<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
April 26, 2000 (February 11, 2000)
WORLD ACCESS, INC.
(Exact Name of registrant as specified in charter)
DELAWARE 0-29782 58-2398004
(State of (Commission File No.) (I.R.S. Employer
Incorporation) Identification No.)
945 E. PACES FERRY ROAD, SUITE 2200
ATLANTA, GEORGIA 30326
(Address of principal executive offices, including zip code)
(404) 231-2025
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The undersigned registrant hereby amends the following item of its
Current Report on Form 8-K filed on February 28, 2000 (event date: February 11,
2000), related to the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of Long Distance
International Inc. by World Access Telecommunications Group, Inc., an indirect,
wholly-owned subsidiary of the registrant.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
In accordance with Item 7(a) of Form 8-K, the following financial
statements of Long Distance International prepared in accordance with
Regulation S-X are included in this report:
- Independent Accountants' Report.
- Consolidated Balance Sheets as of December 31, 1998 and 1999.
- Consolidated Statements of Operations for the three years
ended December 31, 1999.
- Consolidated Statements of Common Shareholders' Equity
(Capital Deficiency) for the three years ended December 31,
1999.
- Consolidated Statements of Cash Flows for the three years
ended December 31, 1999.
- Notes to Consolidated Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On December 17, 1999, World Access entered into an Asset Purchase
Agreement with Long Distance International, Inc. (LDI) whereby it agreed to
purchase substantially all of its assets in exchange for World Access
Convertible Preferred Stock, Series D, with an Aggregate Liquidation Preference
of $185,000,000 ("World Access Preferred") and the assumption of certain of
LDI's liabilities. At the closing of the transaction, 81% of the World Access
Preferred was issued to holders of LDI's 12-1/4% Senior Notes due 2008 ("Note
Holders"), in satisfaction of LDI's obligations thereunder; 6% of World Access
Preferred was issued to NETnet International S.A. ("S.A.") in satisfaction of
LDI's obligation under an Acquisition Agreement dated October 9, 1998; 3% of the
World Access Preferred was issued to LDI to satisfy any remaining obligations;
and 10% of the World Access Preferred was deposited into escrow to secure LDI's
indemnification obligations under the Asset Purchase Agreement. Any escrow
proceeds not so applied will be allocated 70% to the Note Holders; 20% to S.A.
and 10% to LDI.
An Unaudited Pro Forma Condensed Combined Balance Sheet as of December
31, 1999 gives effect to our February 2000 acquisition of LDI as if the
acquisition had been completed on December 31, 1999. The Unaudited Pro Forma
Condensed Combined Statement of Operations give effect to our February 2000
acquisition of LDI, our December 1999 merger with FaciliCom and related
transactions, and our May 1999 merger with Comm/Net.
We have prepared the unaudited pro forma condensed combined statement
of operations to demonstrate how these combined businesses might have looked
if the mergers and related transactions had been completed on January 1, 1999.
The unaudited pro forma condensed combined statement of operations, while
helpful in illustrating characteristics of the combined company under one set
of assumptions, does not attempt to predict or suggest future results.
In connection with the merger with FaciliCom, World Access recorded a
one-time restructuring charge of $37.8 million in December 1999 for the
estimated costs of (1) consolidating certain of the United States gateway
switching centers and related technical support functions into existing
FaciliCom operations; (2) consolidating the United Kingdom operations into
existing FaciliCom operations; (3) consolidating the administrative functions
of the Telecommunications Group into FaciliCom's operations; and (4)
eliminating other redundant operations and assets as a result of combining the
Telecommunications Group's and FaciliCom's operations. The restructuring
charge included the write-down of the switching and transmission equipment
taken out of service, the write-off of certain leasehold improvements, a
provision for lease commitments remaining on certain facilities and equipment
taken out of service and employee termination benefits. The restructuring
program was completed in the first quarter of 2000.
As a result of the FaciliCom merger and the restructuring program
discussed above, World Access expects to realize significant operational and
financial synergies. These synergies are expected to include cost reductions
resulting from traffic routing changes made to take advantage of each
company's least cost routes, elimination of redundant leased line costs,
elimination of redundant switching centers and consolidation of certain
administrative functions. World Access currently estimates that these
annualized cost savings, which have been excluded from the unaudited pro forma
condensed combined statement of operations, will range from $20.0 million to
$35.0 million.
The unaudited pro forma condensed combined statement of operations is
presented for comparative purposes only and is not intended to be indicative
of the actual results had these transactions occurred as of January 1, 1999
nor does it purport to indicate results which may be attained in the future.
2
<PAGE> 3
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
(IN THOUSANDS)
WORLD PRO FORMA PRO FORMA
ACCESS (1) LDI (4) ADJUSTMENTS WORLD ACCESS
------------------------------------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents 147,432 6,798 40,403 (6) 194,633
Restricted cash and investments 32,243 41,884 (40,403)(6) 33,724
Accounts receivable 164,768 13,855 -- 178,623
Other current assets 24,547 5,214 -- 29,761
Net assets held for sale 244,388 -- -- 244,388
-------------------------------------- ---------
Total Current Assets 613,378 67,751 -- 681,129
-------------------------------------- ---------
Net assets of discontinued operations 4,969 4,969
Property and equipment, net 136,033 20,654 (2,000)(5) 154,687
Goodwill 830,234 122,919 (122,919)(7) 1,061,022
230,788 (5)
Other assets 35,201 1,969 -- 37,170
Restricted cash 14,958 -- -- 14,958
-------------------------------------- ---------
Total Assets 1,629,804 218,262 105,869 1,953,935
====================================== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt 83,837 253,033 (221,354)(5) 115,516
Accounts payable 182,107 37,727 -- 219,834
Other accrued liabilities 57,590 23,206 2,000 (5) 71,052
1,500 (5)
(5,736)(5)
(7,508)(5)
-------------------------------------- ---------
Total Current Liabilities 323,534 313,966 (231,098) 406,402
Long-term debt 408,338 2,343 410,681
Other long-term liabilities 633 -- -- 633
--------------------------------------- ---------
Total Liabilities 732,505 316,309 (231,098) 817,716
-------------------------------------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Redeemable warrants -- 13,540 (13,540)(8) --
Preferred Stock 4 17,471 (17,471)(8) 6
2 (5)
Common stock 523 58 (58)(8) 523
Additional paid in capital 1,062,939 108,491 (108,491)(8) 1,301,857
238,918 (5)
Accumulated other comprehensive loss (341) (698) 698 (8) (341)
Accumulated deficit (165,826) (236,909) 236,909 (8) (165,826)
-------------------------------------- ---------
Total Stockholders' Equity 897,299 (98,047) 336,967 1,136,219
-------------------------------------- ---------
Total Liabilities and Stockholders' Equity 1,629,804 218,262 105,869 1,953,935
====================================== =========
</TABLE>
3
<PAGE> 4
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(1) FACILICOM(2) COMM/NET(3) LDI(4) ADJUSTMENTS WORLD ACCESS
------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Carrier service revenues 501,081 404,485 13,868 117,662 (17,543)(9) 1,019,553
Operating expenses:
Cost of carrier services 448,305 364,773 9,923 97,867 (14,932)(9) 905,936
Selling, general and administrative 23,628 49,376 2,324 56,923 - 132,251
Depreciation and amortization 13,541 27,823 390 20,716 36,883 (10) 92,385
(6,968)(11)
Provision for doubtful accounts 4,805 7,276 - 1,899 - 13,980
Restructuring and other special charges 37,800 - - 6,387 - 44,187
--------------------------------------------------------- ----------
Total operating expenses 528,079 449,248 12,637 183,792 14,983 1,188,739
--------------------------------------------------------- ----------
Operating income (loss) (26,998) (44,763) 1,231 (66,130) (32,526) (169,186)
Interest and other income 3,308 3,026 - 4,488 - 10,822
Interest expense (12,914) (33,413) (65) (33,607) (8,325)(12) (58,208)
30,116 (13)
Foreign exchange loss (620) (1,749) - - - (2,369)
--------------------------------------------------------- ----------
Income (loss) from continuing operations
before income taxes (37,224) (76,899) 1,166 (95,249) (10,735) (218,941)
Provision (benefit) for income taxes (10,126) (7,335) 264 - (1,651)(14) (18,848)
--------------------------------------------------------- ----------
Net income (loss) from continuing
operations (27,098) (69,564) 902 (95,249) (9,084) (200,093)
Preferred stock dividends 1,968 - - 2,049 493 (15) 2,461
(2,049)(16)
--------------------------------------------------------- ----------
Net income (loss) available to
common stockholders (29,066) (69,564) 902 (97,298) (7,528) (202,554)
========================================================= ==========
Net loss per common share from
continuing operations:
Basic (0.78) (4.00)(17)
======== ==========
Diluted (0.78) (4.00)(17)
======== ==========
Weighted average shares outstanding:
Basic 37,423 50,634 (17)
======== ==========
Diluted 37,423 50,634 (17)
======== ==========
</TABLE>
4
<PAGE> 5
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. These columns represent the historical financial position and results of
operations of World Access, Inc. The World Access results of operations
information includes the results of Comm/Net from May 1, 1999 and the
results of FaciliCom from December 7, 1999.
2. This column represents the historical results of operations of FaciliCom
for the period January 1, 1999 to December 6, 1999.
3. This column represents the historical results of operations of Comm/Net
for the period January 1, 1999 to April 30, 1999.
4. These columns represent the historical financial position and results of
operations of LDI. The financial position of LDI is as of December 31,
1999. With respect to the information included in the Unaudited Pro Forma
Condensed Combined Statements of Operations, the LDI information is for the
twelve months ended December 31, 1999.
5. The LDI merger has been accounted for under the purchase method of
accounting. World Access has not determined the final allocation of the
purchase price, and accordingly, the amount ultimately determined may
differ from the amounts shown below.
Under the terms of the Agreement and Plan of Merger dated as of February
11, 2000, the purchase price was determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Purchase price:
Issuance of preferred stock (i) $ 217,560
Fair value of World Access options
issued in exchange for LDI options (ii) 21,360
Fees and expenses 2,000
---------
240,920
=========
Allocation to fair values:
Historical shareholders' deficit 98,047
Adjust assets and liabilities
Eliminate Senior Notes and other indebtedness
forgiven in the Merger (iii) (221,354)
Eliminate accrued interest on Senior Notes
forgiven in the Merger (iii) (5,736)
Eliminate liability related to acquisition (7,508)
contingency (iv)
Adjust switching equipment and IRUs to fair value 2,000
Adjust other current assets and liabilities to 1,500
fair value
Eliminate historical goodwill 122,919
---------
Goodwill $ 230,788
=========
</TABLE>
5
<PAGE> 6
(i) Represents the fair value, as determined by management, of the 185,000
shares of Series D Convertible Preferred Stock as of December 17, 1999, the date
the acquisition was announced, issued as part of the LDI merger consideration.
