact that they are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving the
Company, Pledgor, each of its Subsidiaries or any other Obligor (including all
such amounts which would become due but for the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding of the Company, Pledgor, any of its Subsidiaries, or any other
Obligor under any Debtor Relief Law).
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.01. Representations and Warranties Concerning Pledgor. Pledgor
represents and warrants to Administrative Agent and each Secured Party that (a)
the chief place of business and chief executive office of Pledgor and the office
where Pledgor keeps all of its records is located at 945 East Paces Ferry Road,
Suite 2240, Atlanta, Georgia 30326; and (b) no consent of any other Person and
no authorization, approval or other action by, and no notice to or filing with,
any Tribunal is required (i) for the pledge by Pledgor of the Collateral pledged
by it hereunder, for the grant by Pledgor of the security interest granted
hereby or for the execution, delivery or performance of this Agreement by
Pledgor, (ii) for the perfection or maintenance of the pledge, assignment and
security interest created hereby (including the first priority nature of such
pledge, assignment and security interest), or (iii) for the exercise by
Administrative Agent of the Rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement.
2.02. Representations and Warranties Concerning Collateral. Pledgor
represents and warrants to Administrative Agent and each Secured Party that (a)
Pledgor is the sole legal and beneficial owner of the Collateral pledged by it
free and clear of any Lien, security interest, option or other charge or
encumbrance except for the security interest created by this Agreement or as
otherwise permitted by the Credit Agreement; (b) no effective financing
statement or other similar document used to perfect and preserve a security
interest under the Laws of any jurisdiction covering all or any part of the
Collateral is on file in any recording office, except such as may have been
filed in favor of Administrative Agent relating to this Agreement and as
otherwise permitted by the Credit
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Agreement; (c) Schedule 1 is a complete and correct description of all interest
of Pledgor in each of its Subsidiaries, including each class of interest and
number of units or percentage of ownership owned by Pledgor; (d) the pledge,
assignment, and delivery of the Collateral hereunder, and filing of an
appropriate financing statement, create a valid first and prior perfected
security interest in the Collateral, securing the Obligations; (e) the Capital
Stock pledged hereunder is duly authorized, validly issued, fully paid, and
non-assessable and were not issued in violation of the Rights of any Person; (f)
no unpaid capital call or dispute exists with respect to any of the Collateral;
(g) none of the Collateral is evidenced by a certificate, instrument or other
writing that has not been delivered to Administrative Agent; (h) the interest of
Pledgor in each of its Subsidiaries is a 100% interest of all Capital Stock of
Pledgor's Subsidiaries specified on Schedule 1; (i) none of the Collateral is
subject to any buy-sell, voting trust, transfer restriction (other than transfer
restrictions arising under the Exchange Act), preferential right to purchase or
similar agreement or any option, warrant, put or call or similar agreement,
which consent has not been obtained; (j) Pledgor is organized pursuant to the
articles of incorporation, partnership agreement, LLC agreement, bylaws or other
articles of governance, and no other agreement amends the rights of Pledgor
under such documents; and (k) Pledgor's federal taxpayer identification number
is 58-2398004. The delivery at any time by Pledgor to Administrative Agent of
Collateral shall constitute a representation and warranty by Pledgor under this
Agreement that, with respect to such Collateral, Pledgor is the sole legal and
beneficial owner of the Collateral, and that the matters set forth in this
Section 2.02 are true and correct with respect to such Collateral.
2.03. Representations and Warranties Concerning Benefit. Pledgor
represents and warrants to Administrative Agent and each Secured Party that (a)
the value of the consideration received and to be received by Pledgor is
reasonably worth at least as much as the liability and obligation of Pledgor
hereunder, and such liability and obligation may reasonably be expected to
benefit Pledgor directly or indirectly; and (b) none of Administrative Agent,
Secured Party or any other Person has made any representation, warranty or
statement to Pledgor (other than as provided in the Loan Papers) in order to
induce Pledgor to execute this Agreement.
ARTICLE III. COVENANTS
3.01. Affirmative Covenants. Pledgor covenants and agrees (a) promptly
to deliver to Administrative Agent all instruments, certificates, documents, or
agreements evidencing any of the Collateral; (b) promptly to notify
Administrative Agent of any material change in any fact or circumstances
warranted or represented by Pledgor in this Agreement or in any other Loan
Paper; (c) promptly to notify Administrative Agent of any claim, action, or
proceeding affecting Pledgor's title to the Collateral, or any part thereof, or
the security interest therein granted hereunder, and, at the request of
Administrative Agent, appear in and defend, at Pledgor's expense, any such
action or proceeding; and (d) promptly to pay to Administrative Agent the amount
of all court costs and reasonable attorney's fees incurred by Administrative
Agent hereunder.
3.02. Negative Covenants. Pledgor covenants and agrees that it shall
not (a) create any other security interest or pledge in, mortgage or otherwise
encumber the Collateral or any part thereof, or permit the same to be or become
subject to any Lien, attachment, execution,
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sequestration, other legal or equitable process, or any encumbrance of any kind
or character, or grant any option, warrant, or other Rights in the Collateral in
favor of any Person other than Administrative Agent; (b) except as permitted
under the Credit Agreement, cause or permit any Issuer to authorize and issue
any additional Capital Stock, or take any other action that would otherwise
dilute any of the Collateral; (c) except as permitted in the Credit Agreement,
approve any amendment to the articles of incorporation, partnership agreement,
LLC agreement, bylaws, or other organizational or governance document of any
Issuer; (d) except as permitted in the Credit Agreement, permit the merger,
consolidation or dissolution of any Issuer; or (e) sell, lease, transfer or
otherwise dispose of any Collateral in any manner.
3.03. Right to Distributions. With respect to any certificates, bonds,
or other instruments or securities constituting a part of the Collateral,
Administrative Agent shall have authority during the continuance of an Event of
Default, without notice to Pledgor, either to have the same registered in
Administrative Agent's name or in the name of a nominee, and, with or without
such registration, to demand of the issuer thereof, and to receive and receipt
for, any and all Distributions (including any stock or similar dividend or
distribution) payable in respect thereof, whether they be ordinary or
extraordinary. Subject to the next sentence hereof, if Pledgor shall become
entitled to receive or shall receive any interest in or certificate (including,
without limitation, any interest in or certificate representing a Distribution
in connection with any reclassification, increase, or reduction of capital, or
issued in connection with any reorganization), or any option or Rights arising
from or relating to any of the Collateral, whether as an addition to, in
substitution of, as a conversion of, or in exchange for any of the Collateral,
or otherwise, Pledgor agrees to accept the same as Administrative Agent's agent
and to hold the same in trust on behalf of and for the benefit of Administrative
Agent, and to deliver the same immediately to Administrative Agent in the exact
form received, with appropriate undated stock, partnership interest, LLC
membership interest, or similar powers, duly executed in blank, to be held by
Administrative Agent, subject to the terms hereof, as Collateral. Unless an
Event of Default is in existence or would occur as a result thereof, Pledgor
shall be entitled to receive and utilize for its own purposes, all cash
Distributions (other than Distributions constituting a return of capital) paid
in respect of any of the Collateral. Administrative Agent shall be entitled to
all Distributions, and to any sums paid upon or in respect of any Collateral,
upon the liquidation, dissolution, or reorganization of the issuer thereof or
which constitute a return of capital which shall be paid to Administrative Agent
to be held by it as additional collateral security for the Obligations and
application to the Obligations at the discretion of Administrative Agent. All
Distributions paid or distributed in respect of the Collateral which are
received by Pledgor in violation of this Agreement shall, until paid or
delivered to Administrative Agent, be held by Pledgor in trust as additional
Collateral for the Obligations.
3.04. Records of Collateral. Pledgor at all times shall maintain
accurate books and records concerning the Collateral. Pledgor shall cause all
issuers of the Collateral to mark immediately all books and records of issue,
registration, and transfer relating to the Collateral, with an entry showing the
collateral assignment of the Collateral to Administrative Agent.
3.05. Information and Inspection. Subject to the terms and provisions
of Section 6.03 of the Credit Agreement, Pledgor shall, and shall cause each
Issuer to, (a) allow Administrative Agent
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to inspect and copy, or at the option of Administrative Agent, furnish copies
of, all records relating to the Collateral and the Obligations; and (b) furnish
Administrative Agent such information as it may request with respect to the
Collateral, any Distributions thereon, and any proceeds thereof, at the time and
in the form requested by Administrative Agent.
3.06. Indemnity and Expenses. (a) Pledgor shall indemnify
Administrative Agent and each Secured Party from and against any and all claims,
losses and liabilities (including reasonable attorneys' fees) growing out of or
resulting from this Agreement (including, without limitation, enforcement of
this Agreement), expressly including such claims, losses or liabilities arising
out of mere negligence of Administrative Agent or any Secured Party, except
claims, losses or liabilities resulting from Administrative Agent's or any
Secured Party's gross negligence or willful misconduct.
(b) Pledgor will upon demand pay to Administrative Agent and each
Secured Party the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents, which
Administrative Agent and each Secured Party may incur in connection with (i) the
sale of, collection from, or other realization upon, any of the Collateral, (ii)
the exercise or enforcement of any of the Rights of Administrative Agent or any
Secured Party hereunder or (iii) the failure by Pledgor to perform or observe
any of the provisions hereof.
(c) Any payment made or cost borne by Administrative Agent and each
Secured Party shall be a part of the Obligations, shall be payable upon demand,
and shall bear interest as provided in the Credit Agreement.
3.07. Additional Documents. Pledgor, at its expense, shall take all
action, and execute and deliver such further instruments, agreements, blank
stock, partnership interest, LLC membership interest, or similar powers, and
assignments as Administrative Agent shall deem necessary or appropriate to
obtain, maintain, and perfect the security interest hereunder, including the
security interest in after-acquired Collateral granted herein, and to enable
Administrative Agent to comply with all applicable federal or state Law, in
order to obtain or perfect Administrative Agent's interest in the Collateral, to
effect its Rights hereunder, or to obtain Distributions and other proceeds of
the Collateral as provided herein.
3.08. Additional Collateral. Upon acquisition by Pledgor of any
additional interest in any Issuer, Pledgor shall be deemed to grant hereunder,
and shall cause to be granted, Liens and security interests on such interest to
Administrative Agent, as security for the Obligations. Pledgor agrees to take,
and to cause to be taken, at its own cost and expense, such actions as
Administrative Agent shall deem necessary or appropriate to create, evidence,
and perfect such Liens and assure the first priority of such Liens.
ARTICLE IV. RIGHTS AND POWERS OF ADMINISTRATIVE AGENT
4.01. Remedies upon Default. Administrative Agent, during the
continuance of an Event of Default and without liability to Pledgor, may without
notice or demand: obtain from any Person information regarding Pledgor, any
issuer of the Collateral, or any of their businesses, which
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information any such Person also may furnish without liability to Pledgor or any
other Person; require Pledgor to give possession or control of any of the
Collateral to Administrative Agent; endorse as Pledgor's agent or
attorney-in-fact any instruments or documents representing proceeds of the
Collateral; unless earlier permitted hereunder, take control of funds generated
by the Collateral and any other proceeds, and exercise all other Rights which an
owner of such Collateral may exercise; at any time transfer any of the
Collateral or evidence thereof into its own name or that of its nominee; vote
any Collateral and exercise any Rights with respect thereto; and demand,
collect, convert, redeem, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize upon the Collateral, in its own name for the benefit of
Secured Parties, or in the name of Pledgor, as Administrative Agent may
determine. Neither Administrative Agent nor any Secured Party shall be liable
for failure to collect any Distribution or other proceeds, or for any act or
omission on the part of Administrative Agent, its officers, agents, employees,
or other representatives, except willful misconduct and gross negligence. The
foregoing Rights of Administrative Agent shall be in addition to, and not a
limitation upon, any Right of Administrative Agent given by Law, elsewhere in
this Agreement or any other Loan Papers, or otherwise.
4.02. Right of Administrative Agent to Notify Issuers. At any time
during the continuance of an Event of Default and at such other times as
Administrative Agent is entitled to receive Distributions and other property
constituting Collateral pursuant to the terms of this Agreement, Administrative
Agent may notify issuers of the Collateral to make payments of the applicable
Distributions directly to Administrative Agent and Administrative Agent may take
control of all applicable proceeds of any Collateral. Until Administrative Agent
elects to exercise such Right, during the continuance of an Event of Default,
Pledgor, as agent of Administrative Agent, shall collect and segregate all
Distributions and other amounts paid or distributed with respect to the
Collateral.
4.03. Delivery of Receipts to Administrative Agent. Upon Administrative
Agent's demand during the continuance of an Event of Default, Pledgor shall
deposit, upon receipt and in the form received, with any necessary endorsement,
all payments received as proceeds of or otherwise in connection with the
Collateral, in a special bank account in a bank of Administrative Agent's choice
over which Administrative Agent alone shall have power of withdrawal. The funds
in such account shall secure the Obligations. Administrative Agent is
authorized, and is hereby appointed during the continuance of an Event of
Default, Pledgor's attorney-in-fact, to make any endorsement in Pledgor's name
and behalf. Pending such deposit, Pledgor shall not mingle any such payments
with any of Pledgor's other funds or property, but shall hold them separate and
upon an express trust for Administrative Agent. During the continuance of an
Event of Default, Administrative Agent may from time to time apply the whole or
any part of the funds in the special account against the Obligations.