The Series D Preferred Stock bears no dividend and is convertible into shares of
World Access Common Stock at a conversion rate of $18 per common share of World
Access Common Stock, subject to adjustment in the event of below market
issuances of World Access Common Stock, stock dividends, subdivisions,
combinations, reclassifications and other distributions with respect to World
Access common stock. If the closing trading price of World Access Common Stock
exceeds $18 per share for 60 consecutive trading days, the Series D Preferred
Stock will automatically convert into World Access Common Stock.
(ii) Represents the fair value of approximately 1,500,000 options to
acquire World Access Common Stock issued in exchange for certain options
outstanding to acquire LDI stock. The fair value has been determined using the
Black-Scholes Option Pricing Model with the following assumptions: dividend
yield 0%, volatility 70%, risk free interest rate of 6.3% and an expected life
of 4 years. The World Access options have an average exercise price of $18.50
per share. The holders of the LDI redeemable warrants have agreed to terminate
their warrants as part of the closing of the acquisition by World Access.
(iii) Represents the elimination of LDI's debt obligations in exchange for
World Access Preferred Stock including $207.5 million under the 12 1/4% Senior
Notes, $11.9 million under term loans issued by the holders of the 12 1/4%
Senior Notes and $5.7 million of accrued interest relating to the 12 1/4% Senior
Notes. A $2.0 million term loan issued by World Access is also eliminated.
(iv) LDI was involved in a dispute with the sellers of Netnet, a company
which was acquired by LDI in October 1998, and classified 2.5 million shares of
its common stock that were contingently returnable to LDI as an accrued
liability of $7.5 million at December 31, 1999. The sellers of Netnet received
their allocable portion of World Access Preferred Stock upon the closing of the
LDI acquisition and all pending claims were resolved and therefore the liability
has been eliminated.
6. Reclassify the cash and investments which were formerly restricted
under the 12 1/4% Senior Notes which were satisfied as a result
of the acquisition.
7. Elimination of LDI's historical goodwill.
8. Elimination of LDI's historical shareholders deficit accounts.
9. Elimination of inter-company revenues and related costs.
10. Amortization of additional goodwill as a result of the Facilicom,
Comm/Net and LDI Acquisitions over an estimated life of 20 years. The
additional Resurgens goodwill of $127 million is a result of the
7,500,000 shares released from escrow related to the acceleration of
the Resurgens earn-out in connection with the FaciliCom Merger. The pro
forma adjustment to goodwill was computed as follows (in thousands):
6
<PAGE> 7
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENTS
-------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
FaciliCom ............... $592,153 $29,608 $ (2,475) $ 27,133
Resurgens ............... 127,425 6,371 (409) 5,962
LDI ..................... 230,788 11,550 (8,210) 3,340
Comm/Net ................ 22,713 1,136 (688) 448
------- -------- --------
$48,665 $(11,782) $ 36,883
======= ======== ========
</TABLE>
11. Adjustment to depreciation expense for the adjustment to fair values of
switching equipment and IRUs at FaciliCom and LDI.
12. Represents the adjustment to interest expense related to the exchange
of $300 million of FaciliCom notes with a 10.5% coupon for World Access
notes with a 13.25% coupon and the amortization of the $15.0 million
debt discount related to World Access notes over a period of eight
years. The pro forma adjustment to interest expense was computed as
follows (in thousands):
<TABLE>
<S> <C>
Interest expense on World Access notes for eleven months ......... $(36,438)
Debt issue cost amortization on World Access notes for eleven
months ......................................................... (1,719)
Historical FaciliCom note interest expense ....................... 28,875
Historical FaciliCom debt issue cost amortization ................ 957
--------
Net increase in interest expense.............................. $ (8,325)
========
</TABLE>
13. Adjustment to reduce interest expense related to the elimination of LDI
indebtedness resulting from the acquisition as follows: (see Note 5
above).
<TABLE>
<S> <C>
Interest expense on 12 1/4% Senior Notes.......................... $27,656
Amortization of original issue discount on
12 1/4% Senior Notes............................................ 1,202
Amortization of 12 1/4% Senior Notes offering costs............... 944
Interest expense on notes payable to the holders of
12 1/4% Senior Notes and World Access........................... 314
-------
Net decrease in interest expense.............................. $30,116
=======
</TABLE>
14. Adjustment for the additional tax benefit derived from certain pro
forma adjustments. World Access has not recorded any tax benefit on a
pro forma basis that may be derived from LDI's and FaciliCom's net
operating losses.
15. To increase preferred stock dividends to reflect the Series B preferred
stock issued in connection with the Comm/Net acquisition as outstanding
for the full period.
16. To eliminate historical LDI preferred stock dividends and preferred
stock and warrant redemption accretion.
7
<PAGE> 8
17. Represents pro forma weighted average shares and basic diluted
earnings from continuing operations per share. The weighted average
shares are computed assuming the issuance of (1) an aggregate of
4,713,128 shares issued for $75.0 million in connection with the
private placement of World Access common stock in conjunction with the
FaciliCom merger; (2) an aggregate of 942,627 shares issued to the
holders of the FaciliCom notes; (3) an aggregate 963,722 shares issued
to certain FaciliCom shareholders; and (4) 7,500,000 shares released
from escrow related to the acceleration of the Resurgens earn-out in
connection with the FaciliCom merger as of January 1, 1999. Due to the
pro forma loss from continuing operations potential common stock shares
related to stock options, stock warrants, convertible notes and
convertible preferred stock have been excluded from the diluted loss
per share as the inclusion of these potential common stock shares would
be anti-dilutive.
(c) EXHIBITS
<TABLE>
<S> <C>
23.1 Consent of Ernst & Young LLP
</TABLE>
8
<PAGE> 9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on behalf of the
undersigned hereunto duly authorized.
WORLD ACCESS, INC.
Date: April 26, 2000 By: /s/ Martin D. Kidder
-------------------------------------------
Martin D. Kidder
Vice President and Controller
9
<PAGE> 10
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
LONG DISTANCE INTERNATIONAL, INC.
<TABLE>
<S> <C>
Independent Accountants' Report. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999. F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999. F-4
Consolidated Statements of Common Shareholders' Equity
(Capital Deficiency) for the three years ended December 31, 1999. F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999. F-6
Notes to Consolidated Financial Statements. F-7
</TABLE>
F-1
<PAGE> 11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Long Distance International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Long Distance
International Inc. and subsidiaries (the Company) as of December 31, 1998 and
1999, and the related consolidated statements of operations, common
shareholders' equity (capital deficiency) and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Long
Distance International Inc. and subsidiaries at December 31, 1998 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Long
Distance International Inc. will continue as a going concern. As more fully
described in Note 2, the Company has discontinued its U.S. operations and will
require additional capital to fund its operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
/S/ ERNST & YOUNG LLP
West Palm Beach, Florida
March 10, 2000
F-2
<PAGE> 12
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------- -------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 52,064,072 $ 6,798,249
Certificates of deposit 2,907,895 --
Restricted cash and investments 30,410,363 41,883,932
Accounts receivable, net of allowance for doubtful accounts of
$4,210,000 and $3,563,000 at December 31, 1998 and 1999 16,749,980 13,854,631
Other current assets 5,435,820 5,213,838
------------- -------------
Total current assets 107,568,130 67,750,650
Net assets of discontinued operations 27,721,368 4,969,002
Restricted cash and investments 36,600,856 --
Property and equipment, net 38,258,615 20,654,398
Goodwill, net of accumulated amortization of $3,223,000 and $11,397,000
at December 31, 1998 and 1999 129,705,821 122,919,031
Other assets 2,855,565 1,968,676
------------- -------------
Total assets $ 342,710,355 $ 218,261,757
============= =============
<CAPTION>
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 20,865,078 $ 31,482,611
Accrued telecommunication costs 18,243,307 6,243,934
Accrued restructuring costs 3,014,752 505,433
Other accrued liabilities 11,676,328 9,457,152
Accrued acquisition contingency 7,508,029 7,508,029
Senior Notes payable -- 207,530,592
Senior Note interest payable 5,976,563 5,735,938
Notes payable 4,950,000 27,358,617
Current portion of capital lease obligations 10,760,795 12,809,285
Current portion of installment loans 2,840,776 5,334,389
------------- -------------
Total current liabilities 85,835,628 313,965,980
Installment loans 3,907,910 --
Capital lease obligations 12,337,528 2,343,000
Senior Notes payable 205,863,147 --
Commitments and Contingencies
Redeemable convertible, preferred stock, Series A, cumulative
$.001 par value - 2,600,000 shares authorized and 2,456,556
shares issued and outstanding - liquidation value of
$1,228,278 and $1,301,975 at December 31, 1998 and 1999 1,199,278 1,272,975
Redeemable preferred stock, Series B, cumulative
$.001 par value - 5,000,000 shares authorized and 2,500,000
shares issued and outstanding - liquidation value of $25,000,000 14,275,864 16,197,893
Redeemable warrants, 3,394,665 authorized, issued and
outstanding at December 31, 1998 and 1999 11,566,939 12,757,273
Redeemable warrants, 29,890,252 authorized, issued and outstanding at -- 783,092
December 31, 1999
Common shareholders' equity (capital deficiency):
Common stock, $.001 par value - 250,000,000 shares authorized,
57,703,371 shares issued and outstanding at
December 31, 1998 and 1999 57,703 57,703
Additional paid-in capital 110,540,448 108,491,264
Accumulated other comprehensive loss (815,465) (697,586)
Accumulated deficit (102,058,625) (236,909,837)
------------- -------------
Total common shareholders' equity (capital deficiency) 7,724,061 (129,058,456)
------------- -------------
Total liabilities and common shareholders' equity (capital deficiency) $ 342,710,355 $ 218,261,757
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 13
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Retail, net $ 5,656,897 $ 30,115,881 $ 83,142,621
Wholesale, net -- 10,043,579 34,519,192
------------ ------------ -------------
Total revenues 5,656,897 40,159,460 117,661,813
Costs of telecommunications services 4,836,796 33,914,520 97,866,602
------------ ------------ -------------
Gross margin 820,101 6,244,940 19,795,211
Selling, general and administrative expenses 8,718,643 35,390,334 58,821,915
Asset impairment and restructuring costs -- 3,969,740 6,387,000
Depreciation and amortization 440,116 7,490,892 20,716,140
------------ ------------ -------------
Operating loss (8,338,658) (40,606,026) (66,129,844)
Other expense (income):
Interest expense 522,641 23,074,896 33,607,290
Interest income (430,653) (7,089,981) (4,488,245)
------------ ------------ -------------
91,988 15,984,915 29,119,045
------------ ------------ -------------
Loss from continuing operations (8,430,646) (56,590,941) (95,248,889)
Discontinued operations:
Loss from discontinued operations (2,903,357) (28,208,255) (20,288,847)
Loss on disposal of discontinued operations -- -- (19,313,476)
------------ ------------ -------------
Net loss (11,334,003) (84,799,196) (134,851,212)
Preferred stock dividends and preferred stock
and warrant redemption accretion (901,876) (5,623,915) (2,049,138)
------------ ------------ -------------
Net loss applicable to common shareholders $(12,235,879) $(90,423,111) $(136,900,350)
============ ============ =============
EARNINGS PER SHARE APPLICABLE TO COMMON
SHAREHOLDERS - BASIC AND DILUTIVE:
Loss from continuing operations $ (0.39) $ (1.89) $ (1.68)
Loss from discontinued operations (0.12) (0.85) (0.69)
------------ ------------ -------------
Net loss per share $ (0.51) $ (2.74) $ (2.37)
============ ============ =============
Weighted average shares outstanding 23,953,434 32,999,731 57,703,371
============ ============ =============
</TABLE>
See accompanying notes.
F-4
<PAGE> 14
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL COMMON
ACCUMULATED SHAREHOLDERS'
COMMON STOCK ADDITIONAL OTHER EQUITY
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED (CAPITAL
SHARES AMOUNT CAPITAL LOSS DEFICIT DEFICIENCY)
---------- ---------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 22,382,171 $ 22,382 $ 4,535,389 $ -- $ (5,925,426) $ (1,367,655)
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $45,740 1,615,233 1,615 1,283,619 -- -- 1,285,234
Issuance of common stock
for advertising costs 606,950 607 615,454 -- -- 616,061
Issuance of common stock
to investment advisor 150,000 150 89,850 -- -- 90,000
Issuance of Series B warrants,
net of issuance costs
of $1,092,244 -- -- 11,313,050 -- -- 11,313,050
Issuance of warrants for line
of credit -- -- 60,000 -- -- 60,000
Accrued dividend on Series
A preferred stock -- -- (73,695) -- -- (73,695)
Accretion to redemption value
of Series B preferred stock -- -- (828,181) -- -- (828,181)
Net loss -- -- -- -- (11,334,004) (11,334,004)
---------- -------- ------------- ------------ ------------- -------------
Balance at December 31, 1997 24,754,354 24,754 16,995,486 -- (17,259,430) (239,190)
Other comprehensive loss -- -- -- (815,465) -- (815,465)
Issuance of common stock for
acquisition of NETnet 31,073,497 31,073 92,567,948 -- -- 92,599,021
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $59,507 1,597,921 1,598 1,711,786 -- -- 1,713,384
Issuance of common stock
for acquisition of Newgate 213,602 214 854,194 -- -- 854,408
Accrued dividend on Series
A preferred stock -- -- (73,695) -- -- (73,695)
Issuance of common stock
in payment of Series A
preferred stock dividends 63,997 64 239,026 -- -- 239,090
Accretion to redemption value
of Series B preferred stock -- -- (1,925,388) -- -- (1,925,388)
Accretion on warrants -- -- (38,909) -- -- (38,909)
Stock options issued for
professional services -- -- 210,000 -- -- 210,000
Net loss -- -- -- -- (84,799,195) (84,799,195)
---------- -------- ------------- ------------ ------------- -------------
Balance at December 31, 1998 57,703,371 57,703 110,540,448 (815,465) (102,058,625) 7,724,061
---------- -------- ------------- ------------ ------------- -------------
Other comprehensive Income 117,879 117,879
Accrued dividend on Series
A preferred stock -- -- (73,697) -- -- (73,697)
Accretion to redemption value
of Series B preferred stock -- -- (1,922,029) -- -- (1,922,029)
Accretion on warrants -- -- (53,412) -- -- (53,412)
Cash dividends paid on Series
A Preferred Stock -- -- (46) -- -- (46)
Net loss -- -- -- -- (134,851,212) (134,851,212)
========== ======== ============= ============ ============= =============
Balance at December 31, 1999 57,703,371 $ 57,703 $ 108,491,264 $ (697,586) $(236,909,837) $(129,058,456)
========== ======== ============= ============ ============= =============
</TABLE>
F-5
<PAGE> 15
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(11,334,003) $(84,799,196) $(134,851,212)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 440,116 7,490,892 20,716,140
Provision for bad debts 247,137 3,088,312 1,898,809
Amortization of discount on Senior Notes and Notes Payable -- 857,886 1,201,708
Amortization of financing costs -- -- 71,013
Amortization of discount on notes payable with detachable warrants -- -- 471,898
Amortization of bond offering costs -- -- 946,645
Loss on phase-out of discontinued operations -- -- 256,506
Loss on disposal of discontinued operations -- -- 19,313,476
Asset impairment and restructuring -- 3,969,000 6,387,000
Minority interest in subsidiary 132,384 -- --
Options issued for services 217,467 210,000 --
Changes in operating assets and liabilities:
Accounts receivable (1,477,675) (12,992,924) 996,540
Other current assets (135,845) (1,047,449) 221,982
Other assets (301,990) (1,866,069) 886,889
Accounts payable 2,849,790 (306,846) 10,617,533
Accrued telecommunication costs 1,985,173 3,533,332 (11,999,373)
Accrued restructuring costs -- (403,248) (2,509,319)
Senior Note interest payable -- 5,976,563 (240,625)
Other accrued liabilities 2,741,008 4,463,612 (2,467,176)
Discontinued operations - changes in assets and liabilities (4,718,233) (20,902,152) 3,182,384
------------ ------------ -------------
Net cash used in operating activities (9,354,671) (92,728,287) (84,899,182)
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash and investments (76,970) (66,186,249) 25,127,287
Increase in certificates of deposit -- (2,907,895) 2,907,895
Purchases of property and equipment (994,672) (2,065,974) (2,236,178)
Disposal of property and equipment -- 755,000 1,972,144
Purchase of minority interest in subsidiaries -- (1,587,714) --
Acquisition costs associated with purchase of Speedial International (1,047,605) -- --
Acquisition costs associated with purchase of Newgate -- (1,514,073) --
Acquisition costs associated with purchase of NETnet -- (888,950) (1,423,558)
------------ ------------ -------------
Net cash (used in) provided by investing activities (2,119,247) (74,395,855) 26,347,590
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Notes and redeemable warrants,
net of offering costs -- -- 24,793,854
Proceeds from issuance of common stock and exercise of warrants,
net of offering costs 1,285,234 1,713,448 --
Proceeds from issuance of preferred stock, Series B, net of offering costs 22,835,348 -- --
Proceeds from issuance of Notes Payable and warrants -- 216,533,291 --
Dividends paid -- -- (46)
Payments on Notes Payable -- (3,080,118) (981,000)
Proceeds from line of credit 1,480,000 -- --
Repayments under line of credit (1,480,000) -- --
Bond offering costs -- -- (508,041)
Principal payments on capital lease obligations (598,166) (4,891,854) (8,970,580)
Principal payments on installment loans (130,447) (2,443,867) (1,166,297)
------------ ------------ -------------
Net cash provided by financing activities 23,391,969 207,830,900 13,167,890
Effect of exchange rate changes -- (815,465) 117,879
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents 11,918,051 39,891,293 (45,265,823)
Cash and cash equivalents at beginning of year 254,728 12,172,779 52,064,072
------------ ------------ -------------
Cash and cash equivalents at end of year $ 12,172,779 $ 52,064,072 $ 6,798,249
============ ============ =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 3,549,060 $ 10,610,283 $ 1,024,541
============ ============ =============
Property and equipment purchased under installment loans $ 330,000 $ 8,000,000 $ --
============ ============ =============
Accrued dividends on Series A preferred stock $ 73,697 $ 165,329 $ 73,697
============ ============ =============
Accretion on Series B preferred stock and redeemable warrants $ 828,180 $ 1,963,895 $ 1,922,031
============ ============ =============
Warrants issued in connection with line of credit $ 60,000 $ -- $ --
============ ============ =============
Common stock issued to investment advisor $ 90,000 $ -- $ --
============ ============ =============
Common stock issued for advertising costs $ 398,595 $ -- $ --
============ ============ =============
Accrual for acquisition contingency $ -- $ 7,508,029 $ --
============ ============ =============
Common stock issued for acquisitions $ -- $ 93,453,429 $ --
============ ============ =============
Issuance of notes payable for accounts payable $ -- $ 4,950,000 $ --
============ ============ =============
</TABLE>
See accompanying notes.
F-6
<PAGE> 16
LONG DISTANCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ASSET PURCHASE AGREEMENT
Long Distance International Inc. (the "Company") was incorporated in
the State of Florida in May 1993. The Company is a provider of
domestic and international long distance services to residential and
small and medium business customers primarily in Europe. The Company
offers a full range of telecommunications services including calling
card, easy access, prepaid and postpaid calling card, fixed to mobile
and toll free services. The Company ceased providing U.S. domestic
services during 1999.
On December 17, 1999, the Company entered into an Asset Purchase
Agreement with World Access, Inc. ("WAXS") whereby it agreed to sell
substantially all of its assets to WAXS in exchange for WAXS
Convertible Preferred Stock, Series D, with an Aggregate Liquidation
Preference of $185,000,000 ("WAXS Preferred") and the assumption of
certain of the Company's liabilities. At the closing of the
transaction (See Note 20 -- Subsequent Events) 81% of the WAXS
Preferred was issued to Holders of the Company's 12-1/4% Senior Notes
due 2008 ("Note Holders"), in satisfaction of the Company's
obligations thereunder; 6% of WAXS Preferred was issued to NETnet
International S.A. ("S.A.") in satisfaction of the Company's
obligation under an Acquisition Agreement dated October 9, 1998. (See
Note 4 - Acquisitions); 3% of the WAXS Preferred was issued to the
Company to satisfy any remaining obligations; and 10% of the WAXS
Preferred was deposited into escrow to secure the Company's
indemnification obligations under the Asset Purchase Agreement. Any
escrow proceeds not so applied will be allocated 70% to the Note
Holders; 20% to S.A. and 10% to the Company.
2. ISSUES AFFECTING LIQUIDITY
During the second quarter of 1999, it became apparent that the Company
would not be successful in obtaining debt or equity financing
sufficient to meet its operating cash requirements. The Company began
to consider all alternatives available to raise additional liquidity
and/or realize value on its assets and operations. The Company
discontinued its U.S. operations reducing the negative effect on cash
flow (See Note 10 - Discontinued Operations). These conditions raised
substantial doubt about the Company's ability to continue as a going
concern. On December 17, 1999, the Company entered into an Asset
Purchase Agreement with WAXS (See Note 1). The financial statements do
not include any further adjustments to reflect the possible future
effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the
outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and it's subsidiaries, as follows:
- LDI Acquisition Sub - 100%
- Dynamic Telecom International Inc (DTI) - 100%
- NETnet International AB - 100%
- NETnet AB, Sweden - 100%
- NETnet AS, Norway - 100%
- NETnet AG, Switzerland - 100%
- NETnet Italy Spa, Italy - 100%
- NETnet NETcenter AB, Sweden - 100%
- LDI Ltd - 100%
- Long Distance International (U.K.) Ltd. (formerly Speedial
International) - 100%
- Televersa NETnet Telekommunikationssysteme GmbH, Germany -
100%
- NETnet Telekommunikations GmbH, Austria - 85%
- Newgate Communications Ltd. - 100%
All significant intercompany balances and transactions have been
eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
related assets. Property and equipment under capital leases are
recorded at the present value of the future minimum lease payments and
amortized over the lesser of the related lease term or useful life of
the related assets.