4.04. Voting Rights. It is expressly understood and agreed that Pledgor
shall retain all voting or management rights to the Collateral unless an Event
of Default shall exist and be continuing, at which time such voting rights shall
transfer to or be exercised as directed by Administrative Agent, at its sole
discretion; provided, however, that no voting or management rights
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shall be exercised, vote cast, consent, waiver, or ratification given, or action
taken by Pledgor which would be inconsistent with or violate any provision of
this Agreement or any other Loan Paper.
4.05. Realization upon Collateral. During the continuance of an Event
of Default, Administrative Agent, without notice or demand, but subject to any
limitations or restrictions imposed by applicable Law, may exercise any Right of
a secured party under the Uniform Commercial Code of Texas or any other
applicable jurisdiction ("UCC"), this Agreement, any other Loan Papers, or
otherwise and also may (i) require Pledgor to, and Pledgor hereby agrees that it
will at its expense and upon request of Administrative Agent forthwith, assemble
all or part of the Collateral as directed by Administrative Agent and make it
available to Administrative Agent at a place to be designated by Administrative
Agent which is reasonably convenient to both parties or (ii) without notice,
except as specified below, sell the Collateral or any portion thereof in one or
more parcels at public or private sale, at any of Administrative Agent's offices
or elsewhere, for cash, on credit or for future delivery, and upon such other
terms as Administrative Agent may deem commercially reasonable. Unless the
Collateral is of a type customarily sold on a recognized market, Administrative
Agent shall give Pledgor reasonable written notice of the time and place of any
public sale thereof or of the time after which any private sale or other
intended disposition thereof is to be made. Pledgor agrees that ten days advance
written notice thereof shall constitute reasonable notice. Administrative Agent
shall not be obligated to make any sale of Collateral, regardless of notice of
sale having been given. Administrative Agent may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned. Expenses of retaking, holding, preparing for sale, selling, or
the like shall include Administrative Agent's reasonable attorneys' fees and
legal expenses, and constitute a portion of the Obligations. During the
continuance of an Event of Default, Administrative Agent shall be entitled to
immediate possession of all books and records maintained by Pledgor with respect
to the Collateral, and shall have the authority to enter upon any premises upon
which any of the same may be situated and remove the same therefrom without
liability. Upon disposition of Collateral during an Event of Default, Pledgor
shall be entitled to any surplus with respect to the Collateral following
payment in full of the Obligations and termination hereof, and shall be liable
to Administrative Agent for any deficiency with respect thereto. All cash
proceeds received by Administrative Agent upon any sale of, collection of, or
other realization upon, all or any part of the Collateral shall be applied as
follows:
First: To the payment of all out-of-pocket expenses incurred in
connection with the sale of, collection of or other realization upon
Collateral, including reasonable attorneys' fees and disbursements;
Second: To the payment of the Obligations as provided in the Credit
Agreement and in such order and in such manner consistent with
applicable Laws as Administrative Agent in its discretion shall decide;
and
Third: To the extent of the balance (if any) of such proceeds, to the
payment to Pledgor or other Person legally entitled thereto.
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Non-cash proceeds of any disposition of Collateral available to satisfy
the Obligations shall be applied to the Obligations in such order and in such
manner consistent with applicable Law as Administrative Agent in its discretion
shall decide.
4.06. Securities and Other Laws; Contractual Restrictions;
Registration.
(a) Because of the Securities Act of 1933, as amended ("Securities
Act"), and other Laws, including, without limitation, state "blue sky" laws, or
contractual restrictions or agreements imposed upon certain Persons, there may
be legal restrictions or limitations affecting Administrative Agent in any
attempts to dispose of the Collateral and the enforcement of its Rights
hereunder. For these reasons, Administrative Agent is hereby authorized by
Pledgor, but not obligated, during the continuance of any Event of Default, to
sell or otherwise dispose of any of the Collateral at private sale, subject to
an investment letter, or in any other manner which will not require the
Collateral, or any part thereof, to be registered in accordance with the
Securities Act, or the rules and regulations promulgated thereunder, or any
other Law. Administrative Agent is also hereby authorized by Pledgor, but not
obligated, to take such actions, give such notices, obtain such consents, and do
such other things as Administrative Agent may deem required or appropriate under
the Securities Act or other securities Laws or other Laws or contractual
restrictions or agreements in the event of a sale or disposition of any
Collateral. Pledgor clearly understands that Administrative Agent may in its
discretion approach a restricted number of potential purchasers and that a sale
under such circumstances may yield a lower price for the Collateral than would
otherwise be obtainable if same were registered and sold in the open market. No
sale so made in good faith by Administrative Agent shall be deemed to be not
"commercially reasonable" because so made. Pledgor agrees that in the event
Administrative Agent shall, during the continuance of an Event of Default, sell
the Collateral or any portion thereof at any private sale or sales,
Administrative Agent shall have the Right to rely upon the advice and opinion of
appraisers and other Persons, which appraisers and other Persons are acceptable
to Administrative Agent, as to the best price reasonably obtainable upon such a
private sale thereof. In the absence of fraud, such reliance shall be evidence
that Administrative Agent handled such matter in a commercially reasonable
manner under applicable Law.
(b) If Administrative Agent shall determine to exercise its Right to
sell any or all of the Collateral, and if in the opinion of counsel for
Administrative Agent it is necessary, or if in the opinion of Administrative
Agent it is advisable, to have the Collateral or that portion thereof to be
sold, registered under the provisions of the Securities Act, Pledgor will, to
the fullest extent it has the capability to do so, cause the issuers of the
Collateral contemplated to be sold to execute and deliver, and cause the
directors and officers of each thereof to execute and deliver, all at Pledgor's
expense, all such instruments and documents, and to do or cause to be done all
such other acts and things, as may be necessary or, in the opinion of
Administrative Agent advisable to register the Collateral or that portion
thereof to be sold, under the provisions of the Securities Act and to cause the
registration statement relating thereto to become effective and to remain
effective for such period as Administrative Agent may deem appropriate to
facilitate the sale or other disposition of such Collateral from the date of the
first public offering of the Collateral or that portion thereof to be sold, and
to make all amendments thereto and/or to the related prospectus which, in the
opinion of Administrative Agent, are necessary or advisable, all in conformity
with the requirements of the
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Securities Act. Pledgor shall use its best efforts to cause each Issuer to
comply with the provisions of the securities or "blue sky" laws of any
jurisdiction which Administrative Agent shall designate and to cause each Issuer
to make available to its security holders, as soon as practicable, an earnings
statement which will satisfy the provisions of the Securities Act and applicable
"blue sky" laws.
4.07. Further Approvals Required.
(a) In connection with the exercise by Administrative Agent of its
Rights hereunder that effects the disposition of or use of any Collateral, it
may be necessary to obtain the prior consent, waiver or approval of Tribunals
and other Persons to a transfer or assignment of Collateral, including, without
limitation, the FCC.
(b) Pledgor hereby agrees, during the continuance of an Event of
Default, to execute, deliver, and file, and hereby appoints (to the extent
permitted under applicable Law) Administrative Agent as its attorney-in-fact,
during the continuance of an Event of Default, to execute, deliver, and file on
Pledgor's behalf and in Pledgor's name, all applications, certificates, filings,
instruments, and other documents (including without limitation any application
for an assignment or transfer of control or ownership) that may be necessary or
appropriate, in Administrative Agent's opinion, to obtain such consents, waivers
or approvals. Pledgor acknowledges that there is no adequate remedy at Law for
failure by it to comply with the provisions of this Section 4.07 and that such
failure would not be adequately compensable in damages, and therefore agrees
that this Section 4.07 may be specifically enforced.
4.08. Convertible Securities. During the continuance of an Event of
Default, Administrative Agent may present for conversion any Collateral which is
convertible into any other instrument, investment security, or cash.
Administrative Agent shall not have any duty, however, to present for conversion
any of the Collateral, unless it shall have received from Pledgor detailed
written instructions to that effect at a time reasonably far in advance of the
final conversion date to make such conversion possible and such conversion does
not violate any provisions of any Loan Paper.
4.09. Issuer Liabilities. By taking a security interest in the
Collateral pursuant to this Agreement, neither Administrative Agent nor any
Secured Party assumes, accepts, or becomes liable with respect to any debts,
liabilities, or obligations of or owed to any issuer of any Collateral.
4.10. Power of Attorney. PLEDGOR HEREBY IRREVOCABLY GRANTS TO
ADMINISTRATIVE AGENT PLEDGOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE
OF AN EVENT OF DEFAULT WHICH IS CONTINUING) TO VOTE ANY COLLATERAL AND, DURING
THE CONTINUANCE OF AN EVENT OF DEFAULT, APPOINTS ADMINISTRATIVE AGENT PLEDGOR'S
ATTORNEY-IN-FACT TO PERFORM ALL OBLIGATIONS OF PLEDGOR UNDER THIS AGREEMENT AND
TO EXERCISE ALL OF ADMINISTRATIVE AGENT'S RIGHTS HEREUNDER. THE PROXY AND POWER
OF ATTORNEY HEREIN GRANTED, AND EACH STOCK, PARTNERSHIP INTEREST, OR LLC
MEMBERSHIP INTEREST POWER AND SIMILAR POWER NOW
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OR HEREAFTER GRANTED (INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE
COUPLED WITH AN INTEREST AND ARE IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF
THE OBLIGATIONS.
ARTICLE V. MISCELLANEOUS
5.01. Cumulative Rights. All Rights of Administrative Agent and Secured
Parties under the Loan Papers are cumulative of each other and of every other
Right which Administrative Agent and Secured Parties may otherwise have at Law
or in equity or under any other contract or other writing for the enforcement of
the security interest herein or the collection of the Obligations. The exercise
of one or more Rights shall not prejudice or impair the concurrent or subsequent
exercise of any other Right.
5.02. Administrative Agent's and Secured Parties' Duties. The powers
conferred on Administrative Agent hereunder are solely to protect Administrative
Agent's and Secured Parties' interest in the Collateral and shall not impose any
duty upon Administrative Agent or any Secured Party to exercise any such powers.
Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, Administrative Agent
shall have no duty as to any Collateral, as to ascertaining or taking action
with respect to calls, conversions, exchanges, maturities, tenders or other
matters relative to any Collateral, whether or not Administrative Agent has or
is deemed to have knowledge of such matters, or as to the taking of any
necessary steps to preserve Rights against prior parties or any other Rights
pertaining to any reasonable care in the custody and preservation of any
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that which Administrative Agent accords its own property.
Except as provided in this Section 5.02, Administrative Agent shall not have any
duty or liability to protect or preserve any Collateral or to preserve Rights
pertaining thereto. Nothing contained in this Agreement shall be construed as
requiring or obligating Administrative Agent or any Secured Party, and neither
Administrative Agent nor any Secured Party shall be required or obligated, to
(a) present or file any claim or notice or take any action, with respect to any
Collateral or in connection therewith or (b) notify Pledgor of any decline in
the value of any Collateral.
5.03. Waiver. Should any part of the Obligations be payable in
installments, the acceptance by Administrative Agent or any Secured Party at any
time and from time to time of partial payment of the aggregate amount of all
installments then matured shall not be deemed as a waiver of any Event of
Default then existing. No waiver of any Event of Default shall be deemed to be a
waiver of any other subsequent Event of Default, nor shall any such waiver be
deemed to be a continuing waiver. No delay or omission by Administrative Agent
or any Secured Party in exercising any Right hereunder, or under any other Loan
Papers shall impair any such Right or be construed as a waiver thereof or any
acquiescence therein, nor shall any single or partial exercise of any such Right
preclude other or further exercise thereof or the exercise of any other Right of
Administrative Agent or any Secured Party hereunder or under such other
agreements.
5.04. Waivers by Pledgor. Pledgor waives notice of the creation,
advance, increase, existence, extension, or renewal of, or of any indulgence
with respect to, the Obligations; waives
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presentment, demand, notice of dishonor, and protest; waives notice of the
amount of the Obligations outstanding at any time, notice of any Default or
Event of Default, and all other notices respecting the Obligations; and agrees
that maturity of the Obligations and any part thereof may be accelerated,
extended, or renewed one or more times by Secured Parties, in its or their
discretion, without notice to Pledgor. Pledgor waives (a) any claim that, as to
any part of the Collateral, a public sale, should Administrative Agent elect so
to proceed, is, in and of itself, not a commercially reasonable method of sale
for such Collateral, (b) except as otherwise provided in this Agreement, TO THE
EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OR JUDICIAL HEARING IN CONNECTION
WITH ADMINISTRATIVE AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING ANY
AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY
SUCH RIGHT THAT PLEDGOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY
STATUTE OF THE UNITED STATES OR OF ANY STATE, AND ALL OTHER REQUIREMENTS AS TO
THE TIME, PLACE AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE
ENFORCEMENT OF ADMINISTRATIVE AGENT'S RIGHTS HEREUNDER, AND (C) ALL RIGHTS OF
REDEMPTION, APPRAISAL OR VALUATION.