F-7
<PAGE> 17
Included in property and equipment are indefeasible rights of use
(IRU) on certain international telecommunications networks which are
amortized over the lesser of the terms of the agreements or the useful
life of the IRU.
Depreciation and amortization of property and equipment is computed
using the following estimated useful lives:
Furniture and fixtures 3 years
Dialers and equipment 3 - 5 years
Switches and infrastructure 5 years
Computer equipment 3 years
Leasehold improvements 2 - 15 years
REVENUES
The Company earns revenue from customers' telecommunications traffic
along its or other carriers networks. The Company records revenues at
the time a telephone call is completed and registered based upon
minutes of traffic processed or by contracted fee arrangements.
COST OF TELECOMMUNICATION SERVICES
Cost of services represents direct charges from vendors that the
Company incurs to deliver service to its customers. These include
leasing costs for the dedicated phone lines that form the Company's
network, and rate-per-minute charges from other carriers that transmit
international traffic on behalf of the Company. Cost of services are
recorded at the time the call is completed or ratably during the lease
period. Cost of services also includes network cost which consist of
access, transport and termination costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and stated
amounts of revenue and expense during the reporting period. Actual
results could differ from these estimates.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which defines
a fair value method of accounting for issuance of stock options and
other equity investments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the
vesting period.
The Company accounts for employee stock-based compensation under APB
No. 25, under which the Company's employee and director stock option
plans qualify as noncompensatory plans. The Company complies with the
disclosure requirements pursuant to SFAS 123.
LOSS PER SHARE
The Company computes loss per share pursuant to SFAS No. 128, Earnings
Per Share. Weighted average shares outstanding do not include any
contingently issuable shares. The dilutive effect of options, warrants
and Series A convertible preferred stock have not been considered as
their effect would be antidilutive for all periods presented (see
Notes 13 and 14).
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management reviews long-lived assets and the
related intangible assets for impairment whenever events or changes in
circumstances indicate the asset may be impaired. During 1999, the
Company recorded a writedown to certain long-lived assets. (See Note
10 - Discontinued Operations and Note 5 - Property and Equipment).
Based on current circumstances, the Company does not believe that any
additional long-lived assets are impaired at December 31, 1999.
F-8
<PAGE> 18
GOODWILL
Goodwill represents the excess of the consideration paid over the fair
value of assets acquired from acquisitions and is amortized on a
straight-line basis over two to twenty years. The carrying value of
goodwill will be reviewed if the facts and circumstances suggest that
it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows, the
Company's carrying value of the goodwill will be adjusted to fair
value.
MARKETING AND ADVERTISING EXPENSE
The Company expenses marketing and advertising costs as incurred. The
Company incurred advertising expenses of approximately $361,680,
$3,311,959 and $2,039,000 during the years ended December 31, 1997,
1998 and 1999, respectively. Advertising expenses consist of
promotional material and other ancillary marketing activities.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an initial
maturity of less than three months to be cash equivalents. Management
believes the use of credit quality financial institutions minimizes
the risk of loss associated with cash and cash equivalents.
RESTRICTED CASH AND INVESTMENTS
Restricted cash on the accompanying Consolidated Balance Sheets
consist of (i) a portfolio of U.S. Treasury Notes pledged as security
for payment on the first six scheduled interest payments due on the
Senior Notes of which three (3) payments remain, (ii) certificates of
deposit that are collateral for the Company's performance under a
telecommunications services agreement and (iii) certain letters of
credit pledged as security for equipment financing.
The U.S. Treasury Notes restricted for scheduled interest payments on
the Senior Notes are classified as held to maturity and are recorded
at amortized cost. The maturity dates of the securities correspond to
the April 15, 2000, October 15, 2000 and April 15, 2001 interest
payment dates of the Senior Notes.
Regulations of certain countries in which the Company operates require
that a portion of cash be restricted for licensing requirements and
governmental obligations that are owed but have not yet been paid for.
Such amounts include value-added taxes collected and employer and
employee obligations for national social benefit programs.
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends unsecured credit
to its customers. Management has provided a reserve for amounts which
may eventually become uncollectible.
A majority of the Company's transmission and switching facilities are
provided by several telecommunications carriers. Under the terms of
the supplier agreements, the Company purchases long-distance service
at fixed monthly lease rates or per-minute rates, which vary based on
the time, distance and type of call. Although management believes that
alternative carriers could be found in a timely manner, disruption of
these services for more than a brief period of time could have a
negative effect on the Company's operating results. The Company
currently purchases approximately 14% of its telecommunications costs
from a carrier that owns approximately 8% of WAXS.
REGULATIONS
The Company is subject to regulation by the Federal Communications
Commission and by various state public service and public utility
commissions. The Company is also subject to regulations by various
agencies in Europe.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, assets and liabilities denominated in
foreign currencies are translated into US dollars at the rate of
exchange in effect at the balance sheet date, while revenue and
expenses are translated at the weighted-average rates prevailing
during the respective years. Components of shareholders' equity
(capital deficiency) are translated at historical rates. Gains and
losses resulting from translating assets and liabilities at various
exchange rates are reported as a part of other comprehensive loss in
the statement of shareholders' equity (capital deficiency). Net
transaction gains or losses relate primarily to leased-line costs and
are included
F-9
<PAGE> 19
as a component of cost of services on the Consolidated Statements of
Operations. Transaction gains or losses included in the Consolidated
Statements of Operations are not material.
RECLASSIFICATION
Certain amounts in prior year's financial statements have been
reclassified to conform with the current year's presentation.
4. ACQUISITIONS
In October 1998, the Company entered into an acquisition agreement to
exchange 100% of the outstanding stock of NETnet International AB
("NETnet") for 33,592,970 shares of the Company's Common Stock, which
represents approximately 37.5% of the Company's common stock. NETnet
is a provider of international long distance, domestic long distance
and fixed mobile services to small and medium sized business
customers. NETnet operates in Sweden, Norway, Germany, Switzerland,
Austria, Italy, and France. The acquisition was accounted for under
the purchase method and accordingly NETnet's results have been
included in the Company's Consolidated Financial Statements since
October 1998. The exchange transaction, including acquisition costs,
was valued at $101,840,000 as determined by the Company's Board of
Directors. The excess of the purchase price over the fair value of the
net liabilities acquired was approximately $127,470,735 and is being
amortized on a straight line basis over 20 years. The shares issued to
effect the purchase were held in escrow pending the completion of an
exchange offer under the applicable rules in Sweden. The exchange
transaction was not completed at the date of the World Access
transaction. Accordingly, the Shareholders of NETnet received their
allocable portion of Preferred shares directly from WAXS.
The Company is currently in dispute with the seller of NETnet
regarding the accuracy of the seller's representations. Accordingly,
2,519,473 shares that are contingently returnable to the Company have
been classified as an accrued liability at December 31, 1998 and 1999,
and are not included in loss per share calculations for the years
ended December 31, 1998 or 1999. At the February 2000 closing of the
transaction with WAXS (see Note 1), the sellers of NETnet received
their allocable portion of the WAXS Preferred shares and all pending
claims were resolved.
In April 1998, the Company acquired all of the outstanding common
stock of Newgate Communications Limited, ("Newgate"), a U.K. company
providing cellular communication services to UK customers. The
acquisition is being accounted for under the purchase method and
accordingly, Newgate results have been included in the Company's
Consolidated Financial Statements since April 21, 1998. The purchase
price was approximately $2,554,000 consisting of $1,700,000 cash and
the issuance of 214,000 shares of the Company's common stock with an
estimated value of $4.00 per share. The excess of purchase price over
the fair value of net liabilities acquired was approximately
$3,700,000 and is being amortized on a straight-line basis over three
years.
The following unaudited pro forma consolidated financial information
shows the results of operations assuming the above purchases occurred
on January 1, 1997. The unaudited pro forma results for the years
ended December 31, 1997 and 1998 are not necessarily indicative of
what actually would have occurred if the acquisitions had been in
effect for the entire periods presented. In addition, they are not
intended to be a projection of future results.
<TABLE>
<CAPTION>
1997 1998
--------------------------------------
<S> <C> <C>
Revenues, net $ 72,221,830 $ 114,105,858
Net loss per share (basic and dilutive) $(0.80) $(2.21)
Net loss applicable to common shareholders $ (44,017,267) $ (125,766,434)
</TABLE>
In December 1998, the Company acquired the remaining 2.8% minority
interest in NETnet Germany for cash consideration of approximately
$1,200,000, with the entire amount of the purchase price being
recorded as goodwill.
5. PROPERTY AND EQUIPMENT
Property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
--------------------------------------
<S> <C> <C>
Furniture and fixtures $ 1,706,928 $ 1,744,000
Dialers and equipment 14,412,299 16,659,623
Switches and infrastructure 24,277,051 15,416,694
Computer equipment 6,689,569 7,362,762
Leasehold improvements 1,479,179 476,999
--------------------------------------
48,565,026 41,660,078
Less accumulated depreciation and amortization (10,306,411) (21,005,680)
--------------------------------------
Property and equipment, net $ 38,258,615 $ 20,654,398
======================================
</TABLE>
F-10
<PAGE> 20
Depreciation and amortization expense related to property and
equipment was $409,645, $4,140,378 and $12,505,792 during the years
ended December 31, 1997, 1998 and 1999, respectively.
During the year ended December 31, 1999, the Company recorded a
non-cash impairment loss of approximately $6,387,000 related to a
writedown of switching equipment in Europe. These assets are not being
used to full capacity. As a result, the projected future cash flows
from this equipment are less than the carrying value. These assets
were written down to their fair value based on the salvage value of
the assets. The recognition of this impairment is in accordance with
the provisions of SFAS 121 - Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed of.
Included in property and equipment and net assets of discontinued
operations at December 31, 1998 and 1999, is equipment under capital
leases and installment loans of $26,488,000 and $10,898,000, net of
accumulated amortization of $2,868,000 and $14,701,000, respectively,
and a valuation allowance in 1999 of $15,809,000 related to the
adjustment of the assets of the Company's U.S. operations to estimated
net realizable value (See Note 10 - Discontinued Operations). See note
regarding Extinguishments of Capital Leases.
6. NOTES PAYABLE
CARRIER
In January 1999, the Company entered into an agreement to repay a
portion of accounts payable owed to a carrier. The principal amount is
approximately $4.1 million. Interest on the balance accrues monthly at
12 1/2% on a compounded basis. Interest began accruing in September
1998, with monthly interest payments beginning in January 1999. The
entire principal balance was due on September 30, 1999. As a result of
limited liquidity, the Company did not make the scheduled principal
payment. WAXS and the Company are negotiating a restructuring of this
debt.