5.05. Other Parties and Other Collateral. No renewal, increase, or
extension of or any other indulgence with respect to, the Obligations or any
part thereof, no release, exchange, or taking of any security, no release of any
Person (including Pledgor, any of Pledgor's Subsidiaries, maker, endorser,
guarantor, or surety) liable on the Obligations, no delay in enforcement of
payment, no delay or omission or lack of diligence or care in exercising any
Right or power with respect to the Obligations or any security therefor or
guaranty thereof or under this Agreement, and no other circumstance or event
which might constitute a defense available to or discharge of Pledgor, any of
Pledgor's Subsidiaries or any other Person, shall in any manner impair or affect
the Rights of Administrative Agent or any Secured Party hereunder, under any
other Loan Papers, at Law, or in equity. Neither Administrative Agent nor any
Secured Party need file suit or assert a claim for personal judgment against any
Person for any part of the Obligations or seek to realize upon any other
security for the Obligations, before foreclosing upon the Collateral for the
purpose of paying the Obligations. Pledgor waives any Right to the benefit of or
to require or control application of any other security or proceeds thereof, and
agrees that neither Administrative Agent nor any Secured Party shall have any
duty or obligation to Pledgor to apply any such other security or proceeds
thereof to the Obligations. Pledgor hereby waives all rights by which it might
be entitled to require suit on an accrued right of action in respect of any of
the Obligations or require suit against any of Pledgor's Subsidiaries, or
others, whether arising pursuant to Section 34.02 of the Texas Business and
Commerce Code, as amended, Section 17.001 of the Texas Civil Practice and
Remedies Code, as amended, or Rule 31 of the Texas Rules of Civil Procedure, as
amended, or otherwise.
5.06. Continuing Security Interest. This Agreement constitutes a
continuing security interest in the Collateral, and shall remain in full force
and effect until final payment and performance in full of the Obligations, and
termination of all commitments and the other Loan Papers.
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5.07. Rate Provision. It is not the intention of any party to any Loan
Paper to make an agreement violative of the Laws of any applicable jurisdiction
relating to usury. In no event shall Pledgor be obligated to pay any amount in
excess of the maximum amount of interest permitted under applicable Law. If from
any circumstances Administrative Agent or any Secured Party shall ever receive
anything of value deemed excess interest under applicable Law, an amount equal
to such excess shall be applied to the reduction of the outstanding balance of
the Obligations and any remainder shall be promptly refunded to the payor.
5.08. Parties Bound. This Agreement shall be binding on Pledgor and its
successors, assigns, and other legal representatives, and shall inure to the
benefit of Administrative Agent and Secured Parties, and their respective
successors and assigns; provided, however, that Pledgor may not assign its
Rights or obligations hereunder without the prior written consent of
Administrative Agent. The Rights, powers, and interests held by Administrative
Agent and Secured Parties hereunder may be transferred or assigned, in whole or
in part, in accordance with the Credit Agreement, without the consent of
Pledgor.
5.09. Notices and Deliveries.
(a) Manner of Delivery. All notices, communications and materials to be
given or delivered pursuant to this Agreement shall, except in those cases where
giving notice by telephone is expressly permitted, be given or delivered in
writing. All written notices, communications and materials shall be sent by
registered or certified mail, postage prepaid, return receipt requested, by
telecopier, or delivered by hand. In the event of a discrepancy between any
telephonic notice and any written confirmation thereof, such written
confirmation shall be deemed the effective notice except to the extent
Administrative Agent or Pledgor has acted in reliance on such telephonic notice.
(b) Addresses. All notices, communications and materials to be given or
delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) if to Pledgor, to it at:
World Access, Inc.
945 East Paces Ferry Road
Suite 2240
Atlanta, GA 30326
Telephone No.: (404) 231-2025
Telecopier No.: (404) 365-9847
Attention: Chief Executive Officer
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With a copy (which shall not constitute notice) to:
Rogers & Hardin, LLP
2700 International Tower
229 Peachtree Street NE
Atlanta, GA 30303
Telephone No.: (404) 522-4700
Facsimile No.: (404) 525-2224
Attention: Steven E. Fox, Esq.
(ii) If to the Administrative Agent:
NationsBank, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202
Telephone No.: (214)508-9588
Facsimile: (214)508-9390
Attention: Mr. David Williams, Vice President
with a copy to:
Donohoe, Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Telephone: (214) 698-3867
Telecopy: (214) 744-0231
Attention: Michael Cuda
or at such other address or, telecopier or telephone number or to the attention
of such other individual or department as the party to which such information
pertains may hereafter specify for the purpose in a notice to the other
specifically captioned "Notice of Change of Address."
(c) Effectiveness. Each notice, communication and any material to be
given or delivered to Administrative Agent or Pledgor pursuant to this Agreement
shall be effective or deemed delivered or furnished (i) if sent by mail, on the
fifth Business Day after such notice, communication or material is deposited in
the mail, addressed as above provided, (ii) if sent by telecopier, when such
notice, communication or material is transmitted to the appropriate number
determined as above provided in this Section 5.09 and the appropriate receipt is
received or otherwise acknowledged, (iii) if sent by hand delivery or overnight
courier, when left at the address of the addressee addressed as above provided,
and (iv) if given by telephone, when communicated to the individual or any
member of the department specified as the individual or department to whose
attention notices, communications and materials are to be given or delivered
except that notices of a change of address, telecopier or telephone number or
individual or department to whose attention notices, communications and
materials are to be given or delivered shall not be effective until received.
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5.10. Modifications; Amendments; Etc. No amendment or waiver of any
provision of this Agreement, and no consent to any departure by Pledgor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by Administrative Agent, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
5.11. Financing Statement. A carbon, photographic, or other
reproduction of this Agreement or any financing statement covering the
Collateral shall be sufficient as a financing statement. Pledgor hereby
authorizes Administrative Agent to file one or more financing or continuation
statements, and amendments thereto, relating to any Collateral, without the
signature of Pledgor where permitted by Law.
5.12. Definitions. Unless otherwise defined in this Agreement, terms
used herein shall have the meanings set forth in the Credit Agreement. Unless
the context indicates otherwise or the terms are otherwise defined herein,
definitions in the UCC apply to words and phrases in this Agreement. "Pledgor"
and "Issuer" include, without limitation, such Person, such Person's heirs,
successors and assigns, such Person as a debtor-in-possession, and any receiver,
trustee, liquidator, conservator, custodian, or similar party appointed for such
Person or all or substantially all of its assets under any Law.
5.13. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future Laws during the term
thereof, such provision shall be fully severable, this Agreement shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part thereof, and the remaining provisions thereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance therefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to the illegal, invalid, or unenforceable
provision as may be possible.
5.14. Counterparts. This Agreement and the other Loan Papers may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
5.15. Control.
(a) Notwithstanding anything herein to the contrary, this Agreement,
the other Loan Papers, and the transactions contemplated hereby and thereby (i)
prior to a foreclosure of the Liens granted under this Agreement and the other
Loan Papers, do not and will not constitute, create, or have the effect of
constituting or creating, directly or indirectly, actual or practical ownership
of Pledgor, any issuer of any Collateral or any Subsidiary of Pledgor by
Administrative Agent or Secured Parties, or control, affirmative or negative,
direct or indirect, by Administrative Agent or Secured Parties over the
management or any other aspect of the operation of Pledgor, any issuer of
Collateral or any Subsidiary of Pledgor which ownership and control remains
exclusively and at all
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times in Pledgor such Subsidiary of Pledgor or any issuer of Collateral, and
(ii) do not and will not constitute the transfer, assignment, or disposition in
any manner, voluntarily or involuntarily, directly or indirectly, of any license
or certificate at any time issued by the FCC or other applicable Tribunal to
Pledgor, any issuer of Collateral or any Subsidiary of Pledgor ("License"), or
the transfer of control of Pledgor, any issuer of Collateral or any Subsidiary
of Pledgor within the meaning of Section 310(d) of the Communications Act of
1934, as amended, or any other applicable laws.
(b) Notwithstanding any other provision of this Agreement, any
foreclosure on, sale, transfer or other disposition of, or the exercise of any
right to vote or consent with respect to, any of the Collateral, as provided
herein or any other action taken or proposed to be taken by Administrative Agent
hereunder which would affect the operational, voting, or other control of
Pledgor, any Subsidiary of Pledgor or any issuer of Collateral or any Subsidiary
of any issuer of Collateral, shall be in accordance with applicable Law.
(c) Subject to Section 5.15(e), if an Event of Default shall have
occurred and be continuing, Pledgor shall take any action which Administrative
Agent may reasonably require in order to transfer and assign to Administrative
Agent, or to such one or more third parties as Administrative Agent may
designate or to a combination of the foregoing, each License of the Pledgor,
each Subsidiary or any issuer of the Collateral. To enforce the provisions of
this Section 5.15, Administrative Agent is empowered, during the continuance of
an Event of Default, to require the appointment of a receiver from any court of
competent jurisdiction. Such receiver shall be instructed to seek from the FCC
or other applicable Tribunal an involuntary transfer of control of each such
License for the purpose of seeking a bona fide purchaser to whom control will
ultimately be transferred. Pledgor hereby agrees to authorize such an
involuntary transfer of control upon the request of the receiver so appointed
and, if Pledgor shall refuse to authorize the transfer, its approval may be
required by the court. Upon the occurrence and during the continuance of an
Event of Default, Pledgor shall further use its best efforts to assist in
obtaining approval of the FCC or other applicable Tribunal, if required, for any
action or transactions contemplated by this Agreement, including, without
limitation, the preparation, execution, and filing with the FCC or other
applicable Tribunal of the assignor's or transferor's portion of any application
or applications for consent to the assignment of any License or transfer of
control necessary or appropriate under the rules and regulations of the FCC or
other applicable Tribunal for approval of the transfer or assignment of any
portion of the Collateral, together with any License.
(d) Pledgor acknowledges that the assignment or transfer of each
License of Pledgor, each Subsidiary and issuer of the Collateral is integral to
Administrative Agent's and Secured Parties' realization of the value of the
collateral pledged by Pledgor, that there is no adequate remedy at law for
failure by Pledgor to comply with the provisions of this Section 5.15 and that
such failure would not be adequately compensable in damages, and therefore
agrees, without limiting the right of Administrative Agent to seek and obtain
specific performance of other obligations of Pledgor contained in this
Agreement, that the agreements contained in this Section 5.15 may be
specifically enforced.
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(e) Notwithstanding anything to the contrary contained in this
Agreement or in any other Loan Paper, Administrative Agent shall not, without
first obtaining the approval of the FCC or any other applicable Tribunal, take
any action pursuant to this Agreement which would constitute or result in any
assignment of a License of Pledgor, each Subsidiary or issuer of the Collateral
or any change of control of Pledgor, any Subsidiary of Pledgor or any issuer of
any Collateral or any Subsidiary of any issuer of Collateral, if such assignment
or change in control would require, under then existing Law (including the
written rules and regulations promulgated by the FCC or other applicable
Tribunal), the prior approval of the FCC or such other Tribunal.
5.16. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (OTHER THAN THE
CONFLICT OF LAWS RULES THEREOF AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT
OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS).
5.17. WAIVER OF JURY TRIAL. ADMINISTRATIVE AGENT AND PLEDGOR HEREBY
WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGS INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY
ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP
ESTABLISHED HEREUNDER.
5.18. Administrative Agent's Right to Use Agents. Administrative Agent
may exercise its Rights under this Agreement through an agent or other designee.
5.19. No Interference, Compensation or Expense. Administrative Agent
may exercise its Rights under this Agreement (a) without resistance or
interference by Pledgor and (b) without payment of any rent, license fee or
compensation of any kind to Pledgor.
5.20. Waiver of Subrogation. Pledgor shall not assert, enforce, or
otherwise exercise (a) any right of subrogation to any of the rights or Liens of
Administrative Agent or any Secured Party or any other Person against Pledgor,
any of Pledgor's Subsidiaries or any other Person on all or any part of the
Obligations or any collateral or other security, or (b) any right of recourse,
reimbursement, contribution, indemnification, or similar right against Pledgor,
any of Pledgor's Subsidiaries or any other Person on all or any part of the
Obligations or any collateral or any security, and Pledgor hereby agrees not to
exercise any and all of the foregoing rights, and any right to participate in,
any collateral or other security given to Administrative Agent or any Secured
Party or any other Person to secure payment of the Obligations, however any such
rights arise, whether hereunder or any other Loan Paper or by operation of Law
until the Obligations shall have been paid indefeasibly in full in cash and no
commitments of any Lender remain outstanding; and thereafter Pledgor will be
subrogated to the position of the Lenders to the extent of the payments made by
Pledgor. If any amount shall be paid to Pledgor in violation of the immediately
preceding sentence and the Obligations shall not have been paid indefeasibly in
full in cash or any commitment of any
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Lender shall remain outstanding, such amount shall be deemed to have been paid
to Pledgor for the benefit of, and held in trust for the benefit of, the
Lenders, and shall forthwith be paid to the Administrative Agent to be credited
and applied upon the Obligations, whether matured or unmatured, in accordance
with the terms of the Credit Agreement. The provisions of this Section 5.20
shall survive the termination of this Agreement, and any satisfaction and
discharge of Pledgor and each other Person by virtue of any payment, court
order, or Law.
5.21. Loan Paper. This Agreement is a Loan Paper executed pursuant to
the Credit Agreement and shall (unless otherwise expressly indicated herein) be
construed, administered and applied in accordance with the terms and provisions
thereof.
5.22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
5.23. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE
OTHER LOAN PAPERS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
PARTIES.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of
the date first set forth above.
WORLD ACCESS, INC.
By:
------------------------
Its:
------------------------
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EXHIBIT 10.32
SECURITY AGREEMENT
SECURITY AGREEMENT (as amended, restated, or otherwise modified from
time to time, this "Agreement"), dated as of December 31, 1998, made by the
undersigned ("Debtor"), in favor of NationsBank, N.A. ("Administrative Agent"),
and each other lender a party to the Credit Agreement described below (singly, a
"Secured Party" and collectively, the "Secured Parties").