THE LOAN AGREEMENT
On July 20, 1999, LDI Acquisition borrowed $10,000,000 (the "Loan"),
from Frederick A. DeLuca ("DeLuca"), an existing stockholder of the
Company, pursuant to a term loan agreement (the "Loan Agreement"),
among the Company, LDI Acquisition, DeLuca, the lenders from time to
time signatory thereto (the "Other Lenders") and DeLuca, as collateral
agent (in such capacity, the "Collateral Agent"). The Loan has a one
year term, expiring on July 20, 2000 (the "Initial Term"), and is
extendable for up to an additional four months at the option of the
Company (the "Extended Term"). The principal amount of the loan is
payable at maturity. Interest is payable monthly and the loan bears
interest of 12-1/4% per annum during the Initial Term and 24-1/2% per
annum during the Extended Term. The loan is subject to a prepayment
penalty if prepaid prior to January 2000 and to substantial late
charges if monthly interest payments are not paid on a timely basis.
The Loan Agreement has been structured to allow for additional term
loans (up to an aggregate principal amount (together with the Loan) of
$40,000,000) from the Other Lenders in minimum term loan advances of
$100,000. Any such future loans shall be made subject to the terms of
the Loan Agreement. The Company and LDI Acquisition have agreed that
the proceeds of any term loan advances which, together with the Loan,
exceed $32,500,000 would be used to repay the indebtedness of its
consolidated subsidiary NETnet to certain Scandinavian banks with a
lien on the stock of NETnet.
The loan is secured by all the common stock of LDI Acquisition,
pursuant to a pledge agreement by the Company in favor of the
Collateral Agent for the ratable benefit of himself and the Other
Lenders, and by all the capital stock of the subsidiaries of LDI
Acquisition to the extent possible, pursuant to a pledge agreement by
LDI Acquisition in favor of the Collateral Agent, for the ratable
benefit of himself and the Other Lenders. The subsidiaries of LDI
Acquisition represent all the non-U.S. based operations of the
Company.
F-11
<PAGE> 21
As additional consideration for, and as an inducement to DeLuca and
the Other Lenders to make loans under the agreement, the Company has
agreed to issue to the lenders (i) Class A Common Stock Warrants
(the "A Warrants") to purchase up to 30% of the Company's common stock
on a fully diluted basis as of the date immediately preceding the
closing of the Loan (the "Fully Diluted Shares") and (ii) Class B
Warrants (the "B Warrants"; together with the A Warrants, the
"Warrants") to purchase up to 20% of the Fully Diluted Shares (in each
case, assuming a full funding under the Loan Agreement of
$40,000,000). The B Warrants will become void in the event the term
loan to which such Warrant relates is paid on or prior to four months
after such loan is made. To date, Warrants have only been issued to
DeLuca to purchase up to an aggregate of 12.5% of the Fully Diluted
Shares (or 7.5% of the Fully Diluted Shares if the B Warrants become
void). Each Warrant is exercisable for a term of five years from its
exercise date (as hereinafter defined) and the exercise price for each
share of the Company's Common Stock exercisable under a Warrant is
$.001 per share. No Warrant is exercisable (assuming the B Warrant has
not been voided) until the earliest of:
(a) the sixteenth month anniversary date of the issuance
of a Warrant;
(b) the date the Company consummates an initial public
offering of shares of Common Stock pursuant to an
effective registration statement under the
Securities Act of 1933;
(c) the date the Company consummates a sale of all or a
substantial portion of the business of the Company
and its consolidated subsidiaries taken as a whole,
whether by way of merger, acquisition, sale of
assets or sale of capital stock;
(d) the date a bankruptcy petition is filed by or
against the Company, LDI Acquisition or a material
operating subsidiary of LDI Acquisition;
(e) the effective date of a waiver under the Indenture,
dated as of April 13, 1998 (the "Indenture"),
pursuant to which the Company's 12 1/4% Senior Notes
due 2008 (the "Notes") were issued, the effect of
which waiver would be to waive the requirement that
the Company repurchase the Notes pursuant to Section
4.12 of the Indenture because of a Change of Control
(as defined in the Indenture);
(f) the date on which the exercise of all A Warrants and
all B Warrants would not result in a Change of
Control; and
(g) the date on which a Change of Control under the
Indenture occurs for a reason other than an exercise
of any of the A Warrants or B Warrants and a waiver
with respect thereto described in clause (e) above
is not obtained; and
(h) the date on which Cliff Friedland and David Glassman
cease to be directors of the Company (other than by
reason of their death or disability) or beneficially
own in the aggregate less than 5,000,000 shares of
Common Stock of the Company.
Additionally, as further consideration for the Loan, DeLuca (or his
designee) was given the right to a seat on the Company's Board of
Directors. The Company failed to make the scheduled monthly interest
payments under the Loan Agreement in September and October. However,
the Company has received a forbearance from the lenders under the Loan
Agreement with respect to such missed interest payments.
As determined by the Company's Board of Directors, the value of the
Warrants was determined to be approximately $783,000, which resulted
in a discount and effective interest rate of 21% on the Loan. The
discount is being amortized over the initial term of the Loan.
On October 19, 1999, LDI Acquisition obtained a $2 million loan from
WAXS. The loan was made pursuant to the terms of the Loan Agreement.
The value of the Warrants was determined to be approximately $156,618
which resulted in a discount and effective interest rate of 21% on the
loan. The discount is being amortized over the initial term of the
loan.
On November 5, 1999, LDI Acquisition entered into an agreement with
the Holders of the 12 1/4% Senior Notes due 2008 pursuant to the terms
of the Loan Agreement to allow for advances of up to $8 million. The
Company was advanced approximately $6.3 million on November 5, 1999
and an additional $1.7 million on November 29, 1999. Approximately
$626,474 was assigned as the estimated fair value of detachable common
stock purchase warrants issued with this loan.
In December, another Agreement was entered into with the Senior
Noteholders whereby they agreed to advance to the Company up to
approximately $9 million, pursuant to the terms of the Loan Agreement.
On
F-12
<PAGE> 22
December 27, 1999, $4,864,865 was advanced. Approximately $380,964 was
assigned as the estimated fair value of the detachable common stock
purchase warrants issued with this loan.
During September, October and November, LDI Acquisition did not make
scheduled interest payments under the Loan Agreements. LDI Acquisition
received forbearance from the lenders under the Loan Agreement with
respect to such missed interest payments through the closing of the
Asset Purchase Agreement with WAXS.
7. INSTALLMENT LOANS, LONG-TERM DEBT AND SENIOR NOTES PAYABLE
IRUS
In October 1997, the Company entered into an installment purchase
agreement for an IRU on a sub-marine telecommunications cable for
which it will pay an aggregate of $5 million plus 12% per annum
through 2001. In January 1998, the Company entered into an installment
purchase agreement for an IRU on a land-based telecommunications cable
for which it will pay an aggregate of $750,000 plus 12% per annum
through 2001. In May 1998, the Company entered into an installment
purchase agreement for an IRU on a land-based telecommunications cable
for which it will pay an aggregate of $2.25 million plus 12% per annum
through 2001. These IRU payment obligations have been included in
installment loans.
Interest paid on installment loans during the years ended December 31,
1998 and 1999 was approximately $458,000 and $168,200 respectively.
During 1999, the Company ceased use of the IRUs, and accordingly,
ceased making payments under the Installment purchase agreement.
Accordingly, the outstanding balances have been classified as current
in the Company's Balance Sheet at December 31, 1999. The Company
determined the value of the IRUs on its books was less than net
realizable value and as part of its disposal of its US retail segment,
the Company recorded a writedown of approximately $5,066,667 to the
IRUs. The Company is in negotiations to return the IRUs to the seller.
SENIOR NOTES
On April 13, 1998, the Company completed an offering of 12 1/4% Senior
Notes with detachable common stock purchase warrants (see Note 14) for
$225,000,000. The Senior Notes are unsecured and were recorded at
approximately $204,000,000, net of a discount and offering costs of
approximately $21,000,000. The Senior Notes are redeemable at the
Company's option beginning April 13, 2003 at the redemption amount, as
defined, plus accrued and unpaid interest.
The terms of the senior note agreement restrict, among other things,
the Company's ability to declare or pay any distribution on its
capital stock, enter into new commitments or borrowings over specified
amounts and dispose of assets outside the ordinary course of business.
In addition, upon a change in control, as defined, the Company must
mandatorily redeem the Senior Notes at 101% of the stated principal
amount, plus accrued and unpaid interest. The Senior Notes mature on
April 15, 2008.
Approximately $75,500,000 of the net proceeds of the senior note
offering were placed in an interest bearing escrow account to fund the
semiannual interest payments through April 15, 2001. At December 31,
1999, restricted cash on the accompanying balance sheet includes
approximately $38,053,000 designated to fund these interest
obligations. Cash paid for interest on the Senior Notes was
approximately $13,780,000 in 1998 and $14,280,000 in 1999. As part of
its obligations under the terms of the Indenture, the Company had 180
days to complete a registered exchange offer. As the Company did not
complete the exchange offer during that time, it was in default of the
covenants of the Indenture and accordingly, an additional .5% interest
was charged resulting in the additional $500,000 of interest on the
Senior Notes during 1999. The default was cured in February 1999.
On October 15, 1999, the Company made its scheduled semi-annual
interest payment on the Notes in the amount of $13.8 million from its
restricted cash. In addition, the Senior Noteholders directed the
Indenture Trustee to hold the interest payment and not to deliver it
to the Senior Noteholders. On November 5, the Senior Noteholders
directed the Indenture Trustee to advance to LDI Acquisition up to $8
million of the interest payment under the terms of the Loan Agreement
described in Note 6.
At December 31, 1999, the Company was in violation of certain
covenants contained in the indenture agreement and the Noteholders had
the ability to accelerate repayment. Accordingly, the Senior Notes
were classified as current obligations on the accompanying December
31, 1999 balance sheet. As part of the Acquisition Agreement with
WAXS, the Senior Noteholders agreed not to accelerate repayment and to
receive WAXS Preferred in satisfaction of the Company's obligations
thereunder. (See Note 1 - Organization and Liquidity, and Note 20 -
Subsequent Events).