BACKGROUND:
Administrative Agent, Secured Parties and Telco Systems, Inc. and World
Access Holdings, Inc. (the "Company") have entered into the Credit Agreement
dated as of December 31, 1998 (as the same may be supplemented, amended and
modified from time to time, being the "Credit Agreement"). It is the intention
of the parties hereto that this Agreement create a first priority security
interest securing the payment of the obligations set forth in Section 1.02. It
is a condition precedent to the effectiveness of the Credit Agreement that
Debtor shall have executed and delivered this Agreement.
AGREEMENT.
NOW, THEREFORE, in consideration of the premises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, and in order to induce Secured Parties to make the
Advances under the Credit Agreement, Debtor hereby agrees with Administrative
Agent for its benefit and the Ratable benefit of Secured Parties as follows:
ARTICLE I. GRANT
1.01. Assignment and Grant of Security. Debtor hereby assigns and
pledges to Administrative Agent and the Secured Parties for its benefit and the
benefit of Secured Parties and hereby grants to Administrative Agent and the
Secured Parties for its benefit and the benefit of Secured Parties a security
interest in, the entire right, title and interest of Debtor, in and to all
assets of Debtor, whether now owned or hereafter acquired, including, but not
limited to, the following ("Collateral"):
(a) all equipment in all of its forms, wherever located, now or
hereafter existing, all parts thereof and all accessions thereto, including, but
not limited to, machinery, satellite receivers, antennas, headend electronics,
furniture, motor vehicles, aircraft and rolling stock (any and all such
equipment, parts and accessions being the "Equipment");
<PAGE> 2
(b) all inventory in all of its forms, wherever located, now or
hereafter existing, including, but not limited to, (i) all raw materials and
work in process therefor, finished goods thereof, and materials used or consumed
in the manufacture or production thereof, (ii) goods in which Debtor has an
interest in mass or a joint or other interest or right of any kind (including,
without limitation, goods in which Debtor has an interest or right as
consignee), and (iii) goods which are returned to or repossessed by Debtor, and
all accessions thereto and products thereof and documents therefor (any and all
such inventory, accessions, products and documents being the "Inventory");
(c) all accounts, accounts receivable, contract rights described
on Schedule 5 hereto, chattel paper, documents, instruments, deposit accounts,
general intangibles, tax refunds and other obligations of any kind owing to
Debtor, now or hereafter existing, whether or not arising out of or in
connection with the sale or lease of goods or the rendering of services, and all
rights now or hereafter existing in and to all security agreements, leases,
subleases, and other contracts securing or otherwise relating to any such
accounts, contract rights, chattel paper, documents, instruments, deposit
accounts, general intangibles or obligations (any and all such accounts,
contract rights, chattel paper, documents, instruments, deposit accounts,
general intangibles and obligations including those described in Section 1.01(e)
herein being the "Receivables");
(d) all other general intangibles, whether now existing or
hereafter arising and wherever arising, including, but not limited to, all (i)
partnership, corporate, and other interests in and to any Person, (ii) permits,
licenses, consents, contract rights described on Schedule 5 hereto, franchises,
documents, certificates, records, customer lists, customer and supplier
contracts, easements, variances, certifications and approvals of Tribunals,
bills of lading (negotiable and non-negotiable), warehouse receipts, any claim
of Debtor against any Secured Party, liquidated or unliquidated, and other
rights, privileges and goodwill obtained or used in connection with any property
described in this Section 1.01, and (iii) tax refunds and other refunds or
rights to receive payment from U. S. federal, state or local governments or
foreign governments or other Tribunal;
(e) all bank accounts, deposit accounts, and margin accounts,
maintained by Debtor with financial institutions, brokers, dealers, and all
other persons or entities relating to commodities and/or securities, including
all funds held therein and all certificates and instruments, if any, from time
to time representing or evidencing such accounts;
(f) to the extent it is possible to create a security interest or
perfect a security interest in such Collateral by filing a UCC-1 financing
statement centrally, or in the case of dual filing states, centrally and at the
county level, as applicable, all of Debtor's fixtures now existing or hereafter
acquired, all substitutes and replacements therefor, all accessions and
attachments thereto, and all tools, parts and equipment now or hereafter added
to or used in connection with the fixtures on or above all real property now
owned or hereafter acquired by Debtor ("Fixtures"); and
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<PAGE> 3
(g) all substitutes and replacements for, accessions, attachments
and other additions to, tools, parts, and equipment used in connection with, and
all proceeds, products, and increases of, any and all of the foregoing
Collateral (including, without limitation, proceeds which constitute property of
the types described in this Section 1.01); interest, premium, and principal
payments, redemption proceeds and subscription rights, and shares or other
proceeds of conversions or splits of any securities in Collateral, and returned
or repossessed Collateral; and, to the extent not otherwise included, all (i)
payments under insurance, or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the foregoing
Collateral, (ii) cash and (iii) security for the payment of any of the
Collateral, and all goods which gave or will give rise to any of the Collateral
or are evidenced, identified, or represented therein or thereby.
1.02. Security for Obligations. This Agreement creates a first
priority security interest, securing the payment and performance of any and all
obligations now or hereafter existing of the Company, Debtor, each Subsidiary
and any other Person (other than Administrative Agent or any Secured Party)
under the Credit Agreement and Loan Papers, including any extensions,
modifications, substitutions, amendments and renewals thereof, whether for
principal, interest, fees, expenses, indemnification or otherwise (all such
obligations of the Company, Debtor, each Subsidiary and each other Person being
the "Obligations"). Without limiting the generality of the foregoing, this
Agreement secures the payment of all amounts which constitute part of the
Obligations and would be owed by the Company, Debtor, each Subsidiary or any
other Person (other than Administrative Agent or any Secured Party) to
Administrative Agent or any Secured Party under any Loan Paper, but for the fact
that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding under any Debtor Relief Law
involving the Company, Debtor, any Subsidiary or any other Person (including all
such amounts which would become due or would be secured but for the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding of the Company, any Subsidiary or any other
Person under any Debtor Relief Law).
1.03. Debtor Remains Liable. Anything herein to the contrary
notwithstanding, (a) Debtor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same extent as if this
Agreement had not been executed, (b) the exercise by Administrative Agent or any
Secured Party of any of the Rights hereunder shall not release Debtor from any
of its duties or obligations under the contracts and agreements included in the
Collateral, and (c) neither Administrative Agent nor any Secured Party shall
have any obligation or liability under the contracts and agreements included in
the Collateral by reason of this Agreement, nor shall Administrative Agent or
any Secured Party be obligated to perform any of the obligations or duties of
Debtor thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
1.04. Agreement With Respect to Collateral. Debtor and
Administrative Agent, on behalf of itself and each of the Lenders party to the
Credit Agreement, agree that to the extent that any of the Collateral may be
deemed to be a Fixture as opposed to Equipment, Inventory or any other
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form of Collateral that may be perfected by the filing of a UCC financing
statement, it is the intention of each of these parties that such Collateral be
deemed to be Equipment, Inventory or any other form of Collateral that may be
perfected by the filing of a UCC financing statement and such Collateral not be
deemed to be a Fixture.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.01. Representations and Warranties. Debtor represents and
warrants, with respect to itself and the Collateral, as follows:
(a) All of the Equipment and Inventory pledged by Debtor hereunder
is located at the places specified on Schedule 1 hereto (as supplemented from
time to time by Debtor by written notice to Administrative Agent) or in transit
to a place specified on Schedule 1 hereto (as supplemented from time to time by
Debtor by written notice to Administrative Agent) or in transit (i) for sale to
a third-party purchaser that upon such sale will become the obligor under a
Receivable or (ii) in the ordinary course of Debtor's business. The chief place
of business and chief executive office of Debtor and the office where Debtor
keeps all of its records concerning the Receivables are located at 945 East
Paces Ferry Road, Suite 2240, Atlanta, Georgia 30326. All chattel paper,
promissory notes or other instruments evidencing the Receivables have been
delivered and pledged to Administrative Agent duly endorsed and accompanied by
such duly executed instruments of transfer or assignment as are necessary for
such pledge, to be held as pledged collateral.
(b) Debtor is the legal and beneficial owner of, or has valid
leasehold title to, the Collateral pledged by it free and clear of any Lien,
security interest, option or other charge or encumbrance except for the security
interest created by this Agreement (other than Permitted Liens and Liens
permitted in Section 8.03 of the Credit Agreement). No effective financing
statement or other similar document used to perfect and preserve a security
interest under the Laws of any jurisdiction covering all or any part of the
Collateral is on file in any recording office, except such as may have been
filed (i) in respect of Permitted Liens and (ii) in favor of Administrative
Agent relating to this Agreement. As of the date hereof, Debtor has the trade
names set forth on Schedule 2 hereto (and no others). Debtor (including any
corporate or partnership predecessor) has not existed or operated under any name
other than as stated on Schedule 2 since the later of (i) October 28, 1998 or
(ii) the date of Debtor's incorporation.
(c) Debtor has possession and/or control of the Equipment and
Inventory pledged by it hereunder.
(d) This Agreement and the pledge of the Collateral pursuant
hereto creates a valid first priority security interest in the Collateral (other
than deposit accounts in financial institutions which are not Administrative
Agent or a Secured Party and Permitted Liens), securing the payment of the
Obligations which upon filings and other necessary actions to perfect such
security interest will create a perfected, first priority security interest in
such collateral, to the extent that such security interest can be perfected by
filing a UCC financing statement.
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(e) Except as described on Schedule 3 hereto, no consent of any
other Person and no authorization, approval or other action by, and no notice to
or filing with, any Tribunal is required (i) for the pledge by Debtor of the
Collateral pledged by it hereunder, for the grant by Debtor of the security
interest granted hereby or for the execution, delivery or performance of this
Agreement by Debtor, (ii) for maintenance of the pledge, assignment and security
interest created hereby or for the perfection of the pledge, assignment and
security interest created hereby by filing a UCC-1 financing statement
centrally, or in the case of dual filing states, centrally and at the county
level, as applicable (including the first priority nature of such pledge,
assignment and security interest except for Permitted Liens) or (iii) except as
otherwise provided by law, for the exercise by Administrative Agent of the
Rights provided for in this Agreement or the remedies in respect of the
Collateral pursuant to this Agreement, except for consents, authorizations,
filings, notices, actions and approvals by or with the FCC or any applicable PUC
("FCC and PUC Consents").
(f) Debtor possesses all material licenses and permits, including
but not limited to all applicable certificates of occupancy, licenses and
permits and all health and sanitation permits, required for the operations of
its business.
(g) Schedule 4 hereto, is a complete and correct list of all
deposit accounts (demand, time, special or other) maintained by or in which
Debtor has an interest and correctly describes the financial institution in
which such account is maintained (including the specific branch), the address
and ABA number of such institution, the officer of such institution having
primary responsibility for Debtor's accounts, the account number and type (as
supplemented from time to time by Debtor by written notice to Administrative
Agent).
ARTICLE III. COVENANTS
3.01. Further Assurances. (a) Debtor agrees to obtain the necessary
consent to or waiver of such restriction from any Person so as to enable Debtor
to effectively grant to Secured Party such security interest under this
Agreement.
(b) Debtor agrees that from time to time, at the expense of
Debtor, Debtor will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that Administrative Agent may reasonably request, in order to perfect and
protect any pledge, assignment or security interest granted or purported to be
granted hereby, and the priority thereof, or to enable Administrative Agent to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral. Without limiting the generality of the foregoing, upon written
request by Administrative Agent, Debtor will: (i) mark conspicuously each
chattel paper included in Receivables, and, at the request of Administrative
Agent, each of its records pertaining to the Collateral with the following
legend:
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THIS INSTRUMENT IS SUBJECT TO A SECURITY INTEREST AND
LIEN PURSUANT TO A SECURITY AGREEMENT DATED DECEMBER
31, 1998) MADE BY BORROWER, IN FAVOR OF NATIONSBANK, N.A.,
AS ADMINISTRATIVE AGENT
or such other legend, in form and substance satisfactory to and as specified by
Administrative Agent, indicating that such chattel paper or Collateral is
subject to the pledge, assignment and security interest granted hereby; (ii) if
any Collateral shall be evidenced by a promissory note or other instrument or be
chattel paper, deliver and pledge to Administrative Agent hereunder such note,
instrument or chattel paper duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance satisfactory to
Administrative Agent; and (iii) execute and file such financing or continuation
statements, or amendments thereto and such other instruments or notices, as may
be necessary or desirable, or as Administrative Agent may request, in order to
perfect and preserve the pledge, assignment and security interest granted or
purported to be granted hereby.
(c) Debtor hereby authorizes Administrative Agent to file one or
more financing or continuation statements, and amendments thereto, relating to
all or any part of the Collateral without the signature of Debtor where
permitted by Law. A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by Law.
(d) Debtor will furnish to Administrative Agent from time to time
statements and schedules (including Schedules to this Agreement) further
identifying and describing the Collateral and such other reports in connection
with the Collateral as Administrative Agent may reasonably request, all in
reasonable detail. Debtor will promptly furnish to Administrative Agent a copy
of each new or renewal, restatement or modification of any agreement included in
Collateral or otherwise described in Section 1.01 herein.