F-13
<PAGE> 23
8. LEASES
The Company leases its European premises under non-cancelable
operating leases expiring at various dates through 2006. Combined
rental expense for discontinued and continuing operations was
approximately $391,000, $2,047,000 and $3,506,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. In addition, the
Company leases certain computer and telecommunications equipment under
non-cancelable capital leases. Interest paid on capital leases during
the year ended December 31, 1998 and 1999 was approximately $1,558,000
and $1,520,000
As of December 31, 1999, the scheduled future minimum lease payments
required under capital and operating leases for the Company's European
subsidiaries that have initial or remaining non-cancelable lease terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------- ------------------
<S> <C> <C>
Year ended December 31:
2000 $ 3,574,000 $ 1,709,000
2001 1,671,000 1,355,000
2002 672,000 994,000
2003 -- 799,000
2004 -- 690,000
Thereafter -- 271,000
-------------------- ------------------
Total minimum lease payments 5,917,000 $ 5,818,000
==================
Less amounts representing interest (12% to 20%) (382,000)
--------------------
Present value of obligations under capital leases 5,535,000
Less current maturities (3,192,000)
--------------------
Long-term obligations under capital leases $ 2,343,000
====================
</TABLE>
The Company had the following operating lease obligations in the U.S. at
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING LEASES
-------------------
<S> <C>
Year ended December 31:
2000 $ 1,065,813
2001 926,015
2002 947,156
2003 1,022,119
2004 1,044,685
Thereafter 8,057,492
-------------------
Total minimum lease payments $ 13,063,280
===================
</TABLE>
See Note 10 for information regarding the Company's U.S. Capital Leases.
The Company began negotiating with certain of its lessors in the US regarding
lease terminations. The Company abandoned its facilities in Raleigh, North
Carolina; Tulsa, Oklahoma; Fresno, California and Chicago, Illinois and is
negotiating lease terminations with various landlords. See Note 20 - Subsequent
Events for facilities where the Company terminated its lease agreements
subsequent to year end.
F-14
<PAGE> 24
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1999
------------------------------------
<S> <C> <C>
Payroll, commission and benefits $ 2,154,777 $ 3,165,724
Professional and consulting fees 1,258,517 508,070
Equipment purchases 3,438,532 2,015,000
Interest -- 1,843,345
Other 4,824,502 1,925,013
------------------------------------
Total other accrued liabilities $ 11,676,328 $ 9,457,152
====================================
</TABLE>
10. DISCONTINUED OPERATIONS
Following continued weakness in the United States operations, on May
18, 1999 the Company's Board of Directors agreed to a plan to
discontinue the Company's U.S. operations. Accordingly, the operating
results of the discontinued operations, including provisions for
estimated losses during the phase-out period, have been segregated
from continuing operations and reported as a separate line item on the
statement of operations. Due to the subjective nature of estimating
future operating losses and incremental costs of disposal, it is
reasonably possible that these estimates may change in the future.
Future changes in estimates will be included in the statement of
operations in the period determined. The Company recorded an expense
in the second quarter of 1999 in the amount of approximately $14.3
million to provide for the estimated loss on disposition of the
related assets and liabilities of the U.S. retail operations and other
expenses related to the closing of these operations and approximately
$3.1 million in the third quarter to provide for the estimated loss in
disposition of additional assets. Amounts recorded include
approximately $4.3 million for estimated operating losses during the
phase-out period subsequent to September 30, 1999 and approximately
$450,000 for rent under operating leases until the Company estimates
it can negotiate lease terminations of its facilities. In the third
quarter, the Company recorded an additional $1.9 million for estimated
operating losses during the phase-out period. Included in the net
assets of the discontinued operations at December 31, 1999 is $4.9
million for property and equipment relating to the Company's U.S.
network which is net of a write-down of $19.3 million. The Company is
liable for capital lease obligations and installment loans on this
equipment. Accordingly, the lease obligations of $9.6 million and
installment loans of $5.2 million have not been included in the net
assets of the discontinued operation. As the Company is not current on
the payment of these leases, they are classified as current
obligations at December 31, 1999.
The consolidated financial statements and related footnotes of the
Company have been restated to report separately the net assets and
operating results of the U.S. retail operations as discontinued
operations for all periods presented.
Net assets of the U.S. discontinued operations, which are presented as
net amounts in the Company's consolidated financial statements are as
follows:
F-15
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Accounts receivable $ 8,170,303 $ 397,587
Property and equipment 20,560,597 4,936,361
Other assets 361,651 --
----------------- -----------------
Total assets 29,092,551 5,333,948
Reserve for loss on disposition -- (256,506)
Other liabilities (1,371,183) (108,440)
----------------- -----------------
Total liabilities (1,371,183) (364,946)
Net assets of discontinued operations $ 27,721,368 $ 4,969,002
================= =================
</TABLE>
The results of discontinued operations for the years ended December 31, 1997,
1998 and 1999 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues $ 34,459,013 $ 42,276,408 $ 11,497,709
Cost of telecommunications services 17,882,715 30,411,481 16,255,971
----------------- ----------------- -----------------
Gross profit (loss) 16,576,298 11,864,927 (4,758,262)
Selling, general and administrative expenses (19,347,275) (40,073,182) (15,274,079)
Estimated operating losses during the
phase-out period of discontinued operations -- -- (256,506)
----------------- ----------------- -----------------
Loss from discontinued operations $ (2,770,977) $ (28,208,255) $ (20,288,847)
================= ================= =================
Loss on disposal of discontinued operations $ -- $ -- $ (19,313,476)
================= ================= =================
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company is contingently liable under certain
letters of credit provided to telecommunications carriers to ensure
payment of telecommunications costs incurred by the Company.
The Company is party to litigation with a facilities provider under
certain letter agreements which it claims obligated the Company to
purchase certain communications capacity as part of an agreement that
was never consummated. The Company believes that it has no obligation
to pay under those purported agreements and that its liability, in any
event, would be limited to the $1,6 million deposit the Company placed
in escrow during 1998. This amount is included in other assets in the
Company's Balance Sheets at December 31, 1998 and 1999. The Company
has recorded a reserve of approximately $1,250,000 at December 31,
1999 to write down the deposit to its estimated recovery amount.
On October 22, 1999, the Company was named in a suit , brought by one
of its lessors, for non-payment. The Company has accrued the full
amount due (lease, plus interest) at December 31, 1999. See Note 20,
subsequent events and contingencies.
12. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax
basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
The United States and foreign components of loss from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------------------------------
<S> <C> <C> <C>
United States $ (7,589,057) $ (50,803,096) $ (82,885,071)
Foreign (3,744,947) (33,996,099) (53,637,000)
---------------------------------------------------------
$ (11,334,004) $ (84,799,195) $ (136,522,071)
=========================================================
</TABLE>
F-16
<PAGE> 26
Significant components of the Company's net deferred income taxes are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1999
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,139,000 $ 1,122,000
Accrued expenses 1,119,000 339,000
Net operating loss carryforwards 31,923,000 63,031,000
--------------------------------------
35,181,000 64,492,000
Valuation allowance (34,384,000) (64,270,000)
--------------------------------------
Total deferred tax assets 797,000 222,000
Deferred tax liabilities:
Property and equipment (797,000) (222,000)
Total deferred tax liabilities (797,000) (222,000)
======================================
Total net deferred tax $ - $ -
======================================
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Management has determined that a valuation
allowance of $34,384,000 and $64,270,000 at December 31, 1998 and
1999, respectively, is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The change in
the valuation allowance for the years ended December 31, 1998 and 1999
was $28,139,000 and $29,886,000 respectively.
The Company has incurred net operating losses since inception. At
December 31, 1999, the Company had approximately $117,082,480 and
$68,934,292 in operating loss carryforwards for U.S. and foreign
income tax purposes, respectively, that expire in various amounts from
2009 through 2018 for U.S. income and carry forward indefinitely for
foreign income tax purposes. The Company may have had a change of
ownership as defined by the Internal Revenue Code Section 382. As a
result, a substantial annual limitation may be imposed upon the future
utilization of its U.S. net operating loss carryforwards. At this
point in time, the Company has not completed a change in ownership
study and the exact amounts of any such limitations are not known.
The federal statutory tax rate reconciled to the effective rate is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (benefit) (34.00)% (34.00)% (34.00)%
State tax rate, net of federal benefit (3.63) (3.63) (0.73)
Nondeductible items 0.65 1.75 2.90
Change in valuation allowance 37.99 33.43 31.60
Other (1.01) 2.45 0.23
------------------------------------------------------
0.00% 0.00% 0.00%
======================================================
</TABLE>
F-17
<PAGE> 27
13. EMPLOYEE BENEFITS
STOCK OPTIONS
During 1994, the Board of Directors approved the 1994 Employee Stock
Option Plan (the "1994 Plan") covering substantially all full time
employees of the Company. The 1994 Plan is administered by the Board
of Directors who have authority to grant up to 5,000,000 awards of any
combination of incentive stock options (ISO), non-qualified stock
options (NSO), stock appreciation rights (SAR) or stock depreciation
rights. The term of the options (limited to 10 years), vesting
schedule and exercise price, are at the discretion of the Board of
Directors. At December 31, 1999, there were 2,915,877 shares awarded
under the 1994 Plan.
In July 1997, the Board of Directors approved the 1997 Stock Incentive
Plan (the "1997 Plan") covering the Company's executive officers, as
defined. The 1997 Plan is administered by the Board of Directors who
have the authority to grant up to 4,000,000 awards of any combination
of ISO's, NSO's, SAR's or restricted stock. The term of the options,
vesting schedule and exercise price are at the discretion of the Board
of Directors. At December 31, 1999, there were 2,525,000 shares
awarded under the 1997 Plan.
The Company has granted options to certain employees and
employee-directors which are issuable at the discretion of the
Company's Board of Directors and generally vest ratably over a two or
four year period. Remaining option terms range from one to five years.
As determined by the Company's Board of Directors, the exercise price
of all options exceeded the fair market value of the underlying common
stock at the grant date. Therefore, no compensation expense was
recognized.
Pro forma information regarding net loss is required by SFAS No. 123
and has been determined as if the Company has accounted for its
employee stock options under the fair value method of that statement.
The fair value of outstanding options was estimated at the date of
grant using the minimum value method with the following assumptions:
risk-free interest rate of 6.5% and 5.5% for 1997 and 1998,
respectively; no expected dividends; and weighted average expected
life of the options from three to five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
effect of applying the fair value method prescribed by SFAS No. 123 to
the Company's options results in pro forma net loss applicable to
common shareholders of $13,051,000 and $85,210,000 for the years ended
December 31, 1997 and 1998, respectively. The pro forma effect for the
year ended December 31, 1999 was not material. At the closing of the
WAXS transaction, the Company's outstanding options were cancelled.
None of the proceeds of the WAXS transaction were allocated to the
option holders.