(e) Debtor shall not establish or maintain any deposit or similar
bank account not listed on Schedule 4 hereto unless Administrative Agent
receives prior written notice thereof, Debtor executes and delivers to
Administrative Agent assignments of such account in such form as Administrative
Agent may request and the financial institution in which such account will be
maintained delivers to Administrative Agent acknowledgments of the assignment of
such account in form and substance satisfactory to Administrative Agent.
(f) In addition to such other information as shall be specifically
provided for herein, Debtor, the Parent, and each of Debtor's Subsidiaries shall
permit such site visitations and inspections and furnish to Administrative Agent
such other information with respect to the Collateral as Administrative Agent
may reasonably request from time to time in connection with the Collateral, or
the protection, preservation, maintenance or enforcement of the security
interest or the Collateral as provided pursuant to the terms of the Credit
Agreement.
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3.02. Equipment, Fixtures and Inventory.
(a) Debtor shall keep the Equipment, Fixtures and Inventory
pledged by it hereunder (other than Inventory sold in the ordinary course of
business) at the places therefor specified in Section 2.01(a) herein or, upon
thirty days' prior written notice to Administrative Agent, at such other places
in such jurisdiction where all action required by Section 3.01 herein shall have
been taken with respect to the Equipment and Inventory.
(b) Debtor shall, and shall cause each Subsidiary of the Debtor
to, maintain or cause to be maintained all their material Properties necessary
to the conduct of their business (whether owned or held under lease) in
reasonably good repair, working order and condition, taken as a whole, and from
time to time make or cause to be made all appropriate repairs, renewals,
replacements, additions, betterments and improvements thereto.
(c) The Debtor shall, and shall cause each Subsidiary of the
Debtor to, pay and discharge all Taxes, assessments and governmental charges or
levies imposed upon it or its income or Properties prior to the date on which
penalties attach thereto, and all lawful material claims for labor, materials
and supplies which, if unpaid, might become a Lien upon any of their Properties,
except those Taxes, assessments and charges contested by the Debtor diligently
in good faith, and for which adequate reserves have been established in
accordance with GAAP. The Debtor shall, and shall cause the Parent, and each
Subsidiary of the Debtor to, timely file all information returns required by
federal, state or local Tax authorities.
3.03. Insurance. Debtor shall, and shall cause each Subsidiary of
the Debtor to, maintain insurance from responsible companies in such amounts and
against such risks as shall be customary and usual in the industry for companies
of similar size and capability, but in no event less than the amount and types
insured as of the Closing Date. Debtor shall promptly furnish to Administrative
Agent evidence of such insurance in form and content satisfactory to
Administrative Agent. If Debtor fails to perform or observe any applicable
covenants as to insurance on any of such Collateral, Administrative Agent may at
its own option obtain insurance on only Administrative Agent's interest in such
Collateral, any premium thereby paid by Administrative Agent to become part of
the Obligations, bear interest as provided in the Credit Agreement. In the event
Administrative Agent maintains such substitute insurance, the additional premium
for such insurance shall be due on demand and payable by Debtor to
Administrative Agent in accordance with any notice delivered to Debtor by
Administrative Agent. Debtor hereby grants Administrative Agent a security
interest in any refunds of unearned premiums in connection with any
cancellation, adjustment or termination of any policy of insurance required by
Administrative Agent and in all proceeds of such insurance and hereby appoints
Administrative Agent its attorney-in-fact to endorse any check or draft that may
be payable to Debtor in order to collect such refunds or proceeds. Any such sums
collected by Administrative Agent shall be credited, except to the extent
applied to the purchase by Administrative Agent of similar insurance, to any
amounts then owing on the Obligations in accordance with the Credit Agreement.
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3.04. Place of Perfection; Records; Collection of Receivables,
chattel paper and Instruments.
(a) Debtor shall keep its chief place of business and chief
executive office and the office where it keeps its records concerning the
Receivables, and the originals of all chattel paper (until delivered to
Administrative Agent), at the location therefor specified in Section 2.01(a)
herein Debtor shall have given written notice thereof to Administrative Agent no
later than thirty days prior to the moving thereto. Debtor will hold and
preserve such records and chattel paper and will permit representatives of
Administrative Agent to inspect and make abstracts from and copies of such
records and chattel paper as provided in the Credit Agreement. Debtor shall
deliver to Administrative Agent all Instruments to be held by Administrative
Agent as collateral.
(b) Except as otherwise provided in this Section 3.04(b), Debtor
shall continue to collect, at its own expense, all amounts due or to become due
Debtor under the Receivables, chattel paper and Instruments. In connection with
such collections, Debtor may take (and, at Administrative Agent's direction,
shall take) such action as Debtor or Administrative Agent may deem reasonably
necessary or advisable to enforce collection of the Receivables, chattel paper
and Instruments; provided, however, that Administrative Agent shall have the
right (upon an Event of Default which is continuing) (without notice to Debtor)
to notify the account debtors or obligors under any Receivables, chattel paper
and Instruments of the assignment of such Receivables, chattel paper and
Instruments to Administrative Agent and to direct such account debtors or
obligors to make payment of all amounts due or to become due to Debtor
thereunder directly to Administrative Agent and, at the expense of Debtor, to
enforce collection of any such Receivables, chattel paper and Instruments, and
to adjust, settle or compromise the amount or payment thereof, in the same
manner and to the same extent as Debtor might have done. Upon and after the
occurrence of a Default or Event of Default that is continuing, all amounts and
proceeds (including Instruments) received by Debtor in respect of the
Receivables, chattel paper and Instruments shall be received in trust for the
benefit of Administrative Agent hereunder, shall be segregated from other funds
of Debtor and shall be forthwith paid over to Administrative Agent in the same
form as so received (with any necessary indorsement) to be held as cash
collateral and either (a) released to Debtor so long as no Default or Event of
Default shall have occurred and be continuing or (b) if any Default or Event of
Default shall have occurred and be continuing, applied as provided herein.
Debtor shall not adjust, settle or compromise the amount or payment of any
Receivable, chattel paper or Instrument, release wholly or partly any account
debtor or obligor thereof, or allow any credit or discount thereon.
3.05. Transfers and Other Liens. Debtor shall not (a) sell, assign
(by operation of Law or otherwise) or otherwise dispose of, or grant any option
with respect to, any of the Collateral, except as permitted under the Credit
Agreement, or (b) create or permit to exist any Lien, security interest, option
or other charge or encumbrance upon or with respect to any of the Collateral,
except for the security interest under this Agreement (and except as provided
for in Section 8.03 of the Credit Agreement).
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3.06. Administrative Agent Appointed Attorney-in-Fact. Debtor hereby
irrevocably appoints Administrative Agent Debtor's attorney-in-fact, with full
authority in the place and stead of Debtor and in the name of Debtor or
otherwise to take any action and to execute any instrument which Administrative
Agent may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation (provided that the actions listed in
each clause below other than the obtainment and adjustment of insurance may only
be taken or exercised after the occurrence of an Event of Default which is
continuing):
(a) to obtain and adjust insurance required to be paid to
Administrative Agent pursuant to Section 3.03 herein,
(b) to ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under or in
connection with the Collateral,
(c) to endorse and collect any drafts or other Instruments,
documents and chattel paper,
(d) to file any claims or take any action or institute any
proceedings which Administrative Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce compliance with the
terms and conditions of any Collateral or the rights of Administrative Agent
with respect to any of the Collateral. UPON AND AFTER THE OCCURRENCE OF A
DEFAULT OR EVENT OF DEFAULT THAT IS CONTINUING, DEBTOR HEREBY IRREVOCABLY GRANTS
TO ADMINISTRATIVE AGENT DEBTOR'S PROXY (EXERCISABLE FROM AND AFTER THE
OCCURRENCE OF AN EVENT OF DEFAULT WHICH IS CONTINUING) TO VOTE ANY SECURITIES
COLLATERAL AND APPOINTS ADMINISTRATIVE AGENT DEBTOR'S ATTORNEY- IN-FACT TO
PERFORM ALL OBLIGATIONS OF DEBTOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF
ADMINISTRATIVE AGENT'S RIGHTS HEREUNDER. THE PROXY AND POWER OF ATTORNEY HEREIN
GRANTED, AND EACH STOCK POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED
(INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE COUPLED WITH AN INTEREST
AND ARE IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS.
ARTICLE IV. RIGHTS AND POWERS OF ADMINISTRATIVE AGENT
4.01. Administrative Agent May Perform. If Debtor fails to perform
any agreement contained herein, Administrative Agent may itself perform, or
cause performance of, such agreement, and the expenses of Administrative Agent
incurred in connection therewith shall be payable by Debtor under Section 4.05
herein.
4.02. Administrative Agent's Duties. The powers conferred on
Administrative Agent hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon it or any Secured Party to
exercise any such powers. Except for the safe custody of any
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Collateral in its possession and the accounting for moneys actually received by
it hereunder, Administrative Agent shall have no duty as to any Collateral, as
to ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relative to any Collateral, whether or not
Administrative Agent has or is deemed to have knowledge of such matters, or as
to the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to any reasonable care in the custody and
preservation of any Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which Administrative Agent accords its own
property. Except as provided in this Section 4.02, Administrative Agent shall
not have any duty or liability to protect or preserve any Collateral or to
preserve rights pertaining thereto. Nothing contained in this Agreement shall be
construed as requiring or obligating Administrative Agent, and Administrative
Agent shall not be required or obligated, to (a) present or file any claim or
notice or take any action, with respect to any Collateral or in connection
therewith or (b) notify Debtor of any decline in the value of any Collateral.
4.03. Remedies. If any Event of Default shall have occurred and be
continuing:
(a) Administrative Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the Uniform Commercial Code in effect in the state in which the
Collateral is located at that time (the "UCC") (whether or not the Uniform
Commercial Code applies to the affected Collateral), and also may (i) require
Debtor to, and Debtor hereby agrees that it will at its expense and upon request
of Administrative Agent forthwith, assemble all or part of the Collateral as
directed by Administrative Agent and make it available to Administrative Agent
at a place to be designated by Administrative Agent which is reasonably
convenient to both parties or (ii) without notice, except as specified below,
sell the Collateral or any portion thereof in one or more parcels at public or
private sale, at any of Administrative Agent's offices or elsewhere, for cash,
on credit or for future delivery, and upon such other terms as Administrative
Agent may deem commercially reasonable. Debtor agrees that, to the extent notice
of sale shall be required by Law, ten days' notice to Debtor of the time and
place of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. Administrative Agent shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given. Administrative Agent may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to which it was so
adjourned.
(b) All cash proceeds received by Administrative Agent upon any
sale of, collection of, or other realization upon, all or any part of the
Collateral shall be applied as follows:
First: To the payment of all out-of-pocket costs and expenses incurred
in connection with the sale of, collection of or other realization upon
Collateral, including reasonable attorneys' fees and disbursements;
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Second: To the payment of the Obligations as provided in the Credit
Agreement and in such order and in such manner consistent with
applicable Laws as Administrative Agent in its reasonable discretion
shall decide (with Debtor remaining liable for any deficiency); and
Third: To the extent of the balance (if any) of such proceeds, to the
payment to Debtor or other Person legally entitled thereto.
(c) All payments received by Debtor under or in connection with
any Collateral shall be received in trust for the benefit of Administrative
Agent, shall be segregated from other funds of Debtor and shall be forthwith
paid over to Administrative Agent in the same form as so received (with any
necessary indorsement).
4.04. Indemnity and Expenses. (a) Debtor agrees to indemnify
Administrative Agent and each Secured Party from and against any and all claims,
losses and liabilities (including reasonable attorneys' fees) growing out of or
resulting from this Agreement (including, without limitation, enforcement of
this Agreement), expressly including such claims, losses or liabilities arising
out of mere negligence of Administrative Agent or any Secured Party, except
claims, losses or liabilities resulting from Administrative Agent's or any
Secured Party's gross negligence or willful misconduct.
(b) Debtor will upon demand pay to Administrative Agent the amount
of any and all reasonable expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, which Administrative Agent may
incur in connection with (i) the administration of this Agreement, (ii) the
custody, preservation, use or operation of, or the sale of, collection from, or
other realization upon, any of the Collateral, (iii) the exercise or enforcement
of any of the Rights of Administrative Agent hereunder or (iv) the failure by
Debtor to perform or observe any of the provisions hereof. Any payments so made
shall be a part of the Obligation, shall be payable upon demand, and shall bear
interest as provided in Article II of the Credit Agreement.
4.05. Further Approvals Required. In connection with the exercise by
Administrative Agent of its rights hereunder that affects the disposition of or
use of any Collateral, it may be necessary to obtain the prior consent or
approval of Tribunals and other Persons to a transfer or assignment of
Collateral, including, without limitation, the FCC and any applicable PUC. In
connection with the exercise by the Administrative Agent or any other Secured
Party of its rights hereunder relating to the disposition of or operation under
any license issued by the FCC or any applicable PUC, or any other
authorizations, agreements, permits, licenses and franchises constituting
property of the Debtor, it may be necessary to obtain the prior consent or
approval of the FCC or any applicable PUC, other governmental authority or other
Persons to the exercise of rights with respect to the Collateral. The Debtor
hereby agrees to execute, deliver and file, and hereby appoints (to the extent
permitted under applicable law) the Administrative Agent as its attorney upon
the occurrence and during the continuation of an Event of Default, to execute,
deliver and file on the Debtor's behalf and in the Debtor's name, all
applications, certificates, filings, instruments and other documents (including,
but not limited to, any application for an
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assignment or transfer of control or ownership) that may be necessary or
appropriate, in the Administrative Agent's opinion, to obtain such consents or
approvals. The Debtor further agrees to use its best efforts to obtain such
consents or approvals upon and after the occurrence of a Default or Event of
Default that is continuing. The Debtor acknowledges that there is no adequate
remedy at law for failure by it to comply with the provisions of this Section
and that such failure would not be adequately compensable in damages, and
therefore agrees that this Section 4.05 may be specifically enforced.
ARTICLE V. MISCELLANEOUS
5.01. Cumulative Rights. All Rights of Administrative Agent and
Secured Parties under the Loan Papers are cumulative of each other and of every
other Right which Administrative Agent and Secured Parties may otherwise have at
Law or in equity or under any other contract or other writing for the
enforcement of the security interest herein or the collection of the
Obligations. The exercise of one or more Rights shall not prejudice or impair
the concurrent or subsequent exercise of other Rights.
5.02. Modifications; Amendments; Etc. No amendment or waiver of any
provision of this Agreement, and no consent to any departure by Debtor here
from, shall in any event be effective unless the same shall be in writing and
signed by Administrative Agent, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
5.03. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (a) remain in full
force and effect until the later of (i) the final payment in full of the
Obligations and all amounts payable under this Agreement and (ii) the expiration
or termination of the obligations of Secured Party to extend credit to the
Company, (b) be binding upon Debtor, its successors and assigns, and (c) inure
to the benefit of, and be enforceable by Administrative Agent and its
successors, transferees and assigns. Upon any such termination, Administrative
Agent will, at Debtor's expense, execute and deliver to Debtor such documents as
such Debtor shall reasonably request to evidence such termination.
5.04. GOVERNING LAW; WAIVER OF JURY TRIAL.
(A) THIS AGREEMENT AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO BE
CONTRACTS MADE IN DALLAS, TEXAS, AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE
GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS. WITHOUT
EXCLUDING ANY OTHER JURISDICTION AND NOT AS A LIMITATION OF SECTION 5.04, DEBTOR
AGREES THAT THE STATE
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AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS, WILL HAVE JURISDICTION
OVER PROCEEDINGS IN CONNECTION HEREWITH. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
DEBTOR AND ADMINISTRATIVE AGENT HEREBY WAIVE ANY RIGHT THAT EITHER MAY HAVE TO A
TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR
OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER LOAN PAPERS,
OR ANY RELATED MATTERS, AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A
JUDGE SITTING WITHOUT A JURY.
(B) DEBTOR HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS
UPON IT. DEBTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED
MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO DEBTOR AT ITS ADDRESS DESIGNATED FOR
NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED
FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS SECTION 5.04
SHALL AFFECT THE RIGHT OF ADMINISTRATIVE AGENT TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
5.05. Administrative Agent's Right to Use Agents. Administrative
Agent may exercise its Rights under this Agreement through an agent or other
designee.
5.06. No Interference, Compensation or Expense. Administrative Agent
may exercise its Rights under this Agreement (a) without resistance or
interference by Debtor and (b) without payment of any rent, license fee or
compensation of any kind to Debtor.
5.07. Waiver. Should any part of the Obligations be payable in
installments, the acceptance by Administrative Agent or any Secured Party at any
time and from time to time of partial payment of the aggregate amount of all
installments then matured shall not be deemed as a waiver of any Event of
Default then existing. No waiver of any Event of Default shall be deemed to be a
waiver of any other subsequent Event of Default, nor shall any such waiver be
deemed to be a continuing waiver. No delay or omission by Administrative Agent
or any Secured Party in exercising any Right hereunder, or under any other Loan
Papers, shall impair any such Right or be construed as a waiver thereof or any
acquiescence therein, nor shall any single or partial exercise of any such Right
preclude other or further exercise thereof, or the exercise of any other Right
of Administrative Agent or any Secured Party hereunder or under such other
agreements.
5.08. Waivers by Debtor. Subject to the terms of the Credit
Agreement, Debtor waives notice of the creation, advance, increase, existence,
extension, or renewal of, or of any indulgence with respect to, the Obligations;
waives presentment, demand, notice of dishonor, and protest; and waives notice
of the amount of the Obligations outstanding at any time, notice of any change
in financial condition of any Subsidiary. Debtor waives (a) any claim that, as
to any part of the Collateral, a public sale, should Administrative Agent elect
so to proceed, is, in and of itself, not a commercially reasonable method of
sale for such Collateral, (b) except as otherwise provided
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in this Agreement, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OR JUDICIAL
HEARING IN CONNECTION WITH ADMINISTRATIVE AGENT'S DISPOSITION OF ANY OF THE
COLLATERAL, INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT
REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT DEBTOR WOULD OTHERWISE HAVE UNDER THE
CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, AND ALL OTHER
REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR OTHER REQUIREMENTS WITH
RESPECT TO THE ENFORCEMENT OF ADMINISTRATIVE AGENT'S RIGHTS HEREUNDER and (c)
all rights of redemption, appraisal or valuation.
5.09. Other Parties and Other Collateral. No renewal, increase, or
extension of or any other indulgence with respect to, the Obligations or any
part thereof, no release, exchange, or taking of any security, no release of any
Person (including any Subsidiary, maker, endorser, guarantor, or surety) liable
on the Obligations, no delay in enforcement of payment, no delay or omission or
lack of diligence or care in exercising any Right or power with respect to the
Obligations or any security therefor or guaranty thereof or under this
Agreement, and no other circumstance or event which might constitute a defense
available to or discharge of Debtor, any Subsidiary or any other Person, shall
in any manner impair or affect the Rights of Administrative Agent or any Secured
Party hereunder, under any other Loan Papers, at Law, or in equity. Neither
Administrative Agent nor any Secured Party need file suit or assert a claim for
personal judgment against any Person for any part of the Obligations or seek to
realize upon any other security for the Obligations, before foreclosing upon the
Collateral for the purpose of paying the Obligations. Debtor waives any Right to
the benefit of or to require or control application of any other security or
proceeds thereof, and agrees that neither Administrative Agent nor any Secured
Party shall have any duty or obligation to Debtor to apply any such other
security or proceeds thereof to the Obligations. Debtor hereby waives all rights
by which it might be entitled to require suit on an accrued right of action in
respect of any of the Obligations or require suit against Debtor, any Subsidiary
or others, whether arising pursuant to Section 34.02 of the Texas Business and
Commerce Code, as amended, Section 17.001 of the Texas Civil Practice and
Remedies Code, as amended, or Rule 31 of the Texas Rules of Civil Procedure, as
amended, or otherwise.
5.10. Notices and Deliveries.
(a) Manner of Delivery. All notices, communications and materials
to be given or delivered pursuant to this Agreement shall, except in those cases
where giving notice by telephone is expressly permitted, be given or delivered
in writing. All written notices, communications and materials shall be sent by
registered or certified mail, postage prepaid, return receipt requested, by
telecopier, or delivered by hand. In the event of a discrepancy between any
telephonic notice and any written confirmation thereof, such written
confirmation shall be deemed the effective notice except to the extent
Administrative Agent or Debtor has acted in reliance on such telephonic notice.
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(b) Addresses. All notices, communications and materials to be
given or delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers as provided
in the Credit Agreement or at such other address or, telecopier or telephone
number or to the attention of such other individual or department as the party
to which such information pertains may hereafter specify for the purpose in a
notice to the other specifically captioned "Notice of Change of Address".
(c) Effectiveness. Each notice, communication and any material to
be given or delivered to Administrative Agent or Debtor pursuant to this
Agreement shall be effective or deemed delivered or furnished (i) if sent by
mail, on the fifth day after such notice, communication or material is deposited
in the mail, addressed as above provided, (ii) if sent by telecopier, when such
notice, communication or material is transmitted to the appropriate number
determined as above provided in this Section 5.10 and the appropriate receipt is
received or otherwise acknowledged, (iii) if sent by hand delivery or overnight
courier, when left at the address of the addressee addressed as above provided,
and (iv) if given by telephone, when communicated to the individual or any
member of the department specified as the individual or department to whose
attention notices, communications and materials are to be given or delivered
except that notices of a change of address, telecopier or telephone number or
individual or department to whose attention notices, communications and
materials are to be given or delivered shall not be effective until received.
5.11. Parties Bound. This Agreement shall be binding on Debtor and
its successors, assigns, and other legal representatives, and shall inure to the
benefit of Administrative Agent and Secured Parties, and their respective
successors and assigns; provided, however, that Debtor may not assign its Rights
or obligations hereunder without the prior written consent of Administrative
Agent. The Rights, powers, and interests held by Administrative Agent and
Secured Parties hereunder may be transferred or assigned, in whole or in part,
in accordance with the Credit Agreement.
5.12. Definitions. Unless otherwise defined in this Agreement, terms
used herein shall have the meanings set forth in the Credit Agreement. Unless
the context indicates otherwise or the terms are otherwise defined herein,
definitions in the Uniform Commercial Code apply to words and phrases in this
Agreement. "Debtor" includes, without limitation, such Person, such Person's
heirs, successors and assigns, such Person as a debtor-in-possession, and any
receiver, trustee, liquidator, conservator, custodian, or similar party
appointed for such Person or all or substantially all of its assets under any
Law.
5.13. Severability. If any provision of any Loan Paper is held to be
illegal, invalid, or unenforceable under present or future Laws during the term
thereof, such provision shall be fully severable, the appropriate Loan Paper
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part thereof, and the remaining provisions
thereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance therefrom.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision there
shall be added automatically as a part of such Loan
15
<PAGE> 16
Paper a legal, valid, and enforceable provision as similar in terms to the
illegal, invalid, or unenforceable provision as may be possible.
5.14. Control. Notwithstanding anything herein to the contrary, this
Agreement and the transactions contemplated hereby do not and shall not
constitute, create, or have the effect of constituting or creating, directly or
indirectly, actual or practical ownership by Administrative Agent or any Secured
Party of Debtor or any issuer of the Collateral, or control, affirmative or
negative, direct or indirect, by Administrative Agent or any Secured Party over
the management or any aspect of the day-to-day operation of Debtor or any such
issuer, which control remains in Debtor, each such issuer, and their respective
boards of directors, partners and officers (as appropriate); provided, however,
that if Administrative Agent or any Secured Party becomes the owner of any
partnership interest, or other equity or ownership interest in any Issuer
whether through foreclosure or otherwise, it shall be entitled to exercise such
legal Rights as it may have by being an owner of such partnership interest or
other equity or ownership interest.
5.15. Loan Paper. This Agreement is a Loan Paper executed pursuant
to the Credit Agreement and shall (unless otherwise expressly indicated herein)
be construed, administered and applied in accordance with the terms and
provisions thereof.
5.16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
5.17. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE
OTHER LOAN PAPERS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
PARTIES.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
16
<PAGE> 17
IN WITNESS WHEREOF, Debtor and Administrative Agent have caused this
Agreement to be duly executed and delivered as of the date first above written.
WORLD ACCESS, INC.
By:
-----------------------------------------
Its:
----------------------------------------
17
<PAGE> 18
Schedule 1
Locations of Equipment and Inventory
*[To be provided by Debtor]*
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE> 19
Schedule 2
Trade Names
*[To be provided by Debtor]*
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE> 20
Schedule 3
Required Consents
*[To be provided by Debtor]*
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE> 21
Schedule 4
Bank Accounts
<TABLE>
<CAPTION>
Bank Account # Type
---- --------- ----
<S> <C> <C>
[Complete name,
Delivery address
ABA No. and Account
office and phone no.]
</TABLE>
*[To be provided by Debtor]*
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE> 22
Schedule 5
Contract Rights
*[To be provided by Debtor]*
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE> 1
EXHIBIT 10.33
DISBURSEMENT AGREEMENT
THIS DISBURSEMENT AGREEMENT (the "Agreement") is made and entered into
as of the 14th day of December, 1998, by and among WORLD ACCESS, INC., a
Delaware corporation ("World Access"), CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP), an Illinois corporation ("RCG"), and
WILLIAM H. CAUTHEN, ESQ. of the law firm of CAUTHEN & FELDMAN, P.A., a Florida
professional association ("Disbursing Agent").