No options were exercised during the years ended December 31, 1997,
1998 and 1999. A summary of the Company's stock option activity and
related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
--------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1 1,229,500 3,935,000 6,692,500
Issued 2,705,500 3,217,500 646,000
Forfeited -- (460,000) (1,897,623)
--------------------------------------------------
Options outstanding at December 31 3,935,000 6,692,500 5,440,877
==================================================
Exercisable at December 31 3,024,000 3,708,256 4,169,125
==================================================
Options with exercise prices equal to or
less than $1.25 per share:
Number of options at December 31 3,762,000 3,567,000 3,428,000
==================================================
Weighted average contractual life
Remaining (in years) 6.2 5.2 4.1
==================================================
Range in exercise prices $0.05-$1.25 $0.05-$1.25 $0.05-$1.25
==================================================
Weighted average exercise price of
currently Exercisable options $ 0.94 $ 0.93 $ 0.93
==================================================
Weighted average exercise price of
outstanding Options $ 0.93 $ 0.94 $ 0.93
==================================================
Options with exercise prices greater
than $1.25 per Share:
Number of options at December 31 173,000 3,125,500 2,012,877
==================================================
Weighted average contractual life
Remaining (in years) 8.4 8.4 7.4
==================================================
Range in exercise prices $2.00-$2.10 $2.10-$4.25 $2.10-$4.00
==================================================
Weighted average exercise price of
currently Exercisable options $ 2.10 $ 2.35 $ 3.19
==================================================
Weighted average exercise price of
outstanding Options $ 2.06 $ 3.61 $ 3.53
==================================================
</TABLE>
F-18
<PAGE> 28
EMPLOYEE SAVINGS PLAN
On January 1, 1997, the Company adopted a 401(k) savings plan (the
"Plan") pursuant to which all employees that have completed six months
of active service or were employed on the date of adoption are
eligible. The Plan provides for matching contributions from the
Company at the discretion of the Company's Board of Directors. No
matching contributions were made during the years ended December 31,
1997, 1998 and 1999.
The Company maintains defined contribution plans for certain employees
based on the subsidiary in which the employee is employed. For each
plan, the Company contributes to an independent insurance company or
other qualified financial institution an amount equal to either a
percentage of the employee's salary or a fixed amount, as specified by
each plan. These contributions are in the employee's name, and the
employee is entitled to receive the contributed principal and any
earnings the principal has earned. The participants all become 100%
vested upon entering the plan. Certain plans also allow the
participants to contribute to the plan.
The Company records expense for these costs when incurred. The Company
incurred approximately $0, $150,000 and $536,000 for the years ended
1997, 1998 and 1999, respectively.
14. CAPITAL STOCK
SERIES A PREFERRED STOCK
The Company has outstanding 2,456,556 shares of its Series A
Cumulative Convertible Preferred Stock (Series A Preferred).
Cumulative dividends accrue at a fixed annual rate of $0.03 per share
and are payable at December 31, 1998, and at each December 31
thereafter. Shares of Series A Preferred are convertible into shares
of common stock at any time at a conversion price equal to $0.50 per
share subject to adjustment, and holders of such shares are entitled
to the number of votes equal to the number of shares of common stock
into which such shares are convertible. In the event of any
liquidation, dissolution or winding up of the Company, the holders of
the Series A preferred shall be entitled to receive an amount equal to
$0.50 per share plus all cumulative accrued and unpaid dividends. In
addition, if a change in control of the Company occurs, as defined,
the holders of the outstanding Series A Preferred can require the
Company to redeem the shares for $0.50 per share plus all cumulative
accrued and unpaid dividends. The terms of the Series A Preferred
restrict the Company's ability to pay dividends on common stock and
grant the holders of Series A preferred participation in dividends
declared on common shares in excess of certain defined levels.
Dividends on Series A Preferred Stock were cumulative through December
31, 1998 at which time the Company had the option of paying the
dividends in cash or shares of the Company's common stock. Subsequent
to December 31, 1998, accrued dividends will be currently payable. On
December 8, 1998, the Board of Directors authorized the payment of
accrued and unpaid dividends as of December 31, 1998 to shareholders
of record on that date. Accordingly, on December 31, 1998 the Company
issued 63,997 shares of common stock in payment of the dividends. The
shares issued were included in the Company's computation of weighted
average common shares outstanding and had an immaterial effect on loss
per share. No dividends were paid in 1999 pending completion of the
Asset Purchase Agreement with WAXS.
SERIES B PREFERRED STOCK
On July 28, 1997, the Company executed an agreement with a group of
investors under common control (the "Investor Group") wherein the
Investor Group agreed to provide a maximum of $25,000,000 for up to
2,500,000 shares of Series B Preferred Stock, par value $0.001 per
share (Series B Preferred) plus detachable stock warrants (Series B
Warrants) to purchase up to 10,321,215 shares of the Company's common
stock at an exercise price of $0.001 per warrant.
On July 28, 1997, the Investor Group purchased 2,400,000 shares of
Series B Preferred and 9,908,367 Series B Warrants for $24,000,000. In
addition, the Company sold 7,000 shares of Series B Preferred and
28,898 Series B Warrants to certain employees and investment bankers
involved in the transaction for $70,000.
In August, 1997, the Investor Group purchased 75,000 shares of Series
B Preferred and 309,636 Series B Warrants for $750,000. In addition,
the Company sold 18,000 shares of Series B Preferred and 74,313 Series
B Warrants to an investment banker involved in the transaction for
$180,000. Total proceeds to the Company were $22,832,847, net of
offering costs.
F-19
<PAGE> 29
Dividends on the Series B Preferred are payable at a fixed annual rate
of $1.20 per share if and when declared by the Board of Directors. The
holders of the Series B Preferred have the right to elect two members
to the Board of Directors. The Series B Preferred and its accrued and
unpaid dividends are redeemable at the option of the Company any time
or at the option of the holder at anytime after the seventh
anniversary of their issuance. In the event of any liquidation,
dissolution or winding up of the Company, the holders of outstanding
Series B Preferred shall be entitled to receive an amount equal to $10
per share plus all declared and unpaid dividends. On March 20, 1998,
the Company agreed to issue to the holders of Series B Preferred Stock
(Series B Holders) warrants to purchase an additional 1,010,101 shares
of Common Stock. These warrants are issuable in consideration of the
Series B Holders' consent to amend the terms of the Series B Preferred
Stock to, among other things, eliminate the provisions of the Series B
Preferred Stock that provided for potential redemption at $15 per
share. The warrants provide for the purchase of shares of the
Company's common stock at an exercise price of $0.001 per share. The
warrants have no expiration date. The warrants were accounted for as a
dividend to the Series B Holders based upon the estimated fair value
of $3.55 per warrant as determined by the Company's Board of
Directors. For the year ended December 31, 1997, the accretion to
redemption value was recorded assuming a redemption value of $10 per
share.
As determined by the Company's Board of Directors, the Series B
Preferred was recorded at $11,522,298 which represents the estimated
fair value at the date of issuance, net of issuance costs of
$1,092,244, and the Series B Warrants were recorded at $11,313,049,
which represents the estimated fair value at the date of issuance, net
of issuance costs of $1,072,409. The Series B Preferred will accrete
up to the ultimate redemption value through periodic charges to
retained earnings, or in the case of an accumulated deficit,
additional paid-in capital. For the year ended December 31, 1997, the
Company recorded accretion of $828,181.
The terms of the Series A Preferred and Series B Preferred restrict,
among other things, the Company's ability to authorize or issue equity
securities, enter into new commitments or borrowings over specified
amounts or make certain expenditures over specified amounts not
provided for in the Company's financial operating budget.
COMMON STOCK
During the year ended December 31, 1997, the Company issued 1,615,233
shares of its common stock from the exercise of warrants. Proceeds
were approximately $1,285,234, net of issuance costs of approximately
$45,740.
During 1996, the Company entered into an agreement with its primary
advertising printer whereby the printer may receive shares of the
Company's common stock in payment for printing services. The agreement
provided the option to receive cash or common stock for each invoice,
limited to 20% of the amount of each invoice. Included in accrued
expenses at December 31, 1996 was approximately $399,000 payable to
the printer for which the printer elected to receive common stock in
lieu of cash. During the year ended December 31, 1997, the Company
issued 305,264 shares of common stock in settlement of amounts accrued
at December 31, 1996. During the year ended December 31, 1997, invoice
amounts for printing services incurred in 1997 totaling $217,000 were
settled with the issuance of 301,686 shares of common stock. The
agreement expired in 1997.
During 1996, the Company entered into an agreement with an investment
advisor whereby the advisor would receive shares of the Company's
common stock in payment for consulting services. Included in accrued
expenses at December 31, 1996 was $90,000 payable to the advisor. In
January 1997, the Company issued 150,000 shares of common stock in
settlement of the amounts accrued at December 31, 1996.
During the year ended December 31, 1998, the Company issued 31,073,497
shares of its common stock, in connection with the acquisition of
NETnet and 213,602 shares in connection with the acquisition of
Newgate (see Note 3). In addition, the Company issued 1,597,921 shares
related to the exercise of warrants and 63,997 shares related to the
payment of Series A preferred stock dividends. The proceeds from the
exercise of warrants was approximately $1,713,384.
On July 13, 1999, the Board of Directors of the Company approved
Articles of Amendment to the Second Restated Articles of Incorporation
whereby the number of common shares authorized was increased to
250,000,000, and the number of shares of both classes of Preferred,
which may be issued in either Series, was increased by an additional
20,000,000 shares as designated by the Board of Directors.
WARRANTS
In connection with the issuance of the Series B Preferred, described
above, the Company issued 10,321,215 Series B Warrants.
F-20
<PAGE> 30
In July 1997, and in connection with the issuance of the Series B
Preferred and associated warrants described above, the Company issued
warrants to purchase up to 500,000 shares of common stock at an
exercise price of $2.00 per warrant. The warrants were issued to an
investment advisor for assistance with this transaction. The Company
determined that the fair value of the warrants was not material.
In connection with the offering of Senior Notes (see Note 7), the
Company issued redeemable warrants to purchase 3,394,665 shares of
common stock at an exercise price of $0.01 per share. The warrants
were recorded at their fair value of approximately $11,528,000, net of
issuance costs of $487,000 and are being accreted to their redemption
through April 2008. The warrants are exercisable at any time beginning
April 13, 1999 and for a period of ten years. Upon the sale of assets
or merger of the Company, as defined, for consideration other than
exchange traded securities or cash, the Company will be obligated to
redeem the Warrants. The Senior Noteholders have agreed to terminate
the Warrant Agreement as part of the closing of the Acquisition
Agreement with WAXS.
In connection with the Loan Agreement (See Note 7) the Company issued
29,890,252 Warrants to purchase 29,890,252 shares of Common Stock at
an exercise price of $.001 per share. The Warrants were recorded at
their fair value of approximately $1,947,000 and are being amortized
over the life of the Loan Agreement. The Warrants are exercisable as
described in Note 6. As part of the closing of the Acquisition
Agreement with WAXS, the Noteholders have agreed to terminate their
warrants.