W I T N E S S E T H:
WHEREAS, certain of the parties hereto have entered into an Agreement
and Plan of Merger and Reorganization dated as of May 12, 1998, as amended, a
copy of which is attached hereto as Exhibit A and incorporated herein by
reference (as so amended, the "Merger Agreement"), pursuant to which, among
other things, a wholly-owned subsidiary of World Access will merge with and
into RCG (the "Merger") at the Effective Time (as defined in the Merger
Agreement; all other capitalized terms used herein but not otherwise defined
herein shall have the meanings ascribed to such terms in the Merger Agreement)
and RCG as the surviving corporation shall continue to exist as a wholly-owned
subsidiary of World Access;
WHEREAS, RCG has filed for bankruptcy protection under Chapter 11 of
Title 11 of the United States Code, sections 101 et seq. (the "Bankruptcy
Code") and is the Debtor-In-Possession (as defined in the Bankruptcy Code)
under the Debtor's Plan (defined below);
WHEREAS, RCG has filed with the Bankruptcy Court a Debtor's Second
Plan of Reorganization dated September 2, 1998, a copy of which is attached
hereto as Exhibit B and incorporated herein by reference (the "Debtor's Plan"),
which, among other things, provides for the resolution of RCG's outstanding
creditor claims and equity interests (the "Reorganization");
WHEREAS, the Debtor's Plan has been confirmed by the Bankruptcy Court;
WHEREAS, Section 5.1 of the Merger Agreement and Article VII of the
Debtor's Plan call for RCG to issue, at the Effective Time, 3,125,000 shares
(the "Creditor Shares") of its common stock, no par value per share (the
"Reorganized Debtor Stock"), to holders of, and in full satisfaction of,
Allowed Claims and Administrative Expense Claims (including the WNS DIP Loan
Claim (as such term is defined in the Debtor's Plan));
<PAGE> 2
WHEREAS, pursuant to the Debtor's Plan and the Merger Agreement, RCG
shall be deemed to have issued to each holder of an Allowed Claim and an
Administrative Expense Claim (including the WNS DIP Loan Claim) such holder's
pro-rata share of the Creditor Shares based upon the amount of each such claim
in exchange for the surrender of such claims;
WHEREAS, pursuant to the Debtor's Plan and the Merger Agreement, on
and concurrently with the Effective Time and the issuance of the Creditor
Shares, the Creditor Shares (being all the outstanding shares of Reorganized
Debtor Stock at such time as a result of the cancellation of all other equity
interests by the Bankruptcy Court as of the Confirmation Date (as defined in
the Debtor's Plan)) shall be deemed cancelled and retired and will cease to
exist and shall be deemed exchanged and converted into the right to receive the
Disbursed Stock (defined below) and the Contingent Payment Stock (defined
below) in accordance with the terms of the Merger Agreement and the Debtor's
Plan;
WHEREAS, Section 5.2 of the Merger Agreement and Sections 7.3 and 7.4
of the Debtor's Plan call for World Access to deliver to the Disbursing Agent,
immediately following the Effective Time, 3,125,000 shares (the "Disbursed
Stock") of the common stock, par value $.01 per share, of World Access (the
"World Access Common Stock") and 6,250,000 shares of World Access Common Stock
(the "Contingent Payment Stock"; together with the Disbursed Stock the
"Deposited Stock"), to hold and distribute such shares pursuant to Articles 5
and 6 of the Merger Agreement and in accordance with the terms and provisions
of the Debtor's Plan;
WHEREAS, pursuant to the Debtor's Plan and the Merger Agreement, after
the delivery of the Deposited Stock, the Disbursing Agent shall issue to each
holder of Creditor Shares its pro-rata share of Disbursed Stock based upon the
number of Creditor Shares held by each such holder;
WHEREAS, pursuant to Section 7.3 of the Debtor's Plan and the Merger
Agreement, the Disbursing Agent will then return to World Access shares of
Disbursed Stock equal to (x) the dollar amount of all Cash (as defined in the
Debtor's Plan) that the Reorganized Debtor (as defined in the Debtor's Plan) or
the Surviving Corporation must pay to holders of Allowed Priority Claims (as
defined in the Debtor's Plan) (including the principal amount of Priority Tax
Claims (as defined in the Debtor's Plan)) pursuant to the terms of the Debtor's
Plan, divided by (y) $32.00; and
WHEREAS, pursuant to the Debtor's Plan and the Merger Agreement, the
Disbursing Agent shall release to holders of Creditor Shares their pro-rata
share of Contingent Payment Stock, if, as, when and to the extent that the
Contingent Payment
2
<PAGE> 3
Stock (or any portion thereof) is released pursuant to the terms of Article 6
of the Merger Agreement and in accordance with the terms and provisions of the
Debtor's Plan;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. DISBURSEMENT DEPOSIT. Subject to the terms and conditions of
the Merger Agreement and the Debtor's Plan, immediately following the Effective
Time, World Access shall cause to be delivered to the Disbursing Agent, to be
held and distributed as hereinafter provided, the Deposited Stock.
2. PROPERTY DISTRIBUTED IN RESPECT OF DEPOSITED STOCK. Any
dividends (within the meaning of Section 301(c)(1) of the Internal Revenue Code
of 1986, as amended (the "Code")) and any distribution which does not
constitute a dividend (within the meaning of Section 301(c)(1) of the Code) in
cash or other property paid with respect to any Disbursed Stock or Contingent
Payment Stock shall be added to the respective Disbursed Stock or Contingent
Payment Stock and shall become a part thereof (the "Stock Proceeds"). The
Deposited Stock shall be adjusted to appropriately reflect any stock dividend,
stock split, reverse stock split or the like.
3. VOTING OF DEPOSITED STOCK. Prior to the distribution of the
Deposited Stock by the Disbursing Agent, the Disbursing Agent will have full
voting rights with respect to the Deposited Stock; provided, however, that the
persons to whom the Contingent Payment Stock is to be released shall have the
right to instruct the Disbursing Agent as to the voting of such shares;
provided, further, that no such instructions may be given to the extent that
such person's ability to earn the Contingent Payment Stock has been permanently
lost pursuant to the provisions of the Debtor's Plan.
4. FEES OF DISBURSING AGENT. The Disbursing Agent shall be
entitled to a fee for its services hereunder (the "Disbursement Fee") equal to
the greater of (i) $20,000 and (ii) the amount based on its normal hourly
billing rate. Except as otherwise expressly provided herein, the Disbursement
Fee and all costs and expenses incurred by the Disbursing Agent in connection
with the establishment and maintenance of the escrow established hereby shall
be payable in one or more installments by World Access upon demand therefor
from the Disbursing Agent.
5. DISTRIBUTION OF DEPOSITED STOCK. The Disbursing Agent shall
distribute the Deposited Stock held by it under this Agreement in accordance
with the terms of Articles 5 and 6 of the Merger Agreement and Article VII of
the Debtor's Plan as set forth below. Unless
3
<PAGE> 4
otherwise indicated, all capitalized terms used in this Section 5 but not
otherwise defined in this Agreement shall have the meanings ascribed to such
terms in the Debtor's Plan.
(a) On and concurrently with the Effective Date, Holders of Allowed Class
3 Claims, Allowed Class 4 Claims, Allowed Class 5 Claims, the
Prepetition Arrearage (as that term is defined in the Stipulation and
Agreed Order) portion of the Allowed Class 7 Claim, the WNS DIP Loan
Claim, or any other Allowed Claim otherwise entitled, by agreement
with the Debtor or otherwise, to receive a Pro Rata distribution of
Creditor Shares and then Deposited Stock shall be deemed to have
received their Pro Rata distribution of Creditor Shares; provided,
however, that in lieu of receiving certificate representing shares of
Creditor Shares, such distributions shall be effected by means of
bookkeeping entries reflecting such Holders' ownership of such shares
of Creditor Shares; provided further, however, that on and
concurrently with the Effective Date, all such Holders entitled to
receive a Pro Rata distribution of Creditor Shares shall be and are
hereby immediately entitled to, and shall be deemed immediately to,
exchange their Pro Rata distribution of Creditor Shares for a Pro Rata
distribution of the Disbursed Stock and, if released by the Disbursing
Agent pursuant to Section 7.4 of the Debtor's Plan, the Contingent
Payment Stock.
(b) Immediately upon receipt of the Deposited Stock, the Disbursing Agent
shall issue to each holder of Creditor Shares such holder's pro-rata
share of Disbursed Stock based upon the number of Creditor Shares held
by each such holder as reflected on the stock ledger of RCG to be
delivered to the Disbursing Agent by the Surviving Corporation.
(c) The Disbursing Agent shall return to World Access, within sixty (60)
days after the Effective Date, shares of the Disbursed Stock having a
value that equals the dollar amount of Cash that the Surviving
Corporation must pay to Holders of Allowed Priority Claims and Allowed
Priority Tax Claims pursuant to the terms of the Debtor's Plan, which
amount shall be set forth in writing by the Surviving Corporation and
disclosed to the Disbursing Agent within fifty (50) days after the
Effective Date. In calculating the number of shares of the Disbursed
Stock that will be returned to World Access in accordance with the
preceding sentence, the value of each share of the Disbursed Stock
shall be deemed to equal $32.00, notwithstanding the closing price per
share of the World Access stock as reported by NASDAQ. For example, if
the Surviving Corporation is obligated under the Plan to pay $320,000
in cash on account of the principal amount of Allowed Priority Tax
Claims, the Disbursing Agent shall return 10,000 shares of the
Disbursed Stock to World Access even if the closing price per share of
World Access Stock as reported by NASDAQ is greater than or less than
$32.00.
4
<PAGE> 5
(d) (i) The Disbursing Agent will release the Contingent Payment
Stock to Holders of Allowed Claims, pursuant to the terms and
provisions of the Debtor's Plan, on a pro-rata basis, in the amounts
and on the dates specified below, if the sum of the EBITDA for (i) the
Surviving Corporation and (ii) Cherry U.K. for the performance periods
set forth below (each a "Performance Period") equals or exceeds the
Target EBITDA for such Performance Period as set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF
CONTINGENT
PAYMENT
STOCK TO BE
PERFORMANCE PERIOD RELEASE DATE RELEASED TARGET EBITDA
------------------- ------------ ------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including December 31,
1998 (the "First Performance Period") February 15, 1999 25% $ 7,500,000
January 1, 1999 to and including December
31, 1999 (the "Second Performance
Period") February 15, 2000 37.5% $29,000,000
January 1, 2000 to and including December
31, 2000 (the "Third Performance Period) February 15, 2001 37.5% $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Closing Date (as defined in the
Merger Agreement) is (a) on or after July 15, 1998 but prior to August
16, 1998, then the First Performance Period shall commence on August
1, 1998 and shall terminate on (and including) December 31, 1998 and
the Target EBITDA with respect thereto shall be reduced to $7,100,000,
(b) on or after August 16, 1998 but prior to September 30, 1998, then
the First Performance Period shall commence on September 1, 1998 and
shall terminate on (and including) December 31, 1998 and the Target
EBITDA with respect thereto shall be reduced to $6,700,000 or (c) on
or after September 30, 1998, then the First Performance Period shall
commence on the first day of the calendar month in which the Closing
(as defined in the Merger Agreement) occurs and shall terminate on
(and including) the last day of the sixth calendar month following the
month in which the Closing occurs, the release date shall be
forty-five (45) days after the end of such period and the Target
EBITDA shall be equal to the sum of (i) $2,100,000 for each calendar
month of 1998 included in the First Performance Period and (ii)
$2,400,000 for each calendar month of 1999 included in the First
Performance Period.
(ii) If the EBITDA for the Surviving Corporation and Cherry
U.K. is less than the Target EBITDA required for the release of
Contingent Payment Stock in either of the First or Second Performance
Periods (and with respect to the Second Performance Period is no less
than zero), then, notwithstanding the table above, the Contingent
Payment Stock shall be released by the Disbursing Agent if the actual
cumulative EBITDA for the Surviving Corporation and Cherry U.K. for
such Performance Period and any subsequent Performance Periods equals
or exceeds the cumulative Target EBITDA for such Performance Periods.
5
<PAGE> 6
(iii) Within forty (40) days of the end of each Performance
Period, World Access shall deliver to the Disbursing Agent a
Certificate of Instruction setting forth the EBITDA and the cumulative
EBITDA of (i) Cherry U.K. and (ii) the Surviving Corporation for each
such Performance Period and, in the event that such EBITDA or
cumulative EBITDA equals the Target EBITDA or the cumulative Target
EBITDA for such Performance Period set forth in Sections 5(c)(i) or
(ii) above (thus permitting the release of the Contingent Payment
Stock in accordance with this Section 5), directing the Disbursing
Agent to make the aforementioned pro-rata disbursement of Contingent
Payment Stock to Holders of Allowed Claims (together with the Stock
Proceeds, if any) specified in Sections 5(c)(i) or (ii) above and set
forth in such Certificate of Instruction. In the event there is a
disagreement or dispute with respect to the determination of the
EBITDA or the cumulative EBITDA of Cherry U.K. and the Surviving
Corporation or the number of shares of Contingent Payment Stock to be
released as a result thereof, World Access shall provide the
Disbursing Agent with one or more supplemental Certificates of
Instruction within five (5) days of any resolution of such
disagreement or dispute, directing the Disbursing Agent with respect
to the release of any Contingent Payment Stock in accordance with this
Section 5 which results from such resolution.
(e) Notwithstanding anything to the contrary, (i) if during any calendar
quarter of the Second Performance Period, the closing price per share
of the World Access Stock as reported by NASDAQ equals or exceeds
$65.00 for any five consecutive Trading Days during such calendar
quarter, then 25% of all of the shares of Contingent Payment Stock
shall be released on February 15, 2000, provided that if no shares of
Contingent Payment Stock are eligible for release during any such
calendar quarter, then such shares of Contingent Payment Stock shall
become eligible for release in a subsequent calendar quarter for the
Second Performance Period if the closing price per share of the World
Access Stock as reported by NASDAQ equals or exceeds $65.00 for a
total number of consecutive Trading Days during such subsequent
calendar quarter equal to or exceeding the total number of Trading
Days which such closing price was required to equal or exceed for (A)
such subsequent calendar quarter and (B) each of the previous calendar
quarters beginning with the calendar quarter for which such shares of
Contingent Payment Stock were not eligible for release; (ii) if the
combined EBITDA for the Surviving Corporation and Cherry U.K. for the
Second Performance Period equals or exceeds $52,775,000, then the
Contingent Payment Stock related to the Third Performance Period shall
be released on February 15, 2000; and (iii) all of the shares of
Contingent Payment Stock shall be released upon a Change of Control
(as defined in the Merger Agreement) (except to the extent that the
ability to earn such shares has been lost under this section) and the
restrictions set forth in Section 7.4(d) of the Debtor's Plan shall
not apply. World Access shall provide written notice to the Disbursing
Agent promptly upon
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<PAGE> 7
the occurrence of any of the foregoing at which time the Disbursing
Agent shall take the action called for by each of the above.
(f) World Access shall provide written notice to the Disbursing Agent as
to the form and content of the restrictive legends (if any) referring
to the restrictions contained in Section 6.4 of the Merger Agreement
(and the waiver thereof pursuant to Section 6.5 of the Merger
Agreement) to be placed on the certificates representing the Disbursed
Stock and the Contingent Payment Stock to be released pursuant to this
Agreement.
(g) For purposes of distributions hereunder, the number of shares of
Disbursed Stock and Contingent Payment Stock shall, if necessary, be
rounded to the next greater or lower whole number of shares as
follows: (i) fractions of1/2or greater shall be rounded to the next
greater whole number; and (ii) fractions of less than1/2shall be
rounded to the next lower whole number; provided, however, that to the
extent that there are interim distributions, the number of shares of
Disbursed Stock or Contingent Payment Stock shall be rounded to the
next lower whole number for purposes of such distribution and in the
final distribution shall be rounded in accordance with the immediately
preceding clause based on the applicable aggregate number of shares of
Disbursed Stock or Contingent Payment Stock distributed to each holder
in all distributions. The total number of shares of Disbursed Stock or
Contingent Payment Stock shall be adjusted as necessary to account for
the rounding provided hereby. No consideration shall be paid in lieu
of fractional shares that are rounded down.
(h) In order to fund the Trust, on the Effective Date, 40,000 shares of
the Disbursed Stock that would otherwise be distributable to Trust
Creditors shall be distributed by the Disbursing Agent to the Trustee
and the Trustee may also request, and the Disbursing Agent shall cause
to be distributed to the Trustee contemporaneously with distributions
of the Contingent Payment Stock to Trust Creditors under the Debtor's
Plan, shares of the Contingent Payment Stock that would otherwise be
available for distribution to Trust Creditors (all the Disbursed Stock
and the Contingent Payment Stock distributed to the Trustee hereunder
is hereinafter referred to as the "Trust Property"). Any distribution
of the Contingent Payment Stock to the Trustee shall not exceed one
percent (1%) of all stock distributable to Trust Creditors for each
distribution of the Contingent Payment Stock provided in the Debtor's
Plan. The Trust Property shall be issued in the name of Scott Peltz,
as Trustee of the Cherry Communications, Inc. Postconfirmation
Monitoring Trust. The Trustee has the full authorization, power and
authority, at his discretion, to endorse, transfer, and sell all Trust
Property in order to fund the expenses incurred by the Trustee and
professionals, including but not limited to the Law Firm, retained by
him under Article VII of the Debtor's Plan, provided, however, that
7
<PAGE> 8
the Trust Property held by the Trustee shall be subject to all
transfer and other restrictions that apply to the Disbursed Stock and
the Contingent Payment Stock in Debtor's Plan and the Merger
Agreement.
(i) The Disbursing Agent shall take such other actions as required by the
Debtor's Plan or as requested by World Access and permitted by the
Debtor's Plan.
(j) As soon as practicable on or after the Effective Date, the Disbursed
Stock and the Contingent Payment Stock (if and to the extent it is
released by the Disbursing Agent pursuant to Section 7.4 of the
Debtor's Plan) shall be disbursed by the Disbursing Agent in the
manner and priority set forth in this Plan. The Disbursing Agent has
the authority to make such interim distributions as it may determine
to be appropriate pending a final distribution. The Disbursing Agent
shall hold sufficient Deposited Stock, as applicable, in reserve for
distribution to Holders of Claims to which an objection has been
filed. Upon final determination by the Bankruptcy Court of objections
to allowance of Claims, a final distribution shall be made to all
Holders of Allowed Claims entitled thereto.
(k) In the event that the provisions contained herein conflict in any way
with the provisions of the Debtor's Plan, the provisions contained in
the Debtor's Plan shall control.
6. DUTIES OF THE DISBURSING AGENT. The acceptance by the
Disbursing Agent of its duties under this Agreement is subject to the following
terms and conditions, which the parties to this Agreement hereby agree shall
fully govern and control with respect to the Disbursing Agent's rights, duties,
liabilities and immunities:
(a) The Disbursing Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document
which the Disbursing Agent believes in good faith emanates from both
World Access and RCG, not only as to its due execution and the
validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein. The Disbursing
Agent is also relieved from the necessity of satisfying itself as to
the authority of the persons executing this Agreement in a
representative capacity.
(b) The Disbursing Agent shall not be liable for any error of judgment, or
for any act done or step taken or omitted by it in good faith, or for
any mistake of fact or law, or for anything that it may do or refrain
from doing in connection herewith, except for its own gross negligence
or willful misconduct.
(c) The Disbursing Agent may consult with, and obtain advice from,
independent legal counsel selected by the Disbursing Agent in the
event of any question as to any of
8
<PAGE> 9
the provisions hereof or its duties hereunder (the cost of obtaining
such advice being borne by World Access in accordance with Section 4
hereof) and it shall incur no liability and shall be fully protected
in acting in accordance with the opinion and instructions of such
counsel.
(d) The Disbursing Agent shall have no duties except those set forth
herein and those set forth in the Debtor's Plan, and the Disbursing
Agent shall not be subject to, or obliged to recognize, any other
agreement between, or direction or instruction of, any of the parties
hereto unless signed by World Access and RCG. The Disbursing Agent
shall not be bound by any notice of a claim, demand or objection with
respect to the Deposited Stock or any waiver, modification,
termination or rescission of this Agreement, unless received by it in
writing signed by World Access and RCG, and, if its duties herein are
materially increased, unless it shall have given its consent thereto.
(e) The Disbursing Agent's acceptance of the appointment as Disbursing
Agent hereunder shall not prevent it from representing any party
hereto in any matter other than a dispute over disbursement of, or
conflicting claims to, the Deposited Stock and related Stock Proceeds,
or otherwise arising hereunder. If any dispute arises over
disbursement of, or conflicting claims to, the Deposited Stock and
related Stock Proceeds, then the Disbursing Agent may interplead such
contested Deposited Stock and related Stock Proceeds into a court of
proper jurisdiction of its choosing, and thereupon the Disbursing
Agent shall be fully and completely discharged of its duties as
disbursement agent with respect to such contested Deposited Stock and
Stock Proceeds.
7. INDEMNIFICATION AND EXPENSE REIMBURSEMENT OF THE DISBURSING
AGENT. World Access agrees to indemnify, defend and hold harmless the
Disbursing Agent from any and all costs, expenses, damages or liability of any
kind whatsoever (including reasonable legal fees) arising by virtue of its
services as disbursement agent hereunder, except for liabilities due to the
Disbursing Agent's gross negligence or willful misconduct, and to reimburse the
Disbursing Agent for all costs and expenses incurred by the Disbursing Agent in
connection with the performance of its duties hereunder other than such costs
and fees incurred in connection with the establishment and maintenance of the
escrow established hereby, which shall be reimbursed pursuant to Section 4
hereof.
8. NOTICE. All notices and other communications hereunder shall
be in writing and shall be deemed given if (a) delivered by hand, (b) mailed by
registered or certified mail (return receipt requested) or (c) telecommunicated
and immediately confirmed both orally and in writing, to the parties at the
following addresses (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which so
hand-delivered or so telecommunicated or on the third Business Day following
9
<PAGE> 10
the date on which so mailed, if deposited in a regularly-maintained receptacle
for United States mail:
If to Disbursing Agent:
Cauthen & Feldman, P.A.
215 North Joanna Avenue
Tavares, Florida 32778-3200
Attn: William H. Cauthen, Esq.
Telecopier: (352) 343-7759
Telephone: (352) 343-2225
If to World Access or RCG:
World Access, Inc.
945 E. Paces Ferry Road
Suite 2200
Atlanta, Georgia 30326
Attn: Mr. Mark A. Gergel
Telecopier: (404) 262-2598
Telephone: (404) 231-2025
with a copy to (which will not constitute notice to World Access or
RCG):
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: Steven E. Fox, Esq.
Telecopier: (404) 525-2224
Telephone: (404) 522-4700
and
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attn: Mark K. Thomas, Esq.
Telecopier: (312) 902-1061
Telephone: (312) 902-5200
10
<PAGE> 11
9. EXECUTION IN COUNTERPARTS. This Agreement may be executed by
facsimile, and may be executed in several counterparts, each of which shall be
an original, and all of which shall constitute one and the same instrument.
10. APPLICABLE LAW. This Agreement shall be construed and
governed exclusively by the laws of the State of Georgia, without giving effect
to its principles of conflicts of laws.
11. AMENDMENT. This Agreement may be amended or modified only in
a writing signed by all parties hereto.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have duly executed and sealed
this Agreement or have caused this Agreement to be duly executed under seal on
its behalf by an officer or representative thereto duly authorized, all as of
the date first above written.
DISBURSING AGENT
William H. Cauthen, Esq. of the law
firm of Cauthen & Feldman, P.A.
By: /s/ William A. Cauthen
-----------------------------------
Its: President
-----------------------------
WORLD ACCESS, INC.
By: /s/ Mark A. Gergel
-----------------------------------
Its: Executive Vice President
-----------------------------
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP):
By: /s/ W. Tod Chmar
----------------------------------
Its: Executive Vice President/
Secretary
-----------------------------
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
WA Telecom Products Co., Inc.
World Access Holdings, Inc.
Telco Systems, Inc.
NACT Telecommunications, Inc.
Cellular Infrastructure Supply Company, Inc.
World Access Telecommunications Group, Inc.
Cherry Communications U.K. Limited
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-66723, 333-66731, 333-68125, 333-68619, 333-68623, and
333-68625) pertaining to the various stock option, warrant, and other employee
benefit plans of World Access, Inc. and subsidiaries of our report dated March
26, 1999, with respect to the consolidated financial statements and schedule of
World Access, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 9, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report
dated March 5, 1998 on the financial statements of World Access, Inc. for the
two years in the period ended December 31, 1997, which appears on page 51 of
World Access, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998, and which report has been incorporated by reference in each of the
following:
1. Registration Statement on Form S-8 (Registration Statement
No. 333-66723) of World Access, Inc.;
2. Registration Statement on Form S-8 (Registration No. 333-66731)
of World Access, Inc.;
3. Registration Statement on Form S-8 (Registration No. 333-68125)
of World Access, Inc.;
4. Registration Statement on Form S-8 (Registration No. 333-68619)
of World Access, Inc.;
5. Registration Statement on Form S-8 (Registration No. 333-68623)
of World Access, Inc.;
6. Registration Statement on Form S-8 (Registration No. 333-68625)
of World Access, Inc.;
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
April 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 55,176
<SECURITIES> 0
<RECEIVABLES> 80,277
<ALLOWANCES> (9,792)
<INVENTORY> 48,591
<CURRENT-ASSETS> 232,818
<PP&E> 71,300
<DEPRECIATION> (7,698)
<TOTAL-ASSETS> 613,812
<CURRENT-LIABILITIES> 107,232
<BONDS> 115,000
0
0
<COMMON> 441
<OTHER-SE> 360,142
<TOTAL-LIABILITY-AND-EQUITY> 613,812
<SALES> 138,990
<TOTAL-REVENUES> 152,133
<CGS> 83,580
<TOTAL-COSTS> 96,102
<OTHER-EXPENSES> 154,821
<LOSS-PROVISION> 11,332
<INTEREST-EXPENSE> 6,832
<INCOME-PRETAX> (113,535)
<INCOME-TAX> (1,387)
<INCOME-CONTINUING> (114,645)
<DISCONTINUED> (5,557)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (120,202)
<EPS-PRIMARY> (5.45)
<EPS-DILUTED> (5.45)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K. AMOUNTS DERIVED FROM WORLD ACCESS, INC.'S
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 HAVE
BEEN RESTATED FOR THE 1998 PRESENTATION OF DISCONTINUED OPERATIONS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 118,065 22,480
<SECURITIES> 0 0
<RECEIVABLES> 20,501 9,917
<ALLOWANCES> 237 265
<INVENTORY> 22,427 10,657
<CURRENT-ASSETS> 171,680 46,323
<PP&E> 12,650 8,564
<DEPRECIATION> 6,945 5,906
<TOTAL-ASSETS> 225,283 60,736
<CURRENT-LIABILITIES> 17,930 8,362
<BONDS> 115,000 0
0 0
0 0
<COMMON> 193 163
<OTHER-SE> 91,562 52,211
<TOTAL-LIABILITY-AND-EQUITY> 225,283 60,736
<SALES> 48,614 17,131
<TOTAL-REVENUES> 48,614 17,131
<CGS> 27,527 14,076
<TOTAL-COSTS> 27,527 14,076
<OTHER-EXPENSES> 9,322 4,440
<LOSS-PROVISION> 49 0
<INTEREST-EXPENSE> 1,040 39
<INCOME-PRETAX> 13,142 (1,155)
<INCOME-TAX> 4,792 (114)
<INCOME-CONTINUING> 8,350 (1,041)
<DISCONTINUED> 4,784 7,820
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,134 6,779
<EPS-PRIMARY> .76 .52
<EPS-DILUTED> .70 .46
</TABLE>