A summary of the Company's warrants is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C>
Warrants outstanding at January 1 4,585,785 14,472,098 17,712,000
Issued 12,078,143 5,027,865 29,890,252
Exercised (1,605,248) (1,587,599) ( --)
Forfeited (586,582) (200,364) ( --)
----------------------------------------------------
Warrants outstanding and exercisable at
December 31 14,472,098 17,712,000 47,602,252
====================================================
Range in exercise prices $0.001-$2.00 $0.001-$2.00 $.001-$2.00
====================================================
</TABLE>
As of December 31, 1999, common shares reserved for issuance are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Series A Preferred 2,456,556
Series B Preferred 2,500,000
Employee stock options 5,440,877
Warrants 47,602,252
==================
Total 57,999,685
==================
</TABLE>
The warrants issued by the Company contain customary anti-dilution
adjustments for issuances of stock, stock splits, combinations and
certain other events.
15. RELATED PARTY TRANSACTIONS
The Company provides telecommunication services to certain major
shareholders. In the opinion of management, rates charged to these
shareholders are comparable to rates charged to similar commercial
customers. During the years ended December 31, 1998 and 1999, revenue
from these shareholders was approximately $700,000 and $340,000,
respectively. During 1998 and 1999, the Company paid $1,384,000 and
$19,000, respectively, to a network consulting company. In January
1998, the owner of the consulting company became a member of the
Company's Board of Directors and in March 1999, the Director resigned
from the Company's Board of Directors.
16. SEGMENT ANALYSIS
The Company operates in one market, the telecommunications services
industry, which includes international and domestic telephony as well
as fixed-line to mobile services. The Company's operating segments are
based on the geographical, as well as the type of customers it sells
to, retail and European - Wholesale.
F-21
<PAGE> 31
Revenue is based on the location of the entity providing services.
Operating loss represents net revenues less operating costs and
expenses, and does not include interest expense/income and other
expense/income. Identifiable assets by geographic area are those
tangible and intangible assets used in the Company's operation of each
geographic area. Other, as shown below, includes the Company's
operations in Spain, Italy, France and the U.S. headquarters. The
Company also supports headquarters operations in Sweden and the United
Kingdom. The costs associated with those headquarters are included in
the amounts below related to those respective countries.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
---- ---- ----
----------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
United Kingdom $ 3,554,787 $ 15,423,799 $ 26,392,000
Germany -- 4,854,000 19,290,000
Sweden -- 3,104,000 12,092,000
Norway -- 1,038,000 4,954,000
Switzerland -- 1,604,000 6,321,000
Austria -- 1,587,000 7,655,000
Other 2,102,110 3,141,797 8,346,813
European - Wholesale -- 9,586,864 32,611,000
==========================================================
CONSOLIDATED REVENUE $ 5,656,897 $ 40,159,460 $ 117,661,813
==========================================================
OPERATING LOSS:
United Kingdom $ (3,538,792) $ (12,682,920) $ (16,262,000)
Germany -- (1,646,000) (437,000)
Sweden -- (6,833,000) (24,617,000)
Norway -- 71,000 (1,716,000)
Switzerland -- (434,000) (1,926,000)
Austria -- (385,000) (1,108,000)
Other (4,799,866) (18,696,106) (19,543,844)
European - Wholesale -- -- (520,000)
==========================================================
TOTAL OPERATING LOSS $ (8,338,658) $ (40,606,026) $ (66,129,844)
==========================================================
DEPRECIATION AND AMORTIZATION:
United Kingdom $ 192,295 $ 2,368,582 $ 3,139,000
Germany -- 752,000 517,000
Sweden -- 2,681,000 14,885,000
Norway -- 272,000 318,000
Switzerland -- 206,000 527,000
Austria -- 142,000 335,000
Other 247,821 1,069,310 995,140
European - Wholesale -- -- --
==========================================================
TOTAL DEPRECIATION AND AMORTIZATION $ 440,116 $ 7,490,892 $ 20,716,140
==========================================================
ASSETS:
United Kingdom $ 5,886,543 $ 30,654,195 $ 9,257,000
Germany -- 2,194,000 5,487,000
Sweden -- 147,331,000 137,064,000
Norway -- 1,552,000 1,674,000
Switzerland -- 2,958,000 2,720,000
Austria -- 2,911,000 2,165,000
Other 21,891,285 155,110,160 57,720,983
European - Wholesale -- -- --
==========================================================
TOTAL ASSETS $ 27,777,828 $ 342,710,355 $ 216,087,983
==========================================================
</TABLE>
F-22
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
United Kingdom $ 3,201,456 $ 10,769,472 $ 480,000
Germany -- 176,000 571,000
Sweden -- 1,985,000 1,184,000
Norway -- 98,000 32,000
Switzerland -- 647,000 400,000
Austria -- 286,000 531,000
Other 1,671,737 6,714,785 62,719
European - Wholesale -- -- --
==================================================
TOTAL CAPITAL EXPENDITURES $ 4,873,193 $ 20,676,257 $ 3,260,719
==================================================
LONG-LIVED ASSETS:
United Kingdom $ 4,356,640 $ 15,410,201 $ 4,749,000
Germany -- 922,000 1,078,000
Sweden -- 141,281,000 131,042,000
Norway -- 597,000 339,000
Switzerland -- 1,244,000 1,145,000
Austria -- 590,000 787,000
Other 2,251,684 47,376,656 6,402,105
European - Wholesale -- -- --
==================================================
TOTAL LONG-LIVED ASSETS $ 6,608,324 $ 207,420,857 $ 145,542,105
==================================================
</TABLE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, restricted cash, accounts receivable,
accounts payable and accrued expenses on the accompanying consolidated
balance sheets approximate fair value due to the short maturity of
these items.
Installment loans bear interest at Libor plus 3.0% and Libor plus
5.5%. The carrying amounts reported in the accompanying December 31,
1999 consolidated balance sheet approximate fair value because the
interest rates are tied to a quoted variable rate.
Series A Preferred provides for cumulative dividends at a rate of 3%
per annum. Series B Preferred does not provide for cumulative
dividends. The carrying value of the Series A and Series B Preferred
approximates its fair value since it is carried at original fair value
plus accretion.
The senior notes were issued in April 1998. The fair value of the
senior notes at December 31, 1999 approximate their carrying value
based on nominal changes in the market rate of interest since their
issuance.
18. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In December 1998, the Company implemented a worldwide plan to reduce
selling, general and administrative costs and increase efficiencies.
In connection with this program, the Company recorded charges of
approximately $4.0 million in the fourth quarter of 1998. During the
fourth quarter of 1999, the Company directly wrote-off approximately
$1 million of assets abandoned as part of the restructuring plan,
primarily related to equipment that had no alternative use. The cash
outlay related to the remaining charges during 1999 was estimated to
be $2.2 million. Details of the change in the restructuring accrual
between December 31, 1998 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PAYMENTS REDUCTION DECEMBER 31, 1999
----------------- -------- --------- -----------------
<S> <C> <C> <C> <C>
Involuntary employee terminations $ 2,411,170 $ (1,650,732) $ (355,005) $ 405,433
Closure of facilities and related costs 239,582 (239,582) -- 0
Other costs 364,000 (264,000) -- 100,000
----------- ------------ ---------- ----------
$ 3,014,752 $ (2,154,314) $ (355,005) $ 505,433
=========== ============ ========== ==========
</TABLE>
F-23
<PAGE> 33
\
Pursuant to the restructuring, the Company recorded $1.1 million in
employment contract obligations to executives. The Company settled
certain of these obligations for lesser amounts and recorded a
reduction of $355,005 in the reserve related to these settlements in
the second quarter of 1999.
19. QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
(Dollars in 000's except per share data)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1999 1999 1999 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 32,258 $ 32,567 $ 30,866 $ 21,971
Gross Margin 4,014 5,092 5,785 4,904
Operating loss (15,793) (14,162) (12,685) (23,490)
Net loss applicable to common
Shareholders (30,184) (47,787) (26,410) (32,519)
Net loss per share applicable
to common shareholders
(basic and dilutive) $ (0.52) $ (0.83) $ (0.46) $ (0.56)
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1998 1998 1999 1999
------------------------------------------------------------------------
Revenues $ 3,128 $ 4,058 $ 7,693 $ 25,280
Gross Margin 391 352
1,115 4,387
Operating loss (4,291) (4,718)
(6,636) (24,961)
Net loss applicable to common
Shareholders (11,608) (16,413) (19,250) (43,152)
Net Loss per share applicable
to common shareholders
(basic and dilutive) $ (0.46) $ (0.64) $ (0.73) $ (0.91)
</TABLE>
20. SUBSEQUENT EVENTS AND CONTINGENCIES
On January 18, 2000, the Company entered into a Credit Agreement with
WAXS whereby WAXS agreed to lend the Company up to $10,000,000 to
facilitate the compromise and settlement of certain claims of past due
creditors of the Company and its subsidiaries. The Note bears interest
at 12% per annum and matures on March 31, 2000. WAXS advanced the
Company $2,561,600 pursuant to the terms of the Note Payable. As a
result of the Company's liquidity problems, the Company began offering
its creditors reduced payment in settlement of its liabilities. These
settlements have been funded with the proceeds of the Credit Agreement
as well as cash borrowed from the Senior Note Holders.
On January 18, 2000, an additional advance of approximately $4,181,500
was received by the Company pursuant to the terms of the Loan
Agreement described in Note 6. Approximately $327,450 was assigned to
the detachable common stock purchase Warrants.
On February 11, 2000, the Company and WAXS closed the Asset Purchase
Agreement. Simultaneously, the Company's Senior Notes due 2008 were
extinguished, the restricted cash was released to WAXS, and the Notes
Payable to Senior Note Holders were forgiven.
The Company has been working to settle operating lease obligations on
its United States properties. The Company has settled its obligations
in New York, New York; Fort Lauderdale, FL; Raleigh, North Carolina;
Chicago, Illinois; and Fresno, California, and has been released from
its obligations thereunder. The Company has paid $566,852 during 2000
to satisfy its obligation under these leases. The Company was served
as party to a suit with its former landlord in Tulsa, Oklahoma. The
landlord is seeking rental payments through the end of 2001 and
property damages of approximately $115,000. As the Company has already
vacated the premises, it
F-24
<PAGE> 34
is in active negotiations and believes this amount will be settled for
less than $86,000, which the Company has previously accrued for this
matter.
On March 10, 2000, the Company was served as a party to a suit, along
with its former investment advisor, Morgan Stanley Dean Witter, WAXS
and the two Company's Board of Directors. The suit alleges the Company
breached its fiduciary duties and seeks an injunction against the
Acquisition of assets of the Company by WAXS. The Company intends to
vigorously defend against this claim but is unable to predict the
ultimate outcome and the loss, if any.
F-25
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
23.1 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
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 and Form S-3 Nos. 333-79097 and 333-33638 pertaining to the various
stock option, warrant, and other employee benefit plans of World Access, Inc.
and subsidiaries of our report dated March 10, 2000, with respect to the
consolidated financial statements of Long Distance International, Inc. and
subsidiaries included in this Current Report on Form 8-K/A of World Access, Inc.
/s/ Ernst & Young LLP
WEST PALM BEACH, FLORIDA
APRIL 25, 2000
